Like countless business have done and countless businesses will do, Ruby Tuesday (RT) is capitalizing on its very existence. With sales dropping, the company has allegedly started the process of offering itself up for sale. According to Debtwire, the restaurant chain has hired Goldman Sachs to explore some alternatives to continuing as a publicly traded business. The company is one of the myriad of restaurants that have had a hard time in 2013, as fast casual has taken over the mainstream consumer meal.
Slowing sales across the market
Last quarter, Ruby Tuesday's year-over-year comparable-restaurant sales fell 11.4% and 8.4% at its corporate and franchise locations, respectively. The drop shows that Ruby Tuesday is suffering from being in the middle of a huge pack -- its differentiation comes from having a salad bar. The company is taking steps to address its musty brand, adding new menu items that appeal to a new audience. However, those changes may be too little too late, prompting the potential sale.
In its defense, Ruby Tuesday isn't the only company suffering. Chains like DineEquity's (DIN 0.31%) Applebee's and Binker International's (EAT -0.85%) Chili's also had decreases in domestic comparable sales. On the other hand, those companies both saw much smaller declines, and they managed to show increases in other brands. DineEquity had a rise from IHOP and Binker saw a small gain at Maggiano's.
The value of sale
Right now, Ruby Tuesday is valued at around $450 million on the open market, but the value of a possible bid is unknown. Applebee's went for about 5% more than its market value when it sold in 2007, but the companies are very different, and Applebee's was sold to another restaurant while Ruby Tuesday will likely go to private equity.
Even with a bump, investors are unlikely to be meaningfully rewarded, in that the stock has fallen 9% this year, even accounting for 5% increase when the news of a potential buyout broke. Investors would have been much better selling out in the middle of 2013, when the stock was trading around $9.
Better options
The reason behind much of the sector's depressing year can be found at other chains. Companies like Panera and Chipotle (CMG 0.40%) -- fast-casual chains -- have been eating sit-down chains' lunches. Chipotle, in particular, has been a big winner in 2013, pushing comparable sales up 4.2% over 2012 year to date. Earnings per share have also had a sharp increase, again, setting the business apart from its peers.
In all likelihood Ruby Tuesday's fate won't be known for a while, leaving investors to guess at what a fair price for a leverage buyout would be. Right now, it seems like a much better idea to avoid Ruby Tuesday and find a better restaurant to add to your portfolio. Chipotle is a good -- if expensive -- place to start looking.
