RT is a value play that is in the midst of a recovery/turnaround. It has a great safety net by monetizing its asset value, a strategy that management has begun to use with repeated success. RT delivers consistent cash flow yield and continues to paydown debt while still investing in new channels.
RT is currently trading at a large discount to peers due to historically bad comps the last two years, but is finally showing signs of recovery. The market has only begun to realize this turnaround, and new management will continue to take steps to generate returns to shareholders through a combination of store closing and renovation, product overhaul, marketing, and capital structure.
1. Sale-leaseback provides a great downside protection and value play: In the last two years, RT has either acquired or divested through sale-leaseback of 133 of their stores. Using this process, RT could possibly generate in excess of $750 million through sale-leasebacks (assuming current market value at 2.1 million per restaurant and 350 owned restaurants). After using this cash to pay off debt, we realize that RT is effectively trading at 3x EV/EBITDA as the “base case” scenario. This is exclusive of any value to the actual operations of the company.
Furthermore, this analysis assumes that the leases are all operating and not capital/direct financed, where in fact RT uses a mix of both. Lastly, this valuation does not take into the value of building owned/land leased properties, which could also have a significant contribution to RT’s valuation.
Applying a 7x EV/EBITDA multiple (slight discount from peers) and factoring in the value of RT’s real estate results in a downside target price of $12.50. Looking through a value metric, RT is currently trading at 1x TBV, much lower than its average peers at 5x TBV. Management is expecting to continue to sell 20 properties per year for ~45-50 million going forward.
2. A shift into television advertising has led to a recovery: RT has been the laggard in marketing: 2012 was the first year that RT had a national rollout of television ads. While its peers initiated TV advertising much earlier, RT typically spent $80-90 million a year on couponing.
3. Better focus, better restaurants, new concepts: RT has been aggressively cleaning up its image by acquiring suboptimal franchisees (which had average revenue of 700k per store in as opposed to company owned stores of 1,700k in 2011), renovating restaurants, and creating new menus and offerings. As a result, franchise rev per store has steadily increased for the past 4 years.
In Q4 2012, RT purchased Lime Fresh for $24 million at under a 10x multiple. RT is quickly scaling up Lime Fresh stores at a pace of one per month. For 2013, RT expects to add 10 new stores to Lime Fresh, and 15 stores a year after that.
4. Market hasn’t understood RT’s normalized financials: At effectively negative SSS the past 6 quarters (as of last year), RT was the worst in its category. Six months ago, anything slightly better than -5% SSS would have been a good sign. In Q1 2013, RT showed that their initiatives were working and achieved 1.9% comp growth (guidance was 2% comp growth), their first positive number in 6 quarters, which was subsequently followed by another positive quarter (0.3%).
5. Highly cash-flow generative: NTM FCF yield looks to be around 7% of EV. I wouldn’t be surprised to see trend back up to 10%+ FCF yield longer-term (historically RT has been around this). Management’s been very focused on paying down debt (see cash flow from financing) and tapping into sale-leasebacks to debt paydowns.
6. Buyout candidate? RT has recently appointed new board members, two of whom were managing partners at Becker Drapkin Management, L.P., after they filed a 13D with Carlson Capital (combined, they’ve expanded their stake from 7% to 10% over the last 6 quarters). These activist investors could push the board towards a private equity deal, especially considering 3x EV/adjusted EBITDA RT is currently at.