Chain Leader - November 2002
David Farkas SHOPPING SPREE: Landry's CEO Tilman J. Fertitta has been picking up bargains. Here's what he's doing with the goods.
...continued from Published News
Landry's Restaurants is buying restaurants instead of building them. It's safer that way. When the company last attempted to open its own units - some 50 Joe's Crab Shacks in 1998 - it stumbled and sent its once-hot stock into a two-year deep-freeze.
Now, after acquiring four chains - three in this year alone - the fiscals have thawed. Sales at its 275 outposts will climb 17 percent, to around $900 million, in 2002. They'll reach $1 billion-plus next year. Ebitda (earnings before interest, tax, depreciation and amortization) could swell to $135 million in '03, improving Landry's valuation among investors and lenders.
Investors already have rewarded the company. The stock rose 93 percent in 2001 on positive sales. Although a down market has hurt the industry in '02, Landry's shares are up about 16 percent on the year. At $21 apiece, in any event, they're a long way from 2000s humiliating $6 price tag.
Observers give credit to company founder and CEO Tilman J. Fertitta, 45, an oft-brash executive with a penchant for deal making. "He got hammered by investors. But he took it, sucked it up and made the right strategic decisions," declares U.S. Bancorp Piper Jaffray's Allan Hickok, who rates LNY a strong buy.
The strategy has involved buying restaurant companies from unhappy financial owners. Rainforest Café, C.A. Muer and Chart House fit the mold (read: attractively priced). Last month, the company bought a fast-grower called Saltgrass Steak House, a 27-unit chain hampered only by high corporate overhead.
"Tilman sees great opportunity in these brands. Their financial difficulties are history to him," says David Epstein of J.H. Chapmand & Co., a Chicago-based M&A firm. "He has a very keen eye for spotting value others don't see."
Chain Leader caught up with the acquisitive CEO on the day Fertitta closed on Saltgrass, his latest bauble, and grilled him about managing his growing restaurant empire.
Putting aside sales figures and cash flow, is Landry's close to enjoying the status Brinker International and Darden Restaurants have? Let me just think about this. We're a little more nontraditional. We got bigger quicker than both those companies and have laid a great foundation. We deserve our own status in our own right, but I have all the respect in the world for both of them.
You've gotten bigger by buying restaurants instead of building. Why that approach? We didn't want to open 50 units again. When you do that, you end up with some bad locations. So, to keep up growth, we asked ourselves: Are there any acquisitions out there?
You acquired Rainforest Café in 2000, surprising people. How did you know the concept itself wasn't broken? We felt people loved the concept because of the average unit volumes. Planet Hollywood and other (eatertainment restaurants) were not doing any business. Rainforest was, but it just wasn't bringing it to the bottom line. They were paying some company $2.5 million a year, for example to clean the kitchens at night.
But same-store sales in non-icon units were in the toilet. Totally! But part of that was the honeymoon. When you take a store doing $10 million in sales the first year, $9 million the second, $8 million the third, and then say, it stops at $7 million in the fourth year - you've just had a big honeymoon.
Wasn't Rainforest's food also roundly criticized? The menu wasn't right. We're getting rid of all the fancy sauces and anything that's upscale, like field greens. When we get our customer comment cards, they are usually surprised at how good our food is. They're expecting to get bad food. Rainforest Café was a big problem, but we got into it deeply and just felt if we changed some things, we could turn it around. Thank God we did. I mean, we don't have a magic wand.
Too bad. Chart House needs help. Let me tell you what's happening there. There are 39 Chart House units. We're selling off three this year and converting 10 to Joe's Crab Shacks, mainly on the West Coast. The remaining 26 average $3.7 million, even today. We feel the 26 will be at $4 million-plus easily.
What has to happen first? You'll see lots of menu changes, more seafood and more beef. Right now, the restaurants don't execute well. We're adding lots of new (kitchen) equipment. And customers won't be seeing a 1970's dining room. They'll see a 2000 dining room. It will be traditional looking, yet upscale and modern. It's going to fit the check average of $25 a head.
C.A. Muer is an aging collection of seafood restaurants in the Midwest and Florida mostly. What do you see in them? First, they were overpaid for by a financial institution, J.P. Morgan, that wanted to get in the restaurant business. Seven years ago they outbid us for the company by $10 million. We bought it back for $30 million less than we offered the first time. In any case, all the physical plants need to be redone, and some of the menu items need to be updated, which we're doing right now.
But was anything really wrong? The financial owners had put an ops guy in charge. I don't want to knock anyone, but why do people leave companies and think they can go out on their own? It's the whole company that makes you who you are. Only a few people understand it all, and they're usually the people who started from the ground and went all the way up- not someone anointed later. Take Chart House. I visited units in Portland, Oregon and Boise, Idaho, and the GMs told me they had never seen either of the company's two top operations people.
Certainly you can't visit all your stores. I haven't personally visited a bunch. But if I had only 39, I would have showed up. People are happy when we take them over. We're a company, and you have a leader who does this every day when he wakes up. C.A. Muer and Saltgrass, which were owned by financial institutions, had hired in management.
Saltgrass, an expansion vehicle, doesn't need a turnaround. But there were problems, weren't there? They had too much G&A, around 10 percent. For example, senior managers got a 20 percent bonus regardless of whether they hit their targets. What I like about Saltgrass is that it was done right from the beginning. You build out an area and then move on. We didn't do that with Joe's. We screwed up, so I'm a lot smarter this time.
How painful was it to repair Joe's? We didn't realize Joe's customer didn't want to pay $22, $23 or $24 for dinner. We knocked the price down $5 to $7. That hurts margins. Joe's used to do 24 percent restaurant-level cash flow. Today it only does 18 percent. But it's going to be in business for a long time. We put in numerous changes to managers' incentives - monthly bonuses on same-store sales and on profitability, for example. We changed marketing, menu price points and plateware. I wasn't going to sit there and deny we didn't have problems.
An analyst who follows Landry's told me the experience humbled you. You're calmer now and less cocky. True? Cocky? I don't think I was ever cocky. What I have realized is that this is a cyclical business. We went five years never missing a number. Then we missed two numbers in '98. And now we are on another roll. So I now understand there's going to be great times and bad ones.
You've said it's better to be the worst performer in a hot industry than the best performer in a cold one. Today, the restaurant industry is cold. And I'm one of the best performers. (Our stock) is up by about 18 percent. And the company still isn't where it should be stock-wise, with all the growth we've had.
Speaking of which, Landry's is fairly unique in owning a large chunk of its sites. Why the need to own? Because by having an asset, I can always do something with that location. Whereas, if I don't own it, it's nothing but a liability. The assets protect me in bad time.
Just as long as you have something to put there. But I'll always have something. If it's not profitable, I have something to sell. I sacrifice a little money today but feel like it's my insurance for the future.
A few years ago, in a Texas Monthly profile, your father was quoted as saying you were a control freak. Are you still? Absolutely not. Landry's is too big of a company. But I don't assume something is done just because I delegate it. You always have to come back and make sure.
You certainly can't micro-manage these three new concepts. I don't! But I can manage who I put in charge of them. I can control the menus and the design. Those are pretty big things. About the only thing I can't do is be involved in the human resources function of the restaurants. But everything else I can still keep my fingers on. That's not micro-managing, having my hands on the most important things to do with the restaurants.
I like your new offices, especially the gym and cafeteria. With the pool and foosball tables. Be sure to say what employee-friendly corporate offices we have. We probably have a reputation of being tougher than we are.
You have a reputation of being a tough guy to work for. Then why are so many of my employees still here?
Do you offer lots of stock option to executives? We don't. Options are a complicated tool, and we give them mainly to senior level people, the top 50. They understand they can be worth a lot today, and that they many be worth nothing tomorrow. In the field, we pay very good salaries and bonuses.
But granting options is a good way to attract talented executives. I'd rather pay them a signing bonus and a big "stay" bonus. We have some of those in lieu of options.
How do you justify your own bonus of nearly $1 million in 2001? Is that big? I did it in a year when the stock was up almost 100 percent. You know what it is, our industry has traditionally been a lower-paying industry. When I look at (Darden Restaurants CEO) Joe Lee's package, I don't think it's a lot compared to other companies. He probably deserves more.
1974-1976 Attends the University of Houston
1980 Buys Landry's Seafood Inn, in Katy, TX with partners
1988 Buys out partners and found Landry's Restaurants, Inc.
1993 Takes Landry's public
1994 Opens Joe's Crab Shack; Number 5 on Forbes' "Best Small Companies"
1996 Acquires Bayport Restaurant Group - The Crab House Restaurants
1997 Wins Ernst & Young's Houston Entrepreneur of the Year Award
2000 Moves Landry's Restaurants to NYSE; Acquires Rainforest Café
2002 Acquires C.A. Muer Corp., Chart House Restaurants and Saltgrass Steak House