Papa Gino’s blames debt, minimum wage and competition for bankruptcy

The company, which also owns D’Angelo Grilled Sandwiches, said shifting consumer tastes means it needs fewer locations.
Photograph: Shutterstock

The owner of Papa Gino’s and D’Angelo Grilled Sandwiches blamed myriad current issues and trends for pushing the company into bankruptcy: rising minimum wages, price competition, shifting consumer tastes and its own, significant debt load.

PGHC Holdings closed 95 locations over the weekend, more than a third of the chains’ units, and filed for debt protection with $62 million in secured debt and more than $100 million in debt overall, the company said in a bankruptcy court filing Monday.

The restaurant operator also laid off 1,100 workers.

The company’s “existing footprint is too large—in terms of both number and size of restaurants,” CFO Corey Wendland said in a statement filed with the U.S. Bankruptcy Court in Delaware.

The Dedham, Mass.-based PGHC has a deal to sell itself for $20 million to Wynnchurch Capital, a private-equity firm that bought the company’s debt over the summer and replaced its board of directors with Thomas Allison, a restructuring expert from Portage Point Partners.

PGHC representatives said there would be no comment beyond the filing and a press release sent Monday.

Papa Gino’s, a quick-service pizza chain, was founded in 1961 and now has 100 locations after growing to as many as 155 locations at the end of 2016. The company generated $128 million in system sales last year, according to Technomic data. It now has 100 restaurants.

D’Angelo, a chain of Italian sandwich shops founded in 1967, had 139 company and franchised locations at the end of last year, when it generated $88.2 million in system sales, according to Technomic. After the weekend’s closures, the brand has 78 restaurants.

The company is owned by Bunker Hill Capital.

Wendland, who has been CFO since 2013, in a filing said that consumer preferences “shifted from in-restaurant dining to delivery and carryout ordering.”

That, he said, requires fewer, smaller restaurants to serve the same geographic area, and as a result, the company needed to close a lot of restaurants and remodel others.

Wendland also blamed rising minimum wages in many of the chains’ New England markets. And the company said that higher benefit costs, particularly for health insurance, pressured PGHC’s cash flows.

Papa Gino’s and D’Angelo also blamed competition from “national chains that have increased their footprint” in the chains’ core New England markets. Those national chains have put pressure on the chains to lower prices.

But PGHC also has “substantial debt load” that it has been unable to service, and is in default.

Wendland said that the company allowed leases at existing restaurants to expire to shrink its footprint. It also negotiated with landlords to renegotiate or end leases, though the company found the landlords “unreceptive to renegotiating or terminating leases.”

Wendland said the company increased mobile ordering and information technology and is placing a greater emphasis on digital marketing, which “has a higher return on investment than more costly traditional media advertising.”

PGHC has planned a smaller concept that is more efficient but doesn’t have the funds to test the design.

“Revenue and profitability have been insufficient to support” the company’s debt and working capital needs.

PGHC hired an investment banker last year and has been working to find a buyer ever since, but of the 100 potential buyers contacted, only three provided potential offers. All of the offers “were substantially less” than the company’s secured debt.

Wynnchurch bought the company’s debt and reached a deal to buy the company. Another buyer could potentially step in and buy Papa Gino’s and D’Angelo in an auction process.

On Sunday, PGHC closed 47 Papa Gino’s locations and 45 D’Angelo units and plans to have the leases terminated during the bankruptcy process.

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