Tough 2005 for Ruby Tuesday

Most of us rang in 2005 only a few days ago, but shareholders of Ruby Tuesday (NYSE: RI) flipped to the fiscal 2005 calendar last June. And thus far, the restaurant chain has found little cause for celebration. Last summer, it had just capped off a terrific year: Profit margins expanded by 150 basis points, same-store sales were higher, and earnings jumped by around 20% to $1.64 on revenues that pierced the $1 billion mark -- with both of those measures reaching record highs. Since then, things have gone pretty much all downhill.

Signs of trouble first surfaced in September, when the company scaled back its short-term earnings outlook. A few weeks later, Ruby Tuesday posted first-quarter results in line with the recently reduced guidance, but it also warned of further weakness ahead and slashed its full-year earnings and same-store sales projections. The reduced forecast promptly sent the stock tumbling down by more than 15%, to a new 52-week low.

Last month, the company revealed that same-store sales had slipped even lower, with September, October, and November comps declining 8.9%, 8.7%, and 8.1%, respectively, at company-owned restaurants. The second-quarter preview, much like the first, warned of an impending earnings shortfall. In fact, the company backed off its full-year outlook and didn't provide any updated figures.

That brings us to Ruby Tuesday's actual second-quarter results, released this morning. Anyone accustomed to reading press releases has probably discovered that management likes to trumpet any good news -- usually in a bold 18-point font -- right in the headline, while less noteworthy results are buried somewhere lower. Today's headline mentioned only an accounting adjustment, which didn't bode well for the numbers that followed.

As expected, the rest of the news was lackluster at best. Here's a quick summary: Earnings were down 30% (including a one-time charge of $0.07) to $0.23, from $0.33 a year ago. Same-store sales fell 8.6%, with average unit volumes sinking 9.1%. Overall revenues, though, did rise 5.7% to $254.7 million.

The casual-dining sector as a whole has been feeling a slowdown lately. Same-store sales at Applebee's (Nasdaq: APPB), for example, have shown a few signs of slimming down. Ryan's (Nasdaq: RYAN) has also been on something of a downswing lately. Brinker (NYSE: EAT) reported lower first-quarter earnings and declining comps at its Chili's and Macaroni Grill chains.

Nevertheless, Ruby Tuesday's woes can largely be traced to its own actions. The company didn't win any friends when it reduced portion sizes last spring, although it has since changed course. The biggest problem, however, is a transition away from promotional coupons and toward traditional television-based advertising. Estimates suggest that the lack of coupons -- which drove $6 million in redemptions during last year's second quarter -- had a -5% impact on comps.

This marketing campaign doesn't appear to be resonating with consumers, but such things do not pay off overnight, and management is committed to spending an additional $3 million-$4 million on advertising this year. Still, it may be a while before Ruby Tuesday gets back on track, as management conceded that positive comps may not arrive before next year's second quarter.

Fool contributor Nathan Slaughter enjoys Ruby Tuesday's salad bar but owns none of the companies mentioned.