Just shorted some KONA ( avg. price 19.62), still long the GCFB as well. Ay thoughts on a bit of convergence between the two. Maybe at a market cap of 80-90MM?. Currently KONA has market cap of 115MM, GCRFB 65MM.
<<It is all about perceived value. BJRI,is a direct competitor of GCFB.>>
Maybe someday, but not yet. It will be years before they both have stores in the same market.
<<BJRI offers tremendous value to the customer as proven by their 40 consecutive quarters of positive same store sales growth (compared to 1 for GCFB).>>
Obviously they are a much more mature company and should have a longer track record.
<<Sure, customers are paying less for their mugs of beer, but since it is the house brew, which costs them less, I'm guessing they come out pretty well when its all said and done.>>
Once they get to 25 stores, it will be a lot less. Economies of scale begin to kick in at 15 stores and by store #25, their costs will be half of what they pay for and Miller.
<<In the most recent quarter they had over $600,000 of interest expense. That number is growing quite quickly (up 65% from the year before).
So you see the debt creates quite a significant drag. And it is not just a financial drag. There is a psychological drag that comes with it. And it doesnt just affect potential investors. It affects landlords, potential key employee recruits, lenders, etc.>>
Check my last post. It is really rent expense. For a clearer picture it (it of which is for leases) should be added to occupancy costs.
<<I know GCFB has no choice at this time, they are doing a tremendous job with the limited resources they have. But I still believe they have quite a bit more resistance to overcome than KONA.>>
A simple recapitalization will solve those problems. I'd much rather see dilution later than dilution now.
<<And I have not even begun to touch on another concern I have with GCFB which is price point and competition. At a $13 average check they are nearly 20% higher than BJRI. It will be very interesting to see them compete head to head. My guess is that BJRI will win the most coveted sites from landlords for reasons stated above, and so will enter the competition with two strong advantages (price and location).>>
Most of the difference in the checks is the pizza. Your point about winning sites is a good one. GC has been able to win prime sites along with rent concessions not so much because of their strength but that of Dunham. As they build girth and when they recapitalize it will be a moot point. Actually, it probably will be for quite a while anyway. GC is moving east and BJ's has a heck of a bunch of ground to fill in the west and south. If you look at how the market is segmented and changing demographics, there will be room for many.
<<(What will their debt level be after they get their 8 stores open in '07? Does $40 million sound about right?>>
Would that be real debt or "balance sheet debt?" I say that because since the leases are based on land and building, it's accounted for differently. Most of the interest expense on the income statement is really just rent. Traditionally they've used cash to equip the stores and rolled construction costs into the lease. With the increase in utilities and labor and the company's refusal to implement price increases, it's put them into a cash crunch. So for the last three stores of 2006, they're borrowing the money from a lease company for the equipment so that will add about $3m. For the 2007 stores, Wagenheim, Dunham, and a third wheel are financing the interiors to the tune of between $1M to $1.4M each, or $8-11M.
So as far as debt which they can pay off, there really won't be that much. There are two early stores which have loans against them (about $2.5M) and then of course the money they borrow in 2007.
This is why you'll see a change in how they handle new openings. So as for how much they need to raise? $10-17m for debt and the rest for expansion. One of the loans is at a way cheap rate so it may not get paid off. You know how it is - making best use of capital!
<<Forcing me to write things down here has helped clarify certain things for me. So thank you for that.>>
That's why I love these interactions. Nothing will make one a more intelligent investor than having to defend your opinions.
I will concede one point about cash investment per store. While we all assume it goes for things like tables, ovens, etc., we just don't have enough information to know if things like floor tile and drywall are built into the companies' of pocket figures or capitalized into the leases.
<<1. By your analysis GCFB should use Dunhame forever (assuming net margins are higher than 4%). Right there that says to me that your analysis is inherently flawed. Or am I missing something?>>
You're making way too much out of this. My point was that using Dunham isn't nearly as expensive as you're making it out to be. It is more expensive, but at this point it's still a better use of capital. Until they get to a certain number of stores, they are better off using Dunham because they don't have the expense of a site development department. They are esentially shifting G&A expense to interest expense. The extra 2% of revenues it's costing them is dirt cheap when you factor in the percentage of dilution it would have taken otherwise. In the future when the company needs funding, it will be worth a lot more, so the dilution will cost much less than the extra 2% of revs.
My point about the margins is that margins alone will not tell the whole story. You must also factor in the use of cash if you're talking about growing companies. Just because one company has a higher margin doesn't necessarily mean they are making the best use of cash. In theory higher margins should make it easier for them to do so but it doesn't guarantee it.
<<2. You look at net margins as a proxy for cash flow. The better number to look at is restaurant level operating margins which are currently running about 21% for KONA and high teens I believe for GCFB.>>
It's really only part of the equation. The only way we will make money on either of these stocks is for unit growth. Yes, higher margins equate to more cash flow. But on the same token if they use more cash to get a store open (and that really is the name of the game) it's a drain on cash flow. Using more cash would limit how quickly they build stores, and more cash flow would increase how quickly. If one can expand more quickly, it minimizes the "disadvantage" of lower margins. In the grand scheme if things, it really just boils down to a difference in the business models.
<<3. You assume that the two companies have the same margins. But they don't. That is central to my point. One of the key reasons KONA is a more powerful engine is because its margins are higher than GCFB's.>>
I believe when you look at these two companies 5 years from now, you're going to re-think that for a couple of reasons. One, I think it's going to be a long time before you see new GC locations in places like Cedar Rapids and Davenport. The locations they've built in 2006 and are going to build in 2007 are all going to do closer to $5M than $4M. This will raise the target metric accordingly and restaurant level margins will rise accordingly. Second, Kona more than likely will have a higher G&A expense due to the geographic complexity of being spread all across the country. It will take them longer to be able to take advantage of the economies of scale. IMO the differences in restaurant level margins will narrow, and there in fact may not be much difference in net margins.
<<I was throwing BJRI in there as a proxy for GCFB. You said KONA stores must be more expensive because they are higher end. I am saying the facts do not bear that out.>>
BJ's is really a great proxy from the standpoint that they do in fact also brew beer. GC has studied BJ's extensively.
One other MAJOR advantage Granite City has over other microbrewers is Fermentus Interruptus.
Now, having not eaten at a BJ's before, but by looking at their menu online, the only truely distinguishing differences between BJ's and GCFB would be BJ's pizzas and giant potatoes.
I'd have to be strongly convinced, before investing, that their menu would really stand the test in the Midwest, especially Chicago and the larger markets where solid pizza joints are already established.
Anyone actually been to BJ's and have any anecdotal experiences to report?
---being an amateur investor, I personally feel that if you can go and physically see/experience what you are investing in, it's a lot more reassuring that you're making a sound investment.
It is all about perceived value. BJRI,is a direct competitor of GCFB. MCD and BK are in fast food, totally different business and market. BJRI offers tremendous value to the customer as proven by their 40 consecutive quarters of positive same store sales growth (compared to 1 for GCFB). If you think the consumer will pay more for a product of similar or lower quality then you also probably think that GCFB should just keep increasing their prices until they are making enough profit to keep everyone involved happy. And if you think landlords are going to prefer GCFB and all of their debt as a tenant over BJRI and all of their cash and profits, then I guess we will just have to disagree.
I am not saying GCFB has no hope. But I am saying they have a number of hurdles in front of them. I think they will do ok, but I dont see them being a blockbuster. I have actually thought of them as a possible takeover target for BJRI. Not probable, but not out of the question.
Take a chill pill my friend and try to be a little more objective.
Come to think about it...McDonalds and Burger King have a cheaper menu than GCFB. I guess, based upon your ramblings, that GCFB will be forced out of business once one of those establishments moves into a town where GCFB does business.
Does menu, atmosphere, and quality of the product mean anything to you? Or is it all about the $$$. If it is the $$$, they have some great meals at the Salvation Army for little to nothing.
Let me quess you must be an accountant?
One advantage and draw that Granite City has that others don't is their mug club and home brew. I'm a big fan of Granite City and it is one of my favorite places to go.
The $25 per club member is a nice bonus to an opening store and probably doesn't hurt their bottom line too much on return visits by the customer. Sure, customers are paying less for their mugs of beer, but since it is the house brew, which costs them less, I'm guessing they come out pretty well when its all said and done.
I bought an initial position a couple weeks ago after watching the stock for about 6 months. As I said earlier, big fan of the concept, hoping everyone else enjoys it as much as me so I can enjoy the stock as well!