Benihana, Inc. (NASDAQ:BNHN)

CAPS Rating: No stars

The Company is an operator of teppanyaki-style restaurants in the UnitedStates.

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Member Avatar killtone462 (< 20) Submitted: 2/20/2012 1:39:45 PM : Outperform Start Price: $11.34 BNHN Score: -0.55

This place is always full, however needs a thriving economy for expansion

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Member Avatar yourtabo (44.66) Submitted: 9/28/2007 12:27:28 AM : Outperform Start Price: $17.00 BNHN Score: -39.23

One of the best restaurant groups in US. It's been overlooked by many investors because of Chipotle and BWLD. Benihana is just as good as both of them if not better.

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Member Avatar randycali (< 20) Submitted: 9/26/2007 11:22:44 AM : Outperform Start Price: $16.84 BNHN Score: -38.69

I don't know, every time I go to one of these places no matter what city it is in, it's always packed. Many other restuarants offering the same style are popping up all over and few of them have gotten it right. They seem to be putting money back into their restuarants and continue to make them places you want to go to.

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Member Avatar Fedyzer (61.48) Submitted: 8/12/2007 5:18:31 PM : Outperform Start Price: $17.27 BNHN Score: -47.28

everybody loves sushi.

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Member Avatar EBLou (59.77) Submitted: 8/9/2007 4:53:45 PM : Outperform Start Price: $16.00 BNHN Score: -41.88

This concept is going to pay off big in the next couple of years. We just need some sustained growth.

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Member Avatar WildManMac (84.51) Submitted: 1/31/2007 8:04:01 AM : Outperform Start Price: $22.00 BNHN Score: -72.69

I have been to four different Benihana restaurants and there has always been a full house. Waiting time is not excessive for a specialty eatery. The quality of the food is good and the service is great. What more could you want? Even the price is competitive with other specialty restaurants in the Outback range.

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Member Avatar TMFonparole (73.61) Submitted: 9/20/2006 12:42:27 AM : Outperform Start Price: $17.62 BNHN Score: -66.27

Benihana is the parent company for three trendy Japanese restaurant concepts. These concepts can be broken out into the following restaurants: Benihana, Ra, and Haru (a fourth concept named Doraku consisted of one store and was very recently sold off). The main investing premise regarding this chain of restaurants consists of the extremely high same store sales comparables and the room to grow in the two main concepts (Benihana and Ra).

Here are the yearly sales for the corporation in total:
2006 2005 2004 2003
Sales 245.6 218.3 203.0 189.2
Gross Operating Profit 23.1 13.2 15.3 15.3
Total Income Avail for Interest Exp. 23.2 12.9 14.8 14.8
Total Net Income 13.1 7.4 9.0 9.5

Although this represents year-over-year sales growth in the high single digits to low double digits I believe that this is very misleading. Management is just now beginning to realize the growth potential that they possess with the Benihana and Ra restaurant concepts. They have explicit plans to grow these chains greatly over the next few quarters. The short-term penalty for this growth will be high capital expenditures and a negative free cash flow in the strictest sense of the term (operating cash flow minus capital expenditures). However, when removing the growth aspect from the capital expenditures it is my belief that the company will generate very high amounts of free cash flow and is in all likelihood undervalued at its present price of approximately $25 dollars per share.

Margins
Here are the margins for the past few years:
Margins 2006 2005 2004 2003
Gross Profit 0.094 0.060 0.075 0.081
Operating Profit 0.094 0.059 0.073 0.078
Net Profit 0.053 0.034 0.044 0.050

Here are the margins for the past few quarters:
Margins 1Q07 4Q06 3Q06 2Q06 1Q06
Gross Profit 0.085 0.093 0.097 0.086 0.099
Operating Profit 0.086 0.095 0.099 0.086 0.097
Net Profit 0.053 0.060 0.054 0.038 0.058

Besides the blip in the second quarter of 2006 nothing really appears to be out of the ordinary.

Here are the yearly sales for the corporation broken out by segment:
Sales 2006 2005 2004 2003
Benihana 189.8 175 166.5 162.7
Ra 24.6 17.3 11.6 3.2
Haru 27.7 22.8 21.9 20.2
Doraku 2 1.6 1.4 1.8
Total 244.1 216.7 201.4 187.9

The Ra sushi stores were purchased in 2002 and have seen explosive growth ever since. The Haru stores are in highly dense metropolitan areas and have takeout orders comprising 40% of all sales. The Benihana stores have not increased in the number of store counts very much over the years but have a well-known name. Normally increases in sales in restaurants and/or retailers come through some combination of expansion and same-store sales. Let's take a look at these metrics:

Here are the same store sales increases for the past few quarters:
SSS (%) 1Q07 4Q06 3Q06 2Q06 1Q06 4Q05 3Q05 2Q05 1Q05
Benihana 7.7% 8.3% 5.1% 6.4% 8.5% 7.5% 5.3% 6.4% 1.7%
Ra 18.6% 30.5% 35.5% 29.8% 25.0% 16.2% 11.2% 13.1% 9.9%
Haru 10.6% 8.1% 1.7% 1.7% 0.5% -2.5% 1.7% 4.1% 5.8%
Doraku 5.7% 9.3% 23.2% 38.9% 23.3% 6.1%
Total 9.2% 10.3% 7.4% 7.9% 9.0% 7.2% 5.3% 6.5% 2.7%

Looking at the same store sales chart it is quite apparent that Benihana has shown impressive comparisons over the past few quarters. Even more impressive are the comparisons for the Ra Sushi restaurants (actually, these comparisons are bordering on ridiculous).

Here are the total store counts for each of the concepts (these represent only the corporate owned stores. 18 more Benihana stores that are franchised are not included in this count):
Store Counts Jul-06 Jul-05 Jul-04
Benihana 57 56 56
Ra 11 8 8
Haru 7 7 6
Doraku 0 1 1
Total 75 72 71

Note: the fiscal year ends in April

As mentioned previously the concept of the Haru stores are such that they need to be in very densely populated areas. Therefore, the growth of this concept is limited to metropolitan areas. However, there is no similar restriction on the Benihana and Ra restaurant concepts. And, judging by the same-store sales and overall sales growth, the Ra concept needs to be rolled out a lot quicker.

Calculating free cash flow
Calculating the free cash flow is a little bit tricky due to two major endeavors that management is undertaking. The first endeavor is the revitalization of approximately 20 to 25 Benihana stores. Management estimates that this will cost approximately $2 million per store and will take place gradually over the next 30 months. This is a very cost intensive effort, however, it is necessary in order to keep the stores of fresh, hip, and interesting. (Because many of the Benihana stores are 30 years old or older this revitalization has to take place periodically. However, I don't believe that this is something that takes place more currently then every 10 years or so. Management has stated that stores that have already undergone this transformation are performing much better than expected. The translation into actual financials is unclear at this point).

The second endeavor involves growth of the two main restaurant concepts. As of July 2006 management has stated that there are 10 restaurants currently under development. These restaurants would be three Benihana, one Haru, and six Ra. Looking at the existing store count table above is quite noteworthy that the additional Ra constructions would increase this concept store count by 60% or so. Based upon the popularity of this concept and the same store sales growth obviously this is the right move by management.

Here is a rough and effort at calculating the free cash flow:
NI Dep Amort Adj Cap Ex Cap Ex FCF
Apr-06 0
Jul-06 4.5 3.3 1.5 5
Oct-07 2.8 2.5 0.96 3.2
Jan-07 3.3 2.6 2.43 8.1
Apr-07 4 3.5 2.64 8.8
Jul-07 4.5 4.4 3.84 12.8
Total 14.6 13 0 9.87 32.9
Run Rate 17.73

The “adjusted capital expenditures� column is to represent what the actual capital expenditures might be if management decided to stop growing by expansion of stores and revitalization of existing stores. Based upon the two store openings in Tucson ($1.9M) and in Anchorage ($2.8M) let's assume that it takes $2.5 million to open a store (though I suspect that it costs much more than that in the more metropolitan areas). Management has also stated that store revitalization is estimated at $2 million per store. Assuming that it takes one year or less for a store to become developed from the ground up and or revitalized a used a rough estimation that 70% of the capital expenditures are used for growth purposes. The implication here is that 30% of the capital expenditures are used for maintenance purposes and that is why the adjusted capital expenditures column is what I utilized to calculate the free cash flow.

Note: Keep in mind that this is a snapshot of the trailing 12 months and a rough one at that. I fully anticipate this picture to be quite different two years from now once the stores that are currently under development have had a chance to be out in the field for a few months. At that point, even if the company decides to open 10 stores a year every year the revitalization aspect of most of the Benihana's will have been completed. I would expect further revitalization to be isolated to one or two Benihana's per year (but this is simply speculation). This would cause the capital expenditures to drop dramatically and allow for more money to hit the free cash flow line item.

I used the following inputs to estimate the value of the company:
FCF: 17.73 million
Growth rate years 1 - 5: 12.5%
Growth rate years 6 - 10: 10%
Growth rate years 11 - 20: 8.5%
Growth rate years 21+: 3.5%
Discount rate: 14%
Shares outstanding: 11.4 million
Net cash per share: $1.32

Using the above assumptions I arrived at an intrinsic value of $32 per share. The effect of stock options and convertible preferred shares are covered in the increased shares outstanding count. The real thrust of the company's earnings power will come from the Benihana and Ra expansions. I believe that the 12.5% growth rate mentioned above is in all likelihood very conservative. After all, the Benihana store count has hardly moved for a number of years and yet the same-store sales have approached 6% year-over-year since 2003. As the Ra store count increases they will clearly become a greater percentage of the overall revenue contribution. With a very limited number of stores there is a very limited risk of oversaturation of either restaurant concept.

Here are the relative sales contributions from each concept:
Sales 2006 2005 2004 2003
Benihana 0.778 0.808 0.827 0.866
Ra 0.101 0.080 0.058 0.017
Haru 0.113 0.105 0.109 0.108
Doraku 0.008 0.007 0.007 0.010

Again, management is making what I believe to be the correct decision by focusing the investment in the Ra concept. The relative contribution of Benihana will continue to fall, the relative contribution of Haru will likely stay flat, and I would look for the relative contribution of the Ra restaurants to continue to increase. In fact, I would expect the relative contribution to dramatically increase (probably reaching 20% by the end of the 2009 fiscal year).

The success of the company is dependent upon management's ability to keep the concepts fresh and intriguing. Thus far, they have done an excellent job of doing just this as the same store sales comparisons bear out. The revitalization and growth initiatives by management are very capitally intensive but are necessary in order to thrive in a highly competitive restaurant business. A few missteps will really hurt the company financially as witnessed by the management of Outback Steakhouse (who have failed to keep the brand fresh and new). I believe that the company deserves some sort of investment at the time being a

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