On The Money: Show Me the Money

Operators and analysts share tips and warnings about returns and raising capital.

By David Farkas, Senior Editor -- Chain Leader, 12/1/2007

Among the two dozen sessions at the Restaurant Finance & Development Conference last month at Caesar’s Palace in Las Vegas was an unusual video presented by Texas Roadhouse founder W. Kent Taylor.

Recorded several months before the company’s October ’04 IPO, it chronicles the road shows and meetings Taylor, CEO G.J. Hart and COO Steve Ortiz endured to drum up excitement for the upcoming event.

Endured might be too strong a word. For most of the tape, the trio is mugging for the camera, mocking investment bankers and snoozing in a private jet. When the ordeal is over, they break out tequila.

Their self-indulgence almost seemed out of place amid the industry’s financial types, who typically huddled outside meeting rooms, chatted quietly on cell phones or listened intently as speakers detailed the financial underpinnings of the restaurant business. Among topics covered were investor sentiment, interest rates and financing start-ups.

Do the Math

Speaker Brad Saltz of SS&G Financial Services, for example, detailed a benchmarking study that showed the importance of using sales-to-investment ratio to measure the efficiency of capital. His economic model for restaurants looked like this:

"Owners, operations and finance all contribute to the high returns enjoyed by successful restaurants," Saltz declared.

Successful restaurants—particularly casual-dining—are in short supply if bearish Wall Street analysts are to be believed.

Piper Jaffray’s Nicole Miller noted raising prices will be tough for concepts that are not differentiated. "Some with more of a value proposition or an emerging chain with high quality can pass pricing onto customers," she asserted.

Surprisingly, Larry Miller of RBC Capital Markets claimed the relationship between declining sales and traffic at restaurants and spiking gasoline prices was tenuous at best. "It’s a weak relationship," he said. "I don’t see the connection."

Allan Hickok, managing director for Houlihan Lokey Howard & Zuken in Minneapolis, disagreed. "There is a direct correlation between the price of gasoline and energy and personal disposable income," he insisted. "Gas goes up and traffic goes down."

Borrowing Money

There was little disagreement about the rigors of raising capital in a later panel discussion. Moderators Rod Guinn and Nick Cole, both of Wells Fargo, asked operators how they prepared for a transaction.

Jimmy John Liautaud, who recapitalized Jimmy John’s in March, admitted he hadn’t. "The majority of our focus was on operations, making sure everything worked and was measurable," he explained.

Yard House Restaurants President Harald Herrmann said when founder Steele Platt and early investors structured the original investor deal they included a roll-up provision. "It wasn’t an easy process," he added. The chain sold a 70 percent stake to San Francisco-based TSG Partners in August.

Declared Herrmann of the PE firm that eventually invested in Yard House: "We were getting married."