Lone Star prepares to stake new claims with 'cautious' growth plans

Nation's Restaurant News, Feb 24, 2003 by James Peters

WICHITA, KAN. -- Lone Star Steakhouse & Saloon Inc., which is raising its menu prices for the first time in three years while readying six unit openings, is closely acquainted with the hazards of rapid expansion.

Prosperous with proceeds from its initial public stock offering in 1992, Lone Star switched into high-growth mode. During the peak of its expansion in the mid-1990s, the company opened more than 120 units of the mid-scale steakhouse over a 15-month period.

But sales began to slide as a result of what some critics said was a less-than-stellar operational execution by the second-largest steakhouse chain. In 1998 Lone Star's average unit volumes fell to about $1.95 million from its peak of $2.5 million in 1996.

In May 1998 the company decided to halt growth except for units that already were in the construction phase. The adoption of a no-new-unit-growth approach was accompanied by the closing of 24 domestic Lone Stars in 2000. Then the company ran into additional problems in staffing the stores it had built but had not opened. As a result, Lone Star had to delay the openings of 11 units until it could hire enough employees to staff them. It ended up opening those restaurants in 2001 and opened no new units in 2002.

Now, in fiscal 2003, Lone Star has restarted the growth machine. But this time around "aggressive" has been replaced by "cautious and conservative."

"You'll see a controlled growth with us," said T.D. O'Connell, president of the approximately 250-unit Lone Star brand, which also operates 20 units in Australia, where the chain recently shuttered four restaurants.

The company's planned openings of six Lone Stars in 2003 are slated in the second half of the year. The expansion will be accompanied by the launch of two new units of the company's more upscale Sullivan's Steakhouse, which currently comprises 15 units. According to chief executive Jamie Coulter, Lone Star also plans to open one or two branches of its single-unit Frankie's Italian Grille in Charlotte, N.C., which the company has operated since 1995.

Lone Star, in aiming to rebuild the average-unit volumes of its flagship brand, also is working on plans to test several remodeling efforts.

"We'd like to get our volumes back to where they once were," Coulter told investors and analysts during Lone Star's recent conference call about fiscal 2002 results.

The company also is introducing more items beyond its core steak offerings on a new menu being rolled out in late February and early March, O'Connell said. New additions to the core menu will include king crab legs and some pasta dishes and fried shrimp. The chain also is testing rotisserie chicken and barbecued beef brisket and pork in several of its units.

Analysts said the big question is whether the company successfully can get back to its mid-1990s peak annual per-restaurant volumes of $2.5 million in a category that isn't as fast-growing as it once was.

"I think it's difficult to restore average-unit volumes to where they were when they were a hot concept," said analyst Greg Schroeder of Fulcrum Global Partners LLC.

Company officials said a number of aspects of their "Texas roadhouse" image -- from the music to the decor to the servers' uniforms -- needed to be updated.

"Garth Brooks is no longer popular," said Coulter, citing one of the reasons behind the company's plans to change certain elements of the brand.

Analysts agreed with that assessment.

"Not a lot has changed at Lone Star for many years," Schroeder said.

Moreover, there is no shortage of steakhouses, with such competitors as the 175-unit LongHorn Steakhouse and 780-plus-unit Outback Steakhouse continuing to expand at steadier clips, analysts said.

In recent years, though, Lone Star has been able to rebuild and stabilize its volumes. In fiscal 1999 per-restaurant sales fell to a low point of $1.75 million on an annualized basis. For the chain's fiscal year ended Dec. 31, 2002, Lone Star restaurants had average weekly sales of $34,800, which would equate to average sales of $1.84 million for the 53-week year. Fiscal 2002's same-store sales dipped 0.4 percent at domestic Lone Stars, compared with 2001 results. Comparable-restaurant sales fell 4 percent at Sullivan's but grew 8 percent at Lone Star's more upscale Del Frisco's Double Eagle Steak House group, driven by the strong performance of its New York restaurant.

"Obviously, [Lone Star Steakhouse] has the capacity to do higher volumes," said analyst Mike Smith of Fahnestock & Co. The key for the brand, he added, is to come up with a remodeling package "that improves the experience and motivates people to go there more than they do."

Lone Star officials are making sure they have plenty of options from which to choose.

The chain has hired three architectural firms and plans to experiment with several remodeling efforts. The testing is slated to begin late in the second quarter, and the company is looking to keep the average unit-remodeling costs below $250,000, Coulter said.

"The building needs to be 'contemporized,' " he observed.