Monday, July 26, 1999

RARE Hospitality International
(Nasdaq: RARE)
Phone: 770-399-9595
Website: www.rarehospitality.com
Price (7/23/99): $20 7/8


Steakhouse turnarounds are a mixed grill. Some, like Outback Steakhouse (Nasdaq: OSSI), are well done. Others, like Lone Star Steakhouse (Nasdaq: STAR), are still a bit tartare. Then we have some in this well-seasoned revival came up rare, as in RARE Hospitality (Nasdaq: RARE).

Just two years ago RARE was not in rare form. After swallowing up the Bugaboo Creek and The Capital Grille red meat chains, RARE was having digestion problems. The concepts, save for the "top scale" Grille, were struggling.

The restaurant operator pushed forward with new unit expansion, the simple solution to revenue growth, but in the process it neglected the existing locations. The company closed out 1997 in the red -- like its signature meat offerings.

However, over the past year an internal shake-up has driven a new CEO and a new COO to the top. The speedy buildout that resulted in 25 new eateries in 1997 called for just 13 last year. By dedicating itself to winning the "top of the table" battle of customer retention, the company drove home strong same-store sales. Analysts who were expecting less from the company got a RARE treat. The company went on to beat analyst projections -- a trend that continued in this year's first fiscal quarter. RARE has been hot. Believe it or not.


Atlanta-based RARE owns, operates, and franchises 143 restaurants. The largest chain in the company's portfolio is the 113 unit LongHorn Steakhouse, which is positioned as a "cool Texas saloon where our guests can enjoy a great steak with an iced cold beer."

The company, which was formerly known as LongHorn Steaks, also includes 17 mountain lodge-themed Bugaboo Creek Steak House locations and 11 upscale The Capital Grille restaurants.


Income Statement
12-month sales: $333.3 million
12-month income: $10.3 million*
12-month EPS: $0.84*
Profit Margin: 3.1%
Market Cap: $254.7 million
(*Excluding charges)

Balance Sheet
Cash: $6.8 million
Current Assets: $29.5 million
Current Liabilities: $33.4 million
Long-term Debt: $42.0 million

Price-to-earnings: 24.9
Price-to-sales: 0.76


RARE has crossed this path before. When LongHorn Steakhouse was its lone concept, the chain had been cast into the roadhouse wannabe mold that Lone Star seemed to be effectively expanding. But after an executive shuffle at the top, the company was rejuvenated.

Change isn't always good, but in RARE's case the company is two for two even if the new CEO and COO were merely promoted internally.

However, this Double was sizzling for quite some time. For the March 1999 quarter, analysts were projecting $0.29 a share. The company pulled through those already heightened expectations with a $0.34 per share showing before charges.

That is a scene that had been played out all last year as well -- with each upward earnings surprise providing one more chance for an individual investor to pick up on the favorable trend. Even the company got in on the act by announcing a share buyback in October. After watching Outback Steakhouse successfully right its boomerang ways -- with the shares having more than tripled over the past two years -- the market had a taste of what can happen when a casual steak chain turns the corner.

This year has continued where 1998 left off. Margins are improving. Comps are improving to the point where all but Bugaboo Creek are showing positive same-store sales increases (and even the sluggish Bugaboo has trimmed its unit-level shortcomings).

Expansion has also fit snugly between the all-out 1997 schedule and the more somber 1998 openings. Between 15-18 new restaurants, mostly LongHorn Steakhouses, will open this year. It's a natural since that chain accounts for all but a third of company revenues, and recent fundamental data shows that the concept is back on course.

On the bandwagon again, analysts are expecting the company to earn $1.11 a share this year and $1.32 next year. While picking up a company that could grow earnings at a 20% clip over the next few years is tempting at less than 20 times forward earnings estimates, this is not necessarily a RARE treat. The company has stumbled before. And while the company may be a beneficiary now that other roadhouse-themed chains like Lone Star Steakhouse and CBRL's (Nasdaq: CBRL) Logan's Roadhouse are slowing expansion, is this a shakeout or a trend? Be careful with this RARE opportunity.

--Rick Aristotle Munarriz

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