Pecking At Boston Chicken

After last year's dismal performance, Boston Chicken (BOST) has turned highflier. The shares fluttered to 231/4 on May 30, up from just 131/2 in mid-December. Part of the reason: The company reported big numbers, such as a 170% net earnings jump, to $7 million or 15 cents a share, in the first quarter, ended Apr. 16. And all eight analysts tracking the company have turned bullish--three of them hoisting it to a "strong buy."

But not everybody is impressed. Certainly not restaurant analyst Roger Lipton of Lipton Financial Services, an affiliate of Axiom Capital Management, who has shorted the stock. His beef: Boston Chicken's franchisees are actually losing money, based on his analysis of stores in operation a year or more. Boston Chicken operates and franchises 640 stores in 30 states and specializes in rotisserie chicken.

Here's how Lipton sees it: He figures that sales at a franchised store must average $23,000 a week (net of promotional discounts) for it to break even. That covers labor, cost of goods, and other expenses. Lipton contends that, in fact, franchised stores averaged weekly sales of $18,900.

That means, says Lipton, that such franchisees are not making money--in fact, they're each losing an average of $55,000 a year. "And as more stores are opened, that loss grows steadily," he says. Lipton's conclusion: "The quality of earnings is very low, since all of Boston Chicken's income comes from fees, royalties, and interest payments from franchisees, most of whom were financed by the franchisor."

Boston Chicken spokesman Greg Gerdemann debunks all of Lipton's arguments. He maintains that breakeven for the company's franchisees is only $12,000 a week. Gerdemann insists stores averaged $21,000 a week in the first quarter. "I don't know where Lipton gets his figures. We're doing great," he says.

Before it's here, it's on the Bloomberg Terminal.