Chit Chat Stocks - Trouble at Pepsi? (RBLX, PEP, CMG, CAVA, PTLO)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right. I believe we are live. This is the Investing Power Hour on the Chit Chat Stocks Podcast YouTube channel. But if you're listening to this, this is a replay on Spotify, Apple, wherever you get your podcast. My name is Brett Schaefer and as always joined by, well, actually, let me catch myself. I went through the normal intro here, usually joined by Ryan

Starting point is 00:00:59 henderson but he is out again for uh this week on vacation and we have dave ahern from investing for beginners subbing in for ryan we're very gracious for dave here dave welcome in how has you know we got the hurricane maybe hitting florida i guess it's pre-earning season we have some fun earnings with pepsi today but yeah how is your investing week been since we last talked uh it's been i ought to be honest with you i don't know because i haven't checked my portfolio not even a second so i have no idea where i am in any of my positions that's great yeah and honestly the more you get into that as an investor because when you first start everyone i think just checks it every day even multiple times a day you go oh why did this move times a day

Starting point is 00:01:50 Yeah, exactly. Exactly. And the more you can get away from that, I think that shows a sign of maturity for your investing portfolio. I've noticed myself over the last few years moving away from the daily check to being, okay, maybe I'll check if something I see is up or down a lot and trying to figure out why. But besides that, not so much. I think that's much healthier, can lead to better long-term decision-making and not being irrational when stocks are moving and you don't know why, because a lot of the times it's probably for no reason and it doesn't necessarily matter. But Dave, you're from Investing for Beginners, the IFB network. What do you guys got cooking up over there lately? Well, lately we've been trying to just

Starting point is 00:02:32 continue to help people understand the jargon of investing, either through the podcast or social media or the blog, which you contribute to as well. Yep, yep. Got a few blog posts over there. And yeah, it's a beautiful thing. And today, we're going to be talking a lot about, well, given your background, we're talking a lot about restaurants. I have quite a few examples, including our small cap of the week. We're going to do some comparisons with a little teaser, Chipotle, Texas Roadhouse, some other franchises that people will know. And you have a lot of experience working in that industry. So I just wanted to get your thoughts and hopefully do a little bit, you know, maybe investing for beginner

Starting point is 00:03:12 style, do some education on what people should be looking for when discussing those. But we also have Pepsi earnings, which I think show a continued trend of the last few months. We have a Hindenburg short report on Roblox, and we got other stuff that the YouTube commenters and the people that join us live will surely ask us questions. But first, I want to talk about our friends at public. If you want to earn a 6.9% yield for the next four years or more, or I should say, excuse me, 6% or more for the next four years, you need to check out the bond account at public.com. It's a new way to invest in a diversified portfolio of bonds and receive monthly interest payments. The best part, if you act now, you can lock in your yield as the Federal Reserve is

Starting point is 00:04:02 long interest rates. In other words, you don't need to worry about upcoming rate cuts with a bond account at public.com. You can earn this yield even as rates fall, but you have to act fast if you want to take advantage of some of the highest bond yields in years. Discover how you can lock in your yield until 2028 with the new bond account only at public.com forward slash chitchat stocks paid for by public investing. Bonds are not a recommendation of individual bonds or default allocations, member FINRA and SIPC, all that good stuff. And we also have disclosures there in the show notes. All right, we got that intro out of the way. Dave, what do you want to talk about first? Well, let's take a look at the Pepsi.

Starting point is 00:04:49 All right. Yeah. Let me pull up my notes here, get organized for everyone. I thought it was it was a boring one but i think boring because it was more of the same where and i don't know if i'll share these charts but i think there was three charts that really encapsulate what happened to pepsi over the last few quarters and what's happened to a lot of these cpg companies volume growth or organic volume growth has how they've described it has been negative since september 2022 uh it was negative two percent again this quarter it's basically been negative two to negative three, maybe negative 1% since September 2022. We also have net pricing growth has, and maybe this one is one that I can share. It's almost a pyramid where in September

Starting point is 00:05:39 2022, they were raising prices at a 17% annual clip. And I don't know if that solely had to do with inflation or whether they were checking or testing how much they could raise prices without impacting volumes. But it clearly has impacted volumes, as people can tell from what I mentioned before. But that has tapered off quite a bit. And if you look at previously in September 2022, they were raising prices at 17% a year, and volumes were maybe negative 1% to minus 2%. But now we're seeing the same volume declines and net pricing is only 3%, percent which i think obviously you know it's not a good thing for the business and then the last one i'll look at is the organic revenue growth which is kind of you know combining both of these

Starting point is 00:06:31 and that is at its lowest level in a long time at just one percent so that's kind of the lead into the discussion dave what did you think of the report and how do you look at the stock uh well i guess the first question i want to ask you before i respond to that are you a coke or a Pepsi guy? Ooh, I, I think, and I usually only drink them if I'm having like a cocktail or anything. Now I don't really drink soda just to drink soda. I think Coca-Cola. Okay. Yeah. What about you? Oh, I'm, I'm a Coke guy all the way. Uh, I, I worked, uh, we're going to talk about restaurants a little bit, but I worked at, I started, I took a job at a restaurant and found out they were a pepsi only place and i quit because i didn't want to really i didn't want

Starting point is 00:07:18 to drink pepsi while i was at work because i was like you know it's fine once in a while but just as on a regular basis no no no bueno uh all right well coming back to the business what do you think this quarter what what do you think of the trends in general on the pricing and the volume and how that's impacting them? Well, I, to me as an investor, if I saw that, when I saw this, that my first instinct was, that's, that's scary stuff. When you see it, it, it, it hearkens back what Buffett said. And of course this was about Coke. So different, different beasts, but you know, when you have to have a seance to raise prices, that's not a good place to be. And that to me is what this maybe signals. And that to me would be a scary, scary place to be. Obviously,

Starting point is 00:08:09 Pepsi is a beast in the beverage industry as well as the snack industry. But that to me is not a good look. Yeah, I agree. And you're looking at the last maybe 40, 50 years, there's been a formula. they are going to see growing volumes, at least maybe not in North America, but generally internationally. And they've been able to raise prices at slightly higher than inflation without impacting volumes. And what I worry about, you know, a couple of years from now, we might say, oh, this is just a one time blip. And it wasn't the long term trajectory stayed. But volumes aren't growing and they're not able to raise prices at will anymore, as you mentioned, doing the prayer before raising prices.

Starting point is 00:09:00 I think previously, Pepsi, Coca-Cola, all these CPG companies could just say, all right, we're going to raise prices by 3%, 4% a year. Nothing's going to happen. But now, I think, and it's hard to say because a long time ago, a bag of potato chips,

Starting point is 00:09:17 which for anyone that doesn't know, Pepsi also owns Frito-Lay, so that's actually the biggest part of their business. A bag of potato chips maybe costs 50 cents, 25 cents. and if it costs two bucks today is that a big deal when does the ceiling hit is three dollars the ceiling i think from that's hard to know in you know prospectively back then but today we're seeing that maybe they've hit that and they've hit that pricing ceiling where actually people think about what they're purchasing where the whole thing and this is just stealing directly

Starting point is 00:09:50 from buffett and one of the reasons why he bought coca-cola is he said look they trust the brand and if it's 30 cents more at the grocery store, they're not going to buy the generic Walmart or Kroger one. But when it's twice the price, maybe people will think about that. And that could be happening right now. At the current valuation, which I think it's at 24 times earnings, but at least I know it's above 20 times earnings. Does Pepsi interest you at all? Would you like me to hesitate just a second? or why what's the main reasoning there um it comes to me it comes down to i guess a couple things number one is i worry about i worry about it the the potato chip part being a bigger part

Starting point is 00:10:40 of the business i worry about whether health trends are going to continue down the path they've been going and you know the whole conversation about the uh you know the diabetes drugs and the weight drugs. Are those going to have, is that going to become a big enough headwind that it becomes an issue for any company that is putting out less than healthy snacks, shall we say? And so that is something that would concern me a little bit. And number two, if they're seeing volume drops and they're seeing pricing drops, that to me indicates that there's something else going on that's driving people away from drinking Pepsi. I don't have data on Coca-Cola and Dr. Pepper and some of the other ones. If they're seeing the same trends, then that would indicate

Starting point is 00:11:29 to me that there are some headwinds about people drinking those kinds of sodas. And that would be something that would, I guess, concern me. And I would want to see something like that turn around before I would consider investing in a company like this. Yeah, I agree. And one other data point along with the weight loss drugs is I saw, again, it's been a short time period. So I don't know if one year makes a trend, but there were estimates that obesity rates

Starting point is 00:11:59 have gone down in the United States ever so slightly after rising for, I think, multiple decades in almost a straight line. So, again, that can directly impact someone like Pepsi. I know that these weight loss drugs and some of the data around that has specifically helped people stay away from snacking. And there's been a lot of, what I would say, positive data for the people, but negative for someone like Pepsi, that there's a 30%, 40% reduction in consumption on salty snacks, sugary snacks, stuff like that. And that's got to be highly concerning for someone like the Pepsi management team. What's interesting is I read the conference call this morning. And what I think should also concern investors, and again, I agree with you, Dave, this does

Starting point is 00:12:43 not interest me whatsoever at current prices. They didn't have much of an answer for what they were going to do. They said, well, we're going to keep our good marketing campaigns. We know some of these work. We know they're pretty catchy. We know that we can target the younger audiences with some stuff. And they were saying things like, well, macro hits in some of the areas, you know, the Middle East is struggling, China is struggling. And well, what are we going to do? That's kind of what they said. And I think that's just something. i don't know why you would get excited about this at over 20 times earnings especially when

Starting point is 00:13:21 there could be a scenario where this turns into a negative volume business similar to the tobacco companies and that doesn't make you a bad business if you can keep raising prices but it's not one i want to buy at 25 times earnings totally agree so tyler asked a really good question he asked Do you guys think the new internet-based brands like Dollar Shave Club or new brands can scale on Facebook or Google is competing away the returns of CBG companies like Coke, Pepsi, and so on? What are your thoughts on that? I think to an extent, to an extent, we talked about this, I should say as a tease, we have a podcast that released this morning on, and we're recording this on Wednesday, on Celsius. and one thing with that is that there is a it's a lot easier for someone like i think in the united states there's a there's a company or a brand that i've never heard of called alani new that

Starting point is 00:14:19 has three percent market share in the energy drink category and i think it's all based on a i don't know if it was started by some celebrity but either way it was so somewhat like a dollar shave club in that category where you just went online only and you try to gain share going through the Amazon channels, going through your direct-to-consumer website, signing up a bunch of social media influencers. And could it impact someone like Pepsi? Possibly. I know that I saw some data that the soda called Poppy, which I've seen before, I've seen a commercial at least, that was growing at 100% year-over-year on volumes or something along those lines. And yeah, it's a much lower volume than Pepsi, but hey, that's going to eat into your customers.

Starting point is 00:15:04 And if it keeps growing at that rate, well, eventually that, you know, becomes a bigger issue. Yep. What do you think? I agree. I think that there's just way more competition now across the board and a lot of different sectors. And I wonder if some of this, I'm anxious to hear what you guys have to say about Celsius

Starting point is 00:15:29 in some of the other companies that are kind of in that category. And I'm curious, I'm going to be curious to see how all this plays out, because I feel a little bit like some of it can be fad driven and doesn't have the sustainability. And Coke and Pepsi in particular are kind of like the Visa and MasterCard of beverages. But for them to continue to be, I guess, worthwhile investments, they need to grow. and i just wonder if those if those days are are really behind them and that's that's i guess a concern for me and then when you add in you know the expansion of social media and the impact like

Starting point is 00:16:13 you were saying the influencer or influencers that can easily roll out something if they have a big enough following they can get a pretty good traction on something pretty quickly uh jake paul with whatever one he did you know with his huge following that got some traction pretty quickly. And I think those things can really definitely eat into some of these legacy companies. And we'll probably continue to do so until, you know, Pepsi figures out what they want to do. Yeah, exactly. Exactly. And the last thing I'll say on that is we've seen that prime energy drink, which I think is the one that Jake Paul did. It went through a little bit of a boom and bust. But from a Pepsi or a legacy brands perspective, I think you not only could have

Starting point is 00:17:02 an impact on stealing volumes, but it could force you to spend more on marketing, which is another headwind. So either way, I think it's a problem for them. And it will be a continued problem. But I think we should move on to another topic. We'll see what maybe if some people have questions in the comments, but I should say I had the wrong disclosure for public so I don't want to get in trouble. So let me say, for that advertisement at the start, brought to you by public investing member FINRA plus SIPC. As of September 26, 2024, the average annualized yield to worst across the bond account is greater than 6%. Yield to worst is not guaranteed, not an investment recommendation. All investing involves risk. Visit public.com slash disclosure slash bond dash account

Starting point is 00:17:45 for more info. All right. Lots of disclosures there, but they're great partners for us. Helps us keep the show up and running and definitely go check them out for a high interest yield account. Okay. Any questions from anyone? If not, I think we can move on to the restaurant topic. Dave, why don't you, before I go into some of the questions, give some of your background. I know maybe you don't want to share exactly where you worked, but whatever you want to

Starting point is 00:18:13 share and your expertise in the industry. Yeah, absolutely. So I got a degree in music a million years ago, and when I got out of school, the most natural thing was to go into the restaurant business. And the question, do you want fries with that, became a very big part of my lexicon. Anyway, I worked in the restaurant business. I literally did everything from wash dishes to be the big boss, be a general manager at several restaurants. And I waited tables. I worked in the bar.

Starting point is 00:18:43 I worked in the kitchen, did all the positions in the kitchen. I, yeah, I've been there, done that. So, and I did it for almost 25 years. So I still have PTSD about it, but I did survive and I learned a lot along the way about restaurants, how they run, what to look for in good ones, what to look for in bad ones, and just kind of how to, I guess, understand them. What's the biggest, and this is an investing one, but what's the biggest horror story you've ever had at a restaurant? Well, it depends. I got so many. I think the biggest one was the first Valentine's Day that I worked at a restaurant in Minneapolis. We were on a hour and a half wait. And we had been on an hour and a half wait since six o'clock at night. And we had, I don't know, still another 300 people to come into the restaurant. I had a woman and her husband come in and it's kind of funny but it's kind of not they had to wait in the bar and the guy came up to the bar it came up to the host stand where I was standing with the other hosts and he slammed the pager on the counter almost breaking it and weaned over into my face and said you have ruined my valentine's day and I immediately responded with

Starting point is 00:20:10 just out of reflex i said so spending an extra hour with your wife ruined your valentine's day he just blinked and looked at me and my hopes were like you know trying not to laugh in his face and he just stormed away um yeah so he didn't have a lot of nice things to say about me or the restaurant uh after that particular event but yeah that was that was that was one of the many confrontations i had with guests on occasion yeah if you if you're working in long enough. I'm sure you'll enough people coming through a restaurant. Some of them are going to be bad eggs. Yeah. All right. Well, let's get into it. I want to I want to talk about what makes a well run restaurant. And the reason I do is because some of the best performing stocks ever

Starting point is 00:20:53 and some of those durable compounders have been restaurant brands, McDonald's, Chipotle, Taco Bell, which is, I think, turn it. Yeah. Turn the young brands. Domino's has been a good point but there's also a lot of poorly run ones and if you kind of get in with the wrong crowd uh so to say you know there can be some bad performance there's really a difference between a well-run restaurant something that turns into a mcdonald's or a taco bell and one that turns into well maybe some of the examples i have later with our small cap of the week there's a reason it's still quite small but the first question i have is what qualities are you looking for when you want to determine a well-run restaurant. And for anyone listening or watching,

Starting point is 00:21:38 I'm going to share some charts from two well-run ones as we go through this Chipotle in Texas Roadhouse. Yeah. So I think the first thing that I always look at is for any restaurant, whether it's fine dining or whether it's fast food, is are they controlling the costs? What are their costs and the two biggest costs in a restaurant period ended discussion is food and food slash liquor and labor so the input costs to create the things that they sell and the people executing all those things from the kitchen to the front of the house to the management and if those two things are not in control or at least in a reasonable range for them you're going to have lots and lots of problems. If you look at a lot of the companies that are in the restaurant S&P 500 or whatnot,

Starting point is 00:22:29 the net margins are not, for some of the bigger companies, they do a great job. But for some of the smaller companies, and one of the ones that we're going to talk about here in a few minutes, not so great. And so you can see how razor thin those margins are and what a big impact those costs have on the business. So that's the first thing I always look at. And if those aren't in, you know, it's going to range a little bit depending on the type of restaurant. A fine dining restaurant may have lower food costs and maybe have higher labor costs because they're paying the kitchen staff more, for example, where a company like maybe McDonald's may have lower food costs and lower labor costs because they're not paying the people that work there

Starting point is 00:23:15 as much generally, although those things are changing. So those are the two things that I always look for. The other thing I look for is unit growth because the stores themselves can only grow so much. And I'm going to tell you why this is. If you look at any of the companies that have a longer track record, you see the core business starts to stagnate and then they start branching off into other types of concepts because they're trying to continually to generate more and more growth. And the only way they can do that is either by putting more units out in the field or branching off into another, you know, a side gig, if you will. And then the last thing I'd look for would be same sort growth. I know that's a cliche in the retail industry, but it's

Starting point is 00:24:08 a diehard in the restaurant business. And that was a big, big thing that I was measured on for my performance as a manager was how well I continue to grow sales at my particular location, because I can't control somebody in Ohio, but I can control what I do. And if I'm not growing the business and everybody else around me is in the concept, then they're going to come to me and say, what are you doing? Right. Those are the things I always looked at. Now, if you're looking at a stock and you're trying to figure out, you know, the management incentives, like you just mentioned, would you be happy if you saw either in the proxy statement or an executive said that managers are for whatever they're in charge of, they get bonuses or any sort of performance bonus

Starting point is 00:24:53 is based on the comp sales that they're under control of with that? Do you think that would be aligned incentives? Yeah, I definitely do. Okay. And maybe on the comp sales, I never or not never, but there's always confusion on what's a good comp sale or not. So maybe assuming a 2% inflation, what do you think good comp sales figures are for something that's more mature? Say, you know, not a Kava, but more of a McDonald's where, is it just keep it up with inflation or what do you think? Yeah. Keeping up with inflation, maybe a point or two higher. So two to four percent probably would be really good for something like a McDonald's, a Chipotle, not Chipotle, like McDonald's, maybe Burger King, KFC, you know, any of those things that are more

Starting point is 00:25:40 legacy level kinds of restaurant brands. Yeah. You know, GDP or a little bit above is probably pretty darn good. OK, and we're looking at I've been sharing this chart for a little while now, Chipotle versus Texas Roadhouse operating margin. I'm seeing for anyone that's just listening, 17% operating margin at Chipotle. They've actually just recovered from before the Salmonella outbreak. So they had 17% before. I would say I would assume that's kind of their steady state. Maybe that's what they could do.

Starting point is 00:26:12 Maybe it'll get a little higher as they mature. And then Texas Roadhouse, excluding the pandemic has been around eight and a half percent, maybe 9%, maybe a little lower. Why do you think there's a difference here? And yeah, I guess we'll start with that.

Starting point is 00:26:30 Well, the first thing you have to look at is Chipotle primarily, I mean, I know they sell other meats, but I think the big, probably the largest consumption of meat for them is going to be chicken. And if you look at Texas Roadhouse, the majority of their food is beef-based related. So hamburgers, steaks, things of that nature. beef carries a higher cost food cost than chicken does and so if you're selling if your volume mix is higher in chicken for example that's going to give you you know a two or three percent edge right out of the gate on your food cost because you're running a lower a lower food cost and

Starting point is 00:27:14 that's going to help a lot the other thing that would probably play into this would be the cost associated with the labor. So for example, at a Texas roadhouse, you could have up to, let's say, 10 people on the line in the kitchen, all making 15 bucks an hour. And then you'll have the front of the house, depending on the size of the restaurant, how many seats it has, you could have upwards of 15 to 20 servers. And then you also have the bartenders who get paid a higher wage, the hosts that get paid a higher wage, all those things lead to a lot higher costs where in Chipotle, you maybe have what six to 10 people working at a time and they're all making maybe a decent wage, but not as much overall as the people in the kitchen for Texas Roadhouse, because

Starting point is 00:28:06 a cook at Texas Roadhouse generally is more skilled and maybe has more training and has a little more experience. So they pay more than somebody would be to be a line cook at Chipotle, for example. And so the costs that are associated with that would be higher. Their percentage would be higher. And if you look at, I looked at the 10K for both companies and Texas Roadhouse runs around 33, 34% for their labor costs, whereas Chipotle runs around 24%. And the food cost was roughly the same for Chipotle, around 24%. And the food cost for Texas Roadhouse was in the 33, 34%. So the two biggest costs for both of the companies, Chipotle is running around 45 to 50% ish. And Texas Roadhouse is running in the mid 60s. So that right there is what sets the margins

Starting point is 00:29:01 apart. Yeah, that's that operating margin right there. And it's interesting where you could have looked at that perhaps a couple years ago, maybe after the Salmonella outbreak, and you could have seen that with Chipotle and said, hey, maybe there's plenty of room here for operating margin expansion. But I do like the thought of thinking of just about the concept and how many employees are needed and what is going to be your labor costs and whether that's going to be a permanent part of your model. Because as you can see here, that looks like it lines up with the return on invested capital for a chipotle versus a texas roadhouse we see from the chart i'm sharing here chipotle has consistently higher return on invested capital than texas roadhouse although

Starting point is 00:29:44 texas roadhouses has been solid and i guess it's just the beauty of that model where you're serving you know fresh food uh generally cheap stuff compared to you know the beef focused stuff and it's just highly efficient so maybe those that's why those type of models are so uh attractive to investors and yes maybe that's why kava is trading at what is it 12 times sales something like that yeah it's uh i i if i'm if i'm right i noticed the other day that their their market cap compared to chipotle's are almost identical really uh well i think that might have been someone else yeah okay but you might be thinking of another company are you looking at texas roadhouse or might have been i might have been looking at texas

Starting point is 00:30:37 roadhouse i'm not sure yeah either way a lot of these restaurant stocks they can get uh they can get expensive especially when people understand that and this can be the beautiful thing about them is they understand that the model does well and it's replicable across the entire country so that there's that room for unit expansion it's kind of the one of the peter lynch adages. We'll hit some questions here from Twitter, specifically on restaurants. But first, I should say from the screen that I shared there, these are charts from FinChat. You can check them out at finchat.io slash chitchat. I'm in there every day, at least every day I'm doing some investing work. And it's a beautiful platform, saved me tons of time, tons of insights, helps

Starting point is 00:31:23 us out on the show, and you can try it out with a discount with our link, finchat.io slash, excuse me, I can't say slash, slash chitchat. They have a free version and then a paid plan, so go ahead and check them out. You won't regret it. First question here, this is one that's near and dear to my heart because I do own this stock, but don't be afraid. Be as highly critical as you want. Any thoughts on Portillo's?

Starting point is 00:31:51 Yes, I love the food. I lived in Chicago for four years and my wife and I ate there every Thursday for probably several years. So I'm, I'm biased because I love the food. I am curious to, I know that you have done a lot of work on the company. When I looked at just the overall like financials, I didn't see anything yucky that made me go Ew. My question to you is what is their plan for unit growth and do they have a timeline that they're shooting for? I don't know. They don't know if they have a timeline, but they want to

Starting point is 00:32:33 grow by about 10% a year on a unit growth perspective. And I think that's what they're going to be limited to because they fully own their restaurants. I don't think they're even doing operating leases. I think they're fully owning them. So it's a bit more expensive upfront as compared to someone, even like Chipotle is much different, or, I mean, it's obviously the franchise model would be extremely different there. And then from the unit growth perspective, they're focusing solely on the Sunbelt right now, because I think, as you mentioned, you're the exact target audience they're looking at. They said, well, we're getting, you know, in Chicago, our products do well, but the population is going down there and in the

Starting point is 00:33:13 greater area and people moving south. People already know our product. There's population growth here, which is a general tailwind. Plus, we can get kickstarted with ex-Chicago people that already like our food. So they're starting in the Sunbelt, which is specifically really Arizona, Texas, and then the greater southeast, but mainly Florida, which I think is a good idea. The stock's been down mainly because of the comp sales, but they have an interesting i i don't know exactly how much of an impact all these different variables have but when they open a store the brand is already well known that they get a huge surge in demand at first and the year after and actually the next two years they get

Starting point is 00:33:59 kind of negative comp sales even though the stores are still doing millions of dollars and are doing fine they have that pop at the beginning where they're on like a run rate of 10 million dollars a year and that's affecting them. And I think investors don't like that. So the comp sales have looked a little bad, but yeah. You talk with anyone from Chicago and you say, well, yeah, it'd be great if they had this concept in our city. And I think, well, there could be a long runway for growth there. I mean, do you think it would work well where you're living right now? Oh yeah, for sure. Yeah. Yeah. It definitely would. I'm in Wilmington, North Carolina, And it would be, you know, it would be a big hit here.

Starting point is 00:34:42 That's, that's what has me optimistic, but you know, they got to prove out the comp sales. And I think they have to prove out that they can run at positive free cash flow while still investing in growth because of the CapEx is so, so much there, but all right, next topic. What are your favorite restaurant investments? I know we mentioned Texas Rose house and Chipotle, maybe those, but what will come to mind is the best well the most well-run restaurants out there oh that's a

Starting point is 00:35:11 good question um i i have looked at uh texas roadhouse has been very high on the list um chipotle as well the price is a little juicy but um the the other companies that i think i've looked at that I, that I have liked have been Darden. I've also liked the Jack in a Box has been interesting mainly because they're a big cannibal. They eat a lot of shares. And so I think that's kind of interesting. I also have a soft spot for them because I ate there a lot when I was in college. There was one right next to my school. So I have a soft spot for them. The other one that i am dying to go public is um chick-fil-a if that ever goes public i am all over that i don't buy ipos ever but that one i probably would consider buying because that company is ridiculous

Starting point is 00:36:07 yeah that's the one i think that's the answer for a lot of people's question of what one that and trader joe's right yeah but or i think trader joe's might be owned by aldi now i don't know if they're public either way yeah chick-fil-a incredible model last one i have here what metrics and this is an interesting question i don't even know if there's an answer here because it might be on a case-by-case basis what metrics would he use to guess whether a restaurant can scale from a regional to a national category that's a great question i I don't know that they're okay I think one that could give you some clue on whether they're going to have any staying power would be it's a little the net promoter score looking at what other

Starting point is 00:37:00 people are saying about them because the better the reputation the company has the easier it's going to be for them to expand and we were just talking about Chick-fil-a a minute ago when you go to a mcdonald's and you go to chipotle the customer experience is night and day and that is part of what allows a company like a chick-fil-a to continue to expand and the restaurant business can be a bit commoditized in that there i don't think we have a lot of you know would you drive across town to go to a mcdonald's or would you just go to the burger that's half a mile away. There are some people that will, but I think the vast majority are just going to go wherever it's closest or whatever they know, whatever is comfortable

Starting point is 00:37:50 and whatnot. And so for a restaurant to be able to expand, they have to have something that's going to differentiate them from others. And they have to have really good customer service because they have something like that, that can really set them apart from the sea of mediocrity that can be fast food in particular. Fascinating answer. And that leads into our small cap of the week. Again, it's going to be focused on restaurants. This is one I didn't even know was public. This is presented by Yellow Brick Investing. It is Denny's Corporation. Yellow Brick is an aggregator of the best stock pitches across the internet, tracks thousands of blogs, newsletters, fun letters, podcasts, and more. I'm sure they track both chitchat stocks and

Starting point is 00:38:35 Investing for Beginners. They collect and summarize the best pitches on the internet and bring them to you in a single place. That's how I found. I wanted to look up a small cap company that was a restaurant that we could talk about on the show that we haven't looked at before. And I put in some of their criterias, put on that filter and boom, Denny's popped up. So you can try it for free or upgrade to a paid plan to see investor returns and the latest stock pitches on Yellowbrick. We use it all the time. Try it for yourself. Simply go to joinyellowbrick.com slash chitchat and search a company you're interested in. You're bound to find a great report on just about any company. All right. Denny's. This is from a pitch or a write-up

Starting point is 00:39:17 from the All Springs Special Small Cap Value Fund. It was in their investor letter. Here's what they had to say about it. Denny's Corp is the second largest family dining restaurant chain in the U.S. Shares had a lackluster performance amid a challenging overall mid-scale casual industry. We expect Denny's core results to improve in the second half of the year as Denny's will have additional local co-op marketing, easier comparisons, and benefits from an enhanced value message. Denny's has continued to generate strong free cash flow and is reducing its shares count by middle to high single digits annually with optionality from growth of the Kiki's brand over time. Let's get some numbers. Market cap 317.5 million dollars. EV to gross profit 4.

Starting point is 00:39:58 EBIT to EBIT, 12.8. EBIT to free cash flow, 17. Positive free cash flow every year, excluding the pandemic, which I think if you look at the share price, you would think that's not the case, but I was surprised to see that. And then shares outstanding have been declining by 5% since 2014. So that's 5% per year and 6% per year since 2020, because I think they probably They did an equity raise or something during the pandemic. Negative 0.6% comp sales last quarter. So I guess pretty much close to flat. Full year outlook, they're expecting negative 1% to positive 1% domestic system-wide comp sales.

Starting point is 00:40:43 I think they're expecting a consolidated net decline of 20 to 30 restaurants, so shrinking it. But they're going to be opening a lot, so I think they're trying to improve their unit count. and a lot of them are these new Kiki's locations, which honestly I've never heard of. I think that's an East Coast thing. They're expecting commodity inflation, zero to 2%. That's that input cost on food that Dave mentioned. They're expecting labor inflation between 3% and 4%. Again, that's one thing you mentioned, Dave, that's really been hurting a lot of these restaurants. And yeah, that's about it. What do you think? First look at Denny's. Stock's down a lot, but maybe better than people think that that cashflow kind of maybe perk up a bit.

Starting point is 00:41:24 Well, I have, I will admit freely that I have a bias against Denny's because I work for their direct competitor. When I worked in the restaurant business, I worked for a company called Perkins, which you may or may not have heard of. It was a very similar concept where they served a lot of breakfast food, pancakes, eggs, bacon, that kind of stuff. And I worked at the biggest one in the company. We did around 5 million a year in sales at $7 a person. So that was around 65, 70,000 people a month would come through that restaurant. So it was a busy place. There was a Denny's right across the street from us, literally. And it was always pretty dead. And we would go in there and the food was roughly the same as ours. We always thought it was a

Starting point is 00:42:11 little less as good as ours, but that's just arrogance talking. But when I look at this and I see that their comp sales are down, that's a scary thing. I also looked at their margins and their net income margin is 2% or something like that. And so when you're looking at that and then you see something like labor inflation of 3% to 4%, that's scary stuff because I don't know how they're going to combat that other than raising prices. And when your prime customer is coming there for basically a cheap meal, you get a lot of food for not a lot of money and not expect a high level of service, I worry that that's going to eat in more into their margins than it already does. Yeah. I think if you're going to invest in this company, there needs to be more of a thesis

Starting point is 00:43:10 then, oh, they have easy comps. There needs to be something where durably over the long term there's going to be a way to drive more traffic to the stores because given that labor inflation, there needs to be that. And it kind of shows the fragility of the restaurant model where you can get

Starting point is 00:43:25 like this isn't there's only a slight difference between this and something that's well run. And it's just a little bit more traffic and just a little bit more throughput and the ability to raise prices because of your brand. I will say, though, denny's does have a good brand i think people know what it is yes they do and maybe the quality

Starting point is 00:43:49 is not there anymore but yeah i get does this type of restaurant face let's say in general this one we kind of we made some notes on dine-in brands which i think who do they own applebee's and IHOP. It's kind of a similar. Yeah, it's almost a similar type. Like I would put this in a category of sit down casual or almost like like one step above fast casual. There's a lot of these legacy brands out there. Applebee's, IHOP, Denny's. Do you think these type of restaurants, regardless of Denny's or not, are facing like a headwind or a tailwind over the next decade? I think they're all facing a headwind. I think that if I had to categorize them on a scale of evolution of the business, I would say that they're all pretty much on the

Starting point is 00:44:46 downward side of their businesses. I'm 57, and when I was 19, 20, they were the brands to go to. They were the places to go eat. And now they just don't enter the conversation anymore. And newer places like Buffalo Wild Wings or something like Cheesecake Factory have just gotten up way more popular over the last few years. And I think it really kind of stolen the thunder from these kinds of companies. yeah and even excluding or going outside of sit down look at the traffic growth at something like kava that's a tiny restaurant now but you'd much rather be them than denny's or or this dining corp which i should say it's almost similar to denny's really really cheap valuation um let's see it's training at as dying global brands ticker i think is din or maybe d-i-n-e uh evie gross profit 4.8 ev free cash flow 20 even ebit of 10.2 but again comp sales negative one and a half percent to negative 1.8 percent for across their respective brands you gotta have positive comp

Starting point is 00:46:00 sales if labor inflation is three three to four percent all right we've talked a lot of restaurants a lot of food today i want to talk about i think this hindenburg report on roblox which of course we don't want to get into the details of it because there is some graphic things which they had a warning on for some of the stuff but i'll just lead into it i would call it if all the stuff is true an extremely damning video and report from hindenburg for anyone who doesn't know hindenburg is the famous short seller that made its name by exposing the fraud at Nikola during the pandemic. I'd also say the bear cave from Edwin Dorsey has covered this Roblox story quite a bit, but Hindenburg is bigger. So it kind

Starting point is 00:46:49 of got into the mainstream this week. Essentially, this is what they call said. First claim was that they are inflating engagement hours and active users on the platform, which is kind of a standard thing for a platform like this to do but the second claim uh is that well as a side note for people that don't know roblox is a gaming platform for children so this is what makes it extremely concerning hindemore call hindenburg calls it a quote pedophile hellscape which is true if if true is really terrible anyone that wants any details go look at the report yourself i wouldn't want to talk about that type of stuff it was pretty it was way worse than i thought it would be if that's

Starting point is 00:47:34 kind of any indication the question i have we don't even need to talk specifically on roblox how do you react and read the short reports on stocks you follow around because inevitably it's going to come up on one of the port your portfolio companies eventually so how do i react to it yeah um it depends on like if it depends on how well i know the company to be to be blunt if if they came out with a report on visa i feel like i could read it objectively and go just basically go down their claims and go and that's not right that's not right that's right yeah that may be right um but if it's a company i don't know as well i know nothing about roblox other than my daughter used to play on it so as far as like the business goes

Starting point is 00:48:23 i know nothing so if i read a report like this i probably would be swayed towards their point of view just because of their history and that i guess that's how i would look at what are your thoughts how would you look at it i i think i if it's a report yeah if it's a company i follow i'm looking for something that i haven't uh researched before because there's always you know no company is perfect and there's gonna be like little warts on everything and if it's something i've looked at before then i can say okay maybe they looked at what i already looked at and they can excuse me came to a different conclusion but i thought it wasn't a big deal but if it's something i haven't heard of before i get a little concerned because it's well if i haven't heard of this or are there

Starting point is 00:49:12 other things i haven't heard of maybe i haven't done enough research and then i want to look at if it is something that could permanently impair the business or its cost model because if if roblox does have this problem and they're not um essentially making it safe for people on there then of course there could be some legal ramifications or however that will go down And, you know, they weren't being responsible. But from another negative is that they're going to have to and they should increase their, what do you call it, moderation costs or whatever it is to just make it, you know, get rid of all these bad actors and that's going to hurt their expenses. And then, at least with this one, the accusations of lying about engagement and users would be highly concerning to me because it's not one I can go, well, I can just confirm that. Because you can't just count them all up yourself. I don't know.

Starting point is 00:50:18 That one does concern me. Where you have other ones, like, I don't know. It's hard to say. like some of them have a little less meat on the bones than this you have to kind of think okay could this take out the entire entire company was i wrong about this has management been lying to me and if management's been lying to you well you probably got to get out no matter what yeah yeah for sure i mean tyler brings up a great point and mike i was thinking about this like when you think about the amount of users that you that are active on roblox something like this also

Starting point is 00:50:55 calls into question the veracity of everything that they claim where i feel like maybe i'm not a i'm not a meta user or an investor but i have more faith that what they're telling me is more is more accurate than what is coming out of roblox what are your thoughts on that i agree yeah i think meta has gone through and yeah the fake users thing where they kind of like they have a rate that they're trying to normalize or tell you um they've gone through some of this before and doesn't look like it was nearly as bad as what has been happening on roblox or what hindenburg alleges i should say so yeah that that meta stuff doesn't concern me nearly as much where roblox it's only been public for a few years

Starting point is 00:51:40 it's hard they give out a lot of non-gap metrics and given that they're not audited that much i think that those can uh you know there's a way to massage those numbers because you can define there's not a gap way to define active users or number of engagement hours. You can have a bot go on for 30 seconds and be included as an active user. You could have a bot technically be on the platform for hours and hours and hours of time that could be included in engagement hours. And yeah, it seems like Roblox might've been doing that. We have another question here. Any thoughts on the Visa Department of Justice debit anti-trust case. Yes. I have not read through it yet, but I did read through somebody who did

Starting point is 00:52:36 read through it in the fintech space and made some comments. I think it's a bunch of hooey. And here's why. Visa does have 60-ish percent of the market in debit cards. But what But in the past, the government tried to put restrictions on routing of debit card transactions as well as the fees that could be charged. And the whole purpose was to lower costs, not only for the merchants, but also for consumers. Well, unintended consequence, they lowered the fees for the banks and Visa. The merchants just kept the difference. They kept the profits and the consumer still pays $250 for a Coke.

Starting point is 00:53:20 so it didn't change it didn't impact the consumers at all it made merchants better which i'm not you know i'm not upset about but it just when they try to come down with things like this there have been how many fintechs trying to compete with visa to create a debit card rail if i serve as one of them that have not been able to live up to the task and even after they instituted the rule that makes merchants allows merchants to choose which vendor they want to use 60 of them are still choosing visa because it's a better network and so why is visa being punished for being the better network so it's not that they're out competing other people there's plenty of people like square slash block american express discover that have all tried to compete in the space

Starting point is 00:54:10 and have not been able to do it so you know to me that i may be biased because i am a big visa but I just think it's a bunch of hooey. Yeah, I looked up, and this comes from an AI overview from Google, so I think it's correct, but hey, if it's not, blame them. It says that Visa collects over $7 billion in annual processing fees for, I believe that's solely debit cards. I kind of look at that and say that it's not that high. It's really not. Or making, first, having seamless payments for merchants and consumers across the entire country. the value provided is higher safe seamless yeah exactly that's a big part this is safe yep all right we have one comment here from lars says i would like you to do a quote-unquote deep

Starting point is 00:54:59 dive into some past darlings that have collapsed post-covid i'm sure there are some really good opportunities out there a company that comes to mind when we talked about last week stone co i should say i think we've had a couple of people comment on this and i'll probably do that as my next one to research should be a fun one i did say they made like 10 acquisitions though so that makes it much more complicated but hey as you mentioned last week you brought up the first time i've heard about it uh in multiple years some of those earnings metrics look quite cheap quite cheap yeah yeah stoneco and poxa girl particular from brazil are both very very interesting because they're they're cheap as dirt yeah you just have that foreign exchange

Starting point is 00:55:42 potentially headwind it can be a tailwind how how volatile has the do you know the brazilian real versus versus the dollar is it kind of crazy or is it more no it's it's it stayed pretty steady for the last couple years it's uh traded probably between four and a half to six hey ice to a dollar um so my fiance or my wife um sends money to brazil pretty regularly and because it's you know, it's a 5%, you know, five times our money, uh, whenever she makes a deposit in Brazil. So, um, yeah, it's, it's been pretty steady. Gotcha. Gotcha. All right. Let's see other questions here. Ooh, this one's on restaurants again, but I think I like it. What do you think Chipotle did differently to dominate its space? That's a great question. I think it's probably

Starting point is 00:56:38 two things number one the quality of their food is really really good like across the board and the price that they were charging for it felt reasonable if you ever got one of those burritos you know that was full you never complained about a the quality of it or b the amount you got and so i think people felt like it i think people felt like it was a value for what they were getting and they were it also was at the time was kind of being branded as a healthy alternative to fast food makes sense to me and yeah that kava seems to be doing the exact same thing yes for mediterranean it's it's funny how they have almost the exact same playbook uh even to like the specialty items that come up around once a quarter yeah all right we're running up on time oh forgot

Starting point is 00:57:34 to say, I should have done this earlier, but we should talk about our friends at Public once again. Let's see. All right. Interest rates are falling, but you can still lock in a 6% or higher yield with a diversified portfolio of high yield and investment grade corporate bonds at public.com. You might want to act fast because your yield isn't locked in until the time of purchase. Lock in a 6% or higher yield with a bond account only at public.com forward slash chitchat stocks. uh talked about them already this episode fantastic partner i just opened up a bond account actually it's a great way to add different it's so hard for individuals to access bonds and if you want that as a part of your portfolio if you have a shorter time horizon than investing

Starting point is 00:58:20 in the stock market this is a perfect product for you that's a disclosure brought to you by public investing member finra and sipc as of september 26th the average annualized yield to worst across the bond account is greater than 6%. Yield to worst is not guaranteed. Non-investment recommendation. All investing involves risk. Visit public.com slash disclosures slash bond dash account for more info. Okay. Here's my question. What stocks are you excited to see report this earning season? What one are you most anticipating that's a good question uh i'm probably i'm probably most excited to see i think new bank and also google yeah google's always a good one because i think each quarter

Starting point is 00:59:11 there's the viral tweet threads or blog posts that the the end is near right but they seem to just keep growing revenue at 10%. And that cloud revenue has been so, so strong. Yeah. I mean, that one's so fascinating at the moment. You have the AI stuff, Google Cloud, Google Search, potentially losing market share or not. You have the DOJ stuff. Yeah, that should be a fascinating one. NewBank though, what has you most excited there? I know we talked about it last week, but what metrics do you follow? What gets you excited for specifically this quarter? Well, I think to me, it's just, are they still growing? Are they still attracting more and more users to their platform? And are their deposits growing? Because that's the raw material that every bank needs to grow. And so if those two things continue to keep happening, especially if they keep growing faster outside of Brazil, i.e. Colombia and Mexico, I think that'll be, you know, just gravy on the train.

Starting point is 01:00:16 Yeah, I agree. That's a fun one to watch. Maybe one that I know it's not a fallen angel, but maybe another one in Latin America that we should look into here. Let's see. Tyler has this question for Dave. I know he's only asking you because he's asked us before. Does Dave have any thoughts on home builders and how they might perform in a falling rate environment? I am not. So I'm probably the wrong person to ask.

Starting point is 01:00:43 My business partner, Andrew, is very big on home builders, and he has invested in a lot of them and including a lot of companies kind of down the food chain, like Builders First Source and Simpson Manufacturing. Um, so I don't really have, um, a lot of opinion on that. I know Brett has done a lot of work, so I'd like to hear your 32nd opinion. Yeah. I like the, the sector. I think there's some pretty well-run businesses along there. Um, it's the one that you can see the tailwind, but I also can, you can picture some scenarios where immigration is not as strong, birth rates fall and stuff and the housing market is not necessarily needed and you have

Starting point is 01:01:26 you know something i don't do as well so i think valuation matters i know ryan owns a couple and or maybe just one maybe two and he likes them i mean if you look at some of the valuations and you just say hey they got a good management team they're gonna run this rationally it's a little bit cyclical so you can't really predict revenue at each year but if the long-term demand is going up it's going to track gdp and you're buying in as a reasonable price i think they'll do well yeah but i guess not for me i think two the i like businesses that have good cash flow characteristics and some of these just it seems like earnings get stuck in inventory I'm not a giant fan of that.

Starting point is 01:02:14 I know the business models can change. They've done the land option model, but yeah, that's how it goes. All right, we're running up on time. And you said, speaking of Andrew, I want to allow this time to give a little pitch. Why should any listener to this show also follow Investing for Beginners and some of the other products you guys have? Why should they? Oh, that's a great question. Um, they should, because if, if you are listening to Ryan and Brett talk about things and you

Starting point is 01:02:44 don't maybe quite understand all the lingo, check us out. We can help you decode some of the more complex things that they talk about, um, because they're advanced investors and we can, we can help you kind of demystify some of that. Beautiful. And that is the investing for beginners podcast on it anywhere. Very easy to find. and it is a nice name for those SEO purposes. So it'll show up right when you search it

Starting point is 01:03:10 on Apple Podcasts or Spotify. It'll be easy to find. But let me know anyone that wants a link to that. I'll send it over to you. Okay, let's hit the disclosure and close this thing out. Thank you everyone for joining. Thank you to our sponsors, Public, FinChat, Yellowbrick. Go check them out.

Starting point is 01:03:26 Tell them we sent you. Use our links. We love when you guys find value from our advertisers. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guests, including Dave, a special guest on this show, may own securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future.

Starting point is 01:03:49 The Investing Power Hour goes live every Wednesday, 1.30 p.m. Eastern Time on the Chit Chat Stocks YouTube channel, and you can listen to the replays on Spotify, Apple Podcasts, wherever you get your podcasts, or watch the replays after they finish on YouTube. We don't care where Ryan will be back next week. So hit up any questions specifically for him. Excited to get him back on the show and hear his thoughts. Thank you, Dave, for joining today. And we'll see everyone next time.

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