Ruby Tuesday Won't Go Out of Tune

On the face of it, Ruby Tuesday's (NYS: RT) $2 million loss in the last quarter may not be exactly good news. And some people are complaining about the salad bar. I would, however, put my money on the company. The decision has nothing to do with my taste buds, but it's because I do see some major strategic changes being brought about by the management. This could possibly be a game changer.

Bitter taste of the last quarter
With assets worth $1.2 billion and about $90 million in annual cash flows, Ruby Tuesday has huge potential. Last year, it acquired 109 of its franchises to gain better control of these units. But it seems the company is still in the process of turning them into profitable ventures. The total loss suffered by these units in the last quarter was $55 million, partially offsetting a 5.6% increase in the company's total revenue.

Acquisition of franchises also led to an increase in the company's debt burden from $289 million in 2010 to $342 million, which is an area of concern. But they have been able to maintain their interest coverage ratio at or above five times for the last two years. This gives us reason to believe that the company is well-placed to make its interest payments.

Bird's eye view
A few apparent reasons behind Ruby's not-so-good earnings during the last quarter can be understood better if we look at the overall state of the economy. Also, the East Coast was hit by Hurricane Irene in August. It caused a lot of damage and as a result, the spending power of people in the region has been affected. In fact, as many as 17 U.S. states were badly affected and more than half of Ruby Tuesday's restaurants are located in these states.

On the whole, the last quarter has traditionally been a low performing one for the entire industry. To add to it, changes made in labor laws this year, such as an increase in minimum wages in several states, further added to the glum scenario. This is because in service industries such as restaurants where labor costs could amount to a third of total expenses, any regulatory changes do affect the bottom line significantly.

Potential game changer
Ruby Tuesday has some interesting plans for the coming year with capital expenditures to the tune of $35 million. Last year, it got into licensing agreements with concept restaurants such as Lime Fresh Mexican Grill, Marlin & Ray's, and Truffles Cafe. These restaurants have good brand positioning in the fast casual segment, which is a growing segment in an industry where demand exceeds supply. Also, setting them up would require less capital, and as a result, Ruby Tuesday is likely to benefit in terms of higher returns on investment. Seven of these restaurants have already been opened, 11 will open this fiscal year, and 27 more are planned for the next fiscal year.

In addition, improvements are also being made in areas such as customer experience and other promotional tools. All these have the potential to turn Ruby Tuesday's business around, something investors can look forward to in the coming months.

Fool contributor Priya Singh does not own shares of any of the companies mentioned in this article.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

At the time thisarticle was published

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.