Volume has picked up notably (13,470 shares traded thus far today; last at 4.40) but the shares remain stuck in the 4.30s and 4.40s largely.
Q4/04 results (and annual 2004 results) were announced on 3/24/05, so it might be another 2 months before we learn of Q4/05 results. Expect we'd see store #13 in place by late March '06 (The Legends in KC, opening 1/31/06, will be store #12). Buyers appear reluctant to step in until a basing pattern is established in the low $4s or thereabouts.
<<I'd agree with you on all, except to add that earnings is the number one factor in driving a stock price, no?>>
Well, I'd say it's probably the #1 thing that causes the greed or fear that drives the stock price. If it were merely the stock price, charts would all be straight lines either up, down, or sideways.
<<acct6 seems to have an excellent grip on the fundamentals of the stock vs a depth of knowledge in the operations, financials, etc. of the company.>>
I respectfully disagree, unless glancing at the financial statements is enough to be considered "having a grip." Of course on the other hand 90% of people on message boards don't even go that far so I see your point.
I've been pretty clear that I don't believe being short at this point is a good idea, but I always respect anybody's right to do so. I was more or less quizzing him just to see how deep he dug and to see if he's seeing anything in the books which I am not. My interpretation (based on the facts he's presented thus far)is that he simply glanced at the financial statements for 2004 vs. 2005 and made a judgement call accordingly. Otherwise he should know how much is spent on each location or how the company finances them - it's all right there in the notes every quarter if they are read. Those are VERY important facts in determining the burn rate and they appear to have been not used.
Again, I have nothing against him being short, but it would be a shame if anyone else here capitulating would dump because of his input.
Besides, an engaged board with debating makes us all better investors.
<<... because so far this year the "stock", not the company, is a huge dissappointment.>>
There are two things which drive a stock's price - it's either fear, or greed. Fear is usually fear of the unknown. Greed is not wanting to miss out once the unknown is known. A fair value of a stock is usually somewhere in between. Right now there is a lot of fear based on the unknown - thus the continued weakness in the stock price. When things were rolling good and the price went to $5.00 and then $5.50 and even up to $6.00 - that was the greed of not wanting to miss out.
If you can make the "unknown" known before everyone else does, you can really make a pile of money. People's fears here of the unknown are pretty much unfounded. All you gotta do is read the notes and do a little homework to figure it out.
acct6 seems to have an excellent grip on the fundamentals of the stock vs a depth of knowledge in the operations, financials, etc. of the company.
I believe, as acct6 does, that the stock is headed down in to the $3-3.50 range. The only difference is he's short and I'm long @ $5.
So, we (all longs) should consider his point of view and try to learn how he's viewing this company simply from a "stock price" perspective. I feel the poster is quite astute and can help we longs make short term money... because so far this year the "stock", not the company, is a huge dissappointment.
<<If the start-up costs for locations is truely $3.5-4.0M I'm even more concerned. Based on cash burn of existing stores and start-up costs they are going to be issueing more debt or equity in 2006 and 2007 to support expansion plans.>>
Just because a location costs that much to build doesn't mean the company spends that much cash. Have you read the notes to the financial statements?
"It's all about location, location, location. Their agreement with their developer is on a cost plus basis. The amount spent on a site in relation to what annual rent is pretty minimal. And you will find that variations in commercial real estate values in most metro areas (land locked ones excluded) are pretty consistent. All of their locations have been able to stay within the targeted $3.5-4M mark to develop and will continue to do so. If a store can do an extra 300K per year in revenue due to a better location, it makes spending the extra money worth every penny. "
If the start-up costs for locations is truely $3.5-4.0M I'm even more concerned. Based on cash burn of existing stores and start-up costs they are going to be issueing more debt or equity in 2006 and 2007 to support expansion plans. If this is true I definitely would not be long on this stock in 2006. Based on the last stock issuance and the equity discount paid its next issuance will be less than $4 per share.
As I stated I'm short the stock and will be until the financial make a major turnaround. SSS needs to improve and cashflow from operations needs to turn positive before I'll change my position.
Didn't have time to address everything last night. The cashflow went negative because of infrastructure costs of the regional rollout. They have the infrastructure of a 20+ unit chain and a revenue base of a 10 store one. The cashflow would have been negative regardless of what the gross margins or revenue numbers were. You may know that but others they may not.
The increase in debt is basically their long term leases on additional stores and the wort facility. According to IRS rules, a portion of the lease must be capitalized and thus carried on the books as debt. This way a company can't just rent everything and not have to count it as debt.
<<The markets for the stores they opened at the end of 2005 were in much larger markets. Assets cost more to acquire and will be a drain to the cash position of the company.>>
It's all about location, location, location. Their agreement with their developer is on a cost plus basis. The amount spent on a site in relation to what annual rent is pretty minimal. And you will find that variations in commercial real estate values in most metro areas (land locked ones excluded) are pretty consistent. All of their locations have been able to stay within the targeted $3.5-4M mark to develop and will continue to do so. If a store can do an extra 300K per year in revenue due to a better location, it makes spending the extra money worth every penny.
Again, I have nothing wrong with anyone going short, but there is a difference between real problems and perceived ones.
Like yourself I took a crash course in the restaurant industry as well. I've read about every SEC filing I can get my hands on for this company and read the financial statements over and over again to get a better understanding and to try to find anything "between the lines." As for your concerns about what happened operationally I can shed some insight. One thing was that two of the original stores underwent renovations to be converted to the current format. This hurt revenues. The other was increased utility costs. That really hurt margins. The increase in debt is primarily due to the wort facility and also continued expansion.
My take into the secondary offering was that the company was counting on a large number of exercised warrants to fund the 4-6-8 plan. When it became apparent that not enough warrants were going to be exercised they extended the expiration 6 months and then did the secondary to raise the amount that they were going to be short. Why they did the secondary didn't make sense until we found out how many warrants were exercised. (or should I say not exercised)
They do have some pricing power as most everyone says what a great value they offer for the money. However, the company hasn't raised prices yet to offset increased utility costs. My hypothesis of why they haven't really sets the groundwork why focusing on lower gross margins and SSS growth will cause many to miss out on a golden opportunity to buy at these levels:
The company has enough cash now to finish the 4-6-8 plan. Their business plan was designed to work with 16% margins and $4M revenue per store to do it. If you'll notice that even with the lower margins, they're still well over those targeted metrics. Pretty much everyone here is in agreement that they will need a lot more cash when they go national which will more than likely be in 2008. So think about it from the company's point of view. You're going to have to raise a whole bunch of money in 2008. What about 2005? or 2006? It really doesn't matter if they lose 15 cents per share or 13 cents. They will need the money in 2008. What if they do a price increase early 2006? Revenues and margins would go back to way above normal. But what effect does that have on SSS in 2007?
I'm sure they would still be good, but if you were trying to raise a boatload of money, wouldn't it be easier to sell Wall Street with 5% SSS increases and increasing margins instead of 3% and steady ones? The big prize is a several hundred unit chain. The amount of cash they raise in the next offering will go a long ways in determining how fast it's going to happen. THAT'S the reason why the current slide in margins and increases in expenses doesn't matter at this point.
As for them running out of cash, They're only spending about $1.4M-1.7M per store out of pocket. Infrastructure increases like management and the wort house were large expenditures in 2005 and a lot of money was spent in 2005 for 2006 openings. Getting a grasp on the burn rate has not been an easy thing to do. But they're not running out of cash.
As far as risk reward, I see a downside of $4.00 and an upside of $6.00. Way to small of float to go short. Be careful!