A chicken franchise that’s growing spectacularly fast and that wants to do for rotisserie chicken what KFC did for fried chicken. Does that sound like a good investment or not? Professor Jim Wahlen uses the Boston Chicken case to illustrate if accounting information can be used to make smart financial decisions.

“Boston Chicken is a really cool case”, says Professor of Accounting Jim Wahlen, who teaches at the Kelley School of Business at Indiana University. “It was a new fast-food restaurant chain in the United States. A really good concept. They were early in the shift in consumers’ taste to healthier meals and they’d adopted a very different approach to their franchising. Almost all of the growth was coming from franchised restaurants.”

How much is a share worth? This is one of the things Wahlen teaches during his five-day course at the Amsterdam Institute of Finance (AIF) on the Advanced Financial Statement Analysis. The title doesn’t immediately suggest a thriller, but the questions the training tries to answer do: can you use the accounting information to make smart financial decisions? Can you evaluate the quality of accounting and adjust the numbers if you suspect earnings management?

“I really enjoy making accounting information come to life for people who want to analyze financial statements and reports”, says Wahlen about his chosen profession. “A lot of people think that accounting information is difficult to understand or too technical or too dense or irrelevant, but in my course I think most people gain a big appreciation for how important and interesting and dynamic that information can be. Íf you know how to read and analyze it correctly.”

Wahlen speaks calmly, but with an intensity that highlights his enthusiasm. “In the course, we work through three, four or five cases, all based on real companies. Some school-type cases and some I’ve written. We analyze strategies, statements, industries, and identify high-quality and low-quality accounting information.” He calls the end of his treatment of a case ‘the punch line’.

Harvard Business School (HBS) describes the Boston Chicken case as follows: “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% per year, with a new store being opened on average every two days.” The franchise continued to grow and in 1995 it was voted “America’s Favorite Chicken Chain” in a survey by Restaurant and Institutions magazine.

Boston Chicken’s franchising strategy was different from most other successful franchises, writes HBS. “Instead of selling store franchises to a large number of small franchisees, Boston Chicken focused on franchising to large regional developers… Each franchise was expected to have the scale necessary to ensure operational efficiency and marketing clout.” A typical franchisee was a businessman with a lot of experience and financial resources and a mandate to open up to a hundred 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.”

HBS quotes Michael Moe of Lehman Brothers: “Boston Chicken is truly the leader in the home meal replacement market.” He rated the stock to be a strong buy and that projected EPS would grow by 45 percent from 1997 to 2001. Some expressed doubts.

‘Boston Chicken belly up’ is CNN Money’s headline on October 5, 1998. “After dismissing investor jitters in May as unfounded, fast-food restaurant chain Boston Chicken said Monday it filed for Chapter 11 bankruptcy protection and closed 178 Boston Market restaurants.”

According to Jim Wahlen, “this case is about two very, very big questions. One is: what is debt versus equity? And the other big question is: how do these financial statements represent the real, economic underlying entity?”

During the course, Wahlen discusses the nitty-gritty details of this and other cases. He teaches a six-step analysis evaluation framework to teach people not just about earnings management, but how to understand and use the process.

Was Boston Chicken’s way of accounting legal? “It was… technically legal at the time. It’s a very, very clever misuse of GAAP that helped Boston Chicken keep all of the debt associated with its franchisees off the books and keep the restaurants off the books during the loss-making startup phase.”

Did Boston Chicken’s cleverness contribute to its filing for Chapter 11? “Yeah, it did. This structure helped them raise capital to fuel growth by hiding losses, by hiding liabilities. And they weren’t focusing on sustainable profitability. They weren’t focusing on making sure that their franchisees and their restaurants were profitable and sustainable and efficient. They were focusing on growth.”

Join ambitious professionals for the challenging Advanced Financial Statement Analysis program taught by Professor Jim Wahlen (Indiana University) at Amsterdam Institute of Finance on 13 – 17 May.
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