The developer which GCFB uses invests $3.5-4.0M per location and then leases the stores back to the company for at cost +10.5%.
GC spends about $1.0-1.6M cash to open a location, of which $400-425k is for preopening expenses.
At the end of the 3rd quarter, the company had $837k in working capital. They raised and additional $6,918,252 with the exercised warrants and the secondary offering in Q4. If they burn $1.3m in cash per new store, (avg) it would be easy to assume they would run out of money before the end of 2006. However if you look at the history of new store openings, the early numbers are exceptionally strong due to the "honeymoon effect" which the company talks about. There was only one store having one in Q3 of 2005 and the company compared to 5 in Q3 2004. When looking at Q3 for 2005, net margins after everything but depreciation & amortization were about breakeven.
Where am I going with this? They will do over $11M in revenue for Q4 2005 and probably somewhere in the mid to upper 50's for 2006. This will add between $2-5M in cash to offset the burn rate as G&A will grow much more slowly from this point forward than revenues as the wort facility is completed, Granite City University is staffed, and much of the additional corporate management needed is already in place. Also by the end of 2006 the worthouse expenses will be spread across 17-18 stores instead of 10. That combined with increased purchasing power and slower growing G&A expenses will lower food & beverage costs and increase gross margins. Add on top of that the large number of new store openings experiencing the "honeymoon effect" and the increased revenue (and thus margins)per store which comes with them, it's going to be an uphill battle to bet against the company.
They should end 2006 with a couple of million in the bank. By then there will be enough of a store base to build the 2007 stores mostly thru cashflow proceeds. They also have a couple of credit lines available if they end up being a little short.
If I were short, I'd be sure to have the position closed out by earnings time. ; )
Did you see what happened to LNUX today? I got out to early....
I did buy a small position this afternoon again but it isn't nearly what I had. I think it going to run into the 3's before earning. If they show a profit and give a bullish outlook who know where it will end up. The volume is what blew me away today. I can't ever remember the stock trading almost 4 million shares. I'd like to see it pull back to the low 2's so I can get more before earnings.
I'd say the main reason going short on this stock isn't such a great idea is because of the low trading volumes per day. At the current price levels it definitely seems like pure gambling to me to really bet on a short term price in either direction.
If you want to short something I think there's easier money to be made shorting BRCM once the big run up is done.
The restaurant business typically trades at1.4-1.8X sales. Based on my initial analysis of GCFB operations this is why in invested in the GCFB. Expanding from 11 locations in 2005 to 26 stores by 2007 is the type of growth I typically like to be behind. Assuming the above, I truly thought GCFB could be a $150M market cap company in two years. This would mean the stock price would be in the $12-14 range by the end of 2007.
Here is where the problem exists. Existing operations is not cash flow positive. A really good growth story would have existing operations funding future expansion. This is increasing existing shareholder value. In order to fund the companies future expansion they are going to have to raise cash. (They did this in October and December with warrants and a private equity placement to a tune of $6.3 million) If you add this to the previously stated balance sheet GCFB had roughly $10m in cash in the last quarter. They've open three stores since the last filing. Using Honda's math on new store opening this will deplete cash by $3.9 million. For example purpose, lets assume cash flow from existing operations is at the break-even level. This leaves them with $6m in cash after Q4. The plan for 2006 is to open 6 new stores. This is an additional $7.8 million cash outflow. This mean they are short $1.8 million in cash for 2006 and $10.4 million in cash for 2007. The question here is, "How will these expansion plans be funded?" They can issue debt or they can issue equity. Debt will make it more difficult for them to be cash flow positive because of the additional interest expense. Due to the high credit risk lender will associate with the loan they will be paying a premium to fund expansion. If they issue equity it will dilute existing shareholder value and be at a discount to the current market price.
I will remain short through this quarter earning announcement. The only thing that will cause a change in events is this quarters earning announcement. I'll be looking at 2 item in the financial. The current cash position and cash flow from operations. If cash on hand is less the $6 million and cash flow from operations is again negative. I'm going to continue to hold. If cash is greater than 8 million and cash flow from operations is positive I might change my position.
<<Existing operations is not cash flow positive.>>
<<This mean they are short $1.8 million in cash for 2006 and $10.4 million in cash for 2007. The question here is, "How will these expansion plans be funded?" >>
This is probably the primary point where our opinions differ in where the company is heading. IMO you are not taking into account the effect of the coming increase in the revenue stream and putting to much emphasis on Q3 burn rates.
Q3 looked particularly bad primarily because of how the calender dates fell. While Wichita was open for nearly the entire qtr., Eagan was only open for seven days. Add in money spent for the Legends and Speedway locations in KC and it makes things look even worse. You have money being spent on three stores and also infrastructure with only the extra revenue of one. There was G&A money spent for a 2nd store opening team and also a district manager for the KC area. (along with relocation costs) Those costs will be offset by revenue from those locations which was not there in Q3. By the end of Q1 2006 there will be 4 of the 5 planned stores open in the KC district. (as opposed to one of five at the end of Q3 2005)
Cashflow will be positive for 2006. With a company this small you have to look at the books and read between the lines. Having a store opening or major expense fall a couple of days into one quarter or another can really distort the numbers and give one an inaccurate picture.
The new stores will have higher revenue numbers and margins will once again widen; and we all know that has a major effect on cashflow. They will still burn a bunch of cash in Q4 but that number will drop substantially going forward as revenues from the new stores kick in.
They will also turn a quarterly profit by the end of 2007. The only thing I'm not positive about is HOW much it will be. My guess at this point is that they'll take a pause in store openings in 2008 to really make the bottomline look good. It'll be pretty easy to make it look good if they have the revenue of the new stores without the pre-opening costs of others.
It could touch $12-14 by the end of 2007 but I'd say it will be more like 2008.
Just remember - the last private placement (which was unannounced) was done to cover the shortfall caused by the lower actual number of warrants exercised. If they thought they would have needed more money to get thru 2007, they would have just raised it then.
Regardless, you're entitled to your opinion. As for share price predictions, I'm pretty worthless at that. All those metrics used to determine share price can be twisted or ignored when convenient. All I can do is look at the company's books, read the fine print, crunch some numbers, and see what it's worth to me. And to me, anything below $5.00 is a gift and thus a darn good reason not to short!
BTW, when you say you're short do you mean that you're holding a short position or is that just your opinion of where the stock's heading?
Acct6 does seem to have a good handle on things. I came across this stock about 6 months ago and have watched it intensely. Its at an attractive price right now.
I think the stock has a great plan as far as branding: central beer processing = same beer across its stores. The company won't be cash flow positive until it utilizes its beer processing facility closer to 100% (40 stores).
I'd buy at $4.00 - $4.25 and hold onto it for a couple of years and watch it grow. Easy Money. What do you guys think?
I think acct6 is quite legit and seems very thorough and articulate. Do you agree? I wionder if he has a fund that we can invest in?
From a risk management perspective acct6's objectives are in line with mine of eliminating losers before investing in them and exiting positions before a deep and long lasting or even permanent impairment in value from any level occurs. So, the combination of a vigorous risk management policy, the question of positive business momentum of a company and a substantial discount to intrinsic value at which the shares trade seem to be consistent with acct6's attitude and the factors that have led acct6 to short the stock.
THIS GUY IS SHARP! I think I'm fixin' to sell this puppy short.