Planet Hollywood's Bull's Pen
by Rick Munarriz ([email protected])

I can already hear Bill laughing. Planet Hollywood came to market two years ago with all the fanfare of a celluloid epic. It opened with a $3 billion market cap. It went direct-to-video from there. I have so little time and so much to defend. The genre. The company. The brand. I'll be brief. I don't want to go over budget on words, but just know that I still have the movie rights to the eventual Director's Cut.

The genre. Themed restaurants have been slammed recently. It seems that after the initial "wow" factor it's hard to draw a whole lot of return traffic. Investors see falling same-store sales and they freak. Why? Traditionally, this is the kiss of death for sleepy eateries with thin margins. But because of Planet Hollywood's huge volumes and strong high-margin merchandise sales, the subsequent year slumps still have the company producing higher returns than your basic casual dining chains during good times. This is Michael Jordan on an off day -- scoring just 25 points.

A step down when your precipice is so high is not only expected, it's acceptable. That's right, same-store sales were off 11% last year. This is still a sector that has gone from $300 million to $2 billion in sales, or 40% compounded annually, over the last five years. A fad? Don't forget to wish Hard Rock Cafe a happy 27th birthday this summer. Say what you will, do you know what the single highest-grossing restaurant unit in the world is? Yes, a Planet Hollywood, doing about $50 million a year in Walt Disney World.

The company. This isn't paradise. Planet Hollywood's recent woes have gone beyond the more efficient themed restaurants. There are some growing pains in the flagship concept. Last year the company took a $71.2 million write-down (for those keeping score at home, that's about 17 months of the gross sales at the Disney unit) for impaired assets. That's in the past. It's important to note that even with this huge one-time charge, the company still turned a profit. The one initially troubling zinger is that while sales were up just 27% last year, General & Administrative expenses soared 141%. Waterworld you say? No. Prime real estate for the namesake chain has been used up. Opening in smaller cities or cannibalizing existing cities are not attractive options, which is why Planet Hollywood, for the longest time, has been preparing for this very role -- investing in tomorrow.

The company is teaming up with AMC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AEN)") else Response.Write("(NYSE: AEN)") end if %> to open Planet Movies by AMC -- the ultimate chain of entertainment centers merging an AMC multiplex theater with a Planet Hollywood restaurant. We also have smaller Planet Hollywoods opening in airports. But there has to be more to Planet Hollywood for G&A to shoot up like it did.

There is. Apart from the successful Official All Star Cafe, the company is now getting ready to roll out Sound Republic, a music-themed chain. It will be Hard Rock Cafe with celebrities and a wider net of musical tastes. You see, Planet Hollywood was never a slave to edibles -- it was a master to entertainment. That's why the company is planning an Official All Star Cafe Hotel and a Planet Hollywood Hotel in New York City and a Sound Republic hotel-casino in Las Vegas.

This is a company in transition, and while the plot twist may not have been fully scripted beforehand, you are witnessing what appears to be a painful metamorphosis -- but oh, how you will love the result.

For now you have a company trading for less than two times sales and a little more than two times book value. This would be a steal if the bottom line was veiled. It isn't, so investors have run, no doubt unaware that the only reason the bottom-line is suffering today is because it is going to explode tomorrow.

The brand. Mindshare matters. You may not know a whole lot of companies that had half a billion in sales last year, but you know Planet Hollywood. That is why it's been so easy to capitalize on that brand. Board games, Barbie dolls, ice cream -- it's hard to imagine any other company being able to stamp its name on just about anything it wants to -- certainly not one with a market cap below $1 billion.

Everyone is worried about the next quarter, or the next year -- but eventually the market will look to the next decade. By the year 2000, this company will have a significant stake in three towering hotels. Before the Planet Hollywood Hotel was announced, the company said that the first two hotels should contribute about half a buck a share in annual earnings. Tack this on top of a chain that, even after a lackluster first quarter, said it was still on track for operating cash flow of $120 million this year, add in the many limited-risk licensed joint ventures the company will launch along the way, and why can't this company earn at least a buck a share in two years, and probably closer to $1.50?

Host Marriott <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMS)") else Response.Write("(NYSE: HMS)") end if %> will roll out the Cool Planet ice cream scoop shops next month. While the company is scaling back company-owned expansion, all is good on the franchising front. Noted turnaround investor Prince Alwaleed bin Talal from Saudi Arabia just upped his stake in Planet to 4% and will develop 34 new units in 23 countries.

The stock may deserve its rock bottom price based on past performance, but looking forward to future potential, Planet Hollywood is finally becoming that $3 billion company it was on opening day. How so? Take the Official All Star Cafe Hotel. Planet Hollywood paid $20 million for a 20% stake. Recently, one of the partners bought out the others' 40% stake for $70 million. So, not only is Planet's stake now worth $35 million, it will also collect licensing fees for the use of the name.

Then there is ECE.You won't find a more exciting Mexican company than ECE. It owns franchising rights throughout Mexico for the four hottest themed restaurant chains -- Planet Hollywood, Hard Rock Cafe, Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> and Dave & Buster's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DANB)") else Response.Write("(Nasdaq: DANB)") end if %> -- and not only is it expanding Virgin Records south of the border, it is also going south of its own border, becoming a major player in South America. Planet Hollywood owns a 20% stake in ECE -- how much is it worth? Hard to say, but definitely rising.

Planet Hollywood is making great deals that are not immediately visible, and in just another year or two whether same-store sales are up or down will be insignificant to the bigger entertainment conglomerate now selling for a pittance.

This company may have had some operating deficiencies over the past year, but it is setting itself up nicely to be able to sit back and become a royalty-collecting machine in the next few years. And you can't find better businesses than money mints, especially when they're on sale -- as the budding money trees in the company portfolio are misunderstood saplings.

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