International Law

Is Sbarro Struggling?

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Sbarro was picked as one of Yahoo's 15 Companies that might not survive, and a there is this follow up in QSR about Sbarro.

"Under normal circumstances, Sbarro's heavy emphasis on mall locations makes perfect sense. "They're really well-situated to be in a mall," says Robert Welcher, president and CEO of Restaurant Consultants Inc.

Welcher says that Sbarro's cafeteria-style setup and portable entrees are designed to appeal to hungry shoppers--but that's assuming there are shoppers.

With foot traffic in retail centers down 12.9 percent in January and holiday shopping in 2008 down 15 percent from the previous year, Sbarro found itself named last week to Yahoo! Finance's list of "15 Companies That Might Not Survive 2009."

"It's not the pizza that's the problem," the list reads.

"Sbarro can't really boost revenue by adding a breakfast or late-night menu like other chains have done.

And competitors like Domino's and Pizza Hut have less debt and stronger cash flow, which could intensify pressure on Sbarro as key debt payments come due in 2009."

So why does Sbarro have more debt? Here is the discussion from Sbarro's 10q for the third quarter.

"Primarily in connection with our acquisition by MidOcean on January 31, 2007, we allocated a significant portion of the purchase price to intangible assets; goodwill of $212 million, tradename assets of $248 million and other indefinite lived intangibles of $26 million.

The carrying value of these assets is subject to annual impairment reviews based on our estimates of the future cash flows as of the last day of our fiscal year. Interim impairment tests are performed, if deemed necessary, due to significant events or changes in circumstances that could negatively impact the carrying values of these assets.

We have determined that there have been no such triggering events as of September 28, 2008 that would require us to perform an interim impairment test. The estimated future cash flows used in such impairment tests could be negatively impacted due to adverse macroeconomic factors such as reduced mall traffic

during the holiday shopping season, a decline in consumer spending, or adverse changes in other cash flow assumptions which could result in potential impairment of the carrying value of such assets."

I see, Sbarro decided that it was worth 1/2 Billion dollars, and then merged with a holding company, so that the new entity could go to the market and:

"In connection with the Merger, we issued $150.0 million of senior notes at 10.375% due 2015 ("Senior Notes"). The interest is payable on February 1 and August 1 of each year. And, in connection with the Merger, we entered into senior secured credit facilities. The senior secured credit facilities provide for loans of$208.0 million under a $183.0 million senior secured term loan facility and a $25.0 million senior secured revolving facility."

Oh, to borrow $350 million.  This is why high finance makes no sense to me: if Sbarro's intangible assets really made it a $500 million company, why couldn't they either issue shares or borrow directly against its perceived value?  Why go to the expense of incorporating a holding company?  Could it be that the "allocation of the purchase price" contained some fanciful projections?  I guess we will see.

Full post as published by Misleading Advertising Law on February 17, 2009 (boomark / email).