Ruby Tuesday Needs Better Tricks Than This to Survive

Source: Ruby Tuesday.

Tell me if you've heard this one before. Restaurant operator Ruby Tuesday is really going to turn things around this time because it's going to change up its menu while shedding underperforming stores, which will drive same-restaurant sales higher. Comps may still be negative now, but they're starting to head in the right direction. All it needs is just a little more time to set things right.

You'll be forgiven if you think that sounds familiar, because it's essentially the same story the casual-dining chain has been spinning for the past few years. In fact, it said back in late 2012 that after finally achieving positive same-restaurant sales -- the first time in almost two years that it had done so -- it was a result of its new menu and new marketing, which it would use to continue driving comps higher. Yet they soon collapsed, once again.

Source: Ruby Tuesday SEC filings.

As the above charts show, we've heard this refrain before. Ruby Tuesday has been rationalizing its store base, both company-owned and franchised, for a while; yet, despite new menus, regardless of whether one new concept chain has been swapped out for another -- Marlin & Ray's, Wok Hay, and Truffles Grill were seen as holding high-growth potential, but ended up cannibalizing its Lime Fresh Mexican Grill so they were killed off -- same-restaurant sales remain in negative territory.

There are things Ruby Tuesday needs to do if it wants to do more than simply limp along, but investors needn't go along for the ride until management proves it can translate its words into deeds. Last week, it reported a 3.8% drop in revenues to $295.6 million from $307.4 million in the year-ago period, generating a loss of $7.4 million, or $0.12 per share, down from a profit of $2.2 million, or $0.04 a share. It forecast that comps would be in a range between down 1% once again to up 1%, which would be a change of pace; but we've seen these temporary blips before, too.

The larger problem is the decline in dining itself as the economy grinds down consumers. While Black Box Intelligence and People Report say the industry in March enjoyed its first monthly increase in same-store sales since November, with comps up 2% during a two-year period, it also says traffic fell for the month, down 1.2%. This indicates that the gains the restaurants are making are coming from higher average tickets due to higher prices, and not because there's a real groundswell of pent-up dining demand.

The casual-dining segment is in real trouble, which is why Ruby Tuesday is traveling the well-worn path into fast-casual. Yet with only 28 stores total for its Lime Fresh Mexican Grill concept, there's not nearly enough critical mass to change its overall direction. (And can it be any more transparent in trying to copy the segment's niche leader?)

The stock is up 6% during the past month, but we may be just hearing Ruby Tuesday singing the blues again next quarter. Investors should be wary of buying into this perennial turnaround story.

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