Management stated, however, that if the sale of the support center does not happen in Q4 and same-store sales remain down 15% for the balance of the quarter that remaining below the 3.5x covenant “will be tight.” Management even reiterated this point later in the call in response to a question regarding its debt covenant, “Well, David, first, in terms of Q4, I didn't say safe. I said tight and we think we can get over the top but I don't want to suggest that it's a layup, if you will.”
The company’s only flicker of hope, outside of completing the sale, relies on strong gift card sales in Q4, which added $12-$13M of revenues to 4Q07. Management is expecting about the same level of gift card sales in this year’s fourth quarter as a result of RUTH’s increased units and the addition of Mitchell’s (so a decline in gift card sales/unit).
When asked about bank relations, management stated they have a good relationship with their bank lenders and although premature to speculate, that if a default did occur, the strong relationship they have (combined with the strong relationship their largest shareholder, Madison Dearborn, has with the bank lenders) would help to provide a favorable outcome…if it came to that.
So as I highlighted last week, these are clearly desperate times for RUTH.