What’s Really Going On with Ruby Tuesday?

On Oct. 9, 2013 Ruby Tuesday (NYSE: RT  )  reported is fiscal first quarter 2014 results. Same-store sales plunged 11.4% at company-owned restaurants and 8.4% at franchises. The company offered little explanation for the poor performance in either its earnings release or its conference call other than blaming the economy. A closer examination, however, reveals what the real culprit might be.

First, let's rewind to Jan. 9, 2013. On that date, Ruby Tuesday reported its results for the second quarter ending on Dec. 2, 2012. It was the second quarter in a row of positive same-store sales growth, but it also marked the last time Ruby Tuesday reported positive same-store sales growth. Despite what was described even then as a "challenging economic environment," it forecasted at least flat same-store sales for the remainder of the year. Instead, company-owned same-store sales went from bad to worse. For its fiscal third quarter they were down 2.8%, and in the fourth quarter they were down 3.1%. By the most recent quarter they were down 11.4%. That's not a good trend.

Can't blame the economy
What changed so drastically so fast? The menu, service, ambiance, and prices haven't changed that much, at least not enough to warrant such a quick decline. Was it really simply the economy? That's a hard pill to swallow considering that others in the casual dining space haven't experienced anywhere near the same trouble.

For example, Buffalo Wild Wings (NASDAQ: BWLD  ) reported that same-store company-owned sales increased 3.8% for its second quarter, with a 1.5% increase for its third quarter so far. Nowhere in its earnings release or its conference call did Buffalo Wild Wings even mention the economy as any sort of headwind.

Likewise, The Cheesecake Factory (NASDAQ: CAKE  ) reported that same-store sales were up. Though it was more modest at a 0.8% increase, it was the fourteenth consecutive quarter of positive same-store sales growth. Additionally, The Cheesecake Factory expects its fiscal third quarter results to show quarter number 15 of same-store sales growth. Given these examples from competitors, it's hard to accept that the economy alone stopped Ruby Tuesday from being successful.

That leaves marketing as the only suspect left. In Ruby Tuesday's most recent conference call, CEO James Buettgen stated, "Over the past 10 months, we've taken numerous actions that we believe should lead to the stabilization and growth of the company over the longer term. We put in place a highly skilled and experienced senior management team that is working together to lead an integrated effort, our operations, culinary, finance and marketing teams to execute our strategic plan to reposition the Ruby Tuesday brand, and to deliver a more casual, approachable and energetic dining experience."

Stop right there. Ten months ago on the nose was the last quarter that Ruby Tuesday reported positive same-store sales growth, and that was just before the marketing and brand changes. Coincidence? With its next quarter results in April, its CEO stated, "I am pleased with the progress we have made in evolving the Ruby Tuesday brand over the past quarter." That evolution happened at the same time same-store sales began to implode. Then in July he stated, "Our strategy and plans to transform Ruby Tuesday into a more broadly appealing, vibrant, and energetic brand."

Can't he see that this strategy is backfiring? It's the only company-wide change that began at the same during the sales implosion. Now he's saying, "Our strategic plan to reposition the Ruby Tuesday brand, and to deliver a more casual, approachable and energetic dining experience." Maybe it's too casual, and it's alienated its niche customer that used to enjoy Ruby Tuesday for the quiet, slightly formal place it was. Clearly something about the new strategy isn't paying off.

Final foolish thoughts
The culprit is clearly the company's marketing strategy. Rebranding a company's image, especially a restaurant, can backfire and lead to disastrous results. Ruby Tuesday appears to be learning that the hard way while its management is in public denial. Caution is advised regarding Ruby Tuesday until we see hard numbers that its rebranding and marketing efforts are gaining positive traction.

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