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Friday, January 16, 1998
Planet Hollywood International
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Phone: 407-363-7827
Price (1/15/98): $10 11/16
HOW DID IT FIND TROUBLE?
Cut! This summer blockbuster is floundering. With more peaks and valleys than the signature Hollywood landscape, Planet Hollywood has perpetually fluctuated between epic and obit. It roared like the MGM lion when the eatertainment company went public in 1996, but a few months later told a different story.
When the company struck a casino deal with ITT it rose again, only to perish when companies bidding for ITT left Planet Hollywood rolling snake eyes. That was back in February. Yet the shares rushed the box office and doubled by the summer of 1997.
Back then, it was clear that despite investor skepticism on the staying power of the chain, the company was not only growing sales -- but was growing earnings even faster. That all changed when the company reported third quarter earnings. Margins were falling. The jaded were rewarded.
So, despite all the glitz of celebrity owners like Demi Moore and Sly Stallone, the stars are falling -- leaving a one-year price chart that painfully resembles Hollywood Hill.
BUSINESS DESCRIPTION
In just six years, Orlando-based Planet Hollywood has gone from one New York City eatery to more than 70 company-owned and franchised units worldwide. The restaurants, with flashy decor and Hollywood collectibles on display, are probably better known for their celebrity-laden debuts and merchandising than their menu. As a matter of fact, retail sales make up almost 40% of the outfit's revenues.
Official All Star Cafe, just nine units young, shifts the glitzy movie theme to the sporting world. Hollywood stars and celebrity athletes are given stock options in return for attending the openings of the company's restaurants. Newer concepts like Marvel Mania and Chefs of the World are in the works, as is a music-themed restaurant in Times Square.
FINANCIAL FACTS
Income Statement
12-month sales: $472.3 million
12-month income: $66.2 million
12-month EPS: $0.60
Profit Margin: 14%
Market Cap: $1192.7 million
Balance Sheet
Cash: $18.6 million
Current Assets: $122.9 million
Current Liabilities: $53.3 million
Long-term Debt: $50.4 million
Ratios
Price-to-earnings: 17.8
Price-to-sales: 2.5
HOW COULD YOU HAVE SEEN IT COMING?
For the first nine months of 1997, direct revenues on a unit basis have fallen 9%. That is particularly troubling since the chain has seemingly used up all the choice tourist mecca locations and is now relegated to expanding its namesake chain in secondary markets.
The company has many potentially lucrative young ventures in the works, but Wall Street's focus has been on the weakness of the one proven concept. As the company ate through its initial public offering money, with cash shrinking to less than 10% of the original $200 million bankroll, the rolling red carpet began to fade.
Pupils of eatertainment would have expected softer sales at older units. It is hard to live up to the full-capacity euphoria of the themed restaurant's novelty value in its freshman year. The aggressive expansion, at a faster pace than cash flow from operations could support, was evident with every passing quarterly balance sheet. It was there to see -- if one had rightfully assumed that the stock market would maul the stock with blinders on, ignoring the wide diversification in favor of the deteriorating fundamentals of the flagship chain.
WHERE TO FROM HERE?
Just how wide is this planned diversification? By the end of next year, Planet Hollywood will have lodging interests on both coasts. The Pennsylvania Hotel in New York City, across the street from Madison Square Garden, will become the Official All Star Cafe Hotel. In Las Vegas the company will team with Aladdin Gaming to convert an existing property into a casino hotel based on Planet Hollywood's upcoming music-themed dining entry.
Planet Hollywood has sought to debut new products prudently. It knows it has brand equity. It simply teams up with established players in the niche. Planet Hollywood playthings? Mattel put out the Planet Hollywood Barbie and Hasbro the Planet Hollywood movie trivia board game. Ice cream? Dreyer's will help the company distribute Cool Planet Ice Cream and roll out Cool Planet Cafes this spring.
Teaming up with movie stars since its inception, Planet Hollywood has rarely acted without a strong supporting cast. Even the logical expansion into movie theater entertainment centers with the creation of Planet Movies was done with the assistance of AMC Entertainment.
So, as a team player throughout its short public life, why is it that now the company has been abandoned?
Last summer in the Daily Double on Planet Hollywood, I wrote that, "Siskel and Ebert would be hard pressed not to deliver a pair of thumbs down to its lofty valuation." Since then the share price has fallen while sales and earnings have risen -- so does this make a compelling case for this unloved flick?
The stock is selling for just 11 times earnings estimates of $0.91 a share this year, so the real concern is how the company will finance its stake in the new ventures and whether they will steal some of the spotlight from the namesake eatery. Official All Star Cafe is a credible growth vehicle now, and despite competition from similar concepts from the likes of Champps, T.G.I.Fridays, and now ESPN, it leads the pack of a hot sporting trend.
That sporting prowess will come in handy now that the company has tackled the valuation demons and puts on its game face to compete for Wall Street's attention once again. This time with a new game plan.
-Rick Aristotle Munarriz
([email protected])
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