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TWST: Tell us how you view the health of the restaurant industry today and the outlook for the fundamentals over the next six months.

Mr. Hickok: Industry fundamentals have not been this positive in about 10 years, to the best of my recollection. We are particularly confident about the earnings prospects and stability of the group, and we have been very bullish about the price appreciation potential for these stocks for a while. We made comments at the very end of February, which we wanted to project to the Street about this point. Our caveat was that we might be early and that we needed the technology sector to soften, but our message was very simple.
The irony was that in spite of very strong fundamentals, the valuations had never been lower. Our conclusion was that if there was any softening in the technology sector, the restaurant sector was going to be a solid place to put money, and at minimum, a defensive place to invest. We are not prescient, but as it turns out, just about two or three weeks later we had the softening of tech that we needed. And since mid-March, the restaurant sector has significantly outperformed the market. The macro environment has never been as favorable as it is right now. We expect to have very solid, if not spectacular earnings coming out of the segment defining restaurant companies in the fourth quarter and in the first quarter.

TWST: One of the other companies on your list of favorites is Starbucks (Nasdaq:SBUX). There has been a change at the top at Starbucks, I believe.

Mr. Hickok: There has been a titular change in that Howard Schultz is no longer CEO but Chief Global Strategist, and Orin Smith is the new CEO. I don’t think that there is going to be a significant material operational impact. I think that this formalizes an arrangement that has been in place for a period of time. That’s not to diminish the role of Howard Schultz, because I’m not doing that. I’m just pointing out that the functional responsibilities have probably been pretty much the same for a while, so I don’t think it’s really going to change the company that much.

TWST: What’s the secret of their success?

Mr. Hickok: Very good concept, very good people, very large market opportunity, and unit level execution. It comes down to the same things over and over and over again.

TWST: And they’ve gone beyond coffee, haven’t they?

Mr. Hickok: Yes, they have a number of line extensions. They have a wholesale business, the whole bean coffee in the supermarkets, they have ice cream, and they have bottled drinks. They have introduced food in several hundred units, which I think is a big idea for this company because they already have the real estate, and they’re carefully finding other uses for it, and food is one. Yes, the heart of the brand is coffee by the cup, but they have shown that they can extend the brand into other areas. There are many companies that talk about international expansion, and there are many companies that do not realize the international potential originally projected. But that does not include Starbucks because its international development could very well be much larger than its domestic business.