On Nov 14, Zacks Investment Research upgraded Ruby Tuesday, Inc. (RT) to a Zacks Rank #1 (Strong Buy).
The company has been witnessing rising earnings estimates ever since it reported strong fiscal first-quarter results and raised guidance for fiscal 2015 on Oct 8. Further, shares of Ruby Tuesday rose nearly 5% since then.
Why the Upgrade?
Ruby Tuesday’s fiscal first-quarter 2015 loss of 1 cent a share was significantly narrower than the year-ago loss of 34 cents as well as the Zacks Consensus Estimate of loss of 13 cents. The upside reflects improvement in comps and decline in selling, general and administrative expenses.
Same-restaurant sales (comps) were up 1.1% at company-owned restaurants, better than the 0.4% comps growth in the prior quarter. Also, the comps figure exceeded management’s expectation in the range of down 1% to up 1%. This reflects a 1.3% increase in guest count, considerably better than the 0.2% increase registered in the last quarter and 1.7% decline in the year-ago quarter. However, the guest count increase was partially offset by a 0.2% drop in net check.
Also, comps rose 6% at 31 domestic Ruby Tuesday franchise restaurants, highlighting an improvement from the 4.9% increase recorded in the previous quarter.
Restaurant-level margins stood at 17.4%, up 420 basis points (bps) year over year, owing to brand transformation efforts.
Selling, general and administrative expenses, as a percentage of revenues, declined 180 bps to 11% owing to lower marketing expenses on efficient media and production plan.
Given the positive fiscal first-quarter results, the company raised the lower end of the comps guidance.
Further, Ruby Tuesday increased the restaurant-level operating margin forecast, while lowering that of selling, general, and administrative (SG&A) expenses, which caught investors’ attention.
Ruby Tuesday increased the lower end of the comps guidance for fiscal 2015, which now stands at 1–2%, compared with the previous expectation of flat to up 2%.
The company expects restaurant-level operating margin to be up 16–17% in fiscal 2015, higher than the previous projection of 15–16% and 15.1% reported in fiscal 2014. Lower cost of goods sold, payroll and related costs, and other restaurant operating costs are expected to make up for the expected increase in incentive compensation.
The company lowered its expectation for SG&A expenses to a range of $127–$130 million for fiscal 2015 from $128–$132 million. The new range is also much lower than the fiscal 2014 expenses of $137.2 million. The decline reflects $5.3 million costs incurred in 2014 related to corporate restructuring and executive transition expenses and savings of $3.5 million from cost reduction initiatives undertaken in 2014, which will benefit the company in 2015.
Also, Ruby Tuesday expects marketing expenses to decline in fiscal 2015 on the back of benefits from its efficient marketing strategy.
Other Stocks to Consider
The following companies with a favorable Zacks Rank that are worth considering include DineEquity, Inc. (DIN), BJ's Restaurants, Inc. (BJRI) and Domino's Pizza, Inc. (DPZ). While DineEquity and BJ’s Restaurants sport the same Zacks Rank as Ruby Tuesday, Domino's Pizza has a Zacks Rank #2 (Buy).
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