Hamburger Hamlet, Sizzler serve up declining profits; analysts blame changing market, outmoded concepts.

Faced with increased competition, a sluggish economy and failure to adapt to a changing marketplace, two well-established locally based restaurant chanins - Sizzler and Hamburger Hamlet - are reeling from steadily declining profits over the past two years and a resulting dive in stock prices.

Both publicly held "casual dining" chains have posted heavy financial losses for fiscal 1993 and resulting declines in their earnings per share. Sizzler reported its net income for the 40-week period ending Feb. 6 was $3.5 million, or 12 cents per share, vs. the year-earlier profit of $4.7 million, or 17 cents. This marks the fourth consecutive year of a decline in earnings per share for the company.

Hamburger Hamlet has reported its net income for the fiscal year ended Dec. 26 was $458,000, or 11 cents per share, compared to $2.94 million, or 70 cents per share for 1992.

In an attempt to stem Hamlet's fiscal hemorrhaging, management has frozen employee wages and slashed executive salaries. And in a vigorous effort by shareholders to force more dramatic changes within the company, a major shareholder group, HAMB Investors, owning 16.2 per cent of Hamburger Hamlet, earlier this month ousted Hamlet's Chairman and Chief Executive, Thomas A. McFall.

Taking over temporarily is board member Jack Lavine, co-founder and chief financial officer of the highly successful Chili's chain.

Lavine told the Business Journal he blames Hamlet's declining revenues on a confluence of recent events: the California recession, the 1992 riots, the January earthquake, and a "too rapid expansion" program after Hamlet went public for the second time in 1991.

"Some of the people took their eye off the ball and were more concerned about rapid expansion than they were about fixing up the stores they had in place," said Lavine. "There was too much pressure to expand, and it caused them to do it somewhat haphazardly. They picked some bad sites, and now those new sites are not performing up to expectations. All of these things came together at the same time."

Lavine told the Business Journal his goal is to stabilize operations and to focus on the search to hire a permanent CEO for Hamlet - a process he expects to take three to six months.

"In the meantime," he said, "I really don't have any grand scheme to turn things around. What I'm doing now is looking and listening."

At least one financial analyst believes the management turmoil will be good for the gourmet hamburger chain, which was founded in 1950 and has 22 restaurants in Southern California and 13 others scattered throughout the country.

"It's healthy to bring in new people who are closer to the industry," says Laurie Lively Smith, a restaurant analyst with the Seidler Companies. Smith keeps an eye on both Hamburger Hamlet and Sizzler.

She believes both chains have contributed to their own decline by failing to keep pace with a constantly changing, contemporary marketplace.

"The restaurant business really needs to evolve and adapt as its consumers change," said Smith. "It really needs to keep up to date. And in both cases, these chains tended to rest too much on their laurels and not recognize that the world around them was changing."

Smith points to significantly increased competition in the casual dining market, including the rise of such successful chains as Chili's, TGI Friday's, Applebys, the Olive Garden, and California Pizza Kitchen.

"A lot of what we see today, especially in casual dining, is meals as entertainment." said Smith. "People want to have fun when they go out. They want to have a good time, so we see more theme restaurants. I think the fun factor is lacking in both Sizzler and Hamlet."

Smith points the finger particularly at Sizzler's familiar steak-and-potato formula. "Sizzler is just basically food," she says. The restaurant's "Just for Kids Bar," instituted last year, is a step in the right direction, she said, "but it doesn't go far enough."

As for Hamburger Hamlet, Smith points to a "lack of vision" at the top. "That means that basic strategic thinking is missing. I think that Hamburger Hamlet probably needs to rethink its marketing. They haven't spent a great deal in the past on advertising, and they may need to, just to stay competitive. Maybe they need to sit down and talk to consumers and find out what's most important to them."

Smith notes the deliberately dark, sunless atmosphere characteristic of Hamburger Hamlet's interior design in its older outlets, and says further that many of the locations have become rundown. She praises its recently begun remodelling program, which will lighten and brighten the look.

"You get a very good return on those dollars that you invest in remodeling," Smith notes. "It's a very good way of increasing sales and profits."

Lavine told the Business Journal the remodeling program is going full steam ahead, despite the recent management shakeup and cutbacks.

Other financial analysts emphasize the lingering effect of Southern California's dismal economy on both restaurant chains, the effect of the L.A. riots two years ago on Sizzler - which has a large numer of restaurants in South Central L.A. - and on an outbreak last summer of food-borne bacterial illness in a handful of Sizzlers in southern Oregon and Seattle, causing negative publicity and a downturn in business.

One New York analyst who keeps a close watch on Sizzler agrees that the restaurant, which began in 1968, is in need of a catchy new concept.

"The company had tremendous success with the buffet court and grill concept, but the problem was it was too successful," says David Leibowitz, an analyst with Republic NY Securities. "They packed the house with customers who unfortunately were Sordering the buffet court and grill to the exclusion of entrees, so that the average tab went down. They were a victim of their own success."

Over the past two to three years, Sizzler has gradually phased out the buffet court concept, but has yet to find a winning formula as a replacement. Leibowitz believes Sizzler's chain of approximately 227 company-owned domestic restaurants is too many.

"They have too many units at the moment in certain locations, and without a new hook, without a new concept, it is unlikely that all of these units will remain Sizzlers," Leibowitz says.

As of February, seven Sizzlers had been converted into the "Buffalo Ranch" concept, which operates as a full-service restaurant resulting in a higher check average. The company hopes this new concept will complement, not compete, with other nearby Sizzlers, and early returns on the Buffalo Ranch restaurants have indeed been favorable.

More Sizzlers may be converted or closed. Meanwhile, observed Leibowitz, "a lot of Sizzler's customers have recently shown up cleverly disguised as empty seats."

Sizzler's profits and stock value have been declining since mid-1991. In June 1991, the stock was trading at $17 per share. It currently sells at $7 a share.

In its domestic operations, which account for 59 percent of the company's business, Sizzler has reported its revenues for the 40-week period ended Feb. 6 were $221.5 million, down $20.4 million or 8.4 percent from the prior year.

Sizzler's domestic losses before interest and taxes for the third quarter of fiscal 1994 was $8 million, compared to a $5.3 million year-earlier loss.

Hamburger Hamlet's decline in profits began at the end of 1992. It reported a net loss of $605,000, or 14 cents per share, for the fiscal fourth quarter ended Dec. 26, 1993, compared to net income of $692,000, or 16 cents per share, a year before.

In June 1992, Hamlet stock was trading at $17 a share, and currently it sits at $6.50 a share.