The downward spiral continues at casual-dining chain Ruby Tuesday (RT), where shares have lost some 20% year to dates. The company certainly hasn't helped things by continuing to post lackluster earnings, nor by failing to take meaningful steps to put itself back on consumer's radar screens.
RT's fiscal third-quarter results came out last week, but were more of the same for the struggling chain, missing both top- and bottom-line expectations. The company booked $271.5 million of revenues vs. analysts' $284 million consensus estimate, while Ruby Tuesday had $0.03 earning per share instead of the $0.05 that analysts had expected.
Management attributed the shortfall to a combination of competitors' promotions and bad weather. You've gotta love it when companies blame the weather.
The truth is that Ruby Tuesday is simply lost in a sea of casual-dining choices and hasn't done enough to differentiate itself and put customers into seats. This has been an ongoing issue since RT nearly imploded in 2008-2009. Menu changes haven't worked, nor have efforts to redesign stores.
Now, I've probably had three or four meals at various Ruby Tuesday locations over the past four years or so. I never got a bad meal; in fact, the food was quite good. However, the chain just isn't at the top of my list of eateries. There's just no "buzz" or big draw to it.
Of course, restaurant turnarounds are difficult ... but not impossible. Denny's (DENN), Krispy Kreme (KKD), Red Robin Gourmet Burgers (RRGB) and Domino's Pizza (DPZ) have all done it in their own way.
Ruby Tuesday might want to simply steal a few moves from both Domino's and Denny's playbooks. Denny's adopted a refranchising model in which it sold off company-owned restaurants and monetized its real estate assets.
Domino's turned things around by pulling off one of the greatest ad campaigns in restaurant history. The firm admitted that its pizza was lackluster, then went about improving it. The results were amazing -- the pizza got much better and the stock took off. In fact, I'm surprised more struggling companies haven't tried a similar tack.
What Ruby Tuesday still has going for it are real estate assets. The firm owns the buildings that 560 of its restaurants use, as well as the land at 303 locations. This could be a formidable real estate portfolio, but would be even more valuable if RT could show some life and attract more customers.
Still, I believe RT has time on its side, as one smart move the company has made since the dark days of 2008-2009 has been to pay down debt. Ruby Tuesday has cut its debts to just $230 million from around $600 million in 2008. Furthermore, the chain's next big debt maturity ($207 million) doesn't come due until 2020.
But make no mistake about it, Ruby Tuesday is a company in turmoil. The CFO just quit, while the management last week cut fiscal-2016 EPS guidance to just 5 to 8 cents from a previously projected 12 to 17 cents.
The Bottom Line
Despite all of the above, Ruby Tuesday still looks interesting to me from an asset perspective. Debt maturity isn't an imminent threat, while the company ended its latest quarter with $45 million in cash. RT's $460 million enterprise value could also be low when factoring in all of the company's real estate.
Still, I have yet to pounce because there might be an even-better entry point to come given investors' widespread dislike for the company. But Ruby Tuesday isn't for the faint of heart, as Wall Street is littered with the corpses of failed restaurant chains.
Here's my suggestion to management: Pour money into a complete transformation of the brand, starting with a name change. Then, do a Domino's-style "We're Sorry" ad campaign. If that doesn't work, sell the chain's real estate and equipment and call it a day.
