From Oct 1998 Briefing.com, an interesting article on Boston Chicken follows. The bulls will cry "fowl" here, but Boston Chicken provides a cautionary tale that present AMZN longs may want to consider. I think it is way too early to say whether AMZN will be a bomb or a smashing success, but I do think it is fair to say that the risk level for AMZN stock has increased, due to slowing of revenue growth. Bulls will say that this is temporary, and this will end as more product lines are added, but I, like others, do not like slowing of revenue growth in books.
Monday's bankruptcy filing by Boston Chicken (BOSTQ) (changed on 10/6 from BOST) has so many good lessons in it, it is hard to pick a place to start.
In the Boston area, where Boston Chicken had been a presence since the early 80's, the media focused on the apparently ill-advised decision to expand into ham, turkey, sandwiches, and pot pies, instead of the straightforward rotisserie chicken meals that built the business. Maybe that was wrong, but the lesson isn't that a company shouldn't expand its product line.
Some critics are focusing on the company's controversial decision to change its business model from that of a finance engine for restaurant franchisees, to actually purchasing the company restaurants and becoming a restaurant company. But the lesson isn't that a company shouldn't change models in mid-stream; many companies not only must do it, but some do it successfully.
The real lesson in the Boston Chicken story lies in understanding that BOST ultimately was always a concept stock. And you have to find a way to measure whether the concept is coming true or not.
The Concept
When Boston Chicken first became a public company, the concept behind it was simple: McDonald's but healthy; fast food, but good food. Many people began believing that Boston Chicken would become the next national food chain. Americans were leading busier lives, and with more two-income families, wasn't it likely that everyone would start including Boston Chicken in their meal rotations?
And why shouldn't investors believe in the company? Scott Beck, who had been Wayne Huizenga's protege when Wayne built Blockbuster Video into a major national chain, was the President of the company. Everyone, from the Wall Steet analysts to the individual investor felt that Boston Chicken would become as solid an American fixture as McDonald's.
Across the nation, everyone would start eating quality take-out meals. Growth seemed inevitable.And on the strength of that belief, investors drive Boston Chicken to simply astronomical evaluations in the early days.
When the company became public at $10 per share, in November 1993, the stock skyrocketed to $24 on the first day, then shot almost immediately to $40 a share. Hard to believe now, but that type of activity was unusual just five years ago. Boston Chicken drew a lot of media attention as a hot stock.
Concepts: High Market Capitalization on Low Revenues
Boston Chicken, at the end of 1993, had a market capitalization of $624 million dollars, with revenues of only $42 million and earnings of just $1,650,000. At a Price/Sales ratio of 14.9, it was clear that investors expected BOST to take over the world.
Whenever a stock has such a huge Price/Sales multiple, on low revenues, it implies that investors believe the company will experience tremendous growth quickly. If the reason for the belief is an unproven concept, there is tremendous risk in the stock.
To justify such a high market cap, on such small revenues, BOST needed to show fantastic growth in revenues first, and earnings second. (Sound familar?)
In order to achieve these revenues, Boston Chicken embarked on the strategy that would eventually kill the company. But it took most investors years to figure out what was going on.
Boston Chicken, The Bank
In order to drive revenues and earnings on an upward ramp, Boston Chicken management decided to open as many stores as possible, as quickly as possible. They raised an unprecedented $1.4 billion in debt over four years, to finance expansion. Wall Street investment firms sold the debt easily, as institutions also bought into the concept that every 90's family would soon be craving "home cooked meals they could buy," or, as Beck called them, "home-replacement" meals.
But Boston Chicken took the borrowed money and lent it out to other companies, uniquely called FAD's (financed area developers). (The irony of this name seems to have been lost on everyone.)
The FADs eventually operated 2/3 of all Boston Market stores. Boston Chicken lent them money, and they built and operated stores under franchise. With $1.4 billion, it was easy to put stores up everywhere.
Individual investors, meanwhile, seeing stores appearing in every major city, naturally concluded that more and more people were eating hot chicken meals.
And by the end of 1996, Boston Chicken's reported revenues rose to $264 million, with a market capitalization of $2.4 billion. With the stock at $35 7/8, and three years into the expected growth, wouldn't it be logical to conclude that everyone actually was eating more prepared chicken meals?
Concepts Must be Proven
The biggest problem with BOST's revenue and earnings numbers is that you couldn't tell anything about chicken sales from them. To the investor who wanted a piece of the "concept," BOST looked like it was living up to its promise. At least, a quick glance of the financial statements might lead you to believe that.
But Boston Chicken really wasn't in the chicken business. The Edgar filings for the company all clearly stated that the company's "primary use of capital has been to fund loan obligations to its financed area developers." In other words, Boston Chicken was more like a bank than a restaurant.
Where's the Chicken? (or WPSA)
Were people actually making Boston Chicken meals an integral part of their lives?
In order to answer the question of how chicken sales are going, an investor had to dig deep into the SEC Edgar filings. In addition, you had to be pretty savvy about acronyms. Understand WPSA? You needed to.
WPSA is an abbreviation for Weekly Per Store Average and represented the actual weekly revenue of all Boston Market stores.
To the concept investor, which was most of the investing world, this should have been the most important number. After all, it tells you just how well the idea is working. If this number were skyrocketing, then one could conclude that the concept behind the stock was indeed valid.
Early clues that something was wrong with Boston Chicken would have been picked up by following the WPSA line. In the June 2, 1997 10-Q, WPSA rose a meager 3.2% to $23,528, on a year over year basis. Chicken is not going to take over the world at a 3.2% growth rate. A concept investor could still have bailed out at around $16 at that point.
And on August 27, 1997, WPSA was reported as declining 6.5% compared to the year before. The stock price was around $13 at this point. Although an all-time low at the time, WPSA was showing the concept was crumbling.
But even more dramatic is the most recent 10-K, from March 30, 1998. WPSA for all Boston Market stores was listed as declining from an average of $22,461 for fiscal year 1996 to an average of $19,871 for 1997. That's more than an 11% decline!
Far from taking the world by storm, the dramatic decline in WPSA shows people getting tired of Boston Chicken. A investor who bought BOST on the concept that everyone would soon be eating more chicken would be disappointed by the WPSA numbers. And on March 31, the concept investor could still have gotten out at $5 a share (ten times yesterday's closing price.)
Other Concept Stocks
The moral of the story is simple. If you buy a stock based on a concept, find a way to measure the concept. Because the market will eventually.
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