Strategies -- Sea Galley Stores -- Sea Galley Manages To Keep Afloat

SEA GALLEY STORES

-- Employees: 800 to 900 -- Headquarters: Mountlake Terrace -- Business: Budget-priced seafood restaurant chain -- Chief executive officer: Jan Young -- Fiscal 1990 sales: $24.4 million -- Fiscal 1990 loss: $5.13 million, or $1.64 per share -- Major competitor: Red Lobster -----------------------------------------------------------

Probably the most remarkable thing about Sea Galley Stores Inc.'s corporate strategy is its ability to hang interminably by the same tattered and frayed financial thread.

Last week that well-tested thread held again when Sea Galley negotiated the purchase of a Fairbanks, Alaska, restaurant. Given that Sea Galley barely has a financial pulse, the purchase surprised many, says Keith Huetson, Sea Galley's chief financial officer.

"We got it on a real easy arrangement because the restaurant was close to Chapter 11. The attorneys didn't think this could be done but we got all of the lenders to restructure the underlying loans so Sea Galley could assume them," he says. Huetson refused to reveal the purchase price but said Sea Galley used $150,000 in cash.

Despite the bargain, the purchase leads the troubled chain into new territory both geographically and conceptually.

The restaurant, called The Pumphouse, will not become a Sea Galley. "The Pumphouse is an institution in Fairbanks. It would be a sin to turn The Pumphouse into a Sea Galley," Huetson says. The Pumphouse, which serves steaks and other dishes as well as seafood, caters to tourists in the summertime.

Although The Pumphouse is a new concept for Sea Galley, it adds value to the Sea Galley chain and fits the company's new strategy of staying with markets it knows, Huetson says. Sea Galley's Anchorage restaurant posts daily sales of more than $10,000 and is the chain's most profitable. Sea Galley sales at other restaurants average about $20,000 per week per restaurant, he says.

Unfortunately, beleaguered Sea Galley shareholders have heard this refrain before.

Among the financially troubled restaurant chain's dubious credits are a string of unsuccessful business ventures, poorly planned expansion and failed marketing efforts. All were touted by management as great moves and all invariably ended in costly remedies.

The viability of the new purchase has its doubters, as well.

"Any fool can go out and buy something. It's making something work that takes talent," says John Radovich, Sea Galley's largest shareholder and a Bellevue developer. If The Pumphouse was a great deal, maybe it will be fine, but shareholders need to see something on the bottom line, Radovich says.

"Seeing is believing. Let's see the profits generated from the restaurant then I'll make a judgment," says Steve Chess, a broker-analyst at National Securities Corp. in Seattle.

Huetson, however, is nothing but upbeat.

"We're going to do something that has never been done before in this company," Huetson says. Management has a whole new approach - one of patience - which means waiting for a good deal, he says. The Pumphouse was one of those good deals, he says.

A new management approach is also an oft heard refrain at Sea Galley, however.

Management has turned so quickly at Sea Galley that shareholders attending the past three annual meetings have yet to hear the same president twice. Other top managers, too, have been ousted. In 1990, six of the company's seven officers resigned, costing Sea Galley $755,000 in severance costs.

Sea Galley currently has just three board members, Jan Young, Vernon Furry and John Cox, a company co-founder. Board member Cox causes concern among some shareholders. At the June annual meeting, Cox was questioned about a potential conflict of interest because of his personal liability of a reported $3.5 million attached to five Sea Galley restaurant leases. At the meeting, Cox said only that he must answer to shareholders for his actions.

Since the meeting, two management-initiated restaurant closings seem, well, fishy.

Just weeks ago, Sea Galley closed its Everett facility and its University District restaurant. The leases on both of those sites were personally guaranteed by Cox and there is now no remaining liability, Huetson says.

The two restaurants were closed for economic reasons, Huetson says. The Everett restaurant was "extremely unprofitable" and would have been too much of a cash drain to turn around. In addition, Red Lobster is locating a new restaurant near the Sea Galley, which would have further hurt sales, he says.

Radovich, however, questions the closings. Both sites were well located and could probably have become profitable if Sea Galley's management had focused their efforts on the facilities, he says.

Turning Sea Galley around will take about 18 months, Huetson predicts, and closing unprofitable restaurants is only part of the formula, he says.

Another part of the equation is changing the menu, which the chain did recently. With its lunch specials, all-you-can-eat salad bar and other menu changes, the new management team has boosted guest counts at the restaurants to last year's levels, Huetson says. Although last year was still a losing year, returning to those levels is better than continuing a decline, he says.

However, Huetson says the menu still needs to be "tweaked." Higher guest counts have not meant higher sales. The lower menu prices reduced both sales levels and profits, he says.

Joyce Fasano, a Portland restaurant consultant, says margins are particularly thin for restaurants competing on price. Making a profit takes careful attention to details of all kinds, not just guest counts. Menus in price-sensitive restaurants are carefully engineered in a process that is almost scientific, she says. Item preparation time, food costs, customer appeal and other factors are all combined to set a price that will both bring in customers and still maintain profit levels, she says.

Huetson says the company is still working on its pricing strategy and that menu price adjustment and decreased food costs are part of those efforts. The restaurant business is a tight-margin business and companies shave costs, even a fraction of a percentage, wherever possible, he says.

Sea Galley also faces stiff competition from Red Lobster. That chain has a heavy promotional budget and uses television extensively. Sea Galley simply cannot compete at the same advertising levels as Red Lobster, Huetson says. Red Lobster's management could not be reached for comment.

Besides its competitive and financial problems, Sea Galley is facing legal troubles, as well.

Sea Galley is currently embroiled in a lawsuit with Food Service of America, a longtime supplier. As a result of the lawsuit, a judge has restricted the use of some of Sea Galley's assets and cash.

For the second quarter, which ended in June, the company lost $1.6 million, or 50 cents per share, on sales of $5.2 million. That compared with a net loss of $363,000, or 12 cents per share, on restaurant sales of $6 million during the same period. The company faces a 1995 due date on $7.5 million in subordinated debt and is having trouble making the interest payments on that debt in the interim. Young has said Sea Galley needs $24 million to $26 million in sales to service its debt.

With a stock price so low it would take several shares to purchase a cup of coffee, Sea Galley continues to allow its much battered financial thread to bear the corporation's full weight.

Strategies appears weekly in the Business Monday section of The Seattle Times.