Krispy Kremed
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When Americans get stressed out, one thing they do is eat. But apparently not enough.
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.
[See who stands to gain from the General Motors bankruptcy.]
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.
June 15, 2009
Copyright © 2009 US News
