Worst Restaurant Tailspin Since 2009/2010 Crushes Lower End

“The hope that consumer and business spending will surge is probably just that, hope.”

– Joel Naroff, President of Naroff Economic Advisors and TDn2K Economist

So another chain restaurant is “preparing” to bite the dust. Ignite Restaurant Group, which operates the Joe’s Crab Shack chain with 113 locations and the Brick House Tavern chain with 25 locations, and used to operate the Romano’s Macaroni Grill chain with 150 locations until it sold it in 2015, is preparing to file for bankruptcy, “people familiar with the matter” told Bloomberg.

In the quarter ended September 26, 2016, the last quarter for which the company bothered to release an earnings report, same-store sales fell 6.8%; total revenues plunged 10% to $120 million.

A liquidity problem turns into a solvency problem: It had $729,000 of cash and about $26 million of “available borrowing capacity under its current credit facility.” Not exactly a lot, considering that the company lost $15.2 million in Q3, up from a loss of $4 million in Q3 2015.

It had $179 million in liabilities, including $113 million in long-term debt. It shares, which had traded as high as $19 in 2013, have consistently trended lower since, became a penny stock last year, and are now just about worthless (2 cents).

For chain restaurants, it’s really tough out there.

Industry-wide, same-store foot traffic fell 3.3% in April year-over-year. For the past three months, traffic is down 3.9%. Same-store sales in April fell 1.0% are down 1.8% for the past three months, according to TDn2K’s Restaurant Industry Snapshot.

Food sales and alcohol sales both were down. As traffic dropped, the average check increased 2.3%, less than the rate of inflation.

Q1 had been the fifth quarter in a row of year-over-year sales declines. Now everyone is hoping Q2 will be different. But April’s numbers aren’t auspicious. And no one wants six quarters in a row of this. “The last time the industry experienced a similar period was in 2009 and the first half of 2010,” the March report had pointed out. April has moved the needle further in that direction.

There were some regional differences:

The least bad region was California where traffic fell only 0.7% and same store sales inched up 1.9%.

The worst region was the Southwest where traffic dropped 4.9% and sales 2.7%.

Sales fell in three-quarters of the nearly 200 markets.

The segments with sales increases:

Fine dining (includes some expensive chain steak houses) and upscale casual. They offer a “more experience-based dining proposition for a less price-sensitive consumer.” So the folks with money are still spending it on restaurants. Family dining also showed sales increases.

The segments with sales declines – the lower end:

Fast casual and quick service – “After years of positive growth and being one of the top performing industry segments, quick service has experienced a downturn in 2017,” the report said. And then there’s casual dining for which “struggles continue although the rate of decline has lessened somewhat,” with average same-store sales in 2017 down 2.9% compared to the 4.1% dive in the second half of 2016.

The report, which is based on data from over 27,000 restaurant locations and 155 brands with $67 billion in annual revenues, gingerly blamed the Easter holiday because it occurred in April rather than in March (as last year). For the largest segments of the industry – quick service and casual dining – the Easter holiday likely hurt sales. But the smaller segments – fine dining, upscale casual, and family dining – “appear to have been positively affected by the shift in the Easter holiday.”

Under this theory, March should have benefited from the shift of the Easter holidays. But in March foot traffic fell 3.4% and same-store sales fell 1.1%. And in February, foot traffic plunged 5.0% and same-store sales 3.7%. The debacle was blamed on $65 billion in delayed tax refunds from the IRS. But those refunds started gushing out in the second half of February and were caught up by the end of February, and so March and April should have been, and were expected to be, the months when all this cash would suddenly show up. But no.

Last week’s Bank of America credit and debit card spending report showed the same: spending at food service and drinking places has crashed over the past two years, and is fast approaching the X-axis.

There’s hope, however. Of sorts. The report pointed out that “sales started softening considerably” last June. “This translates into easier comparisons when calculating this year’s sales growth rates.” So the numbers in the second half this year might still be crappy, but because the second half last year was so terrible, the year-over-year comparison might look a little better. That’s the hope.

TDn2K’s economist Joel Naroff blamed the slow growth of the economy in Q1 on “mediocre” consumer spending. And this might be an issue going forward: “The rising household debt load is likely to suppress consumption, including eating out.”

Ah, consumer debt, after years of loading up on it, is now hobbling discretionary spending. Who would have thought? And he goes on:

“The hope that consumer and business spending will surge is probably just that, hope.”

“That said, the economy should rebound this quarter but it looks like we are in for another year of 2.25% growth [by comparison, in 2016, the economy grew only 1.6%]. While that pace is not likely

to make anyone happy, it is enough for the labor market to tighten further and the Fed to continue raising rates, possibly as soon as June.”

And higher rates would be the next skillet to drop on our over-indebted chain restaurants. But they’re coming. Inflation pressures further up the pipeline rose the most in five years.

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