Subject: Herb Greenberg @ The Street.Com
Date: Thu, Apr 23, 1998 09:28 EDT
From: MZeltser
Message-id: <1998042313285300.JAA20369@ladder01.news.aol.com>
To all:
In response to Herb Greenberg's remarks about Rainforest during the recent Yahoo Chat, I sent him an e-mail with a different perspect. I thought the members of this board might be interested. Here it is.
Subj: Rainforest Cafe - Yahoo Chat
Date: 98-04-22 13:50:33 EDT
From: MZeltser
To: herb@thestreet.com
Herb,
I read your column with much delight and have followed you from your Chronicle days. I believe you have a certain integrity and the courage and willingness to dig out the facts (do your homework), take on company management, and present well-thought out arguments for or against a particular stock. It is for this reason that I was little disturbed with your off-the cuff remarks about Rainforest Cafe during the recent yahoo chat. Those remarks
illustrated very little first hand knowledge of the company and stock. I expect more from you as a journalist, who should do detailed research on a topic before voicing his opinion in a public forum, especially one that generates so much public interest (the Street.com).
You stated that you have never eaten in one, but were quick to pan the company by lumping it in with Planet Hollywood (a mature and stale concept, with extremely poor, overpriced food, with nothing going for it, loaded with very high cost debt, and poor earnings and cash flow prospects). I do not place the blame on you specifically for confusing a thriving concept and business with a dying one, as the rest of Wall Street and some of the general
public (influenced by the bearish media) seem to share your views. My respect for your journalistic integrity prompts me to suggest that you do a bit more research (perhaps attending the Rainforest Cafe unit at Disney's new Animal Kingdom or Downtown Marketplace). What will be revealed to you is that the first Disney restaurant generated over $35 million in revenues last year! That's right, $35 million. At over 20% operating margins. Not bad.
The Animal Kingdom is likely to do even better. Moreover, Disney is planning additional units at its other theme parks which would be very lucrative to Rainforest. The relationship between the two companies is very strong, as Disney is very happy about the fact that it received more in rent from Rainforest' Downtown Marketplace unit than its previous Chef Mickey's generated in sales.
A "tourist trap", you say (and you're not alone). Rainforest maintains two other "tourist traps" at high volume locations, including MGM at Las Vegas (on course to do over $20 million in revenues) and Downtown Chicago (somewhat less than that). In addition, the Company is in the final stages of negotiating a lease for a large unit at Times Square, NY City for 1999. Living in the New York Area, I can assure you, this unit is likely to be a winner
(over $20 million in revenues). In summation, as Michael Eisner at Disney can tell you, "tourist traps" can be very profitable.
Oh yeah, the company's mall based units. I guess your fad argument is stronger at this level. Same store sales at the mall units open for more than 1 year or 18 months have dropped off sharply. But isn't this largely expected? The units get a huge amount of fanfare in their first year, as people flock to try something new. SSS inevitably drop in their second year, then stabilize going forward. The question is, do people come back again? The
answer is yes. The food is absolutely fantastic, plentiful, and very innovative. The large malls which house the typical units have huge crowds and provide a captive market. The first Rainforest Cafe at the Mall of America is nearly 4 years old and still generates over $10 million in revenues with positive SSS comps. "Then what caused the SSS drop that led to the stock price's collapse this January", you ask? Answer: lower retail sales,
particularly apparel, as customers who, for example, have have bought a t-shirt the first time they came to Rainforest were not willing to buy one again upon their return. What has the company done about it? Plenty. The company has focused on tailoring the mix of retail merchandise to each unit, including providing much more children's items and less apparel, lower priced merchandise in discount malls, more upscale merchandise in more affluent
malls. The results have been positive, as you will see in upcoming reports from the company.
The key argument for the mall based units, however, is one of ROI. The company realizes a 40-50% return on investment in the first year of a unit's operations. Also not bad. These returns are likely to improve as the company tweaks pre-opening and operating costs, improves efficiency and gains some operating leverage.
Rainforest also has some very attractive franchising deals with experienced international operators. These deals bring in a significant amount of free cash flow as each brings a $500,000 - $750,000 in up front fees, $100,000 per unit, and 5-10% of revenues of the units. The company conservatively amortizes these fees over a 5 year period.
Rainforest's balance sheet is flushed with over $100 million in cash. This is more than enough to fulfilll the opening schedule through 1999. The company has aggressively bought back stock after the "crash" and has reigned-in several million bucks from selling puts, of which a large portion has expired worthless (the rest are also likely to expire worthless).
The other bear argument has been the lack of a President. This should be resolved within the next two months. This should provide some added comfort for investors and analysts who are somewhat skeptical of management.
Valuation is very attractive. Estimates for 1998 and 1999 are very conservative, in my opinion, and are likely to be exceeded. The stock trades for less than 15x 1999's conservative EPS of $1.05. Growth should exceed 30% in each of these years, and is likely to be in the high teens to low 20% range going forward. The stock, in my opinion is very cheap.
Mr. Greenberg, I hope you take my arguments in stride and do the due dilligence I have come to expect from you.
Thanks.
Sincerely,
Mike
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