Hooters struggling with startup blues

By Liz Benston

Sunday, Jan. 28, 2007 | 7:30 a.m.

The glow from those notorious orange shorts at the year-old Hooters Casino Hotel is struggling to be seen against the bright lights of the Las Vegas Strip.

Founders of the Hooters restaurant chain, where busty "Hooters girls" wearing short-shorts and clingy tank tops serve up chicken wings and cheese fries, opened their first casino last February with great fanfare and press coverage from Montpelier to Manila.

But the news isn't all good these days.

Naysayers had predicted the chain's sexpot image would turn off female slot players critical for business as well as Las Vegas' new wave of wealthier tourists and business travelers - a casino's most profitable customers.

Hooters might be a hit in, say, Nebraska but wouldn't be as big a draw in Las Vegas, where hiring attractive women to serve drinks is a business imperative for casinos and competition for younger, richer customers has intensified, they said.

Whether that has proved true isn't clear.

What's certain is that the challenges facing Hooters run deeper than whether its blue-collar brand could win sufficient customers in a more sophisticated Las Vegas. Hooters has discovered what Hard Rock, Aladdin and the Stratosphere have previously learned: that it is fundamentally difficult for new, independent startups to make money their first year in the shadow of the Strip. As casino newborns lacking marketing muscle, they're learning how to walk and stumbling along the way.

When the Hard Rock Hotel and Casino opened on Paradise Road in 1995, it needed a cash infusion from owner Peter Morton to carry it through its difficult early days, when it struggled to attract customers from the Strip.

In time, the Hard Rock succeeded, thanks to a nightclub and music venue that attracted a desirable clientele.

In their early days, both Aladdin and Stratosphere fell into bankruptcy, emerging with new management and undergoing extensive remodeling.

Smaller properties have less room for error, Lehman Brothers analyst Jane Pedreira said.

"You've got to make a perfect impression from the beginning and can't make a lot of missteps," Pedreira said. "If MGM opens up a new property, they're going to hit the ground running. They already have an existing player base and marketing infrastructure."

Hooters capitalized on its existing customer base by advertising its casino hotel at more than 100 Hooters restaurants nationwide. But "who goes to a restaurant to book a room?" said Hooter s Casino President Mike Hessling.

The financial challenge facing startups is to simply make enough money to cover debt payments without infusions of cash, creative debt restructuring or selling out.

The Hooters casino lost $16 million in the first three quarters of last year. But more upsetting to Wall Street was its dismal operating cash flow of $5.2 million over that period - not enough to cover the company's annual debt payments of $13 million and resulting in new agreements with lenders. Also troubling was the property's average occupancy rate of about 74 percent from opening through September, which pales next to the 90-plus percent occupancy rates across most of Las Vegas.

Hessling isn't hitting the panic button. In fact, he says he's "impressed" with the property, which has more than doubled revenue from its pre-Hooters days.

"Analysts focus on quarter to quarter (performance) ... this is a marathon, not a sprint," he said.

Hooters took over the small San Remo hotel, which was making even less money, and set off to build a new customer base. That's not a problem for Strip giants like Harrah's Entertainment or MGM Mirage, which can tap existing customers and drive business to new properties, but is critically important to independent startups.

Burdened by debt, Hooters couldn't afford fancier upgrades needed to make a bigger splash, analysts say.

The dealmaker behind the transformation of the old San Remo hotel into Hooters, Santa Monica developer Richard Bosworth, has now made a $225 million offer for the property. It's unclear how Bosworth would finance the purchase, which would be expensive based on what the property earns and its land value, analysts say. The unsolicited offer triggers a 60-day negotiation period to attempt a deal.

Among the early misfires by Hooters' management was not quickly turning to the Internet to sell a large number of discounted rooms. Several months ago, Hooter s began selling rooms online more aggressively, which depressed room rates but boosted occupancy to 81 percent.

The Aladdin, by comparison, is benefiting from the Starwood room reservation and rewards network. The hotel database of millions has helped boost occupancy into the high 90s, spokeswoman Amy Sadowsky said.

Analysts also griped that the Hooters slots were only winning an average of $67 per machine - far short of the $100 or more per day won by the typical Las Vegas slot machine.

Hessling said enough people were visiting Hooters - just not enough older, middle-aged couples who are the backbone of the casino business.

"Hooters attracts 65 (million) to 70 million people to its restaurants every year and is a successful American icon," Hessling said. "We've always been full with younger people. What we weren't doing is attracting the typical Las Vegas visitor."

So while the hotel was filling on weekends with younger, impulse visitors, there weren't enough older customers to fill the property midweek, said analyst Pedreira.

"When you first start off, people don't know you exist when booking their trip so it takes longer to hit their full potential," she said. "I'm not sure if people are turned off by the Hooters name. I think it's more that people don't know about the hotel."

Hooters has also installed newer slot machines and is now marketing its slot club to older gamblers.

"We started out with a certain set of assumptions and had to tweak those," Hessling said. "We've never lost faith in the brand."