Here some reasons why.
Enterprise value: Kona $39 million, gcfb is twice that at $78 million (enterprise value is basically the market cap minus cash plus debt).
Revenue in last twelve months: Both companies have exaclty the same at $34 million. But Kona seems to be much more efficient with its revenue. As evidenced by:
1. Kona has one or two fewer stores than gcfb
2. Kona has gross profit of $6.8 million over 20% more than gcfb's $5.5 million
3. Kona has ebidta of $1.9 million about 80% more than gcfb's $1.1 million (if you take into account the interest kona earns on its $22+ million in cash and gcfb spends on its $15 + million in debt this difference is substantially greater)
4. Kona has operating cash flow of $6 million vs gcfb's $0.6 million
5. Kona has a book value per share of $6.50 vs. gcfb's of $1
Which is all to say that with gcfb you are paying a lot more ($78 million vs. $38 million) for a lot less. This makes sense if you believe gcfb's future outlook is that much brighter than kona's. Both companies are in their infancy so I think it is hard to make that argument.
Don't get me wrong, I am not bashing gcfb. I think it does indeed have a lot of potential. But at this stage of the game I like kona's prospects quite a bit better. And since kona does not have its own message board I am sort of using gcfb to highlight kona.
Good luck to all.
Good posts Honda, thanks and good luck.
I agree, nearly all the value is based on the markets perception of each company's chances of successfully executing their strategy. Financially, KONA is better positioned to execute but the market seems more comfortable with the GCFB concept. If KONA can demonstrate that its concept will continue to be accepted by the consumer then the stock should really pop.
No offense taken. It's often hard to communicate in words exactly what one is trying to say. I used to fly off the handle all the time but usually it's a case of my misunderstanding so I've mellowed.
That's why they say 90% of all communication is non verbal and 10% is words!
<<I think it is inaccurate to assume that because KONA has been in a slow growth preparation mode for several years, that they will continue to grow slowly. In fact they are now on pace to double the number of stores in less than 18 months from the 7 they had at their IPO last August to 14 or more by the end of '06.>>
I didn't mean to imply that. My point was that their slow growth to the point of the IPO allowed them to bankroll more cash. They will grow at a substantial pace, and obviously equal to that of GC over the next 18 months. After that remains to be seen. GC currently has one store opening team. By the end of 2007, they will have three. GC will open stores at nearly double that rate in 2007 and I would expect more after that.
What makes me nervous about Kona is that they do not appear to be dedicating the resources necessary to build a staff which can adequately support that fast of rate of growth. I think they've done it to make the financials look better, and going forward you're going to see it start to show up in staff turnover if they attempt to expand at faster rate than they can support. I would say that number is about 4 stores per year.
Kona has said it plans on hiring one District Manager for each 10 stores while GC is hiring one for each 4-5. This is a key difference for two reasons. One is that it gives store managers more possibilities for advancement and helps create longevity. The other is that there will be an extra body close enough to fill in when needed thus providing backup to keep the level of service high. Think about how far apart the Kona stores are spread. That person is going to be on the road all time, and it ain't gonna be in a car. The GC person will be within an hour of most of it's stores and two or so from any others. How hard is it going to be to keep an employee on the road all the time? If you keep them in the office, then they don't know what's going on in the field. This will be more expensive for GC but will certainly pay off in the long run with improved service and more hands on management.
<<Actually KONA is cheaper than GCFB right now, not more expensive.>>
<<Both GCFB and KONA have the same market cap. at $62 million or so.>>
After figuring cash and debt, why do you think that GC is more expensive? As you said, Kona have more cash, less debt, higher margins and will turn a profit sooner. On the surface it seems like it would be a no brainer to go with Kona.
It's because the market believes that GC is going to grow faster and provide a better return longterm. (or that GC shareholders are just a bunch of lemmings!) If you want to solely value the two businesses based on cash and debt, neither are really worth a wooden nickel right now, so it's all about the story and future potential. If you take the market's word for it that the two companies are fairly valued, (based on today's market cap) it's saying that the future earnings of the two companies will be comparable.
Both are obviously good concepts and will do well. As for which one will be the better investment longterm - enterprise value, ebita, gross revenue and book value at this point in the game are not going to be much help in making that determination.
Obviously by using Wall Street metrics you're paying more for GC at this point but you don't buy stocks like these for what they're going to do this year or next.
To sum it up the differences as simply as possible, it really boils down to a few points:
GC is going to grow much faster than Kona. They are going to do it by spending less cash out of pocket on a per store basis and use more debt. GC spends about 1 million per store less in cash out of pocketcompared to Kona's 2.3. If you look at IROP numbers compared to net cash invested on a per store basis, GC rate of return is actually higher than Kona. I know neither is using all cash but it shows that GC can use more debt and still be profitable. Kona will have the advantage of positive cash flow due to less debt which will offset some of that extra $1M per store in cash spent but once GC store base matches it's overhead they'll both have good cashflow.
GC's numbers at this point really look pretty ugly. Why? Because they just spent a boatload of money on a wort facility and it's only being operated at 30% of capacity and their G&A expense is running at 12-14%. It's not because of the 10 or stores they have now, but for the future 25,35,50,200 or however many stores they will have down the road. They're spending the money up front to build an infrastructure and develop a staff capable of handling the growth.
If you look at the history of the company and in particular the locations of the first 8 stores, they were all placed where they were for the purpose of market testing and not top performance. Anyone wanting to maximize revenue is not going to put stores in places like Davenport, Fargo, and Sioux Falls. On top of that two of the eight have full breweries and they really drag down the numbers.
If the builder is picking up a portion of the cost which GCFB will pay later this should be on the balance sheet in the liabilities section. The only way I see it not been on the balance sheet is if the builders compensation is tied to sales or profitability for the store. As a shareholder I would like to know if these off balance sheet funding activities are taking place? Can anyone confirm or deny these claims?
Excellent response Honda.
You said: "Obviously by using Wall Street metrics you're paying more for GC at this point but you don't buy stocks like these for what they're going to do this year or next." I could not agree more.
One point I would like to understand better because it is central to your thesis is the issue of how much it costs to open a store for kona versus gcfb. You state that to open a store gcfb spends about 1 million less than kona's $2.3 million. My question is, does it actually cost that much less too build gcfb stores or is this essentially an accounting issue? Gcfb is able to spend less out of pocket per store because it essentially borrows the rest from the builder. So on paper it looks like they are spending less, but in fact the difference is not that great.
So if I am correct and the cost of building a kona store is pretty close to the cost of building a gcfb, then the fact that gcfb puts up less cash up front is not a real difference in the underlying cost structure of their business, but rather it simply reflects their decision to let their builder pay a greater portion of the up front cash expenses, and then reimbursing the builder over time. Kona could do the same thing, they just elected not to. On the other hand, gcfb does not have the cash or financial strength to finance new construction on their own and still hit their growth targets.
Am I right about this?
If I am, then I would argue what you see as a strength in their model is actually a refelction of their balance sheet weakness.
In terms of revenue per store, while Kona's numbers are great, except for the prospect of SSS increases they are about as good as they are going to get. Don't get me wrong, most restaraunts would be tickled to have those kind of numbers, but a GC in Kansas City, Milwaukee, or any other major city is going to do much better than one in a tier two market. In addition, GC has proven they can go into a tier two market and be profitable. Could you spend 2.3M in cash and a total to open a Kona in Cedar Rapids, IA and make it pencil? Maybe, but the odds are against it.
GC will grow faster because their business model requires it to be profitable. These aren't exact numbers, but let's say that a Kona can net $500k per store with $2.3M cash used after covering debt payments, and a GC could net $300k per store with $1.4M cash. Do you see how they can both be similarly profitable but go about it in different ways?
As I said earlier, both will be profitable but GC has a competitive advantage on two fronts. One is from the standopint that it's perceived as being premium casual like Kona, but it's costs are only average. It's that perceived value which will allow them to thrive in the marketplace. The other is that the number of potential locations GC can build is several times that of Kona due to the lower cash investment per store and proven profitability in smaller tier two markets.
With that being said, an investment in either will be profitable, but I believe longterm GC offers more potential.