Many companies have complained that energy prices are denting their performance. The restaurant industry is no exception, since it takes plenty of energy to keep the equipment running. With its third-quarter earnings release the night of Oct. 31, Rubio's Restaurants (NASDAQ:RUBO) added its name to the victims of increased energy costs.
The California-based Rubio's, which operates more than 150 restaurants in six western states, is a "fast-casual" Mexican restaurant. Think of Rubio's along the lines of Baja Fresh, a subsidiary of Wendy's International (NYSE:WEN), or Chipotle, which is soon to be separated from McDonald's (NYSE:MCD). Each is unique in its own way, but all are going after a similar group of customers.
The numbers weren't great for Rubio's this quarter. Sales were up 0.9%, but increases in energy costs and sales, general, and administrative (SG&A) expenses drove operating profits down 47% year over year. Diluted earnings per share weren't much better, down 36%. Management admitted that it was "not pleased" with the company's revenue growth. Investors aren't pleased either, trading the stock down more than 10% at midday on Nov. 1.
I find it a bit odd that Rubio's measures its performance with EBITDA. The company carries no debt, so there is no interest, and taxes and depreciation are very real expenses. For a better way to look at Rubio's, wait until the company files its 10-Q with the SEC, and examine it from a free cash flow perspective (operating cash flow minus capital expenditures). Free cash flow adds depreciation expense back to net income, but that is offset by subtracting capital expenditures. Without a representation of capital spending included with the earnings report, it's of limited use in judging a company's performance, unless the company is in a slow expansion mode. This does not appear to be the case with Rubio's, since the company intends to open four new restaurants in the current fourth quarter and around 15 new restaurants per year going forward. Consequently, capital expenditures should be included in Rubio's earnings reports.
If energy prices remain high, Rubio's, like all restaurants, should eventually be able to adjust its pricing and reclaim its lost margins. However, that won't happen overnight, and Rubio's will need its competitors to follow suit. Fortunately, Rubio's has a solid balance sheet and historically generates plenty of free cash flow. Given its energy-induced higher cost structure and a P/E multiple of 27, the stock is not yet cheap. Nonetheless, the company warrants watching, especially to see how its expansion plans pan out.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
