Sales Still Plunging At Quiznos

By Jonathan Maze

Avenue Capital took over the near-bankrupt Quiznos late in 2011. The hedge fund quickly pumped millions into marketing the chain, brought in a load of new talent and began working closely with franchisees. But so far, none of those efforts have yet been able to correct its most glaring problem: plunging sales.

Now there’s this: the lending news service DebtWire said that the Denver-based sub chain has hired the law firm Akin Gump to help fix its finances. We’d heard similar things from our sources.

In a statement, Quiznos CEO Stuart Mathis acknowledged hiring the law firm, and though he said that he couldn’t give specifics on the reasons, “it is not related to recently published information.”

Avenue Capital took over Quiznos in a debt-for-equity swap, eliminating a third of the chain’s massive debt, and promising to pump $150 million into the company, including $75 million in marketing. The company brought in former Friendly’s CEO Harsha Agadi to serve on its board, appointed former Mail Boxes Etc. president Mathis to be CEO, plus added other executives.

Less than two years later, however, sales are still falling. According to the company’s most recent FDD, unit volumes fell 12 percent last year, to $291,000. That’s gross sales, meaning it doesn’t include discounts. Things haven’t improved this year, either: according to sources, same-store sales fell in the double digits in the first half of this year. The DebtWire report said that same-store sales fell 13.5 percent in the first quarter, 5.8 percent in April and 11 percent in May. In short: those unit volumes aren’t reversing course this year.

When volumes decline, stores close, and that has happened in abundance in recent years. According to that FDD, the number of U.S. locations fell by more than 400 last year, to 1,935 domestic units. Roughly 400 of those, apparently, are in gas stations and convenience stores.

Let’s put it another way: At the beginning of 2009, the chain had 4,378 locations. That means there are more Quiznos outlets that have closed in the past five years than are currently open. By all indications, the rate of closures has continued.

All of this is affecting Quiznos’ finances. The franchisor’s revenue has fallen from $95.7 million in 2010 to $56.8 million last year. Net income dropped from $34.4 million to $24.4 million over that same period.

But Quiznos’ main revenue source comes from the sale of food and goods to operators. American Food Distributors, Quiznos’ distribution arm, saw its sales of food to operators drop 16 percent last year, to $188.5 million. Rebates from food and beverage makers dropped another 25 percent.

This is a real problem for Quiznos—according to DebtWire, the chain’s debt-to-earnings ratio is now essentially back to where it was before Avenue took over and reduced the chain’s debt to around $600 million.

Quiznos has lowered costs recently, and it has been rebating some royalties to franchisees that meet certain standards. Last year, AFD returned $19.9 million in rebates to franchisees, according to the FDD. The company also has incentives in place to encourage existing franchisees to reopen closed units. But the only way the chain will be able to effectively stem the unit count slide would be to stop the sales bleeding. That won’t be an easy proposition, given the state of the economy, and the competitiveness in the sandwich sector.

In his statement, Mathis did say the company is working on that. He said the chain is about to complete a six-month test that is focused on the company’s quality and premium positioning—and is designed to reverse the chain’s sales slide. The test, he said, included a revised menu and what he called an “improved restaurant experience.” “We’re encouraged by the results of that test,” he said in a statement, “and look forward to rolling it out nationally.”