Hustled by Wall Street: How Analysts Pushed Dud.

AT first blush, the idea behind the Planet Hollywood restaurant chain didn't seem so half-baked. With movies and television becoming the touchstone for a culture hollowed out by the imperatives of modern life, the nation seems to have a growing, insatiable appetite for all things Hollywood.

So, in the theme-oriented nuttiness of the dining-out trade of the mid-1990s, why not a restaurant based on celluloid? Why not a nationwide chain of outsized, moviethemed restaurants? Would not the masses, starved for some connection to the glamour of Tinseltown, pay real money to dine - and buy souvenirs - in a faux "Hollywood experience"?

Actually, even a halfhearted amount of investigation and truth-telling would have given potential investors and analysts indigestion. For one thing, people seem to like to eat in theme restaurants just once, maybe twice. As a result, what are known as same-store sales -- that is, sales at existing branches (as opposed to newly opened ones) -- tend to decline over time at themed dining establishments. For another, only a handful of tourist cities worldwide could profitably support the huge dining emporiums that were constructed by Planet Hollywood.

These conceptual problems plagued Planet Hollywood almost from the start, but they were smothered by the hype and buzz that accompanied the chain's launch in 1992. Stirring the PR pot were Planet Hollywood's chairman and founder, movie producer Keith Barish, and its CEO, Robert Earl, a former top executive at the successful Hard Rock Cafe restaurant chain. As a result of their expert drumbeating, Planet Hollywood looked to be a financially sexy proposition, at least during the first course.

To be sure, the restaurants were very lively -- an uncharitable person might say they were loud -- the result of music systems turned high, the clank of cutlery and the dull roar of waitresses and patrons shouting to be heard. Some call this "eater-tainment."

The walls of every Planet Hollywood restaurant were drenched with movie and TV memorabilia: a film poster from the 1940s, Sharon Stone's ice pick from "Basic Instinct," the actual sailor's cap Bob Denver wore on the "Gilligan's Island" television series. Video monitors hung hither and yon screened snippets from old movies.

Slavish media coverage

Then there were the house celebrities. In an effort to attract an A-list crowd, most trendy restaurants "comp" recognizable actors and actresses. Barish adopted the comp policy and put it on steroids: he enticed two dozen Hollywood stars to invest in the chain even before the IPO. The likes of Arnold Schwarzenegger, Whoopi Goldberg, Sylvester Stallone, Bruce Willis, Demi Moore and Cindy Crawford bought a cumulative 18 percent of the stock, which was offered to them at discount prices in return for their agreement to show up at the grand openings of new Planet Hollywood outlets. It was a brilliant ploy. Not only did the assembled star power reinforce the chain's image as a Hollywood hangout, it also ensured that the media coverage for openings was terrific, bordering on slavish.

All this cost money, of course. The Planet Hollywood prospectus outlined that public relations costs were far higher than industry norms. Most diners noticed the food was a bit pricey -- and it was, as they were paying for a lot of overhead. As a private company (before going public), the Planet Hollywood chain borrowed more than $126 million to get rolling and spent millions more raised through private equity (pre-IPO sales of private stock).

In its first three years, the chain generated a steady flow of red ink. In 1995, it finally earned a reported $20.7 million on revenues of $270.6 million. That was the zenith for the chain -- and as later financial reports revealed, management either knew it or should have.

For one thing, same-store sales were sinking -- they would be down nearly 5 percent in 1996 (and fully 40 percent over the following three years). For another, although there were 30 Planet Hollywood restaurants around the world at the time the chain sold stock to the public, nearly half of the revenues were generated by four spots (Orlando, Las Vegas, Paris, and London). The remaining 26 restaurants were nearly deadweight.

Especially worrisome, the chain was already in all the best markets -- meaning that adding more spots would almost certainly prove a dead-end strategy. Unlike Denny's or McDonald's outlets, which can be sprinkled throughout a city, theme restaurants are so big and expensive that they are a one-to-a-big-city proposition -- a fact mentioned in Planet Hollywood disclosure statements.

Lots of buzz

Faced with declining same-store sales, glutted markets, an expensive business model, and new restaurants that burned the bottom line, what did Barish and Earl decide to do? What else? They decided to take Planet Hollywood public. Hire securities brokerage Bear Stearns. & Co. to sell the chain to the public, and get your pre-IPO investors squared away.

"It will certainly be the spotlight stock for 1996," enthused David Menlow, president of the IPO Financial Network Corp. "It's going to be huge as far as investor reception."

"It will go into orbit," echoed then analyst Linda Killian of Renaissance Capital Corp. "It's the name that will carry it."

Perhaps more tellingly than he realized, Manish Shah, editor and publisher of the newsletter IPO Maven, added, "Planet Hollywood is going to be an extremely successful offering because a lot of retail investors will be interested."

In a curious sort of symbiosis, Greg Novello, a portfolio manager for the Smith Barney Special Equities Fund (Smith Barney being one of the co-underwriters of the Planet Hollywood IPO) told The New York Times a few weeks before the offering that he planned to add the stock to his portfolio. "Obviously, it's going to be a deal that gets a lot of press attention and publicity," he explained.

The Planet Hollywood IPO prospectus oozed confidence about conquering such sexy cities as Tel Aviv, Boston, Tokyo, Bangkok, Seattle, Sydney and Berlin. In addition, Planet Hollywood executives spoke of launching another "eater-tainment" chain, the sports-oriented Official All-Star Cafe, which would garnish its walls with jerseys and basketballs and other athletic accoutrements. Athletes, not actors, would be the celeb hosts and investors.

By the time Planet Hollywood went public on April 22, 1996, the market had reached a boiling point, fired by smart public relations, friendly quotes from fund managers (many of whom worked for the underwriters), and a terrific road show conducted by Bear Steams. (Michael Tarnopol, senior managing director and chairman of Bear Stearns's investment banking division, would ultimately take a Planet Hollywood board seat.)

The IPO price was first set at $15 a share. Then, just before the offering, it was nudged up to $18. But that was small potatoes. On the very first trade, Planet Hollywood stock hit $31. As it would turn out, that was the zenith.

Tellingly, institutions began selling their shares almost immediately that first day. The stock wound up finishing its initial session at $26.88 -- down noticeably from its high, but still a sizzling 50 percent higher than the offering price. Volume was very heavy, with 22.6 million shares changing hands that first day -- at the time, a record for an IPO on the Nasdaq. It was also a sure sign the institutions were selling, since only institutions can lock up IPO stock in a hot underwriting.

Planet Hollywood shares were trading at about 140 times trailing (the previous year's) earnings and roughly 70 times estimated earnings for 1996. That translated to a market capitalization of $2.9 billion, or a staggering $100 million or so for each of the 30 Planet Hollywood restaurants then in business. It had cost Planet Hollywood an average of $7.3 million to build and open each of its outlets, considered record-breaking sums at the time. In the initial public offering materials, Bear Stearns had posited that each Planet Hollywood was worth $66 million, or 10 times what it cost to build. Now, at the close of the first day of trading for the new shares, Wall Street said each one was worth $100 million.

Institutional payback

That was certainly sweet desserts for the Hollywood stars who had acquired pre-IPO stock. Their cumulative equity stake in Planet Hollywood became worth $537 million.

The IPO was also rewarding to Planet Hollywood's early institutional backers, for it allowed many of them to get out of the company at a substantial gain. Of the $197 million that the IPO brought in, $66 million went to pay off a note held by a director of the company, while another $60 million went to pay off senior debt held by institutions. Additionally, institutional holders of pre-IPO Planet Hollywood stock such as Lincoln National Life Insurance, First Britannia Mezzanine Capital NV, Planetco Ventures Ltd., and Electra Investment Trust PLC sold their private shares into the IPO, reaping enormous profits as they bailed.

On May 14, 1996, four brokerages, all of which had managed or were lead syndicators in the Planet Hollywood IPO, issued "buy," "outperform," or "attractive" ratings on the stock. Smith Barney (now Salomon Smith Barney), Montgomery Securities (now merged into Banc of America Securities), Schroder Wertheim & Co., and, of course, lead underwriter Bear Steams & Co. fell all over each other singing the praises of Planet Hollywood stock.

First up was Joseph T. Buckley, Bear Stearns's top research analyst for restaurants. His panegyric was subtitled in part, "Planet Hollywood: A High-Volume Growth Machine." At the time Buckley issued his 19-page report, Planet Hollywood was trading at $26 a share. That's 51 percent higher than its IPO price.

Nonetheless, Buckley rated the stock attractive" (the equivalent of a "buy" recommendation). He touted Planet Hollywood's ability to market not just food but merchandise, the sales of which Buckley predicted would reach fully half of total revenues "within the next few years." No other restaurant chain had ever sold so much in apparel and knick-knacks, but Buckley predicted it anyway.

This was a parroting of Earl's ill-defined vision of a populace buying different kinds of Planet Hollywood branded products, as consumers came to identify with a restaurant chain-inspired lifestyle. Just why consumers would buy Planet Hollywood cooking tongs or expensive leather jackets instead of ones bearing a recognized culinary or apparel label was never explained.

But Buckley knew there was trouble in paradise. In his report, he noted that same-store sales "were down 4.6 percent in the first quarter of 1996." He attributed the weakening sales to "bad weather." How bad weather could affect a chain operating in 30 different cities on several continents he did not say.

And despite the fact that the chain had constructed only one All-Star Cafe, which Buckley called crucial to its growth plans, he predicted that Planet Hollywood earnings would be up by 83 percent in 1996, followed by a 57 percent jump in 1997. After that, they would settle down to 30 to 35 percent annual growth.

Buckley's report amounted to hardly more than a saccharin-laced version of the IPO prospectus Planet Hollywood and Bear Stearns underwriters had filed with the SEC. Conspicuously absent was any recognition that Planet Hollywood restaurants cost considerably more to operate than similar-sized competing restaurants. Nor did Buckley mention that some large pre-IPO investors had exited Planet Hollywood in the IPO, or that most of the money raised in the IPO had gone to repay debts.

Star struck

Buckley was hardly alone in his ringing praise. Analyst John J. Rohs, then of co-managing firm Schroder Wertheim & Co., also initiated coverage with a positive recommendation (in his case, an "outperform" rating), citing the same roll call of supposed virtues.

Rohs likened the fledgling, struggling restaurant chain to such retailing titans as Home Depot, PetsMart and Bed, Bath and Beyond. But these so-called category killers, the most dominant brand names in American retailing at the time, were then trading at an average of 46 times earnings -- no match for Planet Hollywood's awesome multiples.

Like Buckley, Robs did acknowledge that Planet Hollywood was actually posting falling sales in restaurants open more than 18 months. But also like Buckley, he attributed the decline to "bad weather."

What was it about Planet Hollywood? For some, it may have been their brokerages' investment banking relationships with the company. Others whose firms lacked such obvious ties may have been angling for future banking business, or were helping their large institutional trading clients exit the stock, or may simply have been star struck.

Certainly, Earl made deft use of his expanding stable of stars, trotting them out not only to wow the press at restaurant openings but also to woo analysts. One such gathering took place in 1996 in Las Vegas, where Schwarzenegger appeared before a group of industry analysts. Evidently the analysts were impressed with what they saw, and shortly thereafter, Salomon Bros., PaineWebber and Cowen & Co. all initiated coverage of Planet Hollywood with "buy" signals.

But there was more to the analysts' interest than Arnold's manly charms. There was much to be gained by currying favor with Planet Hollywood management. Were Planet Hollywood to expand, it would probably need to arrange new financing -- meaning there would be more stock to be issued, more bonds to be sold, and perhaps even some lucrative mergers-and-acquisitions work. And if the chain foundered, there would be the opportunity to earn fees for work-outs or bond offerings.

Over the months that followed the IPO, Earl and the analysts--perhaps sensing they may have waded in a bit too deep, given the frothy multiples - began to reposition Planet Hollywood. No longer was it just a restaurant chain. Now it was a builder of a hot brand that would click with consumers for years to come.

In this new spin, the future tense was always emphasized, along with the fact that merchandise sales made up roughly 40 percent of the chain's total revenues. "We see ourselves as building a trademark," Earl said, describing plans to sell T-shirts, ice cream, board games and perfume. Others speculated about co-branded Visa bankcards and a Planet Hollywood Squares television game show.

Although it was obvious that more Planet Hollywoods weren't the solution, the chain kept building. By October 1996, the chain had 45 restaurants up and running. The stock got a short-term boost when Planet Hollywood announced plans to build a 3,200-room hotel and casino on a 34-four-acre site adjoining ITT's Desert Inn casino on the Las Vegas Strip and a smaller, 1,000-room gambling resort on the boardwalk in Atlantic City.

It wasn't hard to see why there was so little talk by management about Planet Hollywood's core business -- restaurants, remember? In a nutshell, the basic business was rancid. While revenues in the second quarter of 1996 were up, rising to $85.4 million from $65.8 million a year earlier, earnings had plummeted, falling to $721,000 from $9.2 million.

Even more significant same-store sales kept on sinking. Also shrinking was the percentage of total revenues generated by merchandise sales.

One would think these figures suggesting decline should have raised some questions by analysts. But they seemed mesmerized by Earl's talk of opening "hundreds" of "Cool Planet" ice cream parlors and "Sound Republic" live music venues, and they relayed Earl's pitches to investors. For shareholders, there was a problem with grand plans and grandiose predictions: none of the plans jelled.

With money disappearing down the Planet Hollywood sinkhole, there was no money to launch casino hotels, no Official All-Star Cafe chain to spin off. There was no Planet Hollywood movie complexes, no Cool Planet shops selling Planet Hollywood-brand ice cream.

But what was hurting investors the most was that Planet Hollywood restaurant sales stunk. After an initial visit, customers stayed away in droves. Same-store sales fell by 11 percent in 1997, followed by another 18 percent nosedive in 1998. Merchandise sales shriveled, falling to just one-fifth of total revenues in 1998, as customers snubbed the $400 PH leather jackets.

By late 1998, one analyst had had enough. In a stinging report, SG Cowen's Paul Marsh noted, "This is a story of bad food. And the stars never come out after grand opening." Marsh added that his earlier "buy" recommendation on Planet Hollywood had been his "career" worst call.

After 1998, the bottom just plain fell out. In the first quarter of 1999, the company reported a stunning 22 percent drop in same-store sales from the lousy year-earlier quarter. By then, the typical Planet Hollywood restaurant attracted about 60 percent of the patrons it had served in 1995. Finishing up 1998, Planet Hollywood reported a net loss of nearly $238 million on revenues of $387 million in March 1999.

For ordinary investors who bought stock after the IPO, Planet Hollywood was an unmitigated disaster. Virtually the only profit takers were the private, pie-offering investors who sold into the IPO and the institutions that were able to buy stock at the IPO price and then liquidate their positions in the first-day run-up.

On January 22, 1999, with the stock trading at $3 a share, Bear Stearns's Buckley finally downgraded Planet Hollywood from a "buy" to a "neutral." Even that call was wrong, for the stock sank to less than $1 shortly thereafter. Later that year the chain declared Chapter 11. At last glimpse, creditors were fighting over the carcass.