CHICKEN SALAD CHICK – Comfort Food and a Great Corporate Culture

Roger Lipton’s introduction, for Franchise Money Maker reader’s, of Chicken Salad Chick.

CSC is a really special emerging fast casual restaurant franchising company. Their corporate culture is special and the unit level economics are among the best in the industry. The most important decision a potential restaurant franchisee will every make will be the Company they choose to affiliate with. The best local operator, with the wrong franchisor, will be a very unhappy experience over a very long time. Chicken Salad Chick seems to be making a lot of great decisions for a company at their stage, so they are worthy of consideration, especially for restaurant operators in the Southeastern US.

By Roger Lipton

CHICKEN SALAD CHICK – Comfort Food and a Great Corporate Culture

Chicken Salad Chick was started in Auburn, Alabama, in 2008, by Stacy Brown, a stay at home mom and self-proclaimed connoisseur of chicken salad who began the business by selling Chicken Salad made from her home kitchen. When she was shuttered by the local health department for selling food from her home kitchen, she was joined a partner and future husband, Kevin, who left a career in software sales to help build the foundation for multiple corporate locations and future franchise growth.

In terms of equity ownership, in early 2015, Eagle Merchant Partners, an Atlanta, GA based private equity firm, purchased the majority ownership of the Company. Kevin Brown, tragically, succumbed to colon cancer in 2015 at the age of 40. Before his death, however, Kevin was instrumental in negotiation of the P/E transaction, and he also helped establish the Chicken Salad Chick Foundation, which raises funds for cancer research and feeding the hungry. In conjunction with that transaction, Russ Umphenour and Scott Deviney become Chairman, and President/CEO respectively. Both are highly respected industry veterans, as Mr. Umphenour was the CEO of Focus Brands (parent of Moe’s, Auntie Anne’s Pretzels, and others), and before that ran RTM Restaurant Group, the Arby’s franchisee that he founded. Mr. Deviney was CEO of SDZ (a multi-unit Wendy’s franchisee) and SVP with SunTrust Bank, specializing in the restaurant industry. Over the last two years, the management team has obviously been broadened further to support the ongoing rapid growth. Stacy Brown, the cultural creator of Chicken Salad Chick remains a prominent spokesperson and brand voice, as well as a shareholder.

Originally a drive-thru and takeout only operation, the menu was expanded and sit-down facilities were added as additional stores opened. With franchise operations beginning in 2012, 29 units were open by the end of 2014, with contracts for an additional 114 locations. The comfortable family oriented decor is combined with a creative and modestly priced menu, featuring over a dozen varieties of made from scratch chicken salad plus pimento cheese and egg salad, as well as fresh sides, salads, soups and sandwiches. The primary meal special called The Chick includes a scoop or sandwich of chicken salad with a choice of a fresh side, salad, soup or another scoop of chicken salad, egg salad or pimento cheese. All meals are accompanied by a pickle spear, wheat crackers, a selection of breads for sandwiches and a small cookie. The menu also offers chicken salad BLT and turkey club sandwiches, though over 95% of sales come from chicken salad, which is also sold in large and small grab’n go containers called Quick Chick. Upwards of 70 percent of guests are women and the chain prides itself on being “chick friendly”.

Chicken Salad Chick ended calendar 2016 with 64 locations operating (55 franchised and 9 company operated. 18 franchised locations and 2 company stores opened in 2016. At the end of 2014, there were 32 stores in the system, so growth has been dramatic over the last two years. There are currently 70 locations (58 franchised, 12 company), in nine states (ALA, GA, FLA, NC, SC, TN, MS, LA, TX,). It is expected that 20 to 25 locations will have opened in 2017, 6 of them being company operated. It has so far not been necessary to advertise for franchisees, as the curb appeal of the physical unit combined with the menu and employee culture, as well as attractive unit level economics have generated more than adequate franchise interest.

According to the most recent (2015) Franchise Disclosure Document: The stores are about 2600 square feet in size, generally located in strip malls, costing from $403-583,000 in total to establish, including up front franchise fees. Much of the franchise appeal is the operational simplicity which in turn generates attractive unit level economics. The equipment package is basic, with a steamer to cook the chicken (everything is prepared daily in the restaurant), food processors, refrigerated sandwich tables, a walk-in cooler, reach-in freezer, water filtration system, toaster and Quick Chick refrigerated case. The absence of fryers (which must be vented) reduces construction costs, creates site flexibility as well as relative desirability as a tenant. The entire package of furniture and fixtures cost around $90, 000. The up front franchise fee is $50,000/unit, the ongoing royalty is 5% of sales with an additional advertising contribution of 1.5%. Average volume of company operated stores was $903,000 in 2015, growing by about 9% in 2016 and 16% so far in 2017. The sales improvement is especially impressive within a restaurant industry that has been challenged in this regard. Cost of Goods Sold has averaged about 30.5% with fully loaded labor at roughly 25.0%. It is noteworthy that only about 45% of sales are dine-in, the balance being takeout and catering. Dine-in and takeout sales combine to provide a ticket average of $14.27. Stores are open from 10am to 6-8pm (depending on the market) and closed on Sundays, taking a page out of Chick Fil A’s playbook, and allowing operating management to “have a day for family life”. While CSC makes no unit level profitability claims, our analysis indicates that franchises are likely earning at least 15% EBITDA (after royalties) at the store level. With sales now running over $1,000,000 per unit, that would generate a “cash on cash” return on the $403-583,000 initial investment of 26% to 37%, among the best returns in the franchised food industry. We emphasize: that is our analysis, not their claim.

Chicken Salad Chick seems to “be on a roll”, with no obvious impediments to substantial further growth. While still relatively small, with only 70 units system-wide, franchisees are “voting with their pocketbooks”, and opening stores at a rapid rate. The concept seems “defensible” in terms of product line differentiation, combined with an employee “culture” reflecting the “chick” founder, but an operational simplicity that allows for fairly rapid growth. We look forward to following this Company’s future development.
About Roger Lipton, Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and an MBA from Harvard, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

He also invested in gold mining stocks and studied the work of Harry Browne, the world famous author and economist, who predicted the 2000% move in the price of gold in the 1970s. Roger has republished the world famous first book of Harry Browne, and offers it free with each subscription to this website. In the late 1970s, Roger left Wall Street to build and operate a chain of 15 Arthur Treacher’s Fish & Chips stores in Canada. In 1980 he returned to New York, and for the next 13 years worked at Ladenburg, Thalmann & Co., Inc. where he managed the Lipton Research Division, specializing (naturally) in the restaurant industry. While at Ladenburg he sponsored an annual Restaurant Conference for investment professionals, with keynote speakers that included Norman Brinker, Dave Thomas, Jim Collins(Sizzler & KFC), Jim Patterson (Long John Silver’s), Allan Karp (KarpReilly) and Ted Levitt (legendary HBS marketing professor). Roger formed his own firm, Lipton Financial Services, Inc. in 1993, to invest in restaurant and retail companies. During the last several years, while continuing to follow the restaurants and retail industries, he has returned to his study of precious metals, and expects gold and silver to appreciate substantially as a result of uncontrolled worldwide deficit spending and paper money creation.

The Bottom Line: Roger Lipton is uniquely equipped as an investor, analyst, investment banker and advisor. He has advised institutional investors, underwritten public offerings, counseled on merger transactions and served on Board(s) of Directors, public and private, and personally managed a successful investment partnership specializing in restaurants/retail. He has studied great success stories over the last 40 years, from McDonalds to Shake Shack. Even more important he has watched scores of companies stumble and sometimes fail. It is this insight that Roger brings to this website. His post, dated 9/30/15, called “VISIT THE GRAVEYARD…..” lists a long list (though only a sample) of companies that have come and gone over the length of Roger’s investment career. This platform is his way of maintaining a dialogue with other professionals in the field, improving his own investment results, at the same time enhancing capital returns for operators and investors alike.


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