An article in Fortune via CNN Money that looks favorably upon the Darden (NYSE:DRI) restaurant chain [see Darden's latest quarterly conference call here], notes the formidable problems facing the restaurant industry:
After years of expansion and development, the restaurant industry is in danger of overbuilding, especially within the casual dining segment, which includes sit-down restaurants such as Applebee's (NYSE:DIN), Chili's (NYSE:EAT), Ruby Tuesday (NYSE:RT) and [Darden's] Olive Garden... Bennigan’s and Steak & Ale chains went bankrupt in July.
In that context, we look at some of the macro trends noted on Ruby Tuesday's (RT) FQ209 conference call. Industry consolidation is just one of the ripples from an industry that is now contracting alongside household disposable income.
Our restructuring plan includes closing approximately 40 restaurants during the third quarter and another 30 over the next several years. In December same restaurant sales for company operated restaurants were down 9.1% and those of our franchise restaurants declined 9.9%. The restaurant level operating margin was 13.5% during the quarter compared with 15% a year earlier.
We have restructuring and goodwill charges of $56.2 million in the quarter… Surplus properties that we intend to sell… totaled $19 million… Also included in this number are… the development costs at sites we no longer intend to open and closed restaurant lease reserves…We [will] incur lease cancellation costs of approximately $10-15 million in the third quarter.
Over the next couple of years we will have closed approximately 10% of our company owned restaurants. This analysis also led us to write down the value of our excess properties to facilitate a quicker sale if possible in this market, to sell them as fast as we can to raise cash to pay down our debt.
Advertising increasingly heads to the internet:
We have… fewer ad dollars… From an advertising perspective we are evaluating everything we have got out there and operating in a more short-term cycle right now in the next 45-60 days based on what we are seeing and what is working out there. But it will be generated around promotions, targeted programs, in restaurant strategies, maybe some viral stuff out there as well.
Cost cutting: More heads to roll?
Our support center headcount is down approximately 20% over the last 18 months. Benefit costs have also been lowered substantially for next year following a large increase this year. Overall our team has done an excellent job of reducing costs. It is almost part of the culture now with everybody looking every day on how to save another $1 million.
We have done an outstanding job of cutting costs evidenced by the $40-45 million we have already cut. In addition I’m sure we will find at least another $10 million, hopefully a lot more before the New Year starts.
Approximately 1/3 of [our store closings] were leases that were expiring naturally in the coming months, December 31 of this year. That was one group. The other group [consisted of] one-off locations in small towns that haven’t performed and we felt like going forward they would not be able to perform in the current environment. The other 1/3 were just miscellaneous.
As you get outside the larger cities in the South they are the ones who have been hurt a lot more. So Atlanta in the last several quarters hasn’t been hurt as bad but then you get out to Macon or Vidalia or some of those and you are getting hurt much worse. That is a consistent trend in the Southern major markets between Nashville, Atlanta and all those type markets. The further you get away from the city the worse off the consumer is.
From Ruby Tuesday’s 10-K:
Our first priority is to stabilize same-restaurant sales and arrest the current decline... We will continue to increase consumer awareness about the new Ruby Tuesday brand through a combination of media advertising and local marketing initiatives.
The decrease in same-restaurant sales is partially attributable to reductions in customer counts, due to a challenging economic environment and various consumer pressures, at a time concurrent with our move toward the higher end of casual dining. We also believe that other factors contributing to the decline include the loss of some of our customers who do not feel as comfortable in our re-imaged restaurants, the impact of heavy price-focused advertising by some of our traditional competitors, and leveling of sales growth in the casual dining segment of the restaurant industry resulting from the growth of supply outpacing that of demand.