2Q Loss Widens at Ruby; Outlook Dim

Ruby Tuesday Inc.’s ( RT - Snapshot Report ) adjusted loss of 7 cents per share in the second quarter of 2013 matched the Zacks Consensus Estimate but was wider than the year-ago loss of 3 cents per share. Lower sales especially in the latter part of the quarter along with higher maintenance expenses hurt adjusted earnings.

Revenues in the quarter slipped 1.0% year over year to $304.2 million. However, revenue beat the Zacks Consensus Estimate of $303.0 million.

The year-over-year downside in revenue was due to permanent closure of 29 company-owned Ruby Tuesday units in the quarter, which fully offset the positive impact of same restaurant sales increase at Ruby Tuesday concept and unit growth at Lime Fresh and Marlin & Ray's.

Behind the Headline Numbers

The casual dining restaurant operator posted a 0.3% upside in comparable store sales at company-owned restaurants while its franchised division saw 0.2% expansion in comps.

Restaurant level operating margin enhanced 170 basis points (bps) year over year to 16.1% attributable to a downside in payroll and related expenses and cost of goods sold, partially offset by an increase in other operating costs and depreciation.

Alongside benefiting margins, efficient cost containment coupled with lower coupon expenses is also financing the company’s television marketing programs to some extent.

Store Update

During the quarter, the company opened two Lime Fresh company-owned restaurants. It also shut down two company-owned Ruby Tuesday stores. Domestic and international franchisees opened one and closed two Ruby Tuesday outlets.

The company also plans to open 10???12 Lime Fresh restaurants and close two Lime Fresh restaurants, 13 Marlin & Ray’s restaurants, one Wok Hay restaurant, six to eight Company-owned Ruby Tuesday restaurants as well as sell two Truffles Grill restaurants, in 2013. The company’s decision for the massive divesture is intended to attain optimum capital allocation.

Liquidity

Ruby Tuesday ended the quarter with cash and short-term investments of $25.6 million, up from the year-ago cash balance of $9.0 million. Total book-debt of $309.0 million was also down year over year by around $33.0 million.

Share Repurchase

he company bought back 2.4 million shares of common stock during the quarter under review at an average price of $7.33 per share. Following the quarter end, the restaurateur repurchased an additional 400 thousand shares at an average price of $7.91.

On January 8, 2013, Ruby’s board expanded the share repurchase authorization by 10 million shares, resulting in 12.7 million shares available for repurchase at present.

Outlook

For fiscal 2013, management lowered its same-store sales at company-owned restaurants guidance to flat from the range of flat to growth of 2.0% projected previously.

While management reaffirmed its anticipation of recording adjusted earnings in the range of 24–34 cents per share, it slashed its reported earnings expectation to the range of a loss of 3 cents to a gain of 3 cents from the prior range of 20–30 cents per share guided earlier.

New CEO transition expenses and CEO pension settlement expense; second quarter impairment charges and third quarter lease and other charges were responsible for the above cut.

Restaurant operating margins are expected to expand 150–200 basis points (bps) (reaffirmed). Free cash flow is expected to be in the range of $10–$20 million lower than the prior expectation of $20–$30 million.

Our Take

After missing Zacks estimates for last two consecutive quarters, Ruby Tuesday managed to meet the Consensus Estimate this time though losses were substantially higher year over year. Additionally, its persistent struggle to post sales growth also concerns us.

While we prefer some of the company’s operational strategies such as improving margins by lowering costs as well as driving same-restaurant sales that too amid such a competitive setting and the closure of underperforming units, the efforts are yet to pay off.

Economic uncertainties, stiff competition from peers and continued investment in sales driven initiatives which may lower margins add to our worry.

Ruby Tuesday currently retains a Zacks Rank #4 (Sell). However, restaurateurs currently performing well include Bob Evans Farms Inc. ( BOBE - Snapshot Report ) and Krispy Kreme Doughnuts Inc. ( KKD - Snapshot Report ) . Both the companies carry a Zacks Rank #1 (Strong Buy).