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

Miami, FL. (May 2, 1997) -- "Goodbye, RUBY TUESDAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RI)") else Response.Write("(NYSE: RI)") end if %>, who can hang a share buyback on you." Now that we've butchered The Rolling Stones' classic, the Morrison's spin-off announced that it would buy back a million shares through a dutch auction.

Nope, you won't be able to tender your shares in Lancaster County, Pennsylvania. A "dutch auction" is a popular form of stock repurchase which has been recently done by companies like VIACOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Amex: VIA/A)") else Response.Write("(Amex: VIA/A)") end if %> and THE LIMITED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTD)") else Response.Write("(NYSE: LTD)") end if %>. Shareholders interested in participating simply indicate at what price within a range (and Ruby's will be between $20-$22) that they are willing to sell their stake back to the company. Ruby Tuesday will then buy back the million shares from the lowest tendered offers, all at the same price. That price will be the highest of the accepted offers. Ruby Tuesday rose sharply on the news, up $7/8 to $20 5/8 yesterday.

There was a little bit of executive traffic at PENN TRAFFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNF)") else Response.Write("(NYSE: PNF)") end if %> yesterday, too. As profiled earlier this week in a Daily Double, the stock has performed well ever since their March appointment of Phil Hawkins as their new CEO. Coming from Vons, where he guided the company to fiscal prosperity, his arrival at the troubled Northeast supermarket chain was a welcome sight indeed. There had been speculation on whether or not Hawkins would begin stocking the executive shelves with members of his competent Vons crew. Well, the company announced that it hired Vons Director of Store Operations Brad Melvin away from the West Coast chain. He will now join his colleague Hawkins as Penn Traffic's Vice President of Operations Support. Investors should take heart in knowing that Melvin was willing to leave the security of the recently-acquired by SAFEWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> grocer to join Hawkins and attempt a turnaround at the debt-laden company.

THE EDIBLE EIGHT

After a disappointing April in which we slipped and fell for a 3.7% loss, May is off to a much better start. Just one trading day into the new month the Edible Eight is sporting a 2% gain for May and has trimmed it's year-to-date loss to just 0.8%. Strong initial gains from QUALITY DINING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDIN)") else Response.Write("(Nasdaq: QDIN)") end if %> and RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> have fueled the comeback. Rainforest Cafe has actually gained $6 3/16 over the last six trading days as a strong first quarter and a muted fallout after the resignation of President Martin O'Dowd finds investors enamored once again by the themed restaurant operator.

We will close with the full text of the May Edible Eight, a bit heavier reading that your usual fare here, but a hearty take on eight companies which appear to have exciting potential for the month ahead.

1997 Returns To Date:

The Edible Eight      -0.8%
NASDAQ                -1.6%
S&P 500               +7.8%

The May Edible Eight

Company                               Price (4/29/97)
Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>        21 3/8
Lone Star Steakhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %>   19 3/4
Bertucci's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BERT)") else Response.Write("(Nasdaq: BERT)") end if %>              5 1/8
Quality Dining <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDIN)") else Response.Write("(Nasdaq: QDIN)") end if %>          7 13/16
Coca Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> ***short***      62 5/8
Garden Fresh <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LTUS)") else Response.Write("(Nasdaq: LTUS)") end if %>           10 3/8
Grist Mill <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRST)") else Response.Write("(Nasdaq: GRST)") end if %>              6
Logan's Roadhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDHS)") else Response.Write("(Nasdaq: RDHS)") end if %>      16 3/8

Where does the time go? April was not kind as equity showers eroded our scant first quarter gain and then some. So, we dug ourselves into a hole the size of a 4% deficit, and those April showers filled the bunker with rain. Welcome to Mud! Here is hoping this next month will bring a hand to lift us higher and a rinse to wash off the residue. So, the May picks, hopefully with a clean towel in its arsenal. . .

1. RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> - April, much ballyhooed for its famous showers, was also subject to a lot of RAIN too. Rainforest Cafe reported a blowout first quarter and then shocked investors with the resignation of President and Chief Operating Officer Martin O'Dowd. While many may not have been surprised, given O'Dowd had taken a 30-day leave of absence for personal reasons back in November, it was certainly a blow to the company. The company is now searching for replacements, as it plans to split up his President and Chief Operating Officer titles to be able to land a restaurant operations savant to handle the COO duties and a strategic visionary to serve as President.

While the stock initially tanked it quickly made up the losses as investors again began to focus on the strong earnings growth success story. Quarterly earnings of $0.16 a share before the pre-announced charge relating to the defunct Taj Mahal and Stratosphere blueprints was well above the consensus estimates of $0.14 a share. This along with an encouraging conference call where it was announced that the troubled Tyson's unit was improving as well as fiscally prudent cost cutting gave investors a chance to whip out the umbrellas in the April and bask in the RAIN.

2. LONE STAR STEAKHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %> - Just a few years ago investors were lining up to buy up every single casual steakhouse stock. The lines were also pretty long inside these restaurants and it seemed a 90-minute wait warranted a stock trading at 90 times earnings. The chains grew and investors grew -- skeptical. With copycats sprouting up and tapping the equity markets times were lean cut at all the chains. The problem is that Lone Star was always the cost-leader. Thecompany managed its units to perfection. So much so that this past quarter, while same-store-sales were off a worse than expected 5.1% they reported better than expected earnings.

Still, hex the eateries. Why applaud cost control when you find an empty chair mid-afternoon? The problem is that Lone Star Steakhouse is now trading at just 12 times trailing earnings. Granted, the cyclical downturn in customer counts is not to be sugar-coated. Lone Star will have to win the patrons back, but 12 times earnings?

An amusing tidbit came just last week when a Smith Barney analyst downgraded the company. The stock, at $19 5/8 was already trading at less than half the price it was when the analysts loved it so, why downgrade now? Well, the reason for the demotion was simple, the analyst was revising her estimates a few pennies, to $2 this year and $2.40 next year. So, she still saw earnings growth of better than 20% this year and a flat 20% next year but she figured it was worth less than 10 times this year's earnings? Someone mail some PEG calculators to Smith Barney, pronto! We're here, and we don't mind the peanut-shell ridden floor or the line-dancing wait staff. We'll wait, for a table, and for the analysts to love the stock again when it gets past $40.

3. LOGAN'S ROADHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDHS)") else Response.Write("(Nasdaq: RDHS)") end if %> - What, another roadhouse-themed steakhouse? Well, it's a bargain hunters paradise so if we have a few oversized steak knives too many this month it's only because of the meaty values in this eatery niche. Logan's is the best of Lone Star clones. For starters Logan's is where Lone Star was quite a few years ago. With just 20 units in the Southeast it certainly has room to grow. When Lone Star and OUTBACK STEAKHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OSSI)") else Response.Write("(Nasdaq: OSSI)") end if %> were this young their infancy was rewarded with P/E ratios close to 100 as investors pondered the future. As the jaded sector this has become Logan's is now down to just 18 times this year's projected earnings of $0.93 a share. While analysts expect steady growth in excess of 30% over the next few years, and the 1998 estimate of $1.23 bears that out (Logan's trades for just 13 times that multiple), the stock has fallen its older, and more mature, brethren southward. With the best unit economics of the bunch, and their return on investment in the 75% range is the envy of even its bigger siblings, Logan's appears undervalued. Again, bring on more of those peanut shells. The only truly nutty case here seems to be the half-baked valuations the market has dictated for this speedy subject.

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, or boiled, as the case may be. In their buying frenzy, even before charges, they mismanaged their growth and earnings slipped to $075 a share last year vs. $0.85 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. If Brinker, 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 this month how will the 63 Burger King units Quality Dining owns make out 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. In the quarter before last 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. And Quality Dining is now suspect because not only have the Bruegger's founders left the Quality Dining board, but the company's high debt may put a brake on expansion efforts.

Estimates have been in a freefall but even in the current stage of analysts in bearskins they still see the company earning $0.67 this year (ending in October) and $0.93 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.

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? It is 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. GAREDEN 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 $0.72 last year (their fiscal years end in September) and after bearing estimates for the first quarter and nailing them in their fiscal second they are now expected to earn $0.87 this year. The stock now finds itself trading at 10 times next year's earnings estimates of $1.03.

The popularity of the concept is rising, as not only is expansion growing the 50-unit chain, but same store sales have been positive every single quarter for the last three years. 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 Gardern Fresh be able to raise admissions 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, the restaurant also makes 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 severe 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 $0.07 a share versus $0.11 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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