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Here comes another bankruptcy wave

Here comes another bankruptcy wave

This post is part of the On the Margin blog.

News this week that Logan’s Roadhouse is planning to file for bankruptcy does not come as much of a surprise. The casual-dining chain has long been speculated as a candidate for filing. 

In addition, restaurant sales are falling. And falling restaurant sales often yield chain bankruptcies.

Industry sales have slumped all year, and that slump accelerated in the second quarter. Even successful chains with all sorts of momentum, such as Arby’s and Texas Roadhouse, reported slowing same-store sales in their most recent quarter. Discounts and value deals have become commonplace.

While we’ve suggested that lower grocery prices are pulling away restaurant sales and the industry over-expanded, analysts are speculating that the industry is at the outset of a recession. And many restaurant CEOs appear to agree.

Regardless of the reason, broadly declining restaurant sales can cause problems at companies with precarious cash positions or heavy debt loads or sizable lease obligations.

Sales and traffic are the magic bullets in the restaurant industry. It’s a lot easier to operate a profitable restaurant when you can get customers. Lose them and those debt and lease payments look awfully bad.

In recent years, many concepts have taken advantage of a debt market flush with lenders. Others opted to sell restaurant buildings and properties to investors, leasing that property back in sale-leaseback deals.

Debt and lease obligations are not inherently bad, especially when a concept is going well. But chains with debt and lease obligations have less protection against falling sales. If the obligations are too heavy, or the sales decline is too great, that could result in bankruptcy.

If Logan’s files, it would be the third restaurant chain bankruptcy this year and the fourth since November, following bankruptcies by Quaker Steak & Lube, Buffets LLC and Johnny Carino’s.

Falling sales played a role in all of them. Revenues fell at Carino’s. Sales at Buffets fell 22 percent from initial projections following the company’s acquisition last year by Food Management Partners. Both cited other factors, but it’s hard to ignore those sales declines.

Logan’s is another example. The company had been working hard to change its image and reduce its reliance on discounts, and a year ago appeared to be gaining some traction. Same-store rose 0.1 percent in the quarter ended Feb. 1, 2015, for instance, though traffic fell 5.5 percent.

But, by the quarter ended Oct. 28, same-store sales had begun to fall again, down 4.3 percent while traffic fell 7.4 percent. For a chain with $391.4 million in long-term debt and little cash, such declines are ominous. Logan’s has not filed its past two quarterly earnings reports.

Broadly falling industry sales beginning in 2008 and continuing into 2010 left many restaurant chains struggling for survival. And numerous franchisees likewise struggled. Bankruptcy filings became common.

Let’s be clear: This is not 2008. I remain unconvinced that we are headed for an outright recession, and I’m skeptical we are even headed for a “restaurant recession.”

But I would not be surprised to see more restaurant chains file for bankruptcy if sales continue to fall — regardless of the reasons for the decline.

Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze

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