Part II: Flanigan's Enterprises, Ticker: BDL
South Florida's favorite nano-cap restaurant chain
Critique
There are four sections that I would critique in my write up about Flanigan’s. The first two were the focus on macro factors, the third was the geography risk and fourth was valuation related metrics/multiples.
Macro event risks - I would take out both sections that discuss macro risk because they’re opinions and not based on verifiable information. I had and still have no idea when a recession is coming, how long people will be able to “pick up pennies in front of a steamroller” or how long COVID will continue to impact global health or why any of these macro events will continue to exist or die out. I feel like those two sections are words on paper but don’t provide value for you the reader. Yes, they were opinions that I had but I was running the risk of being anchored to them after publishing my writeup. I know this may not seem like a big deal because it was a onetime thing, but I feel like it showed that I had both a lack of discipline and “say something” syndrome. There is a story about Warren Buffett and discipline that I’d like to share to drive my point home. He was once on a golf course and offered generous odds to bet on himself making on a hole in one. He refused to take the bet even though it was only $10 and was reminded how rich he was by his playing partners. He told them, “If you let yourself be undisciplined on the small things, you’d probably be undisciplined on the large things, too.”
Geographic risk - I shouldn’t have written about the geographic risk. The company has hurricane insurance so it kind of goes without saying that they’re aware of hurricane related damage. This too doesn’t provide much or any value to you the reader.
Valuation metrics – I should have only used book value and a multiple of earnings approach to value Flanigan’s. Why? Because Flanigan’s FCF has been inconsistent over time and DCF’s don’t work for me. I’ve tried and tried to do DCF’s, but I never have a good reason for choosing a discount rate. I can never say why I’m using discount rate versus another. That’s not to say that I don’t think they work, but they don’t work for me. In my opinion, they lead towards false precision and take me away from trying to be roughly right and towards being precisely wrong. I will say that I’m open to using DCF’s in the future if I can learn about what discount rate to use and why.
What’s Flanigan’s Been Up To Since My Initial Write Up?
Since my initial write up, Flanigan’s has had solid performance. Fiscal 2020 (10/3/2020 year end) revenues were down about 2.7% from $116,202,000 to $112,977,000. The company made $0.60 per share in fiscal 2020, but this figure was down from $1.60 in fiscal 2019. Company owned and operated units increase from 26 to 27 stores as a new package liquor store opened for business in the first quarter of fiscal year 2020. I think the business deserves a lot of credit for being able to handle all the problems that COVID brought its way and still be able to turn out a profit. 2021 has also been a great year for Flanigan’s. As of their most recent 10-Q (for Q3 fiscal 2021) total revenues for the first 39 weeks of the fiscal year were up 22.35% and profits up $13,677,00 due to forgiveness of PPP loans and increased business as compared to fiscal year 2020. Company owned and operated stores is holding steady at 27 units. It is no surprise that the stock price has doubled from its nearly $16 price on June 18th of last year to just north of $32 as of the publishing date of this Part II. As I said in my initial writeup, Flanigan’s continues to chug along.
Why I Ultimately Don’t See Myself Buying Stock in Flanigan’s
I don’t see myself buying Flanigan’s stock because the company doesn’t seem to be focused on accelerating growth. There isn’t a problem with this strategy, but just isn’t for me. Flanigan’s deserves a lot of credit for being able to increase sales and profits almost every year. Most companies can’t do this, especially nano caps. What they’ve been able to do is kind of remarkable given their size and history, but this seems like more of a slow burn. I believe they could start franchising given their proven business model, but I don’t see that happening. Revenues from 2010-2020 CAGR’d at just over 5% while profits CAGR’d at 8% over the same period, The company has only added two stores since fiscal year 2010. To their credit, they made additions and renovations to existing locations which has helped to increase sales, but only two new locations and sub 10% CAGR in revenues and profits in over a decade isn’t the kind of growth I want. I do think the stock will become cheap from time to time like last March when the stock was <$10 per share, but even then, I wouldn’t buy the stock because I don’t believe the company will grow earnings or its book value at high rates. Flanigan’s is a solid business, but unfortunately it isn’t a compounder. That’s not to say it can’t be one, it just isn’t right now.