Friday, July 27, 2012

Ruby Tuesday Beats, Revenue Up 6.2%

Ruby Tuesday Inc. (RT), a casual dining restaurant operator, recently reported its second-quarter 2011 adjusted earnings of 7 cents a share, surpassing the Zacks Consensus Estimate by 2 cents and the year-ago quarter’s earnings by 6 cents.

Total revenue in the quarter increased 6.2% year over year to $290.5 million attributable to a rise in comparable-store sales. The revenue came in way ahead of the Zacks Consensus Estimate of $280.0 million.

Inside the Headline Number
Comparable-store sales at domestic franchised restaurants rose 1.6%. Restaurant sales were up 6.3% at $289.0 million, while franchise revenues dropped by 5.4% to $1.5 million due to lower levels of fees along with temporarily reduced royalties for certain franchisees.

Ruby Tuesday has been witnessing improving trends in comparable-store sales and traffic at company-operated restaurants. After falling 3.1%, 1.7% and 0.7% in the first, second and third quarters of 2010, respectively, comparable-restaurant sales were positive for three consecutive quarters. In second quarter 2011, Ruby Tuesday recorded comparable-store sales of 4.2%, which beat the benchmark index Knapp-Track on a one-year basis by almost 3 points.

The restaurant level operating margin expanded 140 basis points (bps) year over year to 15.1% (as a percentage of company-operated restaurant sales), reflecting a 70 bps drop in payroll and related costs to 34.5%, and a 100 bps drop in other restaurant operating costs to 21.2% partially offset by a 40 bps rise in cost of merchandise to 29.3%.

Stores Update
During the quarter, the company did not open any new company-owned restaurant, but closed one. Two domestic and international franchise restaurants were opened and four were closed.

For 2011, the company expects to open one or two in line restaurants, and close seven to nine company-owned restaurants, while converting five to seven company-operated restaurants to other high-quality dining concepts. Eight to ten franchised restaurants will likely be opened in 2011, out of which a maximum of five will be international. Ruby Tuesday is also planning to acquire more franchisee restaurants in fiscal 2011, in addition to the twenty three restaurants it bought back in the first half of 2011.

Financial Position
Ruby Tuesday ended the quarter with cash and cash equivalents of $8.2 million, long-term debt of $283.3 million and shareholders’ equity of 562.7 million. Capital expenditures at the end of the quarter were $6.7 million.

Outlook
Management reiterated its fiscal 2011 earnings guidance in the range of 76 cents to 86 cents. The current Zacks Consensus Estimate is 87 cents per share for fiscal 2011.

Ruby Tuesday also continues to expect 2011 comparable-store sales for company-owned restaurants in the range of flat to positive 2%, and relatively flat restaurant operating margins. Capital expenditures are estimated between $29 million and $33 million.

Our Take

We remain enthusiastic about the company’s second quarter performance and future strategies including improving margins, stable outlook of food costs in 2011, low risk revenue growth, acquisition of franchise-partner units and returning excess cash to shareholders. The company also has enough financial flexibility owing to its recently received new credit facility.

However, uncertainty prevailing in the economy, stiff competition from peers, and continued investment in product offerings as well as different other initiatives may strain its margin and cash flow generation. The company also maintained its 2011 guidance, which also leaves less room for surprise.

Ruby Tuesday currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.

Major competitors of the company include Krispy Kreme Doughnuts Inc. (KKD - Snapshot Report) and Biglari Holdings Inc. (BH - Snapshot Report).

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