Schlotzsky's Toasted

Yeah, I thought it was Quizno's that has the "buns toasted" ad campaign. Turns out, they weren't talking about anything epicurean; they were referring to competing sandwich shop franchiser Schlotzsky's (NASDAQ:BUNZ). Yesterday the Austin-based Schlotzsky's announced that it was filing for bankruptcy protection under Chapter 11 and is seeking to reorganize. Its stock plunged more than 65% in two days.

In its bankruptcy filing, Schlotzsky's noted that the company had liabilities of $71 million and assets of $111 million, of which $65 million are intangible. Given the deficit, the company elected to file for bankruptcy protection. This comes on the heels of the company's board announcing last month that it was restructuring the management team and removing CEO John Wolley and Senior Vice President Jeffrey Wolley from their executive positions.

Schlotzsky's looks to be another company that franchised heavily and lost control. The world is littered with such stories, from now-McDonald's (NYSE:MCD) owned Boston Chicken to the ongoing troubles with Krispy Kreme (NYSE:KKD). Schlotzsky's (man, is that word hard to type) grew rapidly in the mid-1990s; then its same-store sales suddenly plateaued. My colleague Rick Munarriz noted in 1999 that the company responded to difficult sales comparisons by utilizing aggressive accounting and throwing strategies at the wall to see what would stick. At the time the company had 760 restaurants. Today it has 537, most of them franchised. Even prior to the most recent drop investors didn't think much of the company, valuing its entire system at below $20 million, or $37,000 per store. Yeesh.

Schlotzsky's new management is seeking to reorganize, not liquidate the company. As we have noted in the past, it is almost a certainty that the BUNZ shares that trade for $0.57 at press time will soon be worthless. It's probably a good idea just to lick your wounds, sell, and use the money to go buy a Schlotzsky's sandwich. Call it your "investment." See what happens with the company on the other side of bankruptcy. But as thousands of investors in companies such as Kmart (NASDAQ:KMRT) and MCI (NASDAQ:MCIP) have discovered, even if the company emerges from bankruptcy, its existing stock almost certainly will not.

Bill Mann owns shares of McDonald's, but none of the other companies mentioned.