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NATIONS RESTAURANT NEWS- February 23, 2004

Landry's Enlarged Chain Portfolio Nets $1.1B in revenue for 2003 By Ron Ruggles

HOUSTON – A strategy of aggressive acquisitions and expansion has catapulted Landry's Restaurants, Inc. into the rarified world of billion-dollar foodservice companies. Landry’s which operates such concepts as Joe's Crab Shack, Landry’s Seafood, Chart House, Saltgrass Steak House and Rainforest Café, reported net earning of $2.5 million, or 9 cents per diluted share, for the fourth quarter ended Dec. 21, compared with $4.6 million, or 16 cents a share, in fiscal 2002.

Earnings for the latest full quarter were 19 cents a share after adjusting for a $6.3 million tax benefit from the acquisition of Rainforest Café and a net $9.3 million impairment charge for some assets and lease termination accrual. Revenues for the quarter rose 11 percent to $254.1 million, bringing annual revenues to $1.1 billion, versus $894.8 million a year earlier.

“We’re glad to hit the billion-dollar mark,” said Tilman J. Fertitta, chairman and chief executive of Landry’s, which ended 2003 with 286 units.

“Our company’s revenues increased 24 percent” over the prior year’s revenues, Fertitta said. “And we attribute these impressive increases to increased focuses on cost control and integration of all of our acquisitions in 2002 than are going better than could have been expected.”

Landry’s said same-store sales rose 3.5 percent for the quarter. The company’s restaurants also include the Crab House, Charley’s Crab and a variety of specialty project ranging from the new 201 room Inn at the Ballpark near the stadium in downtown Houston to various aquarium projects in Houston; Nashville, TN; and Denver.

“We’re very ecstatic about the quarter we just had,” Fertitta said. “Trends are good, and trend continue. Our fourth-quarter results were an 11-percent increase over 2002 and a 3-percent increase in comparable same-store sales. More than anything else, we had a 21-percent increase in restaurant level profit.”

Analysts said they were pleased with Landry’s 2003 results, especially with the company’s ability to incorporate its acquisitions into existing operations. Fertitta, in an interview separate from the earnings conference call, said Landry’s philosophy is to “shut their corporate office down the day you buy them.”

The first Landry’s opened in Katy, TX, in 1980, and Fertitta bought the company in 1986. The company went public in 1993 with 11 restaurants and bought Joe’s Crab Shack in 1994. It acquired The Crab House restaurants in 1995, Rainforest Café in October 2000, Muer Seafood Restaurants in February 2002. Chart House in August 2002 and Saltgrass Steak House in October 2002.

Paul S. West, Landry’s chief financial officer, said the company ended 2003 with 138 Joe’s Crab Shacks, 41 Landry’s Seafood, 15 Charley’s Crabs, 26 Chart Houses, 26 Rainforest Cafes, 11 Crab Houses and 29 Saltgrass Steak Houses.
Sales at newly opened units are tracking well, West added. “New units opened in 2001 through 2003 for Joe's Crab Shack came in at $68,000 in average weekly sales,” he said. The last four Joe’s to open are doing annual average-unit sales of $3.5 million. During last year Landry’s opened 18 Joe's Crab Shacks plus eight additional units, including the Houston Downtown Aquarium.

West said the company already this year has opened two Joe’s units, on Saltgrass and the Inn at the Ballpark hotel, which includes an upscale Vic & Anthony’s Steakhouse. He said the company plans to open 20 to 22 restaurants this year, which would include between eight and 10 Joe’s; three Saltgrass units; one aquarium project at Opry Mills in Nashville, TN; one Rainforest Café in Atlantic City, NJ; and two to four other concepts.

The company last year bought the downtown aquarium in Denver. “We’re still in the process of doing some zoning changes,” Fertitta said. “These are very complicated projects, and you have to have patience to make sure your taxes are right. I don’t want to get into specifics, because we’re in negotiations with the city of Denver. We hope to get started on the total renovation at the end of this year. Meanwhile, the project is still open for business operating, and it’s making money.”

Last February in Houston, Landry’s opened the $38 million, six-acre Downtown Aquarium, featuring a 400-seat seafood restaurant, a 6,000-square foot ballroom and a 120-seat casual café.

The company also acquired on La Griglia and one Grotto casual dining Italian restaurant in November 2003 from noted Houston restaurateur Tony Vallone. Fertitta said Landry’s plans to add a Grotto unit in the Houston area. He added that Landry’s – the second largest seafood chain, behind Darden Restaurants’ Red Lobster – considers its “market position to be very, very strong and stable.”

Fertitta added: “Looking outside our own company, we see many factors that raise concerns for investors. First off, Red Lobster is struggling to find stable leadership and fighting dwindling traffic numbers. Bone Fish is expanding at an extremely rapid pace. And many steakhouses and burger chains are focusing on seafood entrees. The demand for seafood is extremely, extremely strong.”

Landry’s itself is looking at three-tiered growth strategy, Fertitta said, including expanding the Joe’s and Saltgrass concepts. “We also will continue to develop our specialty projects (including Rainforest and the aquariums). They all finished last year above our original budget,” he said.

In addition, Fertitta explained, “We will continue to look for opportunistic acquisitions. We don’t do deals just to do deals. If something is the right opportunity, we are a very opportunistic company.”

In 2003 the company not only passed the billion-dollar mark but also celebrated it 10th anniversary as a public company. “We also had our largest refinancing ever with the closing of $150 million in senior private-placement notes and a new $200 million credit facility at the same time,” Fertitta said.

West said the company increased some menu prices in the fourth quarter, which led to an increased check average of about 2 percent. The company also reduced its advertising for Joe's Crab Shack to about half of the prior year’s expenditures. “Despite the modest 2-percent price increase, we still feel our concepts are priced and positioned very favorably,” West said.

“Looking ahead,” he added, “we continue to focus on improving profitability and managing our national marketing expenses.”

For 2003, West explained, cost of sales decreased 50 basis points to 28.7 percent from 29.2 percent. Cost of labor decreased by 30 basis points to 31.1 percent. Turnover for management dropped below 15 percent, a historically low level for the company, he said.

Fertitta remains optimistic about the company’s results in 2004. “Our momentum and trends are very positive going into 2004, judging the preliminary results from January that just finished,” Fertitta said. “We have every reason to believe our strong performance is going to continue.”

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