E Restaurants And Activists

Thesis: Major activist in restaurants actions are underway currently. Bill Ackman has been a frequent restaurant critic but has a mixed record. We do not expect much new news from Ackman’s initial volley with Chipotle.

Introduction: Wall Street activists are often attracted to restaurants. Restaurants are often composed of multiple brands, sometimes owned real estate, and typically the potential to refranchise, that is to sell company stores to franchisees, or to expand via franchising. These elements make restaurants susceptible to financial engineering as fostered by activists. This article outlines activism in the restaurant space since 2005, current actions underway and common denominators.

Restaurants are sensitive: The decline in the number of publicly traded restaurants from 2000 to 2016, and ascension of Chipotle’s stock price and valuations since its IPO in 2006, soaring to $750/share in 2015 were significant drivers to what makes restaurant investments attractive, sensitive and volatile. Many investors hope to “get on the train for the next Chipotle”, and see its success prior to November 2015 as proof that it can occur again. Of course, that wish may be fanciful as the Chipotle of September 2016 is not that of Chipotle of October 2015 or even Chipotle of 2008 or 2009.

  • The number of publicly traded restaurants fell from 102 in 2000 to 57 in 2010, setting up constrained supply conditions.
  • There was great interest in restaurants after the effects of the Great Recession waning, as they are thought to be ‘early consumer discretionary plays.’

The activist typically gets involved when restaurant same store sales falters, management spends funds that could be used for buybacks, and has lost momentum in some way. A key is if there are assets that are saleable or spinoff able in some way. McDonalds (MCD), Yum (YUM), Chipotle (CMG), Wendy’s (WEN), Burger King (QSR), Darden (DRI), Bob Evan’s (BOBE), Buffalo Wild Wings (BWLD) and Jack in the Box (JACK) are all examples. 

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Disclosure: The author has no positions in any stocks mentioned.

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