Rain Maker

The company: Based in Hopkins, Minnesota, Rainforest Cafe Inc. owns and operates a chain of rainforest-themed combination restaurants and retail shops.

The markets: The company has more than doubled its number of locations in the past year. It has eight restaurants around the world, from Walt Disney World in Florida to Picadilly Square in London. Each has an adjacent shop selling rainforest-related toys and clothing. The restaurants feature a rainforest-type atmosphere, complete with rainstorms, tropical fish and live parrots. The company's founder first developed a mock version in his home, with waterfalls, hanging vines and all, then used the model to convince investors of the restaurant's potential.

The sizzle: Rainforest Cafe expects to open 15 new domestic locations by the end of next year. The company also has long-term agreements to open 20 locations in England, Mexico, Canada and Asia. Rainforest Cafe will either receive a royalty payment from each licensed location, hold partial equity or, in some cases, both. Current domestic locations, which are wholly owned, average about $3 million each in net profits per year.

The risks: The company's development schedule is always at risk of being altered by construction delays. In addition, traffic at a typical location tends to subside within several months of opening. Two Chicago locations saw sales decrease 11 percent and 18 percent in the latest quarter compared to last year. The restaurant business is competitive, and Rainforest Cafe has only been in business since 1994. Also, at press time, the company was still searching for a chief operating officer.

Historical financial performance: Rainforest Cafe has grown its sales from $2 million in 1994 to $48 million last year. It has been profitable for the past two years, earning a net income of $1.1 million and $5.9 million respectively. Operating margins have been improving and stand at a strong 21 percent. Each location has been in the black since soon after opening, and all locations have been profitable. The company has $143 million in cash, or $8 per share, and no debt.

Projected financial performance: Net capital expenditures should peak at $50 million next year, so the cash on hand should keep the company moving forward. Rainforest Cafe is expected to increase earnings per share by 93 percent for this year and 54 percent in 1998. At $24 per share, the stock trades at 30 times the 1997 earnings estimate of $0.79 per share and 20 times the 1998 estimate of $1.22 per share. Over the next five years, analysts expect the company to grow at an average of 43 percent annually. If the stock continues to trade at an earnings multiple close to its expected growth rate, it offers plenty of room for appreciation. At $40, the stock would trade at 33 times 1998 estimates, 10 basis points below the expected annual growth rate.

The Outlook

Past and projected sales and earnings.

Fiscal Year 1995 1996 1997* 1998*
Revenues ($M) $13.4 $48.7 $110 $168
Net income ($M) $1.1 $5.9 $14 $21.7
Earnings per share $0.16 $0.41 $0.79 $1.22
Shares outstanding ($M) 7.3 14.3 17.8 17.8
*Estimated

Name: Rainforest Cafe Inc.
Recent Price: $24 5/8
Price/earnings ratio: 43
Market: Nasdaq
Symbol: RAIN
Figures are as of August 11, 1997

The Motley Fool can be found on the Web at http://www.fool.com and on AOL at keyword: FOOL. Jeff Fischer contributed to this article. The above opinions are those of the authors and not of Entrepreneur. Past performance is no guarantee of future results.