This Week in Food and Restaurants
by Aristotle Munarriz (MF Edible)

Miami, FL. (February 28, 1997) -- Great news for the Clintons, but not so great for McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> shareholders as the company announced that the burger wars were alive and well in Oak Brook. Fifty-five cent Big Macs? Big deal, you can't pick up a half-dozen with $3.30 in pocket change? According to the plan, Mickey D was proposing to their franchisees the low-priced burger would have to be accompanied with the purchase of a soft drink and french fries. Unlike the typical value meal pricing, where it's almost as if you are getting the beverage for free, the reduction here is not as pronounced as the almost $2 cut in the sticker price would seem.

The new Big Mac Value Meal would actually be priced in line with the Whopper Jr. Combo at Burger King. This is not the $.29 Hamburger Wednesday, $.39 Cheeseburger Sunday promotion presently taking place at the Golden Arches where that $3.30 would buy you 11 burgers if it was hump day. So, what's the fuss? Well, since nobody handles profit margins better than McDonald's, they are the fiercest if their competitors had to duke it out in the trenches. Make no mistake about it, they will, and if you are adept at working quick math by the menu, you will save drive-thru money.

Margins will be hurt, even if the discount is more imagined than real, as food costs as a percentage of sales will go up. That is why the public fast food companies took a dive on Wednesday, $.29 Hamburger Wednesday. While the hits were in the 5-10% range, hardest hit was CKE Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %>, the owner of Carl's Jr., which suffered 18% worth of carnage as the stock fell $4 3/8. As a suitor for the left-for-dead, Checkers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHKR)") else Response.Write("(NASDAQ: CHKR)") end if %> the company had hoped to salvage the company that began the burger pricing wars with the $.99 price point just a few years ago.

Thursday told another tale. Wendy's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEN)") else Response.Write("(NYSE: WEN)") end if %> and Burger King parent Grand Metropolitan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRM)") else Response.Write("(NYSE: GRM)") end if %> held their own. Regional players like CKE and Jack-in-the-Box owner Foodmaker <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FM)") else Response.Write("(NYSE: FM)") end if %> closed unchanged. It was just McDonald's that continued to slide, down another $1 3/8. While the Wednesday message may have been a declaration of war, investors may have suddenly realized that Thursday was an Arch Deluxe surrender. The company had banked on the new line of Deluxe sandwiches, spearheaded by the Arch, to allow for premium pricing. It was to be the olive branch to the industry and the catalyst to beef up their already impressive margins. In going back to the attractive sub-buck price points, even if the Arch Deluxe continues to take residency on the menu, the company may very well be retreating and giving up prom dresses for denim once again.

THE EDIBLE EIGHT

Here at month's end we now put forth our March list of the eight stocks we here at Fool Food Central feel have interesting prospects for the month ahead. February has been kind, as we have gone from losing 5.3% in January to wiping that out and more in February as we are now a scant 0.6% in the black for the year. With strong performances, highlighted by a 26% gain in Rock Bottom Restaurants, we offer some new entries for the new month.

While we continue to underperform this year, and still maintain a significant lead over the other benchmarks since our January, 1996, inception, it is comforting to have risen 5.9% during a month where the NASDAQ Composite, where most of our stocks reside, is off 4.9%.

The March Edible Eight

March comes home, finding February has cleaned up what January messed up. Some solid winners this past month has dug our wishlist out of the hole January landed us in. So, as a concerned March, what to do? Do we toss February the contents of the cookie jar while sending January to its room?

C'mon, of course not. March sizes up the area and begins to move the furniture around. It is an open house and we have a few new house guests this time. We let go of a few, and reasons are due. Seaway Food Town <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEWY)") else Response.Write("(NASDAQ: SEWY)") end if %>, our sleepy supermarket stock, gets ushered out. While the value is still compelling there are some beaten up growth stocks begging for a vacancy. There was nothing compelling to merit a surge in Seaway's stock barring a buyout or a sector turnaround. We also zapped Q-Zar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QZARF)") else Response.Write("(NASDAQ: QZARF)") end if %> which was a much harder decision. The company is out to raise money to expand their Q-City and beyond the dilution is the fact that this simply is becoming less and less of a food stock. Maybe it never was, but the acquisition last year of Fun Time Pizza was supposed to open new doors as a hip Chuck E. Cheese. The plans for a Q-Kidz rollout has been overshadowed by the flagship Q-Zar laser tag centers and Q-City entertainment centers. Single-digit P/E stocks are hard to let go but this one finds the front porch and cab fare for technical reasons.

While there is still more potential upside to these two those pesky new visitors, they need a room, so, here is the layout of the house for March. . .

1. Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> - Our oldest house guest finds its 15th consecutive month of residency here. As the stock hugs $20 support, selling for less than 50 times trailing earnings for the first time ever, we revisit valuation. At $20 RAIN has a P/E of 49 based on last year's earnings. Granted, earnings are expected to go from $.41 to $.79 this year, so $20 is actually only 25 times this year's projected eps. Keep in mind that almost $9.40 a share is actually in debt-free cash. Skeptics may scoff at the $350 million market cap, but adjusted for the cash the enterprise value is less than $200 million. Sales this year should be about $120 million and $300 million next year. While some of the cash will obviously be put to use, the company is definitely attractive from an enterprise value to sales ratio viewpoint. It is also now selling at just less than two times book value. Finally, if you kick in next year's estimate of $1.22 a share you have a stock on a growth tear with a P/E of 16 next year's earnings. With the analysts looking for 50% earnings growth over the next five years the bear case is a headscratcher. Even more of a puzzle is the fact that even those very analysts have understimated Rainforest Cafe's numbers over the past few quarters and inherent pessimism won't let them raise estimates, until it's too late, and they are upped retroactively. Yes, Rainforest Cafe has a room here, muddy slippers and all.

2. Brinker International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EAT)") else Response.Write("(NYSE: EAT)") end if %> - Brinker came back, like any happy tenant, last month. With an abysmal earnings report and six different major brokerage chains downgrading the company the stock price overshot the pessimism to $11 a share. Of course, one has to wonder why analysts who loved the stock in the high teens are now telling their faithful to bail out at $11 a share over a weak December at Chili's. Surely the problems run deeper here and the management shakeup has many scared. Nevertheless, the creative minds are still there, as are the operation minds that made Chili's one of the more succesful casual dining concepts through the early 1990's. But in one fell swoop the company is cast off to the penatly box for low-sticking. Yes, analysts were expecting $.19 a share this past quarter. In an industry where a penny on the upside or downside is feast or famine, coming in a full four pennies below the consensus, and believe it, since all 24 analysts were wedged between $.19 and $.21 as their targets, the first instinct is that the white flag should be raised universally.

But here is a company with 600 restaurants, ready to add another 73 more in the next fiscal year, that has yet to fully tap the potential of their concepts beyond Chili's and Romano's Macaroni Grill. Maggiano's Little Italy is just four units young and they are reporting about $10 million in annual sales each. Eatzi's debut last year in Dallas was so successful in Dallas that it was named one of the "Hot Concepts of 1996" by Nation's Restaurant News. Yes, commodity prices and labor costs rising are temporary and they hurt Brinker more than any other chain but they are certainly not one to take things lightly. For starters, they announced a $150 million stock buyback, which, if completed, can reduce shares outstanding by 15% at current prices. The management shuffle, which is highlighted by the departure of Chief Operating Officer Creed Ford, is not necessarily a negative as the company takes active steps to make the individual concepts more efficient. As for Ford, he is not leaving with any regrets since he plans on running a few Chili's and Chili's Too himself. Yes, Chili's Too, the smaller version of the popular Chili's, with ambitious growth into airports, malls and hotels. Hotels? Well, guess Brinker is a natural then here to at the Edible Bed & Breakfast.

3. Rock Bottom Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BREW)") else Response.Write("(Nasdaq: BREW)") end if %> - Rock Bottom, the owner of Old Chicago and Rock Bottom Brewery, first made our list a year ago last March. It started the month at $9 1/4 and when we closed the tab at the end of April it was up to $12. Another winner like Brinker and another timely release as margin erosion found the stock reporting lower earnings even as sales surged up. Yet, too much foam, not enough beer, blame it on the hops. But after a series of quarters with lower earnings and sagging same store comparisons last year's third quarter had the glimmer of a turnaround. With earnings of $.16 vs. $.14 in 1995's third quarter the company the owner of 50 casual dining pub eateries seems to be back on course. While revenues once again outpaced earnings growth (sales rose 48% to a 22% rise in net income) margins still need to show some improvement. Yet the "For Sale" sign has a "Reduced" tag swinging underneath this time. The company has a book value of $8 a share yet is trading barely above that. As sales will blow past $100 million for 1996 they are now selling for less than trailing revenues. Our drinking buddy is here, all sobered up too.

4. Bertucci's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BERT)") else Response.Write("(Nasdaq: BERT)") end if %> - Bertucci's was once a high-flier. That was years ago when Joey Crugnale captivated investors and diners in his chain of brick oven pizzerias were all the rage. Growing pains, or earnings lack thereof, sent Wall Street home even if many of the faithful patrons remained. The uniqueness of gourmet pizzas was easily cloned and it caught the company off guard. In 1995 they managed to earn just $.03 a share. Bertucci's recovery began last year when they tinkered with the menu and began to regain their edge. Introducing baked casseroles, along with other higher-priced entrees, found the company back on financial track. The only analyst still around to toss earnings estimate had projected $.08 a share for the last quarter. It was a downward revision from a dime, since that was probably too optimistic given the soft dining sector. As it turned out, BERT announced earnings of $.14 for the quarter yesterday, and a respectable first step to the future. For the year the company earned $.36 and is on solid momentum to improve those figures. Same store sales, which had been slightly positive all year, surged 3.3% over the quarter. Later this month they will introduce a new concept as Sal & Vinnie's Steakhouse takes a 1940's theme to lure diners to an upscale eatery. For now, that is a small part of what will drive the company as the existing 80 units are definitely worthy of lodging here, at least until the end of the month.

5. Quality Dining <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDIN)") else Response.Write("(Nasdaq: QDIN)") end if %> - Bad luck brings another stock a-knocking. Quality Dining began as a happy franchisee of Burger King and Chili's restaurants. Rather than become a REIT, paying out their profits to shareholders as dividends, they pumped that money back into buying more Burger Kings. More Chili's. They began to franchise Bruegger's. Somewhere along the way they figured that it would be nice to keep the royalty payments so they decided to buy an existing concept in the 42-unit Grady's from Brinker International. The price was right and they got Spaggeddies to boot. Then they acquired Bruegger's just as the bagel craze was steaming. In their buying frenzy, even before charges, they mismanaged their growth and earnings slipped to $.75 a share last year vs. $.85 in 1995. While the company now finds itself a casual dining giant, particularly because of the 425-unit Bruegger's chain (where all but 100 units are franchised), investors apparently fear that the company may have grown too large to handle. Brinker's, a group of experienced restaurateurs, couldn't make Grady's work, why would Quality Dining fare any better. If Chili's had a lousy 4th quarter, causing Brinker's stock to slide, where does that leave Quality Dining who not only have to run their 22 Chili's but also pay Brinker as a franchise. If McDonald's is ready to crater the price of the Big Mac how will the 63 Burger King units QDIN owns fare in a price war? A new concept, Papa Vino, was launched late last year but not only is it still far from being a growth vehicle it is probably more of an indication that Spaggedies is not nirvana with tomato sauce. This is probably why Quality Dining is banking on Bruegger's. Last quarter the company opened 68 restaurants in their system, and all but two were Bruegger's. Now that reality has tempered the initial enthusiasm in the bagel world, even though Bruegger's and Einstein Brothers stand head and shoulders above the rest, it is not the lucrative goldmine it once was. Everyone from Dunkin Donuts to Horton's is now peddling the round stuff. Real estate is not getting any cheaper as these small stores fight for location, location, location. Still, estimates call for the company to earn $1.06 this year (ending in October) and $1.52 next year. Despite the uncertainty, in all of its 600 outlets, 8 times next year's forecast seems like the only good purchase QDIN should have made is their own company today. Show them to their room and hand them a history book and this one could be a welcome guest for a much longer stay than last time, where it was here simply as a hedge with the short of Einstein Bros/Noah Bagels <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ENBX)") else Response.Write("(NASDAQ: ENBX)") end if %>.

6. Coca Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> *** SHORT *** - Surge is a soft drink not a mandate for a stock to defy gravity. Is the world's most recognized brand name worth its $150 billion market capitalization? They are not a one product company but few even know that they are also behind names like Minute Maid or Sprite because that addictive cola syrup has coated the world many times over. In a volatile market people find safety in the blue chips and this has been a shelter to the point that it now trades at more than 40 times trailing earnings. I'm not much for rear view mirror investing so let's put this another way. Coke is trading at more than 35 times 1997 projected earnings and greater than 30 times 1998 estimates. For a mature company growing at an annual rate half that is there room for more or is this Helter Shelter?

This is not to belittle Coca Cola and probably the most talented CEO to grace corporate culture. They have demolished their competitors and created loyalty to an almost generic product. Yes, they are in the marketing business and nobody does it better, with soda coming a distant second. The fact is that so many people have flocked to Coca Cola, unaware that their ticker symbol is the boxing term for knockout, that the assumption that this was an all-weather stock might very well begin to show leaks in the roof in the near future. The stock deserves a premium to its growth rate, possibly as high as 20 times 1998's estimate which would put the stock at $40 a share. Yet, sitting here in the cheap seats, where is the upside. Over time, yes, ten, maybe five years from now, Coca Cola will be higher and a true long-term investor should probably make out fine, despite underperforming the market. But as for now, where every conceivable price target for the company in the near future is below it, maybe investors should say the ticker symbol five times fast so they will know what's coming their way. Sanity is contagious and eventually one will understand why this door is marked "short" in swirly red and white lettering.

7. Garden Fresh <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LTUS)") else Response.Write("(Nasdaq: LTUS)") end if %> - This is the thinking investor's Fresh Choice. Unlike that troubled purveyor of soup and salad scatter bars, Garden Fresh, through their twin concepts called Souplantation and Sweet Tomatoes, have grown a profitable business serving up one-price smorgasbord dining of greens and such odd lot. Garden Fresh earned $.72 last year (their fiscal years end in September) and was projected to earn $.86 this year. Yes, was, because for their fiscal 1997 first quarter they beat estimates, as they have just about every quarter, and upward revisions may be in the works.

Some might smell a bargain for a stock with a trailing P/E of 15, and a 1997 ratio of 13 when the few analysts following the stock are expecting annual growth of earnings just north of 20% over the next five years. The popularity of the concept is rising, as not only is expansion growing the 45-unit chain, but same store sales have been positive for the last nine quarters.

The problem, and hence our opportunity, is Fresh Choice. When the company went public last year their timing couldn't have been worse. While they got $9 a share, the stock tanked from the open as the upstart San Diego chain was slugged in sympathy with their California peer who found itself closing stores, playing musical chairs in management, and still haven't been able to squeeze out a profit. Recent weakness in other buffet style restaurants like Buffets and Sizzler have probably cast a dark cloud over the niche which works in Garden Fresh's favor. Since every other company is reporting dreadful results few new entrants would even try to enter the minefield. This is important since the casual dining industry continues to crowd more and more restaurants into tighter and tighter places. That is no doubt why they continue to beat estimates as analysts scratch their heads at how this young company can defy gravity as their peers belly flop into the sea. While Garden Fresh in now at all-time highs, the tide is still, relatively speaking, quite low.

Book value is now up to $6.60 a share, which finds the company to be a shiny diamond as a profitable restaurant company trading at less than 2 times book. With expected growth well above their p/e multiple is there anything a value investor can find fault with here? Well, yes, for starters, they are spending more in new store openings. While strong sales have justified the more lavish construction bills it at least gives pause. Still it is comforting to now that while new units are running about $1.5 million to build including pre-opening expenses (but not land, since most sites are leased) that they are selling $1.8 million a store and had positive cash flow of $346,000 per unit the year before. There is also the concern of inflation. As food prices rise will LTUS be able to raise their admission from an already high $5.49 lunch, $7.49 dinner tab? Garden Fresh has been able to offset that with a creative menu and proprietary software that allows them to shift offerings to work around seasonality of certain items.

That creativity is not to be dismissed lightly. While it may be perceived as a health haven, they also make it a point to introduce new items like foccacia pizza. Their exotic signature items include salads like Tumbleweed Tortellini and Shrimp Tarragon, soups like Chesapeake Corn Chowder and Shrimp Bisque, pasta bar sauces like Sundried Tomato Cream and muffins like Chocolate Chip Mandarin as well as a frozen yogurt dessert bar. Yes, there are plenty more and, yes, this isn't your local Sizzler or Ryan's attempt at a salad bar.

So, you've probably already figured that LTUS is short for lettuce... and maybe by now you have also figured that to an investor, lettuce is green.

8. Grist Mill <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRST)") else Response.Write("(Nasdaq: GRST)") end if %> is backing up the truck by announcing a 500,000 share buyback. With the stock lingering at new lows the move should come as no surprise since the company bought back the same amount a few years back under similar circumstances. Grist Mill makes cereals goods like granola bars, fruit snacks and ready to eat cereals. You know when you go to the store, and right next to Froot Loops you see the store brand imitator with some awful name like Fruity O's or Circles o'fruit or Toucan Sam Has Rabies, Buy Me? Well, Grist Mill makes these private labels for the grocery store chains. While there had long been a comfortable margin in selling generic breakfast eats it has been painful this year given the sever price cuts from the major cereal makers. That found the company having to warn analysts earlier this year with the obvious... that margins were being hurt, that the Oh Fruit Rounds were not moving off the shelf given the major discounting by the originals, and that earnings would fall. They have and so has the stock of Grist Mill. In December the company reported quarterly earnings of $.07 a share versus $.11 a share the year before. Sales are up as new products, like a crispy rice marshmallow treat to clone the successful Rice Krispies snack bar, have shown consistent top line growth but the margins are dismally low enough to reduce the bottom line. Is this the bottom of the cereal bowl with the stock soggy and clinging to $6 a share? Well, last time the company announced a buyback the stock more than doubled the following year? Can history repeat? With the cereal makers beginning to back off their price wars, and acquisitions abound, it might just prove to be fertile ground for a rerun. In the meantime, they have dibs on the breakfast nook.

Until next week, Digest Foolishly,

MF Edible

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