Ruby Tuesday Inc., including its wholly owned subsidiaries, develops, operates and franchises casual dining restaurants in the U.S., Guam and 14 other countries under the Ruby Tuesday. The company also franchises the Ruby Tuesday and Wok Hay concepts in selected domestic and international markets. The company owned and operated 750 Ruby Tuesday restaurants located in 39 states and the District of Columbia. Its traditional franchisees operated 43 domestic and 53 international Ruby Tuesday restaurants in 14 states, Guam, and 14 foreign countries. A traditional international franchisee operated one Wok Hay full-service Asian restaurant. Company-owned and operated restaurants are concentrated in the Northeast, Southeast, Mid-Atlantic, and Midwest regions of the U.S. During the fiscal year ended May 31, 2011 (fiscal 2011), the company acquired 11 of its 13 franchise partnerships, representing 106 restaurants.
Selected financials (in millions USD):
Market Capitalization: approximately 490 million
Enterprise value = 490 (market cap) + 320 (debt) => 810 million
Free cash flow estimate by management for 2012 = 90-100 million
Initial free cash flow yield on enterprise value = 11.25% – 12.5%
Initial free cash flow yield on market cap = 19.75% - 20.25%
Catalyst:
Risks:
Final comment:
The company is trading for around five times free cash flow. Considering the risks involved with debt load and unproven new restaurant openings, the price we pay today is cheap enough to justify the risks.
Disclosure:
I own shares of this company.
Selected financials (in millions USD):
| Financial year | 02 | 03 | 04 | 05 | 06 | 07 | 08 | 09 | 10 | 11 |
| Revenue | 833 | 914 | 1,041 | 1,110 | 1,306 | 1,410 | 1,360 | 1,249 | 1,195 | 1,265 |
| Cash flow from operations | 146 | 148 | 204 | 183 | 192 | 185 | 102 | 103 | 140 | 116 |
| Free cash flow | 35 | (6) | 53 | 21 | 20 | 59 | (15) | 85 | 123 | 90 |
| Total Capital employed | 520 | 805 | 919 | 1,075 | 1,172 | 1,230 | 1,272 | 1,124 | 1,064 | 1,064 |
| Equity | 334 | 415 | 527 | 563 | 527 | 439 | 432 | 416 | 538 | 592 |
| Debt | 8 | 207 | 168 | 247 | 376 | 513 | 588 | 476.6 | 276 | 329 |
| Share count | 64 | 64 | 66 | 65 | 61 | 57 | 52 | 51 | 62 | 64 |
Market Capitalization: approximately 490 million
Enterprise value = 490 (market cap) + 320 (debt) => 810 million
Free cash flow estimate by management for 2012 = 90-100 million
Initial free cash flow yield on enterprise value = 11.25% – 12.5%
Initial free cash flow yield on market cap = 19.75% - 20.25%
Catalyst:
- Cheap price is its own catalyst to start with. The market price of the equity is too low compared to the free cash flow generation.
- Ruby Tuesday owns about 50% of the real estate of the 750 locations. This can be verified by low rent they pay ($44 million per year). Majority investors (e.g. Carlson Capital) is pushing to sell some of the real estates and do lease back transactions. This will create a huge cash reserve for the company which it can use it for debt reduction and share buybacks.
Risks:
- Company is planning to use about $60-70 million on capital expenses including opening new concept restaurants which have unproven profitability.
- Asset sale/lease back real estate essentially increases the operating expenses of the company as it currently enjoys the rent-free status on 50% of the owned RE.
- Economic activity in the greater portion of the restaurant locations remains weak or dismal.
- Raw material cost increases due to sudden inflation may not be passed on to the customers immediately.
Final comment:
The company is trading for around five times free cash flow. Considering the risks involved with debt load and unproven new restaurant openings, the price we pay today is cheap enough to justify the risks.
Disclosure:
I own shares of this company.
