Coco’s and Carrows to Go on the Block

The Irvine-based Coco’s and Carrows chains will be put up for sale so their parent company can focus on its more profitable Denny’s restaurants.

Advantica Restaurant Group Inc. on Thursday also reported deep losses for the fourth quarter and the year and said it is laying off 90 employees--about 20% of its work force--at its headquarters in Spartanburg, S.C.

Advantica bought Coco’s and Carrows in 1996 for $306 million. But the two chains, with a total of about 630 company-owned and franchised restaurants, many in California, have dragged down the company’s overall financial results.

With the help of investment banking firm Donaldson, Lufkin & Jenrette Securities Corp., Advantica said, it hopes to close the sales by the end of the year.

The company did not identify potential buyers or discuss sale prices, but restaurant industry experts predicted that the unprofitable chains will be a tough sell and that Advantica will probably have trouble recouping its initial investment. Advantica did spruce up some Coco’s and Carrows restaurants, but the costly upgrades were not completed.

“My sense is that it may be worth less than they paid for it simply because they haven’t been able to add value to it,” said Irvine restaurant consultant Randall Hiatt.

The move to sell Coco’s and Carrows reflects Advantica’s shift in strategy to concentrate on its more than 1,700 Denny’s diners, the nation’s largest chain of full-service restaurants.

Advantica, which recently sold the El Pollo Loco fast-food chain for $114 million, will be changing the company name to Denny’s as soon as the sales of the other two chains are complete.

“Denny’s is obviously our national restaurant chain, and it represents more than 75% of our revenue and 80% of our cash flow,” said Advantica spokeswoman Karen Randall.

Restaurant industry experts said sale plans come as no surprise, particularly since Advantica is committed to revamping the Denny’s chain to a ‘50s theme with a new name: Denny’s Diner.

“I think they have committed quite a bit of capital to doing the Denny’s Diners,” said Ronald Paul, a Chicago-based food industry consultant. “They don’t have the resources to energize the other chains.”

As part of its strategy, Advantica said, it will try to franchise about 300 of its 835 company-owned Denny’s restaurants.

The Coco’s and Carrows chains have been money-losers for some time. In fourth-quarter earnings released Thursday, Advantica said Coco’s same-store sales--a key measurement of industry growth--dropped 6.5%. Revenue fell 11% to $57.1 million. Carrows had a 2.9% decline in same-store sales, and its revenue declined 11% to $40.4 million.

In comparison, Denny’s experienced a slight increase in same-store sales, although its fourth-quarter revenue was down 3% to $289.6 million.

Coco’s has sought to attract more customers by freshening up its interior and exterior schemes and updating its name to Coco’s Cafe and Bakery. But the $325,000 make-overs have been costly, and Advantica has not progressed much in its proposed three-year, $48.7-million program. At the end of last year, the company owned 148 of the bakery-oriented coffee shops and franchised or licensed 337.

“The basic operation has been fairly capital-starved,” said consultant Hiatt. “They’ve made some attempts to do some remodeling but haven’t been able to afford the continuation of that project.”

Meanwhile, Carrows went through a less ambitious upgrade early last year with new outdoor signs and refurbished interiors. Advantica owns 117 of the chain’s units, and franchisees have 28 others.

For the fourth quarter, Advantica reported a loss of $233.8 million, much of that related to remaking some of its restaurants and a company reorganization in 1998. That compared with a loss of $48.5 million in the fourth quarter of 1998.

Advantica’s revenue in the latest quarter was $387.9 million, down 5% from $407.2 million a year earlier.

Advantica’s stock rose 6 cents Thursday to close at $1.69 per share in Nasdaq trading.

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Advantica Restaurant Group

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Coco’s Carrows Denny’s No. of restaurants* 485 145 1,784 Company-owned 148 117 835 Franchised or 337 28 949 licensed 1999 revenue $225.3 million $164 million $1.2 billion change from 1998 -13% -12% +1.5%

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*As of Dec. 29, 1999

Source: Advantica Restaurant Group