Great Fortune or Great Crime?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Behind every great fortune lies a great crime.”
Ethical investing is as fraught with danger as any other form of investing. To be truly ethically invested is to decide what crimes, sins, omissions, and commissions you are unable to stomach including the sin of not making a profit.
Another Fool posted an interesting article on ethical investing and featured fast food restaurants and those companies’ role in furthering obesity. I have no argument with that but I wish to add that one other consideration for ethical investors is the treatment of labor.
Restaurant Opportunities Centers-United (ROC-U), a public interest group, publishes an annual diner’s guide to restaurants grading them on three metrics: wages for tipped and non-tipped employees, paid sick leave, and advancement opportunities. With help from Tulane and UCLA they gathered data from the top 50 highest grossing restaurants for the three categories of fast food, casual dining and fine dining.
Overwhelmingly the best marks were earned by privately held restaurants, the most notable being the Union Square Hospitality Group of NYC which owns Union Square Café, Gramercy Tavern, Shake Shack, and seven other highly rated NYC restaurants. Its CEO Danny Meyer wrote “Setting The Table”, a primer on how hospitality and high standards for customer service equate to higher profits. Too bad they’re not publicly traded.
Sadly, most of the publicly traded restaurant chains including Burger King, Buffalo Wild Wings, Cheesecake Factory, Cracker Barrel, Bob Evans, Dunkin Donuts, Domino’s Pizza, Panera Bread, McDonald’s, Yum! Brands, Sonic, Wendy’s, Jack in the Box, Papa John’s and Red Robin all received zeros for adequate wages, opportunities for advancement, and paid sick leave.
Of all the chains only two, Chipotle Mexican Grill (NYSE: CMG) and Bloomin’ Brands (NASDAQ: BLMN) received any positive marks; Chipotle for giving paid sick leave and Bloomin’ for paid sick leave at Bonefish Grill and opportunities for advancement at its Roy’s Hawaiian fusion restaurants .
The worst performer overall was Darden Restaurants (NYSE: DRI) which not only received zero marks for the three metrics but was also singled out for the Frowny face symbol as employees at its Red Lobster, Olive Garden, Longhorn Steakhouse and Capitol Grille restaurants have sought legal help from ROC-U for charges of discrimination and wage theft against Darden.
Just on September 17, the Darden shareholders’ meeting in Orlando was disrupted by current and former employees directly grilling CEO Clarence Otis over the company’s policies on sick leave and compensation. Of note is that in Orange County, Fla. Darden is opposing a ballot initiative requiring paid sick leave for companies with over 15 employees. ROC-U has been spearheading a national 'Dignity at Darden' campaign for the 180,000 workers at Darden's 2,000 plus restaurants.
The company has claimed in the past that ROC-U is targeting them because they are the world’s largest fast casual dining chain and maintains that employees’ charges of discrimination and wage theft are baseless. To be fair, Darden remains on the list of Fortune’s “100 Best Companies To Work For” for the second year in a row. The company also runs a foundation benefiting post-secondary education access, natural resource preservation and a Good Neighbor food bank program and gave away $7.2 million in FY 2012.
What about Darden, the stock? It has a yield of 3.60% and a P/E of 16.01 and just hit a 52 week high after reporting on September 21 better than expected earnings of $0.86 a share beating estimates by $0.02. An ongoing turnaround in Olive Garden cheered investors though Red Lobster sales remained flat. The stock rose over 4% after the report.
As for topline, quarterly revenue growth is 3.80% and quarterly earnings growth is 10.00% year over year. It carries total debt of $2.17 billion to $73.70 million total cash. From 2009 when it was at $15.00 you would have a very nice triple and more plus dividends.
Food (and Labor) With Integrity
Chipotle had been a go-to name for momentum and ethical investors. Lately, not so much since its disappointing earnings in July took the stock down over 30% to a 52 week low of $277.26 from $400 on huge volume. That last earnings report saw profit up 61% and revenue up 21% but investors panicked over slowing foot traffic figures with same store sales missing analyst’ expectations. The stock has managed to pull itself back up to the $330 level as investors are beginning to believe the expectations were overheated. Even here it still has a pricey P/E of 41.18 and a forward P/E of 30.93.
Chipotle has significantly underperformed the S&P 500, only up 5.31% thanks to that post earnings plunge. However, Chipotle has much less debt than Darden at total debt of $3.60 million to $529.53 million in total cash and is still opening more restaurants. Chipotle operates 1316 restaurants in the US, United Kingdom, Canada, and France.
Chipotle prides itself on its Food With Integrity and has recently changed pork suppliers because they did not meet the humane standards. A Time Magazine piece on Founder and CEO Steven Ells (originally trained as a chef at the Culinary Institute of America) underscored the meticulous attention he pays to the food‘s provenance and taste. As for efficiency it’s been noted that the Chipotle’s are more efficient per square foot than almost any other food chain.
From late 2008 when the stock hit the $40 level to its high of $440 in April, you would have had a ten bagger in Chipotle. As for ethical considerations, Chipotle received good marks for their paid sick leave but the ROC-U guide did not count the company’s policy of promoting promising line workers to managers so that particular metric is better than the guide would suggest.
Bloomin’ Brands Is Bustin’ Out
Bloomin’ Brands just debuted in July and is the operator of Outback Steakhouse, Roy’s Hawaiian, Bonefish Grill, Carrabba’s Italian Grill, and Fleming’s Steakhouse and Wine Bar. The stock has climbed from $11.57 to $15.84. The P/E is 16.61 and it just received eight buy initiations on September 17. (N.B. The initiations of buy were all from banks that were IPO underwriters.) They operate primarily in the US in 49 states but also operate in 21 countries.
This company has a lot of debt, an overhang from when it was held by private equity. It still experienced an amazing turnaround from 2009 when they were operating at a $64.5 million loss to last year’s profit of $100 million.
Sick workers present headline risk and while there will always be disgruntled workers in foodservice, thankless and grueling as it is, that can present headline risk as well. Should an ethical investor shun all food chains? Going straight to Chipotle didn’t work in July. With momentum names even the whisper of slowing growth can gut the stocks. Darden has a great yield and CEO Clarence Otis is on a mission to turn around the company but these labor issues will likely be ongoing. Bloomin’ Brands is still untested with a legacy of debt.
In June, New York Times columnist Mark Bitttman wrote an opinion piece entitled “The 20 Million” about the 20 million who work on our food chain, half of whom work in restaurants. He noted most can’t afford not to come in when they’re sick and many are on federally subsidized food programs as well as using ER’s as their primary health care. After comparing Darden and the Five Guys burger chain (privately held) which gives paid sick leave and opportunity for advancement, he asked, “Where would you rather eat?”
I ask you where would you rather invest?
(Note: The headline quote by Honore de Balzac from “Pere Goriot” actually reads, “The secret of a great success for which you are at a loss to account is a crime that has never been discovered, because it was properly executed.” The widely translated misquote is probably a little more pithy.)
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants. Motley Fool newsletter services recommend Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.