New Strategy Cooking at Hamburger Hamlet : Restaurants: Responding to earnings decline in Southland, chain mounts image campaign, tinkers with menu and expands in areas with stronger economies.

Hamburger Hamlet Restaurants Inc. owns 33 restaurants, but with two-thirds of them located in the Southland, the chain’s earnings have suffered badly due to the battered regional economy.

Hamburger Hamlet’s profits for the nine months ended Sept. 26 fell 53% to $1 million, even as its revenue rose 10% to $51.6 million, compared to the same period last year. Meanwhile, the company’s stock has nose-dived. It started the year at $18.25 per share, but closed Monday at $7.25 per share on Nasdaq.

The problem: While Hamlet restaurants on the East Coast and in the Midwest registered about a 10% increase in sales this year, sales at the chain’s Southern California restaurants have dipped between 8% to 10% since January. “Clearly, we had to do something,” said Thomas A. McFall, the company’s chief executive.

So company officials decided on a two-pronged strategy: Open more restaurants outside Southern California and retool the chain’s image here.

The company also owns restaurants in Northern California, the Washington, D.C., metropolitan area and Illinois. Hamlet officials said that restaurants on the East Coast opened for at least a year are averaging $3 million in sales, while Southern California restaurants that have been open for the same period are averaging only about $2.6 million.

The company decided to concentrate on opening new restaurants on the East Coast and in the Midwest, where the economy is stronger, and put expansion plans for Southern California on hold. The exception is a new restaurant scheduled to open this week in Irvine, close to the UC Irvine campus. In 1994, Hamburger Hamlet plans to open seven restaurants in Las Vegas, around Washington, D.C., Chicago and Walnut Creek, in Northern California.

A new marketing strategy for the 43-year-old restaurant chain, best known for its affordable gourmet hamburgers and distinctive dining rooms featuring red-plastic booths and dark wood paneling, includes lower-cost menu items. McFall and his crew also decided on a new name, Hamburger Hamlet, The Original California Grill, which appears on the chain’s redesigned lunch menu and also is used in radio commercials.

Meanwhile, a new menu offers larger portions for dinners and cheaper but smaller-portioned lunch items, all prepared with Southern Californians’ desire for healthier meals in mind. The changes took effect two weeks ago and so far the response has been encouraging, McFall said in a recent telephone interview.

“The new change continues to reflect that 18% of our sales are hamburgers, but we are also offering salads, chicken and pasta entrees. We’re responding to our customers’ demands for healthier menu items,” said McFall.

Beginning later this month, the Hamlet will also begin offering a new dinner menu. Currently, the restaurants have a daily $5.75 luncheon special on nine menu items.

Despite the earnings dip, Stephen D. Weinress, an analyst with L. H. Friend, Weinress & Frankson in Irvine, said the company’s marketing strategy is sound and lauded McFall for acting to stem the decline in Southern California.

“He’s cutting back expansion in Southern California and expanding in Washington and Chicago, where the economy is strong and growing. I like their strategy of opening new restaurants in areas that have a population of at least 150,000 within a five-mile radius with a median household income of at least $50,000,” Weinress said.

But one criticism that most analysts make about Hamburger Hamlet is the size of their menu, which lists about 90 items ranging from a vegetarian quesadilla to Chinese chicken salad. “Their menu is too extensive. They can pare their menu significantly and still offer quite a variety of meals,” Weinress said.

“We’re working on that,” said McFall. “We’re going to pare down our menu and come out with revolving specials in January.”

McFall has a lot riding on a turnaround at Hamburger Hamlet. He owns about 16% of the Hamlet’s outstanding shares, worth roughly $4.7 million.

In 1988 he led Weatherly Restaurant Group in a $29-million leveraged buyout of the company, which opened its first restaurant in 1950. About two years ago, McFall took the company public at $11.50 a share, raising about $23.5 million from the stock offering. It was almost enough to pay off most of the $28 million in debt remaining from the leveraged buyout.

For all of its recent headaches, Hamburger Hamlet remains “a very attractive company, with a positive cash flow and very small debt,” said analyst Weinress.

Hamburger Hamlet Restaurants at a Glance Hamburger Hamlet Restaurants, Inc. is a Sherman Oaks-based company that operates 33 restaurants in California, Washington D.C. area and Chicago. The company, which was founded in 1950, is best known for its gourmet hamburgers. However, with 21 of its restaurants in Southern California, the company has been hurt by the struggling local economy, and its profits are down 53% for the first nine months of this year, compared to a year ago. Source: Company reports