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Ruby Tuesday soars as loss, same-store sales decline top estimates

The Exchange
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Ruby Tuesday (RT) was having one of its best days in years Thursday, despite a quarterly loss and another negative reading for same-store sales at the casual-dining restaurant operator.

Shares of the Maryville, Tenn., seller of burgers, salads and entrees were jumping 15.8% to $6.90, and only 90 minutes into trading, volume was nearly four times the normal total for an entire session. The last time it rose more in a single day was April 2009.

The surge, which appeared largely to be a relief trade for a troubled stock, came after Ruby Tuesday said it lost 7 cents a share, before items, in the third quarter, with a same-store sales decline of 1.9% at corporate locations. That was the 11th time in the past 13 quarters it's posted a drop in comparable sales. However, both were better than analysts expected, with FactSet carrying estimates for a loss of 8 cents and a comp sales decline of 5.2%. On the bottom line, it notably broke a string of seven consecutive misses.

Revenue of $295.6 million was down from $307.4 million in the same quarter last year, though that partly was driven by a net reduction of 30 company-owned stores, and it exceeded estimates by some $11 million. Ruby Tuesday does franchise, although it owns the great majority of its restaurants.

As evidenced by the loss and same-store sales, positives here are relative. Another was guest counts. Traffic at comparable restaurants fell 1.7%, keeping up a recurring theme not just for Ruby Tuesday but for similar operators, such as Darden's (DRI) Olive Garden and Red Lobster, DineEquity's (DIN) Applebee's and Brinker International's (EAT) Chili's. That said, compared with the second quarter's 6.3% guest decrease, it was on the optimistic side, even though the trend for the entire set has been poor, influenced by the popularity of fast-casual competitors.

Ruby Tuesday, analysts believe, will report a loss of 76 cents a share for the full fiscal year. At the moment, FactSet says Wall Street is looking for a loss again next year, but a narrower one, at 13 cents a share.

Weak stock

The pop marks a break for a stock that's been a standout of late for its weakness. Ahead of earnings, Ruby Tuesday was down 14% on the year, trailing the average of a broad set of restaurants tracked by Yahoo Finance by a sizable margin. Last year, it shed 11.8%, one of only a handful of restaurant stocks that fell as the group rallied more than 50% and outperformed the S&P 500 by about 25 percentage points. The shares peaked at $33 in April 2004, but the next few years were terrible. Ultimately, the stock closed under $1 in March 2009. Short-covering could be part of the day's big move, though at 8.1% of Ruby Tuesday's float, the stock's short interest is essentially in line with other food establishments.

Ruby Tuesday is trying to reduce its expenses, having said it wants to lower its cost of goods and selling, general and administrative expenses by a combined $13 million a year. That's potentially a significant plus. Its margins on earnings before interest, taxes, depreciation and amortization, a view of the profitability of the business, lags competitors. "We continue to review all aspects of our business to ensure that we are operating efficiently and cost effectively. Key areas that we are focusing on include supply chain, restaurant operations, and marketing," the company said in a press release.

For the fourth quarter, Ruby Tuesday offered a range for same-store sales, saying they'll be anywhere from down 1% to up 1%. Analysts are expecting a 0.2% increase. Additionally, the company will close as many as nine stores in the quarter as part of its continuing restructuring plan, which has seen it abandon some brands it previously owned.

Separately, the company named two new board members, and that could be affecting the share gain to a degree. One is Mark Addicks, chief marketing officer at General Mills (GIS), and the other is Donald Hess. The latter is probably the more interesting to investors, as he brings past experience as the lead director of Saks and as chief executive at department store chain Parisian. Of note is that those stores were sold to department store Proffitt's, which later was merged with Saks.

Hess is currently CEO of Southwood Partners, a private investment firm. As he's been around corporate acquisitions previously, some shareholders may be getting up hopes that Ruby Tuesday could consider such a move down the road, especially as Darden works on a split and faces pressure from activist investors. The company hasn't said anything to that effect but rumors did emerge late last year that it might be exploring such an option.

Ruby Tuesday has 755 stores namesake stores, 679 of which it owns. It also owns and franchises Lime Fresh restaurants.