Ruby Tuesday Misses on Both Lines – Analyst Blog

Ruby Tuesday Inc. (RT) reported adjusted earnings of 5 cents per share in the first quarter of 2013, which lagged the Zacks Consensus Estimate by a penny but was in line with the year-ago earnings per share.

Total revenue in the quarter nudged up 0.8% year over year to $332.9 million. Revenue number also fell short of the Zacks Consensus Estimate of $335.0 million.

The year-over-year upside in revenue was attributable to sales growth at Lime Fresh and Marlin & Ray’s. However, 27 permanently closed company-owned restaurants partly offset overall sales.

Inside the Headline Numbers

Restaurant sales were up 1.9% to $331.3 million, while franchise revenues expanded 14.0% to $1.7 million owing to the franchise partnership acquisitions. The casual dining restaurant operator posted a 1.9% upside in comparable store sales at company-owned restaurants.

Restaurant level operating margin enhanced 400 basis points (bps) year over year to 19.7% (as a percentage of company-operated restaurant sales) due to a 70-bps downside in payroll and related costs, 60-bps dip in other restaurant operating costs, 40-bps decrease in depreciation and 270-bps fall in cost of merchandise. All these cost containment efforts coupled with lower coupon expenses are financing its television marketing programs to some extent.

Store Update

During the quarter, the company opened two Lime Fresh company-owned restaurants and one franchised unit. It also shut down two company-owned stores. Out of the two stores, one was closed permanently and another temporarily so that it can be converted to Marlin & Ray’s.

The company plans to open 12–16 Lime Fresh restaurants, as well as transform 5–7 company-owned Ruby Tuesday restaurants to Marlin & Ray’s. The company also plans to shut down 4–6 company-owned Ruby Tuesday restaurants (excluding conversions).

For 2013, the franchisees of Ruby’s will likely open 10–12 restaurants, among which  10 will be international, and shut down 2–4 restaurants.

Liquidity

Ruby Tuesday ended the quarter with cash and short-term investments of $65.5 million, long-term debt of $310.6 million and shareholders’ equity of $577.5 million.

Share Repurchase

The company bought back 364,000 shares of common stock during the quarter under review at an average price of $6.45 per share. Following the quarter end, it bought back 173,000 shares at an average price of $6.73.

Outlook

For fiscal 2013, management anticipates recording adjusted earnings in the range of 24–34 cents per share and reported earnings in the range of 20–30 cents per share. Comparable-store sales at company-owned restaurants are expected to be in the range of flat to 2.0%.

Restaurant operating margins are expected to expand 150–200 bps. For 2013, free cash flow is guided to be in the range of $20–$30 million.

Our Take

While we prefer the company’s future strategies including improving margins by lowering costs, driving same-restaurant sales through several value offerings, focusing on low capital growth opportunities and returning excess cash to shareholders, its failure to meet the Consensus Estimates in the first quarter concerns us a bit.

In addition, the company’s sales growth has also been sluggish and needs further impetus to surge ahead. Economic uncertainties, stiff competition from peers and continued investment in product offerings as well as marketing initiatives may add to the woes.

Ruby Tuesday, which competes with Texas Roadhouse Inc. (TXRH), currently retains a Zacks #3 Rank, implying a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

 
RUBY TUESDAY (RT): Free Stock Analysis Report
 
TEXAS ROADHOUSE (TXRH): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research