Shells Seafood Restaurants, Inc.

16313 North Dale Mabry Highway
Tampa, Florida 33618-1326
U.S.A.
Telephone: (813) 961-0944
Fax: (813) 960-8539
Web site:http://www.shellsseafood.com

Public Company
Incorporated: 1993
Employees: 2,200
Sales: $90.4 million (2000)
Stock Exchanges: Over the Counter (OTC)
Ticker Symbol: SHLL
NAIC: 72211 Full-Service Restaurants; 55112 Offices of Other Holding Companies

Tampa-based Shells Seafood Restaurants, Inc. is the holding company for a chain of full-service, casual-dinning seafood restaurants which operate under the Shells name. As of March 2001, the company operated or managed 39 restaurants, most of which were located in Florida, with others located in Kentucky and Ohio. Maintaining a broad, family and young-adult appeal, the company’s restaurants offer moderately priced entrees, including fresh fish, shrimp, oysters, scallops, clams, crab, and lobster plates. They also offer daily specials, an array of appetizers, pasta and other side dishes, and desserts. To assure Shells’ name recognition and benefit from customer loyalty, the company developed a prototypical image for its restaurants. They are identified by an exterior name and logo sign and a standardized interior color scheme and design. They are also decorated with tropical island motifs and feature bright colors, cheerful signs, and a casual atmosphere consistent with the company’s commitment to promoting a relaxed and fun dining experience. Incorporated in 1993, Shells was reorganized and reincorporated as a public company in 1996. Between them, Frederick Adler, chairman, and William Hattaway, former CEO and president, own about 39 percent of the business.

1985-91: Origins and Quick Expansion

Shells Seafood Restaurants Inc. emerged from the startup of a single restaurant in Madeira Beach, Florida, in the mid-1980s. Its founder was Swiss-born John Christen, who had behind him years of restaurant experience. Earlier, starting in 1971, he had built a chain of Brewmaster steak houses, which, by the time he sold it in 1983, had expanded to 13 units, all located in the Tampa Bay area. Brewmaster was one of the first casual-diner’s pub-style steak houses. It was also the first Florida restaurant to feature a salad bar. Later, when he relinquished operational control of Shells, Christen would undertake the rebuilding of Brewmaster restaurants, using 1990s variations on his original ideas.

For a year before starting up Shells, under the Café Geneva label, Christen made gourmet salad dressing for grocery chains. Then, in 1985, he launched the Shells chain. He built it as a series of separate Chapter S corporations, all of which paid a management fee to Christen. Under his leadership, the chain began a bold expansion program, both in Florida and beyond. Before the recession began taking its toll in the early 1990s, the chain had grown to 28 restaurants, including units located in Atlanta, Mobile, Charlotte, Nashville, and New York. Outside of Florida, and at some places within, the restaurants struggled for profitability, barely sputtering along, and the economic downturn nationally did not help.

1992-93: Company Falters, Reorganizes, and Downsizes under Hattaway

In January 1992, 14 of the stockholder groups joined together, arranged a collective stock swap, and formed Shells Inc. Their idea was to consolidate the company’s management and operations, making it more efficient and profitable. Shells Inc. still lumbered along with a heavy debt load, unable to obtain the funding it needed for further expansion. Moreover, its aggressive efforts to expand into markets outside Florida had proved almost fatal.

William Hattaway, a former executive with Red Lobster, bought into the Shells concept in 1993 and, as president and CEO, with a 20 percent stake in the company, led its resurgence out of its financial doldrums. When he took over the reins of Shells, Hattaway brought 16 years of experience to the task and an enviable success rate for developing seafood concepts. At the time of Hattaway’s departure from Red Lobster, it was owned by General Mills Restaurant Group and was the largest chain of dinner houses in the United States, with an estimated 625 units open at the end of 1993.

Under Chairman Christen, who stepped down at the end of 1992, later to undertake his revamping of Brewmaster, Shells had begun cutting back on its expansion plans and had also begun a major downsizing, something that Hattaway finished. When he started with Shells in February 1993, he closed three more restaurants, which reduced the size of the company’s chain to just 10 restaurants, down from the one-time high of 28, and completely retreated into Florida. Between them, Christen and Hattaway closed down all the company’s out-of-state operations and all of the Florida units that were not turning a profit.

Hattaway’s plan called for the closing of all the smaller units (under 6,000 square feet) in the Shells chain in order to concentrate on the larger, higher volume restaurants at prime sites. The idea was to hack away the financial deadwood and then rebuild a more streamlined and more profitable chain, which Hattaway almost immediately started to do. The guiding principle was to rebuild as an established neighborhood restaurant with an identifiable name and, at the same time, centralize operational control to achieve a higher degree of efficiency.

Plans made in 1993 called for opening 25 new restaurants over the next two years, mainly in the Tampa, Orlando, and Miami areas. By September 1993, the chain was back up to 15 restaurants; however, two of the restaurants, located in Ocala and New Port Richey, operated under a licensing arrangement and were not owned by the company. As was the customary policy with the company, it continued to lease existing restaurant facilities and convert them into Shells restaurants, at an average conversion cost of about $300,000 per unit. Hattaway planned to take advantage of the fact that the economic slowdown of the late 1980s and early 1990s had left many vacant restaurant sites on the market.

In order to give the company a new identity and make it easier to get financing, Hattaway and his associates formed Shells Seafood Restaurants Inc. It was organized to manage the existing Shells restaurants and develop and manage the new units created under the expansion plans of Hattaway and his executive team. The newly reorganized company was bolstered by fresh venture capital, which allowed Hattaway to reduce Shells’ debt by issuing preferred stock to the company’s creditors.

1994-99: Going Public Despite Growing Pains

Although projections called for averaging a new opening each month during 1994, the company fell far short of that ambitious mark. It also continued to struggle for profitability. In fiscal 1994, with gross sales of $22.2 million, Shells lost $1.6 million. However, under Hattaway, the company had a renewed energy and improved efficiency. By December 1994, Shells Inc. was completely merged with Shells Seafood Restaurant Inc., technically becoming its subsidiary, and in 1995, although Shells was still in the red, the company’s revenue rose to $28.6 million and its net loss dropped to $403,000.

The needed turnaround came in 1996, the year in which the company completed plans to go public and floated a $7.1 million initial public offering (IPO) on the NASDAQ Small-Cap market. By March 1996, just before its IPO, Shells either owned or operated 21 restaurants in Florida, ten of which were in the Tampa Bay area. In its prospectus, as of the end of 1995, the company reported a working capital deficit of $4.7 million, which the IPO was in part designed to offset. Funds raised via the stock sale were slated for opening additional restaurants, remodeling others, reducing debt service, installing point-of-service accounting systems, and providing working capital and corporate funds. The company hoped to obtain enough additional third-party financing to open 12 new restaurants in 1996, some at sites outside Florida. The company not only came close to its growth projections, it climbed into the black for the first time in years, netting a profit of $1.4 million on revenues of $39.8 million, a 39 percent increase over the previous year.

Although at the start of 1997 it had still not ventured beyond Florida, Shells had increased its owned or managed restaurants to 32. It also had plans to open up to another 12 within the year, with a focus on expanding into markets outside Florida. Accordingly, of the nine new restaurants that it did place in operation in 1997, seven were opened in Ohio and Kentucky, states in its targeted Midwest territory. The company’s decision to expand into the Midwest markets was made in an effort to diversify and minimize the seasonal impact on the Florida market. Thus Shells continued its expansion in the Midwest the next year, when it opened ten new restaurants in that region, followed by one more in 1999. At the beginning of that year, Shells did close a restaurant, but it was one in Florida, located in the Mall of the Americas in Miami and one of a group-unit of six acquired in 1996.

Company Perspectives:

We are real seafood. Our mission is to become the favorite seafood restaurant in every neighborhood in which we operate. Real Seafood! A combination of tastes and flavors that takes you back to your last beach-side vacation, seafood that tastes so fresh you feel like you have to wipe the sea salt from your hair and the sand off your deck shoes. The sizzle of a fresh piece offish being tossed on the grill, the aroma of a platter piled high with freshly steamed shrimp, the taste of real butter mixed with the hot sweet tender taste of king crab legs. .. Real Seafood!

As did the first attempt to establish Shells outside of Florida, the expansion efforts faltered when several of the restaurants opened in the new Midwest markets failed to establish an adequate customer base to make them profitable. The result was that, in 1999, despite attaining revenues of $95.2 million, the company realized a net income loss of $2.7 million. It was also plagued by a significant drop in the market value of its stock, which between 1997 and 1999 had dropped from a high of $14.75 per share to a low of $2.06.

As it had in 1992, in 1999 the company began responding to its bottom-line woes by reining in its expansion. In September, it also began closing down restaurants in its new Midwest market, starting with an underperforming unit in Cincinnati that had just opened in February 1998.

2000 and Beyond: Entering a Retrenchment Period

The company pulled the plug on four more restaurants in 2000: one in Ohio, two in Illinois, and one in Florida. It also stipulated that it was reviewing the performance of its restaurants with an eye to closing more, primarily at locations outside Florida, and it put all plans for new units on hold. It opened none in 2000. Clearly, as it had done almost a decade earlier, the company was actively cutting back towards a core of rock-solid performers. Its principal efforts were going into its well-established Florida units. For example, in the last fiscal quarter of 2000, it completed the remodeling of six of its Florida restaurants. It also undertook some marketing improvements, including the revamping of its menu, which was done in November 2000. The return to a retrenching strategy also led to Hattaway’s resignation as CEO—a step he took because he had been the chief architect of the company’s nearly disastrous expansion into the Midwest market.

In the first three months of fiscal 2001, the company closed six more restaurants: one in Florida, three in Illinois, and two in Ohio. It also indicated that, as in 2000, it had no plans to open any new restaurants during the entire year. Then, in early April, the company announced that it was planning to shut down 16 more restaurants. It also announced that reorganization plans were also in the works, starting with changes at the top that had already been made. On April 2, Shells had named David W. Head both president and CEO, posts that had remained vacant since Hattaway had stepped down midway through 2000. Just prior to taking the positions with Shells, Head had been serving as president, COO, and partner of Le Carnassier, LLC, a franchisee of Red Robin International. Before that, he had been president and COO of Red River Barbeque and Grill as well as president and CEO of Houlihan’s Restaurant Group.

There were also other executive changes, including the election of Phillip R. Chapman to the board chairmanship and a reduction in the administration support staff. Chapman replaced Frederick R. Adler, who stepped down but remained a director, as did Hattaway, who, like Adler, still held a significant share of the Shells ownership.

As the company admitted, fiscal 2000 and the first the quarter of 2001 were difficult periods. The performance of the company’s Midwest restaurants fell way short of projected earning goals. Returning to its core business might well mean that Shells would once more completely withdraw from markets outside Florida. It was, in fact, negotiating a transfer of the operational control of its remaining midwestern units to an unaffiliated management business. For 2001 and the immediate beyond, expansion was a buried issue; Shells’ focus would be on retrenchment and the revitalization its Florida restaurants.

Principal Competitors

Chefs International, Inc.; Darden Restaurants, Inc.; Flanigan’s Enterprises, Inc.; Landry’s Seafood Restaurants, Inc.

Key Dates:

1985:

John Christen founds Shells Seafood in Madeira Beach, Florida.

1992:

Christen steps down as company chairman.

1993:

William Hattaway becomes Shells’ president and CEO, and the company is incorporated.

1996:

Company is reincorporated as a public company and makes initial public offering on NASDAQ.

1997:

Shells, seeking new markets, opens first restaurants outside Florida since closure of the last out-of-state units in 1993.

2000:

NASDAQ delists Shells, and the company begins trading over the counter; Hattaway resigns as CEO as Midwest expansion strategy fails.

2001:

David W. Head is named company president and CEO.

Further Reading

Clancy, Carole, “Shells Cooks Up Plans for $7M IPO,” Tampa Bay Business Journal, March 8, 1996, p. 1.

Hayes, Jack, “Christen Updates Brewmaster for ‘90s,” Nation’s Restaurant News, April 24, 1995, p. 7.

——, “Rough Waters Send Shells to Regroup in Fla.,” Nation’s Restaurant News, March 28, 1994, p. 7.

Hundley, Kris, “Tampa-Based Shells Seafood Restaurants Inc. Back in the Swim of Profits,” Knight-Ridder/Tribune Business News, February 12, 1997.

Peters, James, “Shells Fishes for Growth, Focuses on Florida after Midwest Expansion Stalls,” Nation’s Restaurant News, May 7, 2001, p. 8.

Smith, Katherine S., “Shells Ready for Florida Expansion,” Tampa Bay Business Journal, September 10, 1993, p. 1.

—John W. Fiero