By David Farkas

Captain D's President and COO Ron Walker is on an expansion binge of sorts after many years of no growth.

Not opening restaurants can do strange things to a man, if Ron Walker is any indication. Until last year Walker, president of Captain D’s Seafood since 1996, hadn’t opened a new unit for seven years. The chain’s debt-burdened parent, Shoney’s Inc., couldn’t spare the cash. So the 54-year-old executive ended up focusing on operations at the nation’s third-largest seafood chain. Indeed, some might say too much for a man of his position.

“Gordon, this is Ron. I want you to look at a store where a cashier is voiding receipts after closing,” Walker tells a district manager by phone during a routine demonstration of reporting software.

“I knew Ron would find something,” chuckles Rusty Martin, director of restaurant information systems, who’s explaining the complex program. “He always does.”

But Walker may not be routing petty thieves for very much longer. The Nashville, Tenn.-based fast feeder is growing again, funded by new owner Lone Star Funds, a Dallas-based investment group that purchased Shoney’s Inc. in April 2002 and took it private.

The owners have promised Walker they will fund 20 new company units in fiscal 2004 (ending Oct. 31); franchisees are expected to open as many. It’s a towering sum by Captain D’s standards and way above the four company stores the 35-year-old chain opened in fiscal ’03.

Treasure Chest
“Lone Star is putting money in and urging us to build restaurants,” explains Walker, who worked for McDonald’s before joining Captain D’s in 1980. “We’re positioned to grow.”

To accommodate expansion, Walker and his senior staff have been making several dramatic moves. Among the most significant is a smaller prototype, developed over the past two years. The 2,400-square-foot restaurant seats just 70 people. “You can’t open a 3,000-square-foot building today. It’s not franchiseable,” Walker maintains.

To find sites for the building, Walker recently appointed fast-food veteran Colt Hothorn as chief development officer. Hothorn, former president of AmeriKing, a large Burger King franchisee, wants to penetrate existing markets in the Southeast before moving into the Midwest. “The challenge for me is getting to understand the brand,” he says.

Walker, meanwhile, replaced the chain’s longtime distributor, a former arm of Shoney’s, with giant MBM Corp. of Rocky Mount, N.C. He claims the former distributor had only three warehouses, limiting the chain’s growth to the Southeast.

Management is also encouraging franchisees to purchase from a company-run cooperative set up in ’03. Franchisees, who pay a dollar to join, commit to participate for one year unless they sign long-term contracts for seafood. Officials claim everyone pays the same price for goods.

“Yeah, [franchisees] wanted to know what the catch was,” explains Walker. “The catch was, the co-op helps your buying power. It also helped us clean up the system, get uniformity in the product and strengthen our quality-assurance process.”

Wind in Sales
Not that Captain D’s had fallen on hard times like sister chain Shoney’s Restaurants. Walker brags that comparable sales have increased among company and franchise restaurants in nine of the last 11 years. Same-store sales are a crucial metric because until now they’ve been generated by an exiting and aging store base. Most units are at least 10 years old.

Officials like to show visitors a full-sized traffic signal at headquarters that shines green when comparable sales are up. “The first thing many vendors ask me when they call is, ‘Is the light green?’” says Walker.

Captain D's plans to open at least 20 units, penetrating its existing Southeast base before moving to the Midwest.

The light was, in fact, green in early January. Same-store sales had so far climbed 1.6 percent for the first quarter (ending Feb. 15).

The chain’s performance doesn’t surprise industry observers. “Captain D’s has been in stable hands throughout all the shenanigans at Shoney’s. It was the rock bed for cash flow, and it kept [Shoney’s Inc.] alive,” says financial consultant Craig Weichmann, who followed the company for two decades as a restaurant analyst for Morgan Keegan Securities. The chain’s solvency may explain why the brand had not been carved out of Shoney’s despite intense speculation. Angry creditors would likely have charged fraudulent conveyance.

Stability is helping to bankroll expansion. Last month Captain D’s announced a $62 million refinancing deal that lowered interest rates to about 7 percent. “We saw a brand with a good history of performance in terms of same-store sales and average unit volumes,” says Brian Roach, managing director at San Diego-based American Commercial Capital, which has funded several of Lone Star Funds’ acquisitions. The chain’s systemwide average of $1 million ranks it among the highest-grossing brands in the fast-food segment.

Overall revenues, however, have declined since Lone Star Funds arrived, falling from $309.4 million in fiscal ’01 to $305.6 million last year. EBITDA has climbed nonetheless, from $35.2 million to $36.3 million for the same period, as management tightened purchasing, controlled costs and improved G&A.

Technology, for example, nearly all devised in-house since ’98, allows regional and district managers to measure food costs, waste and inventory in stupefying detail. A few years ago, says Martin, the chain’s food cost was 36 percent, and management couldn’t tell if workers were careless or larcenous. “Food cost now runs 31, 32 percent,” he says. “We know what inventory a store started with and what it ends with.”

Walker estimates the difference between this system and the former one is $4 million in savings; IT’s budget for this year is just $600,000, he adds.

The software impresses Roach. “We’ve never seen anything like this in another chain,” he says.

Adding Ballast
Yet technology won’t restore revenues, lost when Lone Star Funds refranchised 24 company-run Captain D’s and sold 166 properties to third parties in a series of sale-leaseback transactions. Those deals raised enough cash to trim Captain D’s debt from $115 million to $50 million.

“It was painful, but we’re healthier now,” says Walker, alluding to supervisory people he had to sack. “Those folks were placed with new franchisees. I also compressed jobs, meaning people were demoted to lower-paying positions.”

Interestingly, Walker himself and 11 other Captain D’s officials became owners of two properties. The deal was struck after he asked Shoney’s Inc. CEO and Lone Star Funds partner David West to provide some sort of “ownership” for senior management because none can own stock in the privately held company.

Walker explains: “We bought two properties after Lone Star gave us permission. One is in Nashville, the other in Chattanooga. We all have equal shares, and we all invested some of our own money. The properties were not given to us. The note is for 15 years.” He estimates a return of 12 percent to 13 percent.

Weichmann believes a sale-leaseback with company officers is a bright idea. “If I’m Lone Star, and the management team comes to me and says, ‘We want to participate,’ then I say, ‘I need this team,’” he says.

Captain D's signature battered and fried seafood still accounts for half of sales.

I’m Your Captain
Walker is staying put in any case. “My opportunity is right where I’m at,” he insists. Although Lone Star hasn’t yet articulated an exit strategy, Walker believes the owners will likely sell the company in three to five years. “They bought us to make money off the real estate,” he says.

After that? One option: Lone Star Funds sells the company to management, which Walker claims has more than 300 years’ experience. What if the Shoney’s chain comes with Captain D’s? “It would be a dilution of performance for me to run both companies,” he allows. “I’m not close to the Shoney’s situation, but as a bystander I say, ‘Why not shut it down?’”

Walker prefers to look to a more immediate future. “It’s a new day with Lone Star Funds,” he says. “They helped us get out of debt, and now it’s up to us to run the company well enough.”

Well enough means finding sites and enhancing cash flow. Hothorn, who arranged the sale-leaseback deals for the new owners before joining Captain D’s, is scouting for sites. He’s anxious to see research the company commissioned from a Kansas City firm that analyzed the location of every unit, including franchised stores. He hopes the data reveals “which variables are driving success or the lack of it,” Hothorn says. “We have an opportunity to do in-fills, and we can get by with smaller sites, say, 30,000 square feet, depending on set-back requirements. We are not looking for ‘B’ sites.”

“C” Going
Curiously, it was a “C” site that sparked the development of the current prototype. Management tested an end cap in a relatively obscure location with the smaller store. The test was a bust in terms of sales volume, which shrank. But the unit’s reconfigured kitchen—the pass-through window was eliminated in favor of an open plan—worked quite well. Production capacity was pretty much the same as the larger unit. Moreover, the bright, upscale interior was a hit with customers.

“We learned a lot,” Walker acknowledges. “Our freestanding prototype sprang from that model.”

Longer term, management is attempting to reposition the chain into the quick-casual category. “It’s necessary for us to make sure the brand can move into the future,” Walker says.

Neither Walker nor anyone else thinks the chain’s signature product—battered and fried fish, which accounts for half of a unit’s sales—will appeal to quick-casual users. But officials do believe the oven-baked and broiled fish items now on the menu, along with several side dishes, can.

Meanwhile, the chain has hopped on the low-carb bandwagon. Last year, it hired a registered dietician to work with Sammy Goldstein, director of research and development. They’ve been analyzing the nutritional content of selected menu items.

Still, officials admit repositioning Captain D’s won’t be easy. “We have to come to grips with whether [quick-casual] is a transition from this brand, or do we need to launch a new brand,” says Marketing Vice President Charles Bruce.

Walker, however, is staying focused on the moment. “Growth is good. It creates excitement. Even modest growth is good,” he declares. And it’s about time.