It wasn’t a good end of the week for Landry’s Restaurants, Inc CEO Tilman Fertitta (previous posts here).
First, there was Landry’s public disclosures that the company was delinquent in its regulatory filings with the SEC and that it was in need of refinancing over $400 million in debt in a rapidly deteriorating debt market.
Those missteps led to Fertitta’s public announcement on Friday that the refinancing “was no big deal,” which led to the inevitable comparisons in some media circles of Landry’s and Enron, and Fertitta and Donald Trump (actually, that comparison has been made before). Not surprisingly, the company’s stock closed at a 52 week low on Friday ($25.43), falling almost 20% in the past week alone.
Fertitta is an easy target, but the situation is probably not as grim as it might seem at first glance. Landry’s has always been a highly-leveraged company. Heck, the latest news resulted in Moody’s downgrading the corporate family rating from B2 from B1, and S&P lowered its ratings on Landry’s corporate credit rating to CCC from B-plus. So, it’s not as if Landry’s stock was blue chip even before the latest developments.
Where things appear to have gone awry is that the company decided that building stores from within wouldn’t allow it to grow fast enough. Back a few years ago when Landry’s was a popular growth stock, the company’s casual dining seafood eateries were popular and growing quickly in generally first-rate locations. But in an attempt to accelerate that solid growth, Landry’s overpaid for the high-volume Rainforest Cafe chain a few years ago and then went on to make a relatively big investment in buying and revitalizing the Golden Nugget casino in downtown Las Vegas. It looked as if Landry’s had decided to pull back on its debt-loaded buying binge when it sold off its its Joe’s Crab Shack chain late last year in a $192 million deal, but the company came right back a short time later to make an unsolicited offer to buy the high-end steakhouse Smith & Wollensky before being topped by a rival bidder.
As the price of Landry’s stock slumped over the past several months, the company sensed value and initiated a program to buy back $87 million in stock. Nevertheless, the market did not respond all that positively to the buyback program, so the stock is still trading at a relatively small 14 times this year’s profit estimates, Thus, a case can be made that Landry’s is a good buy if it can extract itself from its current debt refinancing problems, but the downgrades reflect that the market is a bit skeptical regarding Fertitta’s assurance that arranging such refinancing “is no big deal.”
Nonetheless, this just might be the kick in the rear that Landry’s needs. Building well-located and good-looking restaurants while providing solid service is how Landry’s grew quickly. Paying substantially more for financing the debt necessary to buy overpriced stores may be just the way to persuade Landry’s board and management that building from within wasn’t such a bad strategy after all.