With just two analysts, Wall Street doesn't pay much attention to Ryan's Restaurant Group (NASDAQ:RYAN). As its name implies, it doesn't have any newfangled technologies, a potential cancer-curing drug, or the pizzazz of a high-growth stock. Its earnings release didn't even get posted on its Yahoo! Finance page. But it serves food, mostly buffet-style, and that's enough to pique my interest.
Before proceeding any further, let's take a look at first-quarter results reported earlier this week. The top and bottom line didn't budge much, as revenues were up a tick to $213.7 million, driven mostly from a same-store sales increase of 1.7%. Diluted EPS dropped a penny to $0.25. Free cash flow soared to $20.7 million from $7 million in last year's first quarter because of a significant drop in capital expenditures.
There are two main reasons I thought a checkup would be worthwhile here. The first is that the company is in the process of adding breakfast service on the weekends in all its restaurants. The capital expenditures for this rollout are relatively small, which should make it a low-risk, high-reward proposition as management tries to get more out of its existing assets. The results have been very positive so far, as average weekly sales were a record high for the quarter and same-store sales moved into positive territory. Sales should continue to benefit throughout the year, as a third of the restaurants have yet to implement the change.
I was also enticed by the plan to decrease capital spending by temporarily slowing new-store growth in order to pay off debt. I discussed a similar situation at IHOP (NYSE:IHP) yesterday, although its business model changes are more permanent. With large amounts of free cash flow coming in, cash will be abundant at times. This allows the company to take advantage of buying back shares if the market unduly punishes the stock and provides a second option for increasing returns besides paying off debt. Repurchases have been a regular occurrence since 1996, but to my dismay, its new debt structure allows up to only $15 million to be spent in this fashion in 2006 and 2007. Even this seems unlikely, considering the board of directors voted to terminate its stock repurchase plan in July of last year, mais c'est la vie.
Still, based on the run rate of free cash flow, the stock is trading at a price-to-FCF ratio of just 6.5. At some point, I expect the company will look to invest back into growth, bringing that number closer to historical levels. In the meantime, investors get a nice glimpse into what cash flow would look like if heavy investment in growth were eliminated.
Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors.
