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Rainforest stock burned
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January 7, 1998: 3:41 p.m. ET
Lower-than-expected earnings figures endanger Rainforest Cafe shares
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NEW YORK (CNNfn) - Stock of the theme restaurant chain Rainforest Cafe met with the law of the jungle Wednesday as its shares plummeted on lower-than-expected earnings.
Rainforest Cafe said Wednesday it expects to report fourth-quarter earnings of between 23 cents and 24 cents per share, just missing Wall Street estimates of 25 cents per share.
Analysts were unimpressed with the results despite the fact that the earnings were an improvement over 15 cents per share during the same period a year ago.
Morgan Stanley lowered its rating of Rainforest's stock (RAIN) to neutral from strong buy. Others followed suit, including John G. Kinnard & Co. analyst Tom Emmel, who also downgraded it to neutral from strong buy.
By mid-afternoon, the company's shares had plunged 12-3/8 to 18-3/8.
Several factors have hurt the chain. Primarily, Rainforest needs a king of the jungle.
So far, the company has not found a replacement for former president Martin O'Dowd, who resigned last April citing personal reasons.
O'Dowd, who was formerly with theme restaurant chain Hard Rock Cafe, was seen as a strong force in Rainforest strategy-making and his absence has been felt, said restaurant analyst Dennis Nielsen of R.J. Steichen.
"I think it would make a major difference for the company if they were to announce somebody of some stature in the industry," he said.
Rainforest sales soggy
Rainforest Cafe also said that sales at the three restaurant/retail outlets open more than 18 months -- the best gauge of its performance -- fell about 11 percent from the same quarter in 1996.
Overall fourth-quarter sales are expected to be in the range of $34.5 million. While that figure is 71 percent higher than the fourth quarter last year, it includes sales from newly-opened Rainforest Cafe outlets.
New outlets tend to have a spike in sales that tends to fade as the restaurants remain opened longer.
The tropical (162K WAV) or (AIFF) theme restaurant has been hurt by slowing retail sales of its branded products, such as T-shirts, mugs and other paraphernalia, Kinnard analyst Emmel said. Those purchases account for about 25 percent of the company's overall sales.
Rainforest growth may be checked
Rainforest Cafe CEO Lyle Berman said he was still optimistic, despite admitting that fourth-quarter sales at Tysons, Sawgrass and Woodfield Mall (three newer cafe locations) were less than expected.
He said they were on target for overall sales, however. "At the current anticipated sales levels, these units deliver attractive returns," he said.
The company has also been bogged down by delays in construction, which it said were beyond the company's control, at a Miami site and also at the MGM Grand Hotel and Casino in Las Vegas.
Rainforest Cafe's unit at Walt Disney World presented a bright spot, the company said, with a 15 percent increase in sales for the fourth quarter from the same period in 1996.
And the current round of difficulties has apparently not affected the company's strategy to expand. Currently, Rainforest Cafe plans to open at least 10 new restaurants.
Rainforest is facing a nagging problem in expansion, according to restaurant analyst Andrew Zarnett of Ladenburg Thalmann.
Rainforest has expanded into many of the major tourist destinations, said Zarnett, but as it expands into more regional markets, like Michigan and Washington state, it will likely not have the same merchandise sales from local customers.
"If you live near a regional mall and you go there on a regular basis, you don't need more than one or two Rainforest T-shirts. You're going to stop buying after some point in time," he said.
-- by staff writer Randy Schultz
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