Rubio's Restaurants Reports Second Quarter 2010 Results

Revenue for the first half of 2010 totaled $95.2 million, up just under 1% from $95.0 million in the same year-ago period.

Net loss was $387,000 or $(0.04) per basic and diluted share in the second quarter of 2010 versus net income of $512,000 or $0.05 per basic and diluted share in the same year-ago quarter. The net loss in the second quarter of 2010 included non-recurring expenses associated with the ongoing evaluation of strategic alternatives of $1.1 million or a tax-effected $(0.07) per share. Before these non-recurring expenses, net income in the second quarter of 2010 was $256,000 or $0.03 per basic and diluted share.

For the first half of 2010, net loss was $20,000 or $(0.00) per basic and diluted share, compared to net income of $757,000 or $0.08 per basic and diluted share in the same year-ago period. The first half of 2010 included non-recurring expenses associated with the ongoing evaluation of strategic alternatives of $1.3 million or a tax-effected $(0.07) per share. Before these non-recurring expenses, net income in the first half of 2010 was $741,000 or $0.07 per basic and diluted share.

Adjusted EBITDA (a non-GAAP term) was $2.2 million in the second quarter of 2010, versus $3.9 million in the same year-ago period. Excluding the aforementioned $1.1 million in non-recurring expenses during the second quarter, adjusted EBITDA was $3.3 million (see "About the Presentation of Non-GAAP Financial Information," below, for an important discussion of this non-GAAP term).

For the first half of 2010, adjusted EBITDA was $5.5 million, versus $7.2 million in the same year-ago period. Excluding the aforementioned $1.3 million in non-recurring expenses during the first half of 2010, adjusted EBITDA was $6.8 million.

Cash and cash equivalents at June 27, 2010 totaled $9.5 million, unchanged from December 27, 2009.

Second Quarter 2010 Operating Highlights

Comparable store sales (stores operating for more than 15 months) decreased 3.3% in the second quarter of 2010 versus a comparable store sales increase of 0.9% in the same quarter last year. In the second quarter of 2010, the impact of decreased transaction volume more than offset an increase in the average check per customer.

Average unit volume was $977,000 as compared to slightly over $1.0 million from the same year-ago quarter.

Restaurant operating margin (a non-GAAP measure as defined below) was 16.0% as compared to 16.8% in the same year-ago quarter.

In the second quarter of 2010, as a percentage of restaurant sales, cost of sales decreased by 100 basis points, restaurant labor cost increased by 20 basis points, and restaurant occupancy and other costs rose by 140 basis points versus the same quarter last year. The decrease in cost of sales was due to lower ingredient costs, as well as tighter food cost management. The increase in restaurant labor was primarily attributable to increased workers' compensation cost as the company experienced an increase in major claims which made it necessary to increase claim reserves. The increase in restaurant occupancy and other costs was primarily due to higher advertising expenses, credit card fees, rent and common area maintenance charges.

General and administrative expenses for the second quarter of 2010 were $5.6 million, as compared to $4.4 million in the same year-ago quarter. As a percentage of sales, general and administrative expenses increased to 11.6% from 9.1% for the same period last year. The quarter-over-quarter increase was due to legal and professional fees associated with the ongoing evaluation of strategic alternatives. As a percentage of sales, general and administrative expenses before non-recurring expenses mentioned above were 9.3% for the second quarter of 2010.

Rubio's opened three restaurants in the second quarter of 2010, consistent with three opened in the same period a year-ago. Pre-opening expenses were $177,000 compared to $105,000 in the same quarter last year.

Management Commentary

"The ongoing unemployment and housing challenges in the markets we serve, as well as record cool temperatures in Southern California during the second quarter, continued to put pressure on our top line," said Dan Pittard, Rubio's president and CEO. "As the economic and weather conditions continued into the third quarter, we experienced a decrease in comparable store sales of 4.5% through the first five weeks of Q3. While restaurant operating margins declined in the second quarter versus a year ago, the decline was attributable to increased advertising and marketing expenditures. In response to the continued weakness in the economy and with the prospect of a prolonged and sluggish recovery, we increased media spending and made strategic investments in research geared towards understanding the change in consumer preferences caused by the recession. We continue to believe that we have a winning strategy for Fast Casual, which remains the fastest growing segment of the restaurant industry, and that we are well-positioned to take advantage of an improving economy."

Cash Merger Transaction

As announced on May 10, 2010, Rubio's entered into a definitive agreement under which Mill Road Capital has agreed to acquire each share of Rubio's common stock held by the Rubio's stockholders (other than Mill Road and its affiliates and certain shares held by Ralph Rubio) through a cash merger transaction. Pursuant to the terms of the definitive merger agreement, the outstanding shares of common stock of Rubio's Restaurants will be acquired for $8.70 per share. The aggregate transaction value is approximately $91 million.

After careful consideration, the Special Committee of the Board of Directors of Rubio's unanimously determined that the merger and the merger agreement are advisable, fair to, and in the best interests of Rubio's and its unaffiliated stockholders. Based on the Special Committee's unanimous recommendation, the Board of Directors unanimously determined that the merger and the merger agreement are advisable, fair to, and in the best interests of Rubio's and its unaffiliated stockholders, and therefore, approved the merger agreement and the transactions contemplated thereby, including the merger. The merger is subject to customary closing conditions, including the approval of Rubio's stockholders and regulatory approvals, and is expected to close during the third quarter of 2010. An annual meeting for consideration of the proposed merger has been scheduled for August 23, 2010. Ralph Rubio, Dan Pittard and Rosewood Capital, who collectively own approximately 24% of the outstanding shares of Rubio's, have each entered into voting agreements in which they have committed to vote in favor of the proposed merger transaction. In addition, Mill Road Capital, L.P. currently owns approximately 4.9% of the outstanding shares.

Logos, product and company names mentioned are the property of their respective owners.

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