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Ruby Tuesday Needs a Suitor

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Casual-dining franchiser Ruby Tuesday (NYSE: RT  ) took a hit in last week's trading after delivering a greater-than-expected loss. Store-level sales received a bludgeoning, profit was firmly in the negative, management is planning to close 30 stores, and outlook remains grim. Does this put the company in turnaround territory, ripe with opportunity for deep-value hunters? Management is going through the motions in its goal of repositioning the company as a competitive player in its industry, but so far the language has been textbook. Can this slider-slinging restaurant really do something new?

Earnings recap
Sales dropped nearly 8% in Ruby Tuesday's fiscal second quarter -- from $300 million to $276 million. Leading the downward charge was same-store sales at company-owned locations -- down nearly in line with the overall sales figure at 7.8%. Franchised stores dropped less but still got clocked with a 5.3% decline.

On the bottom line, Ruby Tuesday posted an adjusted loss of $0.43 per share. Analysts knew the number would be in the red, but had anticipated a less drastic figure at negative $0.28 per share.

On all fronts, things look pretty rough for the company. The restructuring process is a painful one for a public company. Ruby Tuesday has fewer customers, and the traffic that does come through the door is spending less. Add to that a whole slew of impairment charges and store closure expenses, and you have one ugly earnings report.

Is this the inflection point as management works hard to steer the ship around?

Too early to tell
The dialogue coming from the C-suite is standard and hasn't changed from recent conference calls -- focus on menu innovation, customer service, etc. The 30 store closures, likely just the beginning of a broader slimming, will help bring costs down in the short term but certainly aren't a solution to the company's fundamental woes.

For prospective investors who have the scent of a deep-value play in the water, there is one bright spot. In 2013, rumors came about that management had engaged Goldman Sachs to shop the company around to bidders. Management never formally acknowledged it, but Ruby Tuesday's brand has an intrinsic value that cannot completely disappear. At the right price, someone will come in and make a go of it. Trying to time that event, though, is a purely speculative game.

Ruby Tuesday doesn't currently offer much in the way of operating-level improvements. The bleeding will slow as cost-cutting initiatives show up on the financial statements, but the best option here is a buyout. Investors should keep a close eye on potential M&A activity in the coming months.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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Related Tickers

9/4/2015 4:06 PM
RT $6.74 Down -0.10 -1.46%
Ruby Tuesday, Inc. CAPS Rating: *