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Schlotzsky's, Inc. (BUNZQ) Message Board

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  • kknauber kknauber Jul 29, 1999 2:58 PM Flag

    to those that care

    I listened to the conference call. Here are a few
    interesting points and some reading between the
    lines.

    1) 1 reason for $.22 vs. expected $.24
    earnings
    They made the statement that there was a non-recurring
    charge to g&a expenses this quarter, towards the end of
    the quarter. I'm still unsure as to exactly what this
    expense is, but it seems to be associated with the 15
    store closings this quarter?? The extra charge to g&a
    was the most alarming number to me. up 25% or like
    $700,000. I still don't have a clear picture as to why it
    was up that much. None of the other numbers really
    bothered me as much as this one.

    2) The 15 stores
    that closed were stores that didn't meet bunz quality
    standards, so bunz forced them to close... there was talk
    that some of these closed stores supposedly will be
    replaced?

    3) There was talk about the tv advertising campaign.
    It sounded like the franchisees weren't 100%
    supporting the campaign because they didn't put up
    billboards and stuff inside or outside the stores to
    reinforce the tv commercial. Probably the franchisees
    didn't want to pay for billboards for a tv ad they
    thought was stupid. I don't blame them. Certainly if the
    commercial had the appeal of the "Yo Quiero Taco Bell"
    chihuauha, we would be seeing signs up everywhere around the
    stores supporting the tv campaign.

    4) someone on
    this message board complained about labor costs being
    up 90%. This was part of company owned restaurant
    ops. Notice that company owned restauraunt sales were
    up over 100%, i think.

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    • I bought Bunz after the "restatement debacle"
      because I thought the story was a good one. The restated
      earnings did not refect the fact that whether or not
      certain assets were described as a reserve against
      defaults on the turnkey operations the fact was that money
      was coming into the company. I stayed with the
      company through the "lawsuit fiasco" because I was
      persuaded that it would blow over and have no effect. I was
      probably right about both of these
      theories.

      However, both theories ignore signs that management didn't
      have a firm grasp. It became impossible to ignore this
      fact with the latest earnings report. System wide
      sales are going up dramatically, but earnings showing
      3% growth. I believe a big piece of the puzzle is
      that management has decided to own more company
      stores, which tend to operate at about break even. How
      many stores do they need to train people at? In
      theory, overhead should not increase that much for each
      franchisee added. How much more does it cost to collect
      royalties from 701 stores, than it does from 700? But
      overhead keeps going up, and profit margins go
      down.

      If I wanted to own a store, I would buy a franchise.
      What I really wanted was to own a company that
      franchised stores which made great sandwiches.

      The
      experience has somewhat soured me on the restaurant industry
      although I like the Papa John's I own. (PZZA). However, I
      took all of my money from Schlotsky's and put it into
      VAR-L. I encourage others to look at this excellent
      manufacturer of electrical components for
      telecommunications.

      It has been swell chatting with all the thoughtful
      people on this board. I'll check back again to see what
      others think, but don't expect to see me here much
      longer.

    • The biggest surprise for me this quarter is that
      anyone was surprised. The stock's drop shows people
      expected better results, but I can't imagine why. The
      company's direction has been clear for six months. Here's
      my take on the numbers and the CC.

      1.
      Horrible unit growth. Fewer openings and more closings
      than prior years. Focus is on "quality" vs.
      "quantity". This means expensive freestanding stores which
      Mom and Pop can neither afford nor operate. BUNZ is
      therefore pursuing higher quality franchisees with ads and
      headhunters. Could be trouble if they were adding 100
      stores/year, but with cash stunting growth they'll find enough
      qualified franchisees. Current goal is 100 "store events"
      this year: 75-80 openings plus 20-25
      remodels.

      2. 18% systemwide growth is way down from prior
      years, but same as Q1. Encouraging, but too early to say
      the patient is stable. Royalties also up 18%, but net
      royalties (what counts) were up 31% due to AD buybacks.
      Most of the buyback gain today is lost to interest and
      amortization, but over time will it show up on the bottom
      line.

      3. Turnkey still bleeding. One analyst finally
      asked; Monica blew her off by saying developer fees and
      turnkey combined are slightly positive. Only an idiot
      would buy into this. Developer fees have nothing to do
      with turnkey. The analyst didn't press the issue as I
      would have (gee, wonder why they don't let me ask
      questions :-). BUNZ has a ton of cash tied up in turnkeys.
      Dumping turnkey assets at a loss is scary. They need to
      tell us how long it will continue and what the final
      tab will be. Stretching the loss out over multiple
      quarters and offsetting it with an separate and irrelevant
      source of non-recurring revenue is at best a shell game,
      at worst outright fraud.

      4. Forgetting about
      the shameless attempt to tie them to turnkey, the
      developer fees are good news. BUNZ is getting new ADs to
      buy previously unsold areas at a 1.25% royalty rate.
      They credit the TV ads, a plausible
      explanation.

      5. Higher G&A came from anticipated higher costs,
      quality audits, and two AD buybacks. The ADs will take on
      the quality audits in the future. I previously wrote
      about booking AD buybacks as assets, a practice I
      consider shady. Despite the EPS hit I'm glad to see them
      expense some of these costs.

      6. Company stores (13
      now) doing a lot better. Used to be breakeven
      operationally, now a 400K op profit. Probably still breakeven on
      an EPS basis (due to interest and depr), but a big
      improvement. Profitable company owned stores are good in too
      many ways to enumerate. I always said when growth
      slowed they could continue to improve financials by
      owning more stores. At the time I didn't expect growth
      to slow for many years, but it's good to see them
      adjusting.

      7. Store closings are still bad. More subterfuge
      here, as BUNZ implies the closees flunked the quality
      audit. This is pure crap. An owner of a profitable store
      will jump through any hoop to keep his franchise and
      will sue if terminated. These owners are walking away
      because the stores are failing. The quality audit is just
      a smokescreen. Poorly managed expansion is coming
      back to haunt us. We need to keep an eye on this one.
      One good side effect of the current slow expansion is
      (hopefully) better site and franchisee selection will result
      in fewer closings down the road.

      8. Interest
      income indicates cash situation still deteriorating.
      We'll have to wait for the 10Q to learn
      more.

      Overall it's like I said - no big surprises. I really
      don't know what the market expected. The key challenge
      is still to increase profits in a slower growth
      environment. BUNZ is doing some good things (AD buybacks,
      improving restaurant ops) but it isn't hitting the bottom
      line, probably because of continued turnkey fallout.
      Managment needs to come clean on this and put an end to the
      shell game, but don't hold your breath.

      • 2 Replies to doggydogworld
      • A general bloodbath in the market today, a heck
        of a drop yesterday noted on BUNZ, and another dip
        into the single digits.

        Looks like I'm not the
        only curious onlooker on the message
        board.

        Good luck to all, regardless of your position or lack
        thereof.

      • for your well-reasoned commentary on the
        disappointing earnings report. I for one very much appreciate
        your analysis. It helps me see the potential
        positives, as well as the certain negatives, in the earnings
        report. Much more helpful than the "this stock/management
        sucks, sell now"-type posts. Like you, I will wait to
        see the 10Q and what they have to say about the
        situation (assuming I can figure it out, of course, and I
        look forward to your help in that one,
        too).

        Thanks again for sharing your knowledge,

        NGG