In the Popeye comic series, the character J. Wellington Wimpy offered to gladly pay you Tuesday for a hamburger today, which implied he had little intention of paying anyone back for the burger. In restaurant firm Ruby Tuesday's (NYSE:RT) case, its strategy of achieving future returns looks equally dubious, and shareholders may not have returns to look forward to.
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Third Quarter Recap
Total sales rose 3.8% to $319.1 million, which the company attributed to the repurchase of stores owned by franchisees. Same-store sales at company-owned stores fell 1.2% but eked out 0.4% growth at the domestic franchised locations. Management converted one location to Marlin & Rays, a seafood concept it just opened in Tennessee and also completed the conversion of another location in Atlanta to a Truffles, a more upscale concept that provides soups, salads, and sandwiches. As of the beginning of March, there were 742 company-owned stores and 113 franchised ones, 57 of which reside overseas.
Total costs rose 6.7% and pushed operating income down 27.8% to $18.7 million. Lower interest expense and a tax credit tempered the net income decline to 10.1% as net income fell to $16 million, or 25 cents per diluted share. This fell well below analyst projections. The company didn't provide a cash flow statement along with its earnings release.
Ruby Tuesday lowered its full-year profit guidance and now expects earnings between 74 cents and 82 cents per diluted share. Analysts project full-year sales growth of just over 4% for total sales of $1.25 billion.
Management detailed a number of strategies it plans to implement over the next three to five years. A primary one is to continue acquiring franchised locations, which stands in contrast to rivals including Yum! Brands (NYSE:YUM) and Dine Equity (NYSE:DIN) that are actively selling off company-owned locations that include KFC and Applebee's, respectively. Fast-food operator Jack in the Box (Nasdaq:JACK) is also doing this as it frees up capital to return to shareholders and focus on keeping the brands fresh in consumer minds.
Another cornerstone approach is to develop new concepts, including the two mentioned above as well as Jim 'N Nick's Bar-B-Q, also in Tennessee. The long-term plan may be to rebrand another of namesake stores, including newly acquired ones from franchisees, though the company also set its primary focus on its core restaurant brand.
Overall, until tangible signs that management's strategies are paying off, investors may be better off keeping their money in their own pockets and not paying up for shares of Ruby Tuesday until sales and profit growth turn consistently positive. Rival Darden Restaurants (NYSE:DRI) has a much better track record of keeping older concepts growing and successfully developing new ones. (For related reading, take a look at 3 Scrumptious Restaurant Stocks For 2011.)
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