Prof G Markets: (HBO) Max, Chipotle & Cava’s IPO, Private Equity’s Public Sales, and the TikTok Ban

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1:26This week's number, 13. In an attempt to evade overweight baggage fees, a teenage traveler wore 13 pounds of clothing. The airline charged her the fee anyway. So no joke here, but a serious offer. If you're out there, this teenager, send us a message. You have an internship with Prop G. That's a serious offer.

1:56Welcome to Prop G Markets. Today, we're discussing, one, Kava's IPO in the fast casual restaurant industry. Two, how private equity makes money in the public markets. and then three, an unpack on Montana's attempt to ban TikTok. Here with the news is someone wearing only 12 and a half pounds of clothing and makeup, Prop G media analyst Ed Elson. Ed, what is going on? I'm good, Scott. I'm busy. I've got college reunions this weekend and then I'm going to Costa Rica on Wednesday. What, like six-month reunions? Aren't you? How old are you again? My second year. Your second year reunion. Okay, you are definitely overpaid.

2:40You've only been out of college for two years. That's right. They have two-year reunions. Yeah, yeah. It's a huge deal. Yeah, that's why Princeton has an endowment the size of Costa Rica and yet continues to reject 92 % of their applicants is because they raise money. If you do, in fact, give money back to them, do it from your side hustle, whatever that is, raising hypoallergenic labradoodles. But no, I don't want any property money to go back to Princeton. Are we clear, Reunion Committee and Ed Elson? At least for the next five years, then I'll start to want to give back, probably. They're very convincing with their donation strategies.

3:13Well, they really need it. I mean, what's Princeton's endowment? I think it's something like$7 million per student. They really need your money. That is absolutely the best use of funds from you right now is to help Princeton advance the trajectory of the children of wealthy people and freakishly remarkable kids from other households that help smear Vaseline over the lens of their mendacious fuckery and income inequality. Anyways, on to the news. There's actually one final stat you might like. This Princeton Reunions thing is consistently the largest single beer order in the United States annually.

3:51Princeton people drink beer? I would have thought it'd be like, you know, the more Pimm's Cups are ordered special order from, wow, beer. Yeah, three straight days just drinking beer. So I'll be on good form next week. I gotta be honest. I like Princeton or I hate them less now. I hate them less now. Get to the news, Ed. Let's start with our weekly review of Market Vitals.

4:19The S &P was down, Bitcoin continued its month of declines, and the yield on 10-year treasuries climbed. Shifting to the headlines. Fitch, a top three credit rating agency, placed the US AAA rating on watch for a potential downgrade as debt ceiling negotiations drag on in Washington. The government could default as soon as this week if Congress doesn't raise the debt ceiling. UK inflation dropped to 8.7 % year over year in April. That's down from 10.1 % in March, but it was still higher than the Bank of England's forecast of 8.4%. Adidas cut ties with Kanye West last October, but it's sitting on$1.3 billion worth of Yeezys, so it's announced it will start selling them again.

5:03A quote, significant amount of the proceeds will go to organizations combating racism and antisemitism, though Adidas did not specify what that amount will actually be. For Scott's take on the Kanye debacle, check out our episode from October 31st. HBO Max has changed its name to Max. The content is the same, but HBO is now a sub-brand alongside the broader Time Warner Discovery catalog. And finally, NVIDIA stock soared almost 30 % after its second quarter revenue forecasts shattered expectations. NVIDIA has added more than$500 billion in market value so far this year amid the AI frenzy, and it is well positioned to become the first trillion dollar chipmaker.

5:46Scott, what are your thoughts? Well, first off, let's just talk about the kind of the, I don't know, the most important company that doesn't get that much news, and that's NVIDIA. and there's just no getting around it. This company is a juggernaut and chips are now center of a national defense debate, but it's, you know, I would say with the exception of vaccines, what is a more important product than chips? And NVIDIA appears to be the best of a very important sector. HBO Max, this will go down in history as a first ballot Hall of Fame, head up your ass brand strategy move. There's something in brand strategy.

6:22We spent two sessions in my brand strategy course called brand architecture. And in an era of M &A and consolidation, when all of a sudden Norwest owns Wells Fargo, and Wells Fargo is the better brand than a Minneapolis commercial bank that specializes in mortgages, what do you do? You say, Wells Fargo and Norwest Company, and then ultimately you drop Norwest and it becomes Wells Fargo. When Dayton Hudson starts this cool retailer called Target, you know, Dayton Hudson, Target, Target, a Dayton Hudson company, and then just Target, and then the whole thing becomes Target as Dayton Hudson fades to black.

6:54There's Datsun, which was a nice brand in the 70s. When I was at, I think it was Emelita Elementary School, our principal was just the coolest cat. True story. He would roll up to the faculty parking lot about second period, clearly hungover. And after, you know, having a lovely over for a little Lancer's wine and listen to the fifth dimension, he would show up about 11 in the morning. And he'd had this silver Datsun 240Z, which was sort of the closest that the Japanese got to a Porsche. It was such an incredible sports coupe. It was just really unique design, great performance. We'd be playing tetherball or handball.

7:38But essentially, it would be like a Who concert when Principal Ukelsen would roll up in his 240Z. and we would rush the fence to see the 240Z. And then what does Datsun do? The Stifzer corporate have this ego thing where they want a global brand and it was called Nissan and other markets. So they trashed the brand. And in the weirdest brand architecture transition move, it had the Datsun logo on the front and then the Nissan logo on the back. So it was like, oh, it's a Datsun. There it goes, no, it's a Nissan. But this takes the cake. HBO, a brand is a series of intangible associations that result in a rational trial or margin.

8:20And those associations are built slowly over time. You can't really buy or build a brand. It's like nine women can't have a baby in a month. The same is true of a brand. You can't build a brand like it. You could have infinite capital and you couldn't build a brand like HBO in two, three, five, maybe even 10 years. And HBO means a level of quality program that is so tapped into the cultural zeitgeist and has such incredible execution as a function of HBO's culture, which was able to basically be a flyweight that could kick the shit out of Larry Holmes. You know, they were spending two or three billion a year on content.

8:56Netflix was spending 17 billion. And yet, what are we all talking about? We're all talking about succession. What did we use to talk about? Game of Thrones. they consistently figure out a way to put out the most culturally relevant content and they're taking that brand and immolating it so they can call it max i mean this is just this is an outrage ash this is an outrage and by the way we're changing the name of the prop cheese show to hbo and we're just going to see what happens let me just push back on this i actually like i actually like this rebrand. I said I liked it on Twitter. I said, I just think it sounds cleaner.

9:35And I got a lot of pushback, a lot of unfollows, interestingly. But the way I see it is, you know, you just made the analogy of the Datsun logo on the front, Nissan logo on the back. Isn't that sort of what's going on here with HBO Max combining the two? I mean, the best situation maybe for you would be you just call the streamer HBO. but there are all of these other production companies they have to now transition getting the discovery plus content onto the max platform don't you think that max is just kind of cleaner plus the hbo production studio is still going to exist you're still going to see hbo original the last of us hbo original game of thrones you're still going to have that brand existing but this to me just feels cleaner plus they've got that that bullseye through the a in the max which is sort of a hat tip to the HBO brand.

10:29What do you think of that? Well, first off, let's nod to your logic and let's change the name of your educational institution to Prince because it's cleaner, Ed. It's cleaner. So you're at the university formerly known as Prince. The notion that we're going to change something to Max and take decades of branding in intangible associations, what you had with HBO is anything on HBO I would trial that I had so much confidence and trust in that brand and brand is sort of synonymous with differentiation and trust and the thing about HBO that made it so successful wasn't the shows that were on it it was the shows that weren't on it and that is the bar is just a little bit higher whereas Netflix is like you know we're going to green light pretty much everything Amazon is essentially we're the Walmart we just any hey you want to sell through us anything it actually has more content than any streaming network HBO was the luxury brand.

11:23It was the Hermes bag, the Birkin bag, the Chanel of media. And it was also at incredible self-expressive benefit. I remember parties in the 70s in Southern California where my dad was trying to fuck everyone that wasn't his wife. He would literally go up to them. And then one of his first one part of his rap was, oh, in our household, we only watch HBO. Like that was some big flex. Or maybe it was the early 80s. I don't know. Anyways, he saw that as a sign of prestige. I mean, this thing called on so many brand attributes, even internally. I think that they were going to have a much easier time attracting talent, the best writers, the best actors to an HBO production as opposed to a Max production.

12:03And I think that similar to every bad decision made in brand strategy, it all circles back or can be reverse engineered back to a 50 or 60 year old something individual who realizes they're going to die and their ego starts to take over all their decisions. And I'm sure because he didn't come from HBO and he didn't invent it. He was at Discovery. He's pissed off the whole thing isn't called Discovery. He wants to have his name on something original, the guy who built Max. And he's destroyed shareholder value. This is a brand of this equity is literally capturing lightning in a bottle over and over for decades.

12:39And to just trash it and say, oh, we're now we're max. I mean, this will go down. First ballot hall of fame of stupid fucking decisions. Anyways, before you say anything really dumb, I'm going to keep going here. Adidas, I feel for them. They made us. I like to call them Adidas because, you know, I live in Europe now. I live in Europe. That's right. Adidas. I like Adidas. I think they showed real metal by saying, you know, sorry, Kanye, that kind of anti-Semitic weirdness, just that dog don't hunt here regardless of the economic harm. And I think they're stuck. That was a buying opportunity when it went down, and I think it tripped back.

13:161.3 billion. My question would be, and it's easy to be a purist and heckle from the cheap seats. You know, my question would be, is any of that money going to go to him? And if it does, you know, then it's sort of uncomfortable. But selling a bunch of Yeezys, they will actually probably clear up pretty fast because they'll probably become collector's items. Sorry, I just want to push back. I mean, we talked about this issue on no mercy, no malice. And And one of the things that we pointed out is that at certain points, corporations need to draw a line just to sort of remind ourselves that a line even exists in the first place.

13:52And we commended Adidas for taking action about this. Doesn't this kind of nullify everything they did? I mean, it's the epitome of all talk, no action. Shouldn't we be making, I don't know, maybe a bigger deal out of this? 1.3 billion, right? They're not producing anymore. They severed the relationship. I mean, I just, I empathize with the board members here, like$1.3 billion. If that shit, if we just burn it and we, when we say to the world, aren't we pure? Okay. That puts us in a hole that makes it harder for us to compete with Nike, makes it harder for us to be economically viable and continue to be a good company that makes the right decision on the longterm.

14:37So I I sort of give them a hall pass here. It's a lot of money. They're trying to say we're going to, you know, donate some of this money to causes that are directly trying to combat the venom and weirdness that came out of Kanye's mouth. But$1.3 billion is that's a serious hit to the company and employees and the stakeholders. And like I said, it's just so easy to be a purist outside the company walls. but you know i think that they should do what you suggest and they should just change the brand name to dos like dos boot that's cleaner isn't it dos it's clean jesus i can't believe you you think this hpl i can't i seriously can't get over that makes me question every decision we've made about you ed uh uta inflation coming down to 8.7 i'm really happy about that i like the new pm he strikes me as really reasonable.

15:28The debt crisis, I'm calling it. I think we do what we always do. I think we go right up to the edge here. I think Speaker McCarthy is, I hate to use the R word, but I do think he's reasonable. I think in a back room, they've winked and nodded each other and said, okay, I got to, he said, Mr. President, I got to pretend I'm fucking crazy to keep the crazies in line and pretend that I'm hearing them and acting crazy and we'll get right up to the eve of this thing. But this would just be, this is just mutually assured destruction. Everyone would come out of this looking terrible. All of a sudden, the military would stop getting paid.

16:04Our vendors would stop getting paid. Social security recipients would stop. That's the people we got to be worried about is the seniors. You want to see an insurrection? I mean, when they start storming the movie set where Murder, She Wrote is filmed and they find out it's no longer in production, watch out. They're coming. They're coming for you. I thought that was funny. I was expecting a laugh from you, Ed. You don't even know what Murder, She Wrote is, do you? I bet they're not going to watch that at the 24-month reunion at Prince. We'll be right back after the break with a look at the false casual restaurant industry.

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19:05we're back with prop g markets Fast casual Mediterranean restaurant chain Carver has filed to raise$100 million in an IPO. Carver's S1 registration statement shows strong growth. Revenue is up 28 % year over year, and there are now 263 restaurant locations across 22 states. That's up from 164 in 2021. However, the company is not yet profitable and lost$60 million last year. Other publicly listed fast casual chains include Sweetgreen and Chipotle. Sweetgreen had an initially successful IPO in 2021, but it got hammered in the downturn. The stock's fallen 80 % since it went public. Meanwhile, Chipotle has been one of the best performing stocks this year, up 48%.

19:50So Scott, you were on the board of Panera Bread, which is sort of a pioneer of the fast casual category. What do you make of Carver's IPO? Well, I'm pulling for it because I know the people at Panera and they're super smart and super hardworking. And if this goes well, it probably sets up for a warm reception in the public markets for Panera. So I'm pulling for it. The revenue grew 13 % in 2022. They want to open about 40 new restaurants. That will be, I think, about a 15 % growth. It's probably a really good time to open restaurants right now because typically opening restaurants, the key cost driver or the risk is the cost you get the real estate for.

20:30And I can't imagine, I mean, for the first time in probably since 2009, the tenant has leverage over the landlords. That's good for Cava. I know that commodity prices are up, which has hurt margins. We were feeling that at Panera, but I imagine they're starting to come down. So we'll see. I wonder if Sweetgreen's problem. I think Sweetgreen's been hammered by people not returning to the office. I bet that's a big kind of lunchtime thing in urban centers where there's big offices. You're young and eat at shitty places. What is Cava? Well, Cava is just a fast, casual, i.e. healthy, slightly higher quality, slightly more expensive fast food restaurant.

21:12We've seen this massive explosion in this category in the last few decades. So in 2009, there were 17 ,000 fast casual restaurants in the U.S. It was a$19 billion market. By 2018, that number had doubled to 35 ,000 restaurants. It had grown into a$48 billion market. The global market is expected to reach$209 billion in annual sales by 2027. So it definitely feels like this is a global consumer shift from traditional fast food to fast casual. So I guess my question to you, especially given your experience at Panera Bread, would be, what is changing about consumer preferences in the food industry?

21:55And do you think that we're going to see a decline in the staple fast food brands? The only insight I would have is that think of them not as much as restaurants, but as distribution centers. Now, over 50%, I believe, of purchases at Panera originate digitally. People buy online, pick up in store. COVID sort of accelerated that trend, and they had to build in new capabilities. And COVID, to a certain extent, gave them cloud cover to make these types of investments. I mean, the innovation is pretty striking. I still think, I mean, the other thing that just always amazed everybody was Chipotle, Panera, and Starbucks had similar NPS scores.

22:36Somewhere, I think, in the low 60s. Could you explain what NPS means? Net promoter score is basically your likelihood to tell someone else, would you recommend this to a friend, would you not? And then it's a ratio of those that creates an NPS. That is seen as a very simple metric that kind of connotes the value of the product. Would you recommend it to a friend at the end of the day? The NPS for Chick-fil-A is like low 80s. I mean, Chick-fil-A is a phenomena. And I would argue the reason they've done that is because of their compensation strategy. They lend money to people who want to be store managers.

23:08So there's an owner there at all times. And if you really think about great restaurants and great retail, it's kind of a function of the level of vested interest or ownership that someone has running the store. Because you can just feel it. When you're in a restaurant where the owner's there, just everything works better. I always feel like the food is, I don't want to say last, but the culture, the cost of the real estate, and then figuring out a way to create more dollars per square foot through digital technology. What's interesting is Chipotle only spends 5 % of their total revenue on occupancy.

23:40And we used to, especially retail, have this basic metric. And that was if you could get below 12 % of your revenue going to the occupancy costs, you had a model that worked. What actually are the occupancy costs? What is rent? Rent and utilities, four-wall unit economics. That 5 % number, occupancy as a percentage of total revenue, isn't because they have better deals. It's because they run so much revenue through those stores. I mean, Chipotle is just a business juggernaut. It's valued at an enterprise value to EBITDA 36 times. That's greater than Apple, Amazon, or Alphabet. So if you want a tech stock, invest in Chipotle, or at least it's got big tech-like valuations.

24:19That probably means you should avoid it, quite frankly. Anyway, Kava, my guess is they won't get the same multiple, but the most important thing about them is not what they say about Kava, not what it says about Fast Casual, but what it'll say about the state of the IPO market. That's what everyone will take from this.

24:44Private equity firms can make a big return when their portfolio companies go public. But typically, that payday doesn't materialize right away. In fact, only 3 % of private equity firms fully exit at the IPO. Instead, they sell their stakes slowly in incremental sales known as follow-ons. The average PE firm finishes selling its stake three years after the IPO. That includes the initial six-month lockup period, which is standard in IPOs. And many private equity firms hold for even longer, some for more than a decade, as they hope to sell above the IPO price. But this year has proven to be an unusual one for follow-ons.