Planet Hollywood's Bear's Den
by Bill Barker [email protected]

As is traditional for the Dueling Fools bear argument, before explaining why the stock's price is too high, let me start by conceding the obvious strengths of the company in question.

[Tick... tick... tick....]

Sorry. My imagination appears to be too limited to come up with anything.

Whatever Rick's bull argument was, I'm sure of a few things -- it's better written than most of the screenplays for the movies of the celebrity shareholders of this company, or the company's business plan script for that matter. Strip away the special effects wordplay that Rick is peddling over in the Bull's Pen and you'll see that unlike celebrity shareholder Bruce Willis's fictitious saving of our planet in his summer action piece, there's no escaping Armageddon for Planet Hollywood shareholders.

Let's start with the single most relevant number to determine the long-term prospects for a theme restaurant company -- same-store sales (SSS). After announcing SSS that were down by double digits in both the third and fourth quarters of last year (click here for the most recent earnings announcement), Planet Hollywood's SSS file was apparently stamped "Horrifically Bad -- Do Not Reveal Contents Lest Shareholders Trample Each Other Looking For The Exit -- Again," and so the company didn't even announce the figures. The 10-Q released later revealed that SSS were down 13%.

Regarding that announcement, I say "earnings" only in the most liberal sense of the word, as Planet Hollywood was able to scratch together just under a penny per share in earnings for last quarter, and that only because of a recent $48.7 million write-down of impaired assets. (Read: "We're recognizing that the restaurants aren't worth nearly what we spent to build them.") This accounting wizardry allows the company to have lower depreciation costs going forward, and thus to artificially inflate earnings. "Inflate" them only up to that lonely penny, which is 90% lower than what earnings per share were for last year's first quarter.

So we're not exactly talking about a growth company here -- at least if growth is measured by earnings or sales, rather than by capital expenditures. Although last year Planet Hollywood spent over $120 million to grow from 69 total units (foreign and domestic) open in the first quarter of 1997 to 92 units open at the end of the first quarter of this year, the company still had lower total sales in this year's first quarter.

Thus, there can be basically no debate about whether the restaurants in their current form have any real future. Some are already shutting down, like the four-year-old unit in Aspen, Colorado. The units at major tourist sites can survive perhaps, though even Aspen appears not to be major enough to keep supplying new diners. The reason for this bleak outlook is simple -- unless Rick walks into one of the restaurants, you won't find anything Edible. (Ouch. I'd better leave the wordplay to my worthy opponent.) Seriously though, this company has such monumental disdain for the American people that it figured it could simply deep-fry anything and people would pay high prices for awful food just so they could gawk at the cheap artifacts inside. One trip to a Planet Hollywood is enough, though, to know for certain whether this company can survive. Try it. Scratch that -- please, please don't -- I don't need the hate mail coming my way.

Having conclusively proven that it knows how to fail at its core business in a truly spectacular manner (shares currently go for about 25% of their all-time high), Planet Hollywood now moves its shareholders into the Double Jeopardy round, where share values can really move down quickly. Let's look at some of the new (and very expensive) planned ventures, each of which this company's management can claim no experience.

Regarding prospects for the new ice cream chain "Cool Planet," I believe three words should suffice -- spokeswoman Whoopi Goldberg. If that isn't enough to scare off potential patrons, remember that in the world of serving food, Planet Hollywood's awful reputation clearly precedes it. With Paul Newman and Starbucks entering the premium ice cream field, I don't see any lack of celebrities or strong brand names entering the arena, and why anybody would pay extra money to eat lower quality rocky road ice cream that gets called Rocky Balboa Road is beyond me. As far as branding through ice cream goes, personally I'd rather see Ben & Jerry's try to extend its Cherry Garcia success by serving up pints of Mintley Fool flavor. (Hmmm....)

While you're mulling that one over, quick, name something that you're absolutely sure that the world doesn't need more of. Did you say, "Expensive themed casinos in Las Vegas?" If so, that probably disqualifies you from getting to the second round of interviews for Planet Hollywood's empty COO position. The company has just floated junk bonds to finance a $250 million music-themed casino in Las Vegas. The interest alone from that debt is cutting this year's and next year's earnings per share by about a third, and it should be noted that the Las Vegas Planet Hollywood restaurant unit is already showing top line weakness, indicating that the Planet Hollywood brand has no special cache in Vegas. If it does anywhere.

Not wishing to keep its exposure to two concepts that are proven to be failing (Planet Hollywood and Official All Star Cafe), one with no track record (themed ice cream), and one in the most highly competitive and overbuilt section of the world (the Vegas casino), Planet Hollywood is also planning two hotel joint ventures in New York City: the Official All Star Hotel and Planet Hollywood Hotel.

I leave it to others to guess whether the company is buying in right at the peak of Times Square real estate prices, but I must share my all-time favorite line from an analyst report. It was written in relation to Planet Hollywood's hotel joint ventures: "Additionally, we view positively the fact that Planet Hollywood will not have an active involvement in day-to-day operations." (Oooooh... that's gotta hurt.)

That vote of confidence comes from an April 1, 1998 Salomon Smith Barney report on Planet Hollywood, which, despite its date, is no April Fool's joke. Salomon Smith Barney is the entity that just handled Planet Hollywood's recent junk bond offering and also was involved in the company's IPO, so this comes from the firm that probably has the greatest interest in singing the praises of Planet Hollywood.

Oh, when the report came out, Planet Hollywood was at just over $11 a share. The report gave a 1999 price target of $6. For some reason, the analyst termed that a rating of "Neutral." Being less Wise, I'd call it a "Strong Sell.

Next: The Bull Responds