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Tuesday, April 28, 1998
Elephant & Castle
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PUBSF)") else Response.Write("(Nasdaq: PUBSF)") end if %>
Phone: 604-684-6451
Website: http://www.elephantcastle.com
Price (4/27/98): $5 15/16
HOW DID IT FIND TROUBLE?
An elephant never forgets, but investors often do. Last year, shares of Elephant & Castle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PUBSF)") else Response.Write("(Nasdaq: PUBSF)") end if %> engaged in a forward stampede when the company announced that it would open licensed Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> restaurants throughout Canada.
There was reason for excitement. One Rainforest Cafe, the $35 million-a-year mammoth at Walt Disney World, generated $10 million more in sales last year than the entire Elephant & Castle chain combined. With both companies in a 50-50 joint venture, each party got what it wanted. Elephant got America's highest grossing restaurant chain. Rainforest got an experienced Canadian restaurant operator.
Three months after the partnership was announced the company lined up financing to begin building the first of at least five Rainforest Cafe units. But the real treat was that long-time board member Martin O'Dowd, who had steered Rainforest Cafe to profitability before resigning for health purposes, would become a company hire.
Elephant shares peaked at $11 shortly thereafter. With the opening of the first unit pushed back to the third quarter of 1998, the emphasis returned to the company's fundamentals. The pub restaurant chain was not presently profitable and the company was cash poor. The $4 million in convertible debentures that was earmarked for a Rainforest Cafe restaurant not due to open for at least another year only added to the company's debt service.
With sluggish same-store sale comparisons and expansion into the U.S. producing the same operating losses that the company was compiling in the Great White North, the stock went south for the winter.
BUSINESS DESCRIPTION
Vancouver-based Elephant & Castle operates two dozen restaurants, mostly British pub eateries. All but four of the units are namesake Elephant & Castle locations. Most are in Canadian shopping centers, with the balance usually occupying space in hotels. The company has also developed Rosie's on Robson and acquired Alamo Grill, a casual steakhouse chain with a San Antonio mission theme that has one unit open at Mall of America in Minneapolis.
FINANCIAL FACTS
Income Statement
12-month sales: $25.0 million
12-month income: ($1.0 million)*
12-month EPS: ($0.35)*
Profit Margin: N/A
Market Cap: $17.2 million
(*Includes non-recurring charges)
Balance Sheet
Cash: $3.0 million
Current Assets: $4.4 million
Current Liabilities: $3.3 million
Long-term Debt: $7.2 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.7
HOW COULD YOU HAVE SEEN IT COMING?
Surf over to the company's website and you are greeted with an audio loop of a trumpeting elephant. The only thing is, is the elephant coming or going? When the company struck the Rainforest Cafe deal last April a cautious investor probably took a look at the lackluster balance sheet and the string of quarterly losses and figured that the coattails needed a little bit of hemming.
Over the next few months, Rainforest Cafe partners in Mexico and England would go on to open the first three international locations. While not known at the time, the portability of Rainforest Cafe proved to be erratic. Operations at Mexico were doing well, but the two restaurants -- eventually on pace to generate $5-6 million a year in sales -- were the softest links in the chain.
London's Rainforest Cafe is struggling to break even as it adapts to the culture and deals with the high rent of Piccadilly Circus. While this information was not known at the time, the fact that Elephant only owns half of the Rainforest Cafe venture, and has to pay royalty payments to the themed restaurant parent on top of that, should have tempered shareholder enthusiasm.
Even with the five eventual Canadian Rainforest Cafe units, it will still be the flagship chain and its expansion of Alamo Grill outside of Minneapolis that will dictate feast or famine for Elephant. That noted, while sales rose 17% last year, comparable sales at the unit level were down.
WHERE TO FROM HERE?
Beaten down as the stock has been, this is not necessarily the Elephant's graveyard. Just last month O'Dowd took over as President and CEO. During his two year stint as President of Rainforest Cafe, the safari-themed chain expanded aggressively, successfully, and just as importantly, the stock rose six-fold.
O'Dowd is cutting deals in familiar places, opening new sites at Holiday Inn and Mills Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLS)") else Response.Write("(NYSE: MLS)") end if %> malls. Between jobs at Hard Rock Cafe and Rainforest Cafe, O'Dowd was an executive for Holiday Inn Hospitality. Most of the Mills locations house, or plan to house, a Rainforest Cafe. At Franklin Mills in Pennsylvania and Sawgrass Mills in Florida the company will open both an Alamo Grill and an Elephant & Castle. The restaurants will be side-by-side, sharing the kitchen and shaving substantial overhead in the process.
The dual-branding practice has been popular with quick service fast-food companies and it will be an interesting experiment in corporate efficiency if all pans out well. With O'Dowd's operating savvy giving the company a good shot at turning a profit and high-profile proprietary and Rainforest Cafe units expected to open later this year, maybe another stampede will be in order -- this time one for both an elephant and investor to remember.
-Rick Aristotle Munarriz
([email protected])
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