Struggling Real Mex taps CEO
Struggling with a large debt load and customers who are tightening their spending in recession, the new owners of the El Torito family of restaurants Tuesday named a new chief executive to help turn the firm around.
Real Mex Restaurants Inc. has tapped industry veteran Richard E. Rivera to lead the Cypress-based company, whose holdings include the El Torito, El Torito Grill, Chevys Fresh Mex and Acapulco Mexican Restaurant chains.
Rivera is the former president and chief operating officer of Darden Restaurants Inc., which owns Olive Garden and Red Lobster, among other chains. He replaces Frederick Wolfe, who left Real Mex in December after a restructuring engineered by private equity firm Kohlberg Kravis Roberts & Co. and hedge funds Farallon Capital Management and Canyon Capital Advisors. Those firms took a controlling stake in the company in November.
Rivera’s task will be to boost slumping sales and earnings at the 189-store Real Mex, which faces deadlines next year to refinance $105 million of debt.
“We have challenges ahead, but I don’t think what we are working our way through is any different from other restaurant companies right now,” Rivera said.
The recession has taken a bite out of the restaurant industry, affecting nearly every category. Consumers are eating out less and choosing cheaper fare when they do.
But so-called casual dining establishments such as the Real Mex chains have been among the worst hit. Restaurants in this segment typically offer table service, alcoholic beverages and large menus. They’ve seen sales slide as bar tabs plunge and customers defect to less expensive eateries and fast-food chains.
“The edge is really off the casual dining segment right now,” said Randall Hiatt, a Fessel International restaurant industry consultant. Sales in that portion of the industry have fallen 8% to 10% from a year ago, he said.
Rivera said Real Mex needed to differentiate its three main restaurant brands -- all of which serve Mexican food -- to attract more distinct segments of the market. He said the company also had not paid enough attention to value.
“We maybe let our prices get out of whack with this economy,” Rivera said.
Turning the company around in the middle of a recession won’t be easy, analysts said.
Real Mex continues to face “severe economic head winds,” said Jon Zhao, an analyst with Moody’s Investors Service. The company has a high risk of defaulting on its debt over the next 12 to 18 months, he said.
Another factor hurting Real Mex is that about three-quarters of its restaurants are located in California, which is suffering from double-digit unemployment and its worst recession since the Great Depression.
Real Mex isn’t the only company having trouble. ARG Enterprises Inc., the Los Altos, Calif., owner of 69 Black Angus Steakhouse restaurants, filed for protection from its creditors in U.S. Bankruptcy Court this year and said it would seek a buyer.
Other chains, including California Pizza Kitchen and Cheesecake Factory, have lost customers to lower-cost eateries and to people eating at home more often.
Last year, Real Mex’s same-store sales, an important measure of a restaurant chain’s health, fell 2.3%. The company posted a net loss in 2008 of $177.2 million on sales of $553.7 million. Much of the loss resulted from a write-down in the value of the business.
Kohlberg Kravis Roberts and the hedge funds took control of the chain late last year from Sun Capital Partners Inc., which bought Real Mex for $359 million in 2006. The group lent money for that transaction and in November swapped the debt for equity in Real Mex, leaving Sun with just a 15% stake in the business. They began housecleaning immediately, replacing the board of directors and launching a search for a new chief executive.
Sun agreed to the swap after deciding not to pump more cash into Real Mex that would be needed to avoid violations of loan agreements, according to people familiar with the restructuring.
El Torito was founded by Larry Cano in 1954 in Encino, and has been headquartered in Orange County since 1976, when W.R. Grace Corp. acquired the chain. El Torito has since seen a number of ownership changes and at one point was a sister company of California Pizza Kitchen.
Despite the challenges, Real Mex executives believe that the company can thrive with a little help from the credit markets and an improved consumer outlook.
“Any concern we have in refinancing the debt is with the tightness of the credit markets rather than the viability of the business,” said Steve Tanner, Real Mex’s chief financial officer.
And recessions don’t last forever, Rivera said.
“The economy will change,” he said, “and people will eat out again.”
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(BEGIN TEXT OF INFOBOX)
Real Mex Restaurants Inc.
Headquarters: Cypress
Chief executive: Richard E. Rivera
Major owners: Kohlberg Kravis Roberts & Co., Farallon Capital Management and Canyon Capital Advisors
Major brands: El Torito, El Torito Grill, Chevys Fresh Mex, Acapulco Mexican Restaurant
Restaurants: 189 (155 in California)
2008 results: $177.2-million loss on $553.7 million in revenue
