(FORTUNE Magazine) – When Robert Earl says, "I intend to build an empire," it has a certain ring of inevitability. A half-hour on the phone with him is all it takes to understand why investors think Planet Hollywood, the theme-restaurant chain of which he is CEO, deserves a stock market valuation in the same league as a huge, established company like Wendy's. With a stock price of $23 as of November 26, Planet Hollywood's market cap is $2.5 billion.

Earl expounds earnestly and convincingly on expanding the five-year-old Planet Hollywood brand to toys, fragrances, retail stores, casinos, and hotels. He's planning to move into more themes, tapping sports, music, and even comic books. In all, Earl sees the potential for more than 300 restaurants worldwide over the next several years. Earl knows how to get people buzzing about his restaurants--he's the man credited with the successful international rollout of Hard Rock Cafe. All of his plans will be backed up by Planet Hollywood's formidable public relations machine. Every grand opening of a Planet Hollywood restaurant is a celebrity event, complete with appearances by superstar stockholders like Arnold Schwarzenegger and Sylvester Stallone; the company's new chain of sports-themed restaurants, Official All Star Cafe, features such icon/investors as Joe Montana and Shaquille O'Neal.

But good as Earl's story may sound, and talented as he may be, there are plenty of reasons for skepticism. This is the restaurant business, after all, where today's fast-growing hit can become tomorrow's flop, taking investors down with it. Planet Hollywood's third-quarter numbers are shaky: Sales for restaurants open 18 months or more barely increased, and the all-important ratio, merchandise sales as a percentage of total revenues, actually slipped. Flat revenues for this company are especially alarming because each restaurant is expensive to run, says Brian Rogers of the Potomac Fund. True, operating expenses at each unit are declining for now, as Earl spreads his costs across more and more restaurants. But who knows if that trend will last?

Another serious question is the sustainability of Planet Hollywood's growth. Earl's ambitious goals are to keep the company growing at 35% to 40% per year in both number of restaurants and earnings per share. But the goals may conflict. To keep earnings rising, says Ron Paul, president of Technomic, a food industry consulting firm in Chicago, "you need trophy locations, because you need throughput, and you need it on a year-round basis. But you run out of trophy locations pretty fast." Already, Planet Hollywood relies on a handful of restaurants for a large chunk of its revenues. So far this year, 35% of sales come from just four of its 45 Planet Hollywood units: Orlando, London, New York City, and Las Vegas. Of those, the enormous restaurant in Orlando, one of the highest-grossing restaurants in the world, alone generates about $50 million in sales--more than 10% of the company's estimated 1996 revenues.

Ever the optimist, Earl expects to maintain momentum by rolling out new concepts, like a chain of music-themed restaurants. (He says he'll announce details at a celebrity-laden press conference on New York's Times Square.) He also says his restaurants aren't just restaurants; they're money machines that generate nearly as much revenue from merchandise as from food--$16 T-shirts have pretax margins of 40%, nearly twice that of the average food tab of $16 per person. Nor is Earl worried about the concentration of revenue in a few restaurants, because they'll be joined by the new All Star Cafes and hundreds of restaurants done up in other themes he's concocting.

All told, Earl thinks he can sustain 40% earnings growth from internally generated cash alone for the next two years or more. "That's why I believe I can justify the high P/E multiples and ratings," he says. He'd better be right; otherwise, Planet Hollywood's stock will be headed toward planet earth.

--Herb Greenberg

HERB GREENBERG is a business columnist for the San Francisco Chronicle