RT - GOOD, NOT GREAT

RT’s 2Q10 earnings of $0.01 per share came in better than both my EPS estimate of a loss of $0.01 and the street’s estimate of a loss of $0.02.  More important in the current environment is that the company beat on a top-line basis as well with company same-store sales declining only 1.7%, 30 bps better than my estimate and 100 bps better than the consensus estimate.  Going forward, I think the most important takeaway from yesterday’s earnings release and conference call was the fact that management maintained its full year comparable sales growth guidance of -1% to -3%; though management did say the low end of the range is more likely.

 

I think that many investors were concerned that this guidance range could be at risk as it assumed a significant acceleration in 2-year average trends.  In this volatile demand environment, it is hard to get comfortable with any expectations that rely on a sales recovery.  The fact that we are about 6 weeks into the third quarter and management is still comfortable with its prior expectations seems to be helping the stock today.  Mimicking the comments of both SONC and CKR, RT did say that trends in December made for a challenging start to the third quarter as weather was an issue, particularly in the weekend prior to Christmas.  I think this comment about December could have put a damper on the stock’s performance today despite the better than expected 2Q10 sales and earnings, but management went on to clarify later in the call that even if trends did not improve from the level the company experienced in December that it could still achieve its same-store sales goal of -3%.  This guidance is still by no means a given as it assumes a significant improvement in 2-year average trends, but I think management’s current outlook, particularly in light of the weaker December, gives investors some comfort.

 

In the second quarter, RT’s 1.7% decline in same-store sales was driven by a 1.8% increase in traffic, offset by a 3.5% decline in average check.  It was encouraging that the decline in average check improved from the first quarter when it declined more than 6%.  Management attributed this sequentially better number to a new menu introduction in early November that included an innovative beverage program and to the recent roll out of its expanded brunch program.  RT’s traffic has increased for the last three quarters so getting average check to move higher while sustaining this traffic growth is key to RT’s top-line story going forward.  RT maintained its goal to increase average check to the $12.50-$14.50 from the current $11.50-$12 range.  For reference, management cited its average check last quarter as being in the $11 range so it appears that average check did move sequentially higher in the second quarter as opposed to it being only a function of easier YOY comparisons in 2Q10 versus 1Q10.  Keep in mind that RT will be lapping its more promotional efforts from January 2009 in fiscal 3Q10 so it will be important to see how same-store sales play out from both a traffic and average check standpoint.

 

Going into the quarter, I thought the company’s outlook for restaurant level margins to decline only 50 to 150 bps was a bit of a stretch.  Obviously, same-store sales in 2Q10 came in slightly better than I was modeling, but both food costs and payroll and related costs as a percentage of sales came in much more favorable than I was modeling.  Food costs as a percentage of sales, specifically, improved rather significantly from the first quarter on a 2-year average basis.  The higher average check helped in this regard.  Based on these better results in the second quarter relative to my estimates, management’s guidance seems much more achievable; though the lower end seems more reasonable.

 

As I said prior to the quarter, comparisons get increasingly more difficult in the back half of the year from both a top-line and EBIT margin perspective.  RT will be lapping some of its labor and span of control cost savings initiatives in the second half of the year.  And, even if same-store sales trends continue to improve on a 2-year average basis, comps are likely to come down sequentially from the second quarter on a 1-year basis.

 

RT - GOOD, NOT GREAT - RT Gap to Knapp


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