Is Ruby Tuesday Back From the Dead?

Take its turnaround with a grain of salt.

Apr 26, 2014 at 11:00AM

Everybody loves a turnaround story. Most of us want to see struggling iconic brands like Ruby Tuesday (NYSE:RT) and J.C. Penney (NYSE:JCP) survive and thrive again. As such, it can be easy to get caught up in the hype any time there is a glimmer of good news. These days it seems "less bad" is the new good. Keeping that in mind, Ruby Tuesday isn't quite out of the woods yet.

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Source:  Ruby Tuesday

From flatbreads to flattish results
Ruby Tuesday reported fiscal third-quarter results on April 9. Revenue slipped 3.8% to $295.8 million. Same-store sales dropped 1.9% at company-owned locations and 2.2% at franchisees. The adjusted net loss from continuing operations expanded 29% to $7.4 million, or $0.12 per diluted share.

The less-bad sales results are a big improvement compared to the prior quarter just three months before. For that period, the adjusted net loss was $0.48 per share; same-store sales collapsed 7.8% for company-owned locations and 5.3% for franchisees. Compared to those numbers, this quarter's 2% drop is more flattish. However, "less bad" is still bad.

JJ Buettgen, chairman, president, and CEO, credited the sort-of improvement to "less bad" to Ruby Tuesday's "brand transformation strategy." The strategy has two main components: a swarm of new menu items (such as a new line of flatbreads and southern style chicken tenders) and an aggressive advertising campaign pushing these items.

The J.C. Penney-like lackluster
Part of the problem that makes Ruby Tuesday's less-bad results seem not very thrilling is that in part they remind me a bit of J.C. Penney. While a retail store like J.C. Penney is a vastly different business than a restaurant, the financial struggle they both find themselves in looks similar.

Last quarter, J.C. Penney announced turnaround results, at least on the surface, that were met with applause. Net sales only fell by 2.6%, and its same-store sales bumped up 2%. Hurray?

But Penney's year-ago quarter had a whopping 31.7% plunge. A 2% gain from that pulverized level isn't much of an accomplishment, let alone solid proof of a successful turnaround. The cheers for J.C. Penney may have been a bit premature.

While not as extreme, Ruby Tuesday had an easy comp as well. In the year-ago quarter, same-store sales were down 2.8%. A 2% bounce-back still leaves it in the red. That also happened to be the quarter when the "brand transformation strategy" first began, so this suggests it has yet to bear any tangible fruit. Concerning.

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Source:  J.C. Penney

Concerns remain
J.C. Penney did give us some encouraging next-quarter guidance of same-store sales growth of between 3% and 5%, but once again it is in comparison to a huge drop of 16.4% in the year-ago period. Just like J.C. Penney, Ruby Tuesday guided for fairly encouraging same-store sales of between negative 1% and positive 1%, but it was also in comparison to around a 3% fall last year.

Perhaps the most troubling statement came from the conference call. Buettgen stated, "As a result of their focus and hard work, new and improved menu offerings are currently driving 25% preference among our guests." Whoa, 25%? It sounds like a large chunk of its business could be in "make or break" curiosity mode for its new "winter menu" and other items. It's a risk.

We don't have any clue if this honeymoon period will last or fade for new menu offerings. What's worse is the large draw to the new items still couldn't even turn Ruby Tuesday's sales growth into the black. It makes one wonder how bad it would have been if not for the tempting new items. 

It's great that the new items and advertising are attracting curious patrons; but if there are fundamental problems with the restaurants, the "less bad" results could prove to be only temporary and fall worse. It's too early to predict if the new items will have staying power, and the overall company results so far don't give us any convincing positive clues.

Foolish final thoughts
Valuation-wise, Ruby Tuesday no matter how you slice it is a very speculative investment. The company, like J.C. Penney, continues to lose money, and all of its analysts expect more losses for this fiscal year. Fools should consider waiting on the sidelines until Ruby Tuesday or J.C. Penney show solid signs of a turnaround in the form of strong same-store sales that are meaningful and based on a specific, clear, and sustained change in ongoing guest loyalty.

Ruby Tuesday and J.C. Penney are old news
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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