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On the Margin
Ruby Tuesday

5 reasons Ruby Tuesday had to be sold

Blog: Falling sales, declining units and a tough segment make comeback difficult

This post is part of the On the Margin blog.

Ruby Tuesday Inc. is a much different company today than it was a decade ago. Specifically, it's a lot smaller and serves a lot fewer customers.

Since 2007, the Maryville, Tenn.-based casual dining has lost more than a third of its locations. Its system sales are down 50 percent. It last made a profit during Barack Obama’s first term.

The company has gone through several chief executives. It created chains and closed them. It bought one chain and sold it for half the purchase price.

On Monday, Ruby Tuesday was finally sold to a private investor in NRD Capital, which is paying $2.40 a share for a chain that once traded at $30 in a deal giving Ruby Tuesday an enterprise value of $335 million.

The company said it plans to take a “long-term view” of Ruby Tuesday and hopes to get the chain back on its feet outside the glare that comes with being a publicly traded company.

Here are five reasons why that needed to happen:

Same-store sales have been falling for years. Ruby Tuesday’s same-store sales began declining in about 2006. Those declines are generally viewed as the first real sign that casual-dining chains were in trouble.

The declines have had a real impact on unit volumes at the casual dining chain, which have fallen by more than 20 percent over the past decade. That’s substantial, especially considering the number of locations has fallen by more than a third — meaning the chain has taken out its underperforming locations.

That sales weakness has continued this year. Traffic fell 9.4 percent in the quarter ended Sept. 5. That’s bad for a chain that is already among the weakest full-service concepts based on unit volumes. Ruby Tuesday’s unit volumes were less than $1.6 million, according to SEC filings. Only a half-dozen full-service chains have lower unit volumes, according to the NRN Top 200.

Bar & grill chains are on the outs. Ruby Tuesday operates in a sub-sector of the restaurant business that is in steep decline. Bar & grill chains Applebee’s, Chili’s, TGI Friday’s and Ruby Tuesday were among the hottest restaurants in the country in the 1990s and into the 2000s. But these days their sales are declining, as the chains are changing management and looking for ways to get sales back in a positive direction. 

Bar & grill chains likely have to close hundreds of units to get supply more in line with current demand. The challenges with the bar & grill sector make it all the more difficult for Ruby Tuesday to make a comeback.

It’s more valuable as a real estate play. The sale to NRD gives Ruby Tuesday an enterprise value of $335 million. Its property and equipment assets are valued at $583 million, according to SEC documents. In other words, Ruby Tuesday the chain is worth negative $248 million.

To be sure, listed property values on balance sheets tend to be generous and the liquidation value is likely much lower (Please, no explanatory emails). But it illustrates where Ruby Tuesday’s value is, and it’s not in the casual-dining brand.

If Ruby Tuesday had leased its space, the company likely would have filed for bankruptcy and would have been sold for a much smaller price than it fetched on Monday.

The chain is losing money. Ruby Tuesday lost $106 million and $50.7 million in the past two years, respectively. In fact, the chain hasn’t reported an annual profit since 2011.

The company has survived those losses by selling off real estate and closing stores. The losses have also kept the company from making the investments some of its rivals have made to improve operations. 

Of course, given that none of their rivals are doing much to generate sales growth, who knows whether it would have helped?

The company has a history of strange moves. As Ruby Tuesday’s sales struggled, executives started or made investments in secondary concepts, including an Asian concept, Wok Hay, and a seafood concept, Marlin & Ray’s. It converted one Ruby Tuesday location into a Jim ‘N Nick’s Bar-B-Q before abandoning the plan.

In 2012, the company acquired Lime Fresh Mexican Grill for $24 million. It sold the assets four years later in a pair of separate deals totaling $10.6 million. 

Amid this, former CEO Sandy Beall tried upscaling the brand. His successor, J.J. Buettgen, returned the concept to its mid-scale roots. Neither effort worked.

What, exactly, NRD plans to do with its casual dining brand remains to be seen. But its task will not be easy.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

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