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Squeezed from All Sides, Yet Highly Recommended?

April 01, 2013 | About:
For the second week in a row Barrons came out with a strong buy on a restaurant stock. Last week it was drive-in hamburger joint Sonic (SONC).

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This time around they are touting the small-cap casual dining chain Ruby Tuesday (RT).

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Barron’s author David Englander is enthusiastic that new management has vowed to cut "couponing" while enticing full-price patrons. That would fatten currently depressed corporate margins while perhaps having the same effect on their spare rib and loaded potato-skin eating customers.

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The new crew faces some strong headwinds. The National Restaurant Association said February marked the fourth monthly decline (in their Restaurant Performance Monitor) in the past five. Industry sales and same store traffic remain weak due to high gas prices, the expiration of the 2% FICA tax holiday and the generally slow economy.

http://www.restfinance.com/content/story.php?article=01081

Labor costs are set to escalate as the full effects of the Affordable Healthcare Act (aka Obamacare) take hold.

Casual dining firms like RT are being hurt by trade down business migrating to popular quick serve outfits like Chipotle Mexican, Five Guys’ Burgers & Fries and Panera Bread. Cost savings from not tipping along with lower menu prices make those more attractive as money is tighter. High-end businesses have not felt that same bite.

Fiscal year 2009 (ended May 31, 2009) showed a 35-cent per share loss as shell-shocked consumers sharply curtailed dining out. Fiscal 2012 sawonly break-even results after two fairly decent rebound years in 2010 and 2011.

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The company’s high debt almost killed them during the last recession when cash flow dried up. Management has worked hard to cut leverage since that near-death experience.

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Ruby Tuesday did not show good shareholder metrics in the past. Stock price stability, long-term growth and earnings predictability all rank near the bottom of Value Line’s 1,700 company main research universe. Value Line’s lowest financial strength rating shy of default is a "C."

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The Barron's column showed that RT stock had declined from a high $15.60 in 2011 as EPS vanished. A longer-term chart would reveal that shareholders from 2006 have suffered losses from near the $33 level.

Optimists hope Ruby Tuesday will post FY 2013 results of 26-cents per share. Value Line’s March 1, 2013 full-page review shows a more somber 10-cent estimate. After a 24-cent loss in the November quarter trailing 12-month EPS are in the red. Even the best-case projections are not mouth-watering.

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The company, and most other casual dining firms, is once again trying to fill empty seats via discounting. Television ad spending went from $1.1 million to an estimated $48.5 million over just two years. That huge push into TV ads has failed, so far, to deliver better net results. RT is back to heavy couponing. Much of it goes out via cost-effective e-mail solicitations.

Coupons deliver traffic but can really hurt margins. Covering fixed overhead demands that RT respond to similar offers from Outback, Applebee’s, Perkin’s, TGI Friday and specialty chains like Famous Dave’s BBQ. Ruby Tuesday’s mostly mall-based locations were a plus when times were booming. Those same shoppers are not out in force lately.

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Why buy shares of a marginal player, in a badly positioned industry? Where is the appeal in a company which sports a dicey balance sheet and a poor track record? Ignore the hype. Save your money for better risk/reward situations.

Disclosure: No position

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.5/5 (10 votes)

Comments

Adib Motiwala
Adib Motiwala - 1 year ago
Good post.
tomhend
Tomhend - 1 year ago
Hi Paul, I am chicken, I see Druckenmiller and now Stockman warning about a collapse and I am afraid to let a value manager I trust, buy stocks on my behalf. I am afraid to get in to the market.

Any advice?

Please leave your comment:


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