Forbes - November 18, 1996
Bill Clinton's fish-house friend
...continued from Published News
On Sept. 27 Tilman Fertitta and his wife, Paige, threw open their home in Houston's posh Memorial area. The occasion: a splendid fundraiser for William Jefferson Clinton and the Democratic National Committee. "I told'em, 'Don't y'all worry, I'll take care of everything,' " drawls Fertitta, and he did. Guests, 500 by one count, poured themselves margaritas from fake 14-foot-tall cacti fitted with taps. Fertitta flew actor Chevy Chase in on one of his two corporate jets.
By the time the last reveler had limoed away, Fertitta had channeled another $1.7 million into the Democrat war chest. He's only 39.
The money for Fertitta's high-level hobnobbing comes from his Houston-based Landry's Seafood Restaurants Inc. It's one of the hottest companies in the restaurant industry. Fertitta took it public in August of 1993 when it had just nine restaurants. Landry's is expected to finish this year with 102 locations (all of them company owned and operated) and $190 million in revenues. Since its initial offering Landry's stock has nearly quadrupled to a recent 2 1⁄2 a share, giving the company a market value of $530 million. Fertitta owns 18%, worth $95 million-a mere down payment, he says, on what he will be worth.
"We are just a little bitty baby," Fertitta declares with an enthusiasm that makes it almost impossible not to like him. "We will have restaurants all over the world. We will dominate the seafood industry."
Fertitta comes by this bombast naturally. His grandfather, Vic Fertitta, ran Galveston's legendary Balinese Room, an illegal gambling house on a pier 40 miles from Houston. In its heyday in the 1940s the Balinese hosted stars like Frank Sinatra and Bob Hope. Tilman Fertitta's father owned a seafood restaurant in Galveston, where young Tilman worked after school.
At 20 Tilman Fertitta dropped out of the University of Houston to open a women's clothing store. By age 23 he had developed a 160-room hotel in Galveston and was beginning to build multi-million dollar homes on speculation. "That was the 1980s," Fertitta remembers. "Anyone could get a loan."
And go bust. When the oil boom fizzled in the mid-1980s, Fertitta was $10 million in debt. He spent his days negotiating with creditors, his nights in a $1 million house he built but couldn't sell.
Then Fertitta saw an opportunity in the restaurant industry. William and Floyd Landry, two brothers from Louisiana, were squabbling with each other and with their partners over two restaurants they owned in Houston. Fertitta bought 60% of the restaurants for $1 million, less than five times cash flow. He financed the deal with promissory notes and the little cash he had left.
Fertitta's first two attempts at redesigning and expanding his restaurants bombed. "Too dark and too Cajun," Fertitta says. But eventually he hit on a formula that worked: a restaurant that was a step above Red Lobster in food quality and décor, yet casual enough to attract the masses.
Fertitta didn't know it, but he was about to ride the "eatertainment" wave-restaurants that confront the senses not just with food but also with lively wait staff and décor (Forbes, Aug12).
His two fastest-growing restaurant brands, Landry's Seafood (with 45 outlets) and Joe's Crab Shack (15 outlets), are big, meticulously designed establishments that stand out, even in restaurant rows crowded with places to eat. The standard Landry's features a big, bright, green-and-yellow movie marquee and a weathered red brick exterior.
At the Joe's Crab Shack outlets your waiter may sit down at the table with you to take your order. At night a disco ball will suddenly spin as the staff climbs up on the bar to perform the latest dance craze, the Macarena.
The portions stand out, too. Fertitta's most popular dish is a $14.95 seafood platter that groans under a load of fried catfish filets, fried stuffed shrimp, fried crab fingers and fried oysters.
Lately Fertitta has been trying to get customers to trade up to fresh fish dishes like the Gulf red snapper in a mango habanero glaze. The price tag reads $15.95, but folks are going for it.
Having spent his teenage years working in restaurants, Fertitta knows the business inside and out. We followed him on a tour of one of his establishments. "The lights aren't right," he says. "The music is too loud. We need an ashtray here."
This isn't just a show for a reporter. Landry's employees joke that Fertitta can spot a burned-out light bulb from his corporate jet. "I thought my mom was the biggest perfectionist until I met Tilman," says Kathy Ruiz, Landry's head chef.
Says Fertitta: "You've got to serve the hot food hot and the cold food cold. That's the big secret in this business."
Landry's Seafood's success has put some dents in the $1.9 billion (fiscal 1996 sales) Red Lobster, the 729-outlet chain that has long dominated the national seafood scene. The flagship of Orlando-based Darden Restaurants, Inc., Red Lobster recently reported that its same-store sales were down 6%. Darden's stock has cratered. In mid-September the chain's president resigned. Fighting back, Red Lobster recently unveiled a store-remodeling program. Fertitta claims it borrows heavily from Landry's designs.
While Red Lobster struggles, Fertitta's average restaurant currently produces $700,000 in annual cash flow on $3.2 million in sales. That 22% operating margin is about 10% above industry averages and is one of the reasons Wall Street applauds Landry's Seafood. Since going public in 1993, Landry's has three times gone back to the market, raising a total of $270 million.
The company has no debt. Its stock trades at 30 times 1996 earnings and nearly three times revenues-very high multiples for stocks in general and restaurant chains in particular. This high valuation has in turn made it easy for Fertitta to use his stock to buy up smaller seafood chains. A nice game, while it lasts.
Will it last? Probably not. At 30 times anticipated earnings, Landry's stock is echoing Fertitta's public opinion that only good things can happen to the company. Yet the sagging valuations of Lone Star Steakhouse & Saloon, Outback Steakhouse and Brinker International remind that bad things can and do happen even to the hottest restaurant concepts. While Fertitta publicly boasts of Landry's Seafood's prospects, privately he is less cocky. During the secondary offerings he has personally sold $70 million worth of Landry's stock, using the money to buy and remodel two hotels in his hometown of Galveston. The hotels are held outside of Landry's.
Landry's Seafood could become even more of a threat to Red Lobster, or it could go down the tubes. Either way, Tilman Fertitta will be around for many years to come.