June 1, 1999
Out of Orbit
The Fall of Planet Hollywood
by Rick Aristotle Munarriz ([email protected])
At the Clarion, the company set up 280 seats, most of which will go unused. It will be a scene repeated at many Planet Hollywood restaurants when they open later in the day. The defections are contagious. The company had cordoned off a dozen seats for VIPs, and the only person sitting on the other side of the velvet rope is Claudio Gonzalez, the Mexican franchisee who is also on the Board of Directors.
Wasted space and empty chairs are restaurant killers, and last year found Planet Hollywood breaking out the red ink pens it had put away after 1994. Sales also dipped 18.5% last year. The company has expanded at a faster clip than its ability to effectively manage that growth. When a shareholder suggests that the company should shut down underperforming units and focus on improving the stronger ones, Earl concedes a smile.
"We should have hired you for strategic advice earlier," he tells her.
If not, maybe they could have hired her as a merchandise buyer. The cotton workhorse of apparel sales has proven to be a gift from the Trojans. Retail sales have gone from 38% to 28% of total sales over the last three years -- and that is on a basis of perpetually declining food sales per store. When the company budgeted for these lavish restaurants, it seems to have counted on the continued success of high margin retail sales. A plot twist. A painful plot twist.
Yet rather than cure the internal ills, the company chose to cast a broader net. By taking on new restaurant concepts like Official All Star Cafe and the musically charged Sound Republic, while entering into deals for casinos, theater chains, hotels, and ice cream parlors, the company was spreading itself thin while laying its debt out thick.
The company is paying the price now. Rather, it is NOT paying the price now. It is in default with its creditors and is involved in heated negotiations in an attempt to stave off bankruptcy. Earl calls the matter "extremely serious," but does not wish to discuss the matter publicly. Unfortunately one can't put up cachet as collateral.
Why are we here then?
We're chasing a loser!
It's a grim meeting indeed when two of the dozen questions raised concern the possibilities of NYSE delisting and reverse stock splits. Yet the shareholders present, for the most part, are not openly resentful. There are no moans when the directors up for election retain their posts. Even the first person to address Earl in the Q&A session is quick to point out how she loves the Orlando restaurant before asking, "What happened?"
It's a loaded question at a time when the company is firing blanks. Everything happened -- and that was the problem. Why would a company spend millions to open a Planet Hollywood in a seasonal resort like Aspen? Why would Whoopi Goldberg make a good ice cream spokesperson for the Cool Planet scoop shops? Why butt heads with Hard Rock Cafe by rolling out Sound Republic when the original theme restaurant chain has the capital to fight back?
"There is no one issue," he explains -- and rightfully so.
Next door to the conference room, three dozen of football's finest young recently drafted prospects are hacking away at a free buffet breakfast. The hotel is hosting the NFL Rookie Premiere. The contrast works. In with the new at Jack's Place. Out with the old in Ballroom C.
Plan Nine From Outer Space
Probably nothing sums up the state of Planet Hollywood better than the company's 1998 Annual Report. It's slick on the outside, like an aging starlet with cake-thick makeup to cover up dated denial. On the cover there are shots of uneaten food, clothes on the rack, and an empty restaurant -- the reality of the Planet Hollywood of today.
"My whole life is wrapped up in Planet Hollywood," Earl explains. He states that he has never sold any shares and, actually, that his family has added to their position in the past.
Then again, some stock options have been recently repriced to levels considerably lower than when they were first issued. That is not a luxury that is granted the regular shareholder. The upside is that the stock would have to triple to hit the lowest exercise price of $2.50.
But will it even get that high? The company promises that it will announce new initiatives, but only after it has set up some kind of game plan with its creditors. Earl explains that the company does not want to release details of the new efforts since the media will likely tarnish any possible good news by harping on the financial uncertainty.
What is known is that the company is looking to shed all of its concepts save for Planet Hollywood. Even so, the flagship chain may not remain intact as the company finds franchisees for some of its company-owned locations and tweaks the remaining units. In moviespeak that means that the film is a dud and a lot of it will now be left behind on the cutting room floor.
The renewed focus on its flagship brand may be a welcome sight to investors, at the very least to the shareholder who was three years late in applying for the task of strategic advisor. The company claims the food quality is now better and more fashionable clothing lines are being added. The movie props and outfits that line the walls will be exchanged more often, rotating with the other restaurants.
New menu. New merchandise. New look. Unfortunately there is no assurance that "new stock lows" won't accompany the Planet Hollywood restoration. Last year, in a move to help rid itself of the perception that all the chain does is sell overpriced hamburgers, it hired Bill Baumhauer as President and Chief Operating Officer. He was hired away from Fuddruckers, where he, well, sold overpriced hamburgers.
Baumhauer sits next to Earl during the meeting. He is, literally and figuratively, Earl's right hand man now. CFO Tom Avallone and Secretary Scott Johnson also share the stage. Don't get too familiar with the faces -- Baumhauer claims that 85% of the previous executives are no longer with the company. Headhunters have claimed some. Others have been let go in the name of accountability.
So the new hires are trying to improve the menu while lowering prices. That sounds great to anyone not running the numbers of the margin contraction that strategy implies.
When asked about online initiatives and the dormant present state of Planet Hollywood Online, Earl points out the costs of being on the Internet. Some would argue the opportunity cost of not being on the Internet. A company part-owned by noteworthy celluloid citizens could certainly drum up a high traffic site complete with content and commerce. Yet Earl seems reluctant to lose money online as the company suffers the same fate offline. Celebrity Sightings will eventually roll out a site where Planet Hollywood's initial investments will be minimal. However, the company is gearing up for an advertising blitz by the end of June. Why spend money on a promotional tool that Wall Street does not embrace over one that it does?
Fundamentally, it appears that the most critical move now is closing the weakest units. With most of the company's 95 restaurants being Planet Hollywoods, the brand has been diluted. The quality of the displayed memorabilia and the uniqueness of the concept have gradually degenerated with every new opening. A family in St. Louis or Indianapolis would be unlikely to go visit the London location when they have one in their own backyard -- much less spring for a t-shirt that no longer communicates exclusivity.
The problem here is that with early lease terminations come financial bills that Planet Hollywood will be hard-pressed to pay. The company is not rich enough to stop being poorer, and that could land the company in bankruptcy court.
"We look forward to seeing you next year," Earl says in closing.
With the possibility of creditors taking over, one has to wonder if that was a statement -- or yet another unanswered question.
Where do you think Planet Hollywood is headed? Tell us by entering the "Save the Planet" contest and you could win a trip to Los Angeles and dinner at Planet Hollywood compliments of TRIP.com.