Landry's Restaurant's, Inc. Case Study

TABLE OF CONTENTS

SECTION PAGE REFERENCE

Executive Summary 1

Landry's, Inc Company Background 1

Landry's, Inc Peer Group Analysis 2

Business Strategy Analysis 3

Value Creation for Customers 4

Value Retention for Shareholders 4

Key Success Factors 5

Business Risks to Value Proposition/Business Model 5

Long-Term Growth Strategy 6

Accounting Analysis 6

Key Accounting Policies 6

Degree of Accounting Flexibility 7

Corporate Accounting Strategy 7

Quality of Disclosure 8

Red Flags Associated with Corporate Accounting Strategy 8

Financial Analysis 9

Quality of Earnings Analysis 9

Return on Equity Analysis 9

Operating Strategy Analysis 10

Investing Strategy Analysis 11

Financing Strategy Analysis 12

Conclusions & Recommendations 13

Exhibits 14 to 18

Executive Summary:

Landry's Restaurant's, Inc. is America's fastest growing casual dining seafood restaurant company. Aside from its core business, Landry's portfolio also includes some of the finest non-seafood eating establishments like Rainforest Cafй, Saltgrass Steak House, and Vic & Anthony's. The company has expanded rapidly through acquisition and has plans to grow one of its core restaurants, Joe's Crab Shack, from 145 units to over 500 in the next ten years. In the last year, Landry's financing decisions have led to strong operating cash flows. Additionally, by taking advantage of historically low interest rates and strong market demand, the organization was able to improve its working capital position, enhance its capital allocation strategy, and situate itself in a place to take advantage of opportunities to drive shareholder value within the restaurant, entertainment, hospitality, and gaming arenas.

Although expansion will fuel future revenue growth, Landry's, Inc. must maintain operational efficiency if it intends to maintain positive cash flows. Given the competitive nature of the industry, as well as rising costs associated with fuel, labor, and food, focused acquisition is key to the long-term stability of the organization; simply adding units without thoroughly assessing the cost/benefit of the acquisition will dilute future earnings and diminish shareholder value. This paper will present a five-year historical analysis of company operations and performance and provide detail behind our recommendation on a short-term hold position on the company's stock.

Company Background:

Landry's Restaurants, Inc. (NYSE: LNY) is a national, diversified restaurant company engaged in the ownership and operation of full-service, casual dining restaurants. Operating over 300 restaurants in 36 states, Landry's is the second largest full-service seafood restaurant operator in the United States. The company, headquartered in Houston, TX, opened its first Landry's Seafood House restaurant in 1980, and has since expanded with the acquisitions of other restaurant chains, including Joe's Crab Shack, Rainforest Cafй, Inc., and the Chart House. Its recent foray into the gaming and hospitality industry demonstrates its commitment to the development of well-known and respected brands, as well as its unending desire to provide its customer with a memorable experience that exceeds expectations. Further, LNY's overall strategy of growth through acquisition goes hand-in-hand with its dedication to driving shareholder value through the development of strong brands and operational excellence, which the company feels will engender long-term profitability.

Fiscal year 2004 was marked by solid revenue, earnings-per-share, and net income growth. In 2004, Landry's enjoyed sales of approximately $1,167.4M, which represented a 5.6% increase over fiscal 2003. This revenue stream is derived from two primary areas: sixty-five percent comes from the company's seafood operations, including the original Landry's seafood House, and the remaining thirty-five percent is derived from non-seafood enterprises, including recent acquisitions like the Rainforest Cafй, the Kemah Boardwalk, and the Inn at the Boardwalk (individual retail sales are included in these percentages). Next, EPS increased from $1.20 to $2.39 and overall net income grew 48% in 2004 to $66.5M. As a result of achieving these operational milestones, the company was rewarded with Restaurant Level Profit (RLP) and shareholder value improvements. RLP measures the profitability of individual locations versus the overall company and in 2004, Restaurant Level Profit had risen 16% to $221.3M; further, sixty of Landry's 305 units reported RLP of $1MM or more annually and over one-third of its restaurants (105 units) had RLP of $750K or more annually. In terms of maximizing shareholder value, the company reported five-year stock gains of 234% when it closed its books in 2004, versus the overall stock decline of the Standard & Poor's index of 17%.

Peer Group Analysis:

The company's that were examined as Landry's peers for the comprehensive business analysis are Rare Hospitality International, Inc (NYSE: RARE) and Brinker International, Inc. (NYSE: EAT). Each of these companies is found within the S&P Restaurant Sector and GISC Sector of Consumer Discretionary and they were specifically chosen for their quantitative likeness to Landry's. Although Brinker International is three and four times larger than Landry's, Inc. and Rare Hospitality respectively, common-sizing some selected financials from these companies demonstrate similarities between these companies' operating performance and justification for peer group selection. These similarities include Net Income as a percentage