Friday, January 11, 2008

3 Months Later Let's Look Again @ Ruby Tuesday (RT)

I don't follow the restaurant sector closely since there is little growth there (except for something like Chipotle (CMG)), but I like to keep my eye on a few. Ruby Tuesday's (RT) is one since its a run of the mill casual dining company.

Back in September, I said this group was toast but since I cannot short individual names, and there is not an ETF to short them, I could not do much except say "well this group is done" [Tough Times Ahead: Restaurants?] A very simple thesis that is "now" conventional wisdom but back in September we were still in the "subprime is all contained" media hype period

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

I was wondering how the heck Chipotle was holding up at the time since last I checked it also has to buy the same inputs as everyone else, and is not immune to cost inflation. Evidence of this inflation was hitting by October [Food Inflation Starting to Hit Restaurants]

In mid October we saw Ruby Tuesday (RT) report a bad quarter [Let's Check in on Ruby Tuesday's] The stock fell from $19 to $17s..

My analysis was simple "I have never digged into the stock, but I know it serves food and it serves US consumers and is not at the very low end of fast food. So therefore its a good short (if I could)"

Well now we have another report out of this lovely company and lo and behold, more pain
  • Shares of restaurant chain Ruby Tuesday Inc. fell to their lowest levels in a decade Thursday after the company cut its fiscal 2008 profit forecast. Ruby Tuesday now expects to earn between 40 cents per share and 60 cents per share in the fiscal year ending May 30, far below the company's previous forecast of $1.01 to $1.13 per share. Analysts polled by Thomson Financial already expected the company to report a profit of 51 cents per share.
  • The company also predicted a larger decrease in same-store sales, or sales at outlets open at least one year.
This is now a $6 stock. Even shorting it in October around the last bad report would of netted us a profit of 67%. (not to mention in July it was $26). Obviously I would of cut back as this name fell and not netted the full 67%, but the return would of been nice and certainly more than 0% which is what I am able to do now. This is why in the "real fund" I hope to launch I will be able to short. And why performance would be better if I was allowed to short individual names. Coach (COH) was another great example. So while I am happy with results of the fund, it could of been far better with individual shorting. This is a great way to "pair trade" longs with shorts and make even more money - wish I could do it in the fund but I can't. But some day.

I'd cover this short here as my theories are now mostly priced into the stock; much like I said I'd cover Coach @ $30, at this time it is just being greedy to remain short but the thesis was dead on. As were the thesis on financials and commercial real estate (but at least I have some ETFs to take advantage of those to some degree). I do expect to see some bounce in these names on a rally but at best we are going to have sideway action on many of these stocks in these sectors for many quarters to come. I'd also check any of your mutual funds and if you have a manager with restaurant stocks (other than Chipotle or McDonalds) in his top 20 holdings the past year, I'd seriously be calling to ask why :) (while pulling my money out!) At this point some value investors will start scurrying into these names, but for those holding these stocks last spring, summer, and fall - I can only ask why?

No positions but wishing I could of

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