Cajun chicken chain Bojangles (NASDAQ:BOJA) went public just a few years ago, but hasn't been able to spread its wings and fly. Now, rumor has it that it's just about done playing the public game.
In this segment from MarketFoolery, host Chris Hill and analyst Jason Moser explain why the restaurant business, especially fast food, is so hard to succeed in alone; how this stock has struggled since its IPO; how an acquisition might be what Bojangles needs to succeed; what investors should watch with the company's CEO situation; why you shouldn't buy on these buyout rumors alone; and more.
A full transcript follows the video.
This video was recorded on Aug. 20, 2018.
Chris Hill: I mentioned listeners emailing about the Pepsi-SodaStream story. Have to say thanks to Lee Watson, a listener who posted this story in our Facebook group -- which anyone can join if you're on Facebook. Motley Fool Podcasts. Courtesy of the Charlotte Observer, a story about Bojangles, your beloved Bojangles --
Moser: The 'jang!
Hill: -- closing underperforming restaurants, dropping some menu items, all of which leading to the speculation that Bojangles might be prepping itself for a sale. When I saw that headline, I thought, "Well, wait a minute." And by the time I got done reading the story, I thought to myself, "You know what? I think that's the way to bet right now."
Moser: I think you're probably right. When Bojangles went public, the first question that I had when the company went public... I mean, trying to separate my personal feelings for the Cajun chicken filet biscuit with the actual business itself...
Hill: [laughs] By the way, we laugh about that, we joke about that, but your experience right there, that's something that so many of us as investors have to do -- separate our own personal experience, which can be great or it could be terrible, and the case for investing in a stock can be the opposite of what our own experience is.
Moser: Absolutely! In many cases, it can be. I think that's one of the tougher lessons to learn as an investor, and one of more valuable ones you can learn and carry on with you for the rest of your investing life. When it comes to Bojangles, the No. 1 question I had out there was, does this company have what it takes, does the brand have what it takes, to reach beyond its quintessential southeastern identity? And the answer, I think, here, is really no. They haven't been able to take this concept across the country and grow it to the extent that they thought they could in the S-1 they filed when they went public. I mean, I can't say I'm terribly surprised by that. By the same token, I wish they could. [laughs]
I do feel like there is plenty of opportunity out there for the product that they're selling. But it's also a very crowded market. You have KFC out there, you have Popeye's Chicken. Restaurant Brands owns Popeye's Chicken and Yum! owns KFC. Then you have Bojangles out here on its own. I think for a while, while we were perhaps hoping to see Bojangles make it on its own, in the back of my mind, I knew it was probably going to end up being acquired by someone and being a part of a bigger company. That's how most of these restaurants have to work these days. It's very difficult to make it on your own in the food service business, particularly fast food, which is the market in which they compete.
The chances of them being acquired are probably better now. There are a number of different ways they could go. Inspire Brands is the going favorite to bring them into the family. Inspire owns Buffalo Wild Wings now, and Arby's. Inspire is a company that's owned actually by Roark Capital, which is in Atlanta. Last I checked, Atlanta's pretty familiar with that Bojangles brand, so it wouldn't shock me at all to see that happen.
It's such a tough business to compete in, especially if you're new and getting your feet under. We saw the same kind of thing with Zoës last week, when we saw Zoës acquired by Cava. I think that made sense, too. Zoës is not a small, inconsequential concept, but it's just really difficult to get out there and compete, especially if you can't grow that brand countrywide.
Hill: Although, to go back to Zoës, you look just through the lens of the stock, Zoës Kitchen, those shares were getting crushed. Shareholders got a complete lifeline in Cava Group buying them out. Shares of Bojangles, for whatever struggles they're going through, stock's up 20% year to date.
Moser: Yeah, but it's not been a great public life. The stock is down from the IPO. Investing is always a matter of when you got in. Anyone who got into Bojangles at the beginning of the story is probably feeling like the investment didn't work out so well. But perhaps there is some light at the end of the tunnel. Perhaps there is a bit of a premium that they go out at. I don't think it's unreasonable to think that they will be acquired at some point. Bojangles has been around for a lot of years. It's not like it's just some concept that's failing. It's just a concept that's very difficult to grow on its own. There are a lot of companies out there, private and public, that would love to have a brand that really tackles one part of the country well. And when you can get those types of brands and run efficient operations, franchise operations like Bojangles are, in many cases, they can be immensely profitable.
Hill: Last week on Motley Fool Money, one of the things we talked about was JC Penney, how they're still without a CEO. I was reminded, reading this story in the Charlotte Observer, about the abrupt resignation of Bojangles' CEO back in March. They have an interim CEO right now. As much as anything, is that the thing to watch with Bojangles? Barring an announcement of someone coming in to buy them, it seems like an announcement about the CEO, whether it's the interim CEO is now being made permanent, or, we found a new CEO, it seems like that's going to be the next best clue of the future of Bojangles.
Moser: Yeah, but I mean, I don't know that it really is going to mean anything one way or the other at the end of the day. If they get someone in there on a more permanent basis, any which way, I'm sure the person that ends up getting that job on a permanent basis is going to come out with their three or four-step plan and how they aim to revolutionize the brand and turn things around. And we know that a lot of times, that's just stuff they have to say, right? We're not going to hire some CEO just to go out there and tell us how bad we suck. We want that CEO to go tell us how things are going to get better.
There may be the chance where they do make something official. But my bet is, given the equity, given the VC owner interest in Bojangles, the way it is today, there is a majority stakeholder there that is trying to realize the best return on their investment they can. They're going to be the ones pulling a lot of the strings anyways.
Hill: And the market cap right now is around $500 million. You have to assume that if they get bought out, they're not getting SodaStream money.
Hill: [laughs] No. We talk, always, about that 30% premium and whatever that really means. I think that's maybe a rule of thumb. I definitely would not buy shares of Bojangles today on an acquisition thesis. It very well may happen, but if it doesn't, then you've got this struggling restaurant concept that doesn't really have any strategy in place and doesn't really have a leader that's married to the success of this business to date.
If you get a CEO in there who, they announce a CEO on more of a permanent basis, then perhaps you have a little bit of something to fall back on. That goes back to why we talk so much about leadership. Really, leadership can make all the difference in the world. McDonald's was a great example. You had Don Thompson that jumped in there. And I mean, he was very well experienced with the company. He was COO for a number of years. And he had a year and he couldn't make anything work. And then you get Steve Easterbrook in there, the guy just can't do anything wrong. He brought McDonald's back from the dead. Oftentimes, it just does come down to leadership.
Hill: We're not bullish on Bojangles' stock. We are, however, bullish on breakfast.
Moser: Extremely. And they are too! That's like 40% of their business. That's another problem, really, believe it or not. When so much of your business depends on breakfast... breakfast is a very competitive space, too. We've seen it already. It's tough to fight.
Hill: As Ron Swanson said, there's never been a sadness that cannot be cured by breakfast food.
Moser: I agree with that 100%.