Consumers aren't the only ones who are broke these days: Businesses of all shapes and sizes are struggling to keep the cash flow coming, in spite of declining sales.
One group which hasn't exactly delivered "supersized" growth is the fast-food sector. With double-digit unemployment numbers and waning consumer confidence, folks aren't just moving down the restaurant value chain -- they're opting out completely and cooking at home. Industry experts predict that results will remain shaky through 2010.
You know it's bad when even perennial leader McDonald's (NYSE: MCD ) has shown chinks in its armor, with a measly 0.1% increase in U.S. same-store sales for the last quarter.
As the value-menu wars continue, tight margins will become tighter. That's why it's extra important that these foodies fatten up their balance sheets to be prepared for a potential famine. We've picked two restaurant groups in particular that are in danger of going broke if folks continue to snub fast food.
Where's the beef?
OK, it's fair to ask how a company can be bust when it has more than $644 million in cash. Well, in the case of Wendy's/Arby's Group (NYSE: WEN ) , changing business strategies and recent declines in same-store sales combine for an unappetizing long-term profit picture.
Wendy's has certainly had its share of problems before. In the latest quarter, both Wendy's and Arby's served up declines in North American same-store sales, off 0.1% and 9%, respectively.
While comps at Arby's North America franchisees declined 10.2%, comps at company-owned outlets dropped only 6.5%, because of higher value-focused pricing. Arby's is now looking to grow its value-menu options while boosting product innovation and remodeling restaurants. Meanwhile, the company aims to "leverage marketing initiatives" to bolster Wendy's market position. Intense price competition means Wendy's/Arby's has to trim the fat wherever possible.
The bad news here is that the company has more than $1.5 billion in long-term debt, and interest expenses ate up nearly 56% of its operating income in the last four quarters, so there's not a lot of disposable income to go around. Lower commodity prices have helped drive profit growth, but any spike in these costs, combined with a jump in unemployment, could cause this company to blow through cash way too quickly.
And then there's the anecdotal: I recently visited a local Wendy's, and I have to say it was pretty gross inside. The floors were dirty, and the food was just OK. (Honestly, I lost my appetite upon arrival.) The time before that, they messed up my order and forgot to give me one of my cheeseburgers, which I didn't realize until I made it home from the drive-thru. Maybe the service is quick and the price is right, but the service I got was not the kind of attention to detail that causes customers to return.
All in all, Wendy's/Arby's isn't broke yet, but with lingering debt and declining sales, the company also may not be ready to weather the fast-food "value menu" blitz.
Whopper of a deal?
Carrols Restaurant Group (Nasdaq: TAST ) , owner and operator of more than 500 Burger King (NYSE: BKC ) , Pollo Tropical, and Taco Cabana restaurants, isn't the king of the hill when it comes to funds. With $3.3 million in cash and $280 million in long-term debt, Carrols is counting on sales growth to propel it out of the bargain basement.
In its last quarter, Carrols generated a 3.8% revenue decline, driven by a 6.1% drop in its Burger King same-store sales. In comparison, Burger King served up a 2.8% decline in its own U.S. and Canada comps for its last quarter, while its franchisees saw a 4.9% drop. With locations situated in the Northeast, the Midwest, and the South, Carrols doesn't have stores in the difficult California market, but it is still struggling to find its place in the crowd.
Burger King has turned to a value-pricing strategy (sound familiar?) including $1.00 double cheeseburgers, upsetting some franchisees that think the prices will cut into margins. Carrols has said that it agrees with the strategy and believes that it will drive traffic. The new pricing should definitely improve the number of sales, but its impact on profit and the overall business picture remains to be seen.
Carrols is cautious regarding overall growth into 2010. It's opening five to eight new locations, but closing five Burger King outlets. Interest expense already eats up 38% of operating income, so the company should be wary of taking on more. Either way, Carrols is going to have to figure out why its locations are underperforming peers and quickly turn the situation around.
Now what?
This isn't the first time that we've looked at fast food and casual dining restaurants as poor investment candidates. Both CKE Restaurants (NYSE: CKR ) and Cracker Barrel (Nasdaq: CBRL ) have made our naughty list because of too much debt and not enough cash. As Yum! Brands (NYSE: YUM ) and others dig in for the fast food pricing war, Wendy's/Arby's and Carrols Restaurant Group are among those that may need to go on a diet in order to thrive in the short time.
For related Foolishness:
RSS Headlines
Fool UK