Dueling Fools
Dave & Busted
The Bull Rebuttal
By
Bill, in his Elmer J. Fuddy Duddy killjoy ways, is clever. He doesn't try to dig into the D&B restaurants themselves because a fondness for D&B as a concept might show. He doesn't even aim for the income statement because it's hard to argue against D&B's stellar top-line growth and soon to improve bottom-line growth.
So he tries to lull you into balance sheet sleep. Look! $70 million in debt! Never mind the fact that this is a paltry number -- less than half of the company's book value trailing revenues. He even throws out return on assets data without ever explaining to you that D&B's numbers are actually better than the industry average.
Yes, that's right, restaurants aren't exactly glamorous. In the retail sector, growing sales beyond any marginal comp improvement has to come through expansion. If it's gradual, the way D&B did it a decade ago, it will be hard to become a growth company. D&B has access to credit lines and secondary offerings so it has chosen to be as exciting a company on the outside as its eateries are on the inside.
To Bill, that's bad. I'm not sure what he is suggesting. Maybe he wants D&B to become even more leveraged, inflating return on equity to an acceptable bloated level. D&B has a conservative balance sheet, with debt-to-equity running at just a third of the industry average.
Are they spending more than they are making? On a cash flow basis, absolutely. You don't grow sales at a 40% clip just by raiding the register every night. However, after a series of international franchise deals that have been struck since a lucrative United Kingdom teaming with Bass, many of D&B's units in the future will be abroad. The risk and the capital outlay belongs to the franchisee. D&B just nods and collects what should be generous royalties.
In time, later in its growth cycle, this may become a stock that Buffett, and Barker, might come to appreciate. Of course, by then the stock will have doubled how many times over?
D&B has never reported Planet Hollywood losses or Rainforest Cafe double-digit comp declines. Bill's tactic there is like trying to throw a twig to slow down Bigfoot in the woods. D&B does have big feet of course. Don't let the tread marks wear you down, Bill. Care to discuss this over a round of virtual golf and one of the many non-fried menu offerings?
Then again, we might have to wait awhile, given the chain's sustainable popularity. D&B's target audience of Generation Xers is limited you say? Madison Avenue might have a bone to pick with that argument, Bill. So might The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>. Or just about any other establishment where disposable income runs high and ambitions even higher.
Next: The Bear Responds