By Eric Jackson
Here's a review of why I liked RRGB back in November:
- Valuation -- its forward P/E at the time was just 11 times.
- Cash flow had remained strong, partly because the company hadn't discounted its menu. This meant the company hadn't trained customers to expect heavy discounts moving forward.
- Marketing had been cut to the bone. Any improvement here would make a major difference.
- Debt load was high ($200 million) relative to most restaurant chains.
- Restricted marketing had led to a drop-off in traffic.
- Management offered confusing explanations on the sources of problems within the company or, more importantly, how the company was going to tackle them.
- It wasn't clear the executive team had a hand on managing commodity costs as well as other chains.
Despite these negatives, I argued the case for going long the stock was compelling at $16 (and then it fell to $14 after the selloff). The stock was due for a rebound even if management did nothing in the months ahead. It turns out that's exactly what they've done, and yet the stock's gone up enormously.