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

Miami, FL (May 30, 1997) -- Boston Market introduced a new line of Kid Meals this week. No, that's not the big news at BOSTON CHICKEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %> but follow me on this one. Well, with kid-sized sandwiches and jello cubes they have also launched their first toy premiums for the young 'uns. They feature a dog, symbolically named Digs. Yes, the stock has been trounced from its December high of $41 1/2 and has been a dog ever since. And, now that Digs is out, how will the company dig itself out? The first toy line is plastic cups which will make great for panhandling if the shares continue to plummet.

Logic says that the company can't fall much further, but logic also was defied as the stock soared even though the company's franchised units kept losing more and more money each year. While Boston Chicken itself has profited well, it is strictly in terms of franchising royalties and financing the franchised units for the area developers. While the slide has been pretty relentless, the news was pretty bleak yesterday when the company announced that it was not happy with how sales were going at the restaurants. Worse yet, Larry Zwain, President and CEO, resigned yesterday as well. My pick for new head? Digs! You gotta love Digs!

THE EDIBLE EIGHT

With just one trading day left May has proven kind for our E8 with a solid 6.8% gain. Okay, shorting COCA COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> was a bit fizzy-headed but I still believe flat days and spilling syrup lies ahead. Going long QUALITY DINING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDIN)") else Response.Write("(Nasdaq: QDIN)") end if %> at a time when there was flux between the company and its Bruegger's Bagel division smelled like opportunity at first, but it seems I mistook the scent for burnt dough. But those picks remain in place for next month, along with all but one, a farewell to our 55% May gainer, LOGANS ROADHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDHS)") else Response.Write("(Nasdaq: RDHS)") end if %>. Well, surely you want details, and I hope you packed a lunch, because the June Edible Eight follows the snapshot of the Edible Eight today which is, say cheese. . .

1997 Returns To Date:
The Edible Eight        +3.6%
NASDAQ                  +8.7%
S&P 500                +14.0%
Fidelity Sel:Food       +4.4%
IBD: Restaurants        -6.4% (as of last week)

The June Edible Eight
Company Price (5/30/97)
Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>        24 1/2
Lone Star Steakhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %>   22 1/4
Rock Bottom Rest. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BREW)") else Response.Write("(Nasdaq: BREW)") end if %>      10 3/4
Bertucci's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BERT)") else Response.Write("(Nasdaq: BERT)") end if %>              5 15/16
Quality Dining <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDIN)") else Response.Write("(Nasdaq: QDIN)") end if %>          5 3/4
Coca Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> ***short***      67 1/2 
Garden Fresh <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LTUS)") else Response.Write("(Nasdaq: LTUS)") end if %>            9 5/8
Grist Mill <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRST)") else Response.Write("(Nasdaq: GRST)") end if %>              6 1/2

Summer is almost here and with that a pretty lazy edition of Edible Eight. Truth is the only stock not to return to our humble wishlist is our biggest winner. LOGANS ROADHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDHS)") else Response.Write("(Nasdaq: RDHS)") end if %> is up 55% so far in May with just one trading day left. We're not going to look a gift horse in the mouth. Logans was ridiculously cheap when it tanked with the larger steakhouses at the end of April. Now that it has bounced back to a more realistic valuation given its growth prospects we move on.

1. RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> - Our pet stock had its Annual Meeting last week and while the announcements may have appeared to be trivial, a letter of intent for their fourth international licensing deal, this time in the Pacific Rim, and a 1998 unit for Detroit the company also listed more than a dozen new sites currently in negotiations and said that many of those could be finalized over the next three months.

Of course Rainforest Cafe doesn't need to soar as new units are announced or brought online. The company has more than enough cash and its bargaining power makes the restaurant chain the prom queen who is free to dance with whichever landlord suits her fancy. So, call off the surprise party when they announce a Times Square this summer. They can and will open a whole lot of new units over the next few years It's just that the lull in new openings, none since the Sawgrass Mills location in Florida in November, has been greeted with a yawning public. Despite the two huge quarterly reports that followed, and a commitment for eight domestic units by the end of this year, Wall Street seems to be saying "Show me the monkey!" And that they will, as South Coast Plaza, just south of Los Angeles, opens June 9. With a licensed deal bringing the first international unit in London set to open a few weeks later, get used to hearing the sound of ribbon cutting.

After the blowout first quarter, where the company topped estimates with a $0.16 a share showing before charges and an encouraging conference call, the stock has been strong despite the resignation of Martin O'Dowd. As the search for replacements is still two-three months away from resolution (his task will probably be divided into separate COO and President titles) even that couldn't sour the party spirits. Even PaineWebber got fitted for party hats when they initiated coverage with an "attractive" rating in May. So, with a history of exceeding analyst estimates, and those presently at $0.79 this year and climbing 53% to $1.21 next year, is the company worth more than the present valuation of 20 times next year's earnings? The answer is written in the clouds, apparently.

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. The company 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. While preliminary figures have improved to a 3.9% deficit for the current quarter the companies is still comfortable with meeting analyst estimates.

So, sell all steakhouses? Why applaud cost control when you find an empty chair mid-afternoon? The problem is that Lone Star Steakhouse is now trading at just 13 times trailing earnings. Granted, the cyclical downturn in customer counts is not to be sugar-coated. Maybe the waits are down to just 13 minutes? Lone Star will have to win the patrons back, but 13 times earnings?

It's been a bit of a bucking bronco and the stock has shaken off plenty of believers. But nothing topped the move back in late April when a Smith Barney analyst downgraded the company. The stock, at $19 5/8 then 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!

The stock has since inched up, much to the Wise's chagrin, but is still trading at just 11 times this year's earnings and 9 times next year's guesstimate. 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. ROCKBOTTOM RESTAURANTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BREW)") else Response.Write("(Nasdaq: BREW)") end if %> - Why is Rock Bottom still trading at rock bottom prices? As the company continues to grow its Old Chicago and Rock Bottom Brewery concepts, now up to 60, the company has continued to make headway in improving their operations.

While the last two years have been flat despite the solid revenue growth, and investor sentiment a bit barley sour over both restaurants and microbrew stocks, turnaround is in the air but shareholders are looking to close out their tabs.

A month ago the company reported its fiscal first quarter, which were sober and spectacular. While the bottom line, $0.11 vs. $0.08 a share for the quarter was nice, there was plenty of body beneath the suds. Margins, which had been responsible for the downdraft, rose. While sales rose just 39% net income actually climbed 48% higher. Cash flow improved to 17.5% and comparable restaurant sales rose 2%. That should have been plenty to send the shares higher but it did not. In the meantime the $7 book value highlights an attractive balance sheet that is heavy on assets and low on liabilities. So, let the tab seekers go, it only leaves some empty bar stools for the bottom feeders.

4. BERTUCCI'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BERT)") else Response.Write("(Nasdaq: BERT)") end if %> - There's a turnaround in the oven but nobody seems to be around to eat it. After two strong quarters, in which estimates from the only analyst still around have been soundly trounced, the stock is treading driftlessly in a casserole of investor apathy. Things weren't always this way. The company was one of Wall Street's go-go eatery stocks that lit up the winners list in the early 1990's. Like fellow June Edible Eight entry Lone Star Steakhouse, they were a rat pack, young and growing, everyone wanted to own them. Valuations? No object.

What a difference a dry spell makes. As the chain suffered through growing pains investors cashed out of their shrinking gains.

Let's shoot back to today. Like the go-go days the company has reported two sound trashings of estimates and what do analyst do? Nothing. Estimates remain unchanged at $0.45 this year and $0.55 next year. This translates to just 11 times next year's earnings at the current stock price. And, this is just from one reporting analyst. The party has indeed moved elsewhere.

In the AOL Bertucci's message board, after their last great quarterly report in mid-May, I wrote:

"Another excellent earnings report for Bertucci's this morning as they reported earnings of $.11 vs. $.06. Again, the only analyst releasing estimates for BERT was at $.09. This was after raising his estimates after the previous quarter. After the 1996's 4th quarter was a blowout $.14 the analyst upped his 1997 estimate from $.35 to $.45. Well, guess, what, still short. Look for this figure to be upped to $.50 soon.

As for the comments of Sal & Vinnie's and the effect on the stock. Yes, it's just one unit in Norwood, vs. 80 Bertucci's. If it pans out there should be more but not until next year. Since these are high volume eateries a few Sal & Vinnie's can have a material effect on the bottom line. But in the mean time it is comforting to know that the flagship chain continues to perform above expectations (and with positive same store sales to boot)."

Still, no estimate hike. Still, no hungry investors at the door. But, be patient, the meal should be worth the wait if things pan out as they have over the last two quarters.

5. QUALITY DINING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDIN)") else Response.Write("(Nasdaq: QDIN)") end if %> - Can things get any worse for Quality Dining? Ever since the acquisition of Bruegger's Bagels last year sent the stock as high as $39 1/2, it's been all downhill. Dough begone! Now that the company plans on selling off the country's largest bagel chain, which had weighed down the performance of the company despite its initial euphoria, the stock gets beaten down even lower? Back in the May 16 Food and Restaurant Update I pondered:

"This week Quality Dining announced that it would divest its Bruegger's Bagels division. When the company first acquired the largest chain of bagel restaurants last year, Wall Street was enamored. Quality's stock gapped up from $21 to $25 after the news and peaked just short of $40 a share this past May. Since then investors who came looking for Quality as a bagel play have lost some serious dough."

Discontented with how Quality was handling Bruegger's, the two founders of the bagel chain, now the largest individual shareholders of merged companies, stepped down from the Quality board of directors. Bruegger's is not alone as other publicly-traded bagel eateries like EINSTEIN/NOAH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENBX)") else Response.Write("(Nasdaq: ENBX)") end if %> and MANHATTAN BAGELS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGLS)") else Response.Write("(Nasdaq: BGLS)") end if %> have lost more than half their value over the last few months.

While last month found the stock rallying when the news of a possible divestiture broke out, this time it went the other way. On the week the stock fell $2 1/2 to $5 5/8, a staggering 31% plunge into record lows.

Is there value? With the elimination of Bruegger's will come some massive charges as the company writes off the investment and closes company-owned units. That leaves the existing portfolio of Burger Kings, Chili's, Spaggeddies and Grady's restaurants, which the market had valued at more than twice the current market cap before the announced merger. The closest to a peer is U.S. RESTAURANT PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USV)") else Response.Write("(NYSE: USV)") end if %> which is also a franchisee of Burger King and Chili's. Two differences, though, are that U.S. restaurant also owns quite a few Pizza Hut franchises and that the company has been a heavy yielder given its Limited Partnership and soon to be REIT status. Well, shares of U.S. Restaurant are up 12% over the last year, while Quality has lost 85% of its value. Smells like value. Is one bad call, merging with Bruegger's, worth the clearance sale?"

Yes, it's been rough, and the upcoming charges are going to make this one long hangover. But there is Quality in Quality Dining, even if Wall Street thinks otherwise.

6. COCA COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> *** SHORT *** - In coming up with a short for the month I just had to think back to the old slogan, "Coke is It." You see, Surge is their new soft drink, not a mandate for a stock to defy gravity. Is the world's most recognized brand name worth its $160 billion market capitalization? Let's see, fizz tickles the nose but eventually goes flat right? The big K-O is not a one-product company but few even know that the comany is also behind names like Minute Maid or Sprite because its 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 44 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 40 times 1997 projected earnings and 35 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 the 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 its twin concepts called Souplantation and Sweet Tomatoes, has grown a profitable business serving up one-price smorgasbord dining of greens and such odd lot. Garden Fresh earned $0.72 last year (the fiscal year ends 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 two 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 the company be able to raise the 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 %> - Like many of their generic breakfast goodies Grist Mill is a quiet company. Show a doctor its stock chart over the past year and she'll wonder if it has a heartbeat. A few months back, a stock buyback at the lows has not done much to put an end to the flatline. Solid profitability in the midst of what had been a cereal price war has gone unrewarded. 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 last year was painful 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

© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us