RUBY TUESDAY INC RT
March 21, 2017 - 4:21pm EST by
scrooge833
2017 2018
Price: 2.40 EPS 0 0
Shares Out. (in M): 60 P/E 0 0
Market Cap (in $M): 144 P/FCF 0 0
Net Debt (in $M): 185 EBIT 0 0
TEV ($): 329 TEV/EBIT 0 0

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Description

First posted in 2008, then 2013 and today. Third time is the charm.  RT seems to have a good risk-reward ratio despite the scary near-term outlook. It can be worth 50% more by years end but you just have to buy the stock, close your eyes and put the certificates in the drawer. 

Since the last forum post here on 1/9/2014, the company’s numbers have gone worse. The company has hired UBS to explore strategic options in Feb 2017. This may be the moment, as oogum said, when management hangs the towel and sell the new concept of the Fresh Start initiative to a PE fund who will take the risk to liquidate or turnaround the business. Company was flirting with credit issues as recently as January.

For fiscal year ending May 2016, same unit sales declined 1.4%. For fiscal year ending May 2015, same unit sales were down 0.5%.  For fiscal year ending May 2014, same unit sales declined 5.3%.  Q3 Fiscal year 2017 same unit sales were down 4%. The AUV is now $1.68 Million.  Contrast that with Olive Garden where AUV is closer to $5 Million.

So, what is the bright side?

 

103 underperforming stores were closed so far in fiscal year 2017

29 insiders have bought the stock in the last 12 months.

They are now on their third CEO. This means, hopefully the third time is a charm.

CEO has launched Fresh Start, a salad bar with 55 items, in 3 test markets and the initial results from 3 million data points look encouraging.  

Company has hired UBS to explore strategic options.

They were able to get waivers on their credit facility and extend unti June 2017, during which they can sell more assets or replace them with better terms. RT is not going bankrupt anytime soon. 

 

New Concept:

 

In August 2016,  RT sold off their Chipotle clone, Lime Fresh and embarked on Fresh Start, a 55 item salad bar as the strategy.  Here is one of their sponsored ads, as written from the perspective of a mom, to demonstrate the value proposition. Looks good: http://www.buildingourstory.com/2017/01/create-your-perfect-salad-ruby-tuesday_27.html

 

The following exchange from the Earnings Call transcript seems promising for the Fresh Start product.

 

“Lane Cardwell:  …  We’ve only had our new menu in place now since mid-November. We are about a week and a half away from launching our biggest initiative, which has been a year in making with the Garden Bar. I believe that these two things combined especially for why people use us, you know, again, we are very Garden Bar dependant. Half of our guests use the Garden Bar on any visit, and as many as 80% who come in and use the Garden Bar came in specifically because of that. We think that the enhanced Garden Bar that we are going to be rolling can kind of change the situation going forward.

Bryan Hunt: And in the three markets that you tested the Garden – expanded Garden Bar in Atlanta, Charlotte and – I forgot what that third market was off the top of my head – St. Louis. Can you talk about what the response was in those markets? Did you all see elevated same-store sales and consistent average check?
Lane Cardwell: We did see elevated same-store sales. Each market we kind of refined and refined as we got guest feedback and as we got operator feedback. What we are going to launch in mid-January is the culmination of literally over 3 million guest visits in the markets we’ve been testing with either people being exposed to or actually ordering in the Garden Bar. We are very confident that this is what we need.
Bryan Hunt: Okay. And then lastly, when you were – I imagine you were testing the menu, the new menu you are using in certain markets or locations as well, can you talk about the consumer feedback there as well as the average check response?
Lane Cardwell: I don’t want to get too specific on average check, but I can give you actual feedback from a national launch. The feedback has been extremely strong from both guests and from our team members. And the team members are sensitive to feedback that they get directly from the guest. Servers in any restaurant are commissioned sales people. The bulk of their income comes from the people they serve. If their guests aren’t happy, they are not happy. And they transmit that either happiness or unhappiness to us very directly and very quickly. We’ve been very pleased with what we’ve heard and very pleased with what we’ve seen. I don’t know if you’ve had a chance to see the new menu, but it’s dramatically different than the one that we’ve had in place for quite awhile. “
David Hargreaves: And, I guess, we are trying to get a sense for what sort of EBITDA run rate you expect the company to be at now, if you are a $60 million or an $80 million company? I’m not sure, there is obviously a lot of noise in the quarter. Is there anything you could do to sort of give us a sense for what we should be thinking of in terms of the run rate?
Sue Briley: Thank you for the question. But given where we are at in our brand transformation and the execution of our Fresh Start Initiative, it would be premature for me to give you that kind of an estimate at this time."

 

A post on a blog by a customer in one of the test markets also looked positive. “Yes they (the new customers coming )  are. I see it and I ask the wait staff. I saw the supervisor in this region at the restaurant and I talked to him, and he said volume in his area has picked up. I think the salad bar is the way to go, along with the ribs. One thing they could improve on are the steaks. Customers will take smaller steaks that are tasty of big ones that are not. I feel like buying 20K shares of this stock.”

 

The current CEO said they saw elevated same store sales. What can a 5% increase in AUV do to EBITDA per store? I compiled the unit economics for the last 5 years.

 

First of all, doesn't it strike you as odd that EBITDA per store was $-90K when unit AUV is about $1.68M whereas in 2011 AUV was $1.67M. And supposedly, the new activist investors had cut as much costs as possible from 2012 to 2016. Furthermore, COGS as % of Sales from 2011 to 2016 dropped by 1 pct point. I understand there is operating leverage and volume discounts but it seems to me that 2016 was just a year where a lot of their experimentation, consultant costs, CEO turnovers, just added up to the SG&A. 2016 was also the same year they sold their Lime Fresh Concept. As CEO of a public company, I know how difficult it is to put these costs in the right bucket and I won't be surprised if the normalized unit number is closer to the 2013 years than 2016. Let us take half of 2013's numbers as the EBITDA per store, then we get $65K per unit. You still get a potential EBITDA of $40 Million.

 

Valuation:

Then they own 269 buildings. They are selling 30 buildings for for an average of 1.6 million. Assuming they are selling the worst locations first, that means their 269 remaining buildings is worth $430M. Triangulate that with the historical cost on the balance sheet. There is still real estate and property historically carried at $365 million in the balance sheet. It is very conceivable that this stock goes up at least 50% by year-end for a market cap of $200 million.

 

Fiscal Year 2011 2012 2013 2014 2015 2016
# of Owned Locations 750 714 706 668 658 646
AUV $1.67M $1.83M $1.76M $1.74 $1.70 $1.68M
EBITDA/unit $173K $101K $137K $-17K $71K $-90K

 

 

 

10 Year Cash Flow Table

Fiscal year ends in May. USD in millions except per share data. 2007-05 2008-05 2009-05 2010-05 2011-05 2012-05 2013-05 2014-05 2015-05 2016-05 TTM
Cash Flows From Operating Activities                      
Net income 92 26 -18 45 47 0 -39 -64 -3 -51 -108
Depreciation & amortization 78 95 76 64 64 68 63 57 52 51 47
Amortization of debt discount/premium and issuance costs           0 -1        
Investment/asset impairment charges     61 3 7 31 44 25 11 61 70
Deferred income taxes -13 -6 -16 20 -1 -20 -16 2 -4 -1  
Stock based compensation     6 7 8 6 4 8 7 2 4
Inventory -2 0 0 -8 -2 6 -2 10 1 -1 2
Prepaid expenses -4 -3 7 -2 -1 -1 -2 -1 -2 -1 1
Income taxes payable     -1 10 -4 2 -1 0 3    
Other working capital 27 -32 -18 -3 5 19 -19 -6 -17 -24 -15
Other non-cash items 7 22 6 4 -5 2 4 16 6 4 18
Net cash provided by operating activities 185 102 103 140 116 112 36 45 55 40 19
Cash Flows From Investing Activities                      
Investments in property, plant, and equipment -126 -117 -17 -18 -27 -38 -37 -28 -31 -34 -31
Property, plant, and equipment reductions 17 8       6          
Acquisitions, net -5 -2 -1   -4 -24          
Other investing activities -1 7 21 8 6 22 59 22 14 15 25
Net cash used for investing activities -115 -104 3 -9 -24 -34 22 -6 -17 -20 -6
Cash Flows From Financing Activities                      
Debt issued           246          
Debt repayment     -112 -204 -91 -263 -27 -40 -14 -18 -10
Common stock issued 40 2   73              
Common stock repurchased -203 -39       -18 -30 -1 0 -10 -10
Excess tax benefit from stock based compensation         1 0 0 0 0    
Dividend paid -29 -13                  
Other financing activities 126 43     -1 -5 4 0 0 0 0
Net cash provided by (used for) financing activities -67 -8 -112 -131 -92 -40 -53 -41 -13 -28 -20
Net change in cash 4 -10 -6 0 0 38 5 -2 24 -8 -7
Cash at beginning of period 22 26 16 10 10 10 48 53 51 75 45
Cash at end of period 26 16 10 10 10 48 53 51 75 67 39
Free Cash Flow                      
Operating cash flow 185 102 103 140 116 112 36 45 55 40 19
Capital expenditure -126 -117 -17 -18 -27 -38 -37 -28 -31 -34 -31
Free cash flow 59 -15 85 123 90 74 -1 17 24 6 -12

10 Year Income Statement

 

Fiscal year ends in May. USD in millions except per share data. 2007-05 2008-05 2009-05 2010-05 2011-05 2012-05 2013-05 2014-05 2015-05 2016-05 TTM
Revenue 1410 1360 1249 1195 1265 1326 1251 1169 1127 1091 1022
Cost of revenue 1061 1093 1026 982 1045 1106 1020 986 933 903 859
Gross profit 349 267 222 213 221 220 231 182 194 189 163
Operating expenses                      
Sales, General and administrative 113 114 82 71 86 115 139 137 115 110 116
Other operating expenses 77 94 149 68 69 101 59 115 83 132 158
Total operating expenses 190 208 231 138 155 215 198 252 199 241 274
Operating income 160 59 -9 74 66 5 33 -70 -5 -53 -111
Interest Expense 22 33 35 17 13            
Other income (expense) -5 -2 1 1 0 -20 -55        
Income before taxes 132 24 -43 58 53 -15 -22 -70 -5 -53 -111
Provision for income taxes 41 -3 -25 12 6 -15 2 -5 -2 -2 -3
Net income from continuing operations 92 26 -18 45 47 0 -23 -65 -3 -51 -108
Net income from discontinuing ops         -16 1      
Net income 92 26 -18 45 47 0 -39 -64 -3 -51 -108
Net income available to common shareholders 92 26 -18 45 47 0 -39 -64 -3 -51 -108
Earnings per share                      
Basic 1.6 0.51 -0.35 0.74 0.73   -0.65 -1.07 -0.05 -0.83 -1.79
Diluted 1.59 0.51 -0.35 0.73 0.72   -0.65 -1.07 -0.05 -0.83 -1.79
Weighted average shares outstanding                  
Basic 57 52 51 62 64 63 61 60 61 61 60
Diluted 58 52 51 62 65 63 61 60 61 61 60
EBITDA 233 151 68 140 130 72 97 -12 47 -2 -64

 

Margins % of Sales 2007-05 2008-05 2009-05 2010-05 2011-05 2012-05 2013-05 2014-05 2015-05 2016-05 TTM
Revenue 100 100 100 100 100 100 100 100 100 100 100
COGS 75.22 79.91 82.21 82.21 81.76 82.25 81.52 84.18 82.61 82.71 84.06
Gross Margin 24.78 20.09 17.79 17.79 18.24 17.75 18.48 15.82 17.39 17.29 15.94
SG&A 7.99 8.41 6.58 5.9 7.3 9.18 11.09 11.73 10.24 10.05 11.39
R&D                      
Other 5.49 7.37 11.92 5.65 4.96 9.23 9.14 10.04 7.6 12.08 15.41
Operating Margin 11.31 4.31 -0.72 6.23 5.98 -0.66 -1.75 -5.95 -0.45 -4.84 -10.86
Net Int Inc & Other -1.92 -2.56 -2.72 -1.4 -1.45            
EBT Margin 9.39 1.74 -3.43 4.83 4.53 -0.66 -1.75 -5.95 -0.45 -4.84 -10.86

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Insider Buying

Company's hiring of a strategic advisor

Positive initial results from the New Concept

Valuation supported by real estate

    sort by    

    Description

    First posted in 2008, then 2013 and today. Third time is the charm.  RT seems to have a good risk-reward ratio despite the scary near-term outlook. It can be worth 50% more by years end but you just have to buy the stock, close your eyes and put the certificates in the drawer. 

    Since the last forum post here on 1/9/2014, the company’s numbers have gone worse. The company has hired UBS to explore strategic options in Feb 2017. This may be the moment, as oogum said, when management hangs the towel and sell the new concept of the Fresh Start initiative to a PE fund who will take the risk to liquidate or turnaround the business. Company was flirting with credit issues as recently as January.

    For fiscal year ending May 2016, same unit sales declined 1.4%. For fiscal year ending May 2015, same unit sales were down 0.5%.  For fiscal year ending May 2014, same unit sales declined 5.3%.  Q3 Fiscal year 2017 same unit sales were down 4%. The AUV is now $1.68 Million.  Contrast that with Olive Garden where AUV is closer to $5 Million.

    So, what is the bright side?

     

    103 underperforming stores were closed so far in fiscal year 2017

    29 insiders have bought the stock in the last 12 months.

    They are now on their third CEO. This means, hopefully the third time is a charm.

    CEO has launched Fresh Start, a salad bar with 55 items, in 3 test markets and the initial results from 3 million data points look encouraging.  

    Company has hired UBS to explore strategic options.

    They were able to get waivers on their credit facility and extend unti June 2017, during which they can sell more assets or replace them with better terms. RT is not going bankrupt anytime soon. 

     

    New Concept:

     

    In August 2016,  RT sold off their Chipotle clone, Lime Fresh and embarked on Fresh Start, a 55 item salad bar as the strategy.  Here is one of their sponsored ads, as written from the perspective of a mom, to demonstrate the value proposition. Looks good: http://www.buildingourstory.com/2017/01/create-your-perfect-salad-ruby-tuesday_27.html

     

    The following exchange from the Earnings Call transcript seems promising for the Fresh Start product.

     

    “Lane Cardwell:  …  We’ve only had our new menu in place now since mid-November. We are about a week and a half away from launching our biggest initiative, which has been a year in making with the Garden Bar. I believe that these two things combined especially for why people use us, you know, again, we are very Garden Bar dependant. Half of our guests use the Garden Bar on any visit, and as many as 80% who come in and use the Garden Bar came in specifically because of that. We think that the enhanced Garden Bar that we are going to be rolling can kind of change the situation going forward.

    Bryan Hunt: And in the three markets that you tested the Garden – expanded Garden Bar in Atlanta, Charlotte and – I forgot what that third market was off the top of my head – St. Louis. Can you talk about what the response was in those markets? Did you all see elevated same-store sales and consistent average check?
    Lane Cardwell: We did see elevated same-store sales. Each market we kind of refined and refined as we got guest feedback and as we got operator feedback. What we are going to launch in mid-January is the culmination of literally over 3 million guest visits in the markets we’ve been testing with either people being exposed to or actually ordering in the Garden Bar. We are very confident that this is what we need.
    Bryan Hunt: Okay. And then lastly, when you were – I imagine you were testing the menu, the new menu you are using in certain markets or locations as well, can you talk about the consumer feedback there as well as the average check response?
    Lane Cardwell: I don’t want to get too specific on average check, but I can give you actual feedback from a national launch. The feedback has been extremely strong from both guests and from our team members. And the team members are sensitive to feedback that they get directly from the guest. Servers in any restaurant are commissioned sales people. The bulk of their income comes from the people they serve. If their guests aren’t happy, they are not happy. And they transmit that either happiness or unhappiness to us very directly and very quickly. We’ve been very pleased with what we’ve heard and very pleased with what we’ve seen. I don’t know if you’ve had a chance to see the new menu, but it’s dramatically different than the one that we’ve had in place for quite awhile. “
    David Hargreaves: And, I guess, we are trying to get a sense for what sort of EBITDA run rate you expect the company to be at now, if you are a $60 million or an $80 million company? I’m not sure, there is obviously a lot of noise in the quarter. Is there anything you could do to sort of give us a sense for what we should be thinking of in terms of the run rate?
    Sue Briley: Thank you for the question. But given where we are at in our brand transformation and the execution of our Fresh Start Initiative, it would be premature for me to give you that kind of an estimate at this time."

     

    A post on a blog by a customer in one of the test markets also looked positive. “Yes they (the new customers coming )  are. I see it and I ask the wait staff. I saw the supervisor in this region at the restaurant and I talked to him, and he said volume in his area has picked up. I think the salad bar is the way to go, along with the ribs. One thing they could improve on are the steaks. Customers will take smaller steaks that are tasty of big ones that are not. I feel like buying 20K shares of this stock.”

     

    The current CEO said they saw elevated same store sales. What can a 5% increase in AUV do to EBITDA per store? I compiled the unit economics for the last 5 years.

     

    First of all, doesn't it strike you as odd that EBITDA per store was $-90K when unit AUV is about $1.68M whereas in 2011 AUV was $1.67M. And supposedly, the new activist investors had cut as much costs as possible from 2012 to 2016. Furthermore, COGS as % of Sales from 2011 to 2016 dropped by 1 pct point. I understand there is operating leverage and volume discounts but it seems to me that 2016 was just a year where a lot of their experimentation, consultant costs, CEO turnovers, just added up to the SG&A. 2016 was also the same year they sold their Lime Fresh Concept. As CEO of a public company, I know how difficult it is to put these costs in the right bucket and I won't be surprised if the normalized unit number is closer to the 2013 years than 2016. Let us take half of 2013's numbers as the EBITDA per store, then we get $65K per unit. You still get a potential EBITDA of $40 Million.

     

    Valuation:

    Then they own 269 buildings. They are selling 30 buildings for for an average of 1.6 million. Assuming they are selling the worst locations first, that means their 269 remaining buildings is worth $430M. Triangulate that with the historical cost on the balance sheet. There is still real estate and property historically carried at $365 million in the balance sheet. It is very conceivable that this stock goes up at least 50% by year-end for a market cap of $200 million.

     

    Fiscal Year 2011 2012 2013 2014 2015 2016
    # of Owned Locations 750 714 706 668 658 646
    AUV $1.67M $1.83M $1.76M $1.74 $1.70 $1.68M
    EBITDA/unit $173K $101K $137K $-17K $71K $-90K

     

     

     

    10 Year Cash Flow Table

    Fiscal year ends in May. USD in millions except per share data. 2007-05 2008-05 2009-05 2010-05 2011-05 2012-05 2013-05 2014-05 2015-05 2016-05 TTM
    Cash Flows From Operating Activities                      
    Net income 92 26 -18 45 47 0 -39 -64 -3 -51 -108
    Depreciation & amortization 78 95 76 64 64 68 63 57 52 51 47
    Amortization of debt discount/premium and issuance costs           0 -1        
    Investment/asset impairment charges     61 3 7 31 44 25 11 61 70
    Deferred income taxes -13 -6 -16 20 -1 -20 -16 2 -4 -1  
    Stock based compensation     6 7 8 6 4 8 7 2 4
    Inventory -2 0 0 -8 -2 6 -2 10 1 -1 2
    Prepaid expenses -4 -3 7 -2 -1 -1 -2 -1 -2 -1 1
    Income taxes payable     -1 10 -4 2 -1 0 3    
    Other working capital 27 -32 -18 -3 5 19 -19 -6 -17 -24 -15
    Other non-cash items 7 22 6 4 -5 2 4 16 6 4 18
    Net cash provided by operating activities 185 102 103 140 116 112 36 45 55 40 19
    Cash Flows From Investing Activities                      
    Investments in property, plant, and equipment -126 -117 -17 -18 -27 -38 -37 -28 -31 -34 -31
    Property, plant, and equipment reductions 17 8       6          
    Acquisitions, net -5 -2 -1   -4 -24          
    Other investing activities -1 7 21 8 6 22 59 22 14 15 25
    Net cash used for investing activities -115 -104 3 -9 -24 -34 22 -6 -17 -20 -6
    Cash Flows From Financing Activities                      
    Debt issued           246          
    Debt repayment     -112 -204 -91 -263 -27 -40 -14 -18 -10
    Common stock issued 40 2   73              
    Common stock repurchased -203 -39       -18 -30 -1 0 -10 -10
    Excess tax benefit from stock based compensation         1 0 0 0 0    
    Dividend paid -29 -13                  
    Other financing activities 126 43     -1 -5 4 0 0 0 0
    Net cash provided by (used for) financing activities -67 -8 -112 -131 -92 -40 -53 -41 -13 -28 -20
    Net change in cash 4 -10 -6 0 0 38 5 -2 24 -8 -7
    Cash at beginning of period 22 26 16 10 10 10 48 53 51 75 45
    Cash at end of period 26 16 10 10 10 48 53 51 75 67 39
    Free Cash Flow                      
    Operating cash flow 185 102 103 140 116 112 36 45 55 40 19
    Capital expenditure -126 -117 -17 -18 -27 -38 -37 -28 -31 -34 -31
    Free cash flow 59 -15 85 123 90 74 -1 17 24 6 -12

    10 Year Income Statement

     

    Fiscal year ends in May. USD in millions except per share data. 2007-05 2008-05 2009-05 2010-05 2011-05 2012-05 2013-05 2014-05 2015-05 2016-05 TTM
    Revenue 1410 1360 1249 1195 1265 1326 1251 1169 1127 1091 1022
    Cost of revenue 1061 1093 1026 982 1045 1106 1020 986 933 903 859
    Gross profit 349 267 222 213 221 220 231 182 194 189 163
    Operating expenses                      
    Sales, General and administrative 113 114 82 71 86 115 139 137 115 110 116
    Other operating expenses 77 94 149 68 69 101 59 115 83 132 158
    Total operating expenses 190 208 231 138 155 215 198 252 199 241 274
    Operating income 160 59 -9 74 66 5 33 -70 -5 -53 -111
    Interest Expense 22 33 35 17 13            
    Other income (expense) -5 -2 1 1 0 -20 -55        
    Income before taxes 132 24 -43 58 53 -15 -22 -70 -5 -53 -111
    Provision for income taxes 41 -3 -25 12 6 -15 2 -5 -2 -2 -3
    Net income from continuing operations 92 26 -18 45 47 0 -23 -65 -3 -51 -108
    Net income from discontinuing ops         -16 1      
    Net income 92 26 -18 45 47 0 -39 -64 -3 -51 -108
    Net income available to common shareholders 92 26 -18 45 47 0 -39 -64 -3 -51 -108
    Earnings per share                      
    Basic 1.6 0.51 -0.35 0.74 0.73   -0.65 -1.07 -0.05 -0.83 -1.79
    Diluted 1.59 0.51 -0.35 0.73 0.72   -0.65 -1.07 -0.05 -0.83 -1.79
    Weighted average shares outstanding                  
    Basic 57 52 51 62 64 63 61 60 61 61 60
    Diluted 58 52 51 62 65 63 61 60 61 61 60
    EBITDA 233 151 68 140 130 72 97 -12 47 -2 -64

     

    Margins % of Sales 2007-05 2008-05 2009-05 2010-05 2011-05 2012-05 2013-05 2014-05 2015-05 2016-05 TTM
    Revenue 100 100 100 100 100 100 100 100 100 100 100
    COGS 75.22 79.91 82.21 82.21 81.76 82.25 81.52 84.18 82.61 82.71 84.06
    Gross Margin 24.78 20.09 17.79 17.79 18.24 17.75 18.48 15.82 17.39 17.29 15.94
    SG&A 7.99 8.41 6.58 5.9 7.3 9.18 11.09 11.73 10.24 10.05 11.39
    R&D                      
    Other 5.49 7.37 11.92 5.65 4.96 9.23 9.14 10.04 7.6 12.08 15.41
    Operating Margin 11.31 4.31 -0.72 6.23 5.98 -0.66 -1.75 -5.95 -0.45 -4.84 -10.86
    Net Int Inc & Other -1.92 -2.56 -2.72 -1.4 -1.45            
    EBT Margin 9.39 1.74 -3.43 4.83 4.53 -0.66 -1.75 -5.95 -0.45 -4.84 -10.86

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Insider Buying

    Company's hiring of a strategic advisor

    Positive initial results from the New Concept

    Valuation supported by real estate

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