Tuesday was an eventful day for casual-dining chain Ruby Tuesday (NYSE:RI).
First, along with several other restaurants, it saw its stock downgraded because of industry traffic weakness. Second, it reported diluted earnings per share of $0.53 for its fourth fiscal quarter, ahead of Wall Street's estimate of $0.51, and $1.65 for the 2006 fiscal year, ahead of the expected $1.63. Third, the company announced that it has expanded its board of directors with the election of Kevin Clayton, CEO and president of Clayton Homes, a Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) company. Finally, it announced a huge increase in its annual dividend, raising it from $0.045 per share to $0.50, paid semi-annually. Whew!
Ruby Tuesday's stock was just as active yesterday. It dropped 4% upon the downgrade, and then rose 4.4% in after-hours trading last night. I almost got whiplash watching this unfold!
Let's look at the downgrade first. Robert Derrington of Morgan Keegan downgraded several restaurants, including Ruby Tuesday and Applebee's (NASDAQ:APPB), because of weak traffic trends and factors that could affect consumer spending -- namely, higher energy prices and higher interest rates affecting disposable income. April and May, Derrington said, had the weakest traffic seen over the past nine years. During Ruby Tuesday's earnings call, management did say that it saw softer traffic in the beginning of its June period but that it began to come back once the company began its television advertisements again. Management explained that each quarter has two weeks during which the company does not advertise on television.
As for the fourth quarter, which included April and May, traffic decreased 0.5% at company stores but increased 4% at domestic franchises, leading to about a 0.6% increase in traffic, by my calculations. Looking at same-store sales growth, we see that company-owned stores saw a 2.4% and 0.5% boost for the two months, respectively, while franchise stores saw 7.3% and 4.6% growth. For the fourth quarter, comps were 2.9% and 7.1% for company and franchise stores, respectively. Management did project flat growth to a 2% decline for fiscal 2007's first quarter, coming back to expected 3%-4% growth by the second half of the fiscal year.
The company expects to grow earnings per share in the range of 12.5% to 15% for the new fiscal year, from a combination of same-store-sales growth, new locations, and a menu-price increase expected in January. By concentrating on the menu and continuing improvements in its television advertising, management is building the brand as a fresh, quality dining location. One menu change I look forward to trying is the triple prime burger, made with three different prime cuts of fresh beef. The chain is also working to further upgrade the salad bar (a point of differentiation from competitors) by making the salads on site and adding more items. Lack of being different was a point that fellow Fool Stephen Simpson raised earlier this year.
Finally, management and the board of directors expressed confidence in the future results of current and ongoing efforts by a 10-fold increase of the annual dividend. At current prices, this boosts the yield from 0.2% to 2%, double what Applebee's and Darden Restaurants (NYSE:DRI) are paying. I don't know whether this was the steady dividend increase that fellow Fool Jeremy NacNealy envisioned at the end of last quarter, but it certainly does reward shareholders.
If Ruby Tuesday can keep differentiating itself from all of the other casual-dining establishments and keep control of its margins, this could be a tasty company to invest in.
More casual-dining Foolishness:
- Check out Ruby's fiscal-year and quarterly numbers.
- Friendly Ice Cream struggles with differentiation.
- Red Robin feels some burger woes.
- Traffic issues cause trouble for P.F. Chang's.
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Fool contributor Jim Mueller really has to visit his local Ruby Tuesday. Last time he visited, more than two years ago, he wasn't impressed, but he thinks the changes sound intriguing. He does own shares in Berkshire Hathaway. The Motley Fool has a disclosure policy.
