Brazil Fast Food Corp. (BOBS)

Brazil Fast Foods is, in their own words, "a Brazilian limited liability company that conducts business under the trade name “Bob’s”, and own and operates, directly and through franchisees, the second largest fast food hamburger restaurant chain in Brazil." ^[1]

As of December 31, 2007, BOBS had 580 points of sale, including 231 kiosks and trailers, of which 58 are owned and operated by Brazil Fast Foods and the remaining 522 by the firm's franchisees, all under the “Bob’s” tradename. Approximately 53.7% of these points of sale are located in the States of Rio de Janeiro and São Paulo, with the remainder widely spread throughout major cities in all other States of Brazil, except for one franchised restaurant in Portugal and one in Angola. The largest number of franchise operations outside Rio de Janeiro and São Paulo are in the States of Santa Catarina and Paraná, both in the south of Brazil.

All points of sale serve a uniform menu of hamburgers, cheeseburgers, chicken burgers, hot dogs, sandwiches, french fries, soft drinks, juices, desserts, ice creams and milkshakes. Selected points of sale also serve coffee and/or beer. They are generally open all year round, seven days a week. Points of sale generally open at 10:00 a.m. Closing hours vary according to location. In some locations with proximity to late night entertainment, the points of sale remain open for the “after hours” crowd.

Bob's fast-food service is based in a single line system distinguished from other competitors by its variety and flexibility, which allow customers to add items to or exclude items from the several meals they have to choose. The restaurants maintain a cooked-to-order philosophy: cooks would prepare orders as read to them by the counter service representative who took the order. ^[2]

[edit] The Business

The business model is based on a simple dual-format model reminiscent of Dairy Queen. Their 'kiosk' model sells refreshments and ice creams while their 'store' model sells hamburgers. Approximately 90% of their establishments are franchises. Over the last 5 years they have increased the growth rate of the kiosk stores with a stated goal of a 13:7 ratio of kiosks to stores. ^[3] Meanwhile total store counts (including kiosks) have climbed from 306 in 2002 to 600 as of March, 2008. ^[4]

Brazil Fast Food has just successfully completed a five-year turnaround of their business. From 2002 when they racked up losses of R$11.2 million (15% of their revenue!), they have improved virtually every aspect of their business for each of the past five years, returning a 15.7% profit margin during the fiscal year 2007. ^[5]

The company has been around since 1952 ^[6]and weathered a long series of massive financial storms a well as a fiercely competitive fast-food environment through the 1990s which saw the exit from Brazil of such competitors as Subway, KFC, and Arby's.

In April of 2007 they received a license to operate YUM brands stores (primarily KFC), of which they inherited four franchises. These are currently immaterial and consist of about 2-3% of annual revenue. The YUM branded stores are currently losing money. ^[7]

[edit] Management

The current CEO was brought in in 2003 to turn the company around, which he has done with steady and remarkable progress in improving all aspects of the business. CEO Compensation is quite reasonable at around $250,000 ^[8], largely due to the successful turnaround (and ensuing 2000% stock price increase) made during his tenure.

[edit] Financials

Over the past five years, BOBS has grown revenue by 60%, earnings have gone from -R$11.2 to R$12.4, equity has gone from -R$1.5 to R$16.5. Their current ratio has improved from 0.4 to 1. The company has no long term debt.

Finally, share dilution has been high in past years when the company was facing financial crisis -- reaching as high as 36% in 2001. However, in the past four it has been 5.3%,1.1%,1.0% and 2.9%.

[edit] The Valuation

Store-count growth has ranged from 11-17% for the last 5 years and management continues to set high targets for growth - aiming for 660 by the end of 2008 (+14%, if successful). Same store sales growth has averaged 5% over the past three years though trending downwards and weighing in at -2% in 2007.

With a trailing P/E of 7 (@ $6.35 / share, 1.6BRL/USD) and a P/S of .5 BOBS is priced very cheaply compared to its peers and the broader market. However, earnings have been skewed significantly higher than can be repeated due to one-time tax benefits. BOBS carries a P/B value of 2.7, though it grew its book value by over 100% in 2007 so this number has been falling rapidly over the past two years.

BOBS management is implementing efficiency and training programs on the advise of an undisclosed, world-renowned efficiency consulting firm. The aim behind this is to continue to improve margins and thus profitability of same-store sales.

BOBS is not covered by any analysts.

BOBS is currently traded on the over-the-counter market in the US. BOBS was formerly a NASDAQ stock but was delisted in 2004 due to prolonged period where the stock traded under $1 per share. BOBS only trades a few thousand shares per day so the price can be extremely volatile and trades can be difficult to execute. BOBS earns all of its revenues in Brazilian Reais. Therefore the value of the company in US dollars will fluxuate with the Real:Dollar exchange rate, making it even more volatile for US investors.

[edit] Summary

This 55 year old business has endured and grown through some of the largest financial shocks on the planet. It is the #2 player in an emerging industry within an emerging economy and with a vast target market at its doorstep (188 million Brazilians). It is 60% owned by insiders who put the current management team in place and have had a successful 5 year run at materially improving the business each year.

[edit] References

Company web site: http://www.bobs.com.br/

SEC Filings: http://pro.edgar-online.com/profile.aspx?CompanyID=3069

Detailed Company history: http://www.referenceforbusiness.com/history/Be-C/Brazil-Fast-Food-Corporation.html

Categories: Food & Beverage | Fast Food Restaurants