Ruby Tuesday's Big Bump Tuesday Can't Mask Chain's Pain

 | Mar 15, 2017 | 11:00 AM EDT
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In what was a fairly humdrum day in the markets, there was probably more excitement caused by the weather in the Northeast than by yesterday's trading activity. Thankfully, we were spared from the expected foot of snow and got about four inches in our area, which means that consensus estimates missed badly. That's one miss that was greatly welcomed. That snow was heavy.

In the land of downtrodden smaller names, there was one interesting piece of news that broke Monday after market's closed and exerted its influence in yesterday's trading. Shares of real-estate rich but otherwise struggling casual dining restaurant chain Ruby Tuesday (RT) shot up 24% on the day on more than 12x normal average volume. This jump was driven by the announcement that the company is "exploring strategic alternatives in order to maximize shareholder value and position the business for long-term success."

That news did not faze me one bit. In my view, Ruby Tuesday has been exploring strategic alternatives for much of the past 10 years as it has struggled to find its place in the crowded casual dining space. However, this announcement made it official as Ruby Tuesday is retaining UBS as its financial advisor.

We also got bits and pieces of what the company's fiscal third quarter, which ended Feb. 28, will look like with the release of preliminary results. Revenue was put at nearly $226 million, up $11 million from the second quarter but down about $46 million from last year -- not all that surprising given recent restaurant closures. Same-store sales were down about 4%. Cash fell from $38.6 million to $32.6 million, which on the surface is better than I would have expected. However, without the benefit of additional fundamental data, it's difficult to label this as positive.

As of the end of last quarter, the company owned 269 locations (land and building) that still were operating. As of yesterday's close, the company's enterprise value (market cap plus debt minus cash) was just $314 million, or just under $1.2 million per owned/operating location. At that time, there were also 25 properties being sold, with average expected net proceeds of $1.6 million each. I hope more detail and updates as to the current status of real estate transactions will be available on the next earnings call.

Thankfully, most of Ruby Tuesday's $223 million in debt does not mature until 2020. However, it is becoming quite clear that the company's days in its current form are numbered.

While no data are available yet on the success (or lack thereof) of the company's Garden Bar initiative, it clearly is fighting an uphill battle in what is a difficult competitive market for restaurants. Ruby Tuesday's days of trying to rebrand, alter the menus, or update stores may be coming to an end. The question now is how does this end -- a sale to private equity, acquisition by another chain seeking to expand somewhat cheaply, a slow and painful piece-by-piece dismantling of the real estate, or worst case, bankruptcy?

Time will tell, and UBS has its work cut out for it, but hopefully this will be done with a sense of urgency that will extract remaining value for shareholders.

As exciting as yesterday's 24% pop may have seemed, RT shares are still down 33% year to date.

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