Industry News | March 15, 2006

Back Yard Shakeup Could Signal Rocky Road, Muddy Future

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Observers say recent leadership changes at Back Yard Burgers, Inc., could signal that the Memphis-based chain is in for some challenging times, the Memphis Business Journal reports.

Late last month the company announced that president and COO Michael Myers had resigned his position effective immediately. It also reported that it would separate the positions of chairman and CEO, jobs currently held by Back Yard founder Lattimore Michael, and will begin a search for a new president.

Having the company founder like Michael, 63, step aside from day-to-day operations is sometimes seen as a positive move by shareholders, who may feel those who birthed the baby see only the beauty of their creation and not the warts.

In the meantime, Joseph Weiss, president and COO from 1993-1999 and a significant shareholder and franchisee, was appointed interim COO.

To take over as president, Weiss resigned from the audit committee of the company's board of directors, which resulted in Back Yard Burgers (Nasdaq: BYBI) falling out of compliance with Nasdaq Stock Market rules. The company received a warning that the stock could be delisted if it doesn't take steps to come back into compliance.

Bringing back Weiss signals a step backward for the company, says Craig T. Weichmann, a former restaurant analyst with Morgan Keegan & Co.

"I see that as a setback for the company in that Joe Weiss' operating style puts the company back to its roots, which, in this case, weren't that strong," Weichmann says.

He's followed Back Yard since it went public in 1993 and his new company, Dallas-based Weichmann & Associates, is a boutique investment firm focused on the restaurant industry.

Back Yard Burgers is still a "good regional brand that had been gaining good growth in the franchise community," Weichmann says.

As of September 2005 the company operated 171 stores, including 130 franchised locations, up from 138 units in 2004 including 96 franchised locations.

Back Yard Burgers stock has traded in a 52-week range of $4.58-$6.75.

In its 8-K filing with the Securities and Exchange Commission this week, Back Yard Burgers said it has a year to get back into compliance with NASDAQ, or by the next annual shareholder meeting, whichever comes first.

The filing stated that the company "intends to elect an additional independent director to serve on its Board of Directors and Audit Committee within the applicable cure period."

Of all the changes the company has encountered in the past month, one of the most significant is the surprise resignation of Myers. A once-touted miracle worker, Myers was widely credited with helping turn around stagnant sales at BYB in his first three years with 12 consecutive quarters of gains in net income.

It was under his watch the company introduced Black Angus beef, beefed up marketing and negotiated a 10-unit licensing deal to co-brand Back Yard Burgers with YUM! Brands, which includes such chains as KFC, Pizza Hut and Taco Bell. The deal didn't work out, but it got Back Yard Burgers noticed.

"Most of the major changes in the company have been a direct result of Mike Myers," Weichmann says.

Myers joined the company in 1999 as COO, but the former Whataburger executive quickly caught the eye of Michael, a former grocery store owner who started Back Yard Burgers in Cleveland, Miss., in 1987.

Michael did not respond to numerous requests for comment on this story.

"I brought him on as COO, but when I saw his talent, I recommended to the board that we promote him to president," Michael said in a 2003 interview for the industry trade publication Chain Leader.

But that was three years ago and times have changed dramatically in the fiercely competitive quick-serve segment of the restaurant industry, Weichmann says.

"It's a highly competitive space," Weichmann says. "It's hard to differentiate yourself."

One of BYB's primary marketing tools, Black Angus beef, is now sold by several competitors.

"You can't rest on your laurels," Weichmann says. "That may have worked years ago but you have to go to the next level and the next and the next."

Some Back Yard stores have tested breakfast, but the chain is late in the game with that, and there is a limited test of playgrounds, which would get BYB into the family market which it has avoided and where, again, there's much competition, Weichmann says.

Where Back Yard has specifically competed, in the smaller "fast-casual" restaurant segment with the likes of Panera Bread, Baja Fresh and Starbucks, the competition has grown but not as dramatically compared to the quick-serve segment, says Sherri Daye Scott, editor of QSR magazine, another industry trade journal.

"If they are having problems I am surprised," Scott says of Back Yard.

And although Back Yard has struggled with its bottom line -- it posted a net loss of $44,000 in 2005 compared to net income of $1.26 million in 2004 -- times are good in the restaurant business, Scott says.

Sales in the quick-serve segment in 2004, the latest for which figures are available, were up 5.9% year-over-year to $128.2 billion, according to QSR, which tracks the top 50 companies in the industry.

The National Restaurant Association expects sales in 2006 to increase 5.1% to $511 billion, with $142 billion of that in the quick-serve segment where many of Back Yard's competitors reside.

If Back Yard will get a piece of that growth isn't clear, says Weichmann, although despite all the changes, it does have one constant.

"To their credit," Weichmann says, "they serve a good-tasting product."

Source: Memphis Business Journal - March 10, 2006.