Sales and profits have fallen steeply this year at drive-in burger chains Checkers and Rally’s, just one year after their $525 million, management-backed buyout.
According to Debtwire, same-store sales fell more than 5% in the third quarter, leading to a 22% decline in EBTIDA, or earnings before interest, taxes, depreciation and amortization. Revenues at the chain declined 10.4% in the period.
Debtwire cited “two sources familiar with the situation.”
System sales at the larger Checkers have fallen 6.5% year to date through October, according to data from Technomic Transaction Insights, including 11.4% in the most recent three months.
Sales have declined 8.1% at Rally’s, including a 15.3% decline in the most recent three-month period.
Technomic is a sister company of Restaurant Business.
Debtwire covers the lending markets and monitors companies that struggle and could breach their lending agreements.
Reshmi Basu, who authored the story for Debtwire, said in an interview that the company could have to rework some of its lending agreements “if the numbers continue to go at this trajectory.”
She said the company has “less breathing room” with some of the requirements in its lending agreement as a result of the earnings decline this year.
A representative for Checkers did not respond to a request for comment Tuesday.
Checkers and Rally’s have been selling company stores to franchisees recently—a third of their 860 locations are company-operated. Franchise revenue rose 9.5% while company restaurant sales declined by 13.3%.
The refranchising likely explains much of the revenue decline.
But the decline in profitability highlights the growing challenges in the restaurant space, even for companies that took on debt only recently.
Oak Hill Capital Partners acquired the company along with management just last year for $525 million. The company has $192.5 million in loans, according to Debtwire.
Basu said Debtwire has been paying closer attention to the restaurant space more recently, as a combination of sales and cost challenges have put many companies on difficult financial footing.
For instance, she noted that third-quarter same-store sales at Pei Wei Asian Diner dropped 12.5%. The chain was recently split off of parent company P.F. Chang’s, which is currently up for sale.
Financial advisors, she said, “are dedicating resources to this space, given the promotional pressures.”
Weak sales and rising labor and rent costs—along with heavy debt loads following years of cheap, aggressive lending—have led to several restaurant industry bankruptcies this year alone.
Checkers and Rally’s operate in the burger space, arguably the most competitive sector in the restaurant business. Only half of the 10 largest burger chains have seen sales increases this year, according to Technomic.
At the same time, labor costs have skyrocketed in many markets, putting pressure on operator profits.
That space has been dominated by heavy discounting all year long, something the chains’ rivals have frequently lamented.
“Across the entire industry there seems to be almost a desperation of same-store sales and transactions,” Jack in the Box CEO Lenny Comma said last week. “A lot of things happening in the market are hypercompetitive and even a little irrational.”