RT – Better than toxic

In FY2Q09 RT, RT’s total revenue declined 9.7% driven by a 10.8% decline in same-store sales. On a monthly basis same-store sales were down 9.4% in September, 10.4% in October and 12.7% in November. Keeping on trend with recent quarters, same-store sales in the Northern markets out performed those in Southern markets. In the quarter, the South’s same-store sales declined 13.9% compared with a decline of 7.7% in the Northern markets. The company’s weakest states are Florida, Alabama, Georgia, Virginia and Tennessee. I would note that things improved slightly since the end of the quarter. In December same-store sales were down 9.1%. The decline in Northern region was 6.5% while the decline in the South was down only 11.7%. At the peak of the decline in August, same-store sales were down 15%.

Turning to the balance sheet, total debt including operating leases, guarantees and letters of credit was $852 million. RT remained in compliance with their covenants at the end of the quarter. RT’s DEBT/EBITDAR ratio was 4.22x versus the maximum requirement of 4.5x. The fixed charge coverage ratio was 2.48 versus the minimum requirement of 2.25. Not surprising, the principle concern with RT is the step down in the leverage ratio going forward. The DEBT/EBITDAR ratio declines to 4.25 in the current quarter through FY1Q10. The debt/EBITDAR declines again in FY2Q and 3Q of 2010 to 4.0x and then goes down to 3.75x at the end of FY2010.

I was somewhat disappointed that the benefit from the store closings was not greater. In FY3Q09 average restaurant volumes should increase approximately $40,000 per year and pre-tax income should increase approximately $10 million. In FY09 RT will generate free cash flow (cash from operations less capital expenditures) between $68-78 million. The combination of the free cash flow as well as proceeds from the sale of other assets will enable RT to pay down $80-90 million in FY09, including the $40 million repaid in the first half of the year.

It’s a bit on the speculative side, but the RT story is one I like to tackle. There is a core RT business that will survive and we are much closer to seeing that core business. Sales comparisons get much easier in the Southern region as we head into the summer and the costs are much better aligned with current sales trends. Any improvement in sales will quickly flow through to the bottom line.

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