|
|
|
|
|
|
Wednesday, June 25, 1997
Quality
Dining HOW DID IT FIND TROUBLE? Lox up the stench and throw away the key! Bagel dough rises, bagel dough falls, ultimately resulting in nothing more than a glorified doughnut. So it goes with Quality Dining, a company that is in the process of shedding its troubled Bruegger's Bagel division. The hype surrounding Quality Dining's acquisition of Bruegger's last year helped its stock price close in on $40 after the acquisition was first announced. The shares have been pre-sliced since then, again and again. Starting out the year at $18, the stock has continued to tumble to a fraction of what it used to be. BUSINESS DESCRIPTION Apart from the almost 500-unit Bruegger's chain, with just 100 of those company-owned, the Indiana company has an extensive fleet of restaurant concepts. It acquired 42 Grady's and 5 Spageddies from BRINKER INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EAT)") else Response.Write("(NYSE: EAT)") end if %> in 1995. It also operates 65 Burger Kings and 24 Chili's Grill & Bar units as a franchisee. FINANCIAL FACTS Income Statement 12-month sales: $286.2 million
12-month income: $4.6 million
12-month EPS: $0.27
Profit Margin: 1.6%
Market Cap: 84.5 million
Balance Sheet*
Cash: $4.8 million
Current Assets: $53.9 million
Current Liabilities: $27.0 million
Long-term Debt: $118.6 million
(*As of Feb. 16, 1997)
Ratios
Price-to-earnings: 18.5
Price-to-sales: 0.3
HOW COULD YOU HAVE SEEN IT COMING? The bagel debacle has been well documented in the recent Trouble coverage of Manhattan Bagel and Einstein/Noah Bagel, yet none has fallen as far as Quality Dining. These companies all began to fall late last year when the bloated expectations of the bagel craze gave way to the reality that the unit economics weren't all that hot. With the players bidding up real estate and oversaturating the market with heady expansion, the stumble in the sector was only a matter of time. But why did Quality fall so far, so fast? It didn't help that Bruegger's own founders were the two biggest critics. After the acquisition, they were the largest individual shareholders in Quality Dining with a 25% stake in the company. Their departure and eventual return to the Quality board of directors was accompanied with sharp criticism for the way the company was running their creation. The high debt load might also have appeared ominous. While it still had spending room on its $150 million revolving credit line, the company's shift in strategy from being a franchisee to a multi-concept developer was a balance sheet red flag. It's one thing to leverage your capital for the predictable cash flow of a Burger King or Chili's franchise, but it's an entirely different thing to be mortgaged to the hilt while tinkering with young and unproven properties. Any letdown would be magnified. And it was, with no help from the two largest shareholders taking shots at the company's management skills all the way down. WHERE TO FROM HERE? Quality has finally conceded that it will rid itself of Bruegger's. It has written off its investment and is talking to a few suitors. If all goes as planned, the bakery will be history by summer's end. The 5.1 million shares issued in exchange for Bruegger's, which at one time were worth as much as $200 million, will be written down to whatever value can be salvaged. After all, $200 million would be $12 a share for Quality Dining. Yet, the current valuation of Einstein, the chain closest to Bruegger's in unit economics (and actually smaller), would be close to $30 a Quality share. Quality obviously won't get anywhere near that much for the subsidiary. This is not 1996. Reality is a year older and a few notches lower in sentiment. But it should get something, and that will help to either mop up the balance sheet or expand its core eateries. How much can the new company make? Look to the old company. Quality Dining had steady 5% profit margins for years before the Bruegger's indigestion. Last year it had more than $206 million in revenues sans "The Brueg." With the 5.6% net margins of 1995, that would translate to $0.68 a share. That is well above the $0.58 per share earnings analysts are expecting next year. That leaves ample room for upside surprises if things become business as usual after Bruegger's is written off. And that would certainly help put the quality back into Quality Dining. -Rick Aristotle Munarriz ([email protected])
|
|||||
|
|||||||