A year ago, Giggles N’ Hugs Inc. was getting ready to take on Chuck E. Cheese’s and other kid-friendly competitors. Despite only one location, the Century City restaurant operator had ambitious plans to go public and expand into malls nationwide.
But the maneuver to go public was a flop. The thinly traded stock saw a brief spike but has since plunged 80 percent. And the company only raised a fraction of the capital it needed.
Now, Giggles N’ Hugs has been forced to delay its expansion and is searching for new funding. And with corporate and legal costs far far above normal for an operation with just one outlet, it’s losing more money than it can make selling flaxseed chicken nuggets and hosting birthday parties.
“If I had to do it all over again, I probably would not have done the public listing at such an early stage,” acknowledged owner Joey Parsi. “We’re all wrong every once in a while.”
It’s something of a reality check from the lofty hype that surrounded Giggles N’ Hugs and its Westfield Century City mall location last year. A kind of upscale Chuck E. Cheese’s with organic food instead of junk food and play areas instead of video games, the restaurant was a hit with celebrities and Westside parents who dropped their kids off while shopping.
The buzz led to television appearances and an article in Bloomberg Businessweek. The restaurant was courted by mall operators eager to attract affluent families, and it was offered discounts on rent and money for construction costs.
Parsi said his ambitions haven’t changed. Despite pushing back the timetable on expansion, he is still moving to open a location in Westfield Topanga, another mall owned by Century City mall operator Westfield Group. He also is in talks with General Growth Properties Inc. to open one in the Glendale Galleria mall and with Macerich Co. to open a location in Montecito. In addition, the company recently added high-profile board members and announced a partnership to branch out into merchandising.
But Jerry Prendergast, principal of Culver City restaurant consultancy Prendergast & Associates, said the business got ahead of itself, and that it’s still an unproven concept.
“These guys, they opened one place and are now going to the public market saying, ‘We want your money because we’re gonna open 10’ – but they haven’t proven that the first one worked,” he said. “You’ve got to walk before you run.”
Going public
Parsi, a former investment banker and stock broker, plunked down $700,000 to found Giggles N’ Hugs with his wife, Dorsa, in 2007. The first restaurant was in Brentwood, which closed last year and moved to Century City.
It went public through a reverse merger on the OTC Bulletin Board in December. In initial trading, the shares rose above $5, giving the company a market cap of about $120 million in January. However, share prices steadily fell and closed at $1 on Oct. 3. The market cap is down to about $23 million.
In addition, Parsi hoped to raise $10 million from investors early this year, but got only $2.2 million. Much of that only paid off the legal, auditing and consulting costs associated with going public.
Giggles N’ Hugs wanted more money to pay for immediate expansion, including opening restaurants in Westfield Topanga and Valencia by early this year and signing leases for another half-dozen or so spaces by end of this year.
Parsi shelved the Valencia opening, and the Westfield Topanga location is expected to open about a year later. Plans for the other half-dozen spaces in Southern California also are on hold as the company looks for more capital. To that end, Parsi plans to complete a private placement in two months and hopes to raise up to $4 million. But that could be tough given the company’s financial performance.
Parsi told the Business Journal last year that the restaurant was doing sales of about $120,000 a month and had profit margins close to 25 percent, much higher than most restaurants.
But public filings reveal that revenue averaged $104,000 a month in the most recent quarter and $93,000 a month last year. Parsi said that the $120,000 figure was a peak that he hoped to sustain but couldn’t. Meanwhile, the company is losing money, reporting net losses of $271,000 in the most recent quarter and $1.1 million last year.
Parsi attributed the losses to high corporate and professional costs related to the planned expansion, arguing the restaurant itself was profitable, though he declined to give exact figures. The company reported an operating profit of 16.5 percent in the most recent quarter when not accounting for executive compensation, and professional, consulting and administrative costs. Parsi said he expects revenues to continue to rise and hit profitability in 2014.
“We just launched a year ago and it takes time for people to know we’re here,” he said. “We’re a startup. We’re going to continue to incur losses for the foreseeable future just like any company.”
Still dreaming big
Despite the setbacks, Parsi is still dreaming big. Once two or three restaurants are open, he thinks he can land institutional investors. And he still envisions more than 100 locations around the country, with designs to be the next Gymboree Corp., which branched off from operating play centers for children into an apparel company.
Indeed, Giggles N’ Hugs added Joan Barnes, Gymboree’s co-founder and former chief executive, to its board in August, along with Philip Gay, former chief executive of Daily Grill operator Grill Concepts Inc., and Glenn Golenberg, founder and director of merchant banking firm Golenberg & Co.
It also announced a partnership with Toronto brand management company Licensing Shop Inc. to explore merchandising options.
“I’m excited about the future of the company and the pieces in place,” Parsi said.
Mall operators also continue to support the concept.
“Creating an appealing merchandise mix and environment for families to be together, shop together, be entertained together and dine together are primary objectives for Westfield,” Westfield Group spokeswoman Katy Dickey said in a statement. “Giggles N’ Hugs is a popular destination, rounding out the kids and family offer very well.”
But Prendergast said the business concept is problematic. Sales are too sluggish to make up for the costs of having a large space to accommodate play areas, even with rent breaks from mall owners. In the restaurant industry, sales of $100,000 a month are not nearly enough to stay open in a mall.
He also pointed to what he believed were several missteps, including going public and paying considerable corporate costs with only one location.
“The lesson is that the old-fashioned way of doing it still works,” he said. “Open a unit, prove it’s successful, open a second unit, prove you can manage it and then maybe we can do something a little more adventuresome.”
