Brand mix changing as Avado works to stem losses

Nation's Restaurant News, May 15, 2000 by C. Dickinson Waters

MADISON, GA. -- With two of its concepts, Hops and McCormick & Schmick's, leading the way in same-store sales growth, financially struggling casual-dining operator Avado Brands Inc. said it would put its capital into those areas that give it the biggest bang for the buck.

"We see Hop's as the fastest growing of the four brands we have," explained Eric Booth, Avado's chief financial officer. "We expect their percentage of our total sales to increase eventually into the mid-to-high 30-percent range. We want to put our capital where we are getting the most return."

Despite the shift in the revenue mix, Avado said it plans to continue operating all four of its concepts -- Hops, McCormick & Schmick's, Don Pablo's and Canyon Cafe -- for the foreseeable future.

"Canyon Caf[acute{e}] is not for sale; Don Pablo's is not for sale," insisted Tom DuPree, Avado chairman and chief executive. He continued in rapid fire, stating, "McCormick & Schmick's is not for sale; Hops is not for sale. Avado Brands is not for sale."

However, recent store openings coupled with announced plans for new unit development are evidence that Avado intends to emphasize the positive momentum of the Hops and McCormick & Schmick's brands. In the last two fiscal quarters Avado opened seven Hops and three McCormick & Schmick's, while the development of its more mature brands -- Don Pablo's and Canyon Caf[acute{e}] -- has stalled completely. With 22 units on the development schedule for fiscal years 2000 and 2001, Hops accounts for 50 percent of the total number of Avado's anticipated 44 new restaurants. McCormick & Schmick's will see eight new openings over the same period, while Don Pablo's will grow by 10 units. Canyon Caf[acute{e}] is scheduled to add four restaurants during the two-year period.

Avado's most recent financial results demonstrated the shift underway at the company even as it continued to struggle with a faltering bottom line.

It posted a $537,000 loss for the quarter ended April 2 despite a 1.5 percent increase in systemwide same-store sales through the first quarter of fiscal 2000. The performance was off from its opening quarter a year ago when Avado reported profits of $5.95 million.

Same-store sales trends for the period revealed the company's increasing reliance on its Hops and McCormick & Schmick's concepts to drive revenues. Hops' same-store sales surged 9.7 percent in the first quarter compared to the year-ago period while McCormick & Schmick's enjoyed a 4.5-percent gain. Don Pablo's suffered a 2.2 percent dip in the quarter, while same-store sales declined 3.8 percent at Canyon Caf[acute{e}].

The same-store sales declines at Avado's two older brands were somewhat offset by the ongoing shift in the revenue mix that saw Hop's share of the company's total sales increase to 28 percent during the first quarter of 2000, from 22 percent in the year-ago first quarter. Don Pablo's share of Avado's revenues declined to 45 percent from 51 percent in the prior year.

Over the same period, McCormick & Schmick's sales grew to 21 percent of total revenues from 19 percent, while Canyon Caf[acute{e}]'s share of Avado's sales fell off slightly, to 6.2 percent of total sales from 8 percent.

Total revenue for the period increased 1.8 percent, to $167.02 million from $164.08 million in the same quarter a year ago.

DuPree also reiterated his confidence in the future of Avado's core Don Pablo's concept.

"We are in the later stages of a turnaround at Don Pablo's," DuPree said. "They have had solid numbers over the last six to nine months and our operational scores have been solid since the fall. They are running about 80 percent of where they want to be. And Don Pablo's management retention rates lead the company" [ldots] in the 65-to-70-percent range."

After a months-long exploration of strategic alternatives -- including a planned management proposal to take the company private -- Avado recently announced a decision to continue operating all four core brands under the current publicly-traded multiconcept umbrella. The company will take advantage of the strength of its balance sheet to arrange a $250 million sale-leaseback of some of its extensive real-estate holdings. The proceeds of the transaction will be used to pay down Avado's debt.

"We think the markets will respond positively to our new capital structure," DuPree said.

Avado owns and operates four decentralized brands, which at the end of the first quarter of 2000 included 16 Canyon Caf[acute{e}] Southwestern restaurants, 137 Don Pablo's Mexican Kitchens, 66 Hops Restaurant-Bar-Brewery units and 27 McCormick & Schmick's seafood dinner houses. In addition, Avado owns a 25 percent stake in 11 Harrigans Grill & Bar restaurants, and a 20 percent equity stake in Belgo Group PLC, a 16-unit restaurant company in the United Kingdom.