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View from America

01 April 2005

In the USA, hope springs eternal in the restaurant business. Hope, that is, that a bump in earnings lies at the end of the next big gamble. Literally, in the case of Landry's Restaurants, a public company headquartered in Houston, Texas. It announced in February that it was buying a Las Vegas casino - the Golden Nugget Hotel & Casino. The price: $295m in combined cash and debt assumption.

Trouble is, the landmark Golden Nugget isn't on the tourist-crammed Strip, Sin City's biggest attraction. It's downtown, on Fremont Street, a pedestrian mall where the less well-heeled go to gamble and shop.

That fact doesn't worry Landry's, however. "Downtown is a key development focus for the city," Landry's chief financial officer Rick Liem announced at a recent presentation to investors. He added that the casino's relatively small gambling arena - just 40,000sq ft - has been "dense with people" on his recent visits.

Like I said, hope springs eternal in this business.

Tough as it is to pinpoint a trend among restaurant companies, Landry's is moving against prevailing wisdom. Investor equity - public and private - is lately being funnelled toward companies that stick to their proverbial knitting. "Complexity is never helpful for Wall Street," says consultant Allan Hickok, a former restaurant analyst who covered Landry's for years.

A few years ago, restaurant companies that operated multiple chains were the darlings of Wall Street. Their potential for growth seemed nearly unlimited. Should a concept stumble, no problem. There's another waiting.

Moreover, investors couldn't resist companies that exploited multiple eating trends. They should have. Outback Steakhouse collected Chinese, Italian, barbecue, seafood, Asian, and burger restaurants. To what end? Smith Barney analyst Mark Kalinowski gives the stock a "hold" rating. That usually means sell.

Landry's stumbled badly when it tried to open more than 40 Joe's Crab Shacks, a sprawling deep-fried fish concept. A lack of focus on existing restaurants trimmed sales and its once-hot stock entered a deep-freeze in 1998.

But unlike competitors, Landry's lurched back with a vengeance and a new strategy: buy instead of build. By 2004, chief executive Tilman Fertitta had shelled out millions of shareholder's dollars to acquire four aging chains, which management fixed - to the surprise of many observers. Liem boasts that 116 of the company's 300-plus restaurants generate $750,000 or more in profit.

All told, Landry's operates (it doesn't franchise) eight chains. Revenues will most likely grow 7%, to roughly $1.3b this year. And now, assuming the Nevada Gaming Commission awards Landry's a gambling licence, it will own a $295m casino-hotel. Financing the deal isn't a problem; a December offering of senior notes brought in $400m.

Wall Street's reaction is mixed. The company's problems may stem from investors who can't figure out how much a share of Landry's will be worth given its new earnings model. Few analysts on Wall Street track gaming and restaurant stocks.

Liem in his presentation downplayed notions the casino deal would complicate anyone's understanding. He alluded to the fact that a single operation is easier to grasp than hundreds. He talked about synergies between the restaurants and the Golden Nugget.

"Cross-marketing," he noted, is a distinct possibility. "You can come into a Joe's [Crab Shack] and earn points to use in slot machines or for a hotel room," he enthused.

Sound far-fetched? Perhaps. But then 37 million people visited Las Vegas last year. Even if only a handful have eaten at a Landry's operation, there's hope they'll try their luck at one of the Golden Nugget's one-armed-bandits.
dsfarkas@reedbusiness.com

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