Shareholder Scoreboard
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Booby Prize Goes
To Boston Chicken
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By Louise Lee
Staff Reporter of The Wall Street Journal
In its television advertisements, Boston Chicken Inc. tempts viewers with shots
of juicy meats and mounds of mashed potatoes. But the Golden, Colo.,
restaurant chain has been serving up considerably less-appetizing fare to
shareholders.
Shares of the once-highflying operator of Boston Market outlets plummeted
82.1% in 1997, making the company the worst stock-market performer for the
year among the 1,000 companies on the Shareholder Scoreboard. A $1,000
investment made at the end of 1996 was valued at $179 at the end of last year.
Spooked by the company's falling sales and profit margins, investors have been
casting a critical eye on Boston Chicken's complicated organizational and
financial structure, which the company is planning to dismantle in coming
months. Analysts aren't optimistic about the company's prospects for 1998.
"This is not a healthy organization," says Wayne Daniels, an analyst at Schroder
Wertheim & Co. "They've got some intractable problems," including high food
costs and tough competition from fast-food chains.
Company executives declined repeated requests for an interview. But a
spokeswoman says the company expects to post 1998 systemwide earnings,
before interest, taxes, depreciation and amortization, of $75 million to $100
million, compared with negative cash flow of $50 million last year.
Why did investors fly the coop? The company's troubles started early in the
year, when it disclosed that weekly per-store sales, an important measure of
performance, were slipping from year-earlier levels. That news jolted investors,
who were accustomed to seeing Boston Chicken post sales increases in the
3%-to-6% range. The rate of the sales decline rose rapidly throughout the year,
starting with a 0.7% decline in the fiscal first quarter ended April 20, and
reaching a 20% drop from year-earlier levels to $18,904 a week per store in the
fiscal fourth quarter.
The sales decline was initially blamed on a promotional strategy that backfired.
In 1996, Boston Chicken started aggressively distributing coupons, which
customers used more than the company had intended. The company's
subsequent decision to scale back the promotion last year harmed sales as well,
as disgruntled customers who were used to clipping coupons headed for
competing burger-and-fries joints. A slew of new foods introduced last year,
including revamped "double-marinated" rotisserie chicken, pot pie and pasta
salad, failed to help turn sales around.
As a result, Boston Chicken's net income for much of the year fell below
analysts' expectations, contributing to the shares' steady decline. The stock
slide also led to a flurry of shareholder lawsuits alleging that the company's
accounting and disclosure practices are misleading, a claim the company says is
without merit. For the year ended Dec. 28, Boston Chicken reported a net loss
of $223.9 million, or $3.32 a share on a diluted basis, compared with net
income of $67 million, or 99 cents a diluted share and $1.07 a basic share, a
year earlier. Revenue, which consists largely of royalties, fees and interest
payments from the company's franchisees, rose 75% to $462.4 million.
In a shake-up last summer, Boston Chicken cut a quarter of its 450
headquarters employees and brought back co-founder Saad Nadhir as chief
executive, reassigning Scott Beck as co-chairman and president. Soon
afterward, the company all but quit opening stores, after a number of years of
expanding by several hundred locations annually. While halting expansion helped
the company focus on its existing locations, the strategy also slowed the flow
of royalties and interest payments to Boston Chicken from its 14 franchisees,
which operate most of the chain's nearly 1,200 stores. The company put the
brakes on other plans, too, such as an effort to speed up the order-taking
system in restaurants.
Also damaging to Boston Chicken's stock price was a harsh spotlight cast on its
complicated financial structure. One shareholder suit filed last summer, in
federal court in Denver, alleges that the structure hides losses within the
franchisees. A spokeswoman responds that the company has publicly stated for
several years that the franchisees were expected to post losses during their
start-up period.
About 27% of Boston Chicken's stores are owned by the company; the rest are
owned by the franchisees, which are closely held and don't disclose individual
results. Under the current system, the parent company makes secured
convertible loans to the franchisees, which build and operate stores. The
franchisees pay royalties and interest on the loans back to the parent.
Although the parent posted net income for the first three fiscal quarters of
1997, the franchisees as a whole are losing money from their restaurants,
requiring some to keep borrowing from the parent. That cycle made some
investors last year question Boston Chicken's function, arguing that the
company is more of a financing concern than a restaurant chain.
Boston Chicken in October said it was planning to buy out its franchisees and
bring all the restaurants under a single, company-owned roof. While the move
would help provide investors with a clearer picture of corporate performance, it
also is expected to result in net losses this year and in 1999, partly as a result of
depreciation charges. Analysts are projecting that Boston Chicken will post a
loss of as much as $1 a share for 1998.
The chain is projecting average weekly sales of about $19,000 to $20,000 per
store in 1998, about even with average sales of $19,871 in 1997. Spending on
ads is expected to be about $80 million, down from $120 million last year, and
expansion remains on hold at least for the first half of the year, the
spokeswoman says.
Even as it continues to struggle with its main business, Boston Chicken is
experimenting in another highly competitive area: prepackaged foods to go,
such as sandwiches and salads. So far, several restaurants in the Charlotte,
N.C., market have added that menu, boosting sales at those sites by more than
20%. The company is planning to expand the new to-go menu to other
markets.
But analysts aren't holding their breath. They say the logistics of packaging and
distributing fresh foods will be tough to pull off on a large scale. "There's no
question that Charlotte has provided a sense of optimism," says Mitchell
Pinheiro, an analyst at Janney Montgomery Scott Inc. "But a lot depends on
their ability to integrate what they're learning in Charlotte, and we're a long way
from that." |
