Ruth's Chris Steak House: Wide Open to a Hostile Bid

I guess it's clear by now that the management at Ruth's Chris Steak House, Inc. (RUTH) really coughed it up with the recent Mitchell's Seafood acquisition. The deal was pricey even in the best of times, but as market conditions worsened, it became increasingly apparent that this deal was on the upper end of expensive when you factor in the depressing effects of a consumer driven bear market.

It's true that the terms of the deal were hammered out in what seems like a distant time and place and it was easier for management to rationalize its attributes. It's also true that Mitchell's was a high quality, nicely profitable, PRIVATE company and wasn't subject to the mercurial day by day judgment of a public market in a bad mood. Mitchell's didn't need to sell and could afford to stand by their price. Something they call "Private Enterprise Value."

What's interesting to me about this deal was that it done for cool clean cash and not any stock. From an acquisitor's point of view, perhaps management felt that the Private Enterprise Value of Ruth's Chris stock was much higher than its public market value (at the time, it was around $12 per share) and therefore an unsuitable currency for the transaction. With the price of the stock now somewhere between 7 and 8, we are starting to see deep value in its shares. Management is hard-headed and their philosophy on how to allocate capital is flawed because it is too rigid. They are reticent to initiate a meaningful stock buyback, stating that they prefer to use capital for expansion, upgrading the business, and for financial flexibility.

However, this is where the value really is. If they are willing to get behind Mitchell's at an average price of around 4.1 million dollars per restaurant unit, then why not get behind their own stock where the market values each restaurant unit at around 1.5 million dollars? What further widens the valuation gap is that the traditional Ruth's Chris unit generates more revenue and profit than the new Mitchell's unit. RUTH is a quality company with good profitability, real growth opportunities, and no credit problems. They will survive and they will thrive, but they are wide open to a hostile bid. As I understand it, RUTH's bankers have already approved a 50 million dollar stock buyback line. As a fan of the deep value style, I would get busy with it now before private equity does it for them. As public companies go, we could soon be RUTH-less.

Disclosure: Author has a long position in RUTH

Comments

[Serge Birbrair:]

I used to be a regular at Ruth Chris. They treat us right, wave corkage fee (we love well aged wine and our cellar is better than theirs). We practically stopped going there. The food has changed and not to the better. Side dishes got somewhat worse and now give me the leery feeling they came from the large wholesale bucket, the meat cuts got somewhat different (the rib eye of today has no resemblance of the rib eye of the yesteryears). We stopped and some other folks stopped too (and I am talking about South Florida where the average age of diner is 70 and retirees are not afraid of economic slow downs) Best of luck with your hopes of the "white knight", I just don't see it, unless the food quality which made Ruth Chris RUTH CHRIS will return.

2008 Feb 24 09:45 AM

[tessant:]

so happy i didnt buy this at 24...phew...

scott w
growthportfolio

2008 Feb 24 04:08 PM

[john haskell:]

comment above just strengthens the case for new management. if you run a steak house and don't want to buy good meat you really don't have any business being in business.

2008 Feb 26 02:37 PM

[Micclay:]

I like to buy stocks of companies who's product and value I can understand. Thus as a Ruth's customer over the years I jumped on it when it went public in 2004. I have been pretty disappointed over its performance. Much of which management could not directly control. Last December we went to Ruth's for Dinner in CT, The wine before dinner was greatly overpriced for what we got (house wine at $13), the meal was mediocre, the service okay but with the waiter pushing hard for sides and add on's (mushroom sauce) and desserts. After that experience, I sold at $12 for my tax (and real) loss. Just bought some back at $7.50 purely as S/term speculation. I don't like where the product is headed. They seem to be cutting corners to improve the bottom line - that will be the kiss of death. Flemings Steakhouse (owned by Outback) is now much better than Ruth's

2008 Feb 26 10:49 PM

[Choncholopolis:]

Before they went public all of their beef was USDA prime. After they went public they started using Choice beef as well, especially with the Filets which approximately 90 percent are Choice instead of Prime. Which is why Ruth's Chris says they 'feature' USDA prime. They also don't put the size of the cuts on the menu so you will get a petite filte which is three dollars less than the full size filet and is eight ounces as opposed to twelve with the full size. Really a three dollar mark up for fifty percent more beef gives an indication of their margins. Most significantly they are in the highest bracket for beef and the price of beef just continues to go up. Graising is increasingly expensive and the bull run in the commodities market coupled with the emergence of ethanol as a substitute/supplement to gasoline with has itself contributed greatly to the bull run of the commodities market all work to dry up the price of beef. Additionally emerging markets are increasing their buying power and the dollar has continued to devalue. These factors contribute to a world wide increase in demand for quality proteins i.e. beef. All of these factors point to increasingly difficult times ahead as Ruth's Chris attempts to sustain inflated margins, which will allow them to be as profitable as they have been, while still being competitive without pricing themselves out of most peoples range all together and decreasing the frequency of those who were otherwise consistent customers.

2008 Mar 06 03:38 PM

[Dr. Vu:]

I have found that Ruth's Chris Steak Houses vary greatly from restaurant to restaurant. It is my belief that the ones that are owned by franchisees are of better quality and consistency. The product is not the same as it was a few years ago. You can tell that once the current ownership tookover they lost that vision that Ruth had. I mean, how could they move to Florida after the hurricane? Poor Ruth must be rolling over in her grave. The product/concept as a whole is still very well recoginized and is still valuable, they just need different leadership. I think they are still the market leader in high end steak houses, but the gap has closed a lot.

2008 Mar 07 12:33 AM

[Who is who?:]

I have been a fan of Ruth's for some time and completely agree that the current managment is directing the ship in the wrong direction. They have compromised the vision that used to be Ruth's. The aquisition of Mitchell's was done strictly to appear less vulnerable at the time to a hostile takeover. The attractiveness of Ruth's Chris to others wanting to buy them out is lessened at their reduced stock price after spending 100 million in cash to acquire a 3rd tier company; instead of sitting on the cash and utlizing it to better their own company. They have recently gone through a power struggle in many markets wherein many long term GM's were forced out to be replaced with GM's that will follow them to the casual market. It's all too bad.

2008 Mar 21 06:41 PM