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Daily Trouble
November 5, 1999

Piccadilly Cafeterias Inc.

Ticker: (NYSE: PIC)
Phone: 225-293-9440
Website: www.piccadilly.com
Price (11/4/99): $3 5/8

By Rick Aristotle Munarriz (TMF Edible)

How Did it Find Trouble?

Gluttony often causes indigestion. When Piccadilly Cafeterias acquired Morrison Restaurants in May of 1998, it simply overate. The marriage of the push-tray titans was supposed to breed synergy. Instead, the merger produced a bloated Piccadilly hell-bent on conversion.

Rather than settle for logistical efficiencies that could have emerged -- such as volume buying power and trimmed down executive redundancies -- the company decided to do away with the Morrison signage and replace it with the Piccadilly name.

The greed has not come cheap. The same customer loyalty that Piccadilly was hoping to generate at the acquired stores already existed -- but under the Morrison storefront.

As the painful makeover continues, the patron defections at the converted Morrison eateries grow more severe with each passing quarter. In June it was a 7.2% decline. Most recently, in September, same-store sales were 10.3% lower than they were a year ago.

The food quality may be consistent but, to investors, the financials are fading. Shrinking profits have turned into growing deficits. The share price, which had raced into the teens during the acquisition, has since been sliced in half. It's a blue plate special. A black and blue plate special.

Business Description

In 1944, T.H. Hamilton opened the first Piccadilly in Baton Rouge, Louisiana. Today the company owns 234 cafeterias and 10 quick-service restaurants.

This past March the company sold its Ralph & Kacoo chain of seafood eateries.

Financial Facts

Income Statement
12-month sales: $480.9 million
12-month income: $0.5 million*
12-month EPS: $0.05*
Profit Margin: 0.1%
Market Cap: $38.1 million
(*Includes non-recurring items)

Balance Sheet
Cash: None
Current Assets: $30.5 million
Current Liabilities: $50.0 million
Long-term Debt: $76.8 million

Ratios
Price-to-earnings: 72.5
Price-to-sales: 0.08

How Could You Have Seen it Coming?

Piccadilly's 1999 annual report is lined with gems of irony. "Who says you can't please shareholders" reads the header of the CEO's letter to shareholders -- a difficult statement to make after earnings per share had been cut in half and the stock price in the process of following suit.

For investors pushing the tray down Piccadilly's recent financial history, the irony was not lost. Since fiscal 1997, annual earnings per share had gone from $0.89 to $0.75 to $0.38. The trend was not exactly the ingredient of comfort foods.

The 1998 deal may have been sound, a case of one major player swallowing another, but the niche was in a rut. Morrison had been struggling ever since its 1996 spin-off. Piccadilly wasn't faring much better. The decision to sell its Ralph & Kacoo seafood chain earlier this year should have given Piccadilly clearer focus. Unfortunately, tunnel vision in a tainted sector, where popularity was waning while overhead was growing, was not the place to be.

Where to From Here?

Want another bit of annual report fodder gone archaic? The company's dividend has "remained stable and uninterrupted for 13 years." With the company's operating struggle, it has now violated some of its creditors' financial covenants. The company is holding back its current dividend, interrupting the uninterrupted, until it squares itself away on that front. It is deferring the pay out, not eliminating it, but if losses continue it will be hard for Piccadilly to continue to dish out its $0.12 a share quarterly dividend.

Investors who bought into Piccadilly for the juicy yield should know better. The company paid $0.48 a share in dividends last year while earning just $0.38 per share.

The major concern goes beyond the dozen quarterly pennies of course. Where is Piccadilly headed?

Piccadilly is doing the right thing, the only thing it can do now, by ramping up its advertising. Same-store sales were also down at the original Piccadilly locations (but not to extent of the converted sites). The confusion over the transition, which went beyond name and menu changes and bundled pricing plan nuances, will eventually subside. It has to. The damage is done.

However, when will it subside? Does Piccadilly have enough time? Those are the elements of risk that seem to point to feast or famine for the company. In the short-run, until the company returns to profitability, the odds favor the hungry.

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