Crossing Over

Wally Doolin expands Buca's appeal to drive top-line growth.

Chain Leader

David Farkas

When CEO Wally Doolin opened Buca Inc.'s second-quarter conference call on July 27, his first words signaled relief.

"It is getting easier to do these calls," declared the veteran restaurant executive.

After all, the turnaround he launched upon joining the casual-dining chain in November 2004 is finally showing respectable results. The 93 restaurants Buca operates lost $718,000 on sales of $61 million. Not bad, considering a $3.8 million loss on sales of $59.7 million for the same period a year earlier.

Even better, the Minneapolis-based company announced its seventh consecutive quarter of same-store-sales gains, posting a 2.6 percent increase for the second quarter (ended June 30). Through the first six months of this year, same-store sales have climbed 4.1 percent at Buca di Beppo, well ahead of the 0.6 percent posted by the 48 casual-dining chains in Knapp-Track, a national sales-trend monitor based in New York.

As a result, weekly sales at the midpoint were averaging $52,500, above 2005's $50,000 yet still below Buca's $58,000 average in the late 1990s.

"Can we get 93 restaurants to the same place 45 were [in 2000]? I don't know," Doolin admits in a late-August interview. "What I do know is that the primary focus of what we are doing is how to improve existing assets by driving top-line sales."

The most effective way so far has been enticing diners into Buca di Beppo for more than celebratory occasions by making it more accessible for smaller parties. It's been an ongoing effort since 9/11, when sales began slipping. The chain, founded in 1993, had been known for serving large, family-sized platters of Italian food meant for sharing among parties of six or more. The country, however, was in no mood for celebration.

"With the shift in dining, we realized we needed more offerings. We needed more of a concept for utilitarian dining," recalls former Vice President of Marketing Randy Lopez, now vice president of national sales for e-mail marketing company Fishbowl.

The result was Per Due (literally "for two"): two entrees on a single platter. It maintained the idea of sharing, crucial to the brand, but it gave couples the opportunity to eat at Buca without toting home leftovers. By late 2003, Per Due had become Buca Small, a platter-sized entree that feeds two or three people; Buca Large feeds five or more. Today, Buca Small accounts for 40 percent of sales.

Master Plan

Yet the company's sales and guest counts didn't recover until Doolin showed up with a plan: expand weekday lunch (now accounting for 20 percent of sales in 24 units); promote menu items via an e-mail program (approximately 540,000 people have signed up); add grilled proteins like steaks and chops (now in test in six Texas units); and polish up Buca To-Go (now 10 percent of total sales, three points higher than when he arrived).

Meanwhile, corporate chefs have whipped up a kid's menu and added several new dishes such as spinach dip, roast pork and berry-topped shortcake to broaden the concept's appeal. Doolin is repositioning the menu away from southern Italian immigrant food, which prior management had labeled it, to casual-dining Italian.

"The immigrant thing is way too fine a distinction. It was Joe's idea, harkening back to his own family," says Buca founder and former Chairman Phil Roberts, referring to ex-CEO Joe Micatrotto, who resigned in June '04. Micatrotto declines to comment.

"We are not creating a whole lot of new things. We are continuing on a plan put in place last year. The e-Club is important and grills are a part of a platform for the future," explains Doolin, once CEO of T.G.I. Friday's. But he has made one change in plans: In September Doolin replaced COO Modesto Alcala with former Morton's President John Bettin, who has the added title of president.

The future is crucial to investors, who gauge a company's value on predictable earnings. "The two things they want to see are profitability and store-base growth," says restaurant analyst Ian Corydon of B. Riley & Co., who currently has a "buy" rating on Buca's stock. (Disclosure: A hedge fund his firm owns may own the company's stock.) Neither has materialized during the current turnaround, and the stock has paid the price, languishing in the $5 to $6 range this year.

"We have a lot of investors who have hung through all this," Doolin offers. "Their belief in the fact that [Buca] is an undervalued stock gives me confidence [the price] will come."

Undervalued or not, the company must show results—and the sooner the better. "At the end of the day, the stock won't go up until they start earning money," declares financial adviser and former Piper Jaffray analyst Allan Hickok, who covered Buca for five years.

Mission Not Accomplished

Doolin, at the helm of a public company for the first time, hasn't announced when Buca will be in the black. "I don't think there is any beginning or end," he explains. "I get judged every quarter. We have made improvements both quarters this year, and we will continue. I'm not going to stand on the deck of a ship and declare victory anytime soon."

If the company's comparable sales climb 3 to 5 percent a year, he adds, "It will get us to where we have to be in terms of profitability." Yet even a 5 percent increase, which would produce $55,125 in average weekly sales, still trails the $57,692 the units rang up in 2000 when Buca reported cash flows of $705,000, or 23.4 percent, per unit. At the same time, store-level margins climbed to 14 percent.

Doolin, however, hasn't disclosed current unit economics. "There's sufficient evidence in the base of restaurants to indicate that store-level economics are competitive," he allows.

Chief Marketing Officer Steve Hickey, another T.G.I. Friday's veteran, gets credit for boosting same-store sales. "He's doing a fantastic job," says Doolin.

Food Comes First

According to Hickey, who has worked for fast-food giants McDonald's and Wendy's, Buca wasn't broken when he got there, about 10 months ahead of Doolin. "The basic concept is strong. That's one of the reasons I went there and why Wally did, too," Hickey explains. "We still do pretty good sales."

Research showed that customers wanted more choice and that the chain didn't get credit for making several items from scratch. Given the company's limited marketing dollars, Hickey emphasized the food, now marketed heavily in-store, via e-mail and in print ads in newspapers like USA Today. "We made a concerted effort to broaden our menu offering strategically. We are trying to offer more northern [Italian] items and change the way customers perceive us," he says.

"The key part [of our strategy] was to recognize that we were not a media-driven brand," he adds, alluding to cable television and radio ads the company used before he arrived. Broadcast media—cable or otherwise—isn't much good to a chain as diffuse as Buca. Apart from Los Angeles, Philadelphia, Miami and Phoenix, the majority of markets have only one or two restaurants.

The wide distribution came as a result of the rush to open new restaurants shortly after Buca's $37 million IPO in April '99. In July 2000, for instance, Micatrotto told Chain Leader he expected to expand Buca di Beppo, then at 45 units, to 450 within several years. Yet by fall of '03, weekly sales had dropped 10 percent, to $45,600. The share price tumbled into single digits, leading influential analyst Bryan C. Elliott of Raymond James to drop coverage. Buca slammed the brakes on expansion.

When Doolin arrived at headquarters (redubbed "Paisano Support Center"), he discovered the company, under prior management, had violated the covenants on a term loan, driving up its cost. That forced him to sell and lease back eight Bucas to pay off the restrictive $18 million note. The company now has roughly $6.7 million in debt (excluding $15.7 million in capitalized leases). "We are not highly leveraged," insists CFO Kaye O'Leary, who joined the company in early '05.

Yet the company still wasn't making money. Doolin also shuttered three underperforming units and put another handful with serious cash-flow problems on watch. Early this year Doolin put Vinny T's 11 units on the block, to no avail. Today, the company considers three Buca di Beppos and all 11 Vinny T's as "discontinued operations" and does not include their financial performance in this year's results. Several Vinnys could be converted to Bucas, although all options remain open, he maintains.

What's To Come

The chance remains he may close more Buca units. "There's always something you lop off at the end of the year, like any other chain. But there's not a bunch of stores we are thinking about doing that to," Doolin says, adding that he doubts he could increase profits with more closings.

The two-year standstill in unit openings has dried up the pipeline, Doolin claims, although one unit will open sometime next year, probably in Southern California, Buca's largest and most lucrative market. The company has announced four to six new restaurants for '08, all in existing markets. By then, Doolin will be rounding up franchisees to fill in markets east of the Mississippi River, beginning with Charlotte, N.C., and Atlanta. "If we are disciplined about how we grow our business and invest capital, it cries out to bring in franchisees," Doolin says.

Yet given Buca's bleak past, which includes crimes committed by Micatrotto and allegedly by other former top officers, charged with defrauding the company from '98 to '03, why would anyone want to sign up? Doolin is quick to cite the 8 percent growth rate of Italian casual-dining chains and Buca's competitive advantages, which include four dining occasions: to-go, lunch, celebratory and everyday dining.

The company has retained a public-relations firm to blunt the publicity generated by the Securities and Exchange Commission's investigation. "You can get 50 phones calls in 10 minutes when news like this hits the wires," Hickey recalls. "Yet I don't think [the investigation] has ultimately done damage to the brand."

Buca has yet to reach a settlement with the SEC but is cooperating with government investigators, according to O'Leary, who today spends 5 percent of her time versus 80 percent last year attending to the accounting inquiry. "I hope never to repeat it," she declares.

"I knew there was work to be done on the concept to get it turned around, and I knew there was an SEC investigation," Doolin recalls, chuckling. "How hard could that be?"