Milling & Baking News - April 6, 2004 - 24

N E W S F E AT U R E
Losses deepen in fourth
quarter, all of 2003
AUSTIN, TEXAS - Revenue fell and
losses widened at Schlotzsky's, Inc. during the fourth quarter and all of 2003, the
company said last week.
During the quarter, revenue dipped
marginally to $14.2 million, down $67,972
from the previous year as same-store sales
at domestic franchised restaurants fell
8.8%.
The company's net loss totaled $5.64
million, compared with a loss of $1.08 million in the previous year's quarter.
Full-year results revealed a net loss of
$11.7 million, compared with a loss of
just $199,048 the prior year. The year's
results included charges of $2.9 million for
reserves against loans to franchisees and
licensees in prior years.
Revenue during the year dropped 7%
to $56.2 million from $60.5 million in 2002
as the chain closed 95 domestic franchised
restaurants. Same-store sales for the entire
year plunged 10.9%. MBN

a three-phase plan to revamp its almost
600 restaurants, a strategy that includes restaged menus, new bakery offerings, refurbished restaurant interiors and the addition
of 100 to 200 new units across the country.
The plan, not yet fully embraced by
some franchisees, isn't quite as elaborate
as the chain's 1991 concept change. Then,
Schlotzsky's doubled the number of its
sandwiches, placed pizza, soup and salad
on its menu and slapped the word "Deli"
on the end of its name.
Still, once completed, the latest changes
will make the typical Schlotzsky's restaurant a far cry from the "hole in the wall"
image that Mr. Wooley admits marked the
chain's youth in the 1970s.
"We're working on the next evolution of
the concept," he said. "This is another 10- or
12-year cycle of reinventing yourself. ... It's
just what you have to do in the retail business to compete."

mid-1990s, followed by a wave of new quickserve restaurants featuring sandwiches instead of hamburgers and french fries.
Company research shows that from 2000
through 2003, the top 25 U.S. sandwich
chains, representing about $8 billion to $9
billion in annual sales, added 7,600 new
restaurant units.
By comparison, the top 25 restaurant
chains overall, accounting for about 10
times that much revenue, added only half
as many units.
"The sandwich sector has become vastly
more competitive over the last few years,"
Mr. Wooley said, "as everybody has seen
the sort of obvious trend that eating habits
are changing and people are much more
interested in health and nutrition.
"It's not just a few people on a diet. It's a
very broad, good thing in terms of people
thinking about how to eat."
Except that not enough of them are eating at Schlotzsky's. The chain's same-store
sales, which grew throughout the 1990s,
started declining after September 11 and
haven't recovered.
In the nine-month period ended Sept. 30,
2003, Schlotzsky's same-store sales - a key
health indicator in the restaurant industry
- plunged 11.3% after falling 5.7% in the
first nine months of the previous year. Perunit weekly sales in the period fell 8.3%,
averaging $10,579, about a third of what the
average Panera realizes in a week's time.
Those nine months yielded a companywide loss of $6.1 million compared with
a gain of $876,446, or 10c per share, in the
previous year. As sales decreased, operating
expenses rose 12%.
Mr. Wooley acknowledged that the poor
results of the past few years forced the company into a liquidity crunch.
The company's long-term debt as of Sept.
30 declined 12%, and operating cash flow
in the nine-month period increased to $5.9

million from $3.8 million the prior year.
Still, total debt for the company remained
$50.4 million, only about $10 million less
than its total revenue for all of 2002.
In the meantime, the chain's restaurant
count dipped to 561 at the end of 2003, down
from 711 just three years earlier. Mr. Wooley
calls one or two-unit owner/operators the
"bread and butter" of the Schlotzsky's system; most of the closings occurred by operators who owned multiple stores.
"The multi-unit people that didn't have
great depth of capital and great depth of
experience when times got tough, we lost
some of those guys," he said.
Mr. Wooley and his brother, Jeffrey,
bought Schlotzsky's in 1981 and in recent
years have loaned hundreds of thousands
of dollars to the company to help it remain
viable. Faced with troubling credit ratios,
the company recently succeeded in refinancing some of its debt, and John Wooley
said the debt restructuring should give
management plenty of time to implement
changes needed to boost sales.
"It gives us time to go and put together a
proper 10-year piece of debt," he said, noting that the company moved $12.5 million
in payments forward by at least 18 months.
"This thing had us really in a difficult situation. By providing more collateral, we improved that significantly."
But Mr. Wooley knows that if sales don't
improve, the debt crunch eventually will
resurface. That, he said, is what makes the
reimaging concept so important.
Schlotzsky's history, Mr. Wooley said, has
consisted of "never-ending" debate among
franchisees and corporate headquarters regarding how best to position the chain's products and its facilities. Getting all the franchisees
on board with the new concept remains key.
"The challenge is getting existing franchisees to really focus on their stores and being
on premise," he said, "and in picking new

Rocky road
Competing has gotten much tougher for
Schlotzsky's since its Austin debut in 1971,
when it offered a single menu item, a sandwich called "The Original."
The company experienced steady growth
through the 1970s and 1980s. But that
changed after Panera's emergence in the

Schlotzsky's new pastry program already accounts for 30% of total sales at its leading
Austin outlet.

24 / Milling & Baking News, April 6, 2004

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