Bloomberg: YUM’s Big Game of Chicken

As KFC wins abroad, it staggers at home.

By Diane Brady

Even at nightfall, it’s easy to spot signs of Ghana’s growing wealth in downtown Accra- from the Toyota Land Cruisers scattered among honking taxis to the ripples of laughter that emanate from a packed rooftop lounge. Read more

Dow Jones Newswires: Technology Revamp on Order At Olive Garden, Red Lobster Chains

-Darden plans new technology platform for Olive Garden, Red Lobster, LongHorn

-Will offer e-gift cards, text-ahead seating, potentially a loyalty program

-Implementation will be multiyear process beginning in fiscal 2013

By Annie Gasparro


New York-(Dow Jones)- Olive Garden and Red Lobster are getting a technology makeover, as parent company Darden Restaurants Inc. (DRI) fights to stay relevant with younger guests and its own employees. Read more

Wall Street Journal: Franchisees Bulking Up

Weaker sales following the recession are prompting many big fast-food chains to adopt leaner business models by unloading company-owned outlets to franchisees.
The latest example is Burger King Holdings Inc., which is in the midst of a turnaround and counting on a bigger appetite for restaurant ownership among people like Vince Eupierre of Corona, Calif.
Burger King restaurants, such as this one in Miami, have revamped their menu as part of the company’s turnaround effort. The chain is unloading many company-owned outlets to
Mr. Eupierre, a 71-year-old immigrant from Cuba, bought his first Burger King franchise in the late 1970s, after working nights as a Burger King assistant store manager. Today, he owns 34 Burger King franchises in Southern California employing 2,500 workers, including part-timers.
His sales are down by about 25% from three years ago, and he recently spent $1.3 million to comply with the chain’s revamped menu, on items like smoothie stations and new freezers.
“If you ask me, ‘Will you buy another store today?’ I’d say, let’s wait a little bit and see what happens in the next 60 to 90 days,” he says.
In the industry, it is known as refranchising, and the strategy is based on the idea that franchisees will tend to run a tighter ship than a company-owned operation.
Since 2007, McDonald’s has reduced its share of company-run restaurants to 19% from 23%, today operating 6,435 of its 33,510 restaurants world-wide, according to company data.
“It’s making the company more profitable,” says Richard Adams, a former McDonald’s Corp. MCD -0.92% executive who runs a San Diego-based consulting company for McDonald’s franchisees.
“The franchisee has more skin in the game,” says William Ackman, a hedge-fund founder who is soon to be one of Burger King’s newest investors through his fund’s interest in Justice Holdings Ltd., a U.K.-listed investment vehicle. “He’s going to put his heart and soul into it.”
But Robert Zarco, a Miami-based franchise attorney, says unloading most or all company owned locations to franchisees could signal that the franchiser lacks “confidence in its own brand.”
Roughly 92% of Burger King’s units already are franchised, a figure that takes into account one large refranchising deal completed last month. The Miami-based fast-food company slipped to third place last year in U.S. sales among burger giants, behind No. 1 McDonald’s and second-place Wendy’s Co. WEN +1.84%
Now, Burger King plans to have almost all of its 7,200 units in the U.S., and more than 12,500 units globally, franchised by early 2013.
“Refranchising has been a highly successful strategy for us,” says Virginia Ferguson, a
spokeswoman for Yum! Brands Inc., YUM +0.61% Louisville, Ky., which currently operates less than a quarter of all its restaurants world-wide. The parent to more than 37,000 Pizza Hut, KFC and Taco Bell restaurants last year sold 404 of its company-operated locations in the U.S., including 264 KFC, 74 Taco Bell and 66 Pizza Hut outlets, company data show.
In doing so, it reduced its ownership of U.S. restaurants to 13% from 15% in 2010. It plans to further shed its ownership of KFC and Pizza Hut outlets to just 5% by the end of the year, and Taco Bell to 16% within two years, she said.
Between 2009 and 2011, Jamba Inc., JMBA +1.87% owner of Jamba Juice Co., sold 174 stores to existing or new Jamba franchisees. About 40% of its 769 stores are company owned today, down from 70% before the refranchising.
“We wanted to expand the brand presence quicker and de-risk the business model,” says Karen Luey, chief financial officer of the Emeryville, Calif.-based beverage chain. “We wouldn’t be able to do that with company-owned stores because it’s a capital-intensive process.”
Jack in the Box Inc., JACK +0.70% a San Diego company that owns Qdoba and Jack in the Box brands, is actively looking for franchisees to buy 17 corporate-run stores in Indianapolis, Kansas City, Oklahoma City and Tulsa, according to company spokesman Brian Luscomb.
All the locations are relatively new, he adds, and are part of the company’s broader strategy of testing markets with company-owned restaurants and then selling to franchisees.
Today, 72% of the company’s 2,221 locations are franchised, up from only 22% of its 2,006 restaurants in 2004. It hopes to sell another 80 to 120 by the end of this year, he adds.
“Wall Street security analysts think dollar-to-dollar royalty cash flows are more valuable than restaurant operating cash flows,” says Kevin T. Burke, managing director of Trinity Capital LLC in Los Angeles.
Burger King was taken private in 2010 by 3G Capital, a New York-based investment firm, and will soon become publicly traded through a merger with a shell company.
John Gordon, a restaurant analyst in San Diego, believes that the company-owned Burger King restaurants expected to go on sale in the coming months are likely to be poor investments.
“The problem is that the unit economics are so bad,” he says. “Because of bad store management over the past 40 or 50 years, you got all these beat-up stores.”
Mr. Ackman, the hedge-fund founder, disagrees with that assessment. “Yes, there are stores that need to be upgraded. But it’s a good investment,” he says.
Last month, Burger King announced that Carrols Restaurant Group Inc. TAST +1.90% of
Syracuse, N.Y., will acquire 278 of its company-owned restaurants for approximately $15.8 million, or about $56,800 per unit. The deal—which will make Carrols the system’s largest
franchisee world-wide with a total of 575 locations—includes a commitment by Carrols to renovate 450 of the stores over the next 3½ years. Burger King agreed to purchase a 28.9% equity stake in Carrols.
Steve Wiborg, president for Burger King’s North America operations, says the Carrols deal isn’t representative of the typical transaction. He declined to comment on prices for the remaining company-owned Burger King restaurants up for sale.
According to Mr. Gordon, the cost of a single Burger King restaurant generally ranges from
$600,000 to $800,000.
Mr. Wiborg said forthcoming sales of company-owned Burger King restaurants will likely include transactions involving just two or three units and that some may require remodeling. He added that the cost of remodeling a Burger King restaurant to current standards ranges from $275,000 to $375,000, depending on the size.

Restaurant Research LLC: Think Piece – Brand Strength

“Restaurant Theory” always has held that eating out propensity was a function of convenience (consumers stretched for time), flavor profile, price, along with growth in disposable income, urbanization, travel and mobility. Restaurant success then supposedly followed these broad macroeconomic waves. But an important addition to the theory now apparent is that brand matters.
While macroeconomics is important, it doesn’t explain the following:
McDonald’s: a 64 year old concept that just recently delivered an 8th year of strong worldwide sales, unit growth and profitability performance has managed to build AUV, customers and unit locations almost every year, despite the macroeconomic waves.
Subway, which now outnumbers even McDonald’s store counts world-wide, was able to post double digit same store sales gains in 2008/2009, realized in the utter depths of the Great Recession.
• How some restaurant institutions (think: Howard Johnson’s, Burger Chef, Bill Knapp’s, Steak N Ale/Bennigan’s) have totally or almost totally disappeared despite rising incomes, and the rising food away from home consumption? Even some current fast casual names (like Pat and Oscar’s and Daphne’s Greek Café) have struggled despite all their press buzz.
• How Chipotle, a phenomenon in its own right, has gone from an AUV of $652,000 in 2000 to almost $2 million today, despite a vastly oversaturated domestic restaurant market and lingering economic weakness marked by high unemployment and underemployment in its core customer ranks.
The DNA and composition of the brand, which transcends macroeconomics, is responsible. Beginning in 2005, and especially since 2008, we see much less that individual company trends move in lock step with the macroeconomics. There are more outliers, more bifurcation. Strength of brand DNA shows up with consumer interest, loyalty and frequency. It shows in the M&A world, affecting EV/EBITDA multiples. It
shows up in the stock market via PE multiples. And it shows up in credit risk and interest rates.
To be sure, same store sales, return on capital invested, unit growth – the classical three drivers of restaurant company value – is important. So too is store level economics, and new product news.
However, restaurant success is not just about “new wave” companies, management strengths, company culture, board governance, amount of leverage and debt, privately held v. public or private equity motivations, marketing budget size and efficiency, number of media GRP points, coupons, pretty restaurants, geographical development zone,
stock valuation, CAPEX and remodeling, company owned v. franchising and management skills. Nor is it only about taste quality, service value and other differentiators.
Rather it seems that a holistic sum of all these influences is needed for success – it’s not just what the consumer sees or believes, but literally a stew of these factors that drives brand value. For investors, it is complicated. But restaurants are the sum of thousands of moving pieces.
Our special thanks for this insightful Think Piece to author John A. Gordon who is an independent chain restaurant analyst, and his firm, Pacific Management Consulting Group 100% focuses on chain restaurant analysis and advisory engagements. John can be contacted at

The Orange County Register: Chick-fil-A’s Controversy Fallout

Chick-fil-A Chief Operating Officer Dan Cathy’s recent reiteration of his long-time support of “the biblical definition of the family unit” in “The Biblical Recorder” caused a national controversy.
Gay marriage proponents called for boycotts and staged ’kiss-ins” at restaurants. Several politicians announced plans to block Chick-fil-A’s applications to open new restaurants in their jurisdictions. And company supporters turned out in record numbers for a Chick-fil-A
Appreciation Day Aug. 1.
Standing at ground zero of the controversy were more than 1,600 franchise owners of Chick-fil-A restaurants in 38 states plus the District of Columbia. Orange County has 14 units.
Chick-fil-A is the latest example of the intertwined relationship — for good or bad — between franchisors and their franchisees. Companies that have good relationships and communications with franchisees weather such storms, several experts said. Those that don’t, have bigger problems than the immediate dustup.
Consider Econo Lube N’ Tune, once based in Newport Beach. In 1999, the state Dept. of Consumer Affairs sued the company for stations doing shoddy and unnecessary work. The accused stations were company owned, but the franchisees suffered financially because of the bad publicity. The company eventually filed for bankruptcy.
By comparison, the impact on Chick-fil-A franchisees – the company calls them operators and the relationship is not traditional franchising – has been mild so far and may be positive.
The Torrance Chick-fil-A was hit by negative graffiti, and many opponents posted angry comments, articles and videos online. Brandindex, which tracks online perceptions of brands, said that as of Aug. 3, Chick-fil-A’s score has dropped 55 percent since the article quoting Dan Cathy was published.
However, privately held Chick-fil-A, which does not release financial data, said the Aug. 1 Appreciation Day “was a record-setting day” for sales.
John A. Gordon, principal at Pacific Management Consulting Group in San Diego, projects that the average Chick-fil-A had a 29.9 percent spike in sales to $10,320 and 367 more customers on Appreciation Day than on an average Wednesday.
He noted that when companies have a one-day promotion, it tends to take sales and traffic away from other days. But in Chick-fil-A’s case, the appreciation event was not created by the company’s marketing department. Supporters of the company and First Amendment free speech rights showed up and spent money without coupons or special discounts, although the long-term impact on franchisees’ business remains to be seen.
“CFA gained a lot of free publicity and energized its base customers, at least for now,” Gordon said. “It also did not discount (to attract business on Appreciation Day). Its hard for other (quick service restaurants) to get that kind of daily pop without a discount or giveaway of some sort.”
Chick-fil-A was already doing well financially. Pacific Management Consulting, whose reports on franchise performance are widely watched nationwide, has estimated that in 2010 Chick-fil-A had the industry’s highest average annual sales per unit of $2.7 million. By comparison, McDonald’s had $2.4 million and El Pollo Loco, $1.4 million.
Chick-fil-A does not use the standard franchising model of growing by using other people’s money, which includes initial fees in the tens of thousands of dollars and royalties plus franchisee ownership of real estate, said Don Sniegowski at Blue MauMau. A new Chick-fil-A operator pays $5,000 and the company finds and pays for the location and restaurant. The company gets 15 percent of sales, collects rent and splits remaining profit with the operator.
Chick-fii-A wants hands-on, single unit operators, not multi-unit franchisees as some other companies seek.
Sniegowski estimates that Chick-fil-A operators average $190,000 a year take-home profit and “some make substantially more,” based on franchise disclosure documents, which must be filed in some states, and other information. However, operators cannot sell their franchise or pass it on to heirs.
Still, that strong financial return “allows Chick-fil-A to be extremely choosy about who runs its restaurants,” he added. “Company officials say Chick-fil-A gets 10,000 to 25,000 applications for roughly 60 to 70 new (operators) each year.”
And none of the people who make it through the selection process to become an operator should be surprised about the owners’ Christian worldview. The company website states that the corporate purpose is ’to glorify God by being a faithful steward of all that is entrusted to us.” All restaurants are required to close on Sunday.
Still, some operators did not want to be embroiled in the Dan Cathy controversy. No local franchisees would comment for this story, but Mark and Heather Howery, operators of the Chick-Fil-A restaurant in Fullerton, posted on their Facebook page, “… The company COO shared his personal views on marriage and family when asked about it in an interview. He does not speak for us as independent owners just as your boss does not speak for you as individuals. As the business owners we do not take issue with any group of people including the gay community.”
Franchise consultant Ed Teixeira, president of FranchiseKnowhow, LLC, said few franchisees in any organization would criticize the company because it might impact the value of their own business. “Franchisees are principally concerned about their own finances… Among the 1,600 (Chick-fil-A) locations, some may not agree with the company but I haven’t read anything about that. That goes back to the strength of the company’s relationship with franchisees and (the controversy) didn’t hurt franchisees financially.”

New York Post: Burger Rivals

Rivals are bringing the burger wars home to McDonald’s.

The world’s biggest hamburger chain posted its first monthly sales decline in nearly a decade as reinvigorated fast-food rivals fight back.

After years of battling each other for second place as they struggled to keep up with McDonald’s, Wendy’s and Burger King are starting to steal market share, analysts said.

With the backing of hedge-fund investors, both chains have undergone transformations in recent months that include revamping their menus, remodeling their stores and honing their marketing.

McDonald’s yesterday said October same-store sales in the US fell 2.2 percent, even more than the global 1.8 percent decline. It marked the first monthly decline since 2003.

The news sent the shares down nearly 2 percent, to $85.13.

“It seems both Wendy’s and Burger King are taking share,” said Sara Senatore, a senior analyst at Sanford C. Bernstein & Co.

Wendy’s, controlled by buyout kingpin Nelson Peltz, is quickly moving to higher price points and premium products, an effort that is paying off with sales gains.

Last quarter, Wendy’s dropped its low-price W Burger so customers would buy more expensive items such as the Bacon Portabella Melt and the Asiago Ranch chicken sandwich.

Yesterday, the chain reported a 2.7 percent increase in same-store sales in the latest quarter, its sixth straight quarter of gains.

Wendy’s CEO Emil Brolick, who came on board about a year ago, is making over the chain. The idea is to compete directly against Five Guys as Wendy’s remodels its stores, which still look like they did in the late 1970s.

Franchisees need to decide if they are willing to invest in the expensive renovations, according to Pacific Management Consulting Group Principal John Gordon.

Wendy’s also plans to push forward with a breakfast menu — a new offering for the chain.

Burger King’s launch of salads, wraps and smoothies helped boost sales, Santore said.

Burger King’s largest franchisee, Carolls Restaurant Group, last week reported same-store sales for the quarter jumped 6.2 percent.

The chain has started to invest again in the brand after going public in April. The moves follow an effort by Burger King’s hedge-fund owners to turn it around after it had languished for years with crippling debt. Bill Ackman, founder of hedge fund Pershing Square Capital Management, also took a 10 percent stake.

Meanwhile, McDonald’s has been shifting to lower price points and pushing its dollar menu, in an attempt to boost same-store sales.

It’s a big change from just last year. In 2011, McDonald’s saw a 5 percent rise in US store sales, Wendy’s grew 2 percent and Burger King fell 3 percent.

“I do see the risk to McDonald’s” as both competing chains get stronger and start to differentiate their offerings, Gordon said.

NPR: Quizno’s Gives Up Control to Stave Off Bankruptcy

Quiznos narrowly avoided bankruptcy this week when the sandwich chain shifted ownership to private equity firm Avenue Capital in exchange for erasing some debt.
The recession and poor management have hit the Denver-based sub-maker hard. The company once boasted more than 5,000 restaurants, but 40 percent of them have now shut their doors.
Andre Bonyadian owns nine Quiznos franchises in and around Los Angeles.
As one of his employees wraps a large roast beef sandwich to go, Bonyadian identifies a chief problem: He’s not going to make much profit on this sandwich. That’s because Quiznos’ corporate office in Denver is offering a “buy-one-get-one-free” deal.
“So they get [the] most expensive sandwich,” Bonyadian says of his customers. “Obviously, who wouldn’t? If you’re getting something free, you pick up the most expensive one.”
Franchiser Control
Quiznos — unlike some other fast-food retailers — owns the supply chain for its franchise restaurants. If a franchisee wants chicken or straws or bread, he has to buy them from the Quiznos corporate office.
So, Bonyadian says, the chain has an incentive to push higher volumes through deep coupon discounts — discounts that hit his bottom line.
“If the franchiser works with the franchisees, they both make money,” he says. “And once this is one-sided and the franchiser is only making money, then things go drastically wrong.”
That inability to work together plus higher supply-chain costs came at just the wrong time. As the recession started eating into the profits of most chains, Quiznos found itself locked in a price war with sandwich chain Subway — and its formidable advertising machine.
Falling Sales
Quiznos couldn’t keep up. Sales fell nearly a quarter from their peak in 2008, according to restaurant tracker Technomic.
Bonyadian, who is a director of the newly formed Quiznos Franchisee Association, says franchise owners — who in some cases invested up to $500,000 to open a store — were hit the hardest.
“There has been a lot of disappointment, and [a] lot of heartbreakings, and [a] lot of people who have gone bust,” Bonyadian says. “[I] personally know a couple of people who have become homeless.”
Mounting Debt
John Gordon, a restaurant analyst who runs Pacific Management Consulting Group, says, “It’s definitely one for the record books.”
In 2010 alone, 600 Quiznos stores closed. Gordon says the sudden loss of restaurants has left Quiznos without enough money to rebound with its own national advertising blitz.
“So unfortunately, you’ve gotten smaller, you can’t or you don’t advertise, you get smaller again,” he says. “It becomes a vicious circle.”
The smaller Quiznos got, the harder it became to pay off its massive debt; so on Tuesday, it gave control of the company to Avenue Capital, one of its largest creditors.
The deal eliminates $300 million in debt and adds $150 million in new funding.
Bonyadian says to turn Quiznos around, new owners will first need to open a meaningful dialogue with the franchisees.
“That’s where the success comes from,” he says. “And we are hoping that the new ownership will just do that — will work with us and listen to us, and it will be happily ever after.”
Bonyadian says that may be the chain’s last hope.

New York Post: Dunkin’ Debt May Rise

Dunkin’ Brands may take on more debt to buy back shares from its private-equity backers, including Bain Capital.

“The most likely use of cash would be a share repurchase, not a public float,” Dunkin’ CFO Neil Moses said yesterday said at a Morgan Stanley investor conference. “It might take the form of a share repurchase from our private-equity owners.”

Moses said the buyback would increase the company’s debt to more than five times earnings before interest, taxes, depreciation and amortization, or Ebidta, up from 4.2 times now.

By that calculation, the company would be taking on somewhere in the range of $200 million to $350 million in additional debt.

Dunkin’s PE owners — Bain, Carlyle Group and THL Partners — took the company public less than a year ago. Six of Dunkin’s 10 directors are from the PE firms.

The share repurchase would likely cut the PE firms’ combined equity stake from 30 percent to roughly 20 percent.

The move could be more fodder for attacks on the private-equity industry. Critics say the firms take money out in the form of dividends and buybacks, while saddling companies with burdensome debt.

Dunkin’ shares, whose shares are up 72 percent since it went public, rose 1.5 percent yesterday to close at $32.62.

“The risk to Dunkin’ shareholders is that Dunkin’ might not have the money to back up international growth” as planned, said John Gordon, a restaurant consultant from Pacific Management Consulting.

New York Post: Mickey D’s Feeling Heat from Rivals

McDonald’s, a darling of Wall Street over the past couple of years, could be looking at some less tasty returns in 2012, according to a report yesterday.

The fast-food chain, whose shares have come under pressure of late, could see its results — and share price — constrained for the rest of 2012 because of a weaker economy, said the report, from Sanford C. Bernstein.

The burger-and-fries joint will also see its balance sheet take a hit because it will be forced to maintain, and possibly expand, its value menu because rival Burger King has discovered value pricing.

McDonald’s CEO-elect, Don Thompson, met analysts in person for the first time late this week and said he would be stepping up its value-oriented menus (Dollar Menu and Extra Value Menu), said the report.

McDonald’s generally does not go out and provide guidance, but “this is part of Don’s strategy of getting out and building some relationships,” said Pacific Management Consulting analyst John Gordon.

Thompson noted some US softness in April and part of May where he said it would continue its focus on value products.

Angus/Premium-Chicken offerings and some McCafé product sales were weak, Thompson said.

Competitors are typically unable to sustain excessive levels of promotion, Thompson said, and added that he looked forward to grabbing market share when they pulled back from promotions, the report said.

“This [meeting] is a signal to manage expectations down,” Gordon said.

McDonald’s shares fell 2.9 percent yesterday to $86.71. Shares are down more than 15 percent from a $102 peak in January.

Nation’s Restaurant News: Why CKE Postponed Its IPO

Concerns on Wall Street over restaurant industry health, recently fueled by a sales miss from McDonald’s, may be to blame for CKE Restaurants’ decision to postpone its initial public offering, according to various sources.

The planned IPO that was set to begin trading on Friday was called off late Thursday “due to market conditions,” CKE said.

The Carpinteria, Calif.-based company operates or franchises 3,263 restaurants under the Carl’s Jr. and Hardee’s brand names. The company had hoped to raise more than $200 million with an offering of 13.3 million shares of common stock priced between $14 and $16 per share.

A report on Thursday by the International Franchising Review, an online publication of Thomson Reuters Capital Markets Publishing, said CKE owner Apollo Management turned down an offer presented by the underwriting banks because it was too low.

According to the report, which did not name sources, the offer by joint underwriters Morgan Stanley, Citigroup and Goldman Sachs was believed to be $10 per share. Earlier, the banks had communicated investor interest in the $10 to $11 range.

Two days before CKE’s IPO was scheduled, Outback Steakhouse parent Bloomin’ Brands Inc. went to market with stock priced at $11 — well below the previous target of $13 to $15 per share. The size of the offering was also reduced to 16 million from the 21 million initially stated, and, though the stock price climbed through the week, some saw the situation as an indicator that investor interest in the restaurant space was cooling.

“For it to be priced below [the target range] and for it to be undersubscribed, that tells you a lot about that market,” said Conrad Lyon, securities analyst with B. Riley & Co. in Los Angeles. “The appetite probably just wasn’t there.”

Observers disagree, however, about the “market conditions” that might be scaring investors off.

On the same day as Bloomin’ Brands’ IPO, McDonald’s reported that its global samestore sales in July were not positive for the first time in years. The quick-service leader reported that same-store sales fell 0.1 percent among U.S. locations, 0.6 percent in Europe and 1.5 percent in Asia Pacific, Middle East and Africa.

Analysts blamed weakness in the global economy but also stiffer competition from competitors like Wendy’s, Burger King and Taco Bell, all of which have shown improving results.

Concerns about beef prices next year may also have been a factor in the postponement of CKE, according to International Franchising Review.

In earnings reports in recent weeks, several public companies said ground beef prices were expected to be favorable for the rest of this year as cattle are sent to slaughter because they are becoming too expensive to feed with the drought in the Midwest putting increasing pressure on corn prices. The long-term result, however, will be even higher beef prices next year, as it takes time to rebuild herd counts.

Others said investors may simply have had enough of restaurant IPOs after a busy year so far. “The client base only has so many bullets to shoot at restaurant investments, and those bullets have been fired already,” said Lyon.

CKE’s planned IPO would have been the fifth this year, following those from Bloomin’ Brands, Chuy’s Holdings Inc., Del Frisco’s Restaurant Group and Ignite Restaurant Group.

Dunkin’ Brands Group Inc. also on Friday announced a secondary offering of 21.7 million shares by stockholders. Last year, Dunkin netted about $423 million with an IPO, selling 22.25 million shares for $19 per share, which was higher than the range initially set at $16 to $18 per share.

John Gordon, principal of Pacific Management Consulting Group, said CKE’s large debt load may also have scared off potential investors. CKE was acquired in 2010 by Apollo Management in a $700 million deal. The company was planning to use income from the IPO in part to reduce net debt of $654 million to a projected $590 million.

Since going private, Carl’s Jr. and Hardee’s have not been able to show strong signs of turnaround, as competitors Wendy’s, Burger King and Taco Bell have shown. CKE’s blended same-store sales rose 2.6 percent in the first quarter, which was “okay, nothing exciting,” Gordon said.

CKE has a growth story to tell, Gordon noted, with plans to grow overseas and into the as-yet underpenetrated Northeast. However, those factors were not enough to overcome the changing outlook for restaurant stocks, which looks very different today than it did in May, when CKE first announced its IPO plans.

“There’s no doubt things are looking worse now than they were in the spring,” he said.

However, he added, investor outlooks are cyclical. “Investor sentiments tend to bounce back and forth between quick service and casual dining,” said Gordon. “And when the economy softens, investors start favoring QSR again.”

The question remains when, if at all, the IPO may still happen, if market conditions improve. Company officials said they could not comment on potential timing.

The planned IPO was based on first-quarter numbers, and the company will likely have to re-file based on second-quarter results, which won’t be released until mid to late September.

Nation’s Restaurant News: Chuy’s IPO

Chuy’s Holdings Inc.. the casual-dining Mexican restaurant operator, debuted on the public market Tuesday, bucking a down market to close up 15.9 percent.

The 36-unit Austin. Texas-based company offered 5.8 mf Ron shares at $13 each, the top end of its forecasted price offering between $11 and $13 per share. The stock closed Tuesday at $15 06, boding well for upcoming restaurant Public stock offerings, including Southlake. Texas-based Del Frisco ’s Restaurant Group, which is scheduled to debut on the market Friday.

In comparison to Chuy’s first-day spike Tuesday, the Dow fell 08 percent and Nasdaq fell 0.9 percent. Wall Street darlings Me Chipotle and McDonald’s were also hit hard by investors as the companies reported depressed sales and earnings news.

Proceeds from Chuy’s offering will be used to pay down debt and add new restaurants Steve Hislop, chief executive of Chuy’s, said in an interview with Nation’s Restaurant News after the chain debuted on the Nasdaq market.

Restaurants take to Walt Street

With Wall Street headed into the doldrums of August John A Gordon, principal of Pacific Management Consulting Group, said companies wanting to go public try to squeeze in public offerings ’before the usual summer street slowdown.”

Gordon cited Bain Capital, in the news now as presumptive GOP presidential candidate Mitt Romney’s former company, as doing its lPOs in late July, “The real market slowdown now couldn’t be anticipated 120 days ago, Gordon said in an email “so its all about the vacation break.

Market-wide, five IPOs went Lip last week and eight are scheduled this week, including two restaurant companies – Chuy’s Holdings and Del Frisco’s Restaurant Group

Del Frisco’s, which operates the Double Eagle Steak House brand as well as the Sullivan’s Steakhouse and the newer Del Frisco’s Grille, said it plans to sell 7 million shares at between $14 and $16 per share. Del Frisco’s plans to offer 4.3 million snares and parent company LSF5 Wagon Holdings LLC. which is owned by Lone Star Funds, will offer 2, 7 million shares.

The company, which tried to go public in 2007 but withdrew its application in December 2008, again tiled for an IPO of up to $100 million in January this year.

Other public offerings in the wings are those from Outback Steakhouse parent OSI Restaurants of Tampa, Fla,, which said in April that it will change its name to Bloomin’ Brands and seek a $345 million IPO. Cheddar’s Casual CafØ of Irving, Texas, which used a provision under the Jumpstart Our Business Startups Act to tile confidentially for its IPO in May, is also on the blocks. Dallas based Dave & Buster’s Entertainment Inc. filed for an IPO in 2011, but it has yet to come to market

CKE Inc., which operates the Carl’s Jr. and Hardee’s burger chains, had tiled for an initial public offering of up to $100 million in May and on Monday said it now expects to raise as much as $230 million. CKE was taken private by Apollo Management in a $700 million deal in 2010.

Shares in Ignite Restaurant Group of Houston, which owns the 127-unit Joe’s Crab Shack and the 16 unit Brick House Tavern + Tap, went public in a $83.8 million offering in May. The company’s stock lost more than 20 percent of its value last week when the company announced it would have to restate financial statements for 2009 to 2011, and the first quarter of 2012, because of accounting issues with fixed assets and depreciation expenses.

Chuy’s future as a public company

The casual-dining chain most recently opened a unit in Gainesville. Fla., and is looking to back fill markets in Texas and Oklahoma, as well to colonize new ones such as Atlanta, Birmingham, Ala., and Louisville, Ky.

Hislop said the company, founded in Austin in 1, 982, expects future units to follow the non-cookie-cutter approach “We’re going to follow our motto of ’If you’ve seen one Chuy’s, you’ve seen one Chuy’s, Hislop said.

Current units range from 7,000 to 12.000 square feet, and Hislop said the lower end is likely to be the target for future development

The chain’s menu of burritos, enchiladas and fajitas produces a per person check average of $12.99, Hislop said, “which makes us very affordable “The concept’s emphasis on rock n roil music and instore Elvis altars also positions Chuy’s differently than many Tex-Mex operations, Hislop said.

Nation’s Restaurant News: Dave and Buster’s IPO

With two recent planned initial public offerings being pulled back, the IPO market in the restaurant industry shows signs of cooling down.

Dallas-based Dave & Busters Entertainment Inc. on Thursday announced It was not proceeding with Its IPO scheduled for Friday, citing “continued volatility for new issuers in the equity market.” That followed CKE Restaurants’ decision in August to postpone its planned IPO.

“While we received significant interest from potential investors, current market conditions are not optimal for an IPO at this time,” said Steve King, Dave & Buster’s chief executive, in a statement. A representative said Friday the company would not comment further.

The operator of 60 restaurant-arcade locations originally filed IPO plans in July 2011. In September, the company said it expected an offering of 7.69 million shares to price between $12 and $14a share, or between $92.2 million and $107.7 million.

Carpinteria, Calif-based CKE, which operates and franchises 3,263 restaurants under the Carl’s Jr. and Hardee’s brand names, had hoped to raise more than $200 million with an offering of 13.3 million shares of common stock priced between $14 and $16 per share.

“There was a pent-up demand for restaurant IPOs earlier this year,” said John A. Gordon, principal at Pacific Management Consulting Group, on Friday.

Three IPO debuts have been successful: Austin, Texas-based Chuy’s Holdings Inc.; Southiake, Texas-based Del Frisco’s Restaurant Group; and Tampa, Fla.-based Bloomin’ Brands Inc. Less successful was Houston-based Ignite Restaurant Group’s offering, which has become mired in accounting problems.

“With CKE and Dave & Buster’s going down in flames, and the problems with Ignite’s accounting, the market is going Co react,” said Gordon. “It is going to cool things off.”

Unless a brand has particular strengths in the market, Gordon said, the likelihood of successful offerings has grown slimmer. “The perceived ’easy’ IPOs are going to have to go back into the oven,” he said. “The numbers are going to have to look better.”

Dave & Buster’s had swung to a profit of $687,000 in the second quarter ended July 29, from a loss of $3.1 million In the same quarter a year ago. Latest-quarter revenue increased 15 percent to $147.9 million in the second quarter compared with $128.7 million a year ago.

King said in a September conference call with analysts that newer stores in Braintree, Mass.; Nashville, Tenn.; Oklahoma City, Okla.; and Orlando, Fla., helped boost the most recent quarter’s revenues. “I’m especially excited about Oklahoma City,” said King, adding that it’s the first of the new 25,000- square-foot format stores.

Prior to the Oklahoma City store, the chain’s small-store format had been in the range of 15,000 to 17,000 square feet, he explained. “It’s very clear to us at this point that a 25,000-square-foot store is much more able to accommodate the volume that we see and the peak loads that we see in our business,” King said in the call.

Gordon said he was surprised that Dave & Buster’s in its Securities and Exchange Commission S-i filings and road show didn’t address international growth.

“There’s only so many 30,000 or 40,000-square-foot sites in the United States that they need,” Gordon said. “When I looked at the [S-i and other comments and I really feel they made the mistake of talking about growth in the United States. What about international? The United States is so crowded with restaurants. … They need to have great sites.”

In addition, Dave & Buster’s $400 million debt load raised investor eyebrows, Gordon said, adding that the current and prior private-equity owners “had each run a dividend through and added to the debt.”

“These are two lPOs in a row, both private-equity with high debt and fast public-market turnarounds. Maybe it just takes more time to fix these companies up,” Gordon said. “It just seems as if the market sees it as too fast of a flip.

Dave & Buster’s owns and operates stores in 25 states and Canada.

Nation’s Restaurant News: Yum’s New Menu Items

While the economies of its international growth markets, especially China, may be slowing down, Yum! Brands Inc. is going to market in the United States with new product news that may bolster the domestic portions of its earnings, which the company will report next Wednesday.

During the past several weeks, the company’s three brands — KFC, Taco Bell and Pizza Hut — have each rolled out new products that star in comprehensive marketing campaigns. The wave of menu innovation comes at a time when economists fear international markets, which generate 65 percent of Yum’s operating profit, could falter from recently reliable and robust growth.

China, Yum’s key market, could be a particular concern. An Associated Press story reported Thursday that the country’s economy might only grow an expected 7.3 percent. While it would be an enviable figure for the United States economy, a growth rate below 8 percent would mark one of the lowest quarterly expansions in several years and signal weakening demand and consumer confidence.

Austerity measures, a possible banking crisis and depressed consumer confidence also could hamper Yum’s outlook in its Yum Restaurants International division.

If Yum were to look to the United States to make up some of the sales slack, recent performance and new products could be reason for optimism. After same-store sales for its domestic system fell 1 percent for fiscal 2011, they rebounded with a 5- percent increase in the first quarter of 2012.

John Gordon, principal of San Diego-based Pacific Management Consulting Group, an analysis and advisory firm focused on restaurant chains, said Yum should be able to win back sales and trial with its new offerings, provided the company makes up for lost time in the United States and stays aggressive in its advertising.

“I don’t understand why their new-product development has been so slow in the United States,” he noted. “This business is fundamentally driven by new-product news. … I’m impressed they have this new news rolling ahead, but they’ve got to sustain that and have to support it with good media. You need to bang on that drum for at least a year to get people’s involvement with the products up.”

Take a look at some the most recent menu rollouts from KFC, Taco Bell and Pizza Hut, as well as analysis of how the offerings could affect Yum’s performance.

KFC: Original Recipe Bites

This week, KFC introduced Original Recipe Bites, a more portable, bite-size version of its chicken prepared with the same 11 herbs and spices of its original recipe. The item is available a la carte or in combo meals with either six or 10 pieces. The chain faces competition for chicken items at snack time not only from Chick-fil-A and Popeyes, but also from McDonald’s and Burger King, which currently are selling a Spicy McBites popcorn chicken item and Chicken Strips as part of a new menu, respectively. Gordon noted that the bite-size snack might be a defensive or reactionary play given that landscape, but the item leverages the strength of KFC’s recipe and still is on trend with how customers snack today. “I think the bites could be a nice transition point so that KFC takes some of the focus off of big chicken-onthe-bone items and can broaden its appeal,” he said. “They have to be a little careful with a combo at an introductory price of $3.99 because that begins to set expectations with what it should be priced at going forward.” One concern Gordon has — and which he said a friend who manages 45 franchised KFC locations shares — is that KFC did not include a large option for the Original Recipe Bites that could compete with a 20-piece order of McDonald’s Chicken McNuggets. “Why wouldn’t they have a 20-piece or larger order?” Gordon said. “This is something KFC could have done ages ago, so why did this take so long? Why wasn’t there a larger portion size sold in order to complement the larger purchases for families or groups that KFC was intended for?”

Pizza Hut: P’zolo and $10 Dinner Box

Yum’s Pizza Hut brand has been extremely prolific the past 12 months with new products, either in the form of a new bundle like the $10 Dinner Box or a new item like the P’zolo, a sandwich platform similar to its P’zone calzones. Initial consumer response to advertising for the P’zolo has been favorable, according to data from marketing research firm Ace Metrix. The ad for the sandwich not only garnered a high score for its effectiveness and persuasiveness, but it also positioned the P’zolo well against Subway’s sandwiches. Ace Metrix executive vice president Jonathan Symonds said that consumers’ comments on the ad mentioned Subway three percent of the time, a significant amount given that Pizza Hut did not name the rival for its new sandwich platform. Gordon said the P’zolo “looks like a great product” and is an effective way to use the restaurants’ resources during lunch hours when the units are open and have staff waiting to be utilized.

“The advertising was extremely well done, and I’m sure they’ll get some trial,” he said. “But it might not be so much to move the needle a tremendous amount. They may get more incremental traffic for a $5 sandwich versus a $10 pizza, so traffic could go up a little and the check could go down a little.” However, while the P’zolo is a nice daypart extension and the $10 Dinner Box can get some incremental traffic from the family portion of the customer base, “the customer would perceive a new pizza as more interesting and relevant,” Gordon said. “If we’re looking at different products for Pizza Hut, the P’zolo is something they should have done sooner and the $10 Dinner Box is interesting, but I would rate them fairly low among transformational traffic drivers,” he said. Among Gordon’s consulting clients is a large group of Domino’s franchisees, he disclosed.

Taco Bell: Cantina Bell menu and Doritos Locos Tacos

Gordon and the investment community are most bullish on Taco Bell’s prospects for a sales turnaround based on the strength of the recently introduced Cantina Bell menu and the Doritos Locos Tacos, which debuted back in March. In a research note, Mark Kalinowski of Janney Capital Markets projects Taco Bell’s same-store sales in the United States to be above 11 percent when Yum reports second-quarter earnings next week. Taco Bell chief executive Greg Creed said during an investor presentation in May that Doritos Locos Tacos in particular were a transformative product, as the chain sold 100 million of the item during its first 10 weeks in the system. Creed also noted that 90 million of those transactions were incremental. While Gordon is skeptical of the 90 million incremental-transaction figure without seeing data for point-of-sale and customer intercepts, he nonetheless expects a big quarter from Taco Bell based on menu innovation. “The average check component will be up more, and they’re definitely going to have more traffic and visibility with all the marketing they’re doing,” he said. Taco Bell officials said the Doritos Locos Tacos line would be ripe for future extensions, including a Cool Ranch flavor before year-end. As for the Cantina Bell menu, with a burrito or bowl made with higher-quality ingredients developed by celebrity chef Lorena Garcia, Gordon speculated that the effects may not last as long. “Cantina Bell can’t possibly hurt the business, but it’s folly to assume that Taco Bell would be competing any way with Chipotle or any of the fast-casual concepts,” he said. “It’s a completely different market and purchase occasion. I think they will have some trade-up from existing customers, and they’ll get some trial, but I see this more as a short-term benefit rather than repositioning the entire brand.” Louisville, Ky.-based Yum operates or franchises more than 37,000 restaurants worldwide. Carl’s Jr. Owner Postpones IPO

CKE Inc. scrapped plans to take the Carl’s Jr. and Hardee’s operator public this week as investors balked at the poor timing, shaky financials and harsh head winds against the fast-food industry.

The fast-food chain, which started as a hot dog stand 71 years ago in Los Angeles, was unable to persuade investors to buy into its initial public offering of stock. CKE postponed the deal at the last minute Thursday night, citing market conditions.

But analysts said the biggest reason CKE put off the IPO was that owner Apollo Management made a series of miscalculations that scared off investors. Critics said CKE, loaded with $1.5 billion in debt, was just not ready to go public.

“Apollo milked it and destroyed the balance sheet, as is typical of private equity firms,” said Francis Gaskins, editor of in Marina del Rey. “It then takes awhile for the company to work itself back into profitability, and Apollo didn’t have enough time with CKE.”

This would have been the second time that CKE had gone public after founder Carl Karcher listed the company’s shares in a well-received IPO in 1981.

This time around, the Carpinteria fast-food giant is a drastically different company. Apollo bought CKE and took it private two years ago for $700 million, then began taking on massive amounts of debt.

Much of the money Apollo would have raised in the IPO was expected to pay down junk bonds that the firm used to acquire CKE. The company had expected to raise $200 million during the IPO, and Apollo would have remained its biggest shareholder.

In addition, Apollo paid itself $190 million in dividends from CKE last year, according to regulatory filings. That includes $13.8 million that CKE would hand over to Apollo to end a management services agreement.

The scenario is typical for private equity firms, which use debt to pay themselves earlier and then cash in again after an IPO. Most private equity takeover teams wait four or five years before releasing companies onto the public markets, giving them time to stabilize away from the public eye.

“They used CKE similarly to a credit card,” said John A. Gordon, a principal with Pacific Management Consulting Group, which advises restaurants. He said the IPO process was “an embarrassment and a total waste of time for Apollo and CKE.”

Another financial factor that weighed on investors is that CKE has not shown an annual profit for two years, and in 2011 suffered a $19.3-million loss. Although sales have grown modestly, much of the company’s cash has been used to pay interest on the debts it owes.

CKE, in an effort to cut costs, even stopped paying matching contributions to employees’ 401(k) retirement accounts.

“The company’s weak financials made the IPO as hard to digest as some of the fast-food it serves,” said IPO research firm PrivCo Chief Executive Sam Hamadeh, who added that he had spoken with investment managers who passed on CKE.

Another fumble for Apollo and CKE was the IPO’s timing, analysts said.

Early August has always been a slow period for such launches, with much of Wall Street on vacation and the remainder worn out by the debuts that tend to swarm the market earlier in the summer. CKE would have been the fifth restaurant company to go public since June.

The most recent, Outback Steakhouse owner Bloomin’ Brands Inc., launched Wednesday. But shrinking demand forced the company to price at $11 a share, below its originally expected $13 to $15 range, while also selling fewer shares than it had hoped.

Both CKE and Apollo planned to offer about 6.7 million shares. After Bloomin’ Brands’ subdued debut, analysts said investors probably balked at CKE’s price range of $14 to $16 a share.

“Investors are so jittery right now that expectations going forward are conservative,” said Nick Setyan, a restaurant analyst with Wedbush Securities. “Appetite for these types of IPOs, particularly for these old, mature stalwarts, has gone away.”

Indeed, there’s heavy competition from younger brands such as Smashburger and Five Guys Burgers and Fries, which have ambitious expansion plans and more buzz. Although CKE has been pushing its store remodeling efforts and international development, its existing base of more than 3,000 locations makes analysts skeptical that it is capable of a major growth spurt.

CKE has also struggled to distinguish itself in recent years, according to research.

Hardee’s and Carl’s Jr. sales are outranked by chains such as Wendy’s, Jack in the Box and Dairy Queen, according to QSR magazine. Carl’s market share of the burger segment fell below 2% last year for the first time since at least 2005, compared with Burger King’s 12% and McDonald’s 49.6%, according to research group Technomic.

“They’re average for speed, average for value, average for food quality,” said Mark Kotkin, director of survey research for Consumer Reports. “They don’t stand out particularly.”

It was not known if Apollo will revive the IPO at a later date.

But if CKE does list its shares on the New York Stock Exchange, it would be a far cry from the first time the Southern California native debuted publicly in 1981. Back then, a heady sense of optimism pervaded the $1 5-million-a-year enterprise, said Loren Pannier, who was then serving as chief financial officer.

“We were going from a small little regional chain to something bigger,” said Pannier, now a retiree in Newport Beach. “It was like going from the minor leagues to the big leagues.” Darden Exec at Ruby Tuesday

After a five-month search for a new chief executive, Maryville-based Ruby Tuesday has turned to the nation’s largest full-service restaurant chain to fill its top job.

James “J.J.” Buettgen resigned Monday from his position as senior vice president and chief marketing officer at Darden Restaurants to become president and CEO of Ruby Tuesday.

Buettgen, 52, will begin his new roles effective Dec. 1, when he takes over for Ruby Tuesday founder Sandy Beall, who announced in June that he was stepping down after 40 years. Beall previously said he hoped a replacement would be named before Thanksgiving.

Meanwhile, lead director Matthew Drapkin, a partner in the investment firm Becker Drapkin Management, will take over as chairman of the board, also effective Dec. 1.

John Gordon, principal at San Diego-based chain restaurant consulting firm Pacific Management Consulting Group, said Buettgen’s hire appeared to be a good one.

“It will give a bit of aura to Ruby Tuesday to take a high-level executive out of Darden to join them,” he said.

While Darden is facing its own challenges, Ruby Tuesday is in far worse shape, he added.

However, Darden has multiple distinct brands, including Red Lobster, Olive Garden and LongHorn Steakhouse. Experience operating those could help Ruby Tuesday, which has recently been expanding its own portfolio to include its in-house seafood concept, Marlin & Ray’s, and Lime Fresh Mexican Grill, which it acquired in April.

“If there’s any shot at all at making a go of the multiple brands Ruby Tuesday has kicked off, J.J. and his team might be able to assess it,” Gordon said.

In a statement posted on its website, Darden indicated that Buettgen had an interest in leading a company.

Before his most recent role at Darden, Buettgen served as Darden’s senior vice president of business development and as president of Smokey Bones Barbeque & Grill. He has more than 20 years of experience in the restaurant and consumer industries, including roles at Disneyland Resorts, Brinker International and General Mills.

“It is an honor to lead Ruby Tuesday, and I am excited to join the company and work with the seasoned management team and dedicated team members to create value for our shareholders. I believe this will be an exciting period of growth for the company and I am eager to begin,” he said in a news release.

Buettgen holds a bachelor’s degree in finance from Miami University in Oxford, Ohio, and a masters in business administration in marketing management from the University of California at Los Angeles.