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RT > SEC Filings for RT > Form 10-Q on 12-Apr-2013All Recent SEC Filings

Show all filings for RUBY TUESDAY INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RUBY TUESDAY INC


12-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis below for the Company should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes to such financial statements included elsewhere in this Quarterly Report on Form 10-Q. The discussion below contains forward-looking statements which should be read in conjunction with the "Special Note Regarding Forward-Looking Information" included elsewhere in this Quarterly Report on Form 10-Q.

General:


Ruby Tuesday, Inc., including its wholly-owned subsidiaries ("RTI," the "Company," "we" and/or "our"), owns and operates Ruby Tuesday® and Lime Fresh Mexican Grill® ("Lime Fresh") casual dining restaurants. We also franchise the Ruby Tuesday and Lime Fresh concepts in select domestic and international markets. As of March 5, 2013, we owned and operated 709, and franchised 77, Ruby Tuesday restaurants. Ruby Tuesday restaurants can now be found in 45 states, the District of Columbia, 11 foreign countries, and Guam.

As of March 5, 2013, there were 16 Company-owned and operated Lime Fresh restaurants and two Truffles restaurants. As further discussed in Notes D and I to the Condensed Consolidated Financial Statements, on April 7, 2013 we closed our two Company-owned Truffles restaurants. In addition, there were five Lime Fresh restaurants operated by domestic franchisees as of March 5, 2013.

Overview and Strategies

Casual dining, the segment of the industry in which we operate, is intensely competitive with respect to prices, services, convenience, locations, employees, advertising and promotion, and the types and quality of food. We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do. While we are in the bar and grill sector as a result of our varied menu, we operate at the higher-end of casual dining in terms of the quality of our food and service. Our mission is to be the best in the bar and grill segment of casual dining by delivering to our guests a high-quality casual dining experience with compelling value.

We believe there are significant opportunities to grow our business, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:

Enhance Sales and Margins of Our Core Brand

In order to entice guests to see the new Ruby Tuesday, increase frequency of visits, drive same-restaurant sales growth and enhance brand visibility, we are in the early stages of new initiatives focused on promoting the Ruby Tuesday brand as more lively and approachable including the introduction of new menu items, music upgrades, lighting improvements, and revitalizing the look and feel of our television advertising and other promotional materials. Our marketing strategy for the last several fiscal years has focused mainly on print promotions, digital media and local marketing programs, with a minimal amount spent on television. Based on favorable trends exhibited in certain of our television test markets in fiscal 2012, at the start of fiscal 2013 we deployed a more balanced marketing program comprised of a mixture of network and national cable television advertising in tandem with direct mail and other print and electronic promotions. We believe that having a more lively and approachable perception of our restaurants, communicated through television advertising expense levels more in line with our competitive peer group in tandem with a more balanced approach on our promotional strategies will position us for improvements in same-restaurant sales in the future from repeat and new guests.

In order to fund the incremental television advertising efforts, during fiscal 2012 we consulted with a leading enterprise improvement firm to assist us in identifying potential savings opportunities in a number of key areas including procurement, occupancy, and maintenance costs. The majority of these cost savings are being reinvested into our television marketing programs.

Focus on Low-Capital Intensive Potential Growth in the Fast Casual Sector We have been focused on growing our Company in a low-capital intensive manner in the fast casual sector through Lime Fresh, our Mexican fast casual concept. We initially opened Lime Fresh restaurants under a licensing agreement and after over a year of experience which enabled us to better understand the concept's


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positioning and potential in the high-quality fast casual segment, we acquired the business for $24.1 million in the fourth quarter of fiscal 2012 since we believed we could more quickly and effectively grow the concept if we owned it. The fast casual segment of our industry is a proven and growing segment where demand exceeds supply, and we believe opening smaller, inline locations under the Lime Fresh brand provides a low-capital intensive potential growth option for us. While the concept is still in its infancy, we believe it has the potential to generate attractive returns for us if we are able to realize our targeted revenue levels. We opened five Company-owned Lime Fresh restaurants during the first three quarters of fiscal 2013 and plan to open approximately four to five additional Company-owned Lime Fresh restaurants during the remainder of the current fiscal year.

Strengthen our Balance Sheet to Facilitate Growth and Value Creation

During the fourth quarter of fiscal 2012, we further strengthened our balance sheet and created additional financial flexibility by issuing $250.0 million in a senior unsecured notes offering with an eight-year maturity. As a result of the transaction, we were able to pay off all of our outstanding debt with the exception of some of our mortgage debt from previous franchise partnership acquisitions, reduce our revolver commitment size from $380.0 million to $200.0 million, obtain attractive interest rates, extend the maturity date of the majority of our debt for up to eight years, and build excess cash which we will reinvest in the future. We continue to maintain a strong balance sheet and have a sufficient amount of liquidity. Our near-term capital expenditure requirements will consist of opening approximately four to five Company-owned Lime Fresh restaurants during the remainder of fiscal 2013.

Our strong balance sheet is supported by a high-quality portfolio of owned real estate, and during fiscal 2012 we commenced a sale-leaseback program on a portion of our properties in order to create greater financial flexibility and generate additional liquidity for debt reduction or reinvestment. We raised approximately $51.9 million of gross proceeds from our first tranche of sale-leaseback transactions, with the proceeds being utilized for general corporate purposes, including the repurchase of shares of our common stock, capital expenditures, and debt reduction.

Based on the favorable capitalization rates that we realized on the last few transactions in our first sale-leaseback tranche, we are pursuing a smaller second tranche of up to 20 sale-leaseback properties in order to raise additional proceeds of approximately $40.0 million to $45.0 million, of which $11.1 million was realized through the third quarter of fiscal 2013. Since March 5, 2013, we have raised an additional $5.2 million, and expect to raise an additional $10.0 million to $14.0 million during the remainder of fiscal 2013. We anticipate the second tranche of sale-leaseback transactions to be completed over the next four to five fiscal quarters. We plan to utilize the proceeds for general corporate purposes, including further debt reduction. See further discussion of our sale-leaseback transactions in the Investing Activities section of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

We estimate we will generate approximately $21.0 to $26.0 million of free cash flow during the remainder of fiscal 2013. Included in these estimates is anticipated capital spending of approximately $10.0 to $14.0 million. Our objective over the next several years is to continue to reduce outstanding debt levels in order to reduce our leverage, focus on prudent Lime Fresh restaurant development, and opportunistically repurchase outstanding shares under our share repurchase program.

Our success in the key long range plan initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.

Results of Operations:


The following is an overview of our results of operations for the 13- and 39-week periods ended March 5, 2013:

Net income was $2.2 million for the 13 weeks ended March 5, 2013 compared to $4.5 million for the same quarter of the previous year. Diluted earnings per share for the fiscal quarter ended March 5, 2013 was $0.04 compared to $0.07 for the corresponding quarter of the prior year as a result of the decrease in same-restaurant sales as discussed below.


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During the 13 weeks ended March 5, 2013:

· Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 2.8%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 1.7%;

· 13 Company-owned Marlin & Ray's restaurants and one Company-owned Wok Hay restaurant were closed resulting in charges of $4.0 million for asset impairments, including those of Truffles, lease reserves, and other closing costs;

· One Company-owned Lime Fresh restaurant was opened and two were closed;

· We repurchased 1.3 million shares of common stock at an aggregate cost of $10.1 million; and

· Reclassified and/or corrected certain immaterial prior year income statement information which did not change net income. See Note A to the Condensed Consolidated Financial Statements for more information.

Net loss was $10.3 million for the 39 weeks ended March 5, 2013 compared to net income of $5.6 million for the same period of the previous year. Diluted loss per share for the 39 weeks ended March 5, 2013 was $0.16 compared to diluted earnings per share of $0.09 for the corresponding period of the prior year as a result of the current year net loss as discussed below.

During the 39 weeks ended March 5, 2013:

· Our former CEO, Samuel E. Beall, III, stepped down on November 30, 2012 and James J. Buettgen was appointed our new CEO effective December 1, 2012;

· Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 0.2%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 1.1%;

· Five Company-owned Ruby Tuesday restaurants were closed;

· Two franchised Ruby Tuesday restaurants were opened and four were closed;

· We closed 13 Company-owned Marlin & Ray's restaurants, one Company-owned Wok Hay restaurant, and formulated a plan to close two Company-owned Truffles restaurants, resulting in year-to-date charges of $20.4 million for asset impairments, including those of Truffles, lease reserves, and other closing costs;

· Five Company-owned Lime Fresh restaurants were opened and two were closed;

· One franchised Lime Fresh restaurant was opened;

· We repurchased 4.1 million shares of common stock at an aggregate cost of $30.1 million;

· We repurchased $11.5 million of our Senior Notes. The repurchases settled for $10.9 million plus a negligible amount of accrued interest. We realized a $0.6 million gain on these transactions; and

· Reclassified and/or corrected certain immaterial prior year income statement information which did not change net income. See Note A to the Condensed Consolidated Financial Statements for more information.

* We define same-restaurant sales as a year-over-year comparison of sales volumes for restaurants that, in the current year have been open at least 18 months, in order to remove the impact of new openings in comparing the operations of existing restaurants.


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The following table sets forth selected restaurant operating data as a percentage of total revenue, except where otherwise noted, for the periods indicated. All information is derived from our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

                           Thirteen weeks ended           Thirty-nine weeks ended
                        March 5,       February 28,      March 5,       February 28,
                          2013             2012            2013             2012
Revenue:
    Restaurant sales      99 .5%            99 .6%        99 .5%            99 .6%
and operating revenue
    Franchise revenue      0 .5              0 .4          0 .5              0 .4
      Total revenue      100 .0            100 .0        100 .0            100 .0
Operating costs and
expenses:
    Cost of               27 .4             28 .7         27 .3             29 .4
merchandise (1)
    Payroll and           34 .5             33 .9         33 .7             34 .0
related costs (1)
    Other restaurant      20 .3             19 .2         20 .8             20 .4
operating costs (1)
    Depreciation (1)       4 .8              5 .0          4 .8              5 .1
    Selling, general       9 .8              7 .6         12 .0              8 .1
and administrative,
net
    Closures and           0 .7              3 .6          0 .5              1 .3
impairments, net
    Interest expense,      2 .1              1 .4          2 .2              1 .4
net
    Gain on                0 .0              0 .0         (0 .1)             0 .0
extinguishment of debt
Income/(loss) from
continuing operations
  before income taxes      0 .9              0 .9         (0 .8)             0 .8
Benefit for income
taxes from continuing
  operations              (0 .7)            (1 .3)        (1 .1)            (0 .3)
Income from continuing
operations                 1 .5              2 .1          0 .4              1 .1
Loss from discontinued
operations, net of tax    (0 .8)            (0 .7)        (1 .5)            (0 .5)
Net income/(loss)          0 .7%             1 .4%        (1 .1)%            0 .6%

(1) As a percentage of restaurant sales and operating revenue.

The following table shows Company-owned Ruby Tuesday, Lime Fresh, Marlin & Ray's, and other concept restaurant activity for the 13- and 39-week periods ended March 5, 2013 and February 28, 2012.

                                     Ruby         Lime        Marlin         Other
                                    Tuesday       Fresh       & Ray's      Concepts*      Total
13 weeks ended March 5, 2013
   Beginning number                      709          17            13              3        742
   Opened                                  -           1             -              -          1
   Closed                                  -          (2 )         (13 )           (1 )      (16 )
   Ending number                         709          16             -              2        727

39 weeks ended March 5, 2013
   Beginning number                      714          13            11              3        741
   Opened                                  -           5             2              -          7
   Closed                                 (5 )        (2 )         (13 )           (1 )      (21 )
   Ending number                         709          16             -              2        727

13 weeks ended February 28, 2012
   Beginning number                      742           1             5              5        753
   Opened                                  -           2             2              -          4
   Closed                                 (2 )         -             -              -         (2 )
   Ending number                         740           3             7              5        755

39 weeks ended February 28, 2012
   Beginning number                      750           -             1              3        754
   Opened                                  -           3             6              2         11
   Closed                                (10 )         -             -              -        (10 )
   Ending number                         740           3             7              5        755

*Other concepts include Truffles and Wok Hay.


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The following table shows franchised Ruby Tuesday and Lime Fresh concept restaurant activity for the 13- and 39-week periods ended March 5, 2013 and February 28, 2012.

                             Thirteen weeks ended                Thirty-nine weeks ended
                       March 5,            February 28,      March 5,           February 28,
                          2013                 2012             2013                2012
Ruby Tuesday
    Beginning number           77                     87             79                    96
     Opened                     -                      2              2                     5
     Closed                     -                     (4 )           (4 )                 (16 )
    Ending number              77                     85             77                    85



Lime Fresh
    Beginning number     5       -       4       -
     Opened              -       -       1       -
     Closed              -       -       -       -
    Ending number        5       -       5       -

We expect our domestic and international franchisees to open approximately three to four additional Ruby Tuesday restaurants during the remainder of fiscal 2013. We currently anticipate opening approximately four to five Lime Fresh restaurants during the remainder of fiscal 2013.

Revenue

RTI's restaurant sales and operating revenue for the 13 weeks ended March 5, 2013 decreased 4.2% to $305.8 million compared to the same quarter of the prior year. This decrease is primarily a result of restaurant closures since the same quarter of the prior year coupled with a 2.8% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants.

The decrease in same-restaurant sales for the 13 weeks ended March 5, 2013 is attributable to lower guest counts partially offset by an increase in average net check in the third quarter of fiscal 2013 compared with the same quarter of the prior year. The increase in average net check was primarily the result of reduced discounts and price increases since the same quarter of the prior year.

Franchise revenue for the 13 weeks ended March 5, 2013 increased 13.6% to $1.5 million compared to the same quarter of the prior year. Franchise revenue is predominately comprised of domestic and international franchise royalties, which totaled $1.5 million and $1.3 million for the 13 weeks ended March 5, 2013 and February 28, 2012, respectively. The increase in franchise royalties for the 13 weeks ended March 5, 2013 was due primarily to increases in domestic franchise royalties attributable to the five Lime Fresh franchise restaurants added since the same quarter of the prior year.

For the 39 weeks ended March 5, 2013, sales at Company-owned restaurants decreased 2.0% to $930.7 million compared to the same period of the prior year. This decrease is primarily a result of restaurant closures since the same period of the prior year coupled with a 0.2% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants.

The decrease in same-restaurant sales for the 39 weeks ended March 5, 2013 is attributable to lower guest counts partially offset by an increase in average net check for the first three quarters of fiscal 2013 compared with the same period of the prior year. The increase in average net check was primarily the result of reduced discounts and price increases since the same period of the prior year.

For the 39-week period ended March 5, 2013, franchise revenues increased 14.1% to $4.7 million compared to the same period in the prior year. Domestic and international royalties totaled $4.5 million and $3.9 million for the 39-week periods ending March 5, 2013 and February 28, 2012, respectively. This increase is due primarily to higher domestic franchise royalties for the 39 weeks ended March 5, 2013 compared to the same period of the prior year due to the addition of Lime Fresh franchise restaurants as discussed above.


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Pre-tax Income/(Loss) from Continuing Operations

Pre-tax income from continuing operations was $2.7 million for the 13 weeks ended March 5, 2013, compared to $2.8 million for the same quarter of the prior year. The decrease in pre-tax income from continuing operations is due to higher selling, general, and administrative, net ($5.8 million) and interest expense ($2.2 million), and increases, as a percentage of restaurant sales and operating revenue, of payroll and related costs and other restaurant operating costs. These higher costs were partially offset by lower closures and impairments expense associated with continuing operations ($9.5 million) and decreases, as a percentage of restaurant sales and operating revenue, of cost of merchandise and depreciation.

Pre-tax loss from continuing operations was $7.0 million for the 39 weeks ended March 5, 2013, compared to pre-tax income of $7.3 million for the same period of the prior year. The decrease in pre-tax income is due to higher selling, general, and administrative, net ($34.4 million) and interest expense ($7.3 million), and increases, as a percentage of restaurant sales and operating revenue, of other restaurant operating costs. These higher costs were partially offset by lower closures and impairments expense associated with continuing operations ($7.5 million), gain on the extinguishment of debt ($0.6 million) related to repurchases of the Senior Notes, and decreases, as a percentage of restaurant sales and operating revenue, of cost of merchandise, payroll and related costs, and depreciation.

In the paragraphs that follow, we discuss in more detail the components of the decrease in pre-tax income from continuing operations for the 13- and 39-week periods ended March 5, 2013, as compared to the comparable periods in the prior year. Because a significant portion of the costs recorded in the cost of merchandise, payroll and related costs, other restaurant operating costs, and depreciation categories are either variable or highly correlative with the number of restaurants we operate, we evaluate our trends by comparing the costs as a percentage of restaurant sales and operating revenue, as well as the absolute dollar change, to the comparable prior year period.

Cost of Merchandise

Cost of merchandise decreased $7.8 million (8.6%) to $83.8 million for the 13 weeks ended March 5, 2013, over the corresponding quarter in the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise decreased from 28.7% to 27.4%.

Cost of merchandise decreased $24.6 million (8.8%) to $254.5 million for the 39 weeks ended March 5, 2013, over the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise decreased from 29.4% to 27.3%.

The absolute dollar decrease for the 13- and 39-week periods ended March 5, 2013 was the result of cost savings negotiated with our primary food distributor coupled with renegotiated contracts and product specification changes on several items with certain vendors since the same periods of fiscal 2012. Restaurant closures further contributed to the reduction in cost of merchandise. Partially offsetting these decreases for the 13-week period were cost increases on beef, poultry, and certain other products since the same quarter of the prior year.

As a percentage of restaurant sales and operating revenue, the decrease in cost of merchandise for the 13 and 39 weeks ended March 5, 2013 is due primarily to cost savings negotiated with our primary food distributor and various other vendors and a reduction in coupons since the same periods of the prior year.

Payroll and Related Costs

Payroll and related costs decreased $3.0 million (2.7%) to $105.4 million for the 13 weeks ended March 5, 2013, as compared to the corresponding quarter in the prior year. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.9% to 34.5%.

Payroll and related costs decreased $9.3 million (2.9%) to $313.3 million for the 39 weeks ended March 5, 2013, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, payroll and related costs decreased from 34.0% to 33.7%.

The absolute dollar decrease in payroll and related costs for the 13- and 39-week periods ended March 5, 2013 was due to restaurant closures, decreases in hourly labor as a result of lower training costs and new staffing guidelines for certain positions in our restaurants, and favorable workers' compensation claims


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experience. These were partially offset by minimum wage increases in certain states, higher field bonus, and higher management labor due to merit increases since the same periods of the prior year.

As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the 13 weeks ended March 5, 2013 was primarily the result of unfavorable cost leverage associated with lower sales volumes.

As a percentage of restaurant sales and operating revenue, the decrease in payroll and related costs for the 39 weeks ended March 5, 2013 was primarily the result of decreased hourly labor due to restaurant closures and other reasons as discussed above.

Other Restaurant Operating Costs

Other restaurant operating costs increased $0.5 million (0.8%) to $61.9 million
for the 13-week period ended March 5, 2013, as compared to the corresponding
quarter in the prior year. As a percentage of restaurant sales and operating
revenue, these costs increased from 19.2% to 20.3%.

For the 13 weeks ended March 5, 2013, the increase in other restaurant operating
costs related to the following (in thousands):

Rent and leasing   $  1,303
Repairs                 681
Other increases         516
Supplies             (1,290 )
Utilities              (708 )
Net increase       $    502

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the 13-week period ended March 5, 2013, the increase was primarily a result of higher rent and leasing charges as a result of sale-leaseback transactions since the same quarter of the prior year and higher repairs expense incurred as we transitioned to a new maintenance agreement with a third-party provider during the current year. These increases were partially offset by restaurant closures since the third quarter of the prior year, lower supplies expense due to negotiated contract savings with certain vendors, and decreased utilities based on reduced rates.

Other restaurant operating costs increased $0.1 million to $193.4 million for . . .

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