Shares of Ruby Tuesday, Inc. (RT) slumped 11.7% as the company recently reported disappointing second-quarter fiscal 2015 results. While losses were wider than the Zacks Consensus Estimate, revenues missed the same. The company lowered its comps guidance for fiscal 2015, further dampening investors’ confidence.
This restaurateur posted a loss of 15 cents per share, marginally wider than the Zacks Consensus Estimate of a loss of 14 cents, possibly due to lower revenues. However, losses were substantially narrower than the year-ago loss of 34 cents.
Meanwhile, total revenue of $262.7 million missed the Zacks Consensus estimate of $268 million by 2% and declined 4.9% year over year. The downside reflects the closure of 42 underperforming restaurants since first-quarter 2014, along with comps decline.
Behind the Headlines
Same-restaurant sales were down 1% at company-owned restaurants, worse than the 1.1% comps growth in the prior quarter. Also, sales failed to live up to management’s expectation of 1% to 2% increase. This reflects a 1.3% decrease in guest count, worse than the 1.3% increase registered in the last quarter. However, this decline was partly offset by 0.3% increase in net check.
Restaurant-level margins stood at 13.6%, up 110 basis points (bps) year over year, owing to brand transformation efforts. Selling, general and administrative expenses, as a percentage of revenues, declined 300 bps to 10.4% owing to lower marketing expenses on efficient media and production plan.
Fiscal 2015 Guidance
Ruby Tuesday expects fiscal 2015 comps in the range of down 1% to up 1%, from 1% to 2% increase.
The company, however, maintained its restaurant-level operating margin and expects it to be up 16%–17% in fiscal 2015.
The company also reiterated its expectation for selling, general and administrative (SG&A) expenses in the range of $127 million–130 million. The decline in SG&A expenses from fiscal 2014 reflects $5.3 million costs incurred in 2014 due to corporate restructuring and executive transition expenses and savings of $3.5 million from cost reduction initiatives undertaken in the same year, which will benefit the company in fiscal 2015.
Also, Ruby Tuesday expects marketing expenses to decline on the back of benefits from its efficient marketing strategy. Capital expenditure is expected to range within $28 million to $32 million.
Third-Quarter 2015 Guidance
Ruby Tuesday expects same-restaurant sales for the third quarter in the range of down 2% to up 1%.
Our Take
In order to cope with the weaker same-store sales owing to a slack consumer spending environment, Ruby Tuesday added cheaper items to its menu and closed underperforming restaurants. We believe that these initiatives will benefit the company over the long run.
Stocks to Consider
Ruby Tuesday has a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include Darden Restaurants, Inc. (DRI), Red Robin Gourmet Burgers Inc. (RRGB) and BJ's Restaurants, Inc. (BJRI). While Darden Restaurants and Red Robin sports a Zacks Rank #1 (Strong Buy), BJ's Restaurants has a Zacks Rank #2 (Buy).
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