RT - STALE BREAD

I am using the metaphor of stale bread in honor of the new bread program that the company rolled early last year, which is also part of the current financial stress on the company.  It’s also a way of saying that this stock is done for a while. 

 

In not going to rehash the whole quarter, but instead highlight the issues that need to be fixed before the financial performance can be turned around.

  • Management is in denial that Chili’s and Applebee’s are hurting Ruby’s, but I agree it’s not all the economy.  I will concede that consumer confidence is down and middle income consumer is hurting.
  • Big picture strategy is confusing.
  • On one hand they are diversifying away from Ruby’s and yet they are buying over leveraged Ruby’s franchisees.
  • Because of the acquisition binge, leverage is a problem again.  There is now only a 70bps cushion on the debt covenants.  Didn’t management learn anything from when the stock was trading at $1 in 2008 and 2009?
  • Limited operational flexibility due to increased leverage.
  • Increased leverage at a time when the company’s capital needs are growing (i.e. debt pay down/incremental growth capital is needed).
  • Share repurchase? Given the leverage and the fact that they want to convert Ruby Tuesdays into other concepts, how are they going to buy back stock?
  • The Ruby’s Tuesday brand is a regional competitor competing against two strong national brands that have sales momentum.
  • The wild card going into this quarter was the potential for more shareholder activism.  I’m sure the new board members were not happy to see the newly leverage balance sheet!
  • My advice is to stay far away from this one for the time being.

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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