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Thursday, June 5, 1997
Boston Chicken,
Inc. HOW DID IT FIND TROUBLE? Why did Boston Chicken cross the road? To get leveled by a streetcar named reality. While the company continued to report hearty earnings, the fact that its franchisees were in the red eventually concerned investors. From its December high of $41 1/2, the stock has been scarred and feathered to scrawny pickings today. An even steeper fall in the share price of its high profile bagel chain investment has also marinated the stock in dread. BUSINESS DESCRIPTION Boston Chicken operates and franchises more than 1000 Boston Market restaurants with the intention of hitting the 3000 restaurant mark by the year 2000. The eateries offer homestyle meals and side dishes for take-out and dine-in. The company also owns a majority stake in EINSTEIN/NOAH BAGEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENBX)") else Response.Write("(Nasdaq: ENBX)") end if %> with its 17.3 million shares now worth about $250 million. On May 29, Larry Zwain, President and CEO of the Boston Market division, tendered his resignation. FINANCIAL FACTS Income Statement 12-month sales: $334 million
12-month income: $72.7 million
12-month EPS: $1.09
Profit Margin: 21.8%
Market Cap: $1036 million
Balance Sheet
Cash: $100.8 million
Current Assets: $146.5 million
Current Liabilities: $87.6 million
Long-Term Debt: $316.5 million
Ratios
Price-to-earnings: 14.0
Price-to-sales: 3.1
HOW COULD YOU HAVE SEEN IT COMING? Those who looked beyond the stellar earnings probably saw the cracks in the eggshell and may have gotten out of Boston Chicken long before Zwain did. The area developers lost $51.3 million in 1994, $148.3 million in 1995, and $156.5 million in 1996. If the chain had ambitious expansion plans through its franchise program, shouldn't the existing units be making money? That should have been a warning sign on many levels. Beyond making it a harder sell to new area developers, since so much of Boston Chicken's income is derived from financing arrangements and franchise royalties, could its receivables be a credit risk? If the problems at the unit level had been missed, then maybe the turmoil at Einstein/Noah Bagel would have had investors cashing out to collect their dough. At its peak, the market valued the 53% stake in the upstart bagel company at $630 million. As Einstein/Noah peaked in October, its gradual decline would eventually be skimmed off the Boston Chicken price as well. The fact that the poultry restaurant stock did not peak until two months later gave ample elbowroom to make a getaway from the inevitable sympathy play. WHERE TO FROM HERE? The analysts remain hungry and still believe the company will earn $1.37 per share this year and $1.78 per share in 1998. At ten times next year's earnings, Pavlov's dog is probably slobbering over the possibility of this skinned treat. However, Boston Chicken still has to prove itself again to doubtful investors. Profit at the unit level is a must. Yet, on the same day that Zwain hung up his chicken suit, the company announced that it was not happy with the concept's performance and that it was working on a reorganization plan. Boston Chicken has been pecking at some of its Mid-Atlantic units, buying out area developers in New Jersey, Philadelphia, and New York. It claims that as developers open more units, the economies of scale will eventually produce profits at the franchisee level. While admirable, will it prove true? And, if so, how long will it be willing to wait in the incubator. It can get really hot in there, and sometimes the chicklings never hatch. Then the yolks on you. -Rick Aristotle Munarriz ([email protected])
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