Lone Star Steakhouse & Saloon, Inc.
Lone Star Steakhouse & Saloon, Inc.
Sales: $598.01 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: STAR
NAIC: 722110 Full-Service Restaurants
Lone Star Steakhouse & Saloon, Inc. is the operator of three restaurant chains: Lone Star Steakhouse & Saloon, Del Frisco’s Double Eagle Steak House, and Sullivan’s. The company’s Lone Star restaurants operate as full-service, casual-dining units positioned in the mid-priced segment of the restaurant industry. The company’s Del Frisco’s restaurants operate in the upper end of the steak house segment. The menu items at the company’s Sullivan’s restaurants are priced midway between the selection available at the company’s other two restaurant chains.
Lone Star was founded by Jamie B. Coulter, who graduated from the University of Wichita in 1963. Coulter began his post-college career driving a beer-delivery truck for his father-in-law before entering the food-service industry in 1965, when he contacted Frank Carney, the founder of Pizza Hut, and inquired about becoming a franchisee of the chain. Coulter enlisted the help of several franchise partners and formed CWG Enterprises, which was destined to become the largest U.S. franchisee of Pizza Hut restaurants. Within 15 years, CWG opened more than 170 Pizza Hut units and developed considerable interest in the Kentucky Fried Chicken chain, eventually becoming the company’s fifth-largest franchisee. CWG dissolved in 1980, leading Coulter to form his own company, Coulter Enterprises, which began with 42 Pizza Hut units. During the next ten years, Coulter expanded his business, amassing a 12-state chain of 100 Pizza Hut units by the time he encountered a company called Creative Culinary Concepts.
Based in North Carolina, Creative Culinary had opened the first Lone Star Steakhouse & Saloon prototype in Winston-Salem in October 1989. One of the company’s largest shareholders, Lester Rudd, invited Coulter to take a look at the concept, fashioned as a mesquite-grill steakhouse. Coulter was interested, and in 1991 he signed an agreement with Creative Culinary to develop four Lone Star units. Within seven months, Coulter had opened four restaurants that featured a limited menu of mesquite-grilled steaks, chicken, grilled fish, babyback ribs, and a Texas roadhouse ambiance. Seating 200 diners and measuring 6,000 square feet, the Lone Star concept became Coulter’s new growth vehicle.
Expansion Begins in 1992
Coulter incorporated Lone Star in January 1992, appointing himself board chairman, chief executive officer, and president. He then began expanding the concept but needed cash to fulfill his ambitious expectations. To raise capital, Coulter turned to Wall Street, completing Lone Star’s initial public offering (IPO) of stock on March 12, 1992. When Lone Star’s $91 million public offering was completed, the company had eight restaurants in operation, each averaging $2.5 million in sales per year. By November 1992, Coulter had completed a second public offering of stock, raising another $41 million to support expansion plans that called for establishing three more units in 1992 and opening 24 new restaurants in each of the next two years.
As Coulter orchestrated his aggressive expansion campaign, he did so by keeping a close eye on the chain’s operating efficiency. The company emphasized reaching monthly performance targets on a restaurant-by-restaurant basis, which was the responsibility of the chain’s general managers. The general managers were given substantial bonuses to reach monthly performance targets, earning cash and stock options as incentives to maintain high sales and industry-leading operating profit margins. For a company that operated without district or regional managers, the role of the general manager took on heightened importance, serving as the only link from the restaurants in the field to corporate headquarters in Wichita. In an August 1993 interview with Restaurant Hospitality a Lone Star executive vice-president explained: “In other chains, there are people who act as filters for information going from the stores to corporate. That’s how we are different. We don’t have any filters.”
Lone Star’s flattened organizational structure and its growing ranks of performance-driven general managers delivered success. In 1993, the company was selected as the best small company in the country by Forbes magazine, a distinction it would also be awarded in 1994 and 1995. In 1994, the company was the highest-ranked restaurant company on Fortune magazine’s list of the country’s 100 fastest-growing company’s, placing sixth overall. Sales were increasing at an annual rate of 210 percent, while the company’s operating profit margins averaged 26 percent, the highest percentage in the industry.
Concept Diversification in 1995
By the end of 1995, three years of frenetic expansion had produced a new formidable force in the casual-dining segment of the restaurant industry. With 182 restaurants in operation, annual sales hit $340 million, up substantially from the $11 million generated in 1991. Coulter was as eager as ever to expand the Lone Star concept further, but he was not averse to exploring new business opportunities. In 1995, as Lone Star was receiving accolades from industry observers, he saw an opportunity for his company in the lower end of the upscale steak market, the niche occupied by restaurants whose checks averaged $35 per patron. As development of a new restaurant concept was underway, the company hired Mike Archer, the former president of Morton’s of Chicago. The result of the collaboration among Archer, Coulter, and Lone Star’s management team was Sullivan’s, a circa-1940s steakhouse named after the early twentieth-century, bare-fisted boxer John L. Sullivan. Featuring more than 200 seats, a limited menu centered on certified Angus beef, mahogany paneled walls, and a decor designed with an 80 percent male clientele in mind, Sullivan’s made its debut in May 1996 in Austin, Texas.
Before the first Sullivan’s opened its doors, Lone Star made another move to diversify outside the casual-dining segment. The company paid $23 million in cash and stock to acquire Del Frisco’s Double Eagle Steak House, a purchase reflective of Coulter’s desire to move his company into the upper end of the steak restaurant market, albeit sooner than he had planned. “We had not intended to go into the prime beef market at this time,” Coulter remarked in a July 1, 1996 interview with Restaurants & Institutions. “We wanted to launch Sullivan’s,” he continued, “and get four to six of them under our belts first, but the opportunity presented itself.” Although the timing was not perfect, the acquisition of the Del Frisco’s concept did represent an important step toward Coulter’s goal of developing Lone Star into a $1 billion-in-sales company, an objective he began making public during the mid-1990s. Coulter’s chief financial officer, John White, who had been at his side since the inception of Lone Star, greeted the news of the Del Frisco’s acquisition without any reservations. “We intend to become the steak company,” he informed Nation’s Restaurant News in an October 2, 1995 interview. He likened Lone Star’s three-tiered strategy to the seating classifications on a passenger aircraft. With a check average of between $16 and $18, Lone Star represented coach. Sullivan’s check average of between $35 and $40 represented business class. Del Frisco’s, whose checks averaged $60, served as first-class seating under the corporate umbrella of Lone Star.
Although there were several industry pundits who questioned whether the diversification into two different market niches was prudent, few could question the amazing success story that Lone Star represented. Coulter was named chief executive of the year by Restaurants & Institutions in 1996, by which time the company’s stock had appreciated 1,037 percent since the March 1992 IPO. Coulter did not intend to slacken the pace of expanding the Lone Star concept, despite the distraction of rolling out two new subsidiary restaurant chains. “This will not slow us down a bit on our Lone Star development,” he averred in an October 2, 1995 interview with Nation’s Restaurant News. Coulter stayed true to his promise but not as long as he would have liked. Lone Star ended the 1990s struggling to regain the form that dazzled Wall Street during the first half of the decade.
Late 1990s Decline
By March 1997, there were 205 Lone Star restaurants in operation, but the company’s stock performance was anemic. Shares in Lone Star had traded for $46 in April 1996, but less than a year later the per share price had fallen to $26. Once the company’s quarterly rate of growth began to decrease because of market saturation and higher food prices and labor costs, analysts lost their passion for the Wichita-based chain. By mid-1998, the situation had worsened. Performance in same-store sales began to suffer, and a large number of the company’s all-important general managers left the company. By Coulter’s own admission, Lone Star was slow to react to the operational problems, which hobbled the company’s expansion plans. Lone Star’s stock value plummeted to $13 per share in July 1998, then fell to $6 per share late in the year. The company opened only two new Lone Star restaurants in 1998. In 1999, the company reversed direction, opening no new restaurants and closing two units that were underperforming. Lone Star ended the 1990s with 265 Lone Star restaurants, 14 Sullivan’s restaurants, and three Del Frisco’s restaurants.
Lone Star Steakhouse & Saloon is a unique category of restaurants offering higher-quality service and food than existing chain or independent restaurants. We believe that this niche is a dynamic growth area within the restaurant industry that offers significant growth opportunities for Lone Star. We believe that our restaurants are uniquely positioned as “destination restaurants “that attract a very loyal clientele.
As the operational difficulties that surfaced during the late 1990s were being dealt with in the early years of the new century, Coulter fought the battle for his survival at the company he had founded. In 2001, a Lone Star shareholder named Guy W. Adams mounted an assault against Coulter, criticizing the company for more than tripling Coulter’s salary as Lone Star’s stock value plunged. Adams also disliked one individual holding both the board chairman and chief executive officer positions, so he launched a proxy battle whose aim was to unseat Coulter as chairman, which would make room for Adams to join the company’s board of directors. Amazingly, Adams held only 1,100 Lone Star shares, which translated to a 0.005 percent stake in the company. More amazing, Adams won the election when the results were announced in July 2001, becoming the first individual shareholder to unseat a chief executive officer from the board of his own company. Coulter stayed on as chief executive officer, but he was forced to relinquish his seat as board chairman. In July 2001, Clark R. Mandigo, a director of the company since March 1992, was selected as board chairman.
Against the backdrop of Coulter’s battle to retain his seat as board chairman, Lone Star opened nine new Lone Star restaurants, its first appreciable expansion in several years. The major news during the company’s tenth anniversary year centered on a possible way to avoid the problems that plagued it during the late 1990s. Part of the reason the company’s stock value fell during the period was because of its inability to meet the escalating quarterly earnings expectations of Wall Street, forcing it to plan for the short-term, rather than the long-term. One way to avoid the intense public scrutiny was to convert to private ownership, which it appeared the company was going to do. In March 2002, Lone Star signed a letter of intent to be acquired by the investment firm Bruckmann, Rosser, Sherill & Co. LLC (BRS). New York-based BRS agreed to take the company private for roughly $580 million. Lone Star’s board approved the letter of intent unanimously, but ultimately the two parties were unable to agree to terms. In May 2002, the deal fell through, leaving Lone Star to plot its future in the public sector.
As Lone Star pressed ahead in its second decade of business, much remained to be accomplished before Coulter could claim victory in his goal of reaching $1 billion in sales. During the first six months of 2002, the company posted a loss of $1.14 million, primarily because of the failed merger and issues related to its stock compensation program. There were no plans to open any new restaurants in 2002.
LS Management, Inc.; Lone Star Finance, Inc.; LS Marketing, LLC; L.S. Leasing, Inc.; LS Mail Order, Inc.; Bridgewater Properties, Inc.; Mama’s Concept, Inc.; Frankie’s Restaurant, Inc.; Big Guns, Inc.; Star Steaks, Inc.; Del Frisco’s of Colorado, Inc.; CGB Delaware, Inc.; CWA Delaware, Inc.; Crockett Beverage Corp.; Irwin J. Grossnerr Foundation, Inc.; Sullivan’s of Delaware, Inc.; Steak Concepts, Delaware, Inc.; Travis Beverage Corp.; Westheimer Beverage Corp.; Village Beverage Corporation.
Metromedia Company; Outback Steakhouse, Inc.; Ruth’s Chris Steak House, Inc.
- A prototype restaurant for Lone Star opens in Winston-Salem, North Carolina.
- Jamie Coulter incorporates Lone Star.
- Diversification into the upper end of the restaurant market begins.
- Dissident shareholder Guy Adams unseats Coulter as chairman.
“Coulter, Creative Team to Take Lone Star Chain Public,” Nation’s Restaurant News, February 17, 1992, p. 2.
Dinell, David, “Lone Star Throws Lasso Around Expansion,” The Business Journal—Serving Phoenix & the Valley of the Sun, November 5, 1999, p. 74.
Farkas, David, “Lone Star’s Strong Suits,” Restaurant Hospitality, August 1993, p. 82.
Grainger, David, “Driving a Stake into Lone Star,” Fortune, August 13, 2001, p. 32.
Hayes, Jack, “Lone Star Stock Sizzles as Expansion Gathers Steam,” Nation’s Restaurant News, November 16, 1992, p. 3.
“Lone Star Steakhouse 1994 Profit Up 86 percent,” Nation’s Restaurant News, January 23, 1995, p. 16.
“Lone Star Steakhouse Repeats as Best Company on Forbes’ List,” Nation’s Restaurant News, November 21, 1994, p. 16.
McDowell, Bill, “Jamie Coulter’s Bull Market,” Restaurants & Institutions, July 1, 1996, p. 26.
Papiernik, Richard, “Lone Star Posts $1.14m Loss after Options,” Nation’s Restaurant News, July 15, 2002, p. 12.
Peters, James, “Rarin’ to Go Private,” Nation’s Restaurant News, April 15, 2002, p. 1.
Ruggless, Ron, “Lone Star Launches 3-Tiered Strategy; Opens Second Del Frisco’s Unit,” Nation’s Restaurant News, April 29, 1996, p. 7.
Schatz, Amy, “Outsider Ousts CEO from Board; Shareholder Wins Seat in Heated Battle for Spot on Board of Restaurant Chain,” The Austin American-Statesman, July 12, 2001, p. D1.
Sullivan, R. Lee, “Steakout,” Forbes, November 6, 1995, p. 365.
Waxier, Caroline, “Falling Star?,” Forbes, March 24, 1997, p. 188.
—Jeffrey L. Covell