whether a firmÔÇ™s long-term assets were impaired? What questions would you raise
with the firmÔÇ™s CFO about any charges taken for asset impairment?
8. Give two examples of instruments designed to hedge changes in the fair values of as-
sets or liabilities. When would you recommend that a firm hedge against changes in
the fair values of its assets or liabilities? Give two examples of instruments designed
to hedge uncertain future cash flows. When would you recommend hedging uncer-
tain cash flow obligations or inflows?
1. See Lisa M. Lynch, ÔÇťA Needs Analysis of Training Data,ÔÇŁ in Labor Statistics Measurement
Issues: Studies in Income and Wealth, Volume 60 (Chicago: University of Chicago Press, 1998).
2. See G. Miller and D. Skinner, ÔÇťDeterminants of the Valuation Allowance for Deferred Tax
Assets Under SFAS No. 109,ÔÇŁ The Accounting Review 73, No. 2, 1998.
3. Despite this poor reported performance, in the 22 months since its initial public offering, the
companyÔÇ™s stock price increased from $1.70 to in excess of $170, indicating that investors were
very optimistic about the companyÔÇ™s long-term prospects.
4. P. Easton, P. Eddey, and T. Harris, ÔÇťAn Investigation of Revaluations of Tangible Long-
Lived Assets,ÔÇŁ Journal of Accounting Research 31, 1993, examine asset revaluations by Austra-
lian firms and find that they are weakly related to lagged returns, suggesting that investors view
revaluations as relevant but not very timely disclosures.
5. OwnersÔÇ™ equity is therefore translated at historical rates (when equity was invested), and any
gain or loss on adjustment is reported as a translation adjustment. All revenues and expenses are
translated at the weighted average rate for the year. No exchange rate gains and losses are reflected
in the income statement.
6. Under the monetary/nonmonetary approach, ownersÔÇ™ equity is again translated at historical
rates (when equity was invested). Ongoing revenues and expenses are translated at the weighted
average rate for the period, but depreciation is translated at the historical rate. Finally, any ex-
change gain or loss is included in income.
Boston Chicken, Inc.
Perhaps no company better captures the spirit of the new economy
than Boston Chicken Inc., which aims to do for the rotisserie what Colonel Sand-
Business Analysis and Valuation Tools
ers did for the deep fryer. . . . There is nothing particularly new about rotisserie
chickenÔÇ”those birds have been turning succulently in delicatessen windows for
generations. But Boston Chicken is not really about poultryÔÇ”it is about develop-
ing a market-winning formula for picking real estate, designing stores, organizing
a franchise operation and analyzing data. These are Boston ChickenÔÇ™s innova-
tionsÔÇ”trade secrets that can be every bit as valuable as a new drug or computer
chip design. With them, Boston Chicken has not only developed the secret for de-
livering generous quantities of home-cooking at affordable prices, but also trans-
Boston formed what had been a mom-and-pop business into a new national categoryÔÇ”
Chicken take-out home-cooked foodÔÇ”that potentially can draw business away from both
supermarkets and restaurants.
The Washington Post, July 4, 1994
Boston Chicken was founded in 1989 by Scott Beck to operate and franchise food ser-
vice stores that sold meals featuring rotisserie-cooked chicken, fresh vegetables, salads,
and other side dishes. The ´¬ürmÔÇ™s concept was to combine fresh, ´¬‚avorful, and appealing
meals associated with traditional home cooking with a high level of convenience and
value. Meals cost less than $5 per person, were sold in bright, inviting retail stores, and
were available for take-out or for on-site consumption. ÔÇťOur strategy,ÔÇŁ Beck noted, ÔÇťis
to be a home meal replacement. Our number one competitor is pizza.ÔÇŁ1
To help operationalize his vision, Beck assembled a management team with consid-
erable prior experience in both the fast-food business and franchising operations. Beck
himself became one of the ´¬ürst and largest franchisees for Blockbuster Video while still
in his twenties. He later sold his franchises back to the parent company for $120 million.
Other top executives included the former president of Kentucky Fried Chicken, and
former vice-presidents of BenniganÔÇ™s, Taco Bell, Red Lobster, ChiliÔÇ™s, and BakerÔÇ™s
Professor Paul M. Healy prepared this case as the basis for class discussion rather than to illustrate either effective
or ineffective handling of an administrative situation. Copyright ´ú© 1997 by the President and Fellows of Harvard
College. Harvard Business School case 9-198-032.
1. The Washington Post, July 4, 1994.
4-21 Part 2 Business Analysis and Valuation Tools
COMPANY STRUCTURE AND GROWTH STRATEGY
By the end of 1994, the Boston Chicken system operated 534 stores, compared to only
34 stores at the end of 1991. This translated to an annual rate of growth of almost 500
percent per year, with a new store being opened on average every two days. As reported
in the ´¬ünancial statements presented in Exhibit 1, revenues for this period increased dra-
matically, from $5.2 million in 1991 to $96.2 million in 1994 and net income rose to
$16.2 million (from a loss of $2.6 million). This growth continued throughout 1995; by
the third quarter there were more than 750 stores in operation and quarterly sales had
reached $38 million (see Exhibit 2 for a summary of quarterly results). The company
was voted ÔÇťAmericaÔÇ™s Favorite Chicken ChainÔÇŁ in a 1995 survey published by Restau-
rant and Institutions magazine.
To provide ´¬ünancing for its rapid growth, Boston Chicken went public in November
1993. The offering, for 1.9 million shares, was highly successful, as the stock price
soared from the initial offering price of $10 to a high of $26.50. However, within months
of the offer the stock had fallen back to $18. Nonetheless, a second offering for two mil-
lion shares at $18.50 in August 1994 was oversubscribed. The company responded by
increasing the offer to six million shares, raising $105 million of new capital (after issue
Competition in the $200 billion restaurant industry was ´¬üerce, and several other com-
panies were quick to take advantage of Boston ChickenÔÇ™s success. For example, in mid-
1993 PepsicoÔÇ™s Kentucky Fried Chicken (KFC) introduced ÔÇťrotisserie-goldÔÇŁ roasted
chicken in most of its 5,100 restaurants. Within four months KFC reported that sales of
the new chicken had topped $160 million, making KFC the worldÔÇ™s largest rotisserie
chicken chain. KFC spent $100 million to launch the new product, including a national
network advertising campaign. However, some analysts believed that Boston ChickenÔÇ™s
biggest challenge would not come from other competitors, but on how well the company
met its goals.2
In its 1994 Annual Report, Boston Chicken described its main goals as strengthening
its area developer organizations, creating communications infrastructure to support area
developers, building an organization to continue new market development, and continu-
ing operational improvements to ensure that the retail concept kept pace with changes in
Area Developer Organizations
The companyÔÇ™s franchising strategy was different from that of most other successful
franchisers. Instead of selling store franchises to a large number of small franchisees,
2. See discussion by Stacy Dutton at Kidder PeabodyÔÇ™s equity research department, quoted in Reuters news report,
November 9, 1993.
148 Asset Analysis
Boston Chicken focused on franchising to large regional developers. It established a net-
work of 22 regional franchises, which targeted the 60 largest U.S. metropolitan markets.
Each franchise was expected to have the scale necessary to ensure operational ef´¬üciency
and marketing clout. The typical franchisee was an independent businessman with 15ÔÇ“
20 years of relevant management experience, strong ´¬ünancial resources, and a mandate
to open 50 to 100 new stores in the region. This structure was intended to provide the
entrepreneurial energy of a franchise operation with the control and economies of scale
of company-owned operations.
Under typical franchise agreements, developers paid Boston Chicken a one-time
$35,000 per store franchise fee, a $10,000 fee to cover grand opening expenses, and an
annual 5 percent royalty on gross revenues. In addition, franchisees contributed 2 per-
cent and 3.75 percent of sales per year, respectively, for national and local advertising
campaigns. In 1994 royalties from these agreements amounted to $17.4 million, and ini-
tial franchise fees for new stores were $13 million. The company also earned interest in-
come from franchise developers, since it provided a line of credit to assist them in new
store development. This source of revenue grew rapidly in 1994 to $11.6 million. Other
revenue sources included income from leasing some of its stores to franchise operators,
and fees for software services provided to developers.
Area developer ´¬ünancing was provided to qualifying developers to assist them in ex-
panding their operations. Under these arrangements, Boston Chicken provided the de-
veloper with a revolving line of credit which became available once at least 75 percent
of the developerÔÇ™s equity capital had been spent on developing stores. The agreement
provided limits on the amount that the developer could draw over time, primarily as a
function of developersÔÇ™ equity capital. Once the drawing period expired, the loan con-
verted to an amortizing four- to ´¬üve-year term loan, with a variable interest rate set at
1 percent over the Bank of America Illinois ÔÇťreference rate.ÔÇŁ Some loans also included
a conversion option, permitting Boston Chicken to convert the loan into equity in the de-
veloper after two years, usually at a 12ÔÇ“15 percent premium over the equity price at the
The company invested $8ÔÇ“10 million to build computer software that provided support
for its network of stores, and linked headquarters to developer stores. This software used
information entered at the checkout counter to advise store managers when to put on an-
other rack of chickens or to heat up another tray of mashed potatoes. It made appropriate
adjustments for the day of the week, the season, and customer preferences at a particular
store in making its recommendations. The software also provided information on
employee work schedules to match daily peaks in customer purchases, automatically re-
ordered food supplies from approved vendors, and updated the storeÔÇ™s ´¬ünancial perfor-
mance on an hourly basis.
4-23 Part 2 Business Analysis and Valuation Tools
New Market Development
New store site selection was critical to the companyÔÇ™s future success. In 1995 it em-
ployed more than 180 real estate and construction professionals to ensure that the pace
of development was sustained and that site standards were maintained. Given these re-
sources the company was optimistic that it could open at least 325 new stores per year
in the foreseeable future.
In 1994 the company implemented a number of plans to improve operating ef´¬üciency
and reduce store-level costs. These included long-term agreements with key suppliers,
the introduction of ´¬‚agship stores, expanded menus, in-store computer feedback from
customers, and drive-thru lanes. Long-term agreements with suppliers provided oppor-
tunities to lock in prices for key inputs. For example, in October 1994 the ´¬ürm reached
a ´¬üve-year cost-plus agreement with Hudson Foods to purchase the entire capacity from
two Hudson poultry processing plants.
Flagship stores included a retail store and a kitchen facility with enough space and
equipment to perform the initial stages of food preparation, such as washing and chop-
ping vegetables, for up to 20 ÔÇťsatelliteÔÇŁ stores. Prepared food was then sent to satellite
stores, which completed the cooking process and served the products. This concept in-
creased the quality and freshness of the side items, because a ´¬‚agship had more frequent
delivery of fresh ingredients. It also led to greater consistency in food taste, facilitated
increased innovation in menu items (since there were fewer production people to train),
and utilized facilities more effectively.
In fall 1994 the company added vegetable pot pies, Caesar salad, and cinnamon ap-
ples to its menu to satisfy customer demand for more variety in food offerings. Rotis-
serie-roasted turkey, ham, and meat loaf entrees were added in mid-1995. Stores offering
these new products showed double-digit sales gains without any signi´¬ücant new adver-
tising campaign. A new line of deli-type sandwiches featuring turkey, ham, and meat
loaf on fresh-baked bread was also added to boost lunch sales. In 1995 the ´¬ürm invested
$20 million in Progressive Bagels (PBCI), a retailer of fresh gourmet bagels. Under this
agreement, Boston Chicken provided an eight-year senior secured loan to Progressive
Bagels, as well as providing administrative, real estate, and systems support services.
Management argued that this investment provided the ´¬ürm with the opportunity to learn
more about the potential of morning service, which could further increase store produc-
tivity. By late 1995 this investment was increased to $80 million, and PBCI had grown
to 53 stores (from a base of 20 units), with plans to open 200ÔÇ“225 stores in 1996. Finally,
in an attempt to increase sales in the traditionally weak fourth quarter, the company
began offering whole hams and turkeys for Thanksgiving and Christmas meals. As a
result of these expanded product offerings, Boston Chicken decided to change its name
to Boston Market.
150 Asset Analysis
In 1995 the company began using technology to keep in better touch with store cus-
tomers. Touch-activated computer terminals were added to some stores, enabling cus-
tomers to rate the quality of food and service. Blaine Hurst, the former Ernst & Young