Hattaway finds winning moves in Shells game

Nation's Restaurant News, Nov 18, 1996 by Jack Hayes

TAMPA, Fla. - In the three years since former Red Lobster president Bill Hattaway and his management team took control of the collapsing Shells dinner-house chain, the company has regained profitability and taken itself public while charting a new course of disciplined and budgeted growth.

The Tampa-based casual seafood chain, which before 1992 operated 28 restaurants in cities as distant as Atlanta, Charlotte, Nashville, Tenn., and New York, now has 23 units sited exclusively in Florida, with three more opening in the state by the end of the year.

"We've got the concept working now, and we're supported," Hattaway said, claiming that each of his new Shells units - operating with more highly trained staffs and centralized controls - is turning a profit.

Furthermore, Shells has agreed to purchase - for $500,000 plus a 1 percent of gross sales royalty payable each quarter - all six south Florida restaurants operated by Solana Beach, Calif.-based Islands, the casual group founded by Chart House Enterprises in 1993. That acquisition, fitting Shells' philosophy of operating where other concepts have failed - thus "recycling" otherwise promising sites as a means of controlling expansion cost - will reinforce the company's positive bottom line, Hattaway predicted.

While there are yet no analysts tracking the chain officially, Michael Fineman in the New Jersey office of St. Petersburg, Fla.-based Raymond James & Associates voiced a vote of confidence in the Hattaway team.

Much of upper management consists of people who know not only the dinnerhouse business but also about seafood," Fineman said. "It sounds like they've got the right people in place, and I clearly believe they're on their way to something."

Hattaway, who served as president of Red Lobster from 1979 to 1986 and then as chairman through the following year, brought in his former Red Lobster peers Warren Nelson and John Ritchey to run the financial and operations sides of Shells, respectively. Together they rewrote its formerly grandiose operational and expansion strategy.

Meanwhile, Chip Roehl, who headed marketing for the chain since 1987, continues in that role as vice president.

Most of Shells' menu from its earlier regime remains intact, as does its credo of serving large portions with a reasonable price tag.

Since coming aboard in 1993, Hattaway and his Shells team have opened some 10 restaurants. And with the three Shells scheduled to debut by the end of the year, the six Islands units set for conversion and another 12 Shells targeted for 1997 openings in both Florida and its newest targeted area, the Midwest, the chain will have grown to 44 total restaurants by this time next year.

"When we expand out of our home turf this time, it's going to work," Hattaway said.

"We've picked the Midwest because we want to be in cities where television advertising is affordable - and where we can supervise distribution - with communities of three to five restaurants," Hattaway said.

The target areas in the broad Midwestern region include Ohio, Indiana and Kentucky. Fineman of Raymond James, however, cautioned that there are unknowns in the Midwestern expansion strategy - even though Shells is deliberately avoiding the large and competitive markets.

"Growing outside of Florida [again] is going to be their test," Fineman said.

"I can get into a restaurant faster in Columbus, Ohio, than I can in Atlanta," Hattaway said. "Plus, it takes a presence if you intend to compete in the large markets.

"Shells had previously opened four stores in Atlanta and tried to be a factor, but there were 13 Red Lobsters already established," he added.

Hattaway's group has been opening Shells locations for an average of $410,000, with sales averaging in the $2 million range. Unit size is running between 5,000 square feet and 8,000 square feet. The average per-person check at Shells is $11.25. An average entree is $8.80.

Furthermore, the group has developed a prototype containing the concept's essential elements - a "playful" family ambience counterbalanced by a small bar.

"We'll use their [the previous operators'] chairs and furniture - and as much of their kitchen equipment as we can," Hattaway said, noting that Shells spends $205,000 on average for physical construction.

Hattaway said the company had grossed $6 million from the public offering that was completed earlier this year, retiring $1.6 million in debt with the remainder set aside for growth. The company reported increases in both revenues and net income as well as same-store sales for the third quarter and 39 weeks ended Sept. 29. Third-quarter revenues were $9.6 million, up from $6.9 million for the same 1995 period. Net income for the quarter was $293,000 vs. a loss of $192,000.

For the 39 weeks Shells posted revenues of $30.6 million compared with $22.0 million last year. Net income for the nine months was $1.4 million compared with $16,000 for the same 1995 period.

"Until the first quarter of 1996, when the number slid to 16.6 percent, we had three consecutive years of 17-percent same-store sales increases," Hattaway said. During the third quarter, however, same-store sales rose to 18.8 percent - pushing the 39-week average to 17.1 percent - a return to the earlier pace.