What's going on at Friendly Ice Cream (AMEX:FRN)?
Despite gloomy results recently, company insiders are scooping up shares. Since Nov. 23, 2004, there have been 18 buys by company insiders. In fact, since June 3, 2004, there have been 76 consecutive buys by insiders and larger shareholders (those with greater than 10% share ownership).
So, is Friendly's a buy?
You might be inclined to say no, after reading the 2004 annual report (cream and dairy prices soared) and last night's first-quarter earnings report. Restaurant sales, 77.1% of total sales, were down 7.9% from last year's first quarter. A contributing factor to the decline: Same-store sales, the holy grail of retail sales measures, fell 3.3% at company-owned restaurants (62.6% of the total number of stores). The company also posted a net loss of $3 million -- near flat compared to last year's results -- net of extraordinary events.
That's an ugly performance.
The company blamed half of that same-store sales showing on the fact that New Year's Day didn't fall in this year's first quarter. Overall revenue was certainly affected by the fact that there were 25 fewer company-owned restaurants.
Speaking of overall revenue, one number was up 8.2% -- Friendly's franchise and food service (supermarket) revenue, which makes up the other 22.9% of total sales.
So, what looks like a revenue disaster is not as bad as it appears -- although declining same-store sales is a worry.
Operating margins, excluding all one-time items, fell from 7.2% in last year's first quarter to 5.1% this year. That's worrisome too.
Then there's debt: Interest costs for the past quarter came in at a walloping $5 million, roughly four times EBIT (earnings before interest and taxes). Unless the company is able to produce consistent results on an EBIT basis, those costs may become problematic, since interest expenses are relatively constant.
So, what is there to like? Declining same-store sales, dropping margins and the cement shoes of big debt are hardly a winning story.
What insiders may be signaling is that Friendly's is finally getting aggressive. Friendly's will introduce three new colossal burgers to drive sales in the current quarter, a period that didn't have a menu-focused promotion last year. Summer sales will be bolstered by 99-cent coupons for cones and special kid-targeted flavors. Getting people into the restaurants for cones will certainly help revenue, but it should also generate return visits to take advantage of a low-priced menu that features an abundance of creamy treats -- something strong New England competitors like Applebee's (NASDAQ:APPB), Ruby Tuesday (NYSE:RI) and Red Robin (NASDAQ:RRGB) don't offer.
Insiders also see falling cream prices (one of the company's largest raw material expenses). Then there are plans for four new company restaurants and 15 new franchised stores. Add in the company's new supermarket initiative -- decorated ice cream cakes -- and there's a lot that could go right.
Friendly's stock is down 39% over the past 52 weeks, and it's down 4% today. A decade-long look isn't pretty unless you bought when the stock cratered in 2001.
But this is a tiny company. There are only 7.7 million shares outstanding. Insiders and large holders are buying the stock, and there's every reason to believe they see tangible reasons to take a chance that this company could once more become profitable. Sure, it's a bit of gamble. Willing to roll the dice?
Fool contributor W.D. Crotty does not own shares in any of the companies mentioned, but he does plan to visit an Orlando Friendly's to try the new Black & Bleu burger (cajun spices with chunky blue cheese dressing). Yummy! Click here to see the Fool's disclosure policy.
