Courtesy of Dr. Paul Price
Squeezed from all sides, yet highly recommended?
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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I'd take the other side of a bet that SONC is going higher, and explained why in my article: A Not-So-Super Sonic.
This time around, Barrons touted the small-cap casual dining chain Ruby Tuesday (RT).
Barron’s author David Englander is enthused 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 sparerib and loaded potato-skin eating customers.
The new crew faces some strong headwinds. The National Restaurant Association said that February marked the fourth monthly decline in their Restaurant Performance Monitor in the past five months. Industry sales and same store traffic remained weak due to high gas prices, the expiration of the 2% FICA tax holiday, and the generally slow economy. (Yup, Restaurants Had A Bad February)
Labor costs are set to escalate as the full effects of the Affordable Healthcare Act (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.
FY 2009 (ended May 31, 2009) showed a 35-cent per share loss as shell-shocked consumers sharply curtailed dining out. Fiscal 2012 saw only break-even results after two fairly decent rebound years in 2010-11.
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.
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 1700 company main research universe. Value Line’s lowest financial strength rating shy of default is a ‘C’. Ruby Tuesday got a B for financial strength.
The Barrons 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 gives a more somber 10-cent estimate. After a 24-cent loss in the November quarter, trailing twelve-month EPS are in the red. Even the best case projections are not enticing.
The company, and most other casual dining firms, are 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 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