Ruby Tuesday — How to Play Wednesday’s Earnings Report

by Jamie Dlugosch | October 5, 2011 11:49 am

Casual diner chain Ruby Tuesday (NYSE:RT[1]) reports earnings for the quarter ending Aug. 31 on Wednesday after the market closes. Given the gloominess of the company’s forecast released in July, investors would be wise to be cautious heading into earnings.

Like other casual dining restaurants, Ruby Tuesday had been operating with rising inflation that negatively impacted profit margins. In addition and unique to Ruby Tuesday were rising administrative expenses related to heavy investment in advertising. Fierce competition is requiring companies in the space to do more to attract customers.

We soon will find out if Ruby Tuesday has done enough to meet greatly lowered expectations. The silver lining is that inflation has reversed course. Since the market began to collapse in mid-July, commodity prices have followed suit.

Earnings at Ruby Tuesday missed average Wall Street estimates by a wide margin in the past two quarters:

When the company released results for the May 31 period, it also lowered guidance for the period ending Aug. 31. At the time of that release in mid-July, Wall Street estimates were at 20 cents per share. The company said profits would fall in a range of three to six cents per share. The average Wall Street estimate today is for Ruby Tuesday to make five cents per share.

For the full year ending May 31, 2012, Wall Street expects the company to make 75 cents per share. Last year, Ruby Tuesday made a profit of 73 cents per share. With earnings growth expected to be nonexistent, RT shares trade for 10 times trailing earnings.

The poor operating performance in the past two quarters has slashed the value of the stock. Early in the year, Ruby Tuesday traded just under $15 per share. Today you can buy the stock for more than a 50% discount at $7.20 per share.

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The selling in shares of Ruby Tuesday is entirely justified. The company simply has not performed well, and there is no guarantee that it will meet greatly reduced expectations. That said, the company caught a break in the fact that commodity prices have taken a breather. Will it be enough to offset already weak expectations?

When the company lowered guidance for the quarter ending Aug. 31, it mentioned its attempt to push its model upstream. That subtle shift might not be such a good idea with the economy in a perilous position. It also could indicate the company is losing the battle against other casual chains, including Applebee’s.

Typically, when a business changes its stripes — however subtle the change — it takes time to accrue benefits to shareholders in the form of higher profits. In some cases the changes never bear fruit. For investors betting on an optimistic outcome, the best strategy is to buy at the lowest price possible. Ruby Tuesday still trades for a high valuation despite expectations of minimal profit improvement in the current fiscal year.

I would want to own this stock at a much lower price. I think we will get that lower price on a third consecutive disappointing report from Ruby Tuesday.

Other companies reporting results this week include Helen of Troy (NASDAQ:HELE[2]) and Constellation Brands (NYSE:STZ[3]).

As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.

  1. RT:
  2. HELE:
  3. STZ:

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