Stocks Fools Love
February 11, 1998

Rainforest Cafe
by Rick Aristotle Munarriz (TMF Edible)

Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>
720 South Fifth Street
Hopkins, MN 55343
http://www.rainforestcafe.com
$12 5/16 as of February 9, 1998

My dozen roses got wilted on the way to Hopkins, Minnesota last month. Rainforest Cafe pre-announced earnings a penny shy of estimates and the cynics jeered and pelted me with a tumbling share price. Love hurts, and I have the migraine to show for it.

With gentlemen callers shooed away, it is definitely a good time to revisit the company behind the highest grossing restaurant chain, per unit, in the world.

Rainforest Cafe went public at a split-adjusted $2 2/3 almost three years ago. It was a five-bagger before it opened its third restaurant -- and has been treading volatile water ever since. Back then it seemed maybe the future was being discounted. Today it seems as if the present is on clearance.

I hear your snickers. I hear your childish chants. Edible and Rainforest sitting on Tracey Tree, F-A-L-L-I-N-G. Probably the first time you heard about Rainforest Cafe your defense mechanism kicked in. Restaurants fail. Themed restaurants are a fad. Isn't rain forest two words?

Then maybe you went to one of the sixteen locations worldwide. You scoffed at the audioanimatronics. You poked fun at the floral scent piped in through the AVAC system. Then you looked down at your son and saw a smile as wide as the line to get seated. You sat down expecting to order a jungleburger and ordered a rib appetizer, grilled swordfish, and a chocolate banana cheesecake for dessert. You washed it all down with a fresh smoothie and doggie-bagged your leftovers for later.

Suddenly you weren't laughing anymore -- you were thinking. The financials suddenly mattered. How many chains turn a profit with just one restaurant open? Rainforest Cafe did. Can one unit make as much as a $3 million-a-year Outback Steakhouse or Chili's? Last year the Rainforest unit at Walt Disney World grossed $35 million.

The top line made your heart skip a beat. This year the company expects to generate $235 million in revenues. And that balance sheet -- as clean as your plate would have been if the portions weren't so huge! The company has no debt and more than $100 million in cash to finance its ambitious expansion plans. You yearned for a relationship that would grow over time and you found it. Earnings are expected to rise from $0.51 per share last year to $0.80 per share this year -- and $1.15 per share next year. You were falling in love.

But same-store sales fell 11% in the fourth quarter -- and you penned your Dear John letter. If you would have thought things through, maybe you would have been a little more patient as you packed your toothbrush and fumbled for cab fare home.

Same-stores fell because, as is the case with themed restaurants, the second year tends to bring a sales slowdown. The Grand Opening "wow" factor fades. Rainforest Cafe was young. Two of three restaurants in the comps were just two years old. Sales should stabilize by the middle of the third year. The oldest unit had same-store sales rise in its third year. But you fell for the sophomore jinx.

All is not well, but now it seems that for January comps are up 4%. Why the 1500 basis point improvement? The fourth unit, the Disney World cash machine with the erupting volcano, has not shown any signs of letting up and is now in the comps. By the time new units enter their second year slump there will be more and more older units to offset the expected double-digit dip.

But figuring out the comp mechanics was like trying to finish Riven without a hint book. Now the comps were back up so you had to revisit the financials. Okay, $4 a share in cash. Nice. At the recent price of $13, the price-to-earnings multiple was just 16 this year and 11 times next year's projections -- for a company expected to grow earnings 40-50% in each of the next two years.

The double-digit net margins were also nice. So was the fact that the units were making so much relative to what they cost to build, that their cash-on-cash return on investment was in the vicinity of 50% a year.

In a change of heart you called your broker to see if the Dear John letter was read. It was. Filled. You were out. You passed out on your couch, moping. Lovestruck. You turned on the Disney Channel to see that, next month, the very entrance to Disney's newest and largest theme park, Animal Kingdom, will be a Rainforest Cafe.

Why the equity tease? Your son never did stop smiling, did he? The zig. The zag. The yin. The yang. The nights you woke up in a deep sweat yelling out "Rasta Pasta, Rasta Pasta."

Just when you thought all hope was lost, the sun chased the darkness from the sky. With the morning came a familiar ringing sound. It was 9:30. The market was open again -- and the waiting arms of the missing puzzle piece that made your heart complete was a buy order away.

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