When I was scouring the web to find potential fixed-income opportunities, I came across Ruby Tuesday (NYSE:RT). Ruby Tuesday hit my radar last month when I noticed a continuing drop in the bond price. The yield at maturity on those bonds is now over 9%.
The drop in the bond price is due to a downgrade from Moody's. Moody's has pushed the rating down to a B3 with a negative outlook. The downgrade is related to a decrease in income because of a loss of market share. Ruby Tuesday's management still attributes this drop in earnings due to the economy, but I don't see that being the case here. Restaurant chains such as Olive Garden and Outback Steakhouse have managed to rebound well in the midst of the recovery. It's likely that Ruby Tuesday's just doesn't have the right offerings to attract customers.
Ruby Tuesday's experienced negative free cash flow of $2.3 million in the latest quarter. The company is improving its cost structure by reducing SG&A expenses by $2.5 million in 2014. While it may seem as if Ruby Tuesday's could breakeven in 2014, that is still not the case.
Management's outlook states that same store sales will continue to decline in the high single digits next quarter. However, there should be some improvement in the proceeding quarters due to better product offerings.
So what does this mean for bondholders? Well I think the company will be fine making interest payments on its debts. Interest expense for the latest quarter was $6.8 million. The additional cost savings and a stabilization in same store sales decline should help. However, the problem isn't just a matter of cover interest, but being able to refinance at maturity. The bonds mature in 2020, so Ruby Tuesday's must improve its credit quality by then or be forced to refinance at a much higher interest rate.
I believe those willing to believe that Ruby Tuesday's management can achieve sufficient cost cuts and adequate SSS growth should buy the bond. However, I believe patience is key here. It's possible the bonds can continue to fall and my recommendation for those that can wait is to buy in the mid 80's.