If you can't beat 'em, join 'em. At least that's what Ruby Tuesday (NYSE:RT) was thinking when it introduced four kinds of pretzel bun burgers to its menu in August. Other chains have been having runaway success with pretzel bun sandwiches including Dunkin' Brands Group (NASDAQ:DNKN) and Sonic Corporation (NASDAQ:SONC). So what could possibly go wrong? Recent events say the Ruby Tuesday pretzel bun is a dud.
Revealed in a filing with the SEC, Senior VP Robert LeBoeuf quit without explanation. This was just two days after chairman of the board Matthew A. Drapkin sold 1.4 million shares and hit the road too. One executive quitting might have an explanation, but two in one week smells like trouble. Just like the 8-K filing notifying the SEC of Drapkin's departure, there was no explanation for LeBoeuf's departure. In fact, it didn't even say if he resigned or if he was fired. It only reported his "departure."
The two resignations occurred less than three weeks after Ruby Tuesday announced terrible financial results. Same-store sales were down 11.4% at company locations. Total sales were down 11.6%. Net loss was $21.5 million or $0.36 a share. Cash was down to $36 million with over half a billion in liabilities. So what's Ruby Tuesday's response? Join the pretzel bun trend.
The pretzel bun trend
Sonic Corporation launched a pretzel bun dog this past summer. "The consumers love the Pretzel Dog," stated Chief Marketing Officer James O'Reilly. The new item in part helped Sonic Corporation post an increase in overall sales of 5.9%, same-store sales increase of 2.3%, and net income increase of 20%.
Dunkin' Brands Group is experiencing similar success with its Pretzel Roll Roast Beef Sandwich. CEO Nigel Travis attributed its growth in part to the sandwich's launch. He described its contribution as "terrific." The Pretzel Roll Beef Sandwich in part helped Dunkin' Brands Group post a 5.8% increase in systemwide sales, a 4.2% increase in same-store sales, and adjusted EPS growth of 10.8%.
Sonic Corporation and Dunkin' Brands are just two examples of industrywide success with the pretzel bun. Seeing this success and desperate to right the sinking ship, Ruby Tuesday jumped on the pretzel bun bandwagon and launched four different new burgers each with pretzel buns during the last quarter. In the earnings release, the company had little positive to say about this and predicted that sales would drop further in the quarter ahead.
In the conference call, Ruby Tuesday COO Todd Burrowes confessed the pretzel bun is a "significant departure from the menu positioning of the past." It sounds like the company may have alienated its current fan base while failing to bring in new customers.
Let's see. New menu items that were a total change from the past. Sales imploded and are expected to stay imploded following the menu launch. Two top executives left soon after the numbers were reported and one of them dumped 1.4 million shares at the low. It doesn't sound good.
Final foolish thoughts
The positive takeaway here is that maybe it was the management team that needed revamping more than the menu. Clearly whatever they're doing isn't working. Sure, Ruby Tuesday may find the secret sauce to turn things around and it could be a great winner in the future, but why take the chance when there's so many less risky chains to invest in that have just as much upside potential, such as Sonic Corporation or Dunkin' Brands Group? Watch from the sidelines and first see if Ruby Tuesday can right the ship.