TGI Friday’s has more outstanding gift cards than it has in its cash reserves

2024 has not been a great year for nostalgia-inducing casual dine-in restaurant chains. Back in May, Red Lobster filed for bankruptcy, and we noted that its “Ultimate Endless Shrimp” may have accelerated its decline. Over the weekend, we received news of another fallen soldier when TGI Friday’s, the flagship restaurant chain of domestic-airport terminals across the United States, filed for bankruptcy protection as well.

According to The Wall Street Journal, business hasn’t been great at TGI Friday’s since the pandemic: sales were $728 million in 2023, down 15% year over year, and the company’s store count had declined by 11% from 2021 as well.

However, TGI Friday’s is a franchise-heavy business that only owns and operates 39 of its own stores, compared to 122 franchised locations in the US and 316 in other countries. Because of this, the company’s franchised operations, as well as TGI Friday’s Franchisor, an affiliate that owns its brand and related intellectual property, stayed out of bankruptcy.

That being said, those franchises aren’t totally off the hook. On Monday, Reuters reported that there are currently $49.7 million TGI Friday’s customer gift cards outstanding, and the amount of unused gift cards exceeds the company’s available cash, even after taking into account a $5.9 million loan that TGI Friday’s is borrowing to fund its restructuring. Jason Binford, an attorney representing more than 60 franchisees, explained how the bankruptcy could leave franchises vulnerable to gift-card redemptions:

“TGI Fridays' independently owned franchises have little protection if customers rush to cash out their gift cards and could find themselves forced to honor TGI Fridays' gift cards at their restaurants without any assurance of reimbursement from the company, Binford said at Monday's hearing. They typically accept gift cards as payment, then seek reimbursement from the central corporation, Binford said.

Uncertainty around a company's bankruptcy filing often encourages a ‘use it or lose it’ mindset that pushes customers to accelerate their use of gift cards, Binford said.”

For now, the judge overseeing the case allowed TGI Friday’s to continue its gift-card program on an “interim basis,” giving franchisees more time to review the program and negotiate with the parent organization. However, TGI Friday’s may struggle to get its hands on more cash, as the company also lost a “significant portion of its revenue stream” due to a breach in the covenant of $375 million in bonds that it sold in 2017.

In 2017, TGI Friday’s sold $375 million in bonds structured as a “whole-business securitization,” meaning that it could lose control of business assets including the “chain’s brand, license agreements, future franchise agreements, royalties and other sources of revenue” if terms of the bond were breached.

In September, bondholders issued a manager-termination notice after TGI Friday’s made a nonrecoverable $2 million overpayment to vendors, and FTI Consulting, the then backup manager, now controls those revenue-generating assets. Basically, TGI Friday’s doesn’t have money, it doesn’t control its own revenue streams, and its franchise owners could be on the hook for almost $50 million in gift cards, assuming they all get redeemed.

TGI Friday’s is in discussions with potential acquirers about buying the business, but as it stands, the company wouldn’t have enough cash to reimburse its franchise owners if too many gift cards are redeemed. This isn’t that different from a bank-run scenario like we saw with Silicon Valley Bank a couple of years ago. If too many customers redeem their gift cards at once, TGI Friday’s won’t have the money, and franchise owners may have to eat the cost. Meanwhile, because customers now know that TGI Friday’s filed for bankruptcy, they might rush to redeem their gift cards so they don’t become worthless. Not a great situation to be in for the restaurant chain.