Thursday wasn't a good day to own shares of Ruby Tuesday, (NYSE:RT). It announced a major slip in earnings for its most recent quarter. Ruby Tuesday fell to a net loss of $0.37 per share from a net gain per share of $0.04 in the same quarter a year ago. This significantly missed analysts' expectations of a $0.06 per share loss and shares declined by more than 17%.
In response to the larger-than-expected loss, CEO J.J. Buettgen announced that the state of the economy was to blame for the company's shortfall. Whether or not this is true, it does seem telling that other companies in the casual dining industry appear to be struggling.
One example is Darden Restaurants, (NYSE:DRI), the parent company of Olive Garden, Red Lobster, and LongHorn Steakhouse to name a few. After the company announced that same-restaurant sales had declined by up to 5.2% at its Red Lobster chain and 4% at its Olive Garden chain, Barington Capital Group LP announced a 2.8% stake in the company and urged management to spin off its underperforming assets from its performing ones.
Another company to see disappointing earnings is Yum! Brands, (NYSE:YUM), the parent company of Pizza Hut, Taco Bell and KFC. Yum! Brands saw its earnings decline by 68% compared to the same quarter a year ago (though a large portion of this shortfall came about as a result of a writedown of its Little Sheep acquisition in China).
Although this could be a short-term downturn, Yum! Brands has been struggling all year which could indicate a larger trend. The company saw its second quarter revenue decline by roughly 8.3% when compared to the same quarter a year ago. In its first six months of the year, revenue dropped by about 8% compared to the same six months the year before.
Though Mr. Buettgen may be right and the economy could indeed be faltering, it seems more likely that consumer preferences are migrating toward fast-casual dining restaurants like Chipotle Mexican Grill (NYSE:CMG) and Panera Bread Company (NASDAQ:PNRA.DL). While the companies analyzed above have been seeing their revenue and margins fall, Chipotle and Panera have seen theirs swell.
For starters, Panera has seen its revenue increase by 64% over the past five years and its net income increase by an even more impressive 157.3% as consumers swarm to its doors in lieu of either pricey sit-down restaurants or low-quality fast food. Not to be outdone, Chipotle has seen its revenue increase to the tune of 105% over the previous five years while its net income has ballooned by 255.5%.
What does this mean for Ruby Tuesday shareholders?
Shifting consumer tastes could mean that the long-term viability of restaurants like Ruby Tuesday may be in jeopardy. In a world that is moving ever faster, companies that cannot adapt to consumer trends are often left in the dust. Despite its plight, Ruby Tuesday has something that none of its peers, especially Chipotle and Panera, have; assets.
(Table made by author. All financial data for these companies can be accessed here)
Looking at the table above, we can see the Price/Book Ratio of each company discussed in this article. Taking Yum! Brands as an example, the Price/Book Ratio states that, for every $1 in assets, less liabilities, that you receive by buying shares, you have to pay $13.24. Using this methodology, we can see that the ratio varies widely between companies. The most interesting thing to note is the Price/Book Ratio of Ruby Tuesday. At $0.74, an investor or prospective investor in Ruby Tuesday could conclude that, for spending $0.74, you are receiving $1 in book value.
From a theoretical perspective, this would mean that you could buy all of Ruby Tuesday, liquidate it, and net a return of 35.1% (assuming no fees or taxes are realized). This is especially appealing when considering the fact that the company has no goodwill, which is typically worthless upon liquidation. However, before you rush to your phone and call your broker to buy shares, it is very important to consider two things.
First, upon liquidation (whether orderly in nature or rushed due to bankruptcy), it is hard to get book value for most assets, which generally results in lower returns than expected. Second, a high Price/Book Ratio is generally reserved for a company that Mr. Market expects to perform very well in the future, while too low of a ratio may indicate potential bankruptcy risks.
Realistically speaking, the best way to approach Ruby Tuesday's low Price/Book Ratio is to assume that there is likely little downside in owning shares since the company could always liquidate if it falls below what it believes to be its liquidation value. As such, this can act as insurance against further declines. The company can also leverage its assets to borrow money for a turnaround effort, or a large investor might offer to buy up the entire company at a premium to its current book value.