Gerald: LTUS makes Motley Fool Lunchtime Review
The Daily Double
Apr 13, 1998
Garden Fresh Restaurant Corp.
(Nasdaq:LTUS - news)
Phone: 619-675-1600
Price (4/9/98): $20 7/16
HOW DID IT DOUBLE?
Today's salad special might just whet your appetite. Begin with a restaurant chain selling a
fixed-price product yet showing perpetual same-store sales growth. Toss in some crisp and steady
earnings growth. With this delectable mix of ingredients, it was a Daily Double recipe waiting to
happen.
For Garden Fresh, the parent of Souplantation and Sweet Tomatoes, patience was more of a
mandate than a virtue. The company came public at the wrong time. When the shares made their
1995 debut, investors were not interested -- and with good reason. Over the past year they had seen
shares of peer restaurant chain Fresh Choice (Nasdaq:SALD - news) collapse from $30 to the
single-digits.
Was the market so jaded that it would expect nothing less than failure for another California-based
scatterbar chain? Apparently. Despite repeatedly proving quarter after quarter that it was not going
through the same operational growing pains as its predecessor, Garden Fresh shares lingered near
the offering price for more than two years.
While good produce rots over time, good performance is another story. After posting same-store
sales growth of 2.5% in 1996, 4.7% in 1997, and a stunningly good start to fiscal 1998 with a 9.8%
showing in the first quarter, investors soon took notice of the improving top and bottom lines at
Garden Fresh. It was time to reap the harvest.
BUSINESS DESCRIPTION
I am a patron of my local Sweet Tomatoes, so slip into my shoes for a quick tour. You walk in, grab
a tray and a plate, and make your way down a double-sided 55-foot long salad bar. The offerings are
enticing, exotic, with an ever-changing mix that may include a Thai chicken salad next to your basic
collection of fresh greens.
That's not all. From a soup station to a manned pasta bar to a good selection of muffins and breads
(oh, and focaccia pizza) and a dessert bar, it is all-you-can-eat.
With 52 locations nationally -- 29 of those in the company's home state of California -- the company
uses the Souplantation moniker in San Diego and Sweet Tomatoes everywhere else. Different
names, same concept.
FINANCIAL FACTS
Income Statement
12-month sales: $94.9 million
12-month income: $4.1 million
12-month EPS: $0.89
Profit Margin: 4.3%
Market Cap: $94 million
Balance Sheet
Cash: $0.4 million
Current Assets: $4.7 million
Current Liabilities: $13.2 million
Long-term Debt: $15.3 million
Ratios
Price-to-earnings: 23
Price-to-sales: 1.0
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Last year investors got a rare treat when CEO Michael Mack paid visits to the AOL message board
devoted to his company. He explained Garden Fresh happenings and addressed concerns. While his
presence was sadly short-lived, it manifested what is so great about the online medium. It was more
than the oft-used "great leveler" axiom. It was a welcome bridge between executive management and
the individual investor.
Mack took the time to explain negative working capital and was frank about the competition.
Investors found that he was as articulate and conservative as the company itself.
Garden Fresh realizes that while the relentless unit level improvement has been impressive, even if it
has been mostly fueled by labor-related price hikes, it ultimately may not be sustainable. This is not
only spelled out in the SEC filings, it is also why the company that is hoping to grow earnings at
20% a year will be opening 11 new units (22% unit growth) this fiscal year.
Those who waited the first two years for a proven track record got it. Those who saw a conservative
company on track to continue growing sensed a bargain when the shares were trading for just ten
times year-ahead earnings estimates.
WHERE TO FROM HERE?
When equity success finally catches up to corporate success it often overcompensates. That is why,
given the fact that earnings at Garden Fresh have not kept pace with share price acceleration, the
stock is now selling at a slight premium to its estimated long-term growth rate for the first time ever.
This is not to say that the bloated capital appreciation has had its fill. If the company continues its
levelheaded growth execution from here on out, there is no reason why the stock won't keep pace
with 20% earnings growth. So, will it double again in the next few months? Probably not. Over the
next 3-5 years? Possibly.
The fact that the stock has built momentum may bring on a new breed of speculator, enamored with
the share's recent relative strength. Being on the CANSLIM radar is nice, but note that the December
quarter's stunning 56% earnings growth is not sustainable over the course of the year. That is the
company's seasonally slowest period and was based on just pennies in quarterly earnings the year
before.
-Rick Aristotle Munarriz
(tmfedible@aol.com) |
