The dismal economy has punished retailers, with companies like Circuit City and Linens 'n Things going extinct and dozens of others losing money. Now it's hitting their cousins in the restaurant industry, too. The Bennigan's and Steak & Ale chains were early casualties, going belly up last summer.
This year, with Americans cutting back on spending, sales at restaurants could fall by 10 percent or more. Analysts don't expect widespread closures, but some chains are likely to close unprofitable outlets, cut back on service, and look for other ways to reduce costs.As in retail, companies that help people save money will weather the storm better than others. Chains like McDonald's, Pizza Hut, and Olive Garden, which offer ample portions at value prices, should do OK and maybe even pick up market share. It helps if they've been run conservatively, with low borrowing costs and cash held for a rainy day.Other eateries are in a pickle. Fancy restaurants that had long waits a few years ago are now begging for customers and offering sales. Midpriced casual dining outlets are losing customers to cheaper fast-food joints.
Even some dollar-menu franchises are suffering if they're overdependent on mall traffic or clustered in regions where the economy is weakest. A key factor is debt: With sales down everywhere, many companies that borrowed heavily to remodel, expand, or buy other franchises now find that interest payments gobble up a nerve-wracking amount of cash flow.Since debt is such an important menu item, we scoured data from ratings agency Standard & Poor's to gauge which well-known restaurants are facing tough challenges. The following list represents companies that meet two criteria: They have a credit rating of B or lower, and S&P assigns them a negative outlook. Landing on this list doesn't mean the company is likely to declare bankruptcy or close its doors. But these firms are vulnerable to deteriorating economic and financial conditions. And the negative outlook means there's a chance S&P could downgrade the company's rating over the next six to 24 months.
Here's our watch list:
Perkins Restaurant and Bakery.
Company accountants could probably use some of the comfort food on the menu at this diner-style franchise, which has about 500 locations, mostly in the Midwest. Like other restaurants, Perkins has been able to cut food costs since they soared in 2007. But revenue has fallen, and the parent firm lost $9.7 million in the first quarter. S&P says the firm's liquidity position is "tenuous." With market share of just 8 percent, Perkins is more vulnerable to a lousy economy that competitors like Denny's (22 percent market share) and IHOP (19 percent). Perkins also owns the Marie Callender's Restaurant and Bakery chain, which suffers from similar financial burdens. Plus, Marie Callender is based in hard-hit California, which has been hammered by the housing bust. A company spokesperson says Perkins has cut expenses by $7.3 million to help shore up its finances, delayed some remodeling, and called a halt to expansion.
Sbarro.
Many of this pizza chain's 1,070 outlets are in malls, where traffic is down and spenders are stingy. That contributed to a $5.7 million loss in the first quarter, more than double the red ink from a year ago. Interest payments on debt gobble up much of the company's cash flow, leaving little margin for error. The company is especially vulnerable to any rises in food or commodity costs and to competition that could force prices down. With about 40 percent of sales coming during the Christmas season, the company will need strong December results at a time of high unemployment and weak spending. A Sbarro executive declined to comment on the company's financial prospects.
Krispy Kreme.
The famed doughnut chain got too chubby over the last 15 years, and it's been closing unprofitable stores to help reverse several years of steep losses. Revenue has plunged since 2005, but cutbacks helped the company turn a $1.9 million profit in the latest quarter. Lenders have provided a breather by easing some of their requirements over the last two years. The temporary reprieve expires in 2011. By then, the company
hopes that streamlining, profitable new overseas stores, and other measures will have strengthened its finances.Spokesman Brian Little points out that Krispy Kreme has cut its debt by nearly 40 percent and has a $21 million cash cushion. The recession, he adds, isn't as daunting to Krispy Kreme as to other food chains: "We sell an affordable indulgence consumers will purchase when they can't afford to treat themselves or their families to other luxuries."
There are others on the list, but these are the only ones I've seen/heard of in Canada. Could one of your favourite restaurants be "on the list" too?
Be interesting to see how some of the other big chains fair.
Red Lobster?
Smittys?
Pancake House?
Moxies?
The Keg?