Lowered interest rates buoy Shoney's profits

Nation's Restaurant News, Jan 13, 1992 by Bill Carlino

NASHVILLE, Tenn. -- Reapping the benefits of lower interest expenses and moderate growth from its restaurant and commissary divisions, Shoney's Inc. posted a 22-percent gain in net income, to $21.3 million, for the year ended Oct. 27.

The addition of new restaurants buoyed revenues by 7 percent, to $992.4 million, the diversifified foodservice operator said.

During the fourth quarter, profits for Shoney's Inc. spiraled upward by 38 percent, to $9.3 million, while company revenues hit $234 million, a 7-percent rise.

Shoney's explained that the decline in the prime rate lowered the interest rates on the company's loans. The rate on the company's recapitalization debt was slashed to about 8.7 percent from an average of 10.5 percent in fiscal 1990, lowering interest expenses by about 10 percent, to $64 million.

"I'd attribute their earnings to a combination of growth in operating income and a pretty significant paydown of the recap debt," said Mike Mueller, an analyst with Montgomery Securities in San Francisco.

According to Taylor Henry, Shoney's chief financial officer, the company paid down $55 million of its recap debt during the year. To date, it has repaid $295 million -- including $155 million in prepayments -- of the $585 million it secured for refinancing, leaving a balance of $290 million.

"I think our results clearly show that the recapitalization has worked," Henry stated. Shoney's assumed the recap plan in July 1988.

During the year the company also opened a total of 61 restaurants, 22 of which were company-owned units.

Shoney's, the company's 700-unit family restaurant chain, reported revenues of $471 million, an 8-percent year-over-year jump, while revenues at the 280-unit Lee's Famous Recipe Chicken rose 6 percent, to $30.6 million.

However, revenues at Captain D's, the chain's 650-unit fast-food seafood operation, remained flat, at $236.3 million.

Shoney's Inc. also operates a 20-unit string of specialty dinner houses bearing the names Pargo's and Fifth Quarter.

Despite the steady increases in divisional revenues, same-store sales at Lee's Famous Recipe and Shoney's rose a modest 2.8 percent and 1.1 percent, respectively, while Captain D's average unit sales slumped 1.3 percent.

Results for the Shoney's non-restaurant operations included a 21-percent climb for commissary revenues, to $138 million. The Nashville-based commissary services about 500 Shoney's restaurants.

Mike Rose Foods, Shoney's manufacturing arm, which produces such items as salad dressings, batter mixes and tartar sauces, dipped 2 percent, to $38.7 million.

"They've [Shoney's] been one of the more active companies this year," added Barry Stouffer, who follows Shoney's for the Nashville-based firm of J.C. Bradford & Co. "They've implemented a lot of internal programs that have helped their bottom line."

Over the past year Shoney's has sold its 50-plus lodging properties to one of its franchisees, streamlined its field supervisory staff and given the unit-level manager more decision-making power. The ratio of unit management to field staff will be about 1:3.1, from a previous mark of 1:2.2.

The company also appointed Charles Porter and Vearl Starnes to assume command of the stagnant Captain's D's division.

Several weeks ago Shoney's unveiled "Project 80-85," a systemwide program designed to raise the minimum score of "mystery shopper" visits to 80 percent from its current mid-70s level. The Shoney's division has also begun a systemwide rollout of "The Pie Shoppe," an in-store display case offering several varieties of fresh-baked pies.

Henry added that Shoney's would add 29 company-owed units in 1992, while company franchisees are expected to open about 100 stores. He also predicted that the first period earnings for the company's 1992 first quarter would increase 33 percent.