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Yesterday, RT reported 1Q09 same-store sales down 10.8%. Although this seems like a horrific number, for RT, it is really just more of the same as it follows three quarters of 10%-plus declines in comparable sales. That being said, trends continued to worsen on both a 2-year and 3-year average basis.

Management attributed much of this continued weakness to challenging trends in the South, where more than half of RT’s restaurants are located. According to management, the rate of decline at these locations was about 50% higher than the restaurants in the north (and this trend has continued into September). Management stated that the challenges stem largely from increased supply, saying, “I think one, over the last five years, I’d say yeah, we’ve built a lot of restaurants in the Southeast when everybody was building restaurants and we only had the South and the Northeast to build in, and I think that’s hurt us somewhat. The South has been easier to develop in for everybody, so I think you’ve had increased competition there but I do think that they’ve been hurt more in the South, that includes Florida, more from a real estate standpoint, from an oil impact standpoint, and probably from -- I’m guessing, I’m not sure on this but I’m guessing from unemployment. But I’ve talked to some other businesses too and the South is just -- it’s a bit weaker.” Management also said that recent gas shortages in the South magnified an already difficult environment.
  • I think it is safe to bet that these macro issues, related to increased competition, real estate, gas shortages and unemployment, in the southeastern region of the country are impacting other restaurants as well. CHUX, which has already been experiencing negative same-store sales growth for some time now, particularly at its O’Charley’s concept, is also highly exposed to this challenging region with nearly 25% of its restaurants located in Florida and the South Atlantic states. In its most recent quarter, CHUX’s operating margins fell to 1%, which led to a net loss of $0.38 per share. The company is not expected to make money again in its upcoming quarter, which leaves little margin for error.
  • Thirty-four percent of RUTH’s Ruth’s Chris Steak House concept is located in this region of the country as well. As I have said before relative to RUTH’s recently completed sale lease-back transaction, the banks are already driving the process at RUTH (please refer to my post from September 24). Although the company stated that its motives for doing the sale lease-back were to “ensure maximum operating flexibility,” sale lease-backs do the opposite. I think Wells Fargo wanted its money back and forced the company to use the cash proceeds from the transaction to reduce its outstanding debt balance. RUTH is already in a tight position and the potential for decelerating top-line trends at over one-third of its restaurants will not help matters.
  • RT’s CEO simply stated yesterday in response to a question about the company’s cushion relative to current debt covenants that there are two ways to provide a deeper cushion in this environment. They include paying down more debt and increasing profits. RT, CHUX and RUTH all need to do one of these two things and their significant exposure to the challenges in the South are going to make it increasingly more difficult for them to turnaround their sales trends and increase profits.