Goodwill shrinking: Restaurants bite impairment bullet

Goodwill shrinking: Restaurants bite impairment bullet

Darden Restaurants Inc. [3] set itself apart in late 2008 by not doing something many of its competitors were forced to do—namely, taking goodwill impairment charges.

The casual-dining company, based in Orlando, Fla., said Dec. 23 that after an evaluation of the company’s goodwill, or the value of such intangible assets as a brand name, no charges would be needed. Other companies have been less fortunate, however. At least five restaurant companies already have reduced their goodwill carrying values to match current fair value, and many more are expected to do so in the near future after year-end evaluations.

Among those who have already bitten the impairment bullet: OSI Restaurant Partners LLC [4] booked a goodwill impairment loss of $161.6 million for the nine months ended Sept. 30; O’Charley’s [5] slashed its goodwill balance by nearly half its carrying value in its latest quarter; Morton’s Restaurant Group Inc. [6] took a $69.8 million charge last year; and Jamba Inc. recorded a trademark impairment expense of $82.6 million in its fiscal second quarter ended Oct. 7.

“It’s a crushing blow; it’s a whole other area of weakness,” said Craig Weichmann, managing director at Mastodon Ventures Inc., a financial advisory firm in Austin, Texas.

Impairment is the condition that exists when a company’s carrying amount of goodwill exceeds its implied fair value. Accounting rules state that companies need to evaluate their goodwill and other assets annually. If after that evaluation the company determines that its goodwill is valued above market, it undertakes a full balance sheet mark-to-market.

Many restaurant companies evaluate their holdings at year-end, but this year a handful of companies decided to undertake earlier interim tests because such factors as sales weakness and the current economic environment indicated that impairment was likely. Companies including O’Charley’s and Morton’s reported expected charges in their latest quarters, and also said that values would be finalized when reporting their fiscal fourth quarters. Others, like Benihana Inc. [7] and Steak n Shake [8] Co. are undertaking their evaluations now for reporting in 2009.

“There may be a rude awakening for many in the spring,” Weichmann said.

Weichmann suggested that because so many restaurant companies will likely take charges against their goodwill because of reduced cash flows or general poor performance, the actual impairment might not be viewed as anything other than a necessary evil by investors.

“It will most likely be discounted,” he said. “Still, it can be like Pandora’s Box, where you’re just opening up another element of bad news for the industry.”

Some companies, like Ruth’s Hospitality Group Inc. and Red Robin Gourmet Burgers Inc. [9] will have to evaluate the goodwill carrying value of recent acquisitions. Red Robin said in its latest quarterly report filed in November that following its latest quarter, which ended Oct. 5, the company’s stock price had declined “significantly,” reducing its market capitalization below the company’s carrying value of net assets. The company said additional evaluations would be taken at the end of the fourth quarter that could result in possible impairment of goodwill. As of Oct. 5, Red Robin had $61.3 million of goodwill on its balance sheet.

A study covering various industries released late last year by investment bank Houlihan Lokey found that 46 companies recorded goodwill impairment charges in the first half of 2008, versus just six in the first half of 2007. Houlihan Lokey researched companies with market capitalizations above $100 million, excluding insurance and financial services firms. Eight companies within the investment bank’s data set wrote off their entire goodwill balance in 2008, a phenomenon that did not occur in 2007.

In the restaurant space, all of the early charges were taken based on poor company performance and the tough economic environment, which has affected everything from guest spending to corporate stock prices.

OSI, which is based in Tampa, Fla., and operates more than 1,500 restaurants, said its charge was based on “poor overall economic conditions, declining sales at company-owned restaurants and a challenging environment for the restaurant industry.”

The company recorded an aggregate goodwill impairment loss of $161.6 million for its Outback Steakhouse, Bonefish Grill [10], and Fleming’s Prime Steakhouse and Wine Bar [11] concepts. It also recorded impairment charges of $3 million for the Carrabba’s Italian Grill [12] trade name and $3.5 million for the Blue Coral Seafood and Spirits [13] trademark.

Emeryville, Calif.-based Jamba said it took its trademark impairment expense because of the company’s stock price, which fell 88 percent in 2008, and negative same-store sales. The company operates or franchises about 750 Jamba Juice [14] locations.

O’Charley’s, based in Nashville, Tenn., took its nearly $48 million impairment charge, which totaled about half of its goodwill carrying value of $93 million, based on the estimated fair value of its Ninety Nine Restaurants [15]. Officials looked at market multiples, comparable transactions and discounted cash flow, the company reported. O’Charley’s operates or franchises 116 Ninety Nine locations, 243 O’Charley’s restaurants and 10 Stoney River [16] Legendary Steaks units.