McCormick & Schmick's Seafood Restaurants (MSSR)

QUOTE AND NEWS
Marketwire  Nov 16  Comment 
NEW YORK, NY -- (Marketwire) -- 11/16/11 -- Levi & Korsinsky notifies investors of McCormick & Schmick's Seafood Restaurants ("McCormick & Schmick's" or the "Company") (NASDAQ: MSSR) of claims of possible breaches of fiduciary duty and other
Reuters  Nov 8  Comment 
McCormick & Schmick's Seafood Restaurants finally agreed to be bought by Landry's Restaurants Inc CEO Tilman Fertitta for $131.6 million, less than the $137.3 million offer he made...
MarketWatch  Nov 8  Comment 
Shares of McCormick & Schmick's Seafood Restaurants Inc. were up 28% on news it has entered into a deal to be acquired by Landry's Inc. for $131.6 million, or $8.75 a share, representing a nearly 30% premium to Monday's closing stock price....
StreetInsider.com  Nov 8  Comment 
McCormick & Schmick’s Seafood Restaurants, Inc. (Nasdaq: MSSR) signed a definitive agreement with Landry’s, Inc. whereby Landry’s MSA Co., Inc., a subsidiary of Landry’s, will acquire all of the outstanding shares of McCormick & Schmick's...
Wall Street Journal  Nov 8  Comment 
McCormick & Schmick's Seafood Restaurants agreed to sell itself to Landry's in a deal that values the company at roughly $132 million.
MarketWatch  Nov 8  Comment 
McCormick & Schmick's Seafood Restaurants Inc. said Tuesday it agreed to be bought by a subsidiary of Landry's Inc. for $8.75 a share. The price amounts to a premium of 29% over the restaurant chain's closing level of $6.77 a share on Monday....
StreetInsider.com  Aug 4  Comment 
Visit StreetInsider.com at http://www.streetinsider.com/Earnings/McCormick+%26+Schmick%27s+%28MSSR%29+Reports+In-Line+Q2+EPS%2C+Sales+Top+Expectations/6687749.html for the full story.
Forbes  Jul 18  Comment 
Tillman Fertitta announced after Friday's close that the restaurant chain will participate in the sales process.
Forbes  Jul 18  Comment 
Landrys chief Tillman Fertitta announced after the close of trading Friday that he is terminating
StreetInsider.com  Jul 15  Comment 
Visit StreetInsider.com at http://www.streetinsider.com/Corporate+News/Tilman+J.+Fertitta+Terminates+Tender+Offer+for+McCormick+%26+Schmick%27s+%28MSSR%29/6641126.html for the full story.




 
TOP CONTRIBUTORS

Business Overview

McCormick & Schmick’s Seafood Restaurants, Inc. is a leading national seafood restaurant owner and operator in the affordable upscale dining segment. They have been growing the business for the past 39 years by focusing on serving a broad selection of fresh seafood. It was founded in 1972 with the acquisition of Jake's Famous Crawfish in Portland, Oregon. As of December 29, 2010, they had 96 restaurants, 89 of the restaurants in the United States. There are also seven restaurants in Canada under The Boathouse name. McCormick & Schmick does not franchise.

The menu is printed daily and contains between 85 and 110 made-to-order dishes, including an extensive selection of international, national, regional and local varieties of seafood. The signature “Fresh List,” displayed at the top of the daily-printed menus, features 20 to 30 varieties of fresh seafood, based on seasonality, product availability, price and guest preferences. They also offer several alternatives to seafood, including high quality beef, creative salads and fresh pasta dishes.

Each restaurant is designed to capture the distinctive characteristics of each local market, positioning them to compete successfully in a sector comprised primarily of locally owned and operated seafood restaurants. They want to create an inviting atmosphere which enables them to attract a diverse guest base of men and women, primarily ages 30 to 60, typically college-educated and in the middle to upper-middle income brackets. The combination of restaurant atmosphere, extensive menu offerings, superior service and broad range of price points appeals to a diverse guest base from casual diners, families and tourists to business travelers and special occasion diners.

McCormick & Schmick's first became publically traded on July 20, 2004.


Business Model

McCormick & Schmick's Seafood Restaurant generates revenues through sales at the restaurants, including banquets. In 2010, food sales accounted for approximately 72.2% of gross sales and the remaining 27.8% of gross sales was from bar sales.

McCormick & Schmick's most significant operating costs come from food and beverage costs and labor and employee benefits. Because these costs are so high, yet crucial to business, management closely monitors costs and reviews vendor pricing on a regular basis. Employee benefit costs include health insurance and are therefore subject to any increases in the overall trend of healthcare costs.

MSSR prides itself on its' entrepreneurial culture. The head chef at each restuarant has the flexibility to prepare whatever they feel is appropriate for that season and the geography in which the restaurant is located. The annual retention rate for chefs and general managers is 80%.

Industry Analysis

Industry Overview

Demographics, consumer taste and personal income drive the restaurant business. The restaurant industry is extremely labor intensive. The industry is highly competitive and not only is there competition amongst existing restaurants, home cooking, prepared/frozen food, warehouses, delis, etc.

Competitors

Image:MSSR_competitors.jpg


Ruth's Hospitality Group (RUTH)

Ruth's Hospitality Group, Inc., together with its subsidiaries, operates restaurants in the United States and internationally. It operates the Ruth's Chris Steak House, Mitchell's Fish Market, Columbus Fish Market, Mitchell's Steakhouse, and Cameron's Steakhouse restaurant concepts in the full-service dining industry. The restaurants cater to families, special occasion diners, and business clientele. As of December 26, 2010 there were 131 Ruth’s Chris Steak House restaurants, of which 64 were company-owned and 67 were franchisee-owned, including fourteen international franchisee-owned restaurants in Aruba, Canada, China (Hong Kong), Mexico, Japan, Taiwan, and the United Arab Emirates. The Company also operates 20 Mitchell’s Fish Markets and three Cameron’s Steakhouse restaurants, located primarily in the mid-west and Florida. Ruth's Hospitality Group, Inc. was founded in 1965 and is headquartered in Heathrow, Florida.

BJ's Restaurants (BJRI)

BJ's Restaurants, Inc. owns and operates casual dining restaurants in the United States. The company operates restaurants under the BJ's Restaurant & Brewery brand name, which includes a brewery within the restaurant; BJ's Restaurant & Brewhouse and BJ's Pizza & Grill brand name, which is a smaller format, full service restaurant. As of March 4, 2011, it owned and operated 103 restaurants located in California, Texas, Arizona, Colorado, Oregon, Nevada, Florida, Ohio, Oklahoma, Kentucky, Indiana, Louisiana, and Washington. The company was founded in 1991 and is based in Huntington Beach, California.

Cheesecake Factory (CAKE)

The Cheesecake Factory Incorporated operates upscale, casual, and full-service dining restaurants in the United States. As of February 23, 2011, the company operated 164 restaurants comprising 150 under The Cheesecake Factory name in 34 states and the District of Columbia; 13 under the Grand Lux Cafe name in 9 states; and 1 under the RockSugar Pan Asian Kitchen name in California. It also operated two bakery production facilities located in Calabasas Hills, California and Rocky Mount, North Carolina. The company produces baked desserts and other products for its restaurants, as well as for other foodservice operators, retailers, and distributors. In addition, it licensed two bakery cafes under The Cheesecake Factory Bakery Cafe name to another foodservice operator. The company was founded in 1972 and is based in Calabasas Hills, California

Morton's Restaurant Group (MRT)

Morton's Restaurant Group, Inc. owns and operates primarily upscale steakhouse restaurants under the Morton;'s Steakhouse name; and Italian restaurants under the Trevi name in the United States, Canada, Hong Kong, China, Mexico, and Singapore. As of January 2, 2011, it owned and operated 77 Morton's Steakhouse restaurants; and 1 Trevi Italian restaurant. The company was founded in 1978 and is based in Chicago, Illinois.

J. Alexander's Corporation (JAX)

J. Alexander’s Corporation operates as a full service casual dining restaurant located in the United States. As of January 2, 2011, it operated as a proprietary concept 33 J. Alexander’s full-service, casual dining restaurants located in Alabama, Arizona, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Michigan, Ohio, Tennessee and Texas. J. Alexander’s is a traditional restaurant with an American menu featuring prime rib of beef; hardwood-grilled steaks, seafood and chicken; pasta; salads and soups; assorted sandwiches, appetizers and desserts; and a full-service bar. J. Alexander's was founded in 1971 and is based in Nashville, Tennessee.

Darden Restaurants (DRI) (Red Lobster)

Red Lobster is a full service restaurant and is a part of the Darden Restaurant services. It was one of the first seafood restaurants to introduce guests to fresh dishes such as popcorn shrimp, calamari, snow crab and lobster – often for the first time. Over the years, the brand’s passion for fresh, delicious seafood has kept Red Lobster evolving. The restaurant introduced an award-winning Today’s Fresh Fish Menu, installed wood-fire grills in every restaurant in North America, trained staff to become seafood experts and most recently launched a new restaurant design, inspired by the New England coast. Red Lobster was founded in 1968 and is owned by Darden Restaurants.

Summary

McCormick & Schmick's proves to be inferior to its' competitors based on its' negative returns and extremely low margins. It is also has an extremely high beta which means the stock is risky and volatile. In summary, MSSR may not be the best stock choice in the restaurant services industry.

Probable Buyout

Chief Executive Officer of Landry's, Tilman Fertitta has offered $9.25 per share for all of MSSR stock. This values the company at a 30% premium as of the closing price on April 5, 2011. The buyout offer stands at 137 million. The official offer for Landry's to buyout McCormick & Schmick's will come on Thursday, April 7, 2011 according to Fertitta. Fertitta believes that it is very hard for restaurants to grow purely in the United States. Restaurants expand to roughly 60 or 70 locations in the U.S. then need to expand internationally to keep consistent growth. According to Fertitta, McCormick & Schmick's isn't growing at the necessary 15% growth to keep shareholders satisfied, which is why Landry's wants to acquire it at the 30% premium. Another reason Landry's wants to acquire McCormick & Schmick's is because they haven't rebounded out of the recession as well as some of its' competitors have. Landry's feel that their management team can go in and make adjustments so that McCormick & Schmick's can get higher margins. This buyout is offered at a discount to most of MSSR's competitors, but is in line with other restaurants that are not recovering from the housing bubble fiasco. Tilman Fertitta currently owns 10% of MSSR stock.

SWOT Analysis

Strengths

Weakenesses

McCormick & Schmick's is struggling to bounce back from the recession. Most of its' competitors are increasing sales, which leaves MSSR in the dust. This is why Landry's wants to buyout McCormick & Schmick's so that they can fix their business plan. Their business plan is not positioning the company in a way to become profitable again, which is not positive for the company. The poor economy affected MSSR and its' competitors the same, but MSSR is having a harder time becoming profitable. Another weakeness for the company is that food prices are rising. Wheat, grains and corn prices have risen substantially which could affect the quality and quantity that restaurants can afford to buy.

Opportunities

McCormick & Schmick's does not pay a dividend to shareholders because they feel it is important to reinvest their money to finance the expansion and development of the business, including working capital and debt levels. They view this as an opportunity to help grow the business and become more profitable.

Threats

McCormick & Schmick's trades at a lower margin than its' competitors (listed above) which shows that it is not the best investment in the restaurant industry. This deflates their stock price because investors will choose companies with higher margins that prove themselves to be more profitable.

The potential buyout by Landry's could be seen as a threat to some of MSSR's investors. I think most people would see the buyout as a positive thing to help increase margins and profits, but the atmosphere of the restaurant may change with new management, which may decrease customer loyalty.

McCormick & Schmick's costs are made up primarily of labor costs. If there is a revision in wage laws this could increase costs MSSR has to pay to its' employees, which would lower net income even more. An increase in costs, would cause a decrease in margins.

MSSR is currently disputing insurance coverage that the insurer said is used up from 2004 litigation. They have initiated litigation to contest the insurance companies claim. If MSSR is unsuccessful in regaining coverage they will owe about 1.7 M and that expense will negatively affect their financial position and operations.

Porter's 5 Forces

Buyer Power

Customers have the majority of the power in the restaurant industry. Customer preferences drive sales. When preferences, tastses and spending behavior changes, restaurant sales can either thrive or deflate. Restuarants profitability depends solely on sales, and sales can only come from customers, so they hold the ultimate power.

Supplier Power

Suppliers of food and beverages that McCormick & Schmick's buys from have medium power. MSSR decides who they want to buy food from based on price and most importantly, quality. Suppliers increase their power once the relationship is established with MSSR, and then the supplier can increase the price. Suppliers may be reluctant to inflate prices especially if they are not the sole supplier to the company.

Threat of Substitutes

Threat of Substitutes is extremely high for McCormick & Schmick's. Not only are there substitutes for MSSR's main entree, seafood but also for dining out. People can opt for take out, fast food, home-cooked meals, frozen dinners and already prepared meals at the grocery store. Dining out is now seen as more of a luxury in the current economic state, so the threat of substitutes is even higher. McCormick & Schmick's also has a full bar service. People can not only order other drinks besides alcoholic ones, but also can go to a different bar, pub or brewery if they only want alcoholic drinks. The main threat to the restaurant industry is that more individuals and families are going to start cutting back on unessesary spending and prepare their own meals.

Threat of New Entrants

The restaurant industry is capital intensive, but the barriers to entry of starting a new restaurant are not high. Therefore, the threat of new entrants is high. In the current economic state, there may not be as many new restaurants opening or existing restaurants expanding, but there are still threats of new players coming into play. Customers may also prefer to go to a non-chain restaurant to try something new, which would also increase the threat of new entrants to MSSR.

Rivalry Amongst Existing Competitors

There is a lot of rivalry in the restaurant business. Each restaurant competes for the same type of customers, depending on what target market they're going after. It is very important for each restaurant to build their reputation wtih excellent service and quality of food so that customers come back and remain loyal. The only way for restaurants to become profitable, they need steady food sales and bar sales. Since there are only two primary methods of generating profit, competition is fierce and extremely vital to longterm success of the business.

THe restaurant industry is taking a hit due to low consumer confidence and spending, therefore copmetiton is increased amongst competitors because each restaurant's sales are more imporatnt with less spending. Traveling has also slowed down in the current economy, so the number of toursists is lower. This also reduces the number of customers that go to the restaurant.

Business Analysis

Marketing

McCormick & Schmick's uses a broad based marketing approach, which includes a preferred guest program and an e-marketing program. The preferred guest program now has over 110,000 primary members and 85,000 secondary members. The online e-marketing email club has over 380,000 members.

Product

McCormick & Schmick's two main products are food and beverage services. Their food services include a number of fresh seafood selections, beef, entree salads and pasta. The menu changes daily depending on what seafood is fresh for that particular day. Seafood is the specialty selection for McCormick & Schmick's. They offer about a dozen varieties during their respective peak seasons. Some of the popular choices of seafood include Alaska Halibut, Northwest Salmon, Hawaiian Mahi Mahi, Oregon Petrale Sole and a wide array of oysters from the United States and Canada. The menu even appeals to non-seafood lovers. Dishes are tailored towards regional preferences and the chef's specialties. Menus are printed twice daily and include a "Fresh List" that features specialty seafood for the day. The availability of seafood changes throughout the day depending on the freshness of the deliveries. Each location has a different menu. Menus are different because the quality of food depends on region. Most locations also feature a lighter fare section on the menu for those who are watching their weight or just want a smaller portion. The bar section of McCormick & Schmick's serves bar type food and premium drinks.

Below is a graph of the main regions where McCormick & Schmick's imports their fresh fish and a graph of what percentage of all the fish McCormick & Schmick's serves that is available each month.

image:seafoodbyregion.jpg image:seafoodmonth.jpg

Price

McCormick & Schmick's is an upper scale restaurant that attracts middle-upper income families and individuals. The restaurant is split ito two revenue sales divisions- food service and bar service. The typical price of lunch including beverages is between $16 and $33 and dinner is between $36 and $61. They also have expanded their menu to include lower priced meals, but still at the same quality.

Promotion

McCormick & Schmick's prides itself on treating every customer like they are family. Their philosophy places emphasis on a dining experience where everyone feels comfortable and well taken care of. The wait staff is extremely knowledgable about the food and attentive to customers needs. Management also visits tables to make sure the dining experience is up to customers standards. McCormick & Schmick's is also dedicated to giving back to the community and participates in benefit events and community fundraising projects. Each restaurant donates goods, services, banquet and meeting space, dining certificates or meals to a number of key charitable organizations. McCormick and Schmick’s encourages and supports employees to volunteer in local activities such as food and blood drives, holiday adoption programs and fundraising walks and runs.

Place

Each restaurant is uniquely designed to create an inviting, original and relaxed atmosphere for customers. No two restaurants are the same in size, layout or personality. Each restaurant reflects the community in which it was built. Each restaurant does use natual wood, rich colors and original glass work for the interior design of the buildings. Each restaurant also has carefully selected artwork that reflects the ambiance. McCormick & Schmick's chain locations are located in many different locations, anywhere from downtown to suburban areas. They are also present in some historic districts and buiildings. Most locations are stand alone properties, however there are some that are part of a shopping/lifestyle development. All McCormick & Schmick properties are leased except for one that is owned and operated under a mangement agreement. Headquarters is located in Portland, Oregon and has a leasing agreement until April 2017.

To the right is a map of the states McCormick & Schmick is located in. The dark green represents these areas.

Strategy

McCormick & Schmick's mission statement is "Absolute Guest Satisfaction". They identify themselves with qualities such as freshness, quality, value, traditionalism, simplicity, service commitment, seafood and northwest heritage. They strive to deliver high quality and fresh food which they believe will transfer into a loyal customer base.

McCormick & Schmick's is also trying to expand their base into new markets. They believe that expansion is crucial to their growth strategy. They evaluate new locations based on projected returns on investment. Acquisitions are also a part of their growth strategy and evaluate those that they believe would fit with their existing restuarants and business plans.

Another part of McCormick & Schmick's strategy is to increase the visibility of their brand among a larger audience. They also want to implement strategies to improve financial performance. Some of these initiatives include a comprehensive service training and recertification program for all employees, continue cost control programs and upgrading "back-of-the-house" systems to increase productivity and reinvesting in their current restaurant portfolio. MSSR is also contemplating expanding the Boathouse chain into Canada.

Human Resources

image:mssr_hr.jpg

Financial Analysis

Profitability

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When looking at revenues compared to net income, it is easy to see that MSSR does have consistent sales, but their costs are driving down their actual earnings. Revenue has been pretty consistent the past five years and didn’t get crushed in 2008 when the stock market crashed. This proves that MSSR has a loyal customer base and that they have consistent sales. However, having negative net income the last three years could be detrimental to the company. Their costs are outweighing their revenues, and management needs to go in and alter them so that MSSR can become profitable. McCormick & Schmick’s doesn’t seem to be very profitable, especially in the last three years and they need some serious alterations going forward to be profitable.

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From the graph above, it is apparent that MSSR’s gross profit margin has been steadily decreasing the past five years. This shows shareholders that they are becoming less profitable. This gives a negative outlook for the company. They need to increase their margin by cutting costs or increasing sales revenue. Landry’s wanted to buyout McCormick & Schmick’s to help increase their profitability, but it is not going through.

Efficiency

Image:Mssr_efficiency.jpg

McCormick & Schmick’s efficiency metrics prove that the company falls in the middle of its’ competitors. Its’ inventory and receivable turnovers stack up in the middle of its’ competition. This is neither positive nor negative for MSSR. With regards to other restaurants in the industry, MSSR’s asset turnover is higher, which is not good. MSSR turns over its’ assets every 2.22 days while its’ competitors all turnover their assets in less than 1.7 days. This proves that management may not be as efficient as other companies, which is a negative to stockholders. MSSR’s cash conversion cycle is second lowest out of the group which is good, because they are getting paid faster, especially when compared to Morton’s or Ruth’s. Net Income per employee for McCormick & Schmick’s is negative, which means they aren’t generating positive net income which is problematic for the company. In all, MSSR does not have a competitive advantage in their efficiency when compared to its’ peers.

Financial Strength

Image:Mssr_financial_strength.jpg

Looking at the financial strength of McCormick & Schmick’s compared to other restaurants in the industry; it is not that much better off. Its’ quick and current ratio are in the middle of the competitors. However, MSSR’s total debt/equity is much lower than other players in the industry. This low debt is good for the company because they will have less interest payments to pay off in the future. The interest coverage ratio of MSSR is negative though, which is not good for the company. When looking at its’ competitors, most restaurants have a negative interest coverage ratio, which could be normal for the industry. The fact that McCormick & Schmick’s cannot pay their interest is a negative for the company and need to find different ways to cut costs or increase sales to pay off their debt.

References


10K MSSR

Google MSSR

McCormick & Schmick's Website

CNBC Landry's Buyout Offer

BusinessWeeek Article

Yahoo RUTH

Yahoo MRT

BusinessWeek Article MSSR

Yahoo BJRI

Yahoo CAKE

Reuters Financial Highlights MSSRarticle title

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