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Analysts weigh in on probability of a Ruby Tuesday turnaround

Analysts weigh in on probability of a Ruby Tuesday turnaround

Editor’s note: Analyze This is a new, quarterly report taking a look at a publicly traded restaurant company that has sparked discussion—for better or worse—among the securities analyst community. The analyst comments do not necessarily reflect the views of Nation’s Restaurant News nor should any statement be construed as a recommendation to buy or sell any security.

MARYVILLE TENN. Ruby Tuesday Inc., operator or franchisor of 942 casual-dining restaurants, reported April 2 a 59-percent plunge in third-quarter net income as declines in sales and guest traffic continued to challenge the struggling chain. —

(To view the charts featured in this week's print issue, click here)

For the 13 weeks ended March 4, net income slipped to $11.7 million, or 23 cents per share, from $28.7 million, or 49 cents per share, a year earlier. —

Quarterly revenue fell 7.1 percent to $351.2 million. Same-store sales fell 12.7 percent at corporate restaurants and 12 percent at domestic franchised units. —

The company booked expenses of 6 cents per share for the year-long rebranding initiative undertaken to upgrade its image. The company has completed remodels at more than 600 of its 721 corporate locations. —

Despite the weak financial results, Ruby Tuesday said it was at “a turning point” for the chain, in terms of efforts to build its average check and manage costs. —

BB&T Capital Markets analyst Barry Stouffer

Even though Ruby Tuesday has essentially completed the majority of its remodeling program in hopes of moving out of the bar-and-grill segment and toward the more upscale casual-dining arena, Stouffer maintains a “Hold” on the stock. —

“Management believes its strategies to upscale the brand are beginning to gain traction as evidenced by the significant improvement in customer satisfaction scores for price/value, food quality, service and ambiance,” he said. “But if the proof is in the pudding, Ruby Tuesday’s dismal sales trends should either be better than they are, or begin showing dramatic improvement soon.” —

Wachovia Capital Markets LLC analyst Jeff Omohundro

Omohundro remained concerned about the “sharply negative sales trend” at Ruby Tuesday. Still, he said, the gap between Ruby Tuesday’s same-store sales results versus casual-dining’s overall results, as measured by Knapp Track, did improve in March. —

“We are cautiously optimistic that this could be an early sign of improvement in traffic trends at the chain in this challenging economic environment,” Omohundro said. “The relative improvement in traffic trends might be a sign of the company’s reimage initiative beginning to gain traction with some consumers.” —

Omohundro lowered his fourth-quarter and fiscal 2009 profit expectations for the company, on the negative sales trends and increased operating costs. —

Morgan Keegan & Co. analyst Robert Derrington

Citing lower same-store sales results and weaker operating margins, Derrington lowered his projections for the company for the current fourth quarter, but did hint at the possibility of a “dramatic turnaround” for the chain in fiscal 2009, which begins in June. —

“Given past remodeling, marketing and menu upheaval, Ruby’s operations could be poised to stabilize [and] same-store sales to benefit,” Derrington said. “We project Ruby Tuesday to generate [about] $100 million of free cash flow in FY’09, likely earmarked to reduce debt.” —

Ruby Tuesday said it risked default on bank loans because its earnings-to-debt ratio was too high. In its latest report, it said it was working with lenders to change covenants and had reached an agreement that will be detailed later this month. Its debt load is about $612 million. —

MKM Partners analyst Stephen Anderson

Anderson said the chain should perhaps think more about its value offerings in today’s challenging consumer environment. —

“We think management still is fighting the last battle as current economic uncertainties mandate a shift from providing high quality to offering value,” he said, “particularly in the bar-and-grill segment.” —

He estimated that Ruby Tuesday’s average prices are 5 percent above Applebee’s, Chili’s and T.G.I. Friday’s, which is why, he added, Ruby Tuesday’s sales are behind those concepts. —

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