Conference Call, 04/24/97 - Rainforest Cafe Q1

FOOL CONFERENCE CALL SYNOPSIS*
By Rick Munarriz (TMF Edible) and
Paul Larson (TMF Parlay)

Rainforest Cafe
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607 Washington Ave. South, Ste. 204
Minneapolis, MN 55415
612-945-5400

April 24, 1997 /FOOLWIRE/ -- Rainforest Cafe reported their first quarter earnings today for the thirteen weeks ended March 30, 1997. Revenues rose 284% to $21.9 million from $5.7 million in the first fiscal quarter of 1996. Results for the first quarter of 1997 included half of the $.5 million licensing fee from the Elephant and Castle Canadian joint venture. Net income per share quadrupled to $.16 a share from $.04 per share before the net effect of the previously announced charge to write-off development costs at the cancelled units at Taj Mahal in Atlantic City and Stratosphere in Las Vegas. Adjusted to reflect the $1.9 million charge, the company earned $.09 for the quarter. CFO Mark Robinow pointed out how the $.16 a share showing was higher than the mean analyst estimate of $.14 a share. Absent the one-time charge, the company earned $2.8 million, or 13% of revenues after taxes.

Sales were strong, highlighted by an $8.2 million showing at the Disney Village Marketplace location. Retail sales were also strong, Robinow noted, as Beanie Babies, which were in stock about half the time, and the proprietary line of Rainforest Cafe items helped push retail to 23.1% of total revenues (with 76.9% coming from the restaurant).

OLDER UNITS IMPROVING. Sales at the original Mall of America unit were up 9% versus year ago comparisons. Woodfield Mall, which struggled in the fourth quarter with a 15% same store sales decline, trimmed that to a 14% drop-off for the quarter. Sales at Woodfield, which had slowed primarily during weekday evenings, improved once the company began to accept reservations in March. Since the end of the first quarter, Woodfield has improved to show just an 8% year over year decline in April sales. Woodfield is still on track to do over $13 million in sales this year.

MARGIN IMPROVEMENT. The company reported 20.3% in operating margins and food costs improved to just 23.8% of restaurant sales. For calendar years 1995 and 1996 operating income was 16.1% and 18.3% while food costs were 27.8% and 25.0% respectively. Part of this margin improvement was due to favorable commodity food costs, and the company expects food costs to rise above 24% in the second quarter.

On the coporate level G&A costs improved to 6.9% of revenues for the quarter and the company expects that ratio to level off at about 6% for the entire year.

As part of a previously announced million share stock buyback the company entered into a put option transaction on 550,000 shares with strike prices between $17 1/2 and $22. The majority of the puts have a strike at $17 1/2. The company received $1 million in option proceeds, which is not recognized in the profit & loss statement. The company is not under obligation to buy the stock but in April bought back the first 10,000 shares. The company will continue to report on the share repurchases in the regular company filings.

PRESIDENT AND COO MARTIN O'DOWD ON RAINFOREST DEVELOPMENTS. There will be 10-12 new units in 1997, with the first three scheduled to open in June. The June 9th opening of the seventh Rainforest Cafe at South Coast Plaza in Los Angeles, California, will be followed by licensed units in Cancun and London later in the month. This will increase the number of units by 50% in one month.

The third quarter will target openings at The Source in Long Island, Palisades Center and a third Chicago location, this one in the Downtown area. The year will then close out with fourth quarter debuts at MGM Grand in Las Vegas, Grapevine Mills in Dallas, Phoenix Mills and Aventura Mall in North Miami. O'Dowd noted there would be 18 Rainforest Cafe locations by year-end, later noting that two unnamed international locations, in Mexico and Canada, were still not finalized.

QUESTION AND ANSWER SESSION.

Woodfield's profitability in Q1 was in the high-teens on a bottom-line, unit basis. As the busier Q2 and Q3 approach, the company expects margins to improve above 20% in this particular unit.

Despite spending $17 million of their expected $45 million 1997 capital expenditures budget this quarter, the company still had $156 million in cash and cash equivalents at the end of the quarter. The company is also projecting $45 million in capital expenditures next year for the eight domestic units. Even with the aggressive expansion schedule the company's internal projections have cash above $100 million by the end of next year.

The company plans on opening 8 domestic units and 8 international units in 1998. Leases have been signed at the previously announced Disney and Denver units while the other 1998 openings will be announced as the leases are finalized. O'Dowd also noted that all property-level managers were hired for the restaurants through 1998. All these managers are currently going through training at the South Coast unit. The rest of the 1998 development schedule will be discussed at the annual meeting in May. The company does not see any barriers to delivering these units on an on-time basis.

Mall of America continues to have favorable year to year comparisons in April with sales improvements running in the high single-digits for the month so far.

Retail gross margin was down from the fourth quarter simply because of a favorable year-end physical inventory which boosted the fourth quarter numbers. The 47% cost of retail sales should improve through 1997 as more and more proprietary items are added to the stores. Proprietary items comprise approximately 10-20% of the merchandise right now. Beanie Babies sales were actually stronger in the non-Chicago area units since the Beanie phenomenon started in Chicago a few months ago.

In April the menu was revised with five new items and a few deletions. The proprietary line of eight distinct Rainforest Animals, which have been prominent in retail clothing items since their debut at the Disney location over the summer, is now featured on the menu artwork. The new passports also debuted this quarter which are used as a marketing tool. A new line of ceramics will be rolled out on May 15.

With the sucessful quarter just announced, the company has "increasing comfort" with the $.80 analyst profit estimate for 1997.

1998 should include a new unit at Manchester, England, along with a pair in both Mexico and Toronto, Canada. The company continues to negotiate with various domestic tenants as well as potential international licensees and will announce those developments as they become finalized. The London unit should cost about $6.5 million to build and the company has executed its 20% equity position in this unit.

On the international front the company projects landing 8-10 licensing deals overall. The company has three deals presently (with ECE in Mexico, Glendola in Great Britain and Elephant & Castle in Canada) for the development of 17 units. The average royalty payment should amount to about 7% of revenues as well as initial signing and per-unit fees. The company may take a financial stake in some of the units as well. While the company has no equity in the Mexico units, they have already exercised a 20% stake in the first London unit and has an option for 50% of the Canadian restaurants.

The average restaurant check has risen from $11.75 to $13 per patron. O'Dowd attributes this not to the slight menu price hikes but to improved upselling of drinks and desserts by the "safari guide" wait staff.

While some insiders sold shares in March, Robinow said that, according to his conversations with the selling shareholders, was done to pay their personal income taxes and "it killed them to sell at these prices."

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.