What is Ruby Tuesday's Real Estate Worth?

I've had my eye on restaurant Ruby Tuesday (RT) for a while. I still haven't done proper homework on the stock, but there are few interesting things to look at.

The multiples are suspiciously low: 7.8x trailing earnings, .27x sales, .97x book, 4.8x EBITDA, 2x operating cashflow, 7x free cashflow (OCF-capex). (Sources: Yahoo!, Morningstar; unconfirmed). There are also millions of dollars of insider buying among several individuals.

Not that long ago shares traded over $30; they're closer to $8 today. Not surprisingly, RT is facing a host of both company-specific and macro issues.

Then there's the real estate. The 10K elaborates: "Of the 680 Company-owned and operated restaurants as of June 5, 2007, we owned the land and buildings for 309 restaurants, owned the buildings and held non-cancelable long-term land leases for 212 restaurants, and held non-cancelable leases covering land and buildings for 159 restaurants." Anybody know what that's worth?

The balance sheet shows a mere $8 million in cash and almost $600 million in debt, most of which is current (ie, due soon). Bear Stearns' January 17th report stated:

On its 2Q call, the company cautioned that its models indicated potential violations of debt coverage and fixed charge coverage covenants. The company's 10-Q indicates that its debt covenants were revised during the November quarter. It is disconcerting that more covenant relief is needed so quickly. The company could face issues with its bank group and with the holders of $150 million raised in a private placement. Turmoil in the credit markets increases the risk related to debt issues.

I don't have the full story here, especially regarding the balance sheet, which must be addressed before investing. But if you can make the case for a turnaround and a liquidation value far higher than the market, perhaps there's an opportunity in Ruby Tuesday, although this may be more suited for a control investor of the Ackman-Lampert-Icahn school.

P.S. O'Charley's (CHUX) is a similar story: suffering restaurant, low multiples, high debt, owns a pile of real estate. With Chux, you also have an activist (Crescendo Partners) pushing for change.

Disclosure: No Positions

Comments

[PJ568]

Good example of why companies shouldn't lever up doing buy backs. It works fine when you're in a strong market but falls apart when the economy takes a downturn. Operating margin has disappeared plus they have increased interest expense. I'll guess that the lenders have the real estate covered pretty well.