Ruby Tuesday, Darden in the Spotlight

 | Oct 14, 2013 | 8:00 AM EDT
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The debt ceiling debacle may be stealing the spotlight this week, but let's not forget that last week was also the unofficial kickoff of the latest earnings season. Among those dishing out results early on this season was the popular restaurant conglomerate Ruby Tuesday, Inc. (RT).

It was a dismal fiscal quarter for this parent company of Ruby Tuesday and the casual dining restaurants Lime Fresh Mexican and Wok Hay. Same stores sales fell 11.4% at company-owned restaurants and 8.4% at its franchises year-on-year. Shares in Ruby Tuesday were trading at $7.55 at the close heading into earnings on Wednesday afternoon, October 9th. By Friday's close they were down nearly 19% to $6.12/share.

Ruby Tuesday investors are used to feeling the heat. The company has a history of wide percentage swings and had plummeted in 2007 out of a trading range that swung $6 to $7 on either side of $27/share for four years. It continued its descent into the start of 2009 to strike a low that was nearly $1/share.

Despite recovering to $15/share by early 2011, the gains were short-lived and the company has traded between $5 and $10 since. The most recent blow, however, threatens to dislodge it from the monthly trading channel it has held since the second half of 2011.

Ruby Tuesday's new chief operations officer has his work cut out. Todd Burrowes stepped into the role in June. Burrowes had spent the past five years as the executive vice president of operations for Darden's  LongHorn Steakhouse brand. As it stands now, the technicals for Ruby Tuesday suggest that the company will continue to face downward pressure throughout the rest of 2013 as well as 2014. A return to $2 to $3 share within that time frame is not unreasonable unless Burrowes and the rest of chief executive J.J. Buettgen's team can manage to pull a rabbit out of their hat.

This summer Buettgen stated that Burrowes would be "instrumental" in leading their "efforts to reposition the Ruby Tuesday brand, creating a livelier and approachable guest experience." It may have a shot, but it's going to take time.

By contrast, Darden Restaurants (DRI) had so far succeeded where Ruby Tuesday has failed. Although it also came under pressure in 2007, its recovery since hitting lows in 2008 saw the company's shares striking new all-time highs for three years in a row between 2010 and 2012. While Ruby Tuesday's shares fell sharply last week, shares in Darden jumped more than 7% last Wednesday and were up over 8% for the week as a whole by Friday's close.

Darden's move last week was not the result of earnings. Instead, the move followed the announcement of a new ownership stake from Barrington Research. There was also speculation that Darden will finally move to split up the company's assets between the slow-growing assets of its Red Lobster and Olive Garden brands, and its high-growth, high-expansion specialty assets such as Bahama Breeze and The Capital Grille.

The talk revolves around pushing to free Darden from its "Ruby Tuesdays." Darden reported its quarterly earnings on September 20. It also missed and fell sharply as a result. Same-store sales at the Olive Garden were down 4.0 for the reported quarter, while they fell 5.2% at Red Lobster. They were up 2.7% for Bahama Breeze, however, and up 3.2% for The Capital Grille. Burrowes's Longhorn Steakhouse posted same-store sales of up 3.2%.

Despite new all-time highs as late as last fall and last week's spike in share price, Darden is hardly a "safe bet." The pivot that took place in late 2012 off those highs triggered a major monthly corrective pattern I refer to as a "Momentum Reversal," and since then we've been seeing the development of the potential continuation of that strategy as the company bounces for the second time off lows since its 2012 reversal.

If the pace of this latest daily rally were to slow quickly, the pattern for the monthly continuation on the downside could confirm with a break in the triangle that has also been forming on this time frame by year's end. Even if the bulls do continue to hold on heading into early 2014, due to the monthly Momentum Reversal, another break to new all-time highs within the next year would most likely be a bull trap.

So, while the charts for both Ruby Tuesday and Darden Restaurants suggest that the bulls face a struggle ahead, both companies are in the middle of some potentially game-changing moves that just might turn things around. For Darden, those potential changes could have an impact soon rather than later. For Ruby Tuesday, it will be "wait and see..."

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