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Ruby Tuesday (NYSE:RT), a chain of casual dining restaurants and franchises around the world, was down almost 5% (in after-market trading) after its Q1 FY2013 earnings miss. The company's stock has little downside left, with a short ratio of 11 days and the shares now trading near $7. While we think that the company has shown an improvement in same restaurant sales and margins (due to cost savings), it leaves much to be desired for an ideal investment opportunity. Investors should look for customer traffic to hold up in the coming quarter before investing.

Q1 FY2012 performance:

In July, the company had given a same restaurant sales guidance of approximately 2% for Q1 FY2013. The company met its guidance by posting same restaurant sales of 1.9% in Q1. Comparable restaurant sales had decreased by 4.1% in Q1 FY2012 and increased by 1.2% in Q1 FY2011. Thus, the latest performance in terms of same restaurant sales has definitely improved, as this quarter proved to be the first quarter out of the last seven with positive sales.

The company reported diluted earnings per share of $0.04, or $0.05, excluding the CEO transition/search fee. The four analysts that follow the stock were expecting $0.06. A year ago, the EPS was $0.05. Net income of $2.9 million (excluding the CEO related expense) is still down $3.1 million.

The company has favorably reduced debt to $322 million as compared to last year Q1's $347 million, and the cash amount on the balance sheet has improved from $8 million last year to $65 million. The interest coverage ratio (trailing twelve months) is 3.67x, which means that the company might face some troubles in interest payment if net income continues to decline. The company does not pay a dividend. With operating cash flows of $112 million (trailing twelve months), according to Yahoo Finance, the company plans to repurchase stock and reduce debt.

Guidance:

The full year same restaurant sales were expected to be in the range of 0%-2%. Diluted EPS guidance for FY2013 was $0.2-$0.3, below analyst estimates of $0.44, according to Reuters. The company reiterated its FY2013 guidance yesterday. Analysts are now expecting an EPS of $0.28.

Free cash flows for the year are estimated to be $20-$30 million, with CAPEX of $44-$50 million. Last year (FY2012), the company had free cash flows of $74 million with CAPEX of $38 million. The company attributes this difference to higher interest expense, the CEO's pension, higher CAPEX, and lower EBITDA.

The cost saving ($37 million for FY2013) is being spent to fund television advertising to increase traffic at restaurants. The company raised its operating margin improvement guidance due to cost savings from 0.2%-0.25% to 1.5%-2%. The advertising expense is expected to be almost double last year's expense of $47.9 million i.e. $80-$85 million.

The company repurchases shares; it repurchased 364,000 shares during the quarter and 173,000 just after quarter end. A total of 5.4 million shares can be repurchased under the remaining repurchase authorization. The company has around 63 million shares outstanding. The repurchase authorization left is around 8.6% of the outstanding shares. The company, in its guidance, mentioned fully diluted weighted average shares outstanding for the year to be 63-64 million.

Valuation:

The short ratio for the stock is 11 days, with 6.6% of the float short.

At a forward P/E of 20x and FY2014 consensus EPS of $0.35, the share price comes out to be $7. The mean consensus price is almost the same i.e. $7.33. Competitors like Darden Restaurants (NYSE:DRI) and Dine Equity (NYSE:DIN) trade at forward P/E multiples of 12x and 13x, respectively, with PEG ratios of 1.2 and 1.38 as compared to RT's 2.79.

To reiterate, we do not find RT to be a compelling buy, even after positive same restaurant sales this quarter. The bottom line leaves much to be desired, and the shares seem to be priced at a premium to the company's peers.

Source: Ruby Tuesday: Growth In Restaurant Sales Doesn't Warrant A Buy Rating