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

Next time Jim and I are at Fool HQ, I think a trip to the Rainforest Cafe at Tyson's Corner will be in order. My treat. Because while I can respect his cynicism, I think some field research is in order. His stance that Rainforest Cafe's success is based solely on concept is near-sighted. He preaches the "separation of sentiment from analysis" but seems guilty of the same crime by merely skimming the surface.

Jim's ill-placed generalization ignores the many jungle-themed eateries that preceded it as well as the amazing unit level economics. It belittles the company to the point that one might think the company's business plan simply reads, "Buy robotic crocodile, fill fish tank, sell food and t-shirts." Disney did not invite Jungle Jim's. Disney has not asked Planet Hollywood for a second location at Walt Disney World -- especially one that will serve as the very entrance to it's largest theme park ever in Animal Kingdom.

This was a company whose menu was designed by chefs and restaurateurs, not Demi Moore. Taste is subjective, but this is not your basic Hard Rock Cafe burger.

Jim brings up Cheesecake Factory. Great chain. Perpetual same-store sales growth. Strong expansion. Flat earnings. How so? Margin deterioration. No concept is strong enough to survive poor unit-level management. At Rainforest Cafe the margins seem to be getting better and better. Even in the sluggish fourth quarter foods costs have fallen to 24% of total restaurant sales and operating margins were still above 20%. That is why this eatertainment company was able to turn in such solid profitability in the face of a slump in the Chicago stores. The airbag worked.

But Jim is dead-on that the 11% decline in same-store sales needs to improve. With Disney up 15% over the quarter and now open long enough to become the fourth restaurant included in the comps this current quarter, logic and momentum would deem it a lay-up. Still, it is important to note that the major reason for the decline was not the lack of patrons returning for the ample foodstuffs, but rather a dramatic dropoff in retail. Are we going to assume Rainforest Cafe is half the company it used to be just because Beanie Babies are tired and the company has yet to create enough equity in its brand to make Rainforest Cafe clothing a hot commodity?

I don't think so, but apparently Wall Street, like Jim, has found it fit to slice the company's market value in half. Eventually the bottom-line will rise -- and so will shares of Rainforest Cafe.

Next: The Bear Responds