Stocks & Markets

Ruby Tuesday Bets on New Chains to Spark Growth


In a bid to restart its growth, restaurant company Ruby Tuesday (RT) is going off its time-tested menu: Rather than expand its eponymous flagship chain, the company will make forays into Mexican, barbecue, and seafood dining it expects to be more profitable.

Ruby Tuesday, based in Maryville, Tenn., was arguably the hardest, and earliest, hit in a restaurant category—known as casual dining—that bore the brunt of American frugality over the past three years. According to Raymond James estimates, the chain's individual restaurant sales dropped 20 percent from their peak in the second quarter of 2004 to their low in the third quarter of 2009. Its shares plummeted to an all-time low of 91¢ in March 2009 on bankruptcy fears.

"Some people in the investment community thought we wouldn't survive," Samuel "Sandy" Beall, Ruby Tuesday's founder, chairman, president, and chief executive, tells Businessweek.com. "We didn't think that."

Now sales have stabilized and are exceeding industry averages. Shares are up 72 percent so far in 2010, after hitting 12.94 on Oct. 25, their highest level since December 2007. And Beall has an unconventional strategy to expand the company—by actually shrinking the Ruby Tuesday chain and investing in other restaurant concepts.

Youthful Heartbreak

In 1972, Beall helped open the first Ruby Tuesday restaurant, which was named after the Rolling Stones song of the same name released in 1967. In a new memoir, Life, Rolling Stones guitarist Keith Richards says Ruby Tuesday is "basically" Linda Keith, a young model who later dated Jimi Hendrix. "Linda Keith was the one that first broke my heart," Richards writes.

Like its namesake, the restaurant company has also broken some hearts on Wall Street. Ruby Tuesday's 11.2 percent same-store sales decline in 2008 was worse than any other U.S. restaurant chain with more than $1 billion in sales, as tracked by industry information provider Restaurant Research. More troubling, the company had $564.9 million in debt in December 2008, and the cash flow from each store used to pay that debt had been cut in half, estimates Raymond James (RJF) analyst Bryan Elliott.

Sales have not rebounded strongly, but they have stabilized. After slowing their slide in late 2009 and early 2010, Ruby Tuesday posted a 0.3 percent increase in quarterly same-store sales in July, compared with a 1.3 percent decline for casual dining restaurants as a whole, according to Restaurant Research. In an Oct. 6 earnings release, the chain said same-store sales rose 1.2 percent last quarter, and adjusted earnings per share were 58.3 percent higher than a year ago.

"They see the plan we executed on is getting results," Beall says of investors' recent enthusiasm for Ruby Tuesday's stock.

No Longer a Quarter Century Ago

That plan included renovating restaurants and changing menus at Ruby Tuesday. "We remodeled every restaurant to take it away from something that looked like it was created in the Eighties," he says. Higher-priced items, such as seafood, were added to menus.

But the chain switched to a more upscale look and menu just when the economy was starting to turn south. Changes alienated existing customers without bringing in new ones, says Brad Ludington, analyst at KeyBanc Capital Markets. "It was the absolute right idea at the absolute worst time in the economy."

Chris O'Cull, an analyst at SunTrust Robinson Humphrey, says recent sales trends are evidence that consumers like the new Ruby Tuesday, once they give it a try. Aggressive use of coupons made a difference, he says. The problem "wasn't the fact that they had changed the brand but the fact that they weren't communicating it effectively," O'Cull says.

Garlic Cheddar Helps

When the severity of the recession became clear, Beall slashed costs and closed restaurants while continuing to introduce new initiatives. Ruby Tuesday provided free garlic cheddar biscuits to diners and introduced a Sunday brunch, a Tuesday night steak-and-lobster deal, and more TVs to the bar to attract sports fans—all while keeping the salad bar that has been the chain's signature feature.

We're "testing stuff all the time," Beall says. "We're a lot better company than we were." He frequently says his goal is to provide a "$25 high-quality casual dining experience for $15."

Not everyone is a fan of the chain. William "Marty" Kotis III, president of Kotis Holdings, a restaurant real estate and investment firm in Greensboro, N.C., says he thinks all the changes have confused consumers.

"Ruby Tuesday has been all over the place," Kotis says. "I can't figure out what they're trying to go for other than the salad bar."

Rough Competition

With 820 domestic restaurants concentrated in the eastern U.S., Ruby Tuesday competes directly with "bar-and-grill" chains such as Applebees, owned by DineEquity (DIN); Chili's Grill & Bar, owned by Brinker International (EAT); and privately held T.G.I. Fridays.

The bar-and-grill chains have not fared well. While Raymond James estimated on Oct. 8 that Ruby Tuesday's individual restaurant sales ultimately dropped 20 percent at their worst, Applebees' sales slid an estimated 9 percent, and Chili's sales fell 13 percent peak-to-trough. Sales at Brinker's Chili's continue to drop. In quarterly results released Oct. 27, Chili's same-restaurant sales fell 5 percent, and Brinker, which also owns the Maggiano's Little Italy chain, said total revenue fell 6 percent.

By contrast, sales at Italian casual dining chain Olive Garden, a unit of Darden Restaurants (DRI), fell at most 3 percent from their peak. An even starker contrast is with the so-called fast-casual restaurants, such as Chipotle (CMG) and Panera Bread (PNRA), which position themselves somewhere between casual dining and fast food, with high-quality food but moderate prices and no table service or tipping.

Same-store sales at those two chains have risen every year despite the recession. Chipotle said on Oct. 21 that same-store sales rose 11.4 percent last quarter, while Panera reported a 6.9 percent rise on Oct. 26.

More Demand Than Supply

Casual dining is an "overdeveloped category," and even after the recession shut many restaurants there are "still 10 percent to 15 percent too many" casual dining restaurants in the U.S. based on demand, Beall says. It could take another "three to five years to recover," he adds.

Fast casual, meanwhile, is an "underdeveloped category," Beall says. "It has greater demand than supply." So rather than expand its Ruby Tuesday brand, Beall is planning to move into the fast-casual segment. On Sept. 13, Ruby Tuesday signed a deal to license up to 200 new restaurants following the fast-casual concept of a Miami-based chain called Lime Fresh Mexican Grill.

Ruby Tuesday is also closing down some underperforming restaurants, renovating them, and turning them into other, high-end concepts. An upscale barbecue restaurant called Jim 'N Nick's Bar-B-Q is already open in Knoxville, Tenn., and a café called Truffles is expected to open in the Buckhead section of Atlanta in November. Those concepts were licensed from other companies, though Ruby Tuesday is also developing its own new seafood concept.

The idea is to find concepts that can generate far more revenue on the same real estate, often in places where nearby bar-and-grill competition was constraining sales.

Splintered Attention

There are risks, but also potential rewards, in branching out beyond the Ruby Tuesday brand. "If management divides their focus across too many different concepts, that could weaken focus on the core brand," says Morgan Keegan analyst Robert Derrington. "On the other hand, it could be a big boost to sales" and profits, he says.

Derrington has a neutral "market perform" rating on Ruby Tuesday's shares, arguing they "appear to be fairly valued." Of the analysts surveyed by Bloomberg who provide ratings, three others give the chain's stock a neutral rating and four rate it a "buy." None recommends selling the stock.

Raymond James' Elliott, who gives the stock an "outperform" or buy rating, is optimistic about management's ability to juggle its new initiatives. "This is a pretty sophisticated management team," he says. "Certainly, the current level of sales and profits does not justify opening more Ruby Tuesday restaurants."

Casual dining is often the first to be hurt in a recession, when consumers cut back on nights out, Elliott says. It's also the first to benefit from a recovery, but he expects industry sales to grow at most 2 percent to 4 percent per year—"very different from the 5 percent to 10 percent everyone in this industry was used to."

In that environment, competition is likely to be fierce. "You've got to make sure you're overdelivering," Beall says. "It's still a street fight out there."

Steverman is a reporter for Bloomberg News in New York.

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