Hello Ruby Tuesday by Jonathan Heller
Hello Ruby Tuesday (RT, $7.25)
Shares of this casual dining chain have been pummeled recently, along with many others in the sector. Down 30% year to date, and 72% from this time last year, its’ a reflection of the economy and overall market conditions as well as the company’s lackluster operating performance. Ruby Tuesday was also recently booted out of the S&P Midcap Index, and added to the S&P Small Cap Index.
The fact is that when the consumer is getting squeezed, they will ultimately cut back discretionary spending, and restaurants are a casualty. Compounding this situation is a huge run up in materials, a huge part of operating costs, second only to labor—and to add insult to injury, there’s a minimum wage hike on the way in late July. Its’ difficult to pass along increasing costs if customers decide they can no longer afford to eat out.
Restaurant stocks typically get pummeled during a severe economic slowdown or perhaps even the appearance of one, and from a valuation perspective often get very cheap as a result. Post recession, however they tend to do very well. As the economy picks up, consumers resume their dining out habits, and since the supply of new restaurants lags during a slowdown, this creates a supply/demand situation that can be beneficial to restaurant stock investors
This brings us back to Ruby Tuesday. For the past several years, profits have been falling. While 4th quarter results (announced recently) beat expectations, for the most part recent results have been lackluster, and same store sales challenged to put it nicely. What sounds like a no-win situation does have a bright side, especially if you believe this economy of ours will ultimately begin to show some life.
Ruby Tuesday happens to be a rarity in the restaurant business, one of the few publicly traded restaurant chains that owns a substantial amount of its real estate. In this case, the company owns the land and buildings of 330 locations, and the building only (land leased) at another 200+. That’s a potentially very nice portfolio of commercial real estate, especially given the company’s market cap of just $350 million, and an enterprise value of $944 million. On an enterprise value to owned location (land and building) that works out to $2.86 million. (That isn’t to suggest that each location is actually worth $2.86 million, but rather for perspective.)
Ruby Tuesday currently trades at 13.4 times trailing, and 12.9 times forward earnings, (although I would not put a great deal of stock in the forward estimates at this point). At just .8 times book, with a real estate portfolio in the mix, shares are currently cheap. But, they may stay that way for awhile.
The company recently had to re-work some credit agreements, and as a result no longer pays what appears to be very fat 7.3% dividend yield on many data financial data vendors’ profiles of the company. (That’s what we in the data business (as a 17 year Bloomberg veteran) call stale data.) They may decide to resume paying a dividend in the future, but only with lender approval.
This is one to keep an eye on, but don’t expect a quick recovery. As the economy goes so will the Ruby Tuesday and the restaurant sector in general.
Jonathan Heller, CFA
No position in RT