A recap of commentary from the last earnings call and our thoughts heading into 4QFY11 earnings on Thursday.
The biggest event for RT this quarter was that Steven Becker and Matthew Drapkin have been appointed to the board of directors at Ruby Tuesday shortly after Becker, Drapkin and Carlson Capital began agitating the company. Sandy said "Steve, Matt and I recently met in person, and have subsequently worked quickly and cordially to reach a win/win scenario which we believe is in the best interests of our shareholders.”
HEDGEYE - Why did Sandy cave so quickly? My guess is that the fundamental performance of the company did not offer him the opportunity to fight. Yes, it’s going to be another bad quarter. That being said, look for changes in the strategic direction of the company (i.e. new ways to create shareholder value). The stock has been outperforming of late.
BIG PICTURE COMMENTS FROM LAST QUARTER
SALES TRENDS - “Absent the snow-related impact during the quarter, which we estimate at 1.5-2.0% on top of last year's negative weather impact, we would have had our fourth quarter in a row of positive same restaurant sales.” The weather dilution impact estimated at $0.03 to $0.04 per share in the third quarter
“We have seen sales in bar grill lag casual dining overall and have recently seen some non-weather related issues in some of our markets, more so in the south, which is most likely due to the gas prices being significantly higher year-over-year and tracking a bit like we saw in 2008. We are actively responding with sales building programs to drive traffic in these markets, which we hope will offset this behavior over time.”
HEDGEYE – Actually, we have learned that sales in the bar & grill category have not been disappointing. The two largest players Chili’s and Applebee’s are showing accelerating trends: yet another indication of a bad 4Q from RT.
INVESTMENTS FOR THE FUTURE - “We will have invested approximately $9 million of loan in our fresh bread program and our new marketing/brand research initiatives by the end of fiscal year '11 and with some offsetting costs, but basically a big investment year. Just need to translate into sales. “We've recently strengthened our real-estate and development team as we get back into trying to move into the investment of this excess capital and start growing a bit again.”
HEDGEYE - Defensive move or competitive advantage. Not sure giving away bread is a big deal to anyone.
THREE YEAR STRATEGIC PLAN - “First and foremost, we continue to stay focused on getting more out of Ruby Tuesday, continue to enhance the sales, margins, and overall strength of that great brand. We need to maintain that cash flow and create even more cash flow from Ruby Tuesday, the cash cow, so that we can reinvest it in other areas, and if we can't, return it to shareholders in whichever way is appropriate.”
“Our second strategy is focused on increasing shareholder returns through new concept conversions. We believe that converting our low volume Ruby Tuesday restaurants that are in good site locations to other high-quality casual dining concepts.”
“Whatever is best suited for that local marketplace is what we're focused on. Actually, we're trying to run our entire company in almost in every respect on what's right for that market instead of being a national brand is more of a roll-up or collection of communities in our company.”
“Our third strategy is to create value by increasing revenue and EBITDA through franchise partner acquisitions. We pretty well have this complete. We'll have it complete by the end of the year”
HEDGEYE - First, it was two years ago that a national advertising campaign was going to save the day and drive traffic. Since that failed, they are now going in the opposite direction “roll-up or collection of communities in our company”. Second, they want to convert Ruby’s Tuesdays in to other concepts and at the same time increase exposure to the brand by buying franchise partners. I’m not sure that’s likely to produce an outcome in line with the company’s ultimate goal.
COMMODITY EXPOSURE - While we currently could have some food cost exposure in the back half of fiscal 2012, we also have plans for savings, which on a net basis we currently estimate to approximate a 20 to 30 basis point increase in food costs for fiscal 2012.
HEDGEYE – The final impact of food inflation will likely be higher than 20-30 basis points, in our view.
PROMOTIONS - “We hope to continue shifting our promotional dollars away from coupons and incentives and towards LTO product offerings and frequency-building programs”
“From a promotional and advertising perspective, we continue to have success with our RT Athletics program, which is a part of our So Connected e-mail club The investments we've made in the bar program to create a more sophisticated sports viewing experience where guests can come and have fun with friends, watch great sporting events, and enjoy handcrafted beverages and unique bar fare have resulted in improved bar sales and are helping to support our goal of moving alcohol sales from 9% to our goal of 12%.”
“We're investing approximately $4 million in order to better understand consumer and guest behavior this year, and anticipate these investments will continue to positively impact sales and brand strategy throughout fiscal 2012”
HEDGEYE - Coupons are a big driver of consumer behavior. The transition could cause a hiccup in sales trends.
DEVELOPMENT - “We are still researching and negotiating potential sites for restaurant development and are on track to open our first Lime Restaurant in the first quarter of fiscal 2012 and should have six to eight open by the end of the calendar year. We're targeting three regions for development including Washington, D.C., the Midwest and Ohio Valley area, and the core South East.”
“Our next planned conversion will be a Marlin and Ray's slated for the northern Virginia area early this summer. Now our site selections for our planned conversions over the next 12 to 15 months are largely complete and over the next nine to 12 months we should have a better of idea of which brands represent the best conversion growth opportunity in each individual market.”
GUIDANCE FOR 2011 IS AS FOLLOWS:
- Same-restaurant sales for company-owned restaurants to be in the range of flat to positive 1% for the year
- We do not expect to open any inline restaurants in fiscal '11, anticipate closing eight to 10 company-owned restaurants, these closures obviously exclude our conversions, and converting four to six lower performing company-owned restaurants to other high-end casual dining concepts. Our franchisees expect to open between six to eight restaurants in the year, up to three of which will be international.
- We plan to buy back the remaining 13 franchise partnership restaurants during the fourth quarter.
- We expect restaurant operating margins to be relatively flat, primarily reflecting the impact of our continued investment in higher-quality menu items and new product offerings, such as our complimentary bread program, as well as investments in service to enhance our guest experience and drive sales, all offset by lower promotional levels.
- Our core food costs are expected to remain relatively stable compared to the prior year.
- Depreciation and amortization is estimated to be $62 million to $64 million.
- SG&A is targeted to be up approximately 18% to 20% year-to-year, primarily reflecting a shift in spending from promotional initiatives to advertising expense, higher marketing brand research, higher training expense, and the loss of fee income from acquired franchise partnerships which has historically offset our selling, general, and administrative expenses.
- Interest expense is estimated to be in the $12 million to $13 million range. The tax rate is estimated to be 10% to 15% as we continue to benefit from FICA Tip and other employment-related tax credits.
- Diluted earnings per share in fiscal 2011 are estimated to be in the range of $0.74 to $0.82.
Howard Penney
Managing Director
Rory Green
Analyst
