She would never say where she came from
Yesterday don't matter if it's gone
While the sun is bright
Or in the darkest night
No one knows
She comes and goes

Goodbye, ruby tuesday
Who could hang a name on you?
When you change with every new day
Still Im gonna miss you

Ruby Tuesday, Inc., together with its subsidiaries, owns, develops, operates, and franchises casual dining restaurants. The company operates its restaurants under the Ruby Tuesday brand; and owns and operates 13 Lime Fresh Mexican Grill, 11 Marlin & Ray’s, 2 Truffles, and 1 Wok Hay casual dining restaurants. As of December 4, 2012, it owned and operated 709 Ruby Tuesday restaurants and franchised 77 Ruby Tuesday restaurants in 45 states, the District of Columbia, 11 foreign countries, and Guam. The company was founded in 1920 and is based in Maryville, Tennessee.

Why is it interesting?

- Lime Fresh Mexican Grill is a Fast Casual growth concept that could benefit from being a “Chipotle clone”.

- Real estate monetization could lead to increased share buybacks.

- Average sales at Ruby are $1.75m per restaurant.  Peak sales per site pre-recession were $2.25m.  Other concepts such as Texas Roadhouse, Olive Garden and Red Lobster are back at 100% of their volumes, non inflation adjusted whereas Ruby is much lower.  This confirms that their high end brand positioning was a failure and was ill timed.  Ruby’s cost structure allows for $70m of extra revenue ($100k per site) to equal $30-$35m in incremental EBITDA.

RT Facts

 -      Consolidated revenues of $1.3 billion and a market cap of approximately of $440 million.

 -      786 Ruby Tuesday restaurants, with 709 of those being company owned and 77 franchised. Ruby's has average restaurant volumes of approximately $1.75 million, and the Ruby Tuesday concept represents about 98% of our total revenue as a company, and it's obviously the primary focus with us as the management team. Our Lime Fresh Mexican casual -- fast casual concept, which we acquired in April 2012, had 15 company-owned restaurants and 5 franchised locations as of the quarter end December.

 -      Management has stated its #1 priority is to stabilize and grow same restaurant sales and guest counts at the Ruby Tuesday brand.

 -      Approximately 40% to 45% EBITDA flow-through on incremental sales given really tight cost structure.

 -      CapEx needs are approximately $20 million to $25 million a year.

 -      Opportunities to enhance the brand position and performance that do not require large capital investment.

Lime Fresh Brand

 -      Well positioned in the exciting and high-growth fast casual segment.

 -      Co believes this brand offers an attractive unit growth opportunity.

 -      The capital investment is low, and the concept has compelling unit economics if we can achieve our targeted sales volumes.  Lime Fresh build out is $800-$850k.  Revenue is $1.2m - $1.3m with EBITDA of $150k to $200k

A large part of the thesis on RT is predicated on the work of Management.  The new CEO Joe Buettgen joined in December of 2012.  Has not even been on the job 180 days.  Buettgen has inherited a brand that has been mismanaged for years and has tremendous experience in the consumer and marketing space for about 24 years, about 14 of which has been in the restaurant sector.

 Buettgen background:

 -      Mid 1990s, when the Olive Garden Red Lobster brands were still part of what was then the General Mills restaurant division, Buettgen was Director of advertising for the Olive Garden, ultimately as the Head of Marketing in Culinary for the Olive Garden.

 -      2002 Head of Marketing for Brinker International and then ran a concept for Brinker for a while.

 -      Came back to Garden for about 8.5 years or so ago as part of the transition plan when Joe Lee retired as Chairman and Clarence Otis was made the CEO, originally came in to be a Concept President running Smokey Bones for Darden and then went into new business development for Darden, and in that role had a chance to do a number of things. One of which was retool the insights organization at Darden, did a lot of work on -- from the consumer analysis for acquisition candidates, took some of their brands international for the first time, doing some deals in the Middle East, as well as Mexico and Brazil and led the team that developed what Darden now talks about as the "synergy restaurant" concept, which is a small market expansion vehicle for their large concepts.

 -      For about the last 1.5 years up until this December, served as the Chief Marketing Officer for Darden before coming to join Ruby Tuesday. So a couple of takeaways in terms of background, one of which is a lot of experience in marketing and strategy and in a number of different consumer categories and also had the chance to see what great looks like, whether that's in terms of great brands, great strategy, great processes and tools to development brands and great people.

Further Value Drivers

 -      Third leg of RT investment thesis is solid balance sheet, which provides good financial flexibility.

 -      RT has significant real estate ownership, which provides good protection for our equity and bondholders.

 -      Board is in favor of opportunities to return excess cash to shareholders through share repurchases.  Activist Becker Drapkin recently managed to get Hott Topic (HOTT) sold.(http://blogs.wsj.com/deals/2013/03/08/activist-hedge-fund-scores-another-pe-sale-with-hot-topic/?mod=yahoo_hs)

History

 -      In 2008, the company began a 3-phase brand repositioning effort that included reimaging 650 restaurants over approximately a 15-month time period, followed by a focus on providing better, fresher food and higher quality service that was more consistent with a high-quality casual dining brand. The final phase of this plan was implemented in April 2011 with the testing of a TV advertising strategy with more competitive spend levels.

 -      While RT made significant changes to the brands over the past -- the brand over the past 4 to 5 years, both from a restaurant look and feel, as well as menu and service upgrades, it did not effectively communicate those enhancements for a couple of reasons.  One of which was about RT's marketing spend which was historically been predominately focused on coupons. 

 -      RT's $85 million marketing budget was comprised essentially 100% of couponing efforts.

 -      By fiscal '13, marketing spend was almost a 50% mix between coupons and television advertising. RT has only had had a year of experience in trying to communicate the enhancements that we made to the brand, as well as some of the most-recent changes it has made to positioning.

 -      RT looking at some improvements in the restaurants where it can make some improvements to the atmosphere such as lighting and  music to bring up the energy level.

 -      Focus on traffic-driving programs through menu introductions and limited time offers that emphasize affordability, approachability and unique flavor profiles, as well as the reintroduction of previous all-time guest favorites. Food integrity program has never been communicated to consumers either through television advertising or even on our menu.

 -      Steer the brand towards a more approachable and affordable direction ie more casual with the chalkboard look and feel, a broader range of items, some higher end, some lower end, a cold beer, a glass of iced tea, again showing a broader range of options that are available to guests.

 Balance Sheet / Real Estate

 -      Since 2009, RT has reduced its debt level by about $184 million.  Management recapitalized the company in May 2012 with a $250 million high-yield bond offering, which gave RT significant financial flexibility – they have no material debt maturities due until 2020.

 -      RT owns approximately 340 of its locations valued at $500 million to $600 million, and 285 of those locations are debt free.

 -      Since Q3 2012, RT has executed sale-leaseback transactions on 26 locations, and generated gross cash of $59 million.  They are currently pursuing sale-leaseback transactions on an additional 18 to 20 properties, which management believes could generate gross proceeds of $40 million to $44 million. This will take another 5 to 6 quarters to complete.

- The Company is real estate heavy.  There is roughly $600m in real estate (340 x $1.75m).  As of the last few years, 60th percentile properties have been monetized.  Average proceeds have been $2.2-$2.3m per box.  In Jan 2012 Ruby started the monetization process.  The best offer was a 7.75% cap for 50 properties.  However this had bad tax leakage because of book value and market value difference.  It is worth noting that O’Charleys accomplished a 8.6% cap rate sale leaseback rate.  If you are patient, which Ruby is since there is no urgency to selling, Ferris Lee, the broker, says that a less than 7% cap rate may be achieved.  It is worth noting that the first 25 properties were sold at a 6.9% cap rate with proceeds of $2.2m per box.

Share Buybacks / Debt

 -      RT has bought back over 5% of its outstanding shares year to date through the first period in its third quarter. In January, the board increased the share repurchase authorization by 10 million shares bringing the current authorization to 12.7 million shares. 

 -      Management will also look to opportunistically pay down debt.   The revolving credit facility allows RT to repurchase up to $15 million per year of our high-yield bonds. So far this year, RT has repurchased $11.5 million.

Three Year Key Financial Targets

 -      Targeted adjusted EBITDA range of $125 million to $135 million in 3 years will largely be tied to incremental flow-through on Ruby Tuesday sales in addition to growth contribution from Lime Fresh. To put it into context, every 1% of incremental revenue at our company-owned Ruby Tuesday restaurants generates approximately $5 million of incremental consolidated EBITDA given the 40% to 45% flow-through on incremental sales.

 -      Annual free cash flow target of $40 million to $50 million is driven by EBITDA growth noted above, slightly offset by increase in CapEx.

-      Net debt to adjusted EBITDA target of approximately 2x reflects a combination of both EBITDA growth, debt reduction and excess cash on hand.

 -      Exit all non-core concepts: Marlin & Ray's, Truffles Grill and Wok Hay.

 -      Build sales momentum by an appropriate mix of coupon and television dollars.

SWOT

Valuation  Scenarios

One:  Management EBITDA targets hit

Sales: $1.3b

EBITDA: $130

LT Avg Sector Multiple: 8.9x

Enterprise Value: $1157m

Less Net Debt: $273m

Equity Value: $884m

Shares: 59.4

Value Per Share: $14.88

Current:  $9.5

Upside:  $5.38 (56%)

Two:  Sale leaseback of 20 locations / share retirement / Mgmt Target hit

Assumptions:

Proceeds from sale leaseback:  $40m (based on previous sales)

Shares retired ($40m/$9.75 avg) = 4.1m

New Shares out: 55.3m

Cap Rate assumption:  7.5%

Imputed rent: $3m

Sales: $1.3b

EBITDA: $130

Less Rent Expense: $3m

Adjusted EBITDA:  $127m

Sector Multiple: 8.9x

Enterprise Value: $1130m

Less Net Debt: $275m

Equity Value: $855.0m

Shares post buyback: 55.3

Value Per Share: $15.46

Upside:  $5.96 (63%)

Three:  Liquidation Value

Midpoint of Real Estate Value: $550m

Lime Fresh Acquisition Price: $24

Ruby Brand Value: $65m (5% of sales)

Total Value:  $639m

Total Net Debt: $275m

Equity Value: $364

Shares: 59.4

Value Per Share: $6.12

Downside:  $3.38 (35%)

NOTE ON LONG TERM DEBT

 Long-term debt and capital lease obligations consist of the following (in thousands):

MEDIA

Carlson Goes Activist

http://www.marketfolly.com/2011/06/carlson-capital-goes-activist-on-ruby.html

Jon Heller Street.com

http://finance.yahoo.com/news/hello-ruby-tuesday-143000857.html

Blog

http://blogs.knoxnews.com/harris/ruby-tuesday/