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Ruby Tuesday, BJ's Restaurants, or Libbey: Who Should You Bet on for a Restaurant Industry Recovery?

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With a mix of so many winners and losers in the restaurant space these days, it can be difficult to sort through them all and make the right investment choices. One simple way to make a broad-based bet on a recovery in the restaurant industry is to bet on a supplier such a Libbey (NYSEMKT: LBY) rather than individual names such as BJ's Restaurants (NASDAQ: BJRI) and Ruby Tuesday's (NYSE: RT).

Libbey makes and sells everything glass when it comes to the restaurant biz. It describes itself as "the leading manufacturer of tabletop products for the U.S. food-service industry."

When times are better, three factors will drive restaurants to order more glassware from Libbey. First, new restaurants will need to order and stock their initial supplies. Second, current restaurants will invest to upgrade their old, worn-out supplies. Third, as business improves with heavier traffic there will naturally be more breakage, supply thrown in the trash, etc., along with the need to simply stock up on backups.

Libbey Recent Results
Libbey reported its third-quarter results on Oct. 29. Sales were down 2.3% to $204.4 million. Adjusted earnings before interest and income taxes declined 24.5% to $28.7 million. While these numbers were certainly less than impressive, Libbey generated $34.8 million in positive cash flow from operations and $24.5 million in free cash flow. Both of these numbers set records for the 125 year-old company.

CEO Stephanie A. Streeter stated that current demand has been soft, but the company is on track for long term profitability and cash flow generation. The reason the company was able to achieve record cash flow generation despite soft demand, she explained, was because "restructuring initiatives over the last two years have strengthened our cost position considerably." Streeter stated, "We are now focused on productivity improvement initiatives across our global operations."

Libbey Conference call
In the call, Streeter stated, "The current macroeconomic environment has proved challenging during the quarter, as many of our largest retail customers, restaurants and hotels, are reporting decreased traffic compared to prior year."

She also warned that overall the players in the foodservice industry have seen "their comparable traffic going down all year." This suggests that the recovery hasn't quite begun yet so you need to wait and watch for it in the future.

Follow the laggards such as BJ's Restaurants and Ruby Tuesday
If you don't have the time or patience to follow the results and outlook of every publicly traded restaurant chain, consider following the laggards. When the ones who are struggling and blaming the economy start to finally see positive gains in business, it may be a sign that a full recovery is on the way. It may be the case that if these guys are doing well, then everybody must be doing well.

Take BJ's Restaurants as an example. As a brewery-restaurant, the chain certainly goes through a lot of glassware. Last quarter, BJ's Restaurant saw same-store sales drop by 2.2%. Net income nearly got sliced in half. CEO Greg Trojan stated, "The overall sales environment for the casual dining industry continues to be very challenging."

CFO Gregory Levin concurred. He stated, "We expect the casual dining industry in general to remain challenging through at least the end of this year and most likely into early next year." When Trojan and Levin get optimistic, you can bet they'll be ordering more glass supply for BJ's Restaurants, and perhaps other chains will do so as well.

Ruby Tuesday is perhaps the poster child for restaurant struggles these days. Last quarter, it saw sales nosedive 11.7% and same-store company-owned sales collapse 11.9%, and an earnings per share loss of $0.39. Two top insiders left the company in October following the dismal results. The company has blamed the "challenging economic environment." It seems like Ruby Tuesday will be the last restaurant to show positive results. If and when it does, it may be a sign that the entire restaurant industry may be in a full blown recovery.

Foolish final thoughts
Libbey hasn't been sitting idle waiting for a recovery. The company has been active in accomplishing three things: cost reduction, productivity enhancement, and debt pay down. Look for signs of a restaurant recovery from restaurants themselves, especially from those that have been struggling. This could give Foolish investors an early heads up that Libbey's business is about to prosper..

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Related Tickers

9/27/2016 4:00 PM
BJRI $36.36 Down -0.71 -1.92%
BJ's Restaurants CAPS Rating: ***
LBY $17.35 Up +0.06 +0.35%
Libbey CAPS Rating: ***
RT $2.64 Down -0.08 -2.94%
Ruby Tuesday CAPS Rating: *