Not Out of the Woods Yet: Will IGNITE Be the Next Restaurant Bankruptcy?
The long-time truism was that if a restaurant made it through its first year, it was probably there to stay. Once you move into the realm of restaurant conglomerates, though, potential risk continues long past that one-year benchmark.
Chains of eateries are feeling the pinch of online competition just like businesses in other industries. With rising costs eating into already tight margins and balance sheets loaded with debt, some may not make it through 2017.
Today’s post looks at one company on the brink — IGNITE Restaurant Group, parent of Joe’s Crab Shack and the Brick House — and the financial metrics that give cause for concern.
An Industry in (Slow) Recovery
After last year’s dismal performance and a record number of bankruptcies, the restaurant industry is showing some signs of hope.
Analysts expect modest sales growth, especially in fast casual and limited service chains. On the other hand, sales at full-service chains are expected to weaken, with even high-end restaurants in foodie capital New York City feeling the pinch.
Consumers Have More Options for Dinner
Problem is, the industry continues to add seats, but overall traffic hasn’t increased. Industry analyst Bonnie Riggs told National Restaurant News, “It’s just a battle for share. … More restaurants than visitors.”
In the same article, Riggs pointed out the other big challenge facing restaurants: “We need to keep in mind that competition is no longer just restaurant competitors. It has become a very fragmented market, and consumers have many options available to obtain a prepared meal.”
In addition to the growth in prepared food options at grocery and convenience stores, there is also competition from meal delivery services, such as Blue Apron, Green Chef, Sun Basket, and Plated. All of these food options offer a cost-effective and convenient alternative to going out to eat — and millennials are opting in.
Why Is IGNITE in So Much Trouble?
Like many businesses, IGNITE tried to grow too fast, purchasing Romano’s Macaroni Grill for $55 million right after its IPO in 2013. Then after that chain became a huge cash drain, IGNITE took a whopping $47 million loss to get it off their books.
Overall industry pressures have challenged the company even further, leading to closures of Joe’s Crab Shack locations, when that chain was considered their cash cow at the time of the Macaroni sale.
Joe’s Crab Shack also took a big gamble when it tested a no tipping policy. Customers walked away from the higher menu prices designed to cover a living wage for servers without tips, and the chain rolled that back.
Here are the specific signs of financial distress:
- Negative cash flow for all but 1 of the last 5 quarters
- Delisted from the NASDAQ stock exchange in March for failure to achieve value benchmarks
- Stockholders equity turned negative
- IGNITE is in the bottom quartile of industry peers for operating margin
- Operating losses in the last 5 quarters
- Same-store traffic drops 7% across the board
- The FRISK® score — 96% accurate in predicting bankruptcy — drops to 1, the lowest of the low, which means there’s up to a 50% likelihood the company will file for bankruptcy within 12 months.
Despite this obvious pattern of financial distress, IGNITE has maintained a consistent Days Beyond Terms (DBT) index, showing positive payment history even in the face of financial struggles. But as we've shown before, in One Way Portfolios Get Blindsided: The Wrong Credit Risk Metric, payment performance is not an effective indicator of financial stress for publicly traded companies, since they often continue to pay on time right up until their bankruptcy filing.
Find out more about the financial red flags that put IGNITE Restaurant Group on our high-risk watch list. Download the full High Risk Report
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