RT - Who Knew What When?

RT's stock price moved up 12.5% yesterday prior to the company reporting 4Q09 earnings after the close. And judging by RT's significantly better 4Q performance, someone knew something! Earnings came in at $0.28 per share relative to the street's $0.20 per share estimate. Company same-store sales declined 3.2% in the quarter. This was a surprisingly strong number on many counts. RT easily beat the street's expectation of -5.3%. It showed significant improvement from RT's recent performance (-6.8% in 3Q and -10.8% in 1H). And RT outperformed its casual dining competitors by 2.4% in the quarter as measured by Malcolm Knapp. This last point was the most surprising as RT has underperformed its casual dining peers by 5%-10% for the better part of the last two years.

RT - Who Knew What When? - RT FY09 Gap To Knapp

RT management attributed its relatively strong top-line results to its marketing initiatives that have focused on communicating the concept's compelling value proposition. The increase in same-store sales does not come without cost, however, as RT is driving increased traffic with its value message at the expense of average check and restaurant margins. For reference, RT's 2.4% same-store sales outperformance relative to its casual dining peers stemmed from its 8%-9% traffic outperformance, which points to the company's underperformance on an average check basis. RT's CEO Sandy Beall stated that the company's first priority is to "get bodies in seats." Along those lines, the company has not increased its average check in 2-3 years and is not focused on driving check higher in FY10. Instead, Mr. Beall said RT "will keep pushing value for some time to come until the consumer changes."

This increased focus on value will continue to put pressure on restaurant margins, primarily from the negative impact discounting has on food costs as a percent of sales. Despite declining restaurant margins, another bright spot in the quarter was RT's nearly 250 bp YOY increase in operating margins, which was a continuation of the improvement we saw in 3Q. RT has been able to offset its lower restaurant margins in the back half of FY09 by cutting costs in other parts of the P&L. Specifically, the company reduced its annualized costs by $45-$50 million, with the bulk of these cost savings implemented during 3Q. A big portion of the cost savings stem from reduced labor costs as a result of a more efficient labor-scheduling process and lower supervisory costs as RT expanded control for both regional and area supervisors. The company will continue to see the benefit of these cost reductions, particularly in the first half of fiscal 2010, but taking more costs out of the business going forward will be difficult without impacting the guest experience. I have always said that cutting costs that the guest cannot see, taste or experience makes sense, but reducing area supervision can be risky as it can often impact the overall guest experience. This just means it will become increasingly more difficult for RT to protect its operating margins in this challenging sales environment from increased discounting and lower restaurant margins as a lot of the fat has already been cut from the P&L. The company currently has no plans for company-owned unit development, however, which will provide some operating flexibility going forward.

All of that being said, RT has come a long way. It has gone from being a concept that seemed close to becoming a thing of the past to outperforming its peers from a sales and guest count perspective. It has gone from being a company that was at risk to breaking its debt covenants to one that paid down $112 million of debt in one year, in excess of its initial $80M-90M and revised $90M-$100M targets. And in FY09, RT reversed 4 years of operating margin declines.

RT - Who Knew What When? - RT 4Q09 EBIT


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more