Published News

Chain Leader - August 1998

David Farkas
Bait Expectations

...continued from Published News

Tilman J. Fertitta won't budge. Despite repeated pleadings for an impromptu kitchen tour at the Joe's Crab Shack, in Richmond, Texas, he's having none of it. Even when the divisional vice president in charge of the concepts volunteers as guide, the answer is no. Fertitta's excuse: The equipment isn't up to date. "This stuff is old," he says dismissively. "All of our new kitchens are state of the art."

For the 41-year-old chairman, president and CEO of Landry's Seafood Restaurants, image is everything. And after spending the past five years acclimating to the moody scrutiny of the public markets, the prospect of a reporter poking around a dated kitchen is enough to trip his mental circuit breakers.

It's not surprising Fertitta is especially protective of Joe's. Company officials, after all, invested nearly two years retooling Joe's menu and implementing a sophisticated cost control system after acquiring two units in 1994. Their efforts richly paid off. The dinner houses, which feature a bait-camp motif, average $3 million sales volumes with cash-flow margins of 23 percent. The concept ballooned from two to 80 units in barely four years.

Growth Wave

The parent company's growth has been equally impressive. Since 1994, the company's net income margin has climbed steadily from 6.6 percent to 8.8 percent last year. Earnings per share (diluted) for the same period swelled from 41 cents to $1.03, a 151 percent increase. This year, it reported a 27 percent gain in earnings per share, $0.28, in its first quarter (ended March 31) and a 34 percent increase in net income, $7.8 million on revenues of $90 million. Wall Street has been impressed.

"Landry's performance relative to the group [of publicly traded restaurant companies] looks very good," says Lynn Detrick, a restaurant analyst for Sanders, Morris, Mundy in Houston. "I can't recall an earnings disappointment with this company, and this is in an environment that is very difficult."

The company, which does not franchise, will open some 20 more Joe's by the end of this year, bringing the total to 100. Another 40 are planned for 1999. Landry's is betting its future on Joe's. Who wouldn't? The restaurants are cheaper to build and operate than the company's two other seafood concepts; Landry's Seafood House and The Crab House. Since spring, all new Joe's are open for dinner only. It's also easier to attract labor: Servers get to wear jeans and T-shirts and dance on tables.

"We fussed around a lot with Joe's," Fertitta says, his easy Texas drawl thick as the Houston humidity. "So far there's nothing we've done that hasn't worked. We knew the seafood business and we knew what the public wanted."

Defense Instinct

The comment is classic Fertitta: bravado with an underlying hint of defensiveness. It's hard to blame him. Like many hot growth companies, Landry's still struggles to prove to naysayers that its growth is sustainable and manageable. Although the company has met or beaten every earnings estimate, its stock has been volatile. The announcement recently that this summer's scorching heat in Texas was keeping customers off the patios and sapping as much as five percent from Landry's relatively small same-store sales base sent share price south to the lowest levels of the year. It also prompted analysts to revise earnings estimates for fiscal 1999 and speculate whether high temperatures were really the problem.

A July 8 Wall Street Journal article didn't help matters. It reported that a Dallas-based restaurant analyst visited or called every Landry's or Joe's in the country during peak business hours only to discover short waits or no waits at all. Management vigorously denied waits had shrunk so dramatically. Although Lynn Collier of Stephens Inc. in Dallas says the story exaggerated her position, the article may have left readers with the impression that the concepts themselves had run out of steam. Collier says she can't account for the steep drops in Joe's volume after three to six months.

Fertitta shows his ire when the Journal article comes up. By the second reference, he only half jokingly threatens to end the interview.

Young Entrepreneur

Arguably, it is that same fire-in-the-belly attitude that has brought Fertitta's company to where it is today. After riding out the boom-and-bust early '80s as a hotel developer, he invested $1 million (mostly on paper) in a couple of seafood joints called Landry's in 1986. He bought out his partners two years later.
His new company grew by snapping up ailing mom-and-pops on the Texas and Louisiana Gulf coasts. With little national competition in the seafood segment besides Red Lobster, Fertitta's timing could not have been better. An IPO in August 1993 raised $60 million for the (then) 10-unit chain.
By the end of 1997, Landry's operated 116 restaurants in 27 states. But the 38 Landry's Seafood Houses were history in growth terms. Senior management was now devoting almost all its energy to Joe's. The 1996 acquisition of Bayport Restaurant Group added the 20-unit Crab House chain to the mix, but the deal has yet to pay off largely because sales at the 14 south Florida Crab Houses remain negative.

Growing Pains

Landry's explosive growth has created its own problems. Barry Stouffer of Nashville's J.C. Bradford & Co. recently dropped his fiscal-'99 earnings estimate from $1.62 to $1.30. In his analysis, sales have softened because of operational problems caused by rookie general managers and high staff turnover, not concept issues. "Some of their best managers have been picked off by the competition," he says. "And when a manager leaves, some of the staff leaves too."

Steven Scheinthal, vice president of administration, says management turnover rate has increased lately. "In the last two or three months there's been a rise. Last year and through the first quarter '98, we'd been in the 30 percent range." The company expects improved benefits and an expanded training and development program to reduce turnover.

Stouffer also cites declines at restaurants not in the same-store sales base, and supposedly in their "honeymoon" phase. "We're not seeing long honeymoons or as many $110,000 or $120,000 weeks," he adds.
Allan Hickok of Piper Jaffray, Minneapolis, says the concept is sound. "I think Joe's still has strength and that it's very relevant to today's consumer. But let's face it, Landry's has been a four-year binge, growing at 40 percent to 60 percent. They have to take a breather." Paul West, Landry's chief financial officer, concedes that honeymoon periods have shortened but adds that's expected since many new Joe's open in existing markets. "Joe's might start out at $3.4 million run-rate and then settle down to $3 million after six months," he says.

Marketing for Growth

Marketing efforts are sprouting at Landry's. Fertitta just recently hired a full-time marketing director. "Before that, I sort of handled marketing myself," he says. "We don't do a lot of it, haven't had to." Landry's, which budgeted about $6 million for marketing purposes this year, plans to cluster Joe's in existing markets to gain media efficiency. Fertitta's aggressive growth plans are undeterred by any hiccups along the way. "We've raised a bunch of money for the company so that now we can now grow out of cash-flow," he says. "We are still going to be a big company regardless of one or two quarters of one or two or three percent same-store sales.

Back to Published News