The parent of the Chevys and El Torito brands said Thursday the company is in danger of defaulting on loans as it continues to struggle with lagging sales.
In discussing first-quarter earnings in a call to analysts, Real Mex Restaurants Inc. interim chief executive and chief financial officer Richard Dutkiewicz said there is a possibility that certain financial covenants related to the notes and senior secured revolving credit facilities will not be met as of June 26. Real Mex said it is in negotiations with lenders to amend the covenants.
Cypress, Calif.-based Real Mex is between chief executives. Last month the company named David Goronkin president, chief executive and chair, replacing outgoing chief executive Richard Rivera, who stepped down in April. Goronkin, who previously was president and chief executive of Bennigan’s Franchising Co., begins his new job at Real Mex in June.
Dutkiewicz said Real Mex is still being buffeted by headwinds of California’s lingering economic woes. Of the 178 restaurants the company operates under its three primary brands, 149 are in California.
For the first quarter ended March 27, Real Mex reported a net loss of $5.4 million, compared with a loss of $4.6 million in the same quarter a year ago.
Same-store sales across all brands fell 1.6 percent, blamed primarily on a 3.8-percent reduction in guest counts that was partially offset by a 2.3-percent increase in average check.
Revenues declined by 3.5 percent to $116.2 million for the quarter, which was primarily due to a $4 million drop in restaurant revenues. The company has five fewer restaurants open in the first quarter compared with the previous year.
The company operated 178 restaurants under the El Torito, Chevys Fresh Mex and Acapulco Mexican Restaurants Y Cantina brands. Real Mex also franchised or licensed 24 Chevys locations, as well as eight El Torito restaurants in international locations.
In addition, Real Mex operates eight one-off and small regional brands under the Las Brisas, Casa Gallardo, El Paso Cantina and Who-Song & Larry’s brands.
Efforts to drive traffic this year will include expanding a brunch and happy hour programs that have been successful at El Torito, as well as a new value-positioned lunch promotion at Chevys designed to compete with discounting competitors.
Lowell Petrie, Real Mex’s chief marketing officer, said a $3 happy hour and a promotion called “Buck It Up” — which allows guests to trade up to a more premium beverage for only $1 more — will be introduced to the Acapulco and Chevys chains next week.
The company said El Torito also has had success with an $11.99 value meal that includes a choice of soup or salad, with choice of one of four entrées, and a dessert. The promotion now makes up more than 14 percent of product sales, Petrie said, and a version of the offer was introduced at Chevys in the first quarter.
Chevys also will soon begin testing a new cantina menu with “more finger food-type appetizers that are less Mexican and more border cantina,” Petrie said. Chevys also will be testing a Sunday brunch in June.
In addition, Chevys is testing a value-positioned lunch offer with items in $6.99 to $7.99 price range, with traditional entrées such as fajitas and salads available in smaller portions. Chevys menu items typically start around $8.99.
“It’s aimed at the customer who wants to eat a bit lighter at lunch,” Petrie said. “We’re really targeting items that are smaller in size and price, and quick and easy to produce.”
Dutkiewicz said the company is continuing to expand its manufacturing arm through subsidiary Real Mex Foods Inc., which makes branded products for itself and other brands. In the first quarter, the company introduced new El Torito-branded grocery products in Costco stores.
Rising commodity costs are forcing Real Mex to raise prices on some of those grocery products, Dutkiewicz said, but he didn’t quantify the increase.
Officials made no mention of plans to raise prices in its restaurants.
Contact Lisa Jennings at [email protected]