Over the last year, Ruby Tuesday (NYSE: RT ) has completely rejuvenated its brand, offering a new menu to complement heavy and aggressive marketing campaigns. In the last month, Ruby Tuesday has given us reason to believe that its efforts are paying off. Yet, while many now think it's a good recovery investment, should investors jump on board or stick with the likes of Buffalo Wild Wings (NASDAQ: BWLD ) or Darden Restaurants (NYSE: DRI ) ?
Back on track?
Since 2011, Ruby Tuesday has lost about half its valuation. In the last month, however, shares have appreciated by 40%, led by a better-than-expected first-quarter earnings report. In that quarter, revenue fell nearly 4% to $295.8 million. However, same-store sales really excited investors, as they fell just 2% versus a near 8% drop in the three months prior. Therefore, many are convinced that Ruby Tuesday is on the right track and might have found the recipe for a full blown stock recovery.
In retrospect, a 2% decline in same-store sales during a rough first quarter (due to bad weather) is rather impressive considering what we've seen in this space. Certainly, there were restaurants that thrived, such as Buffalo Wild Wings, which saw its same-store sales increase 6.6% in the period. However, that is the exception: Darden, led by Olive Garden and weighed down by Red Lobster, saw considerably worse quarterly results.
Specifically, in January and February, Olive Garden's same-store traffic fell 4.6% and 4.9%, respectively. In the same period, Red Lobster's traffic declined 18.7% and 11.9%, respectively, in the first two months. So, in looking throughout the industry, Ruby Tuesday's performance is somewhere in the middle. But is its valuation?
Where is Ruby Tuesday valued?
Buffalo Wild Wings trades at a rather lofty 2 times sales multiple and 25 times next year's earnings, and rightfully so; the company has earned it. Buffalo Wild Wings has become a legitimate growth company in a casual-dining space that has lost momentum thanks to the rise of fast-casual chains.
Darden, clearly a troubled company, trades at just 0.7 times sales and 17.5 times next year's earnings. Granted, the company also pays a 4.4% forward annual dividend, meaning its valuation is likely inflated slightly more than it deserves. Nonetheless, the gap between Buffalo Wild Wings and Darden represents the range of casual-dining stocks, essentially implying that a company such as Ruby Tuesday, fundamentally in the middle, should also trade somewhere in this range.
Instead, Ruby Tuesday trades at just 0.4 times sales, a near 50% discount to Darden. However, Ruby Tuesday is not profitable, having an operating margin of negative 0.5%, which is in large part due to the restructuring and new marketing concepts. In 2011, Ruby Tuesday had an operating margin of 4.5%, comparable to Darden; but after a 50% increase in selling, general, and administrative costs since 2011, margins have visibly declined.
Fortunately, Ruby Tuesday's margins will likely improve as the company's new concept becomes complete; that should leave it as a company trading at a near 50% discount to Darden relative to both revenue and earnings. Therefore, one could conclude that based on this alone, Ruby Tuesday is in fact presenting value.
For investors, we are assuming that Ruby Tuesday is presenting value based on both its recent earning reports and the likely scenario of declining costs associated with the conclusion of its restructuring program. The one thing that's impossible to know is whether Ruby Tuesday's efforts will pay off in the form of growing comparable-store sales or if the first quarter was a fluke.
However, in using the first quarter as a guide, there is clearly growing momentum in the company's stores, at least currently. Based on this fact, and the cheapness of its stock, Ruby Tuesday's reward might be worth the risk. Because if Ruby Tuesday does in fact see year-over-year growth with a return to profitability, it has a lot of room in front of it before falling in the range provided by Darden and Buffalo Wild Wings.
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