Rubio's Restaurants: 1Q 2007 Earnings Review

| About: Rubio's Restaurants, (RUBO)

On May 9, Rubio's Restaurants (RUBO) reported 1Q 2007 results (see the press release here and listen to the conference call and related webcasts here).

  • Revenue up 16.8% to $41.0 million from $35.1 million in 1Q 2006
  • Cost of sales $11,761,000 from SSS up 8.3% (this is the largest increase for Rubio's since the company went public in 1999)
  • Transactions up 0.5% from 1Q 2006
  • Guest count up 7.8% from 1Q 2006
  • Restaurant operating cash flow margins 15.3% from 15.4% from 1Q 2006
  • Net income $196K ($0.02 per share) from $192K ($0.02 per share) in 1Q 2006
  • Cash position $5.79 million compared to $9.95 million in 4Q 2006
  • No debt
  • The main thing that jumped out at me was the fact that the company's cash position decreased more than $4 million in the quarter. The reason for this was because of higher costs. Rubio's relies quite heavily on California produce, and California has experienced some colder-than-usual weather so far this year, which increased the costs for produce and avocados a good amount. Labor costs were also up a good amount YOY, I'd guess this is primarily because of the minimum wage increase. Considering the circumstances, I think they did a good job taking care of business, I would have expected income to be down YOY because the bulk of Rubio's locations are in California. What's even more impressive to me are the strong same-store sales [SSS]; they really had a boost in business. This makes me feel comfortable with my previous assessment that Rubio's has enough of a niche to survive and expand, very few restaurants have been able to report much of a leap in SSS, let alone 8.3%. I'm curious to see how they do the rest of the year, if SSS are more consistent, I'll be very confident in the company.

    I think management was smart to not open any new locations this quarter for a couple reasons, the first being that they did use up a lot of cash covering the higher costs, and I don't think it was a good time to build new restaurants anyway considering the extreme weather. What I want to see management do is make the current operation more consistent -- get things stable. I think they've got a very nice product that could expand to at least 300 restaurants, but they need to stabilize current operations first before going much further, in my opinion. I think this would be most rewarding for the company and shareholders in the long run.

    These results did beat analyst sales estimates of $40.81 million but missed EPS expectations of $0.06. I'm fine with this, I like how management is handling things and I'm more confident in them and the business now than I was before. The strong balance sheet kept the company from feeling much of a pinch from the higher costs, and they still have a good amount to open new restaurants or improve current restaurants if they need to.

    The price of the stock of $11.38 is still a little too high for me to start a position. I want to see if the company can keep this nice streak of strong sales going and see how management uses the cash. I don't think new restaurant openings are the thing to do at this point, but management may have a plan. CEO Dan Pittard says "We have initiatives underway to improve both our food and labor costs.” I want to be sure management does have a plan and isn't just saying things. But I must say I'm very impressed with this quarter, and if it's a sign of things to come, I'll be tempted to open a position. Consistency is what I'm looking for. Insiders still own a nice chunk of shares amounting to 22.42% of the company.

    For the coming 2Q 2007, the three analysts following Rubio's expect an EPS of $0.08 on sales of $44.24 million.

    RUBO 1-yr chart

    RUBO
    Disclosure: none