Shoney’s takes a bum rap: shame on Wall Street – Shoney’s Inc

Shoney’s takes a bum rap: shame on Wall Street – Shoney’s Inc – column

Charles Bernstein

Shoney’s takes a bum rap: Shame on Wall Street

Prudential-Bache’s Michael Culp, who has apparently become a one-person E. F. Hutton of the food-service business, says, “Don’t buy.’ When he talks, investors listen.

Alex. Brown & Sons. another leading prognosticator, says, “Don’t buy.’ A few other prominent Wall Street analysts say, “Don’t buy.’

Result: Earlier this month Shoney’s Inc.’s stock plummeted 10% in one week as investors suddenly expressed doubts about what has long been considered a jewel of a company.

Why the Wall Street skepticism about a company that has achieved a possible world’s record of 106 consecutive quarters of earnings growth–profits as well as revenues exceeding those of the previous year’s same quarter?

This is a company that racked up a 23% net profit rise, to $37 million, on a 15% revenues increase, to $546 million, for its latest fiscal year, ended Oct. The current first quarter ends this week, and expectations are that comparative profits will be up a scaled-down 12% to 15% after a 17% rise in the fourth quarter. In any case the likelihood is that by late October Shoney’s will have raised its record to 110 quarters of consecutive earnings increases, or an astounding 27 1/2 years of upward results.

Yet Wall Street lowered the boom on Nashville-based Shoney’s after Culp’s reduced earnings projections to “only’ 13% for the current fiscal year, and other analysts concurred. That forecast is based on a continued 11% annual unit expansion rate for Shoney’s restaurants and a drop from 14% to 11% for Captain D’s.

The company’s top three executives–chairman and chief executive Ray Danner, president and chief operating officer Gary Spoleta and chief financial officer Taylor Henry–are not responding to any of the assertions or criticisms. They’re probably too busy figuring out how to maintain the company’s steady expansion. They are being criticized for “conservative’ management and for insisting on expanding only at a level that they can finance internally. Actually, Shoney’s is avoiding the pitfalls of debt and overexpansion that are the nemesis of so many chains. Its unit managers may be stretched a bit thin, as Culp suggests, but accelerated expansion would only aggravate that situation.

There is always great pressure on large public companies, such as Shoney’s, to accede to Wall Street and stockholder wishes and to expand at a pace as fast as people can dream up the sites and the financing. The landscape is littered with the skeletons of such operations.

Wall Street and its leaders do indeed carry clout, but an operator who wants to succeed cannot allow it to dictate policy. He can hear Wall Street’s leaders and consider their opinions, but he must act on the long-term needs of his company, not on the short-term demands of investors.

In the short or long run, stockholders are best served when chains are run by executives dedicated to building a continued solid operation and not necessarily to climbing the highest on Wall Street’s buy list.

It doesn’t mean that Shoney’s has no problems. Traffic in the restaurants has flattened as fast feeders, such as Wendy’s, cut into breakfast volume. Perhaps it was inevitable that traffic is flattening in today’s economic environment. It would be difficult to introduce more products beyond the breakfast bars and salad bars Shoney’s launched last year.

A new Shoney’s prototype that had to be redesigned also delayed the expansion timetable. Lee’s Famous Recipe units, which Shoney’s acquired several years ago, are far from world beaters.

Nevertheless, Shoney’s still shapes up as a leader in its head-on clash with the Marriott Big Boy empire (Shoney’s spun its coffee shops away from Big Boy almost two years ago), and its Captain D’s units are holding their own.

Most operators today would gladly take Shoney’s Inc.’s projected 13% to 15% profits rise for this year, a slightly reduced 6% net profit to revenues ratio–and even 10% of the projected 110 consecutive quarters of earnings increases.

Setting a formidable record, Shoney’s has established a pattern of such high expectations that Wall Street is suddenly disappointed (as so often happens) when not every expectation can feasible be met. But Wall Street is fickle; Shoney’s and other operators have to stick to their own guns.

COPYRIGHT 1986 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

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