The Fall and Rise and Fall of Ruby Tuesday

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A Ruby Tuesday restaurant location in Maryland.
Kristoffer Tripplaar/Alamy
The bad thing about turnarounds is that sometimes turnarounds themselves can turn around. Shares of Ruby Tuesday (RT) tumbled on Friday after posting uninspiring quarterly results. The casual dining chain has been struggling in recent years, but it finally seemed to be turning the corner last year.
Ruby Tuesday was starting to close underperforming eateries, and comparable-restaurant sales were starting to turn higher. It wasn't a very dazzling turnaround, but at least the chain was starting to take baby steps in the right direction. That brings us to Friday's fiscal second quarter report when Ruby Tuesday rediscovered its backpedalling ways.

Flavor of the Weak

It was a rough quarter for Ruby Tuesday. Revenue from continuing operations slipped to $262.7 million, well short of the $268.4 million that analysts were expecting. Closing 42 restaurants over the past year will eat into top-line growth, but Ruby Tuesday was also held back by a 1 percent decline in same-restaurant sales.

The slowdown at the restaurant level was fueled by a 1.3 percent decline in traffic to the average Ruby Tuesday. That may not seem so bad, but keep in mind that comps at company-owned restaurants plunged 7.8 percent during the prior year's fiscal second quarter. Work the math back and we're talking about an 8.7 percent decline in comps over the past two years.

The restaurateur managed to post a narrower deficit than it did a year earlier, but red ink is still red ink.

Turnaround Denied

After five consecutive quarterly deficits, Ruby Tuesday seemed to be turning the corner with a profit during the first quarter of fiscal 2015. It was coming off of back-to-back quarters of positive comparable-restaurant sales and its guidance for the quarter ending in early December called for it to stretch that streak to three straight quarters of year-over-year growth.

After a couple of makeovers and menu tweaks, it seemed as if the chain had finally discovered a way to make itself relevant at a time when casual dining icons including Red Lobster and Darden Restaurants' (DRI) Olive Garden were sputtering.

It wasn't to be. Last month it warned that same-restaurant sales would be negative for the quarter. The turnaround would have to wait, and it was time to worry again about the chain that has only beaten Wall Street's profit targets in two quarters over the past two years.

Goodbye Ruby Tuesday

It's hard to fix a chain once consumers have moved on. Ruby Tuesday tried to go upscale a couple of years ago, trading in its then-signature bric-a-brac decorations and faux Tiffany lamps for a fancier and pricier menu served up to guests sitting in leather banquettes and surrounded by dark woods. The move to go upmarket came at a lousy time. The country was heading into an economic funk.

It then went the other way in 2013, trying to appeal to value chasers with pretzel bun burgers and flatbreads at single-digit price points. It didn't work right away, but the temporary uptick last year suggests that it seemed to be on to something.

It wasn't. The midpoint of Ruby Tuesday's guidance for the current quarter calls for another period of negative comparable-restaurant sales. It plans to close a few more restaurants. The carnage continues. Ruby Tuesday still has a chance, but it won't be as easy as last year's brief mirage of a turnaround.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.
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