How Wall Street Sees Ryan's

 

At first glance, it looks like Ryan's Family Steak Houses Inc. (RYAN, over the counter) hasn't fared too shabbily during the industry's hard times, tripling in less than four years from its IPO price in July 1982 of $9.25 to $30.50 last spring. That's way off the mark, however. The stock has been split no fewer than four times in that interval, in tandem with its four-year earnings-per-share growth rate of 55%.Thus last spring's price of $30.50 is really the equivalent of $205.88 per share -- the best performance by far among public restaurant issues.

Wall Street has been only a reluctant believer in Ryan's management style, though. For one thing, because the company refuses to borrow, it would seem that it couldn't leverage the kind of earnings growth investors in small companies expect. But last year's 12-month earnings-per-share jump of 53% put the lie to that assumption. Observes Frank Williams, a special-situations analyst affiliated with the Boston office of the brokerage firm of Cantor, Fitzgerald & Co., "The way they've built the business has enabled them to maintain absolute control over every important area. When you have debts you surrender control over certain parts of the business -- the banker has a vote."

And when Ryan's rolled out its expensive "mega" food bar last September, threatening a severe margin squeeze, again Wall Streeters fidgeted. ". . . [Ryan's] food costs have risen roughly 3% to 5% and payroll costs an additional 3%, resulting in a compression of operating margins from 20% to 13% to 15%. . . . The trend to tighter margins is undeniable. . . ." worried L. Keith Mullins of Morgan Stanley & Co. (Unnecessarily, as it turned out: the make-it-yourself salad spread increased 1985 sales by nearly 6% over the previous year.) Not only that, Ryan's wasn't spending anything on promoting itself, insisting on opening a unit with nary an advertising word. "Initially, the analysts were baffled that we didn't advertise," recounts chief executive officer Alvin A. McCall Jr.But as earnings compounded and the price of RYAN kept climbing, they soon were singing a different tune. "Now they're saying this is the way everybody else ought to be: good enough that customers will come back without having to spend money on advertising."