As time goes by, if the cost of food is 32% and beef prices rise, they just raise prices to keep margins at 32%. Now remember that many operators tend to focus on their margins. Imagine that on the left side of the graph are the average ticket prices and the bottom side is guest count. The problems of a distressed restaurant business can be illustrated by a graph. We suspect that high prices, low value, high real estate costs and too much overhead were the culprits, just as we saw with Planet Hollywood. Company officials blamed the poor economy. Many struggling food chains will just be shuttered and written off, as in the September case of Disney’s ESPN Zone family/sports bars. Owners of restaurant chains, including many private equity firms that bought in 2006 during the easy credit boom, are fatigued and want out of their overleveraged investments, which are essentially no collateral businesses with few assets to liquidate. There are too many casual dining seats for the demand.

We saw good prices for Wingstop, Dave & Busters and the holding company DKE (Hardee’s, Rubio’s Mexican Grill).īut rather than spelling relief for a distressed sector, the hot deal market underlines the market split. Investment bankers are promising six- to eight-times cash flow to prospective clients. Where traditional sales prices are four-to six times EBITDA, we saw Papa Murphy’s trade at ten times EBITDA. Sales price as a multiple of cash flows are fully valued for the best-run chains. It created some buzz for other restaurant shares, as speculation mounted that private equity groups needing to put capital to work would be potential buyers. $4 billion purchase by the private equity group 3G Capital represented a 46% premium over the publicly traded shares at the deal’s announcement. We are in a bifurcated market, split between the haves that are obtaining capital or being sold for high multiples and the have-nots, which are locked in the downward spiral, soon to become casualties in an overbuilt industry.

After two years of double-digit drops in sales, the restaurant industry shakeout is continuing with little sign of ending soon.

Dave and busters prices chart