Denver-based Quiznos is under financial pressure as sharpened competition, waning sales and debt woes weigh on its bottom line.
Analysts say the sub-sandwich company is struggling to pay its debt and could be headed for a reorganization. The chain has seen a sharp downturn in its number of stores and shrinking revenue from the outlets that remain open.
Privately owned Quiznos does not disclose financial metrics and releases almost no public information.
Yet analysts who follow the company say it is clear that the chain is nearing default on its loans and scrambling to restructure $875 million in debt.
“It’s one of the biggest restaurant collapses in American history,” said restaurant consultant John Gordon of San Diego-based Pacific Management Consulting Group.
In keeping with its private orientation, Quiznos through a spokesman last week declined to comment and issued only a brief statement about its finances.
“Quiznos has hired a financial adviser to assist in working constructively with its lenders to develop a proper financial structure for the company,” the statement said. “We expect these activities will not adversely impact Quiznos’ customers, franchise owners, employees or business partners. We fully expect this process to drive an outcome that will help the brand grow and prosper.”
The problems stem from a highly leveraged investment in 2006, competition from other sandwich purveyors and a protracted battle with the company’s franchisees over operating costs and profitability.
The result is an estimated 14 percent drop in sales last year and the loss of 600 restaurants — the steepest decline of any major fast-food chain, according to restaurant consulting firm Technomic Inc.
Sales in 2010 were about $1.55 billion, down from the 2008 peak of $2.02 billion, Technomic estimated. During the same period, stores declined from about 5,000 to 3,500 and likely are fewer than 3,000 this year.
“It leaves them in a precarious position,” said Darren Tristano, executive vice president of Chicago-based Technomic. “In all likelihood, their options are either a buyout, conversion of debt to equity, or bankruptcy.”
Growth took a hit in 2005 when Quiznos lost an important competitive edge — its exclusive status as a maker of toasted subs — after larger rival Subway began offering toasted sandwiches.
Further erosion occurred in 2008 when Subway introduced the $5 foot-long, and Quiznos’ counter-punch with the $4 “torpedo” failed to bring customers back.
Quiznos’ average customer check is $7.85 compared with Subway’s $6.90, according to Technomic.
“If they are successful in renegotiating their debt, they need to reinvent themselves with something that their competition does not offer,” said David Kincheloe, president of Denver-based National Restaurant Consultants.
Customer Mark Calvert said he hopes the financial struggles won’t have an impact on his neighborhood Quiznos at 13th Avenue and Grant Street — the chain’s first location in 1981.
“I love these sandwiches,” he said. “I’d go here over Subway any day.”
As Quiznos has fought to maintain market share, it has suffered lingering animosity from some franchisees who say profit margins are lean or nonexistent — due in part to a requirement that franchisees buy food at allegedly above-market prices from a Quiznos-mandated supplier network.
In 2009 Quiznos settled a franchisee class-action lawsuit by agreeing to pay up to $95 million.
The corporate debt problems are troubling to remaining franchise operators, said Justin Klein, a New Jersey attorney who represented franchisees in the lawsuit.
If Quiznos were to default on its debt and file for bankruptcy reorganization, “it would have a negative impact on the investment these franchisees have made in the company. It pretty much puts that investment into the toilet,” Klein said.
The Wall Street Journal, citing unnamed sources, reported in July that Quiznos had notified its lenders that it would soon violate loan terms. Doing so would put the company in default and could trigger a requirement for immediate repayment of its debt.
Much of Quiznos’ $875 million debt stems from a deal in 2006 in which a private-equity affiliate of JP Morgan Chase purchased 49 percent of Quiznos from a partnership led by Colorado investors Rick and Richard Schaden. The Schadens retained the remaining 51 percent.
Finding new investors, or persuading lenders to swap debt for equity, is an uphill battle for Quiznos, said Gordon of Pacific Management Consulting.
“The trends are ominous. They’re bad,” he said. “Quiznos continues to close doors, and same-store sales continue to fall. The issue is, when does Quiznos hit bottom?”
Gordon said that to his knowledge, Quiznos’ owners have not contributed $50 million in new capital that lenders have been seeking as a good-faith commitment to facilitate the debt restructuring.
A Quiznos spokesman declined to comment on the status of new investment by owners.
Without a capital infusion from the owners, Gordon said, “it’s not exactly a vote of confidence” in persuading lenders to convert their debt to equity in Quiznos.
Steve Raabe: 303-954-1948 or sraabe@denverpost.com
Side note
Just three years ago, it topped $2 billion in sales. Now, industry observers say the Quiznos sandwich chainled by Denver investors Rick, below, and Richard Schaden — is $875 million in debt, with sales down 14 percent and 600 stores closed last year. “It’s one of the biggest restaurant collapses in American history,” says restaurant analyst – John Gordon.
http://pacificmanagementconsultinggroup.com/articles/quiznosfinanceissues.pdf