Rainforest Cafe Bull's Pen
Rick Munarriz (TMF Edible)

Most investors have put Rainforest Cafe on the endangered species list. Sure. My fellow Fool Jim will no doubt note that themed restaurants are in a slump. Same- store sales at the likes of Planet Hollywood <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHL)") else Response.Write("(Nasdaq: PHL)") end if %> and even Rainforest Cafe were down for the fourth quarter. He may wave the fad banner proclaiming eatertainment dead. Granted, Hard Rock Cafe has been branded a passing craze for the last 26 years.

If fashion is so fickle, why are we so sure that one soft quarter will spell the end when a strong quarter would be quickly dismissed? Since when did we get blinded by the flashbulbs to the point of forgetting that the big picture ends with the bottom-line? The fact is that despite an 11% drop in same-store sales last quarter, total sales and earnings were up better than 50%. The company is comfortable with earning $0.80 a share this year and $1.15 next year. Is the market so near-sighted that it thinks a company growing earnings 45-50% a year is worth just ten times next year's earnings?

Look harder. It is easy to be skeptical about a chain where the sounds, sights, and even scents are automated. Long lines are anecdotal. On a unit basis, this is the highest grossing restaurant chain in the world, but nothing lasts forever.

So let's get tangible. Rainforest Cafe is debt free with $4 a share in cash. Book value is above $8 a share. Revenue growth has been so phenomenal, with $235 million expected this year, that the company is now selling for just 1.49 times that sales projection at a recent price of $13.

Sales growth is easy. When a company is a desired tenant, a draw to a landlord's property (as Rainforest is), millions in cash and free rent allowances often come that company's way. Pity, because with more than $100 million in cash, it is not as if Rainforest Cafe needs the dowry. It does make for some interesting unit economics though. Struggling as some of the units are, they are still showing a cash-on-cash annual return of 50% on the initial investment.

Let's look at the third-oldest unit at Gurnee Mills in Chicago. It is the weakest link in the chain with just about $8 million in annual sales. A dud? It only cost the company $3 million to build the restaurant, another million or so in pre-opening expenses that have already been written off over the first year, and had positive cash flow of $2 million last year.

Let's look at the fourth oldest, and largest unit, at Walt Disney World in Florida. The volcano-topped standalone behemoth cost $12 million to erect but grossed $35 million in sales last year. Cash flow? $7 million.

These are the extremes, but they show that despite the fact that particular units are slowing down in their sophomore year, Rainforest Cafe has a remarkably healthy portfolio of eateries. Even in a slump, generating 20% operating margins like Rainforest Cafe has is an enviable feat in the restaurant industry.

For now, unfair comparisons have been plaguing the stock. This is not Planet Hollywood. Rainforest Cafe turned in its first profitable quarter with just one restaurant open back in the summer of 1995. Meanwhile, Planet Hollywood did not get out of the red until the chain closed in on 30 units. For Planet Hollywood, a 13% decline in same-store sales in December meant the difference between profit and loss. For Rainforest Cafe the 11% slide meant missing earnings estimates by a mere penny.

So the bear is left with one credible knock -- leadership. Since May the company has been searching for a President and Chief Operating Officer to replace the departed Martin O'Dowd. Rudderless? Perhaps, yet despite the prolonged search for a successor, the company has managed to beat analyst estimates in two of the three following quarters.

This is clearly a story of unit economics and unit growth. Lucrative international sites, where the company passively collects royalties, will more than triple this year. Meanwhile, another nine domestic units will go up, the most newsworthy one opening next month as the very entrance to Walt Disney World's brand new Animal Kingdom theme park.

It is going to be wild, and, over time, it may very well be the skeptics that become the endangered species. RAIN On!

Next: The Bear Argument