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All Sizzle, No Steak At Ruby Tuesday

Posted: Jul 14, 2008 10:54 AM by Glenn Curtis

Tickers in this Article: DRI, EAT, RT

In the past I've been pretty hard on casual dining chain Ruby Tuesday (NYSE:RT). The last piece I penned on the Tennessee-based company back in April was titled "Ruby Tuesday A Car Without An Engine", which pretty much says it all.

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However, last week Ruby Tuesday reported a fourth-quarter profit of 27 cents a share. This was a head turning 7 cents north of analyst estimates. Meanwhile, in fiscal 2009 the company expects to earn 50-70 cents a share. Not too bad for a company that trades for about $6.24 a share, right? I can almost hear the Ruby Tuesday bulls yelling "scoreboard" in mockery of my prior call, but is Ruby Tuesday's stock really worth buying at this point? Let's explore. (For more on analyst estimates, read Do-It-Yourself Analyst Predictions.)

Where's The Beef?
The first thing that stood out from earnings release was a 10.3% drop same restaurant sales (similar to same store sales for a retailer) for company-owned restaurants in the period, and a 7.2% drop at domestic franchises.

These declines are a very bad sign, especially when you consider that the company was going up against an easy number. Its same-restaurant numbers in the comparable period last year were down 3.9% at company-owned locations and down 2.1% at domestic franchise stores.

Before I'm convinced that the stock is worth buying I want be confident that these numbers are going to start trending the other direction, and right now I'm not feeling the love. According to the recent earnings statement, in fiscal 2009 same-restaurant sales are expected to decline at a rate in the low to mid-single digits for the year, improving sequentially throughout the year. The company expects first-quarter same-restaurant sales to be down 8-9%.

The casual dining space isn't in the best health, but I still I think it's important to consider how other well-known players have been faring. Brinker International (NYSE:EAT), which is known for its Chili's concept, saw its same-store-sales rise 1.1%. Meanwhile, Darden (NYSE:DRI) saw its Red Lobster's U.S. same-restaurant sales drop only 0.2%, and its its U.S. same-restaurant sales increased 5.8% for Olive Garden.

Can't Count on 2009 Forecast
Earnings of 50-70 cents a share sound good for a mid-single digit stock. It also sounds pretty decent given that the company put up 51 cents a share this past year. But, can we really bank on those numbers that management provided?

The economic environment is hardly encouraging. It's impossible to predict what will happen with consumer spending in the next few months, especially with gas prices rising. Also don't forget about the potential for rising food costs and how that can impact a restaurant's margins.

If budgets do get tighter, Ruby Tuesday will be in real trouble. Casual dining is already a very aggressive market, and if rival chains start to feel the pinch they will respond with couponing and discounts. Some of Ruby Tuesday's patrons could also be pushed to cheaper, fast food alternatives.

Bottom Line
I don't mean to pick on Ruby Tuesday. The fact is that the entire casual dining space is having a tough time. However, I do want to point out that, despite of its better-than-expected numbers and its fairly optimistic outlook for 2009, I will avoid the stock.

Learn to put your money where your mouth is, in our related article Sinking Your Teeth Into Restaurant Stocks.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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