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Carrols looks to ease debt by cutting capital outlays

SYRACUSE N.Y. Carrols Restaurant Group Inc., the largest Burger King franchisee and owners of the Pollo Tropical and Taco Cabana quick-service brands, said Wednesday it would cut capital expenditures this year and next to focus on debt repayment.

The company said it would reduce its planned spending this year by as much as $15 million, to a target between $65 million and $70 million, and slash discretionary capital spending next year to just $30 million. Carrols also said it would continue to close sale-leaseback transactions — which so far this year have garnered $10.5 million — to the tune of an additional $12.0 million expected during the next six to nine months.

“These actions are intended to maximize free cash flow during these uncertain times and to reduce our outstanding debt,” Alan Vituli, Carrols’ chairman and chief executive, said in a statement. He added that the moves would “provide a greater margin of safety with respect to the financial covenants in our loans.”

Securities analyst Steven Rees at J.P. Morgan Securities Inc. said he believed Carrols may also explore a partial sale of its Burger King business, but the company did not raise that possibility in its statement. Carrols operates 317 BK restaurants and has been in the Miami-based franchisor’s system since 1976.  It is both an operator and a franchisor of its Pollo Tropical and Taco Cabana brands.   

Carrols has been hit this week with analyst and investor concern that its significant leverage, at more than $300 million as of June, as well as slowed sales at the in-house brands and increased commodity costs systemwide, would lead to debt covenant breaches. The company’s stock hit a new annual low of $1.65 per share during trading on Monday, and closed at $2.00 per share, an 18.7-percent drop from Friday. The entire market also hit multi-year lows on Monday.

Securities analyst Rees said the dramatic stock plunge was sparked by “concerns over potential bankruptcy given high leverage.” Rees and other analysts pegged Carrols ratio of total debt to earnings before interest, taxes, depreciation and amortization, or EBITDA, at 4.2. The company’s lending requirements currently call for the maintenance of a total debt-to-EBITDA ratio of 4.75, and will tighten to 4.5 by the end of the year, analysts said. Carrols management said it has room to maneuver, however, according to analysts who said they spoke with company officials.

“We have reviewed the company’s debt levels and spoken with management regarding debt covenants … We believe that Carrols’ debt coverage appears to be adequate at this time and that the sell-off in the stock may be overdone,” said analyst Jeff Omohundro at Wachovia Capital Markets LLC.

Also on Wednesday, Carrols said its total revenues rose 2.7 percent for the third quarter to $209.1 million, aided by menu price increases and the openings of four new restaurants. In addition to its BK units, the company operates or franchises 89 Pollo Tropical units and 153 Taco Cabana restaurants. For the quarter ended Sept. 28, same-store sales increased 3.5 percent at Burger King, and fell 1.9 percent at Pollo Tropical and dipped 0.9 percent at Taco Cabana. The company estimated that it lost about 150 restaurant operating days during the third quarter because Hurricane Ike forced the closure of units within the Taco Cabana chain, which has numerous units in Texas.

Carrols said it expected per-share earnings for the third quarter to total between 15 cents and 17 cents, down from earnings a year ago of 27 cents per share. Its full third-quarter report is expected Nov. 4.

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