On The Money: Hit and Miss
A restaurant analyst gives industry perspective on a shareholder’s dispute with Applebee’s.
By David Farkas, Senior Editor -- Chain Leader, 4/1/2007
Shareholder Richard C. Breeden of Greenwich, Conn.-based Breeden Partners, which controls about 5 percent of Applebee’s stock, recently complained in a public letter that Applebee’s weak performance measures nonetheless led to generous executive bonuses. Shortly thereafter, the chain’s board of directors announced they’d hired financial advisers to evaluate “strategic alternatives.” We asked strategic consultant and former restaurant analyst Craig Weichmann to evaluate Breeden’s case.
What do you make of the letter?
It’s a well-written, thoughtful letter that challenges the company’s methodology of paying fairly substantial bonuses to its executives without getting the full benefit for its shareholders. It should have been sent confidentially, but today the activist-shareholder state of mind is to rally public sentiment.
It’s a different environment from when you were working as an analyst.
In those days, leading analysts went into private meetings with buy-side individuals to talk about concerns with management. You got new disclosures and direct answers to questions from the CEO. Today, no disclosures can be made privately.
One might ask whether Breeden understands restaurants.
True. His bias is that the stock market is the ultimate measure of the accomplishments of the company.
The company, however, has no control over the market.
I would point to the market correction [on Feb. 27]. Does it mean that management teams did something wrong? The P.E. ratio is a relative barometer that changes frequently.So what is Breeden missing?
He’s missing what drives a chain to perform. Breeden’s letter heavily criticizes management benchmarks. For example, store managers typically receive bonuses based on same-store sales, mystery shops, cost controls and employee turnover, because those criteria are thought by many chains to be crucial to measuring performance. I bet senior-executive bonuses parallel the same formula. The thinking is: We measure our people on those standards. So we should be measured on the same criteria. That’s a mark of good leadership.
You can’t ignore Breeden’s charge that executives used the company plane for personal business.
He is dead on in finding the abuse of allowing use of the corporate jet. He’s correct to challenge it. But let’s step back for a minute. Sure, Breeden has caught Applebee’s with their pants down during one of the most difficult periods that Applebee’s has faced. Yet many other casual-dining chains are in a difficult period, particularly those with $10 to $15 check averages. We are at a point of history where many chains are in a soul-searching mode.
The letter nonetheless appears to have prompted the company to explore strategic alternatives. Do you think Applebee’s will be sold?
It’s a distinct possibility. The company has a highly predictable royalty stream, and there are examples of financing off royalty streams:Quizno’s, for example. Applebee’s has a large pool of fee-simple company stores. Someone could tap into that real estate and use it as a means of financing. Third, Applebee’s store margins are at low ebb, as noted by Breeden. Someone could figure that by taking corrective measures and boosting margins 100 basis points, the transaction will pay for itself.
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