Ruby Tuesday, Red Lobster, or Buffalo Wild Wings: Which Restaurant Deserves Your Money?

Shares of casual-dining restaurant chain Ruby Tuesday (NYSE: RT  ) have been dead money for some time now, as the company has struggled to attract growing numbers of customers to its restaurants. It's a trend that has also affected competitors, like Darden Restaurants (NYSE: DRI  ) . The double whammy of rising commodity costs and unending promotions has cut into Ruby Tuesday's profits, evidenced by a downward sloping trajectory for its operating margin over the past few years.

However, Ruby Tuesday's shares perked up by a double-digit amount in early April after it reported slightly better-than-expected sales and profitability in its latest fiscal quarter. So, is it time to bet on a new day for the company?

What's the value?
Ruby Tuesday has survived for more than 40 years by remaining true to its roots as a good neighborhood spot to get a quality meal at an affordable price, evidenced by price points that range from $7.49 to $19.99. Like other casual- dining chains, though, the company has anecdotally succumbed to competitive pressure from the fast-casual chains, which have picked off parts of its customer base with lower-priced food that is of comparable quality. Consequently, Ruby Tuesday has lost much of its pricing power, leading to historically weak per-store productivity.

In FY 2014, Ruby Tuesday has continued to operate in a difficult environment, reporting a decline in overall sales that has primarily been a function of lower customer volumes. More importantly, the lower level of per-store sales continues to negatively impact its store level margin, pushing the overall company's operating profitability into the red. The net result for Ruby Tuesday has been a need to continue reducing its store footprint as well as to sell off assets in order to shore up its financial position.

It's tough all over
Of course, Ruby Tuesday isn't alone in its difficulties, as other sector players have had similar issues, including casual-dining leader Darden Restaurants. The operator of a hodgepodge of brands, headlined by its Red Lobster and Olive Garden units, has posted disappointing results lately, due primarily to weak comparable-store sales at the two named units, which together account for roughly 70% of its overall store base. 

Like Ruby Tuesday, Darden has been hit by encroachment on the part of the fast- casual chains, which have limited Darden's pricing power and forced management into a new proactive mind-set. This has been highlighted by the addition of lower-priced and healthier fare options to its traditional menu offerings.

Looking into the crystal ball
Ruby Tuesday seems to be making the right operational moves, with a smaller overall store base and some new enticing menu options, like its spicy pretzel burgers and chicken flatbreads. However, until the company can put a stop to its draining customer volumes, it is unlikely that the changes will lead to sustainable profit increases. As such, investors should probably avoid trying to time the bottom at Ruby Tuesday and instead look for a sector player that continues to attract growing legions of fans, like Buffalo Wild Wings (NASDAQ: BWLD  ) .

In its latest fiscal year, the reigning king of the American sports bar continued building on its multi-year growth trajectory, reporting a 21.7% top-line gain; the increase was a function of higher comparable-store sales and a further expansion of its overall store base, including the recent introduction of its brand to Mexico. 

Unlike Ruby Tuesday and Darden, Buffalo Wild Wings continued to enjoy a broadening of its customer base during the period, a trend that it helped to perpetuate with menu innovations, like its wings-by-portion offering and its GameChanger beer, a partnership with craft brewer Redhook Brewery. Combined with relief from lower raw chicken wing prices, the net result for Buffalo Wild Wings was a higher operating profit, funding its continued fast expansion across North America.

The bottom line
Shares of Ruby Tuesday may have spiked recently, but a sustainable move higher requires the company to get its customer volumes back into growth mode, which would go a long way toward restoring its profitability. Until then, Ruby Tuesday is, at best, a crap shoot, and prudent investors should avoid it.

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Related Tickers

7/23/2014 3:59 PM
BWLD $158.56 Up +0.91 +0.58%
Buffalo Wild Wings CAPS Rating: ****
DRI $44.49 Up +0.27 +0.61%
Darden Restaurants… CAPS Rating: **
RT $7.26 Up +0.05 +0.69%
Ruby Tuesday, Inc. CAPS Rating: *

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