Ruby Tuesday Earnings: Investors Should Stay Away

Summary

• Ruby Tuesday is closing locations.
• Ruby Tuesday needs to boost operating income to cover interest costs.
• Free cash flow situation improved.

On Jan. 12, dine in restaurant chain Ruby Tuesday (NYSE: NYSE:RT) came out with its Q2 FY 2015 10-q which followed up on its earnings announcement released Jan. 8. The company didn't do so well on the top line front, but it is making some strides on the profitability and free cash flow fronts. However, the company leaves much to be desired investment wise. Here's why.

Revenue declined

Ruby Tuesday saw its year-to-date revenue decline a whopping 4%. Ruby Tuesday closed a total of 36 company owned and franchised locations year-over year. One small bright spot is that its year-to-date same store sales at its company and franchised locations increased 0.1% and 6.9% respectively, meaning customers are slowly returning to established and open locations. However, customers may get discouraged if they continually hear about other location closures.

Improved profitability

Location closures and cost cutting measures at Ruby Tuesday resulted in a net loss shrinkage of 88%. The company swung a year-to-date net operating loss of negative $49.1 million to a positive $1.4 million so far this year. Cost cutting measures are a must when a business is struggling, but the company really needs to reflect on strategies to improve customer experience and bring more customers through the doors.

Free cash flow improved

Ruby Tuesday's year-to-date free cash flow swung to a positive $1.7 million from a negative $8.8 million the same time last year. However, this wasn't due to normal operations. The main reason the company was free cash flow positive related to disposal of plant, property and equipment amounting to $5.6 million. Companies can't thrive on the sale of equipment from shuttered businesses.

Balance sheet ok for normal circumstances

Ruby Tuesday possesses an ok balance sheet if times were normal for the company. Ruby Tuesday's $48 million in cash translates into 11% of stockholder's equity. I would prefer if this figure exceeded 20% to help them self-finance innovation and strategic acquisitions. The company reduced its debt by $21 million which represents a good thing when operating profits are scarce. However, its year-to-date operating income only exceeded interest expense by 0.12 times. The rule of thumb for safety lies at five times or more. I would definitely like to see this company improve its operating profit or else it's going to have a difficult time making interest payments.

How does this fit into the bigger picture?

Ruby Tuesday has been in trouble for quite some time. Over the past five years revenue, net income, and free cash flow declined 4%, 137% and 74% respectively (see charts below). The company has struggled with declining same store sales and declining average restaurant volume, meaning customers are shying away from the chain. Long-term subpar fundamentals translated into long-term losses for its shareholders. Over the past five years, Ruby Tuesday gave its shareholders a negative return of 17% vs. a positive return of 75% for the S&P 500.

RT Revenue (NYSE:TTM) data by YCharts

RT data by YCharts

Looking ahead

I would like to see Ruby Tuesday's fundamentals stabilize and return to a growth trajectory before investing. If the company can't turn enough of an operating profit to pay its interest costs then it may default. Prospective investors should take their investing dollars elsewhere.

Analyst’s 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.