Ruby Tuesday, Inc. (NYSE:RT) is struggling. The restaurant that gets its name from a classic Rolling Stones’ song faces declining revenues, flat or declining same store growth, flat or declining guest counts, and store closures.
Management has plenty of challenges, but very few answers — most of which focus on its rebranding. Is RT stock a good buy, or is it time to say goodbye?
From what I see, RT stock is a sell.
RT Stock Has Plenty of Problems
As noted, RT is facing difficulties. Revenues from the last quarter fell $10 million year-over-year to $285.9 million last year. Same store sales at company owned restaurants fell for the quarter by 0.3%, while guest counts at the restaurants were down 1%.
Furthermore, the company is shuttering more locations than it is opening. This past quarter, RT closed five company owned locations and international franchisees closed three more while opening just one.
Management’s annual outlook paints a similar picture for the rest of Fiscal year 2015: Same store sales range from nearly flat to slightly declining and RT expects a net closure of company owned restaurants. Furthermore, the company is finalizing the store closures by selling off $9 million to $11 million in excess real estate.
Things aren’t all bleak for RT, though. The company is paying down its debt. It currently has $251 million in long-term debt for the most recent quarter — a decrease from $267 million from the same quarter last year. Additionally, RT has grown its cash at hand to $61.2 million in the latest quarter from $44.5 million in the same period last year.
Restaurant operating costs are ticking lower, too: 21.6% of sales this quarter compared to 21.8% in the year prior.
The numbers show that RT is getting its house in order, but the momentum in terms of growth and sales has either stalled or declined slightly.
Brand New Ruby Tuesday?
Trying to kickstart its sales, RT’s management is pushing for new restaurant branding by addressing four key strategic pillars: Food, Service, Atmosphere, and Communication. While each of them are were outlined in some detail on the earnings call, I have my doubts about whether this strategy will lead to a turnaround.
Highlighting the innovations with its food menu, RT COO Todd Burrowes covered the new rib flavors — Hog Heaven, Ragin’ Cajun and Texas Dusted — and new desserts — Apple crumble flat bread and chocolate goblet sundae. He noted, however, that research shows that RT’s core menu items were less than fully satisfying.
To address issues with the core menu, Burrowes said Ruby Tuesday was looking to make product enhancements, replace certain products and simplify the steps to prepare the food in order to broaden the bull’s eye of quality. While making progress on all three areas in the core menu, Burrowes said the pipeline of new menu items is currently under testing. It’s too early to tell if the changed core menu will be a success.
Covering service concerns, Burrowes detailed the new service platform and key member training program. The new program has led increased server attentiveness, which increased sales. New promotions for larger beer portions and other alcoholic beverages have tested the selling abilities of servers — with much success, according to Burrowes.
For atmosphere, Burrowes reported that RT was undergoing conceptual work for a remodel program, which would pilot in the first half of fiscal 2016. However, it’s too early to tell if the remodeling will have any effect on getting customers in the door or even getting existing customers to spend any more on the ticket.
Finally, addressing communication, Burrowes covered the guest loyalty program So Connected Hospitality Club, which has 2 million active members. However, Ruby Tuesday is still looking to select a social media agency to make full use of the active members, suggesting RT has not fully engaged that membership.
Any Shine on this Ruby?
RT stock still has a long way to go before it becomes an attractive investment. While Ruby Tuesday is undergoing a rebranding strategy in the hopes to draw in customers, the company is essentially cost cutting its way to achieve viability.
I am doubtful that the restaurant’s rebranding strategies will address the challenges of declining revenues and flat or declining same-store growth and guest counts, especially since its core menu doesn’t excite customers. Even its CEO J.J. Buettgen admitted the rebranding would not be accomplished “in a couple couple of quarters and our results may not be on a straight-line trajectory.”
Until Ruby Tuesday’s rebranding results turn key financial numbers from red to black, there isn’t much reason to invest in RT stock.
As of this writing, Johnny Chen did not hold any of the aforementioned securities.
