I expressed concerns last week about how the real estate holdings of old-time bricks-and-mortar retailers like Sears (SHLD) and JC Penney (JCP) might no longer have the value that we once thought. However, that doesn't necessarily extend to restaurant real estate as well.
After all, while shopping habits continue to change and the number of idle stores grows, I expect any vacant real estate from restaurant chains that close will get filled up by up-and-coming chains or more-successful current operators.
I just have to look back to my own life experience to see why. When I was a kid growing up in the 1970s, my family didn't dine out frequently, but did make regular trips to the local malls. That was a form of recreation in those days -- an end-of-the-week reward and a way to get out of the house.
But it's just the opposite now that I'm all grown up and have a family of my own. My family rarely goes to the malls, and I'm struck when we do by how empty the stores are. It seems as if many people think that online shopping is simpler these days, at least for many items.
By contrast, my family dines out a great deal more than I did when I was a kid. In fact, it's my view that restaurant visits have replaced shopping trips as American families' weekend reward. And while I'm a big fan of online shopping due to its ease and efficiency (not to mention the fact that I don't like shopping in general), I can't see the Internet ever replacing the dining-out experience.
It's true that I might never buy another book anywhere other than Amazon (AMZN) , but if I have a craving for the grilled chicken salad from Cracker Barrel (CBRL) , I'm going there to get it. I have no interest in having a drone deliver takeout to my door.
Now, I suspect that's true for many U.S. consumers. Dining out is one of America's favorite pastimes, but trips to Sears? Not so much.
Therefore, I'm less apt to dismiss the potential value of restaurant real estate vs. retail real estate. That's partly why I continue to own restaurateur Ruby Tuesday (RT) even though Wall Street all but hates the chain.
Investors' negative view of RT isn't surprising given the company's inability to generate a profit over the past several years or remain relevant to consumers. But unlike many investors, I see plenty of value in Ruby Tuesday's real estate. After all, RT owns the buildings that nearly 560 of its locations use, as well as the land for some 300 sites.
However, the company's total enterprise value (market capitalization plus debt minus cash) is just $408 million. That means to me that Wall Street expects very little from the chain in terms of operating performance. The market has grown weary of Ruby Tuesday's inability to turn things around, as the chain has been down this road many times before since nearly going under in 2009.
But that was a different time and a different company. One smart move that Ruby Tuesday has made since then was to pay down its debts from around $600 million to just $229 million now. But interestingly, the company had a higher enterprise value during 2009's dark days than it does today.
If RT can somehow surprise the markets with a better-than-expected quarter, the stock should react strongly given the market's current low expectations. But at this point, investors are valuing the company just for its assets. Many clearly view the chain as one of the dinosaurs of Restaurantland -- perhaps on the verge of extinction.
However, many investors are forgetting that company-owned real estate like what Ruby Tuesday owns can provide restaurant chains with some good turnaround options. For example, Denny's (DENN) managed to right the ship at least partly through refranchising. The chain sold company-owned real estate to franchisees and used the proceeds to reduce debt.
Similarly, Cracker Barrel did a sale-and-leaseback transaction several years ago that brought in $45.2 million for 15 stores (or just over $3 million per store). Perhaps RT can learn a lesson from both of these companies and do the same.
