Post of the Day
February 20, 1998

From our AOL
Boston Chicken Board


Subject: BAD NUMBERS
Author: CVshark

Has anyone had a chance to review the Boston Chicken "earnings" from today? They reported an operating loss of about $40 million and total loss (after writeoffs) of $274 million.

Of more interest, they told people on the conference call that EBITDA (profit) estimates for 1988 are too high and need to be reduced again by about $15 million. So BOST will lose even more money this year (and next) than had been expected. The reason for the worsened outlook is that sales levels in the restaurants have started off very poorly so far this year and they expect sales for the entire year to be below the earlier plan - due in large part to reduced marketing spending needed to drive the sales.

What does all of this mean? Simply put, in my opinion there is ZERO value to this stock for the common shareholders, and thus, even in the $6-7 range the stock is grossly overvalued. Indeed, Goldman Sachs is telling people this afternoon that they should continue to sell the stock, that there is probably no value to the common equity, and that their convertible arbitrage department is worried about default risk on the bonds (the company burned another $20 million in cash in the fourth quarter, and even with NO new store openings and much reduced overhead and advertising expenditures they should burn another $50 million+ this year after maintenance capital spending).

So for those of you who think that the stock should be bought because the "food is good" (I wholeheartedly disagree on this, by the way, but thats a different issue) I would point out the following:

1) The fundamental trends here have not bottomed out. Indeed, the fundamental outlook for all of 1998 looks poor, and much worse than originally anticipated - per the company's own conference call this morning.

2) Currently the company has $1.045 billion in gross liabilities (including the new PIK preferred stock to be issued as part of the consolidation of the preferred pools currently outstanding) and assets, ex the stores, of $135 million (the Einstein's stock and the cash). Thus, the store base would have to be worth over $910mm for the stock to have any value at all. It is NOT worth anything close to this. This is $800,00 per store, which is absurd. Remember, this store base makes no money, has expensive leases, etc... Thus, on a net asset value basis the stock is clearly worth less than zero.

3) The common shareholders have not only been diluted by the preferred deal announced today, but it looks like BOST will issue another 15-20 million common shares to buy out the minority interests in the FADs. This will create further significant dilution for the holders of BOST.

4) Lastly, on a multiple of EBITDA basis (which is now how the company wants you to look at it) the stock now sells at 16X the midpoint of the new 1998 estimated EBITDA range, and 12X the 1999 range (and the 1999 EBITDA estimates are still much too high, in my opinion). These EBITDA multiples are 2X-3X the restaurant industry average. If BOST's EBITDA multiple were to come back more into line with its peer group, which it will, the value of the stock is completely wiped out.

So those who like the stock can say what they want about the food, low-priced stock, etc., but I defy you to use the numbers to explain to me why this stock won't go to zero. By all relevant measures it has no value, and, in my belief, once the retail investors realize this (virtually all institutional investors who understand the numbers have already come to this conclusion) the stock is headed much lower still.


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