Friday, December 12, 2008

Reading the ink blots of recent developments

Here's a blog entry I posted on Fohboh, a social network for members of the restaurant industry (Fohboh stands for front of the house/back of the house):

I seem to be out of sync with fellow Fohboh-ers on an issue that threads its way through many of the blogs and discussions here. Try as I might to catch the economic optimism shown by my community mates, the gauges I’m reading on the industry’s near-term prospects tend to fluctuate between sobering and scary. But read on, because this is actually a positive post.

First, the harsh realities. Consider some of the this week’s news stories.

DineEquity, the parent of Applebee’s and IHOP, announced that it’ll suspend dividends for the foreseeable future to pay down the debt weighing profoundly on the company. Indeed, the industrial-sized IOU is proving more of a burden than anticipated. DineEquity planned to pay back what it borrowed to buy Applebee’s by selling company Applebee’s units to franchisees. But the licensees can’t get their hands on capital in the current credit freeze. There really hasn’t been a Plan B.

The news about dividends followed last week’s revelation that a big and powerful DineEquity shareholder, Southeastern Asset Management, is planning to take a hand in the company’s operation. Surprisingly, the coverage provided little information about SAM, which is actually an investment vehicle for a larger financial concern, Longleaf Partners Funds, which in turn is headed by a junior Warren Buffett named Mason Hawkins. Longleaf has or held significant investments in such other restaurant companies as Yum! Brands, Marrriott, and Wendy’s/Arby’s, and was a major shareholder of Dell Computer.

Hawkins, a guy who could pick up the tab if he lunched with Buffett or Bill Gates, is regarded as a very astute guy. And the investors in his funds include such business titans as Michael Dell, he of Dell Computer fame. Indeed, some insiders say Michael Dell has taken more than a passive interest in the workings of Applebee’s. The business has apparently piqued his curiosity.

Which brings us to some of the positives. Yeah, suspending dividends is an extraordinary move. But the action megaphones the message that DineEquity isn’t operating under a passive, business-as-usual mindset. And if it should lapse into inertia, investors who view it as a potential prize will ensure any lethargy is shaken off pronto. And they’ve shown that they know how to right or run a business. A kingpin of casual may soon be revived, which could help in elevating that whole wheezing sector.

There’s still plenty of bad news seeping out of that segment. On Tuesday, for instance, the private equity company that owns the Del Frisco and Sullivan’s steakhouse chains quietly shelved its plan to sell the operation through an initial public stock offering. The significance extends beyond Del Frisco, since the private-equity buying binge of 2005 and ’06 has left many private companies with restaurant companies they planned to spin off in a year or two. What are they going to do with those strained assets if individual buyers can’t get the financing, and the stock market is providing an unfeasible option? And while they’re waiting for conditions to improve, the private-equity firms have to run their holdings. They’d likely admit they’re asset portfolio managers, not restaurant operators.

Yet here’s some positive news: A financial analyst said he was told by Brinker Internatiional executives that the casual-dining giant still expects to sell its Romano’s Macaroni Grill chain by Jan. 1. Somewhere out there is enough financing to fund the $131.5-million deal.

The bad news: Brinker said it will cut 40 more headquarters positions, according to a Dallas news report.

And the even worse news: The company still faces a credit review by Moody’s, the debt-rating service, that could spell trouble for the company.

So I’m puzzled by the sunny perspective of others within the community. Sure, it’s not time to crawl out on the ledge. But these are extraordinarily dire conditions—hands-down the worst I’ve seen in 24 years of covering the business.

Nonetheless, I’m going to leave you with a positive recent story that virtually slipped by the industry: Ruby’s Diner, the well-regarded diner concept on the West Coast, broke the industry’s long-running hiatus from launching new concepts. The chain fired up the grills this week for a new, upscale venture called Ruby’s MotoDiner, whose checks are likely to top the typical tab at its parent concept by 20 percent, according to blogger extraordinaire Nancy Luna.

You don’t launch a new concept if Armageddon is ‘round the corner. Why bother having the menus printed?

But between now and the first bar of “Happy Times are Here Again,” we’ve got some tough slogging.

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