Macaroni Grill turnaround proves challenging for Ignite

Ignite Restaurant Group Inc. has encountered challenges in digesting its April acquisition of the Romano’s Macaroni Grill brand and turmoil on the bottom line, but executives continue to see long-term potential.

Executives at the Houston-based company, which also owns the Joe’s Crab Shack and Brick House Tavern + Tap casual-dining brands, said on Wednesday that the acquisition, closed April 9, led to a more expensive turnaround than expected and swung the company to a loss in the second quarter.

“Quite frankly, I think we were bit arrogant,” said Ray Blanchette, Ignite’s chief executive, in an earnings call with analysts. “And that's the piece that's a little embarrassing.”

Blanchette pointed out that Ignite, which went public a year ago, implemented a successful turnaround at Joe’s Crab Shack as a private company. “The reality is it took us two years to turn the Joe's business around to the point where it was really cranking and producing significant same-store sales growth,” he said.

He told analysts that Macaroni Grill’s same-store sales had been about negative 5 percent in the months leading up to the signing of a letter of intent on Feb. 6.

“From February through April 9, when we closed on the business, comp sales deteriorated to negative 11.5 percent,” he said. “While there was no secret to us that Macaroni Grill sales had been challenged for an extended period of time, the pace of deterioration in the first quarter was significantly greater than we had anticipated, and we felt that we needed to act very quickly.”

During the second quarter, the company invested $2 million in marketing and $3 million to $4 million in labor toward Macaroni Grill. “I think going in now as a public company, putting myself back in the same fire of having a turnaround, you go in with a greater sense of urgency,” Blanchette said.

Ignite sent out early smoke signals last week that second-quarter results would be hit hard by the Macaroni Grill turnaround costs, and analysts noted Wednesday that the turnaround would be challenging.

In a report headlined, “Macaroni Grill Acquisition Creates a Big Hole to Climb From,” analyst Bryan C. Elliott of Raymond James & Associates said it will likely take Ignite several quarters to return the brand to profitability.

In the first five weeks of the third quarter, Macaroni Grill tallied negative same-store sales of 1.6 percent, executives said, after logging a 7.4-percent decline between April 9 and July 1, which ended the second quarter. By comparison, Ignite is tracking same-store sales increases of 1.6 percent at Joes and 3.7 percent at Brick House in the five-week period.

Building the customer base

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Blanchette said Ignite’s executive team is “obsessing” with increasing Macaroni Grill’s customer base.

To that end, Ignite spent $2 million in marketing in the second quarter, emphasizing its July “Summer Uncorked” half-price wine promotion and limited-time offers to the newly acquired Macaroni Grill email database, Blanchette said. The brand has also changed between 25 percent and 35 percent of the current menu and will be rolling out a “Braiser” campaign in the next week or so to promote those changes.

In addition, Macaroni Grill created and filled 1,700 new jobs, which increased hourly head counts by more than 22 percent. Michael Dixon, Ignite’s president and chief financial officer, indicated the company spent between $3 million and $4 million beyond what it had expected to spend during the quarter for the new hires and training.

Blanchette remained optimistic about Macaroni Grill. “At the end of the day, we acquired a restaurant brand with strong consumer recognition, sound real estate and with the potential for significant increases in [average unit volumes], and we acquired it for about $300,000 a unit,” he said.

Ignite executives said they were pleased with the other two brands in their portfolio. The company opened a high-profile Joe's Crab Shack unit in Harlem, New York, and Dixon said it did more than $215,000 in sales the first week.

In the second quarter, Ignite opened three new Joe's Crab Shack units in the Northeast and one Brick House in Colorado. “Continuing our real estate optimization strategy, the Colorado Brick House was converted from an underperforming Joe's unit,” Dixon said.

For the remainder of the year, he added, the company expects to open four new Joe's Crab Shacks and one new Brick House, as well as convert as many as two Macaroni Grill locations to the Brick House brand.

Blanchette said Ignite has conducted several “discovery days” for potential franchisees and seen “a lot of strong interest in the Brick House brand domestically and the Macaroni Grill brand internationally.”

He added, “I am really excited about what this could potentially be, but again we don't want to get out of our seats here. That's a slow burning fuse, but we know the idea of creating a long-term stable cash flow in Ignite is very exciting and worthwhile work.”

As of July 1, Ignite owned and operated 134 Joe's Crab Shacks, 186 Romano's Macaroni Grills and 16 Brick House Tavern + Taps. The company also franchised five Romano's Macaroni Grill units in the United States and 19 units in U.S. territories and foreign countries.

Contact Ron Ruggless at [email protected].
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