Collins Sees Quarterly Loss of Up to $7 Million
After nearly two decades of continued successes, Collins Foods International Inc. is suddenly facing a myriad of financial headaches and said Tuesday that it expects to post a fourth-quarter loss of $5 million to $7 million--among the worst quarterly results in its history.
A year ago, the Los Angeles-based restaurant company posted fourth-quarter net income of $4.4 million, primarily the results of its success with the company’s 256 Kentucky Fried Chicken franchises and nearly 500 Sizzler restaurants.
The company said Tuesday that it plans to close some of its 14 Josephina’s Restaurants and also reduce the stated value of its oil and gas investments.
Company officials also said they are still “real concerned” about a possible bankruptcy at Naugles Inc., the fast-food chain in which Collins purchased a majority interest last November.
As a result of these problems, Collins said it expects to take charges of $15 million to $19 million in the fourth quarter ended April 30.
Annual Earnings Expected to Drop
For the year, it expects to post a sharp drop in net income--down to between $7 million and $9 million, compared to net income of $18.3 million in fiscal 1985.
Although much of the restaurant industry has faced a downturn over the past nine months, the situation at Collins appears to be unique in its range of problems.
Collins Chairman James A. Collins is far more accustomed to the continued successes reaped by the company’s Kentucky Fried Chicken franchises and its company-owned and franchised Sizzler restaurants. Now, however, things are going sour in growth areas that are relatively new to the company.
“Collins always planned to deploy the money it made from Sizzler and Kentucky Fried Chicken into exciting new concepts,” said N. John Campbell, an analyst at Pemberton Houston Willoughby Inc., a Vancouver, Canada-based brokerage house. “But all of a sudden, its new ideas are not panning out.”
Range of Difficulties
Among its problems are:
- Josephina’s Restaurants, the Italian dinner house chain that Collins purchased for $3.5 million two years ago, has failed to catch on. Collins said it will sell off a handful of the units and include the remainder in a 50-50 joint venture managed by Val’s Ltd., a privately owned, Lincoln, Neb., operator of medium-price pasta restaurants.
- Naugles Inc., the Mexican-American fast-food chain based in Fullerton, posted a $26.6-million quarterly loss last week. Collins has a $9.8-million investment at risk in Naugles.
- In an attempt to diversify four years ago, Collins sold its Los Angeles headquarters building and used a portion of the profits to make oil and gas investments in Oklahoma and Texas. The company is reducing the stated value of those investments for the fourth quarter to reflect the decline in oil and gas prices.
Christopher Thomas, vice president of finance at Collins, said in an interview Tuesday that the situation at Naugles has been “much worse than we anticipated.” In late April, Naugles announced plans to close 70 restaurants.
Collins is trying to consolidate operations at Naugles and devise a marketing campaign for the chain. But Campbell, the analyst, warned that “trying to revive Naugles is like applying artificial respiration to someone who’s been floating dead in a pool for four hours.”
But analysts say that even more discouraging than the Naugles dilemma is the failure of the Josephina’s Restaurants operation. The chain, which operates mostly out of Southern California, was Collins’ recent attempt to diversify into the white-tablecloth segment of the market.
“We started out with the idea of a pizza and pasta restaurant, but it got away from us,” Thomas said. “Then we wound up not being able to deliver what the customers wanted.”
The planned joint venture operation will convert the restaurants into mid-price pizza restaurants. Customer checks average up to $14 per person at the current operations.
One relatively new area where Collins remains successful is at Ed Debevic’s Short Orders Deluxe, a 1950s-style diner chain. The company, which now operates three diners, plans to open a $1.8-million Ed Debevic’s in Torrance in June and a second Ed Debevic’s in Beverly Hills on La Cienega Boulevard in October.
Collins owns 60% of the current trio of Ed Debevic’s operations as part of a joint venture with Lettuce Entertain You Inc. of Chicago.
In the coming year, Collins also plans to convert 40 former Rustler Restaurants into Sizzler restaurants and open eight new Kentucky Fried Chicken franchises.
The company said it plans no new acquisitions in the next year.
“We have plenty to keep us busy,” Thomas said.
COLLINS FOODS INTERNATIONAL AT A GLANCE
The Los Angeles-based company is the biggest franchisee of Kentucky Fried Chicken outlets and owns 71% of Sizzler Restaurants International. In January, 1986, it raised its stake in Naugles Inc., a Mexican-American fast-food chain, to more than 50%. On Tuesday it announced it would close some of its 14 Josephina’s pasta and pizza restaurants and operate the rest in a joint venture with a Nebraska company.
9 months ended Jan. 31 Year ended April 30 Millions of dollars 1986 1985 1984 1983 1982 1981 Revenue 398.5 468 396 325 299 265 Net income 14.2 18.3 15.4 12.4 9.6 7.5
Assets (1985 fiscal year): $265 million Employees: 10,000 Common shares outstanding: 19.9 million 12-month stock price range: $11.50 -- $17.25 Tuesday’s close: $17.00, up 12 1/2 cents
