Ruby Tuesday Beats by a Penny

Ruby Tuesday Inc.(RT - Snapshot Report) reported adjusted earnings of 18 cents per share in third quarter 2012, beating the Zacks Consensus Estimate by a penny and also ahead of management’s guided range of 12-16 cents per share. However, reported earnings compared unfavorably with the year-ago quarter earnings of 24 cents.

Total revenue in the quarter perked up 1.8% year over year to $324.8 million.The year-over-year upside in revenue was attributable to franchise partnership business acquisitions in 2011, partially offset by a drop in comparable restaurant sales.

Inside the Headline Numbers

Restaurant sales were up 2.0% to $323.5 million, while franchise revenues plunged 28.5% to $1.4 million owing to the franchise partnership acquisitions.

The casual dining restaurant operator posted a 5.0% decline in comparable store sales at company-owned restaurants, due to heavy promotional activities by competitors to drive traffic. Comparable store sales at domestic franchised restaurants also dropped 5.8%. However, to drive traffic, the company is now focusing more on marketing with increased television advertising.

Restaurant level operating margin slipped 10 basis points (bps) year over year to 16.9% (as a percentage of company-operated restaurant sales) due to a 110-bp upside in payroll and related costs to 34.6%, partially offset by a 110-bp dip in other restaurant operating costs to 19.6% and a 50-bp decline in cost of merchandise to 28.8%.

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 by the end of first quarter of 2013. At the end of the quarter, Ruby completed a sale-leaseback transaction on eight properties, resulting in $17.5 million in gross proceeds. Ruby Tuesday plans to use the proceeds for debt reduction and capital expenditure.

Stores Update

During the quarter, the company did not open any new company-owned restaurant, but closed down one restaurant. The company openedtwo domestic and international franchised restaurants in the quarter, but closed down four.

For 2012, the company plans to close 31-33 company-owned restaurants, convert 8-10 company-operated restaurants into other high-quality dining concepts and open one new Truffles Grill restaurant. Ruby Tuesday is also planning to open 6-8 Lime Fresh Mexican restaurants. During the fourth quarter, company plans to close 25 to 27 underperforming company-owned units.

The company plans to open six to eight franchised restaurants in 2012, out of which five will be in the international market. Ruby Tuesday also expects to close 18 to 20 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 $292.6 million and shareholders’ equity of $584.4 million.

Outlook

For fiscal 2012, management expects adjusted earnings in the range of 43 cents to 48 cents per share versus the previous expectation of 55 cents to 65 cents per share, and comparable-store sales at company-owned restaurants to dip 4% to 4.5%, up from the earlier forecast of down 2% to 4%. Restaurant operating margins are expected to contract slightly. For 2012, capital expenditures are estimated between $35 million and $37 million and free cash flow in the range of $75 to $85 million.

Ruby Tuesday expects same-store sales to benefit from higher television advertising and restaurant-level margins to expand due to cost-savings programs, resulting in annualized savings of $35 to $40 million.

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. Additionally, the acquisition of Lime Fresh Mexican Grill, a fast casual concept, is also promising.

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