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Ruby’s Diner files for bankruptcy protection

Weak sales, failed refranchising and costs from a gift card program all contributed to the chain’s financial struggles.
Photograph: Shutterstock

Ruby’s Diner has filed for federal bankruptcy protection this week following a handful of financial setbacks, from weather to a troubled gift card program.

The Newport Beach, Calif.-based diner chain hopes a financial restructuring and cash infusion from one of its franchisees, Steven Craig, will put the company on a better foundation.

“The agreement and proposed equity infusion are strong endorsements of the Ruby’s brand,” Doug Cavanaugh, Ruby’s owner and CEO, said in a statement. In a bankruptcy court filing on Friday, Cavanaugh said that same-store sales are expected to increase this year.

Ruby’s operates 32 diner locations, mostly out West but with some units in Pennsylvania, New Jersey and Texas. Two-thirds of the locations are owned by franchisees.

According to bankruptcy filings, Ruby’s has just less than $3 million in secured debt in addition to $5.6 million in unsecured debt.

The company will get $2 million in financing from Craig to get it through the bankruptcy process. Craig will also cancel a $1 million loan Ruby’s owes him and will provide $1 million in new funds.

Craig, according to filings, will become the company’s chairman and will own 60% of the company that emerges from the bankruptcy process. Cavanaugh, one of the chain’s founders, will remain its CEO.

“In recent years, as Ruby’s has evolved with a changing industry, the company suffered some financial setbacks from which we have been working to recover,” Cavanaugh said. “For the most part, we have been successful.”

Ruby’s problems date back to 2012, when the company bought out two of its partners “after years of disputes.” Ruby’s faced “several legal challenges” related to the buyouts and disputes over one of the California locations.

Craig and Opus Bank provided financing for the buyouts, according to the filing.

But the company faced sales challenges related to a conversion of some locations to a fast-casual concept and what the company in a filing called “significant increased competition in the restaurant industry.”

Ruby’s restructured its loans in 2016 and tried to refranchise company locations. The company was able to sell three locations for $2.5 million, but other sales fell through. As a result, Ruby’s wasn’t able to cut costs as much as it had planned.

Bad weather in the first half of 2017, meanwhile, “severely degraded sales volumes over prior years and forecasts.” Costs rose because of commodity price increases and regulations, notably medical benefits and minimum wage costs.

“While the company experienced a rebound in the second half of 2017,” Cavanaugh said in a legal filing, “the company’s cash flow remained insufficient to meet its ongoing obligations.”

He also cited a gift card program through Costco as a contributor to its financial problems. Ruby’s hoped the gift cards would generate traffic to its restaurants, but the company was unable to convince franchisees to assume part of the discounted price of the cards.

As such, Cavanaugh said, Ruby’s had to reimburse franchisees for the cards “at an unfavorable rate,” thus “minimizing” their benefit.

“In sum,” Cavanaugh said in the filing, Ruby’s “found itself in a position with an overleveraged balance sheet and without the cash flow to pay its operating costs, and its obligations to creditors, thereby necessitating this bankruptcy filing in order to restructure its financial affairs.”

But Ruby’s said that its same-store sales are expected to grow this year “and going forward.” The company is also developing an international franchising plan and has developed a small franchise prototype known as Ruby’s Shake Shop that is “designed to compete in today’s on-the-go market sphere.”

The first Shake Shop debuted last month in North Hollywood, Calif. It has a reduced menu of 20 items, as well as beverages and Ruby’s shakes.

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