RUTH - Ruth's Hospitality Group

[Libs]

RUTH, IMO, is an example of a stock that's 1) beaten down 2) has enough liquidity to make it through COVID 3) will not be impaired or disrupted afterwards.

 

If anything, it will emerge in better shape, as competitors go broke over the next year. I view this as a double your money in <5 years kind of thing. Maybe more.

 

~$8.75 a share currently. RUTH made $1.46 in 2019. I'm assuming we have a vaccine in 12-18 months; and within 2 years they are making $1-1.50 again. At a typical multiple of 15 that gets you to $15-22. If they go back to their steady growth, there's no reason the stock can't make $2 and hit $30 again.

 

RUTH is no ordinary steakhouse IMO. The average check is $86 / person and the food is always great. I believe their wealthy clientele have largely fared well during the pandemic, and will return. Also, as luck has it, they've always had tables pretty far apart, so the new rules about table-distancing won't hit them as hard as others.

 

Regarding liquidity: They have 62MM  drawn from their revolver, and (ugh) are selling stock at 7.75. They are selling 6MM shares, with the underwriter having the option for 6MM more. That will raise 43MM - $86MM. They were burning 2MM a month during the shutdown; but from today's 8-K we can see they are back to around 60% capacity ( $60,000 weekly revenue VS $100,000 in normal times), so the burn-rate must be a lot lower. From the 8-K:

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Ruth’s Hospitality Group, Inc. will meet with investors at the Jefferies Virtual Consumer Conference on June 23, 2020. During these meetings, the

Company plans to share the following information with investors and analysts.

• During April 2020, the operating status of the restaurants was as follows:

o Company-owned and managed restaurants - 56 operating take-out and delivery and 30 were closed;

o Franchisee-owned restaurants - 14 dining rooms open, 28 operating take-out and delivery and 31were closed.

 

• As of June 5, 2020, the operating status of the restaurants was as follows:

o Company-owned and managed restaurants - 35 dining rooms open, 29 operating take-out and delivery only, and 22 were closed;

o Franchisee-owned restaurants - 48 dining rooms open, 7 operating take-out and delivery only and 17 were closed.

 

• As of June 21, 2020, the operating status of the restaurants was as follows:

o Company-owned and managed restaurants - 50 dining rooms open, 18 operating take-out and delivery only, and 18 closed with plans

to open an additional 10 – 15 dining rooms by the end of June;

o Franchisee-owned restaurants - 62 dining rooms open, 3 operating take-out and delivery only and 7 closed.

 

• The average weekly sales for Company-owned restaurants that were open in April 2020 was $19.3 thousand. In May 2020, the average weekly

sales for Company-owned restaurants that were open was $30.6 thousand. Through June 21, 2020, the average weekly sales for Company-owned

restaurants that were open during June was $59.3 thousand and includes the benefit of Father’s Day

 

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Issuing stock so cheap is painful, considering they bought back ~$150MM of stock at much higher prices the last 5 years.

That aside, I think the chain is pretty well-run. They add 3-5 restaurants a year, which is manageable. They owned up to the mistake of buying a fish restaurant chain a few years ago and sold it off. And most importantly, the food / service / ambiance  has not wavered, in my opinion.

 

Risks would be  1)  no vaccine, 2) a second wave causing massive shut-downs again 3) I'm wrong about the wealthy coming back, possibly because the recession gets worse  4) business travel / entertainment is permanently reduced post - Covid.

 

There is a bear write-up on VIV I can't read until August, unfortunately. I would like to know what I'm missing.

 

Opinions and dissent on my thinking are welcome- thanks.

 

P.S. From the angle of valuing each restaurant, does anyone have any experience in that area? FWIW, they have bought out franchisees for about $5MM a pop, and their 83 owned restaurants do about $5MM in revenue each. gross margins are around 20%. If these 83 are truly worth 5MM each, that's $415MM. In addition, they make about $250,000 (5% of revenue) a year from each of their ~70 franchisees. That's about 18MM in revenue that basically goes to the bottom line. If that's worth 15X, that's another 270MM in value.

 

So add 415 + 270 = 685MM. Current market cap ~300MM if you count the new 6MM shares ( $8.75 X 34MM = $300MM).

 

 

 

 

 

 

 

 

[samwise]

I am not in this name, but in another steakhouse. But we could discuss the industry here :)

 

What did you think of the VIC short writeup? I wonder if beef cost is passed on to customers. Depends on the competitive landscape in steakhouses. It seems they each have some brand value (see my third point below)

 

There is also a 2011 writeup. I found the description of client mix very interesting: basically a third business, special occasion and casual. Not sure how true it is, and how fast traffic recovers after a recession. In 2011, they were still well below peak revenue. How fast do they recover this time?

 

You may also lookup the old writeup for FOGO, where the author found a huge percentage of steakhouses survived over many years, much more than ordinary restaurants. If that is true, the competition is probably less intense than usual restaurants. Maybe it’s due to brand value or habit...not really sure.

[Libs]

samwise,

 

Thanks for the tip, I will look up FOGO.

 

Not worried about the beef prices, for the reasons you gave. People with money will always pay up for a good steak. Anyway I took the money and ran on this, but if it drops again I might buy it again.