Which Restaurant Turnaround Is a Good Bet Right Now?

Ruby Tuesday, Ignite Restaurant Group and Darden Restaurants could all enhance shareholder value by turning their businesses around--but which is the best pick today?

Jan 6, 2014 at 3:56PM

A successful business turnaround can drive performance improvements that lift a company's share price significantly. Restaurant chains Ruby Tuesday (NYSE:RT), Ignite Restaurant Group (NASDAQ:IRG), and Darden Restaurants (NYSE:DRI) have focused on restructuring efforts that could result in share price gains, which is why 2014 could be quite a year for these three companies.

Ruby Tuesday has plenty on its plate
Ruby Tuesday owns and operates several restaurant chains that include Ruby Tuesday, Lime Fresh Mexican, Wok Hay and GrillMarlin & Ray's. The company's operating results for the first quarter of 2014 did not look pretty; its same-restaurant sales declined by 11.4% at company-owned locations and dropped by 8.4% at franchise restaurants. In fact, the turnaround of Ruby Tuesday effectively began at the end of 2012 when J.J. Buettgen, the ex-chief marketing officer of Darden Restaurants, was appointed as the company's new CEO.

Since then, Ruby Tuesday has closed underperforming stores, changed its menu, and repositioned Ruby Tuesday as a more appealing, vibrant, and energetic brand. In August, the company launched eight new products, including pretzel burgers, a tempura green bean appetizer, and crispy flatbreads. Several days after the new product introductions, more than 20% of its guests had ordered one of these eight new items.

Moreover, the company has been reducing its debt, repurchasing $12.9 million of its high-yield bonds at a bit of a premium to par. In the future, Ruby Tuesday will continue to execute bond repurchases to further lower its outstanding mortgage debt. Furthermore, Ruby Tuesday has completed its sale-leaseback program, which provides the company with $83 million of gross proceeds at average initial cap rates of 6.7%. The restaurant chain can use the proceeds to pay back debt and strengthen its balance sheet. 

Turning around Ignite Restaurants' Macaroni Grill
Macaroni Grill is Ignite Restaurants' main source of revenue, but it has been faced with declining business performance. In the third quarter of 2013, Macaroni Grill's comp sales dropped by 2.70%. Nevertheless, this result was much better than the negative comp sales of 7.40% that Macaroni Grill experienced in the previous quarter. In contrast, Ignite Restaurants' legacy brands, Joe's Crab Shack and Brick House, enjoyed improving business performance. Joe's delivered positive comps in 20 of the past 21 quarters and its same-store sales increased by 3.3% for the quarter, while Brick House Tavern and Tap's comp sales advanced by 4% for the quarter.

In order to enhance shareholder value, Ignite Restaurants will focus on four areas: improving the Macaroni Grill's sales and margins, growing the Brick House business by converting underperforming stores, remodeling older Joe's locations, and leveraging the franchised infrastructure of Macaroni Grill to fuel business growth. 

Barington Capital pushes for Darden Restaurants' split
Darden Restaurants is facing sluggish operating performance at its two biggest restaurant chains, Olive Garden and Red Lobster. In fiscal 2013, Olive Garden experienced a 2.8% decline in same-restaurant guest count, while the same-restaurant guest count of Red Lobster decreased by 1.8%. Activist hedge fund Barington Capital has been pushing the company to split into two businesses: one mature business that contains Olive Garden and Red Lobster and one growth business that contains LongHorn and other specialty restaurant brands.

Furthermore, by streamlining operations and improving advertising efficiencies, Darden Restaurants' operating expenses could be reduced by $100-$150 million. Barington estimates that a business split could also unlock Darden's extensive real estate assets, which would push the company's share price up by at least 50%. 

My Foolish take
Investors might see large benefits from the business restructuring of these three restaurant chains. Among the three, Darden Restaurants might be the best pick because the turnaround agenda has been laid out pretty clearly by Barington Capital, which will try its best to ensure that the business split creates shareholder value. Moreover, while investors wait for Darden to post better results after it restructures its business, they can receive a juicy dividend yield of 4% at Darden's current price.  

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Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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