Aficionados of Bojangles Inc's (BOJA +0.00%) deep-fried Cajun recipe chicken and mildly addictive biscuits relish the thought of "Bo Time." Yet when will it be Bo Time for the "BOJA" symbol? From its debut on the public markets on May 8, 2015, until the time of this writing, company stock has followed a disappointing course, declining by nearly 50%.
The Charlotte, N.C.-based chain has a 40-year operating history, mostly in the southeastern United States, where it's an iconic brand that enjoys widespread consumer recognition. Expectations were clearly high when Bojangles went public. In the three years leading up to its IPO, for example, Bojangles' had expanded its systemwide store count at a compounded annual growth rate, or CAGR, of 7%, and recorded a revenue CAGR of nearly 13% over the same period.
In its registration filing with the SEC, Bojangles' told investors that it believed it was in the early stages of its growth and could continue to expand systemwide stores, split evenly between company-owned and franchised locations, at a CAGR of between 7% and 8%.
Cajun filet biscuit combo. Image source: Bojangles' Inc.
Fast forward to today. Revenue through the first nine months of 2017 has eked out a 1.7% gain, to a total of just under $400 million, while comparable store sales, or "comps," have dropped by 1.8%. Increased labor costs and promotional discounting in response to competing chains have pushed restaurant margin -- the profit the company makes from its stores before the application of corporate overhead items -- down nearly three percentage points in the first three quarters of 2017, from 18.5% to 15.4%.
During the company's third-quarter 2017 earnings conference call earlier this month, CEO Clifton Rutledge succinctly detailed the factors that have brought Bojangles' once promising growth to a near standstill:
Without a doubt, we are operating in a very competitive retail environment, but this is especially true for regional limited service restaurant brands. The persistent headwinds affecting our industry, they're significant. Consumer spending remains soft, and it appears those with lower household incomes have been impacted more than others. The competition from convenience and grocery store is still a concern for many. Consumers are staying at home more and using delivery. And of course, aggressive deep discounting from larger national brands with significantly greater marketing budgets continues to attract consumers away from small, regional players.
To be more specific regarding at least one of the very valid pressures Rutledge mentions above, the presence of a resurgent McDonald's Corporation (MCD 0.82%) can't be stressed enough. McDonald's has successfully repositioned itself as a contemporary quick-service restaurant. Its drive to diminish the use of preservatives, additives, and antibiotics in its foods appears to be resonating with customers.
Additionally, McDonald's has combined marketing of new premium items like its customizable, "signature crafted" sandwiches, with strategic value promotions, including $1 "any size" soft drinks, thus boosting traffic to its stores. In contrast to Bojangles', McDonald's reported a U.S. comps increase of over 4% in its most recent quarter.
Of course, McDonald's in 2017 has affected more chains than simply Bojangles'. But the Golden Arches are particularly problematic to Bojangles' because the company straddles the line between the fast-casual and quick-service sectors of the industry.
Most of Bojangles' menu is prepared in the mode of fast-casual chains: Ingredients are never frozen, and biscuits are made from scratch throughout the day. Yet the stores, featuring fast walk-up service and drive-throughs, are more accurately characterized as quick-service. So McDonald's, which seems to always have restaurants in proximity to Bojangles' locations in the South, can and does influence customer choice when it runs promotions, hence dampening Bojangles' traffic.
Indeed, Bojangles' executives are seeking to replicate McDonald's menu model. Management is retaining a consumer research firm to help it develop a classic "barbell" menu strategy, which aims to push sales of both value and premium items. The company has previously floundered a bit in its response to value offers by McDonald's and other quick-service competitors. A deep value campaign this year called "Welcome Home" to celebrate the chain's 40th anniversary lifted traffic, but the company found that after the promotion ended, the additional customers didn't stick around.
It's not easy to trace the weakening of enthusiasm in Bojangles' customer base to a certain cause. The factors Rutledge mentions above, including cautious consumers, competition from grocery and convenience chains, and a rising trend of eating at home, all play some role in Bojangles' negative comps trajectory. But one has to wonder if evolving food habits, especially millennials' preference for healthier food versus older generations, is also contributing to Bojangles' malaise.
Bojangles' executives tend to discuss quality, freshness, and unique recipes when describing the positive aspects of the company's food, but rarely nutritional content. Healthy menu alternates are limited at Bo's, potentially curbing its appeal beyond the south, where its restaurants have traditionally flourished.
A question of "when," without a simple answer
Bojangles' management team is responding to environmental conditions in a manner which you'd expect from a chain with decades of staying power -- very methodically. If you're looking for the stock to pop in the next few quarters, given its 50 percent haircut over the last two-and-a-half years, don't bet on a huge price movement. In fact, executives are removing or slow-walking several potential catalysts for the "BOJA" symbol.
Bo's is dialing down its pace of restaurant openings, due to negative comps trends, the uncertain environment, and also to diminish cannibalization effects of new openings on existing locations -- especially those held by franchisees. The company will have opened between 50 and 52 stores in 2017 by year end, an increase of about 7% versus the prior-year base of 716 units, but it will curb openings next year. A projected range should be available after the final quarter of 2017.
In addition, Bojangles' has indicated that tests for delivery and digital ordering will proceed with caution, as the company strives to make sure that both initiatives roll out smoothly and positively influence the P&L.
Thus, shareholders may have to look ahead to 2019 as a reasonable time frame for the effects of a new menu strategy, a more controlled cadence of store openings, and other corporate initiatives to show significant impact.
In the meantime, investors with a bargain bent and native patience may appreciate that Bo's is relatively cheap, trading at a forward P/E ratio of 15.3 -- an attractive discount to McDonald's, which currently trades at more than 25 times forward earnings. For long-term investors, Bojangles' stock is on the value side of the pricing barbell.
