Is Ruby Tuesday’s 20% Stock Pop a Case of Low Expectations?

Ruby Tuesday's (RT) stock price has surged over 20% higher since releasing FY 2014 third quarter earnings last week. The operator of 755 Ruby Tuesday and 28 Lime Fresh concepts, Ruby Tuesday competes in the increasingly crowded full-service casual restaurant space occupied by nationwide restaurant companies like Darden Restaurants (DRI 0.46%) and Bloomin' Brands (BLMN -0.97%).

After seeing its stock price fall by one-fourth in value over the past twelve months, is Ruby Tuesday's recent stock pop really a case of low expectations?

Credit: Ruby Tuesday

Ruby Tuesday's recent earnings 
Revenues for Ruby Tuesday fell 3.8% to $295.6 million, beating expectations of $284.6 million. The company suffered a net loss of $7.3 million versus the $2.2 million in net income when compared to the same quarter of last year. Like many in the full-service restaurant segment, restaurant traffic was down 1.7%, although it saw an improvement over the 6.3% decline last quarter.

When compared to both Darden Restaurants and Bloomin' Brands, the weakness of Ruby Tuesday's quarterly earnings becomes more evident.

Credit: Bloomin' Brands, Darden Restaurants, and Ruby Tuesday filings.

During the conference call, Ruby Tuesday's management didn't provide earnings guidance. They did say that they anticipate same restaurant sales for the fourth quarter to be between -1% and +1%, however.

The lack of management earnings guidance and a flat sales outlook going forward are not the only obstacles in Ruby Tuesday's way, though.

Two main obstacles for Ruby Tuesday
First, Ruby Tuesday lacks several catalysts that would otherwise help drive future revenue growth.

During the 2013 fiscal year, the company already streamlined operations when it exited from its non-core concepts Marlin & Ray's, Truffles Grill, and Wok Hay to focus on Ruby Tuesday and Lime Fresh.

The company is also very much up-to-date with the rest of the full-service restaurant industry when it comes to utilizing technology. Ruby Tuesday restaurants already offers a to-go service called Ruby Tue Go and currently provides reservation services.

In contrast, Darden Restaurants has plenty of room for improvement considering that it owns eight restaurant concepts, and most recently announced that it will be adding computerized conveniences to its Olive Garden and LongHorn Steakhouse restaurants.

Additionally, Ruby Tuesday already offers a lunch menu highlighted by its $7.99 unlimited Garden Bar. By comparison, Bloomin' Brands has just recently started to focus on the $25 billion domestic lunch segment through its Outback Steakhouse concepts.

Without any major changes that could spark a turnaround in revenues and sales, one of the only strategies left for Ruby Tuesday in the near-term is to continue reducing its restaurant count.

Credit: Ruby Tuesday

The second biggest obstacle for Ruby Tuesday is a lack of brand identity.

During the conference call, Ruby Tuesday stated that it will continue to reengineer the core menu. In the 2013 fiscal year, the company introduced several new products like the pretzel burger and flatbreads that drove traffic. However, this strategy is costly for a full-service restaurant chain since marketing, advertising, and rollout costs can be expensive.

Brand identity is further affected when the company's strategy is conflicted on menu price points. CEO James J. Buettgen said that affordability is one of the long-term goals for the chain. During the conference call, however, the company said that it introduced several new higher-priced combinations for guests who choose to spend a little more.

In short, Ruby Tuesday appears to be a restaurant chain that now provides a little of everything at a low-to-high price range. As a result, this has made it hard for Ruby Tuesday to be the go-to restaurant for anything specific.

Bottom line
Ruby Tuesday is trying to be something for everyone. In 2013 , customers spent an average of $5.32 at fast food locations while the average check at fine dining restaurants was $28.55. Ruby Tuesday has menu prices scattered across most of this range even though it is neither fast food nor fine dining.

Unless Ruby Tuesday can narrow its focus on a select group of target customers and control costs associated with constant menu changes, it will continue to see sales fall and may need to close more locations than the 6-9 planned for the fourth quarter.

Can Ruby Tuesday focus on a target group of customers?

Shares popped similarly last year after Ruby Tuesday reported its third quarter 2013 earnings. However, unlike this year's third quarter, the chain reported positive net income.

If Ruby Tuesday's fourth quarter is anything like their recent third quarter, expectations may need to be even lower.