Lessons From the Cosi Bankruptcy To Help You Target Credit Risk
The U.S. restaurant industry is experiencing a financial crisis not seen since 2009, with eateries closing at rapid pace. 14,000 brick-and-mortar eateries have closed their doors in just two years. Clear financial risk red flags are waving.
Among the turmoil, here are a few questions to think about: Are restaurants just the canary in the coalmine? Are your credit decision tools up to the task of spotting risk early? And, what are the bigger lessons from the Così bankruptcy?
14 bankruptcies, and counting: An industry teetering on the edge
Since last December, nine companies owning 14 chains have filed for bankruptcy. The list includes Così Inc., a restaurant chain with 1,100 employees; Logan’s Roadhouse, which has over 200 locations; Rita Restaurant Corp., which operates 16 Tex-Mex Don Pablo restaurants, and other familiar names.
Falling sales have been made more painful by cost increases and the burden of debt. Darren Tristano of restaurant data provider Technomic Inc. explains the uptick in financial distress and bankruptcy this way:
"… many restaurants are just a bad quarter away from folding, despite doing their best to improve and get by.”
What has led to restaurant industry hard times?
Changing eating habits and oversupply has hurt category sales and profits. Millennials, burdened by record student debt and high rents, dine out less than previous generations. There’s more ‘at-home’ eating and cooking with friends. The rise in meal-kit delivery services and supermarket ready meals has also reduced restaurant visits. And, the growing ‘work from home’ trend has created a decline in reliable lunchtime customers.
Cosi, Inc. Bankruptcy post-mortem: Timing is everything
Like its struggling restaurant peers, Così had a host of financial problems. The silver lining in all this red ink is that there are reliable ways to spot spiraling financial risk, and protect your company.
While the Altman ‘Z’ sent up a red flag of fiscal danger on the early side, and payment performance didn’t hint at trouble at all, here's what the pattern of telltale warning signs looked like:
- Successive losses, dwindling working capital and declining cash
- Negative long-term trends for key metrics: Performance ratios, leverage ratios, liquidity, and rates of return.
- Reclassification of all outstanding debt to short-term
- The FRISK® score (LINK) dropping deeper into the ‘red zone’, from a ‘5’ to a ‘1’ over the 12 months before bankruptcy
- Peer analysis that placed Così in the bottom quartile for most ratios
- Market cap down 84% in less than a year; stock delisting; violations of debt covenants; leadership resignations; concerning statements in the MD&A … and much more.
Download our analysis of the Cosi bankruptcy, to see how events unfolded, and understand the complete pattern of predictive warning signs that accompanied Così’s business failure.
Download our Cosi, Inc. postmortem bankruptcy analysis
Restaurant Bankruptcy: the canary in the coalmine ...
Here are some of the broader issues raised by the Così bankruptcy:
- The restaurant industry represents about 10% of the jobs in the economy, and roughly 4% of U.S. GDP.
- Bankruptcy risk is rising across multiple sectors of the U.S. economy, including restaurants, bricks-and-mortar retail, and many others, according to the FRISK® Stress Index.
- According to financial pundits, restaurants are a classic leading indicator of economic conditions, and the restaurant industry’s struggles may well be the proverbial canary in the coalmine.
In today’s economy, financial risk is rarely isolated, and these same trends may be taking a toll on your customers and suppliers. As a result, you may have more risk in your credit portfolio than you think.
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