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Sunday, August 07, 2005

Big Apple Bagels (BABB)

This company (website) has what I would consider a bad name. No matter how much I know "Big Apple" means New York, it's difficult to avoid the image of "apple bagels" which would only seem appealing to a small number of people.

They also have "My Favorite Muffin" and "Brewster's Coffee". Oh geez, this gets worse. Also Mrs. Fields (ok, good), Kohr Brothers Frozen Custard.

They had to restate 2003 results due to accounting of financing of equipment. It's worse than it sounds. After the fact, they determined that the financed equipment was never delivered, the financing was never executed, and the transactions did not exist. No apparent fraud.

The number of stores is declining. Company owned went from 4 to 3. Franchise went from 178 to 167. Revenues are derived from royalties on franchises and company store operations, so earnings may not reflect P&L in most of the stores. SG&A percentages increased in company-owned stores, so I suspect comps are dropping, let's see: Net sales at company owned stores decreased from $3 million in 2003 to $1.8 million in 2004. They closed one store and sales from that store were $283K in 2003 and $37K in 2004 (approx zero). So if we back out the $283K from the $3 million, we get a drop from $2.7 million to $1.8 million, or about a 1/3 drop in same store sales. Ouch! If we jump ahead to Q2 of this year, sales in company owned stores dropped to $400K vs $433K in the prior year. This decrease was due to dropping wholesale business (claimed as less profitable, which I suppose I could believe).

What I really want to understand here is how the P&L is going within the franchise stores. One crude way of finding out is to see how many stores closed (not net stores closed, but actual store closings). No need, since the net store closings have been fairly high. Royalty revenues dropped 7.8% in 2004 (since these are 5% of net sales, it shows declining revenues) while franchise fees increased 5% (store openings). So there's a lot of churn. This is bad. "Food, beverage and paper costs incurred at Company-owned stores decreased $402,000 in 2004 to $596,000... in 2003." Yep, bad.

Corporate payroll related SG&A increased in 2004 to focus on franchise development. They moved the HQ offices ($13K, probably a downward move) and held a franchise convention ($26K). Mgmt reduced a lot of costs that probably shouldn't have been there in the first place, and they increased collections (i.e. they started worrying and finally started to get serious about the business), a lot of bad debt was recovered.

Operating cash flow was cut in half in 2004 from 2003 to $845K. A lot of it shows a shrinking business.

Balance sheet is fairly strong, but there's a huge amount of goodwill ($3.5 million), some was impaired in 2003 due to a contract termination with an airport business.

I would guess that if the business is sustainable (I'm not sure that it is), there would be about $500K of sustainable free cash flow (includes a margin of safety), which would put the business as worth about $7.5 million total. There are 258K options outstanding and about 7 million shares, so we'll say the business is worth about $1 per share which is almost exactly what it's selling for now.

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