Restaurants and Institutions - April 1, 2000
Exploring the Rainforest
...continued from Published News
Six years ago, Tilman Fertitta and Lyle Berman were working on a deal in Minneapolis. Berman suggested they have lunch at a new restaurant concept that had opened the day before in the giant Mall of America retail complex. It was called Rainforest Café. "I told him, 'No, no. I don't have time to go see some rainforest restaurant,' " Fertitta recalls. And he does so with a laugh because in February Houston-based Landry's Seafood Restaurants Inc., of which Fertitta is chairman, president and chief executive officer, agreed to acquire Rainforest Café Inc., of which Berman is chairman, for $125 million.
The offer surprised some in the industry not only because Minneapolis-based Rainforest's financial misfortunes are well-known, but also because it seems an unusual pairing with the portfolio of seafood restaurant concepts under the Landry's banner.
Fertitta believes the skeptics simply can't see the Rainforest for the trees. Where some see only red ink, he sees cash flow, profit potential and the need for some operations improvements.
The Rainforest chain encompasses 28 units in the U.S. and 10 international locations. The nine largest - its so called "icon units" - account for $150 million in annual revenues "and throw off $30 million in cash flow," Fertitta says. "You've got to remember the worst [Rainforest] unit does $5 million [in annual revenues]. That's the worst one. Now, of course, the problem with that unit is that the rent on it is $1 million."
"Economically, it doesn't work," he says of that imbalance, "but the concept works." Fertitta believes the same can be said for Rainforest Café overall. Revenues have grown, but earnings have eroded as same-store sales have declined. For the 52-week period ended Jan. 2, 2000, total revenues were up 23%, to a record $263 million, while net income dropped 19%. Comparable-stores sales were down 11%; for the 52-week same-store sales were even worse, down 13%.
"We won't know for a year or two whether the deal is a steal or a mistake," says Allan Hickok, restaurant analyst with US Bancorp Piper Jaffray in Minneapolis. "Rainforest Café has suffered from chronic same-store sales numbers. Then profit margins took a tumble. If [Landry's] can stabilize or reverse the same-store sales trend, the deal could look very good."
The Same-Store Problem
Fertitta knows the numbers, good and bad, and agrees Rainforest is a sound buy, "If you're able to stop the same-store sales decline."
It's a gamble that was just too enticing for Landry's to pass up. Rainforest stock had sold for as high as $25 per share in 1997. Fertitta's combination stock and cash bid price was valued at $5.23 a share for stock that had been hovering around $4.
Some Rainforest shareholders grumbled that the price was too low, with the possibility that the Landry's deal could fall apart or that another chain could make a higher bid. Landry's, though, was something of a white-knight: Its $5-a-share bid topped a $4.54-per-share acquisition offer Rainforest had accepted from Minnesota casino operator Lakes Gaming last December.
"Lyle [Berman] knows we're operators," Fertitta says. "He'd just as soon have stock in our company than operate [Rainforest]."
But Rainforest's depressed stock price may say something about Wall Street's valuation of and confidence in all restaurant stocks as well as about the chain's obvious operations problems. "Rainforest is an out-of-favor category of an out-of-favor industry in an out-of-favor universe, consumer cyclicals," Hickok says. If Landry's is getting a steal, it may be partly because Wall Street just doesn't understand the restaurant business.
On The Boardwalk
Fertitta is confident he does. For the 12 months ended Dec. 31, 1999, Landry's reported revenues of $438.9 million, up 9.8% over 1998. Same-store sales for the year rose 3.6%. At the close of 1999, Landry's operated 149 restaurants, primarily mid-price, casual-dinner houses under the Joe's Crab Shack (88 units), The Crab House (13) and Landry's Seafood (41) brands. It also owns a more upscale concept called Willie G's Seafood and Steak House (3) and a more downscale tavern called Cadillac Bar (4). Rainforest adds a new wing to that assemblage, but won't function as a huge growth leader.
"We see Rainforest as something where, after we fix the problems - and we may have to close down a few units - we'll start rolling them out one or two a year," he says. "But I never see more than 50 Rainforest Cafes in America."
Fertitta won't say for sure, but one of the first new Rainforest Cafes Landry's is likely to open will be on Kemah Boardwalk, a 40-acre oceanfront marketplace complex on Galveston Bay near Houston. Fertitta conceived the project, which draws 3 million visitors annually and already includes eight Landry's restaurants.
Under The Sea
Kemah also is home to Aquarium, Fertitta's own ambitious foray into the eatertainment category. The 25,000-square-foot, three-story restaurant - identified at its entrance as "An Underwater Dining Adventure" - seats about 200, with banquet space for 200 more. Aquariums dominate the décor; the largest holds 50,000 gallons of water and more than 100 species of fish. But Fertitta emphasizes that it is "a quality seafood restaurant first and an aquarium second."
Emboldened by his success with Aquarium and the Kemah project in total, Fertitta believes Landry's can find ways to improve business in the giant Rainforest Café locations. "The brand is great. The décor is great," he says of Rainforest. "I think some of the 'boxes' are too big and need to be reworked. And I think the food, well, there needs to be some changes."
The menu, he says, has been Rainforest's biggest problem, adding that it needs its prices lowered.
"It isn't like Rainforest Café management wasn't trying to arrest," per-store sales, analyst Hickok says. "They worked very hard at it. But it was a big issue. Whether Landry's can take the right steps to fix it is the $64 question."
Fertitta points out that Landry's last year faced declines in per-store profit margins at its Joe's Crab Shack units. Menu changes, a 5% reduction in prices and a 20% increase in manager salaries have stemmed the declines, he recently told a meeting of financial analysts. That experience gives him confidence about what he's getting into.
"The mall may not be busy, but there's always a line at Rainforest Café," Fertitta says. "The concept works. We know that."