Hello, Ruby Tuesday

 | Apr 11, 2012 | 2:30 PM EDT
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Burger King, which is set to once again go public in the next few months, is reportedly testing a bacon sundae in the Nashville market.

Things like these are part of the reasont I've been fascinated by the restaurant sector for years. There are few sectors that are more competitive and the landscape is littered with chains that just could not survive. Some will try anything for some attention. Remember Denny's (DENN) post-Super Bowl breakfast giveaways?

This may seem like strange territory for a value investor, but there have been some nice opportunities the past few years to pick up shares in companies that the market had given up on. One that I'm watching now is casual dining chain Ruby Tuesday (RT), which has been slammed in the past week via the combination of a bad earnings report and the general direction of the market.

Here's another name in the sector that seemingly has nine lives. In early 2009, shares were trading for less than a buck and it appeared as though the company might not survive. Ruby Tuesday was saddled with more than $600 million in debt and was facing an extremely difficult economy. The company made several moves, including the closure of stores, menu changes and debt reduction. It staged a remarkable comeback by early 2010.

Shares hit the $15 level by early 2011, but have since given much of that back and now trade for less than $7, a 3-year low. You could say that the decline is well deserved, especially given the company's 5% decline in third-quarter same-store sales. Ruby Tuesday also missed the mark on revenue for the quarter, which was 4% below the $339 million consensus, and reduced guidance for the full year to 43 to 48 cents a share, well below the 56 cents consensus. The company also announced that it will close 25 to 27 underperforming stores in the fourth quarter.

If much of this sounds like déjà vu all over again, keep in mind that this not the same company it was back in 2009. Like others burdened by debt and facing the economic mess in early 2009 (Saks (SKS) and Gannett (GCI) are two examples) Ruby Tuesday cleaned up its balance sheet. Total debt of $307 million is half of what it was back in late 2008.

This is no small chain, with about 825 locations, 740 of which are company operated. But the kicker here is that the company owns the land and building for 368 locations and building only for another 250. That's a potentially interesting portfolio of commercial real estate, especially considering the company's current $730 million enterprise value. At current levels, shares also trade at just 0.76x tangible book value.

Granted, owning significant real estate assets does not put customers in the seats and Ruby Tuesday does have significant challenges to once again try and differentiate itself from the already crowded casual dining space. But the company is better positioned financially to do that now than it was three years ago.

While I'm not ready to take a position just yet, Ruby Tuesday is back on the radar and there may be an opportunity to get a better price as the dust settles on what was a very challenging quarter.

It will also be interesting to see how the company's foray into Mexican food will progress, given the recently announced acquisition of Lime Fresh Mexican Grill, a Miami-based chain with 16 stores, for $24 million.

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