by Lawrence Meyers | January 11, 2013 9:19 am
It must be a bummer to launch a restaurant chain and enjoy prosperity for a few years, only to have the chain eventually start to lag and go out of style.
I’ve eaten at Ruby Tuesday (NYSE:RT[1]) restaurants and have fond memories of those visits. Then again, I love IMAX (NASDAQ:IMAX[2]) movies. But in neither case do I love the stock … and now it seems like founder and former CEO Sandy Beall, who ran the company for a very long time, got out while he still could[3].
Ruby Tuesday’s most recent earnings went down as well as cheap vodka. Same-store sales were down 0.3%, with the “uncertain and volatile consumer spending environment” likely to keep things that way, according to management’s conference call.
The company posted a 7-cent loss, excluding one-time charges — charges that included closing a bunch of stores and some offshoot brands that weren’t working out. Total revenue was down 1% thanks to 29 store closures, and RT also had to deal with the bankruptcy of a Midwest franchisee.
Margins, however, improved 170 basis points thanks to some cost savings and labor controls.
On the balance sheet, Ruby Tuesday repurchased some high-yield bonds at a discount of 5% to par, and thus brought its long-term debt down to $309 million from $342 million. That’s a very significant move, and it is moving into sale-leaseback transactions to raise cash for the balance sheet. RT also made what I think is a terrible move — which I’ll explain shortly — in that it spent $20 million repurchasing stock.
Ruby Tuesday is not in imminent danger of bankruptcy. What I’m concerned about is that the company expects $10 million to $20 million of free cash flow this fiscal year. As long as that FCF comes through, then it’ll be able to hang on just fine. I still wouldn’t say RT is a growth play, but it’ll hold its own.
However, if that free cash flow does not hit targets, Ruby Tuesday has only $25 million of cash on hand. That means if cash flow goes negative, RT will either have to cut back on capex (which is pretty necessary considering the brand repositioning the company is engaging in) or risk depleting that cash to pay the $28 million in interest they owe each year. That’s where the risk lies.
Ruby Tuesday also is banking on Mexican food in the form of its Lime Fresh concept[4], but given how oversaturated that market is, I can’t say I’m impressed. I think RT is dealing with a fiercely competitive market without any distinguishing product.
The company projects 24 to 30 cents of profit this year year, down from 46 cents last year. That means RT is trading around 30 times earnings, which is crazy considering the multiples of other restaurants that are at 30x or less and in much better shape. For instance, you’ve got …
I think if you are holding Ruby Tuesday, you should sell. If you want to bet on a turnaround, be my guest, but I think that’s a long shot with significant downside risk here. In fact, RT probably is worth even considering as a short, given its valuation and questionable future.
As of this writing, Lawrence Meyers[8] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[9], which brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses. He also has written two books[10] and blogs about public policy, journalistic integrity, popular culture, and world affairs[11]. Contact him at pdlcapital66@gmail.com[12] and follow his tweets @ichabodscranium.
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