On Tuesday, Ruby Tuesday (NYSE:RI) will announce earnings for the fourth quarter of fiscal 2006. Read on to see what's expected of this ambitiously growing company (it just announced three franchise locations opening in Dubai, United Arab Emirates).

What analysts say:

  • Buy, sell, or waffle? Five say "buy," six say "hold." Nobody is recommending a sell right now.
  • Revenues. Expectations for the fourth quarter call for $361 million, up 22% from a year ago. Note that the fourth quarter is one week longer compared with last year. For the fiscal year, analysts are expecting $1.3 billion, a 17% climb over last year.
  • Earnings. Analysts predict $0.51 per share for the quarter, right in the middle of company guidance of $0.50 to $0.52. This is 27.5% higher than last year's $0.40 EPS. (Again, remember this year's longer fourth quarter.) For the year, $1.63 per share is the mark.

What management says:
In announcing last quarter's results, Chairman and CEO Sandy Beall said, "We are extremely pleased with the results from our investments in the business -- positive guest counts, sales, and earnings after a year of investing heavily in the business and transitioning from a coupon-based marketing strategy to one based on television advertising. ... We believe our transition to a media-based marketing strategy in conjunction with the investments we have made in other areas of our business has certainly better positioned us for continued same-restaurant sales and earnings growth."

Those investments in the business include changes to the menu, such as moving away from diet-related items (such as the Atkins diet), and appealing to a wider customer base. Ruby Tuesday has also decreased the number of menu items available, focusing on burgers in addition to its mainstay salad bar and ribs. And rather than focus on coupons such as those in Sunday newspapers, it has increased television advertising both in local markets and nationwide. This has helped boost sales quite a bit.

What management does:
While sales growth has really picked up, margins have shrunk on a rolling basis. This is partially due to an increase in food costs, which hovered around 27% of revenue (less franchise revenue) for the quarters ended in August and November before dropping to 26.3% last quarter. Two years ago, it was 25.3%. The other main factor appears to be an increase in selling, general, and administrative costs, primarily in advertising, because of the changes. Note that starting with fiscal 2007, Ruby Tuesday will include stock-based compensation expenses in its financial statements. This will put downward pressure on margins on a strict comparison of year-over-year results.

Margins %*

11/04

3/05

5/05

8/05

11/05

2/06

Gross*

74.2

74.1

74.0

73.7

73.5

73.4

Operating

15.6

15.4

14.3

12.9

12.2

12.3

Net

10.4

9.8

9.2

8.2

7.8

7.7

Sales Growth %**

5.4

6.7

7.2

15.2

14.3

17.0
All data from company 10-K and 10-Q filings. Trailing-12-months data for quarter ended in the named months.
* Based on gross profit defined as sales less cost of food, without revenue from franchisees.
** Year-over-year comparison for quarter ended in named month.

One Fool says:
A line from last year's 10-K caught my eye. "We also believe there is potential for several thousand additional Ruby Tuesday restaurants to be operated across the United States." That is an ambitious goal, especially given that the company has only about 850 locations worldwide. Competitor Brinker International (NYSE:EAT) has more than 1,500 locations divided among five different brands, while single-brand Applebee's (NASDAQ:APPB) has a few more than 1,800 stores.

To effectively compete with companies such as Brinker and Applebee's and grow to a chain numbering in the thousands, Ruby Tuesday must continue with its marketing changes. It has hired Brad Blum, former CEO of Burger King and president of Olive Garden at Darden Restaurants (NYSE:DRI), to help with these changes. We just have to wait and see whether tomorrow's earnings release shows continued strength in sales growth and any reversal of margins shrinking.

Competitors:

  • Applebee's
  • Brinker International, operator of Chili's and On The Border
  • Darden Restaurants, operator of Red Lobster and Olive Garden
  • T.G.I. Friday's, a member of privately held Carlson Companies

Fool contributor Jim Mueller does not own shares in any company mentioned.