Ameerex Corporation

What they do

The company operates two casual dining chains: Black-eyed Pea and Denny's. As of June 27, 2001, it operated 92 Black-eyed Pea restaurants in nine states, with 80 in Texas, Arizona, and Oklahoma, and 70 Denny's restaurants in 14 states, with 40 in Texas and Florida. The company also generates a portion of sales from carry-out, which was about 12.8% of restaurant sales in the first half of 2001. The company sold 23 Denny's restaurants in January 2001 and is focused on improving Black-eyed Pea performance.

Revenue drivers

• Black-eyed Pea restaurants — The company operated 92 Black-eyed Pea restaurants as of June 27, 2001. In the second quarter of 2001, Black-eyed Pea sales declined $1.1 million year-over-year, with same-store sales down 5.0%.
• Denny's restaurants — The company operated 70 Denny's restaurants as of June 27, 2001. In the second quarter of 2001, Denny's sales decreased $7.3 million due to the sale of 23 restaurants in January 2001, though same-store sales increased 0.2% for the first half.
• Carry-out sales — Carry-out accounted for approximately 12.8% of restaurant sales in the first 26 weeks of 2001 and 12.9% in the prior-year period.

Recent performance

For the second quarter ended June 27, 2001, total restaurant sales decreased 16.3% to $46.5 million, driven by the sale of 23 Denny's restaurants and a 5.0% same-store sales decline at Black-eyed Pea. Restaurant operating loss was (3.7)% of sales compared to income of 10.4% in the prior-year quarter. Payroll costs rose to 38.4% of sales from 34.6%, and other operating expenses increased to 34.6% from 26.4%, due to lower sales volumes and a $1.7 million increase in advertising expense. Net loss was 19.5% of sales versus a net loss of 0.7% in the second quarter of 2000.

Strategy

The company re-instituted television advertising for Black-eyed Pea in March 2001 after eliminating it in 2000, and is focused on improving customer service and operations. It sold 23 Denny's restaurants in January 2001 to reduce debt and focus on Black-eyed Pea. Management has stated that the decrease in comparable store sales was primarily due to the cessation of television advertising, which has now been reversed. The company also closed underperforming Denny's restaurants, which improved remaining store performance.

Risks

• Same-store sales decline — Black-eyed Pea comparable store sales fell 8.1% in the first half of 2001 and 5.0% in the second quarter, pressuring profitability.
• Cost inflation — Payroll and other operating expenses rose sharply as a percentage of sales due to higher wages, worker's compensation, utilities, and advertising costs.
• Liquidity and debt — The company reported a net loss and negative operating income, with interest expense at 7.0% of sales in the second quarter, indicating potential cash flow challenges.
• Reliance on key markets — The company's Black-eyed Pea restaurants are heavily concentrated in Texas, Arizona, and Oklahoma, making it vulnerable to regional economic or weather events.

Outlook

Management re-instituted television advertising in March 2001 and expects it to help improve sales trends, though the impact may take time. The company continues to focus on improving operations at both Black-eyed Pea and Denny's. No specific financial guidance is provided in the excerpts.