Ruby's Surf City Diner sign.

flickr: Steve Harris

Doug Cavanaugh co-founded Ruby’s in 1982.

Ruby’s Diner Files for Bankruptcy Protection

The California-based concept has an agreement in place to 'significantly reduce its debt.'

Ruby’s Diner, a 1950s-themed concept based in Newport Beach, California, filed for federal bankruptcy protection on September 5 in Santa Ana. Ruby’s Diner, Inc., the operator and franchisor of the 32-unit chain, of which four are company run, said it has also entered into a plan support agreement with Steven L. Craig. Craig, a mall developer, owns multiple “profitable Ruby’s franchises,” the company said, and will lend Ruby’s up to $2 million to keep it operating in bankruptcy, if approved by the U.S. Bankruptcy Court. He would then invest another $1 million when the company emerges from bankruptcy. The plan also involves Craig becoming Ruby’s chairman and owner of 60 percent of the brand. The 36-year-old concept’s co-founders, Douglas Cavanaugh and Ralph Kosmides, would own the remaining shares.

Cavanaugh said in a statement that Ruby’s restaurants “are open and customers can continue to rely on Ruby’s for great food and excellent customer service.”

“We will continue to sell and honor all customer gift cards and our Ruby's Rewards program remains in place," he added.

Ruby’s said the agreement with Craig would significantly reduce its debt and strengthen its balance sheet, allowing the company to leverage “a new strategic business plan leading to increased store sales and franchise growth.”

Ruby’s hopes to emerge from bankruptcy in 120–180 days, and doesn’t expect the process to impact employees, restaurants, or franchisees. The locations in Huntington Beach, Laguna Hills, Oceanside, and Palm Springs are included in the proceedings. Franchises and the remaining 28 Ruby’s stores are not.

Cavanaugh said Ruby’s has suffered some financial setbacks as sit-down concepts have grappled with additional challenges. “For the most part, we have been successful. We believe the agreement, once implemented, will significantly improve our capital structure and provide Ruby's the best opportunity for long-term success,” he said.

One main issue for the chain took place in 2012 when Ruby’s borrowed money to buy out some of its partners in a long-running dispute. According to the filing, Craig and Opus Bank helped finance the buyouts. Opus Bank wanted to have a third party run the company. Ruby’s owes Opus $2.1 million and missed its June 30 payment to the company. Ruby’s struggled with sales related to the conversion of some stores to a fast-casual model as well.

Additionally, the brand is dealing with a gift card issue, with $4 million worth of outstanding Ruby’s cards sold through Costco. Ruby’s motion to honor the cards for diners was approved by the court. Cavanaugh said in the filing that franchisees didn’t assume part of the discounted price and Ruby’s had to reimburse operators at an unfavorable rate.

Ruby’s restructured its loans in 2016 and refranchised three locations for $2.5 million, which came under its sales projections. Weather issues in the first half of 2017 also “several degraded sales volumes,” and commodity hikes, as well as rising minimum wage pressures, increased costs to sink year-over-year results. Cavanaugh said the company rebounded in the second half of 2017 but wasn’t able to generate enough cash flow to meet its “ongoing obligations.”

Despite the filing, Ruby’s said its same-store sales are projected to increase this year and the company is in the process of developing an international franchising model. It has also built a smaller store franchise called “Ruby’s Shake Shop” intended to capitalize on the to-go trend. The store has a reduced menu (20 items) and opened August in North Hollywood, California.