On Tap: Yard House
CEO Steele Platt’s upscale Yard House is poised to roll out the barrels.
By David Farkas, Senior Editor -- Chain Leader, 6/1/2007
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Begin in San Diego in a sprawling restaurant called Yard House on the corner of Broadway and Fourth. Jokingly ask a young bartender if she uses her wristbands to wipe away the sweat that collects on her brow from hard work. She laughs and shakes her head. "They cover my tattoos," she says, lifting one to reveal the ink.
End up a couple days later in Irvine, Calif., in the office of Yard House USA CEO Steele Platt, who co-founded the growing concern that operates 16 premium casual-dining restaurants, each with annual sales ranging from $5 million to $12 million. Listen as he explains the policy: "There are two ways to go. You can hire for personality and experience, or you can have a corporate structure where you create consistency in the hamburgers, the beer, the music and the service." In others words, you ban visible tattoos.
The 10-year-old concept, which features 130 beers, is all about consistency in an attempt to gobble up market share alongside the country’s highest volume brands. It has revamped its menu, turned its trendy-looking units into eating-and-drinking emporiums that lure an affluent crowd, and made itself an attractive catch for lifestyle-center developers. Says CB Richard Ellis’ Peter Moersch, an Anaheim, Calif.-based real-estate executive who represents developers: "Beer bars can get a blue-collar crowd or a white-collar crowd. Steele Platt got a white collar one—and the menu and decor had a lot to do with that."
So far this year, a new outpost debuted in Waikiki and two more are scheduled to open, in Newport Beach and Riverside, Calif., in September and November, respectively. Officials expected a Las Vegas opening in November but pushed it back to January ’08. Four more units are slated to open next year including Yard House Bar & Grill, a test of a freestanding prototype that’s smaller than the typical 10,000-square-foot Yard House.
Big Box, Big Business
The big-box Yard House has performed well in larger markets. The concept has two big draws: a full menu featuring both ethnic specialties (Cuban sandwiches, poke salads) and contemporary grub (Porcini Crusted Halibut, spicy tuna roll), and a large bar area with 130 beers on tap. The keg room, a cavernous glass-enclosed and refrigerated space lined with hundreds of beer barrels, is also meant to grab attention.
"These are big and interesting restaurants," marvels Lowell Petrie, vice president of marketing for Mimis Cafe, headquartered in nearby Tustin, Calif. "There’s usually a nice flow in the bar, which creates energy. It’s sort of like the old days of T.G.I. Friday’s."
Last year, beverages including wine and spirits accounted for 44 percent of sales, down several points from the late ’90s when Yard House’s reputation was mostly as a watering hole. Since then, Executive Chef Carlito Jocson has added trendier dishes to bring in a dining crowd that includes families with kids. Platt boasts the chain served a million kid’s meals last year. (Because Yard House USA is a private company, numbers cannot be independently verified.)
Platt also claims several Yard Houses ring up $1 million annually after 10 p.m., mostly on weekends when most customers are drinking. Peering into a flat computer screen, the 48-year-old entrepreneur reels off recent late-night sales figures: "Here’s Waikiki, ten grand on a Friday night. Long Beach, ten grand. San Diego, nine grand. Glenview [Ill.] is only $1,800, and Lakewood [Colo.] is $1,200."
Location, Location, Location
Those are the two suburban markets Platt picked four years ago to demonstrate the concept could travel. Wringing sales from the 11,000-square-foot boxes has been a challenge; the two rank as the lowest volume producers in the system. Platt says volumes have grown from $4.3 million to almost $6 million in Lakewood. Last year, the Yard House Glenview rang up just $5.3 million (break-even is about $4 million). A Yard House costs about $5 million to open, including $500,000 in pre-opening costs.
Platt blames the low output on the less-than-ideal locations he had to settle for. "Back then [in ’03 and ’04], those were the only sites offered to me," he says. "Developers asked, ‘Who are you? You only have three restaurants in California.’"
Platt had opened five Yard Houses by the time he ventured outside the Golden State, according to a company document. Since Glenview opened in June ’04, the company has built six more units outside of California, in Phoenix, Palm Beach Gardens, Fla., and Kansas City, Kan. "None of these stores has ever had a negative cash flow," he maintains.
Still, the company is counting on the less costly 6,300-square-foot prototype to produce better returns. The first unit opens in Chino Hills, Calif., an affluent city of 78,000 about 30 miles northeast of Irvine, in May ’08, the second in San Clemente later in the year. Despite a smaller footprint, menu (50 items instead of 110) and bar (60 draft beers instead of 130), Platt expects the Bar & Grill to produce sales volumes similar to its larger sibling. "I would have built this in Glenview and Lakewood," he says.
Given the volumes and same-store sales—up 5.4 percent year to date and 4.3 percent for the first quarter—Platt is searching for a private-equity partner to fund Yard House’s future. Platt has opened restaurants with the help of 120 investors; until recently one was his aunt. According to Platt, a $15,000 stake in 1995, the year he began raising money for the Long Beach unit, is now worth $495,000. In 2002 Platt raised about $24 million in a private placement that provided capital for six new restaurants.
Capital Goods
"This is how I grew the company without getting banks involved to this point," he explains. "I have no debt." Platt owns a 22 percent stake in Yard House USA, as does co-founder Steve Reynolds; the two are estranged and Reynolds is no longer an officer in the company. President and COO Harald Herrmann and Jocson each own roughly 5 percent. About 100 employees and the original investors own the remaining shares.
Should a significant infusion of private equity recapitalize the company, Platt estimates Yard House USA could be operating a dozen units among Boston, New York and South Florida within five years. Platt’s East Coast strategy is simple: "Boston talks to Florida and Palm Beach talks to New York and Boston," he says, meaning he’s hoping New Englanders who visit his Palm Beach outpost will embrace the Yard House in Dedham, Mass. Platt recently signed a letter of intent for a spot in a proposed lifestyle center in the Boston suburb.
A private-equity firm will have to meet Platt’s "magic number," a figure he won’t reveal except to say the company may be worth from 12 times to 18 times income "depending on how you look at it." He may be onto something. Financial buyers have been particularly active in the restaurant industry recently, showing a willingness to pay for profitable fast-casual and upscale casual-dining chains. Both segments are demonstrating an ability to maintain healthy same-store sales compared to most QSR and casual-dining concepts.
"I wouldn’t rule [the multiples] out," says financial strategist Jim Parish of Parish Partners, who recently joined the board of McCormick & Schmick’s Seafood Restaurants. "Yard House is a good brand. They have paid attention to food and decor."
As of mid-May, however, private-equity players hadn’t come close to Platt’s number. "It’s mind boggling how private-equity people are," Platt says. "They are more interested in their return than they are in your return. Right now [the offers are] way out of whack."
Mark Saltzgaber, a former investment banker who now advises private-equity firms about restaurants, also likes Yard House. "It’s smartly positioned in the upscale-casual niche. That’s not a bad place to be with the macro factors affecting mainstream casual-dining chains," he offers.
Second Bite
Saltzgaber believes Platt and a private-equity firm could resolve their differences if principal shareholders such as Platt and Reynolds reinvested a "meaningful portion" of their stock into the company. "It does two things," he explains. "It provides the sellers with significant, immediate liquidity and gives them a second bite of the apple. That way, if they believe the purchase price is not a full one, the cost basis and potential upside of the second bite is better for them."
"What he says is spot on," Platt says. "But I still need to have a satisfying front side to take the risk on the back side—and to get me to hand over my baby to someone else."
Developers have been more amenable to Yard House, chipping in $1 million to $2 million in the form of tenant incentives of the roughly $5 million build-out. Platt says Yard House’s cash allocation is about $3.5 million per project. Annual rent runs about 6 percent of sales, acknowledges Herrmann. "At that rent rate, [developers] are making their money back," says real-estate executive Moersch. He adds that popular concepts like Yard House give other tenants the chance to thrive "on a different level."
"The demand for Yard House outstrips supply," boasts Platt, who opened his first business—a Hawaiian-themed restaurant—shortly after graduating from Denver University, where he majored in hotel, restaurant and tourism management. "I probably have 18 projects to choose from. I get to pick six." Even better, the capital required to open them won’t vary. "The real-estate cost is exactly the same no matter where I go because I dictate it. I say, ‘This is what I pay. If you don’t do it, this [developer] will,’" he declares.
You could argue Platt’s track record at Yard House gives him room to brag. "Here’s a guy who hit two home runs right out of the gate," Moersch recalls. "He turned Long Beach, which was in a failing district, into one of the highest volume restaurants anywhere, and he made a good strategic move when he took over Triangle Square mall [in Costa Mesa]." The question now is, can he recapitalize the company and turn Yard House into a consistent power hitter?
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