Ruby Tuesday Inc. (RT), a casual dining restaurant operator, recently reported its third-quarter 2011 adjusted earnings of 24 cents per share, below the Zacks Consensus Estimate of 31 cents and the year-ago quarter’s earnings of 28 cents.
Total revenue in the quarter increased 3.8% year over year to $319.1 million and was in line with the Zacks Consensus Estimate. The upside in revenue was attributable to acquisition of seven franchise partnership businesses.
Inside the Headline Numbers
Restaurant sales were up 3.8% to $317.2 million, while franchise revenues climbed 17.3% to $1.9 million based on higher royalty from traditional franchisees.
For the last three consecutive quarters, Ruby Tuesday witnessed improvements in comparable store sales and traffic at company-operated restaurants. However, during the third quarter of 2011, comparable store sales dropped 1.2% due to inclement weather condition. Comparable store sales at domestic franchised restaurants inched up 0.4%.
The restaurant level operating margin contracted 250 basis points (bps) year over year to 17.0% (as a percentage of company-operated restaurant sales) due to a 80 bps upside in payroll and related costs to 33.5%, a 130 bps spike in other restaurant operating costs to 20.7% and a 80 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 seven of the same. The company opened one domestic and international franchised restaurant in the quarter.
For 2011, the company does not intend to open any in line restaurants but expects to close eight to ten company-owned restaurants, while convert four to six company-operated restaurants into other high-quality dining concepts.
The company plans to open six to eight franchised restaurants in 2011, out of which three will be international. Ruby Tuesday is also planning to acquire the remaining thirteen franchisee restaurants in the fourth quarter, in addition to the ninety six restaurants it bought back year to date.
Financial Position
Ruby Tuesday ended the quarter with cash and cash equivalents of $8.9 million, long-term debt of $344.1 million and shareholders’ equity of $581.3 million. Capital expenditures at the end of the quarter were $5.1 million.
Outlook
Management has trimmed its fiscal 2011 earnings outlook to 74 cents to 82 cents from its prior guided range of 76 cents to 86 cents. The current Zacks Consensus Estimate is pegged at 90 cents per share for fiscal 2011.
Ruby Tuesday also tightened its forecast of comparable-store sales for company-owned restaurants to flat to positive 1% from the previous range of flat to positive 2%. The company expects restaurant operating margins to remain flat. Capital expenditures are estimated between $29 million and $32 million.
Our Take
We remain enthusiastic about the company’s future strategies including improving margins, driving same restaurant sales, focusing on low capital growth opportunities, acquisition of franchise-partner units and returning excess cash to shareholders.
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 reported disappointing third quarter results and has also lowered its guidance. Thus, we expect estimates to plunge going forward.
Ruby Tuesday currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.
One of Ruby Tuesday’s primary competitors, Red Robin Gourmet Burgers, Inc. (RRGB) posted fourth quarter 2010 adjusted earnings of 12 cents per share, which surpassed the Zacks Consensus Estimate of 5 cents. Results benefited from the upside in revenue driven by higher comps.
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