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Friday, July 31, 1998
Landry's Seafood Restaurants Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LDRY)") else Response.Write("(Nasdaq: LDRY)") end if %>
Phone: 713-850-1010
Website: www.landrysseafood.com
Price (7/30/98): $12 1/16
HOW DID IT FIND TROUBLE?
How comfortable is comfortable? Apparently not comfortable enough if you are the country's second-largest seafood restaurant chain. Just last month Landry's CEO Tilman Fertitta was speaking at a Piper Jaffray investors conference and claimed that he was "very comfortable" with earning estimates for the June quarter and the year as a whole. A fish tale? Well, the shares had been floundering, and Fertitta's backing of earnings of at least $0.38 a share for the quarter and $1.28 a share for the year should have been enough to lift the stock from its murky depths.
It didn't. The fundamentals were caught in a net. A month later the company would have to concede that earnings might very well fall a penny shy of estimates for various reasons. Pick a cod, any cod, the results were the same. Record heat discouraging patrons from the typically popular outdoor patio seating area? Go fish. Expansion in existing markets leading to new unit cannibalization of older units? Go fish. A 5-6% drop in same store sales due to all these factors and the fact that Joe's Crab Shack had shifted primarily to a dinner-only venue? Go fish go. [Ed. Note: Yesterday (July 30) Landry's reported Q2 EPS of $0.38.]
BUSINESS DESCRIPTION
Houston-based Landry's is second only to Red Lobster in the casual dining seafood segment. With 126 restaurants operating under the names of Joe's Crab Shack, The Crab House, and the namesake Landry's Seafood, the company provides three different eating experiences.
Joe's Crab Shack is the fastest growing division and the value-based niche with rustic playful decor. The Crab House was acquired two years ago and is the more upscale outlet. Landry's fits snugly in between, with storefronts often incorporating loud neon-heavy theater marquees but with a more sedate interior.
Landry's went public in July of 1993 with just ten Texas eateries and has grown significantly over the past five years through regular stock offerings to replenish expansion funds.
FINANCIAL FACTS
Income Statement
12-month sales: $367.3 million
12-month income: $33.0 million
12-month EPS: $1.18
Profit Margin: 9.0%
Market Cap: $375.1 million
Balance Sheet*
Cash: $87.1 million
Current Assets: $128.7 million
Current Liabilities: $28.5 million
Long-term Debt: $25.7 million
(*As of Mar. 31, 1998)
Ratios
Price-to-earnings: 10.2
Price-to-sales: 1.02
HOW COULD YOU HAVE SEEN IT COMING?
Shares of Landry's peaked just as the Florida Marlins were winning the 1997 World Series. Coincidence? Evil fish-dismantling conspiracy? Hardly. The real irony here is that just as Landry's has become a barnacle-infested investment, shares of Red Lobster parent Darden Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DRI)") else Response.Write("(NYSE: DRI)") end if %> have soared. It was a reversal of fortune since Landry's was the one that was used to capital appreciation while Darden -- and Red Lobster specifically -- had been in a rut since being spun off by General Mills <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIS)") else Response.Write("(NYSE: GIS)") end if %> three years ago.
A cautious Fool would board a sturdy boat and set sail to March when the company completed a secondary offering of 3.8 million shares. Landry's received $102.4 million in net proceeds, but insiders also filled their pockets -- cashing out part of their stakes in the process. This may have appeared troublesome but was not without precedent. The company regularly had secondary offerings to finance its ambitious growth plans, and it was often accompanied by some option-fed executives, Fertitta included, selling shares themselves.
Insider selling as the chain reproduced like guppies was a regular occurrence and it had never really held the stock back. The fact that the stock slid through the typically buoyant price support from a secondary offering's underwriter and against Fertitta's own words at the June conference was a credit to the investors who seemed to know the company's future even better than the brokers and the company itself. They sold like insiders. They sighed as outsiders.
WHERE TO FROM HERE?
Right now, Landry's is doing some sole searching. The analysts are now officially off the leaky boat. Morgan Stanley Dean Witter, J.C. Bradford, and Robinson-Humphrey all downgraded the company after the mid-July earnings shortfall announcement. Legg Mason Wood Walker's analyst David Gardner (not our David Gardner) also took his expectations down a notch.
Can I argue with a David Gardner? This time I have to. Way too many times the brokerage houses are euphoric when a stock is hitting new highs and downbeat when the shares are hitting four-year lows. Nobody liked Darden a year ago -- at half the current price. Nobody seems to like Landry's today.
Landry's certainly deserved to be hooked out of the mid-$30s last fall, but this move appears well overdone. More than a dead catfish bounce is in order here. Missing estimates by a penny over a 5-6% same-store sales decrease is not the end of the world. The $0.38 a share showing for the June quarter is still 27% higher than the $0.30 a share showing a year earlier.
This is not the best time for a sales slump, since the summer is Landry's strongest season, but even if 1998 earnings get revised down to, say, $1.20 a share, the stock is trading at a pre-teen P/E multiple with a recent price around $13.
This is strangely reminiscent of the safari hunt that Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> went through seven months ago. An executive announces comfort with current quarter and year-ahead estimates at a conference, but after the quarter is concluded a month later, the executive has to revise the level of comfort and the stock falls on a scant penny a share shortfall.
Rainforest Cafe has not fully recovered, it but has bounced back from the $10 3/4 low set in the aftermath. Landry's may have a little proving to do, which is only natural since casual dining peers like Planet Hollywood <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHL)") else Response.Write("(NYSE: PHL)") end if %> and Lone Star Steakhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %> started with minor misses before the fundamentals caved in. But if the solution is as simple as a cold front moving in or building new units farther apart or re-opening Joe's Crab Shack for lunch, then this might just be the time to reel this one in -- before whining months later about the one that got away.
-Rick Aristotle Munarriz
([email protected])
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