3 struggling chains scramble for answers3 struggling chains scramble for answers

Jonathan Maze

This post is part of the On the Margin blog.

The recent slowdown in same-store sales and traffic has had a major impact on the restaurant industry. Several CEOs have been replaced in the past two months, and stock prices have struggled.

But the decline has been especially problematic for three chains in particular: Ruby Tuesday Inc., Ignite Restaurant Group Inc. and Cosi Inc. All three have struggled for years, and then the slowdown made matters worse, putting all of them in a tough spot as they seek answers.

Ruby Tuesday Inc.
As my colleague Ron Ruggless wrote this week, JJ Buettgen has resigned as CEO of Ruby Tuesday Inc.

Ruby Tuesday said that same-store sales fell 2.7 percent in its most recent quarter. The company hasn’t recorded an annual profit since 2011. It recently said it would close 95 units, in addition to 11 locations a franchisee recently shut down, and the latest in a series of closures that go back as far as 2009.

The company’s stock price has been on a steady, downward trajectory for years. It is now trading at less than $3 a share. Even worse, it is trading at an enterprise value multiple of less than 4 times cash flow. Not long ago, nearly every restaurant chain on Wall Street was trading at a cash flow multiple of 10 times or more.

The low multiple could, theoretically, make the chain a potential takeover target. Ruby Tuesday has $600 million in property and equipment — far more than its enterprise value of just over $300 million. Alas, buyers just don’t pay for turnarounds any more (as you’ll see once we begin talking about Ignite Restaurant Group).

Ruby Tuesday's same-store sales have fallen for each of the past five years, and for eight of the past nine years. And that’s off particularly weak unit volumes, which, at $1.6 million, is at least $1 million lower than its three primary competitors — Applebee’s, Chili’s and TGI Fridays. That makes it less likely to refranchise or to sell real estate.

Ruby Tuesday's stock price has lost 80 percent of its value over the past five years. It has lost half of its value this year.

Ignite Restaurant Group Inc.
As bad of a year as Ruby Tuesday is having, the owner of Joe’s Crab Shack has it worse: Its stock price has lost 75 percent of its value this year.

Ignite Restaurant Group can actually trace its entire problem to a single, very bad decision. In February 2013, Ignite Restaurant Group bought Macaroni Grill for $55 million, believing at the time that it got a steal.

It didn’t. Macaroni Grill's sales fell sharply. Just 18 months later, Ignite Restaurant Group sold Macaroni Grill for just $8 million.

Those 18 months took Ignite’s eye off the ball. Same-store sales at Joe’s Crab Shack rose in 2009, 2010, 2011, 2012 and 2013.

But in 2014, same-store sales began to fall. They fell 4.9 percent that year. The next year they fell another 4.5 percent. Joe’s Crab Shack looked to be on the right track in the first quarter after same-store sales fell just 1 percent. But in the second quarter ended June 27, same-store sales nose-dived 6.8 percent.

Meanwhile, Ignite Restaurant Group has recorded an operating loss of $6.3 million in the first six months of the year. The company named a new CEO late last year and has been quietly closing locations.

Cosi Inc.
It’s hard to believe, but for a time before the recession, Così was considered an up-and-comer, part of the new fast-casual trend. Its stock price was over $40 a share.

But the recession, along with the bakery-café chain’s inability to turn a profit at its mostly urban locations, took a toll. The company’s stock price is trading below 20 cents per share.

In other words, Così’s stock has lost 99.6 percent of its value since those years.

The company has yet to turn a profit in its time as a public company. It has closed units; it has gone through a succession of CEOs; and it famously spurned former Olive Garden president Brad Blum’s offer to run the company. The chain has used various lifelines and other strategies to generate cash so it could stay afloat.

Two years ago, Così hired R.J. Dourney, its most successful franchisee, to be CEO. For a time, Dourney seemed to have the company on the right path. Earlier this year, it was on track to generate positive cash flow. Same-store sales rose 2.2 percent in the first quarter this year.

But they fell again in the second quarter. Così said it wouldn’t be cash-flow positive like it thought it would, and then it fired Dourney.

Contact Jonathan Maze at [email protected]
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