In recent weeks Doug Cavanaugh knew he was headed to bankruptcy court with the restaurant chain he founded, Newport Beach-based Ruby’s Diners Inc.
He also insists that after the Aug. 29 and Sept. 5 filings in Santa Ana, “it’s business as usual,” at the 32-store, full-service ‘40s era diners, the restaurant he named after mom Ruby.
Going forward, it will be a healthier, better-capitalized company, he said.
Between the debtor-in-possession financing of $4 million from new majority partner Steve Craig, and the cash flow from a largely successful stable of stores, Ruby’s will emerge a better business, with its still-popular brand intact, he believes.
There will be challenges.
His lawyer is well-known restructuring specialist Bill Lobel, who this year opened the Costa Mesa office of national firm of Pachulski Stang Ziehl & Jones.
His team needs secured creditors, vendors and other unsecured lenders to buy into the plan to emerge from Chapter 11.
In “this particular bankruptcy, everyone’s going to get paid,” he said.
The proceeding involves Ruby’s corporate—Ruby’s Diner Inc.—and four company-owned stores: Huntington Beach, Laguna Hills, Oceanside and Palm Springs.
The next big court date in the case is a creditor’s committee meeting before Judge Catherine Bauer, on Wednesday, Oct. 3, at 10 a.m.
40-Year Run
The Cavanaughs grew up in Baldwin Hills; about 20 miles from a Baldwin Park-bred restaurant chain that also sells nostalgia with food, In-N-Out Burger, now based in Irvine.
“I was a good friend of Rich Snyder … we were no competitors at all,” Cavanaugh said. “They deserve every bit of success they get.”
The Cavanaughs and jazz-loving son immigrated to Orange County in the ‘50s, dad a real estate developer and mechanical contractor. “Built the Mormon Temple on Santa Monica Boulevard,” Cavanaugh said.
He learned a lot from his dad, “consistency” for one. But the restaurant thing was learn as you go. His first effort—not a Ruby’s—was on the tony island of Nantucket.
“Fabulous two-year-run. I was just there, it’s as I left it; still very popular. I had the idea for Ruby’s before that.”
Newport City Manager Bob Gwynn urged Cavanaugh to come home; there was this boarded-up bait shack on Balboa Pier.
The Balboa Pier location was a “city-built building after the hurricane, [it was] ready to fall down. No idea what we were up against in those days. No sewer. No holding tank. It took our whole budget, amazing feat.” But he had the help of his engineer-minded dad.
The once boarded-up bait shack opened Dec, 7, 1982, as Ruby’s Diner, named after his mom, “truly a member of the greatest generation.”
“I grew up on jazz music, big band; it’s a 1940s thing, like the restaurant.”
A review by ABC7 restaurant critic, Elmer Dills, cited it as the “best burger in Southern California.” The review helped get things going and the signature milkshake helped sustain its growth for about 35 years, fairly unfettered to 40 stores, right up to the Great Recession.
“We had solid yearly financials,” Cavanaugh said. He and fellow Foothill Knight Ralph Kosmides owned a slight majority of stores, franchising the rest as LPs and LLCs.
A top store could easily clear $3 million and the musician was learning, too.
“We built a 10,000-square-foot restaurant in the National Bowling Stadium in Reno, but they only opened it for tournaments … we had no traffic … that was a challenge,” he recalled. “You have this many [restaurants] you’re going to have your failures.”
“We actually had a pretty recession-proof concept—for when people couldn’t afford to go somewhere on the higher end.”
Franchisee-turned-partner Craig can attest. He built his first Ruby’s over 20 years ago in Carlsbad, now has six and his store in Citadel Outlets in Commerce is the chain’s top grosser. “They’re all doing well today, at least $3 million,” Craig said. “Citadel does double that.”
“Doug and Ralph built a great brand, didn’t cut corners.”
“The recession [2007] wasn’t our issue, the first challenge was that litigation.” Cavanaugh said. There was a partner who wanted out “and we didn’t have the liquidity.”
“He had seven restaurants, all extremely successful with the exception of one. It was a good relationship until it wasn’t.”
Craig estimates the litigation and buyout cost Ruby’s about $5.5 million. “That’s a lot of working capital.”
And now Cavanaugh, in a tight-margin business, had an extra “nut” to meet. Opus Bank was one of the driving forces behind the Chapter 11 filing; there’s also at least $500,000 owed to area law firms, among the roster of unsecured creditors.
“I’ve got nothing but good things to say about [Opus Chief Executive] Steve Gordon and those guys.” Cavanaugh said.
White Knight
In times of crisis you find out who your friends are.
Cavanaugh at a minimum discovered a big believer in him and the brand when Newport Beach real estate developer and Ruby’s franchisee, Steve Craig, stepped up immediately.
“We just had a franchise meeting,” Craig said. “It was upbeat. We have a very loyal following. No one’s throwing in the towel.”
The owner of Craig Realty and OC 500 member is best-known for premium outlet malls like The Citadel and more recently the Outlets at San Clemente, home also to a Ruby’s he developed.
Now the developer will own 60% of the business—it’s the first time Cavanaugh and Kosmides will own less than half of the company.
But he’s getting a shrewd business partner.
“Citadel is now phenomenally successful, and it’s a Steve Craig franchise,” the founder said. “He [Craig] understands the business [and] is a good operator; he bought [locations] from us [in] Corona del Mar, Laguna Beach a couple of years ago.”
“I spend a lot of time in the stores,” Craig said. “Every week meeting customers, bussing tables and checking our parking lots. The chicken initiative—a move away from frozen—started with me. Four months later we have some of the best chicken around … and believe it or not it saves us money.”
Once Business, Full-Service Friendly
Cavanaugh, the 37-year restaurant owner, is adapting.
He’s currently opening a new prototype in North Hollywood, with a “fast casual model,” and a smaller footprint.
The store at Orange Station in Old Towne Orange has a full alcohol license and hosts bands.
Cavanaugh believes he’s long-embraced other trends, the healthy ones—first with skinny fries, then trans-fat burger, and now “I think we have the best comparable beef in the industry.”
