Ruby Tuesday Is on the Mend, but Is It a Buy?

It's not easy to be a casual full-service restaurant chain these days, and Ruby Tuesday (NYSE: RT  ) has until recently been no exception to the trend. While the company posted lower year-over-year figures for nearly all of its financial metrics and continued to earn a negative bottom line, the numbers actually came in at a premium to the Street's estimates. Ruby Tuesday is another casual restaurant whose model did not age well, and management is trying to transform the brand as quickly as possible without alienating the remaining customer base. The company is also on target to achieve operating efficiencies and allow more to flow to the bottom line. Is Ruby Tuesday becoming investable?

Better bad results
For the company's fiscal third quarter, Ruby Tuesday again posted lower sales, though this time it was not a matter of declining operations. Due to 30 net store closures over the past year, the company brought in just under $300 million, as opposed to slightly more than $300 million in the year-ago quarter. Same-store sales continued downward as well -- 1.9% at company-owned stores and 2.2% at franchised ones -- due to a 1.7% drop in guest count. While the numbers in isolation aren't much to celebrate, the guest drop comes in better on a sequential basis. The second-quarter guest count had dropped more than 6%.

Considering that more than 20 stores were closed for renovations during the quarter, plus the terrible weather across many parts of the U.S. and the still-cautious consumer, Ruby Tuesday's results are indicative of a turnaround plan that may just be working.

On an adjusted basis, net loss was $0.07 per share -- $0.03 better than one year ago. Starting to help the bottom line are cost-savings efforts aimed at SG&A as well as cost of goods sold. By the fourth quarter of the fiscal year, the company expects to realize $3 million in savings.

Primed up?
There is no doubt that the company's effort to reinvent the menu, spice up the locations, and create operating efficiencies is working, but does that make it a buy at these levels? This is still a money-losing business, and next quarter is projected to show a continued drop in same-store sales and more store closures. At the right price, this is an encouraging turnaround story. But Ruby Tuesday's current EV/EBITDA is nearly 13 times. If the company were to hit the high end of sales estimates for fiscal year 2015 ($1.2 billion), the implied forward price-to-sales ratio is 0.34 times.

At a glance, the company is reasonably valued and on the cheaper end, but its downside risk is still prevalent enough to keep deep-value turnaround investors away. Management has proved it can stop the bleeding, but the question of whether Ruby Tuesday can truly flourish again is still an open-ended one.

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