Description

Smith and Wollensky is a play on a NYC/nationwide travel recovery post 9/11/2001, a busted IPO story, and a growth story. The company just pre-announced horrible third quarter numbers due to the effects of the World Trade Center Bombing on their leading markets and travel. My own sources tell me that NYC dining in general and SWRG’s restaurants in particular are recovering faster than expected. While the stock market has begun to recover – including some of the hard hit travel related companies, SWRG is still trading on its lows and represents an opportunity with significant upside.

The Company went public at $8.50 a share, which was when restaurant stocks were hot. C.E. Unterberg mispriced the IPO and the shares immediately sunk to $6. SWRG was expected to generate $7.5mm of EBITDA this year and $10.5 mm next year as it rolled out its Scottsdale and Boston locations. The terrorist attacks have dramatically impacted business, which was already slowing. Comparable sales are down about 20-30% after the bombing and the company will burn $1.5-2.0 in cash this quarter. However, third quarter is traditionally weak and the fourth quarter should at least be cash flow break even - barring an economic depression or further attacks. Expansion plans are on hold for the moment to conserve cash. The company owns and/or manages 14 restaurants (9 owned) under the Smith and Wollensky, Cite, Manhattan Ocean Club, Post House, ONEc.p.s., Maloney & Porcelli and Park Avenue Café brands.

Valuation

The company has over $11.8mm in cash ($1.26 per share) and only $1.9mm of store level mortgage debt. Even if SWRG burns all of its cash and the burn rate stays the same, the company has 6 quarters before it must draw on its $20mm of bank lines. Haircutting PPE by 50%, tangible book is about $3.00 per share, fully loaded book is $6.44. But the reason to own SWRG is not for its book value but for its cash flow potential, excellent management team and growth. Alan Stillman is the founder of TGI Friday’s and has a long career of profitably managing restaurant chains. When the economy recovers, SWRG should hit $10.5mm of EBITDA within the next year or two. (assuming the Scottsdale and Boston locations do the chain average of $9.5mm in revenue and keep the company owned EBITDA margin of 16.6% - generating $3mm in incremental EBITDA).

SWRG is relatively under penetrated in the US compared to its competitors and still has room to grow given that the company is only in a handful of locations nationwide. At $3.40 per share, you are paying 2.9x normalized EBITDA and 2.1x forward EBITDA. Even if the whole cash horde is burned up and no new stores are built, you are paying 4.2x normalized EBITDA for a premier brand name company. Maintenance capital spending is immaterial at less than $1mm (furnishings are expensed) so most of that EBITDA will flow to the bottom line ($0.80 per share for a 23% free cash flow return on $3.40 per share). Private market values for the Vegas restaurant are estimated to be about $15mm and $12mm for the Miami site(pre 9/11). Assuming things go back to normal at some point in time, those two restaurants and cash equal about $4.00 in value with the rest of the operations for free.

Public Comparable Analysis

According to Bloomberg, the following 8 public restaurant chains trade at the following trailing multiples compared with SWRG (assuming normalized revenue of $79mm EBITDA of $7.5mm and EBIT of $3.7mm):

EV/EBITDA EV/EBIT EV/Rev.
RYAN 5.20 7.19 .77
PFCB 13.70 19.12 1.66
CPKI 13.62 20.93 1.81
RARE 7.50 11.04 1.01
STAR 6.53 32.87 .46
MRG 7.33 10.57 .71
CHT 27.89 NA .35
BNHN 4.87 6.45 .62

Mean 10.83 15.45 .92
Median 7.42 11.04 .74
Max 27.89 32.87 1.81
Min 4.87 6.45 .35

SWRG 2.92 5.92 .28
(Normalized)

Risks

No one knows what the long-term impact of the terrorist attacks will be on New York City in specific and travel in general. The recession was already hitting high-end restaurants hard and the longer it goes on the worse for SWRG. The stock market bubble is over and that certainly fueled a lot of the growth in upscale dining. The counter to those trends is that a lot of SWRG’s less capitalized competitors will go belly up and that it is one of the best brands in the business with a loyal base of customers. In addition, its NYC locations are all midtown, which should benefit over the long term from further migration from downtown. While Vegas is the hardest hit location at the moment, I believe that gambling will hold up fairly well in a recession and that Vegas travel will return. Miami will continue to be a Latin American/tourist hub and should come back as well and thrive long term.

Catalyst

SWRG has more of a buy side catalyst than a sell side one. For the value players, it is easy to see the company trade at 6x normalized EBITDA (which is lower than the 7.5x median of comparable companies) or $5.87 a share sometime in the near future as the company shows better visibility of a recovery in key markets (my sources tell me that the New York restaurants are already comping above last year, while those outside the city are doing better but not back to former levels) for a 73% return. At 6x forward EBITDA, the company would trade at $7.80 per share for a 129% return. For growth players, it is conceivable that SWRG will keep on growing to about $20mm in EBITDA and trade at $13.89 per share at 6x EBITDA for a 308% return over the next 2-4 years. At current levels, the risk reward is outstanding given the brand name, superb liquidity, and low valuation.