American Restaurant Partners, L.P.

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Type: Public Company
Address: 3020 North Cypress Road, Suite 100, Wichita, Kansas, 67226, U.S.A.
Telephone: (316) 634-1190
Fax: (316) 634-1662
Sales: $130 million (2006 est.)
Stock Exchanges: Pink Sheets
Ticker Symbol: XXMUT
Incorporated: 1987
NAIC: 722211 Limited-Service Restaurants

Based in Wichita, Kansas, American Restaurant Partners, L.P. owns and operates more than 130 Pizza Hut restaurants franchised from YUM! Brands, located in seven states, mostly in Montana, Oklahoma, and Texas. Many of the restaurants also offer carryout and delivery services. An affiliated company, Restaurant Management Co., also owns and operates 20 Long John Silver's stores, and ten Kentucky Fried Chicken restaurants, as well as some dual-brand units with YUM! operations. Although American Restaurant Partners is a public company, its shares available on a Pink Sheet basis, it is mostly owned by Chairman and Chief Executive Officer Hal W. McCoy, Sr., and his son, Hal W. McCoy, Jr., who serves as the company's president.

Founder Worked for Pizza Hut: 1971

After graduating from the University of Oklahoma in 1967, Hal McCoy moved to Wichita to take a position with IBM as a systems engineer and marketing representative. In 1971 he went to work for Wichita-based Pizza Hut, which had been established a dozen years earlier by brothers Dan and Frank Carney. The chain started out as a single pizza parlor but after just one year in business, Pizza Hut began to franchise, spreading the brand across the country. In 1966 the company had 145 franchise units and was reaching out to Canada, prompting the opening of a home office in Wichita. By the end of the decade units were open or under construction in Mexico, Germany, and Australia. By 1971 Pizza Hut numbered 1,000 units, making it the largest pizza chain in the world. To better manage its far-flung empire, Pizza Hut began improving its operations, and McCoy was at the center of much of it. At first he worked in the data processing department, part of an effort to merge the different accounting systems used by companies acquired by Pizza Hut and to provide management with relevant data for strategic decision making, beyond the numbers that could be combed from the annual report that had previously been the basis for long-term business planning. In addition, Pizza Hut became more dependent on marketing in order to continue the chain's growth, and McCoy was among a small group of people that formed the nucleus of a marketing department in the early 1970s.

McCoy also became a Pizza Hut franchisee, operating a unit in Missouri that he acquired in 1971. Three years later, however, Pizza Hut was a public company and under the auspices of the Securities and Exchange Commission, which ruled that headquarters' personnel such as McCoy were no longer permitted to own franchises. McCoy complied by selling his Missouri restaurant, but soon regretted the decision and began questioning whether he wanted to continue working at Pizza Hut's home office. "The choice became clear to me," he told Restaurant Business in a 1981 profile. "I felt the best thing for me and for my family would be to be at the franchising end of the business, not in headquarters." Thus, he resigned his position and formed Restaurant Management Company to operate as a Pizza Hut franchisee.

Addition of Long John Silver's Franchises: 1975

McCoy quickly expanded Restaurant Management Company. Not only did he open Pizza Hut units in Wyoming and Montana, in 1975 he diversified his operations further by becoming a franchisee of the Long John Silver's chain, one of the first companies to award franchises according to the ADI (area of dominant influence) method. McCoy received the rights to Tucson, Albuquerque, and Phoenix. Pizza and seafood proved to be a good mix, as poor conditions in one were offset by better conditions in the other. In 1975, for example, the price of fish soared, but because beef prices remained stable Restaurant Management was able to weather the tough times visited upon seafood restaurants because of a strong Pizza Hut business. The down cycle for Long John Silver's lasted from 1976 to 1978, and it was McCoy's team that instituted many of the changes that would revitalize the concept, among other things improving food presentation, replacing benches with cushioned booths, adding plants, and hiring hostesses to make the atmosphere more friendly. Thus, when Pizza Hut was to experience some of its own difficulties, the improved Long John Silver's operations were able to keep Restaurant Management profitable.

Beyond diversification, there were operational reasons for bringing Long John Silver's into the fold. According to Restaurant Business, McCoy's "management philosophy dictates that he never wants his divisional operations chiefs to be more than one step removed from his store managers. He needed another franchise concept to develop in order to maintain that position." McCoy explained that he wanted division managers "to be intimately familiar with the problems faced by the manager in an individual unit. If the operations chain of command gets too far away from the store level, that's when the problems start." As a result of this approach, he was able to develop a well-run operation and minimize turnover. However, in order to retain talented managers, he needed to provide opportunities for further career growth. The addition of a new franchise concept helped to increase those opportunities. At the start of the 1980s, Restaurant Management became a franchisee in a third restaurant concept, Grandy's Country Cookin, a quick-serve chain launched in Dallas in 1973 that served homestyle fare, such as fried chicken, country steaks, and catfish.

By the end of 1980, Restaurant Management operated 28 Pizza Huts, 24 Long John Silver's, and six Grandy's. Together they generated sales of $21 million. Over the next several years the company grew at a steady clip, both through the development of new stores and through acquisitions, so that by the summer of 1987 Restaurant Management was operating 47 Pizza Huts in Colorado, Georgia, Montana, Texas, and Wyoming. The company's portfolio also included a combined 41 Long John Silver's and Grandy's restaurants.

Formation of American Restaurant Partners: 1987

In order to pay down $4.1 million in debt incurred from the acquisition of 21 Pizza Hut stores as well as to have additional funds available to develop new stores, McCoy decided to make a public equity offering by selling units in a new limited partnership, American Restaurant Partners L.P., which was formed in Delaware in April 1987 to acquire the assets of Restaurant Management Co. With Milwaukee-based Brunt Ellis & Loewi acting as underwriter, American Restaurant Partners completed an initial public offering of 800,000 partnership units in August 1987, netting nearly $7 million. The units then began trading on the American Stock Exchange. Regardless of the formal change in ownership, McCoy remained in charge of the business, becoming president of American Restaurant Partners.

The company's Pizza Hut holdings grew to 64 units over the next four years, making it the ninth largest Pizza Hut franchisee. With the Pizza Hut units leading the way American Restaurant Partners posted total revenues of $33.4 million in 1991 and net income of $1.4 million. A 65th Pizza Hut unit was added in 1992, but the company soon chose to sell seven North Texas Stores in order to pare down debt and free up money to expand its pizza delivery business as well as to open a new unit in Waco, Texas, a high-growth market.

Hal McCoy, Jr., Joins Company: 1992

It was also in 1992 that Hal McCoy, Jr., joined his father at American Restaurant Partners, having tried his hand at entrepreneurship and learning something of the restaurant franchisee business on his own. While studying business administration at the University of Kansas, he started a successful T-shirt company. He was then sitting in on a meeting with his father in 1990 when American Partners considered divesting four underperforming Texas Pizza Hut stores. The younger McCoy decided to buy them and formed CenTex Pizza Partners, L.P. to own and operate the stores. He turned around the units, sold CenTex back to American Partners in 1993, and joined his father's management team in Wichita.

The sale of seven Pizza Hut units helped to boost net income to more than $3.4 million in 1992 on sales of $34.6 million. The company enjoyed modest growth over the next three years, topping the $40 million mark in revenues in 1995, when the company also posted net income of $2.5 million. New products, in particular the introduction of Stuffed Crust Pizza, were instrumental in driving sales. The company's Pizza Hut holdings totaled 60 stores, 25 of which were located in Texas, 17 in Montana, eight each in Georgia and Wyoming, and two in Louisiana.

In 1996 American Restaurant Partners acquired a 45 percent stake and Restaurant Management Co. purchased a 29.25 percent interest in Oklahoma Magic, L.P., a new company that owned and operated 27 Pizza Hut units in Oklahoma. Two years later, American Restaurant Partners increased its position to 60 percent and Restaurant Management Co. to 39 percent, giving McCoy-controlled partnerships almost complete ownership of the Oklahoma operation. The debt taken on to make the original purchase, however, adversely impacted the bottom line for American Restaurant Partners in 1997, as well as the loss of income from the closing of five restaurants during the year. As a result, sales dipped from $40.4 million in 1996 to $39 million in 1997, while net income fell from $1.6 million in 1996 to a net loss of almost $2 million in 1997. In November of that year the partnership elected to be delisted from the American Stock Exchange and limited the trading of its units. In order to continue to be taxed as a partnership rather than a corporation, the company maintained a Qualified Matching Service, which connected individuals interested in buying units with people looking to sell.

In 1998, American Restaurant Partners closed single units in Louisiana and Texas while opening a new store in Montana, so that by the end of 1998 the company's Pizza Hut holdings numbered 89 stores in six states. The company also continued to operate 20 Long John Silver's restaurants. Sales totaled $43.5 million for the year, resulting in net income of $808,000, a significant improvement over the loss the company reported the year before. American Restaurant Partners closed the 1990s by selling a Texas Pizza Hut and closing another unit in Oklahoma, reducing the number of stores to 87. Nevertheless, revenues soared to $57.8 million, driven by the introduction of the 16-inch Big New Yorker Pizza early in the year, and net income improved to $1.3 million in 1999.

Growth in the New Century

At the start of the new century Hal McCoy, Jr., assumed a greater role in the running of American Restaurant Partners, taking over as president while his father remained chief executive and chairman. The company enjoyed steady growth in revenues in the 2000s, increasing to $70 million in 2002, again driven by successful product introductions, such as The Insider Pizza in the fourth quarter of 2000, Twisted Crust Pizza in the second quarter of 2001, and the P'Zone, unveiled early in 2002.

In order to expand its slate of Pizza Hut units, American Restaurant partners relied more on acquisitions than new store openings in the new century. "Our business has tended to grow by buying failing companies and turning them around. There isn't much territory left for us to build," Hal McCoy, Jr., explained to the Wichita Eagle in a 2007 interview, adding "There are a few people in the Pizza Hut business that have the ability to acquire other companies, and we are one of them. We basically wait until the deals are right in the markets we want to be in." One of those opportunities arose in 2003 when Winny Enterprises, Inc., was acquired, adding 13 Pizza Hut restaurants in Colorado, bringing the total number of units in the system, less one closing in Oklahoma, to 100. The rights to open additional Pizza Hut units in several Colorado counties were also acquired. Two years later another 42 restaurants were added in Austin, Texas. After winnowing out some of the units, American Restaurant Partners' Pizza Hut holdings numbered 135 units by 2007 and announced sales were in the $130 million range.

Principal Subsidiaries

Mountain View Pizza, LLC.; Oklahoma Magic, L.P.

Principal Competitors

Domino's Pizza, Inc.; Papa John's International, Inc.; Pizza Inn, Inc.