Maryville, Tennessee – based Ruby Tuesday Inc. ( RT - Snapshot Report ) reported a loss of 3 cents per share in second quarter 2012, narrower than the Zacks Consensus Estimate of a loss of 6 cents and management’s guided range of a loss of 4-8 cents. However, the company’s result compared unfavorably with the year-ago quarter earnings of 7 cents.

Total revenue in the quarter perked up 5.9% year over year to $307.5 million.The year-over-year upside in revenue was attributable to franchise partnership business acquisitions in 2011.

Inside the Headline Numbers

Restaurant sales were up 6.0% to $306.2 million, while franchise revenues plunged 16.4% to $1.3 million owing to the franchise partnership acquisitions.

The casual dining restaurant operator posted a 4.2% decline in comparable store sales at company owned restaurants due to tough year-over-year comparison. The plunge in comps was higher than management’s expectation of a 2–3% dip in same-store sales.

Comparable store sales at domestic franchised restaurants also dropped 6.0%.

Restaurant level operating margin contracted 160 basis points (bps) year over year to 13.5% (as a percentage of company-operated restaurant sales) due to a 70-bp upside in payroll and related costs to 35.2%, a 20 bp jump in other restaurant operating costs to 20.9% and a 60 bp rise in cost of merchandise to 29.9%.

The company has also begun executing its sale-leaseback strategy to raise $50 million in gross proceeds through the sale and leaseback of approximately 25 locations. At the end of the quarter, Ruby completed a sale-leaseback transaction on one property, resulting in $2.3 million in gross proceeds. The company is currently in talks with potential buyers of another 17 to 19 restaurants, some of which may close during the third quarter.

Stores Update

During the quarter, the company did not open any new company-owned restaurant, but closed down one. The company opened a domestic and international franchised restaurant each in the quarter, but closed down nine.

For 2012, the company plans to close three to five company-owned restaurants, convert six to eight company-operated restaurants into other high-quality dining concepts and open one new Truffles Grill restaurant. Ruby Tuesday is also planning to open six to eight Lime Fresh Mexican restaurants.

The company plans to open seven to nine franchised restaurants in 2012, out of which six will be in the international market. Ruby Tuesday also expects to close 15 to 17 restaurants, out of which 14 will be in the international market.

Financial Position

Ruby Tuesday ended the quarter with cash and short-term investments of $8.9 million, long-term debt of $324.8 million and shareholders’ equity of $578.6 million. Capital expenditures at the end of the quarter were $12.3 million.

Outlook

For fiscal 2012, management expects earnings in the range of 55 cents to 65 cents per share, as compared to the previous expectation of 60 cents to 75 cents, and comparable-store sales at company-owned restaurants to dip 2% to 4%, up from the earlier forecast of flat to down 2%. Restaurant operating margins are expected to contract slightly. For 2012, capital expenditures are estimated between $33 million and $37 million and free cash flow in the range of $90 to $100 million.

For the third quarter of 2012, the company estimates earnings in the range of 12 cents to 16 cents per share due to higher advertising and interest expense.

Ruby Tuesday expects strong profitability in the fourth quarter with revenue being the highest in the year benefiting from expansion in restaurant-level margins due to cost-savings programs, an extra week in the quarter and additional EPS leverage from share repurchase program.

Our Take

We remain enthusiastic about 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.

However, uncertainty in the economy, stiff competition from peers and continued investment in product offerings as well as other initiatives may strain its margin and cash flow generation.

Ruby Tuesday currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.

One of Ruby Tuesday’s primary competitors, Morton’s Restaurant Group, Inc. ( ) posted an adjusted loss of 11 cents per share in the third quarter of 2011, in line with the Zacks Consensus Estimate. The company's loss comes in the wake of a seasonally weak third quarter.