My Foolish colleague, Jeremy MacNealy, put the cherry on it Monday; ice cream and casual dining restaurant Friendly's (AMEX:FRN) turned in another quarter that was anything but congenial to shareholders. The company reported revenues that were off by more than 11%, with triple-scoop losses of $3.82 per share.
While the fourth quarter had one less week this year than it did last -- making it not quite a hot fudge sundae-to-hot fudge sundae comparison -- the company added several new store-owned and franchised units during the prior year, and it was actually those franchises that helped bolster what little sales Friendly's did have. The company added four new franchise stores and refranchised five other company-operated ones, adding $137,000 to franchise operations.
As Jeremy noted, the company has plans to further differentiate itself from the competition by becoming an even more full service-style restaurant by expanding the menu. Way back when the company was owned by Hershey (NYSE:HSY), I was a night manager of a local store, and perhaps the burger-and-shake concept was different elsewhere, but Friendly's was already a local restaurant with a full breakfast, lunch, and dinner menu. If it's intent on becoming more like Applebee's (NASDAQ:APPB) or Ruby Tuesday's (NYSE:RI), then I think it's missing what has always set it apart: the flavor of a local ice cream shop where you could also get a decent meal.
The biggest reason for Friendly's losses, however, was its decision to take a big hit in its $22 million in deferred tax assets, saying that it had entered into a three-year cumulative loss position (though that would not have affected its ability to use the tax benefits in the future). Taking such a big charge in this area is one way companies can "manage" their earnings, either now or in the future. I'm not saying that Friendly's is engaged in any such tactic, but investors should keep an eye on how the company handles its deferred tax assets in the coming months.
Nor does Friendly's assertion -- that its losses are at least partially attributable to Hurricane Katrina -- pass the "smell test." The company' s 525 locations are concentrated primarily in the Northeast. While it has 16 stores operating in Florida, it didn't say its stores were damaged and unable to open. Rather, Friendly's attributes its poor performance to the increase in gas prices that resulted after the storm. It is simply too convenient for management to turn to this excuse following any sort of natural disaster -- regardless of the actual impact the disaster had.
For example, although rising gas prices are obviously a nationwide phenomenon, competitor Steak n Shake (NYSE:SNS) apparently didn't feel the impact as badly. Indeed, it reported sales growth of nearly 10% in the further quarter (with same store sales declining 1%) and its stores are primarily located in the Southeast.
The fact remains that Friendly's sales have been flat or declining for two years now, and no amount of financial rejiggering or catastrophe-blaming can change that:
Sales Change
|
2005 |
2004 | |
|---|---|---|
|
Q1 |
(4.7%) |
1.6% |
|
Q2 |
0.6% |
(5.2%) |
|
Q3 |
(6.2%) |
(4.6%) |
|
Q4 |
(11.5%) |
6% |
|
Total |
(4.7%) |
(0.9%) |
Friendly's sales have melted like ice cream left out of the freezer for too long. That doesn't mean it has to expand beyond the concept for which it is known. Rather, I believe it's a signal that the company needs to return to its roots of quality ice cream and decent, affordable meals. Still, slumping sales may explain why the share buying spree that insiders had been on for the past year has subsided, even though share prices are still at comparable levels or below. I'd advise investors to look closer at this company's operations before scooping up shares for themselves.
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Fool contributor Rich Duprey fondly remembers his days working at Friendly's, but he does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
