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November 17, 2004

Schlotzsky's proposes an auction of its assets

Schlotzsky's, the Austin-based sandwich franchisor that filed a chapter 11 case earlier this year, has proposed in its bankruptcy case that its assets be sold at an auction next week.

This proposal comes on the heels of a $88 million quarterly loss, large operating deficits as a debtor-in-possession, and tepid interest from reorganization investors. The auction sale will essentially liquidate the company, and almost certainly means that neither unsecured creditors or shareholders in the company will receive any dividend on their claims or equity interests.

Absent a "white knight" investor, restaurant reorganizations almost always fail. The margins are just too thin, and the competition so robust, for management to make enough headway from an operations standpoint in chapter 11 to persuade creditors to take a stake in a reorganized company that comes out of chapter 11 without substantial new capital.

Posted by Tom at November 17, 2004 6:46 AM |


What a shame. I remember when the company was one of the darlings of the bull market. However, while the sandwiches were always tasty they were rather pricey.

I haven't eaten at a Schlotzky's in a few years - I guess I wasn't the only one.

Now the only one left of this type of sandwich shop is Quizno's - another one that I don't frequent for the same reasons. Sell short?

Posted by: Craig at November 19, 2004 7:06 PM

Quizno's is no. 2 in the deli industry behind Subway's, and appears to be in decent shape. Given that they are well positioned to pick up Schlotzky's business in the Southwest, my sense is that Quizno's will be O.K. Most of Quizno's stores are franchised, and Schlotzky's company owned stores were one of the reasons that they got into financial trouble. They did not operate them well, they began to lose boatloads of money on them, and did not close them quick enough to stem the tide. In the end, the deli business was probably due for a shakeout, anyway, and Schlotzky's was the least well run of the three. Once Schlotzky's filed a chapter 11 case, I knew the end was near. Restaurant debtors are notoriously hard to reorganize for a variety of reasons -- damaged brand, limited exit financing alternatives, ferocious competition. Absent, a white knight investor to bring it out of chapter 11, Schlotzky's was "toast." ;^)

Posted by: Tom K. at November 19, 2004 8:34 PM

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