Collins Foods Can Halt Firm’s Slide, Analysts Say : Butler to Sell Stake in Naugles
Harold Butler, the colorful founder and former chairman of Naugles Inc., said Tuesday that he has tentatively agreed to sell his 36% stake in the ailing fast-food chain to Collins Foods International for an undisclosed price.
Some industry analysts predicted that the sale of Butler’s interest to Los Angeles-based Collins Foods could be just what beleaguered Naugles needs to reverse a downward spiral in its fortunes. The move came as the Fullerton-based company reported a $1.6-million loss for its first fiscal quarter ended Oct. 17.
The loss in the latest quarter compares to net income of $490,000 during the year-ago period. The chain of hamburger and Mexican food restaurants has lost money for four consecutive quarters and expects to continue losing money throughout fiscal 1986.
At current market prices, Butler’s 1.6 million common shares would be worth about $6.4 million, but some industry analysts estimated that he may have received up to twice that amount for his controlling block. Naugles’ stock has risen steadily on the over-the-counter market recently from a low of $1.50 per share two weeks ago to $4 per share Tuesday.
Butler and executives of Collins Foods were unavailable for comment Tuesday beyond the formal announcement put out by Naugles.
With the purchase of Butler’s interest, Collins Foods, which already has a 4.9% interest in the company, emerges as Naugles single largest shareholder with total holdings of about 41%. At 64, Butler, who 30 years ago founded the Denny’s coffee shop chain and held the chief executive’s post at Naugles for 15 years, is expected to invest the proceeds in his latest restaurant project, Hershel’s Deli & Bakery, a Fullerton chain that has shown solid growth. Collins Foods also agreed to invest an unspecified sum in Hershel’s as part of the deal.
“(Butler’s) talents lend themselves to growth, not retrenchment,” said Wayne Withers, 50, who was named Naugles chairman and chief executive three months ago after Butler stepped down. Withers said Butler is expected to resign soon as a Naugles director.
Collins and Naugles have had a close relationship for years, Withers said. Collins has been Naugles’ largest supplier, and Naugles has been Collins’ largest commercial customer.
Some analysts believe that Collins Foods is primarily interested in the valuable real estate under the 219 company-owned restaurants in eight states--more than half of which are in California. Land costs in California have skyrocketed, restricting the expansion of many restaurant chains. Under this speculation, Collins, a giant franchisee of Kentucky Fried Chicken outlets, would test the Naugles concept for a short time, and, if losses continue to mount, eventually convert the stores to fried chicken stands.
Expects Big Changes
“It’s conceivable that Naugles could cease to be within the next year,” said Paul Laufer, analyst at Piper, Jaffray & Hopwood, a Minneapolis brokerage. “I’m sure that Collins bought into the company with the notion of making big changes and making them soon.”
Withers, who was aware of the negotiations between Butler and Collins, said he believes that Collins is interested in keeping the Naugles concept.
Still, under an about-face in corporate philosophy, Naugles is already making some major changes. Hurt by a reputation for high prices, it is already reducing prices virtually across the board. And, under a program to cut its own expenses, Naugles is shrinking its menu size and plans to close up to 10 unprofitable restaurants in the next year, Withers said. Rapid expansion into untested markets two years ago--which resulted in the closing of 33 stores in 1984--led to many of today’s headaches.
At the company’s annual meeting in Fullerton on Tuesday, attended by a record 200 shareholders, Withers announced a string of additional changes ranging from major actions, such as closing of some out-of-state stores that continue to lose money, to knocking 10 cents off the price of its soft drinks.
“Everything we’re doing is to make us more competitive,” Withers said.
Could Turn Around
Some of management’s proposed remedies have persuaded analysts that Naugles remains a viable concept. And many contend that Collins Foods, which also is the majority shareholder in the Sizzler steak house chain, could turn around Naugles without completely gutting the concept.
“Collins brings a lot to the party,” said Michael G. Mueller, analyst at Montgomery Securities in San Francisco. “They have strong management and know the California market well. They could quickly do things to stop Naugles from losing money.”
Donald Rice, analyst at Blunt, Ellis & Loewi, a Milwaukee brokerage house, said: “The purchase seems to make sense. Collins is a no-nonsense food operator and could help turn Naugles around.”
Collins Foods’ strength “has been in taking other peoples’ ideas and running with them,” said James L. Thayer, analyst at Bear, Stearns & Co. in New York.
The firm reported first-quarter net income of $136.4 million, up 18% from the last year, and revenue of $136.4 million, up 17%.
