Last quarter, Ruby Tuesday (NYSE:RT) took casual dining's miserable trend of declining comparable sales to new lows. Rivaled only by Darden Restaurants (NYSE:DRI) chains Red Lobster and Olive Garden, Ruby Tuesday saw comparable sales decline 7.8% at company-owned stores.
The disappointing results led management to make a series of changes, and with earnings on tap this week, investors will get to see if they've paid off.
Ruby Tuesday reports third-quarter earnings this Wednesday. Here are two key things to watch.
Will restaurant closures boost same-store sales?
If there's one major takeaway from the declining same-store sales theme of casual-dining restaurants, it's that the current supply is outweighing the demand. Securities Analyst Andy Barish of Jefferies Equity Research recently predicted an oversupply of casual-dining restaurant locations continuing in 2014. Olive Garden has over 800 locations, Ruby Tuesday and Red Lobster have over 700 each, and that's simply too many for today's consumer.
With recent quarterly comparable-sales declines of 5.4% at Olive Garden and 8.8% at Red Lobster, Ruby Tuesday is not alone in its woes. However, last quarter Ruby Tuesday's management took a good step in initiating the closure of 30 restaurants.
In theory, this move should boost comparable-store sales. In select locations, Ruby Tuesday fans who may have decided between two locations in the past will now be going to the same restaurant. The obvious question will be whether people like Ruby Tuesday's food enough to seek out a new location. Management hopes the closures will have comparable sales flat by their fiscal fourth quarter.
On this earnings call, we'll want to hear if those closures are making a positive impact on comparable sales.
Cost-cutting and brand repositioning
After last quarter's loss of $0.43 per share, with one-time items excluded, management implemented a plan to reduce merchandise costs. This goes hand-in-hand with the company's new menu and "brand repositioning."
Management is attempting to make the brand more casual, energetic, and broadly appealing. Through new menu items like flatbreads and pretzel burgers, management plans to both reenergize the brand and cut costs in one move. At the same time, Ruby Tuesday has exited non-core concepts like Marlin & Ray's and Wok Hay.
The Company has stated that these and other cost-cutting initiatives are "estimated to result in a $6.0 million annual reduction to cost of merchandise beginning in fiscal 2015," as well as an "estimated savings of $2.0 million in the second half of fiscal 2014."
This quarter we'll want to listen closely to see if the cost-cutting is on schedule, and if the new menu items are a hit.
Foolish conclusion: This quarter counts
While Ruby Tuesday may not be alone in casual dining "hell," its investors sure feel that way. Even though Red Lobster has performed as poorly as Ruby Tuesday, Darden's stock has held up better, thanks to its higher-end brands.
Ruby Tuesday is attempting to reinvent its brand, which is a very difficult task for a well-established restaurant. While I applaud management's bold action, at the end of the day, consumers have been gravitating to higher- (and lower-) end options.
If Ruby Tuesday is going to survive, this quarter will be a key to the turnaround. Listen carefully on this earnings call; cost-cutting, new menu times, and store closure updates will tell you what you need to know.