Ruby Tuesday: Uncompromisingly Poor Results

| About: Ruby Tuesday, (RT)
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Summary

Ruby Tuesday is "fully committed to preparing and serving food of uncompromising freshness and quality."

Does Ruby Tuesday deliver uncompromising returns for investors? Unfortunately not.

Based on its negative EPS, anemic returns, and high EV/EBITDA, we advise investors to give Ruby Tuesday a miss.

Ruby Tuesday (NYSE:RT) owns, operates and franchises the Ruby Tuesday casual dining restaurant chain. As of June 3, 2014, RT owned and operated 668 - and franchised 79 - Ruby Tuesday restaurants.

Ruby Tuesday's Parmesan Chicken Pasta. Source: Yelp

According to its website, Ruby Tuesday is "fully committed to preparing and serving food of uncompromising freshness and quality." Great. So our question is: Does Ruby Tuesday deliver uncompromising returns for investors? It doesn't look good.

The Numbers

  • Increasing Losses Per Share, Declining Same-Restaurant Sales. Upon reading RT's 2014 10-K (emphasis added), it's not a pretty picture:

For the fiscal year ended June 3, 2014, our diluted loss per share from continuing operations was $1.08 on a net loss from continuing operations of $64.9 million compared to the prior year diluted loss per share from continuing operations of $0.38 on a net loss from continuing operations of $23.4 million. On an adjusted basis, the year-over-year decline in earnings per share was primarily driven by our 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants and the impact of closure and impairment charges associated with a net

Not great. RT loses money, and is experiencing a decrease in same-restaurant sales. But maybe this year is just an anomaly?

Unfortunately not.

  • Declining Revenue Growth, Declining (And Negative) Net Income. For several years, revenue growth and net income has been in decline, and net income is currently in the red at -29.54M.

RT Revenue (<a href=

Source: YCharts

  • Cost of Goods Sold Tracks (Or Exceeds) Revenue. We can't quite get excited about revenue increases for RT because its net income is nowhere in sight - despite its revenue growth. Also, we note that Ruby Tuesday's Cost of Goods Sold closely tracks (and sometimes exceeds) revenue.RT Cost of Goods Sold Chart

Source: YCharts

  • Decreasing Operating Margins. Over the past decade, Ruby Tuesday's operating margins have been in decline. After steep downturns between 2008-2010 and 2012-2013, they have settled into lows in the neighborhood of -2.67% and -3.41%, respectively.

RT Operating Margin Chart

Source: YCharts

  • Returns At Near-Decade Lows. Returns, despite recent improvements, are still near 10-year lows:

RT Return on Assets Chart

Source: YCharts

Context

  • But perhaps Ruby Tuesday is an outperformer compared to its peers in the industry? In the following graph, we compare RT with its peers based on several return and valuation metrics.

Based on this chart, it seems that:

  • Unlike its peers, RT has no P/E (because it has no earnings).
  • Unlike its peers, RT has a negative EV/EBIT (because it has no EBIT).
  • RT's ROA is far lower than its peers.
  • RT's ROE is far lower than its peers.
  • RT's operating margin is far worse than its peers.
  • RT's net margin is far worse than its peers.
  • RT enjoys near-zero (or lower) 10-, five-, and 1-year revenue and earnings growth.

In fact, Ruby Tuesday has significantly underperformed both its Peer Group Index and the NYSE Composite Index:

Source: Company Filings

Further, on an EV/EBITDA basis, RT is more expensive than many of its more profitable (based on ROA, ROE, operating profit margin) peers:

RT EV to EBITDA Chart

Variant View

Based on its negative EPS, anemic returns, and high EV/EBITDA, we advise investors to give Ruby Tuesday a miss. But maybe this isn't the whole story for Ruby Tuesday: RT is currently undergoing a brand transformation:

It is possible that, based on this brand transformation, RT will turn its metrics around. As a result, it may be worth putting RT on a watchlist and checking back for significant improvements in ROA, ROE, operating and profit margins, and so forth. Yet, because we won't reward a company for straying from its brand heritage, core customer base, and causing traffic declines, we're not willing to buy RT until it proves itself with strong metrics.

Conclusion

Despite Ruby Tuesday's full commitment to preparing and serving fresh food of "uncompromising freshness and quality," Ruby Tuesday doesn't deliver uncompromising returns for investors. We advise investors to pass on this company in favor of one of its more profitable peers--at least until it shows signs of improving margins, decreasing cost of goods sold, and higher returns.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.