by James Brumley | March 11, 2014 9:46 am
On Monday, pizzaria chain Sbarro — an iconic name within the food court community at many of the nation’s malls — filed for Chapter 11 bankruptcy protection … again.
The restaurant also filed bankruptcy in 2011, and though Sbarro was allowed to emerge from that filing, the underlying causes of its fiscal problems never really went away. Thus, it’s back in dire straits.
But Sbarro is hardly the only restaurant struggling to make ends meet right now. Indeed, there are several more that may be following in the pizza chain’s bankruptcy footsteps. In no particular order, here are four more restaurants that may be fiscally insolvent in the foreseeable future.
The sandwiches may be delicious, but the menu Cosi Inc. (COSI) offers at its 136 restaurants is increasingly irrelevant, either for price (the average ticket size is about $8.81), convenience, or both.
The company is about to book its fifth consecutive year of falling revenue. Even worse, Cosi is on the verge of booking its worst annual loss (in percentage terms) since 2004, when it posted a net loss of 16.6%. Last year’s loss is projected to roll in somewhere around 13.2%. Oh, and the company has never turned a full-year profit.
New CEO Stephen Edwards, who took over in June of last year (the fourth CEO since 2011, if that tells you anything) is admittedly a big step in the turnaround effort, though it may be too little, too late. His first priority is to shore up the company’s poor customer service.
But he’ll soon learn that a corporate culture is the most difficult of all things to turn around in the restaurant game … particularly when a certain restaurant has developed a reputation for poor service, as many Cosi stores have.
Speaking of overpriced sandwiches, toasted hoagie outfit Quiznos may be about to file bankruptcy. In fact, it could be the first among the four names on this list that could file Chapter 11.
How do we know? Because some folks at the Wall Street Journal and CNBC — credible sources — reported in late February that the struggling company was already in discussions with creditors, seeking a plan that would work for all parties involved.
Filing chapter 11 would help Quiznos with its $570 million in debt (compared to about $600 million in sales for 2012), though less debt still doesn’t solve the bigger problem for this group of approximately 2000 restaurants — a waning number of customers.
Not that Ruby Tuesday (RT) was ever really lighting it up on the revenue or earnings front, but the past three quarters’ revenue has been so weak, the company slid from breakeven levels to sizeable losses … with no end in sight for its restaurants.
Specifically, in the past three quarters, Ruby Tuesday’s top line has fallen 13%, 13%, and 9%, respectively, driving the company deep into the red ink. For the fourth quarter of last year, the net loss was a whopping 12.6% of sales — the worst showing from the company in years.
The end result is a current cash balance of only $24 million. That’s not much for a restaurant chain of this size. It’s bad enough that the company recently decided to shutter 30 restaurants, for perspective.
One of its key creditors was willing to cut Ruby Tuesday’s some slack, but more liquidity will mean nothing if the restaurant chain can’t pull in more customers, soon. And that’s the one aspect of the business the company doesn’t seem to have a compelling plan for.
Granted, on the surface, Darden Restaurants (DRI) looks like its strong enough to salvage. Although income hasn’t grown much since 2011, at least the top line has steadily increased since 2010. In fact, the restaurant chain has been profitable — even if only marginally — every quarter fore the past several years.
So what’s the red flag waving over Darden? In simplest terms, the vultures are starting to circle.
You know your goose is cooked when you start getting unsolicited ideas from hedge fund managers explaining their idea to “fix” your restaurants. And, when the phrases “unlock hidden value” and “convert your real estate into a REIT” are part of that conversation, it’s time to put your hand on your wallet.
One way or another, shareholders are apt to be on the losing side of that deal, even if such a deal avoids a bankruptcy that wouldn’t materialize for years. The alarming part is that the company’s best idea to shore up the struggling business is to sell its Red Lobster restaurants. But even that doesn’t solve the bigger-picture problem.
But the problem doesn’t stop at Darden…
These four restaurants may top the list of most-prolific potential bankruptcies, but they’re hardly the only restaurant chains hanging by a thread. There are more, less-known and less-obvious names that could have been added to the list.
All of these companies have something of a common thread though … they’re all aiming for the mid-tier spender that doesn’t exist the way it did in the 90s and early 2000s.
Gone are the days of an $8 sandwich for lunch when a similar meal can be had for about $5 at a Subway restaurant. Similarly, Red Lobster could have justified a typical $20 ticket (per visit, per person) a decade ago, but with consumers getting stingier — and healthier — fried seafood at a premium price isn’t exactly a draw.
And as for Ruby Tuesday, the same “shtick,” not to mention the same menu, from the 90’s just doesn’t get the job done anymore. Even a salad bar eventually becomes passé, as time and convenience factors that didn’t exist a few years back take a toll now.
The point is, restaurants that haven’t adapted or evolved over the past 10 years are all poised to hit a headwind. This group is just the beginning, unless restaurateurs take a step back and reinvent themselves from the ground up.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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