Planet Plummets
Profits off, stock dropping at Hollywood cafes
The company, which operates 78 Planet Hollywood restaurants and nine Official All-Star Cafes, plans to write off $45 million in the quarter against the cost of a restructuring.
It warned that net profit in the quarter, before the effect of the charge, was expected to dive from $14.2 million to just $1 million. Wall Street analysts had been expecting a quarterly profit of $23 million to $25 million, the company said.
Revenue will be up slightly to $102 million but much of the company's revenue growth comes from the opening of new restaurants. Sales from existing restaurants, a more important indicator of the company's health, fell 13% in the quarter, Planet Hollywood said, and 11% for all of 1997.
The announcement came after the close of trading, when Planet Hollywood stock fell 19¢ to $10.43. The stock, which has sunk from a high last summer of $27.25 on nervousness about the business, is expected to fall to $6 to $7 when trading opens today.
Planet Hollywood CEO Robert Earl blamed the downturn on the entry of new restaurants "(which) have sought to emulate our success," as well as higher overhead costs associated with the company's expansion.
To rectify the slump, Earl announced a number of restructuring initiatives include a sharp reduction in the number of new company-owned restaurants scheduled to be opened this year as well as cost-cutting measures.
At the same time Earl said the chain plans "to increase the frequency of celebrity events and promotions and broaden the number of celebrities associated with Planet Hollywood, with an emphasis on new, up-and-coming stars."
To help bring in new celebrities, a senior exec, Brian Woods, will move to Hollywood, the company said.
"They have to recharge the concept by getting stars to go there and young ones, not just Arnie (Schwarzenegger) and Demi (Moore) and Sly (Stallone). They have to get beyond that into Alicia Silverstone or Leonardo DiCaprio," said Paul Marsh, an analyst with Cowen & Co.
Marsh added that consumers patronizing a Hollywood-themed restaurant like Planet Hollywood also wanted the chance to star-gaze.
"Otherwise it's kind of like walking into a wax museum if you don't have a remote possibility of movie stars going there," he said.
A core group of high-profile actors including Stallone, Moore, Schwarzenegger, Bruce Willis and Whoopi Goldberg have led the celebrity promotion of the restaurant -- even being mentioned in the prospectus for the company's initial public offering in April 1996.
In exchange the actors received grants of stock and stock options, although the collapse in the stock price over the past six months has rendered many of the options worthless.
Planet Hollywood said in an SEC filing last year that 36 celebrities held options to buy 4.05 million shares at exercise prices ranging from $7.88 to $24. Additionally, a group of celebrities involved from the beginning -- likely including Schwarzenegger, Moore, Willis and Goldberg -- were granted stock but there were limits on its sale.
While some stock was allowed to be sold late in 1996, some of the limits are in place until 1999, the stock offering prospectus said. Holders of the stock would be unlikely to be pleased as they watched the stock fall from $27 to its current price, unable to sell.
Analysts said the effort to draw in more celebrities would likely require the company to issue more options. And given that the value of existing options has declined considerably, the company may have to re-price existing options to keep those celebrities who are now involved.
Marsh predicted that any attempt to re-price the celebrity options would be "unwelcome" on Wall Street.
He said there were indications of problems in restaurant sales last summer, when the company reported its second-quarter profit and was questioned about the high degree of one-time franchise fees contributing to the earnings. In the third quarter, the company revealed that comparable sales had dropped.
Planet Hollywood announced last year a joint venture with AMC Entertainment to develop movie theater complexes under the name of Planet Movies by AMC. Earl said Wednesday the company was relying on this and other joint ventures to provide earnings growth in the future.
For 1998, however, the company warns that growth in earnings and revenue will be flat, as a result of the restructuring. He claimed to be confident that growth would resume in 1999.
