Description

First posted in 2008, then 2013 and today. Third time is the charm.  RT seems to have a good risk-reward ratio despite the scary near-term outlook. It can be worth 50% more by years end but you just have to buy the stock, close your eyes and put the certificates in the drawer. 

Since the last forum post here on 1/9/2014, the company’s numbers have gone worse. The company has hired UBS to explore strategic options in Feb 2017. This may be the moment, as oogum said, when management hangs the towel and sell the new concept of the Fresh Start initiative to a PE fund who will take the risk to liquidate or turnaround the business. Company was flirting with credit issues as recently as January.

For fiscal year ending May 2016, same unit sales declined 1.4%. For fiscal year ending May 2015, same unit sales were down 0.5%.  For fiscal year ending May 2014, same unit sales declined 5.3%.  Q3 Fiscal year 2017 same unit sales were down 4%. The AUV is now $1.68 Million.  Contrast that with Olive Garden where AUV is closer to $5 Million.

So, what is the bright side?

103 underperforming stores were closed so far in fiscal year 2017

29 insiders have bought the stock in the last 12 months.

They are now on their third CEO. This means, hopefully the third time is a charm.

CEO has launched Fresh Start, a salad bar with 55 items, in 3 test markets and the initial results from 3 million data points look encouraging.  

Company has hired UBS to explore strategic options.

They were able to get waivers on their credit facility and extend unti June 2017, during which they can sell more assets or replace them with better terms. RT is not going bankrupt anytime soon. 

New Concept:

In August 2016,  RT sold off their Chipotle clone, Lime Fresh and embarked on Fresh Start, a 55 item salad bar as the strategy.  Here is one of their sponsored ads, as written from the perspective of a mom, to demonstrate the value proposition. Looks good: http://www.buildingourstory.com/2017/01/create-your-perfect-salad-ruby-tuesday_27.html

The following exchange from the Earnings Call transcript seems promising for the Fresh Start product.

“Lane Cardwell:  …  We’ve only had our new menu in place now since mid-November. We are about a week and a half away from launching our biggest initiative, which has been a year in making with the Garden Bar. I believe that these two things combined especially for why people use us, you know, again, we are very Garden Bar dependant. Half of our guests use the Garden Bar on any visit, and as many as 80% who come in and use the Garden Bar came in specifically because of that. We think that the enhanced Garden Bar that we are going to be rolling can kind of change the situation going forward.

Bryan Hunt: And in the three markets that you tested the Garden – expanded Garden Bar in Atlanta, Charlotte and – I forgot what that third market was off the top of my head – St. Louis. Can you talk about what the response was in those markets? Did you all see elevated same-store sales and consistent average check?
Lane Cardwell: We did see elevated same-store sales. Each market we kind of refined and refined as we got guest feedback and as we got operator feedback. What we are going to launch in mid-January is the culmination of literally over 3 million guest visits in the markets we’ve been testing with either people being exposed to or actually ordering in the Garden Bar. We are very confident that this is what we need.
Bryan Hunt: Okay. And then lastly, when you were – I imagine you were testing the menu, the new menu you are using in certain markets or locations as well, can you talk about the consumer feedback there as well as the average check response?
Lane Cardwell: I don’t want to get too specific on average check, but I can give you actual feedback from a national launch. The feedback has been extremely strong from both guests and from our team members. And the team members are sensitive to feedback that they get directly from the guest. Servers in any restaurant are commissioned sales people. The bulk of their income comes from the people they serve. If their guests aren’t happy, they are not happy. And they transmit that either happiness or unhappiness to us very directly and very quickly. We’ve been very pleased with what we’ve heard and very pleased with what we’ve seen. I don’t know if you’ve had a chance to see the new menu, but it’s dramatically different than the one that we’ve had in place for quite awhile. “
David Hargreaves: And, I guess, we are trying to get a sense for what sort of EBITDA run rate you expect the company to be at now, if you are a $60 million or an $80 million company? I’m not sure, there is obviously a lot of noise in the quarter. Is there anything you could do to sort of give us a sense for what we should be thinking of in terms of the run rate?
Sue Briley: Thank you for the question. But given where we are at in our brand transformation and the execution of our Fresh Start Initiative, it would be premature for me to give you that kind of an estimate at this time."

A post on a blog by a customer in one of the test markets also looked positive. “Yes they (the new customers coming )  are. I see it and I ask the wait staff. I saw the supervisor in this region at the restaurant and I talked to him, and he said volume in his area has picked up. I think the salad bar is the way to go, along with the ribs. One thing they could improve on are the steaks. Customers will take smaller steaks that are tasty of big ones that are not. I feel like buying 20K shares of this stock.”

The current CEO said they saw elevated same store sales. What can a 5% increase in AUV do to EBITDA per store? I compiled the unit economics for the last 5 years.

First of all, doesn't it strike you as odd that EBITDA per store was $-90K when unit AUV is about $1.68M whereas in 2011 AUV was $1.67M. And supposedly, the new activist investors had cut as much costs as possible from 2012 to 2016. Furthermore, COGS as % of Sales from 2011 to 2016 dropped by 1 pct point. I understand there is operating leverage and volume discounts but it seems to me that 2016 was just a year where a lot of their experimentation, consultant costs, CEO turnovers, just added up to the SG&A. 2016 was also the same year they sold their Lime Fresh Concept. As CEO of a public company, I know how difficult it is to put these costs in the right bucket and I won't be surprised if the normalized unit number is closer to the 2013 years than 2016. Let us take half of 2013's numbers as the EBITDA per store, then we get $65K per unit. You still get a potential EBITDA of $40 Million.

Valuation:

Then they own 269 buildings. They are selling 30 buildings for for an average of 1.6 million. Assuming they are selling the worst locations first, that means their 269 remaining buildings is worth $430M. Triangulate that with the historical cost on the balance sheet. There is still real estate and property historically carried at $365 million in the balance sheet. It is very conceivable that this stock goes up at least 50% by year-end for a market cap of $200 million.

10 Year Cash Flow Table

10 Year Income Statement

Catalyst

Insider Buying

Company's hiring of a strategic advisor

Positive initial results from the New Concept

Valuation supported by real estate