Casual Dining – Ugly is as Ugly gets

Yesterday we posted a bleak Macro view of the consumer. What we left out was the impact of the October stock market crash on spending.

As you can see from the commentary below the trends in 4Q08 are very bad. Complicating the bad consumer environment is management missteps. (1) MRT was still buying back stock in 3Q08 and is planning on adding capacity in 2009. (2) MSSR also plans to add 5-6 units next year. (3) Poor RUTH, they are just trying to stay alive. There is no reason to own RUTH, MRT or MSSR.

You can throw a dart at a dart board to find a good short in this group, but to me LNY, DIN, RRGB, CPKI and PFCB stand out.
RUTH – Madison Dearborn to the rescue, but still on the Bankruptcy watch list

RUTH is on our short list of Bankruptcy candidate, but it should be noted that a very larger shareholder has capital and access to those that have capital.

In 3Q08, RUTH’s same-store sales decreased 6.9%. The average check fell 1.5%, driven by menu mix shift and year-over-year pricing of approximately 2% - RUTH saw a 5.2% reduction in traffic. Same store sales in 3Q07 declined 0.4%.

This is where its gets really ugly - October comps at Ruth's Chris declined approximately 15%. On the call the company said “If we assume company operated, comparable restaurant sales at the Ruth's Chris Steakhouse decreased 15% for the entire 13 week period, we would expect earnings per share between zero and $0.02 (street at 0.17) for the fourth quarter and between $0.33 and $0.35 for all of 2008 (from prior guidance of $0.55-$0.60).

MSSR – Management does not get it

More of the same…. October same store sales were horrible and they are still growing too fast
MSSR reported 3Q08 EPS of $0.09 vs. street at $0.11. Same-store sales declined -5.5%, with traffic declining -9.8%.

On the conference call the company said that October same-store sales declined approximately 10%. Management offered that if same-store sales trends do not change for the balance of 4Q, 4Q EPS would be $0.15-$0.20 (street at $0.29), and for every 1% change in quarterly same-store sales, there is a $0.02-0.03 impact to earnings.

MSSR is a classic case of watch what I do not what I say! Management provides the customary balance sheet commentary; “Given the recent credit market crisis, we have focused on maintaining maximum financial flexibility and ensuring that our balance sheet remains financially sound, including managing our debt level and limiting our new unit development for next year.”
But in the next breath MSSR’s management says we still plan on opening 5-6 new units in FY09 (a slowdown from FY08’s 11 units). WHY?

MRT – In a very difficult position

Morton's Steakhouses 3Q08 same-store sales declined 7.6%. This includes the benefit of a pricing impact of approximately 3.5% in the quarter. The balance of the change was driven by menu mix and decreasing guest traffic. This compares to strong comparable restaurant revenues of +7.3% in 3Q07. MRT commented that same-store sales for the month of October declined 15%.

The Company currently expects 4Q08 revenues to range between $98 million and $100 million, which reflect a 9% to 11% same-store sales decline.

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