Ryan's Q2 Hit Hard

GREER, SC-Ryan’s Restaurant Group Inc. hit a roughpatch during the second quarter 2005. Revenues,same-store sales and customer counts were all down forthe restaurant operator, as were margins. During thequarter, Ryan’s also was hit with nearly $6 million incharges.

“Priority number one at this company is gettingsame-store sales up,” said Fred Grant, Ryan’s seniorvice president of finance, treasurer and secretary,during the chain’s earnings conference call. For thesecond quarter, same-store sales were down 4% andcustomer count was down 7%.

The chain posted sales of $215.5 million for thesecond quarter, a decrease for $216.5 for the sameperiod in 2004. Net earnings decreased 56% to $6.3million compared to $14.2 million for the secondquarter in 2004. Earnings per share dropped to 15cents from 33 cents in 2004.

“We think customers are still impacted by high energycosts, but we thought we would see some momentum,”Grant admitted. Margins were down more than 3%, primarily due to atleast a $5 million charge related to ongoing laborlitigation and an $838,000 charge for closing an underperforming restaurant. The chain has entered negotiations to settle the lawsuit, which was filed in 2002. Grant said that he expects the overall settlement to be more than $5 million.

Ryan’s also experienced higher wage costs during thequarter, as well as higher food costs due to anincrease in the value of pork and chicken. However,Grant said that he expects food costs to decrease 70to 80 basis points now that the Canadianimport of beef is no longer illegal. “That’s a win forus,” he noted.

Due to the chain’s poor second-quarter performance,Ryan’s wasn’t able to meet its required debt coverageof 2.25 times, putting it in default of the debt covenants,Grant said. In fact, he expects that the restaurantoperator won’t be able to meet the requirement for thenext several quarters. “Lenders have agreed to awaiver for the second quarter,” he said, adding thatRyan’s intends to work with its lenders in the thirdquarter to make some changes to the credit agreements.

Grant said that Ryan’s is taking steps to improve itsoverall performance. On the store front, the chainwill continue to implement “theme nights” such asseafood night and barbeque night where certain foodsare highlighted.

Moreover, the restaurateur is testing a buffetbreakfast on Saturdays and Sundays at 10 locationsacross the country. “Breakfast is an excellent use ofour assets,” Grant said. “We think there’s some goodpotential here.” In fact, the restaurants that aretesting the breakfast buffet have posted same-storesales increases ranging from 4% to 10%.

“We feel like we should see some improvement throughthe rest of the year,” Grant said. Looking forward,management has decided to cut capital expenditures for2006 by $20 million for a total expense of $62million. The cost cutting efforts are primarilyfocused on store expansion. Next year, Ryan’s willopen nine new stores including three relocationscompared to 15 new stores in 2005. Currently, Ryan’sowns and operates 346 restaurants.