2003 Boloco Annual Report
NOTE: Boloco was known as Under Wraps in 1997, The Wrap from 1998-2004 and Boloco thereafter. Clearly we are comfortable with change!
To Our Stockholders, Team Members, and Friends,
Happy Holidays! We are pleased to present you with the Fiscal 2003 Annual Report for Stellar Restaurant Group, Inc. (“Stellar”). Stellar’s fiscal year consisted of the 52-week period ending September 28, 2003. All financials have been reviewed by the Boston-based accounting firm Brown & Brown. Their report is available upon request.
Financial Performance
Gross sales rose 3.3% to $6.25 million from $6.05 million a year earlier. All of this gain is attributable to opening our new location at Children’s Hospital in April, as same-store sales for fiscal 2003 were down 2.0%. Same-store sales, our most carefully watched performance statistic, measure how well restaurants open 12 months or more fared relative to the prior year. This marks the first year since inception that we experienced same-store sales that decreased versus the prior year.
Store-level Profits decreased from $1.25 million in 2002 to $1.01 million, mainly due to higher occupancy costs of new stores, higher insurance costs, and more accurate allocation of G&A to appropriate stores. This contributed to a company EBITDA decrease to $269K in 2003 from $582K in 2002. The balance of this decrease is attributed to new hires and salary/benefits increases at the founder and support team level. For clarity, Company EBITDA represents earnings before interest, taxes, depreciation, amortization, and occasional extraordinary expenses.
Net income, which includes everything excluded from Company EBITDA, decreased to $8,600 from $246,000 in 2002 and from $34,000 in 2001. While $8K is not an exciting figure, it nonetheless marks our third profitable year in a row.
Our balance sheet is not as “pretty” at the end of 2003 as it was the previous year. With the opening of two new restaurants, our liabilities increased from $375K to $975K. Due to more favorable terms with our largest suppliers, our Accounts Payable figure increased from $164K to $482. It’s important to note, however, that ten days after the close of the books, a payment for $220K to our largest food vendor came due and was submitted. Timing alters the look of our balance sheet significantly.
Expansion Mode – Déjà vu?
Last year, our Annual Report stated the following: “In 2003, we will be expanding again. Cautiously, of course… It is important to note that our renewed expansion efforts will bring new expenses and obstacles, some of which I can not predict with any real degree of accuracy.”
This year’s openings of Children’s Hospital and Pearl Street in Boston’s Financial District were laden with unexpected expenses and obstacles… they both cost more and took months longer than originally expected, just as we feared. In addition, The Wrap in Hanover, NH at Dartmouth College, originally expected to open in late summer 2003, has experienced similar delays… we now have a late January 2004 projected opening date.
Operating for 2.5 years (late 2000 to early 2003) with no new store openings was an excellent way to ensure that the stores, the company, and the concept, could be profitable in a “steady-state” mode of operation. Having achieved that goal, we moved back into expansion mode. What we seemed to forget earlier this year was how much pressure opening new units places on an existing restaurant organization, especially one as lean as ours. We almost instantly lost focus on existing stores and had to watch them limp along for a few months before reeducating ourselves on how to handle both tasks at once. With a few new key hires and some leadership shuffling into more defined roles, we are better prepared for the two, possibly three, openings planned in 2004.
Distributions to Shareholders
Although we had shareholder and Board approval last March for the distribution of a $10,000 dividend divided pro-rata to all common shareholders, we held off at the advice of a couple of our more active and industry-savvy shareholders who strongly urged us to put the money to use within the company. We followed that advice, and will continue to do so until further notice.
People First
We continue to believe that the key to any future success lies in finding and keeping excellent people – those who continue to display passion, intelligence, creativity, and a strong work ethic.
In addition to the promotion of at least a dozen Team Members to the position of Team Leader, we were very lucky to hire Anna Fincke as Director of Strategy and Operations, and Pamela Berry as Director of Marketing. Both women are welcome additions to our Support Team! For more on each of them, visit the “corporate” page on our website.
We are always looking for good people with a willingness to learn and grow – if you know of any who could help us, please send them our way!
Discussion on Your Investment in Stellar
What I wrote last year continues to apply this year, so some of the following may seem repetitive.
As you all know, there is no public market for Stellar shares at this time. I wish this was not the case, mainly because I don’t believe in trapping people’s capital in a place where they may not want it.
In fact, there is an active, albeit small, market for Stellar shares. In the last 24 months, seven shareholders were able to sell their shares when, for a variety of reasons, they needed to or wanted to. Five other shareholders stepped in and took the other side of the transaction. Indeed, I have re-invested myself multiple times over the past seven years, during times when the company was in need of capital, but also when various shareholders wanted to sell at a fair price.
As a reminder, the average “Under Wraps, Inc.” shareholder bought his/her shares at approximately $0.40 per share, and the average “Jera’s Juice, Inc.” shareholder bought his/her shares at approximately $2.08 per share.
My point in discussing this is to once again remind you that there are opportunities for each of you in Stellar’s “market”, regardless of your original position. If you are one of those own stock at $2.08 per share, buying other shareholders could be an opportunity to significantly lower your average cost per share. Or, you could do as some have and sell simply to offset capital gains taxes in other investments by realizing the loss. Whether you are a buyer or a seller of Stellar stock, there’s probably a way to better your position.
Please contact me at any time if you have any questions at all regarding your investment. There are still a few of you I have never heard from - mere names on a capitalization chart – let’s change that this coming year.
Moving Forward
1. Expansion:
We continue to actively seek new sites. In 2003, as you already know, we opened:
· The Wrap - Children’s Hospital
· The Wrap - Pearl Street (Financial District)
We have two locations set to open in 2004, and are looking for one more that would open at the very end of this fiscal year, or possibly in early F2005.
The Wrap - Dartmouth College (late January/early February 2004)
35 South Main Street, Hanover, NH
In January 2003, we signed a lease on Main Street in Hanover, New Hampshire. Five of our twenty shareholders are alums of either Dartmouth or Tuck, and a couple others have business concerns in the area, so I expect a lot of support during your future visits to the Upper Valley! The restaurant will be in the old Peter Christian’s space, which is undergoing major renovations at this very moment. Expected opening has been delayed from late summer 2003 to January 2004. It’s an amazing project – by far our most challenging, but hopefully one that will prove to be very rewarding. The buzz in town is fantastic. We expect first year revenues to exceed $700,000.
The Wrap - Federal Street (Financial District) (June 2004)
133 Federal Street, Boston, MA 02110
Closing the only remaining Jera’s Juice location at 75-101 Federal Street in September 2003 did not happen without a 3-year battle with the landlord to get permission to convert it to our core Wrap concept. Ultimately, we did not get approval, but we did find a distressed company about 50 yards up the street that sold to us at a fair price (the closing actually takes place 12/30/03). 2,100 square feet, lots of tall windows, a renegotiated lease, and tons of outdoor seating should finally give us a “flagship” location in the Financial District. Pearl Street and Water Street will do about $1.0M combined in 2004. We expect this new Federal Street to open in June 2004, and to contribute at least $700,000 to the top line and greatly increase awareness of our company and concept to the Financial District, thereby helping all locations.
Further commentary on Expansion:
We do very well in areas dominated by students. The Average Unit Volume (AUV) for our four locations in predominantly college areas was $995,000 at year-end 2003. As of December 7, 2003, that AUV figure for the same four stores had increased to $1.025M… that’s over $735 per square foot… they are doing extraordinarily well. We believe Hanover will one day make positive contributions to this statistic, and we are currently considering other student markets outside of Boston where people have asked us to consider opening. Providence and New Haven are both candidates. Rest assured we will only go forward in areas such as these if we are able to find the very best people to run the locations – that is the key ingredient to everything we do.
The Financial District, on the other hand, has been challenging during the last 3 years. Water Street has seen three straight years of double-digit sales decreases… not a good sign that we are a desired concept for young and veteran professionals. That being said, we’ve never had an “A”, or even a “B” location in the Financial District… 133 Federal is a location that is definitely a “B”, maybe even an “A”, and its performance will tell us how to proceed in downtown areas in the future.
If you have any ideas related to new Wrap locations, we’d love to hear them.
2. New Concepts:
Stellar is a preferred minority shareholder in a new concept called B.Good, opening in January 2004 in Boston’s Back Bay. The site is on the ground floor of Bain & Co.’s new corporate headquarters at 131 Dartmouth Street. We had the good fortune to meet Anthony Ackil and Jon Olinto in late 2002, and have been working with them on developing this concept ever since. Some of you may remember that Anthony presented to us at the 2003 Annual Meeting. We successfully raised over $400,000 to get the concept up and running, and if things go well, our hope is that Stellar will become an important partner in its expansion plans. I am on the Board of Directors and an active Manager of Bgood, LLC – “silent” investing is not something we were interested in. Check out the website at www.bgood.com. Don’t miss the story of how they got started… their off-beat sense of humor has attracted hundreds of eager customers to their site even before the restaurant is in existence! The city of Boston seems excited – I guess that means we should be too!
We are not actively looking at any other new concepts.
3. Partnerships:
As mentioned in last year’s report, in 2002 we began working with Kettle Cuisine to take our soup program to the next level in order to increase sales in our slower winter months. Kettle, based in Chelsea, MA, creates soup from scratch and uses only the freshest and often organic ingredients. After a successful test in early 2003 at our Water Street location, Kettle’s soup line and marketing strategies were implemented at all locations this fall. Soup at The Wrap is now more than just a side offering, and the increased soup sales prove it!
4. Franchising:
Although we are still approached multiple times each month by interested and increasingly qualified franchisees, we have not yet invested in the legal documents or systems that would make franchising a possibility. That being said, we are more open to this option today than ever before – if anyone of you has knowledge of franchising, or of people or organizations that could help us do so successfully, I would very much appreciate hearing from you.
5. Sale:
Although we are not actively searching for a buyer of Stellar, we had two large companies inquire about the possibility of buying all of our locations – no deals were negotiated. While we are always open to discussing terms of a sale with potential buyers for the benefit of our shareholders, we continue to operate our business with long-term success as our top motivator.
6. Raising Capital:
In 2004 there is a strong possibility that we will begin the process of raising a large round of capital to fund expansion into a new market. Our intention would be to build a new market from scratch as we did in Boston and quickly saturate it (2-3 years). We would be seeking $2M - $3M.
If any of you would like to participate yourselves, know someone else who might be interested, or have close contacts with a retail/restaurant focused venture firm, it would be great to hear from you.
Tortilla Games:
Burritos 1, Wraps 0… and the clock is ticking
The Wrap is at a pivotal point in its history. Never has it been more important for us to understand what we stand for in the eyes of our customers, and how we will fit into the competitive landscape as it becomes, well, more competitive.
First, consider that as I write this, we are experiencing an unbelievable surge in same-store sales (9% YTD in F04). After three quarters of negative comps in 2003, we broke the trend in the 4th quarter by being up about 1% versus 2002. And now in the first two months of 2004, we are smashing records in many stores. There are a number of reasons for this surge, many of which I’m proud to report were our own doing.
Next, consider that while “wraps” themselves have not been recognized as a “hot” growth concept for nearly a decade, fast-casual burrito/Mexican companies are sizzling; raising large amounts of capital, being purchased by large companies at high valuations (McDonalds, Wendy’s, Jack-in-the-Box each own one), and most importantly connecting with the hearts of customers across many demographic lines. Chipotle, Baja Fresh, Qdoba, La Salsa, and Moe’s are some of the best examples, and the best part is that they all do exactly what we do… wrap great food up in tortillas. The implication here could be that if we position our concept correctly, our time is yet to come. This is good.
But, here’s the part that concerns us:
Burritos, not wraps, may be here to stay. Yes, they are essentially the same product. But, in the eyes of the general public, we’ve determined that “wraps” don’t give out the same positive vibes to a great number of our target audience as “burritos” do. There have simply been too many “bad wraps” introduced on menus across the country over the last few years. Here are some words we often hear used to describe each, whether true or not:
Wraps: cold, healthy, maybe taste good – maybe don’t (that’s not why they eat wraps), green, crunchy, lettuce, dry, pita bread, low fat, expensive, faddish
Burritos: hot, spicy, healthy(?!), taste great, hot and soft tortillas, good value, not bad for you, enthusiastic responses, low fat
For the record, The Wrap makes great burritos… unbelievable burritos, actually. But for us, that’s just a portion of what we “wrap” (20-25% of sales). We offer our customers a great variety of ingredients, with influence from many different cultures. And, of course, we offer smoothies, salads, and soups. We have something for nearly any appetite! And yet, that may be our problem. It’s possible the public wants the simplicity that these “taquerias” offer… that they don’t want the variety in tastes offered by The Wrap. After all, the company that inspired us in the first place, World Wrapps, is going nowhere soon – they’ve been stuck at 15 locations on the West Coast for what seems like an eternity. It’s possible that as these “Mexican Wrap” concepts enter Boston, which they are planning to this year, our sales will dip drastically as customers flock to their stores in search of what they perceive to be an “authentic” burrito.
What would be careless of us at this point would be to do nothing about this situation – to convince ourselves that rising sales must mean that our concept is prepared for battle. The product we serve may actually be ready, but it will require some serious support on the marketing front. We need to educate our customers, both loyal and new alike, about our restaurants, our ingredients, and our authenticity. Why shouldn’t a “wrap” place make the Best Burrito in town, when a Burrito is, after all, a Wrap?
Winning Best of Boston 2004 (Boston Magazine) and/or Boston’s Best Burrito (Improper Bostonian) is one of our top priorities this year. Not Best Wrap… no sense in winning an award in a category that inspires few. Besides, we already won Boston’s Best Wraps three years in a row, from 1998-2000. Best Burrito is what we need to solidify ourselves against the strongest players as they enter our market… it is a long-shot, but one that we will fight hard for. Anyone advice out there??
For any of you who think I am exaggerating the importance of this “wraps” versus “burritos” perception, bear with me for one more paragraph. This summer, I had the honor of meeting Howard Schultz, CEO of Starbucks, at their headquarters in Seattle. I presented this very problem to him. After a good attempt on his part at trying to convince me I was making a mountain out of a mole hill, we took a tour of the facility where he proceeded to ask more than a handful of SBUX partners to describe their perception of wraps and burritos. As we exited the building an hour later, his response to my question, “Do you see the problem now?” was a simple “Yes. I do.”
We’re working on it… in the meantime let us hear your thoughts.
Commentary on 2004 Projections
The 2004 Pro-Forma Income Statements by Store and as a Summary are included as the last exhibit in this report. Comments on the major items follow:
Same-store sales increase of 5%
Last year, we suffered nearly a 14% drop at Harvard Square due to the opening of Real Taco less than a block away...one year later, they are closed, and the sales we lost are coming back our way for the time being. I guess “wraps” get a point for that victory, but new and better competitors are on their way; losing 15% is probably the least we can expect in the future. Cleveland Circle and Northeastern are up over 20% year to date, Mass Ave and Newbury are up about 4%, and we expect Water Street to reverse its decline (-11% YTD) within weeks, if it hasn’t happened already (takes a few weeks to spot a LT trend). 5% SSS growth for 2004 should be attainable.
COGS increasing to 33.7% of sales, versus 32.8% in 2003
We increased the size of our large size wraps and burritos in September… the Larger Large. We also increased the price of our burritos, but the two did not offset each other exactly; our COGS has increased as a result. In addition, costs of our major ingredients have increased. As always, we will do everything possible to keep COGS under control – sales increases are worthless if you give away all of excess!
G&A increasing to 12.8% of sales from 12.1% in 2003
With new hires in Strategy and Marketing, the promotion of a Team Leader to full-time IT work, and normal increases in current Support Team salaries, Overhead Labor is increasing by over $170,000 in the coming year. In addition, the opening of a dedicated commissary will increase overhead by another $60,000, though we hope to start seeing significant savings at the store-level within six months to a year (savings not projected at this time).
Net Loss projected to be $64,000
In the 2002 Annual Report, with expansion back in the picture, we projected a net loss of $70,000 for 2003. In fact, we showed a profit of $8,600. This year, once again, I must project a loss of about $64,000. However, as with this past year, please be assured that I will do my best to see a 4th straight year of profitability.
Final Words
2003 was a good year, overall. We’re proud that Stellar has been profitable for three years in a row. We’re proud that we continue to beat the odds and have made a concept that was considered passé into a relatively healthy, growing business. And most importantly, we still enjoy building and operating this business, learning new lessons in business and life through our jobs, and working with a team that has stuck together for many years. The Wrap is a great laboratory for many of us as we test the delicate balance of building a company in new and different ways with the necessity of earning a profit and providing a solid return on investment.
This year’s Annual Shareholder Meeting, open to all shareholders, will be held on Monday, March 8, 2004 at 9:00am at our offices at 139 Massachusetts Avenue, Boston, MA (or an alternative location if necessary, which would be announced at least 7 days prior to meeting time). The meeting will last approximately 2 hours. While the legal purpose of the meeting will be to “conduct business according to the by-laws of the company”, the true purpose will be for shareholders to ask questions, give feedback, and voice concerns. Lunch will be provided by b.good and The Wrap.
I sincerely hope that you will make the effort to attend the meeting. An RSVP would be greatly appreciated, however, do not be surprised if you hear from me before then encouraging you to attend! Also, we will again have a conference call number if you can’t be there in person – last year we had four people dial in from various parts of the country.
Finally, don’t forget… Quarterly (1st, 2nd, 3rd only) and Annual shareholder reports are found on our website a few weeks after the end of each quarter at www.thewrap.com. From the home page, go to “Corporate”, then to “Shareholder Log-In” and enter your username (“share”) and password (“holder”).
Thanks for your continued support, and best wishes to you and your families for a continued warm and happy holidays.
Sincerely,
John S. Pepper
Chairman and CEO
617 266-2200 x206
