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Despite stronger sales, Perkins can’t avoid bankruptcy

RB’s The Bottom Line examines the bankruptcy filing of Perkins & Marie Callender’s, which came after a brutal two-year period for the company.
Photograph: Shutterstock

the bottom line

The past couple of years have been hard on the restaurant industry, and not even improvement this year can save some companies.

One example came earlier this week, when Perkins & Marie Callender’s filed for bankruptcy protection in a bid, it said, to encourage a sale. As we wrote previously, the company had been for sale for some time, but finally had to seek out credit protection to get the job done.

The company is made up of three parts: family-dining chain Perkins, which has 366 locations, 255 of which are company-operated following the latest round of closures; Marie Callender’s, which has 49 locations; and Foxtail Foods, which makes pies and muffins and other supplies for the restaurant chains as well as for some other customers.

The company closed 11 corporate-owned Perkins locations before the bankruptcy filing and 21 Marie Callender’s restaurants.

The two chains are likely to be broken up in a sale. A company called the Perkins Group LLC has the inside track to buy the Perkins chain and some of the Foxtail assets for $40 million in cash, according to bankruptcy court documents. Someone else could step in and bid more during an auction.

The company’s adviser, investment bank Houlihan Lokey, is talking with potential buyers of Marie Callender’s.

Perkins & Marie Callender’s has $115 million in secured debt. The company said in bankruptcy court documents that it struggled with sales problems in 2017 and 2018—problems it blamed on the overall industry environment.

Those sales challenges had a “compounding impact” on Foxtail, which itself lost a large customer outside of the chains in 2017.

And then there are the other industry challenges, notably rising labor costs and a tight labor environment, along with higher commodity costs.

Falling sales and rising costs are generally a bad combination. For companies with a lot of debt, they are devastating.

In this instance, the company couldn’t make improvements quickly enough to avoid a bankruptcy filing.

In June, a company spokeswoman said that Perkins’ same-store sales were up 5.1% year-to-date, with traffic up 3.9%, while Marie Callender’s was up 6.9%, with traffic up 5.4%. The company also said in court documents that Foxtail sales have “stabilized” thanks to improvement from the two chains along with some “new-customer wins.”

But, CEO Jeff Warne wrote in an affidavit filed with the court, while the company believes it has “reached a point of stabilization, the challenges faced in 2017 and 2018” led it to begin considering restructuring.

Perkins & Marie Callender’s has a lot of debt—$115 million, according to court documents. The company failed to make interest payments on that debt in July and October last year. It then failed to make mandatory prepayments and, in December, entered into a forbearance agreement.

It made a second such agreement in March.

The company put itself back on the block earlier this year and retained Houlihan Lokey to run a sale process.

By a May deadline, the company had a pair of bidders. One targeting the entire company needed more time to arrange financing. Another, which just wanted Perkins, needed more time.

Houlihan then targeted previous bidders that were interested, but at a lower price, according to bankruptcy documents. Ultimately, advisers decided that the best result was to break apart the chains—though it’s notable that the $40 million sale price for Perkins is substantially lower than the amount of debt on the company.

This is the restaurant business, however. Though sales appear to be looking up so far in 2019, companies are still feeling the financial pain from the previous couple of years.  

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