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Ruby Tuesday Just Used the ‘R’ Word

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Ruby Tuesday (NYSE: RT  ) is not having a good year. Revenue, same-store sales, cash, and just about every other financial metric have been in a downward spiral. It seems that the only thing that's been increasing is Ruby Tuesday's net losses. Given the dire situation of the business, the last thing investors want to hear is the word "restructuring."

On Nov. 20, Ruby Tuesday issued a press release announcing "initial" cost structure changes and operating expense reductions. The company said this is the "first" step in the process. While it's always good to know that a company is committed to reducing its expenses, oftentimes when the word "restructuring" is used, it's leading up to a bankruptcy filing.

CEO JJ Buettgen stated:

Restructuring is difficult, and we greatly appreciate the contributions of the teammates that have been affected. These organizational changes were implemented to ensure we are strongly positioned to invest in brand repositioning initiatives, and we are aggressively focused on lowering our cost structure with no dilution to the guest experience. I am confident in our brand transformation strategy, and in the ability of our talented teams in Operations and the Restaurant Support Center to successfully execute our plans.

Do you know what was missing from this statement? There wasn't any mention of any commitment to the shareholders. Ruby Tuesday is clearly focused on "the guest experience," but what about the owners of the company, the common shareholders?

The press release noted that these actions will reduce Ruby Tuesday's overhead by $6 million per year starting in fiscal 2015. That comes out to an average of $1.5 million per quarter. Hey, it's a great start, but we're talking about a company that had $37 million in selling, general, and administrative costs alone last quarter along with a $21.9 million loss from continuing operations. At this rate, the company will be broke by 2015.

Last quarter results
Ruby Tuesday reported its most recent quarterly results on Oct. 9. Overall sales dropped 11.7%. Same-store sales dropped 11.9%. The earnings per share loss from continued operations was $0.39. Cash was down to under $36 million while total liabilities were over half a billion dollars.

Ruby Tuesday hired an unnamed "leading enterprise improvement consulting firm." It seems like it may be cushioning the blow for a bankruptcy filing. Last month, two executives quit the company without explanation. Senior VP Robert LeBoeuf and chairman of the board Matthew A. Drapkin both left almost at the same time. Drapkin sold 1.4 million shares of stock in the open market.

What was also missing from this most recent press release was any assurance of improved sales, guest traffic, or anything else. This is not very encouraging especially at a time when some of Ruby Tuesday's competitors are starting to see the light at the end of the bad economic tunnel. Burger joints Red Robin Gourmet Burgers (NASDAQ: RRGB  ) and Sonic (NASDAQ: SONC  ) are seeing green while Ruby Tuesday is seeing nothing but red.

Red Robin Gourmet Burgers saw revenue jump 8.1% last quarter with same-store sales up 5.7%. Its net income leaped by 34%. CEO Steve Carley credited the success to changes in menu, presentation, new marketing approach, and brand focus. This is similar to what Ruby Tuesday is trying to do but Ruby Tuesday is failing.

Similarly, Sonic saw same-store sales climb up by 5.9% and its adjusted EPS shot up by 20%. Sonic management credited the success in part to "more media, more products, and more promotion." Maybe Ruby Tuesday should hire Sonic to help it out instead of a "leading enterprise improvement consulting firm."

Foolish final thoughts
While I do hope Ruby Tuesday is successful in its turnaround, I wouldn't touch the stock as an investment with a ten-foot pole for now. The warning signs are piling up with no obvious light at the end of its dark tunnel. There are plenty of other restaurants to consider for investment such as Red Robin Gourmet Burgers and Sonic that come with much fewer concerns and risks.

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Related Tickers

5/25/2016 4:02 PM
RT $3.97 Up +0.06 +1.53%
Ruby Tuesday, Inc. CAPS Rating: **
RRGB $50.62 Up +0.89 +1.79%
Red Robin Gourmet… CAPS Rating: ***
SONC $29.84 Up +0.26 +0.88%
Sonic Corp CAPS Rating: **