Watch List: Distressed Franchisors Struggling with Insolvency

Below is a list of franchisors that have either stated that they are considering filing for bankruptcy or that we estimate are in such a weakened position that we are paying especial attention to their solvency. To include a company on the Watchlist, please include a link to a press release that indicates their weakened state or a statement by the company that they are considering bankruptcy.

1. Blockbuster; about 60,000 employees; stock down 57%. Newman writes, "The video-rental chain has burned cash while trying to figure out how to maximize fees without alienating customers. Its operating income has started to improve just as consumers are cutting back, even on movies. Video stores in general are under pressure as they compete with cable and Internet operators offering the same titles. A key test of Blockbuster’s viability will come when two credit lines expire in August. One possible outcome, according to Valueline, is that investors take the company private and then go public again when market conditions are better."

2. COSI - This chain expanded rapidly for revenue despite sub-par profitability. in troubled economic times, it is now paying the price. Ann Northrop, CFA, reports on March 12, 2009, "Years of operating losses have drained Cosi's cash reserves, casting substantial doubt on its ability to survive the worst recession in decades. The bakery-café chain has generated negative free cash flow every year since going public in 2002, leaving few resources to fall back on."

3. Cuppy's Coffee / Java Jo'z - a distressed, young start-up franchise system of 200 or fewer units faced with controversy, shuffling leadership and companies, disputes over non-returned franchise buyer deposits, the lay off of most of the head office staff, a buyout, a move of the head office from Florida to Alabama, a coffee war that the start-up franchisor heads into, lawsuits for lack of payments, a consumer-base pulling away from premium priced coffee, a brand website that has been pulled down. Need we say more?

4. Chrysler. (Privately owned; about 55,000 employees). Chief business correspondent for US News, Rick Newman, writes in Seeking Alpha, a financial news site, "It’s never a good sign when management insists the company is not going out of business," which is what CEO Bob Nardelli has been doing in February 2009. He adds, "The company is quickly burning through $4 billion in government bailout money, and with car sales down 40 percent from recent peaks, Chrysler may be the weakling that can’t cut it in tough times."

5. Dollar Thrifty Automotive Group; about 7,000 employees; stock down 95%).  Newman writes, "Dollar Thrifty is also closely tied to Chrysler, which supplies 80 percent of its fleet. Moody’s predicts that if Chrysler declares Chapter 11, Dollar Thrifty would suffer deeply as well."

6. El Pollo Loco; Moody's Investors Service published a list of its riskiest 15 percent of all companies it tracks called the Bottom Rung on March 9, 2009 that had El Pollo Loco among those it considers likely to default on its loans. That doesn't necessarily mean bankruptcy for the first default but it doesn't look good.

7. Jamba Juice - Like COSI, Jamba is also suffereing the effects of uncontrolled growth that has led to under-performing franchisees being opened. On March 12, Ann Northrop, CFA, observes, "Although management has formulated a turnaround plan that includes innovating new menu offerings, it would take a long time for new day-parts, such as breakfast or lunch, to become meaningful contributors... and beverage sales alone cannot support the stores. A costly $25 million cash infusion should buy it some time, but not much, as consumers cut spending and cash flow falls."

8. Krispy Kreme; about 4,000 employees; stock down 50%. Newsman again comments, "The donuts might be good, but Krispy Kreme overestimated Americans' appetite - and that's saying something. This chain overexpanded during the donut heyday of the 1990s - taking on a lot of debt - and now requires high volumes to meet expenses and interest payments. The company has cut costs and closed underperforming stores, but still hasn't earned an operating profit in three years. And now that consumers are cutting back on everything, such improvements may fail to offset top-line declines, leading Krispy Kreme to seek some kind of relief from lenders over the next year." The good news for the firm is that in March 2009, the SEC let Krispy Kreme off the hook telling them to not cook the books again.

9. Mrs. Fields Brands Inc.- Mrs. Fields brands, franchisor to TCBY and Mrs. Fields Cookies has been losing money for years. The firm made arrangements to forgive large parts of their bond payment to get them out of a couple of monthis in bankruptcy court, but the company is weak heading into tough economic times in 2009.

10. NexCen Brands Inc. - NexCen bit off more than it could chew when it acquired a mountain of debt in the beginning of 2008 to purchase yummy The Great American Cookie brand from Mrs. Fields - along with the earlier purchase of Pretzel Time and Pretzelmaker. Out went the old CEO Robert W. D'Loren and in came Kenneth Hall, who managed the Herculean feat of lowering debt interest rates, selling brands for cash, lowering the conglomerate's massive debt obligations and merging franchise chains Pretzel Time and Pretzelmaker. The firm did this without the help of any bankruptcy court! Hats off to Mr. Hall. But like Mrs. Fields, the franchise conglomerate is weak as the economy heads into tough times. On Feb 13, 2009, NexCen Brands stocks were delisted by NASDAQ.

11. Pizzeria Uno - With some 76 franchised pizzarias and 118 company-owned units, the franchisor announced that it is likely to miss its bond payment on August 14, 2008. The private equity-backed company anticipates a 30-day grace period before needing to file for bankruptcy protection.

12. Westaff - Westaff staffing services is working hard to cut costs and negotiate with its lenders to forgive its debts. Its bank has said they will temporarily but it may not be so charitable in the long term.

To readers and members: Please look at our list of franchisors. The community needs your help. If you see a firm that has announced it is looking into bankruptcy or unable to pay creditors, please add their name in your comment along with a link to a credible site that reports it. Otherwise, it will not be added.

Comments that speculate or quote rumors will be moved into the appropriate forum discussion area.