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RT > SEC Filings for RT > Form 10-K on 5-Aug-2013All Recent SEC Filings

Show all filings for RUBY TUESDAY INC

Form 10-K for RUBY TUESDAY INC


5-Aug-2013

Annual Report


Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations

Introduction

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. Our mission is to be the best in the bar-grill segment of casual dining by delivering to our guests a high-quality casual dining experience with compelling value. While we are in the bar-grill sector because of our varied menu, it is our goal to operate at the higher-end of casual dining in terms of the quality of our food and service. As of June 4, 2013, we owned and operated 706 Ruby Tuesday restaurants located in 38 states and the District of Columbia. Our franchisees operated 33 domestic and 44 international Ruby Tuesday restaurants in 14 states, Guam, and 11 foreign countries. The Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic, and Midwest regions of the United States. We consider these regions to be our core markets.

As of June 4, 2013, there were 18 Company-owned and operated Lime Fresh restaurants, as well as five domestic and one international Lime Fresh restaurants operated by franchisees.

References to franchise system revenue contained in this section are presented solely for the purposes of enhancing the investor's understanding of the franchise system, which includes our traditional domestic and international franchisees. Franchise system revenue is not included in, and is not, revenue of Ruby Tuesday, Inc. However, we believe that such information does provide the investor with a basis for a better understanding of our revenue from franchising activities, which includes royalties, and, in certain cases, support service income. Franchise system revenue contained in this section is based upon or derived from information that we obtain from our franchisees in our capacity as franchisor.

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. 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 Through Repositioning of Our Core Brand

In an effort to stabilize and grow our guest counts, same-restaurant sales, and profitability, 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 soundscape upgrades, lighting improvements, and revitalizing the look and feel of our television advertising and other promotional materials to better reflect the variety on our menu and project a more casual, energetic, and approachable brand personality and dining experience. Our marketing strategy historically has focused mainly on print promotions, digital media and local marketing programs, with a minimal amount spent on television. However, based on the results from television test markets in fiscal 2012, we deployed a more balanced marketing program in fiscal 2013 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, 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 that enabled us to better understand the concept's 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 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 early stages, we believe it has the potential to generate attractive returns for us if we are able to realize our revenue and profitability targets. We opened nine Company-owned Lime Fresh restaurants during fiscal 2013.

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 senior unsecured notes 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 certain 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 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 for three primary reasons. First, the program enabled us through a series of transactions to corroborate the estimated market value of our entire remaining real estate portfolio for both our equity and debt holders. Second, the program enabled us to generate excess cash during fiscal 2013, when our free cash flow was at lower levels, in order to opportunistically pay off debt and repurchase our shares, which we would have been unable to do absent the sale-leaseback transactions. Third, we were able to complete the sale-leaseback transactions at low capitalization rates with minimal tax leakage.

Our sale-leaseback program, which was completed subsequent to the end of fiscal 2013, enabled us to raise approximately $82.5 million of gross proceeds through monetizing 37 restaurants during the entire program tenure, with $54.4 million of these proceeds being realized in fiscal 2013 through the monetization of 24 restaurants. The sale-leaseback proceeds were utilized for general corporate purposes, including capital expenditures debt reduction, and the repurchase of shares of our common stock. We have no plans at this time to pursue any additional sale-leaseback transactions. 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").

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 strategic initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.

Our fiscal year ends on the first Tuesday following May 30 and, as is the case once every five or six years, we have a 53 week year. Fiscal 2012 was a 53-week year. All other years discussed throughout this MD&A contained 52 weeks. In fiscal 2012, the 53rd week added $22.9 million to restaurant sales and operating revenue and $0.03 to diluted earnings per share in our Consolidated Statement of Operations.

Our same-restaurant sales for Company-owned Ruby Tuesday restaurants decreased 1.0% in fiscal 2013 compared to fiscal 2012, and our diluted loss per share was $0.65 in fiscal 2013 compared to diluted loss per share of $0.00 in fiscal 2012. Throughout this MD&A, we discuss our fiscal 2013 financial results in detail, provide insight for fiscal years 2012 and 2011, as well as discuss known events, uncertainties, and trends. We believe our commentary provides insight as to the factors which impacted our performance. We remind you, that, in order to best obtain an understanding of our financial performance during the last three fiscal years, this MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Part II, Item 8 of this Annual Report on Form 10-K.


Results of Operations

Ruby Tuesday Restaurants
The table below presents the number of Ruby Tuesday concept restaurants at each
fiscal year end from fiscal 2009 through fiscal 2013:

                                             International
Fiscal Year Company-Owned Domestic Franchise   Franchise   Total
2013             706              33              44        783
2012             714              36              43        793
2011             750              43              53        846
2010             656             165              58        879
2009             672             173              56        901

Other Concept Restaurants
The table below presents the number of other concept restaurants at each fiscal
year end from fiscal 2009 through fiscal 2013:

                            Lime Fresh                           Company-Owned
Fiscal Year Company-Owned  Franchise*  Total Lime Fresh    Marlin & Ray's   Other
                                                                          Concepts**
2013             18            6              24                 -            -
2012             13            4              17                 11           3
2011              -            -              -                  1            3
2010              -            -              -                  -            2
2009              -            -              -                  -            2

*Fiscal 2013 includes one international Lime Fresh franchise restaurant. **Other concepts include Truffles and Wok Hay.

During fiscal 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 1.0%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 2.1%;

· Eight 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 two Company-owned Truffles restaurants, resulting in year-to-date charges of $21.7 million for asset impairments, lease reserves, and other closing costs for the three discontinued concepts;

· Nine Company-owned Lime Fresh restaurants were opened and four were closed;

· Two franchised Lime Fresh restaurants were opened;

· We repurchased 4.1 million shares of common stock at an aggregate cost of $30.3 million;

· We repurchased $15.0 million of our Senior Notes. The repurchases settled for $14.5 million plus $0.2 million of accrued interest. We realized a $0.5 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 1 to the Consolidated Financial Statements for more information.

During fiscal 2012:

· Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 4.5%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 5.7%;

· Ten Company-owned Ruby Tuesday restaurants, two of which closed in a prior year, were converted to Marlin & Ray's concept restaurants;

· One Company-owned Truffles restaurant was opened;

· Six Company-owned Lime Fresh restaurants were opened. Seven were acquired, along with the royalty stream from five Lime Fresh concept franchised restaurants (one of which was not yet open), and the Lime Fresh brand's intellectual property for $24.1 million;


· One Company-owned Wok Hay restaurant was opened and two were closed. In addition, one franchised Wok Hay restaurant was closed;

· Thirty-six Company-owned Ruby Tuesday restaurants were closed, eight of which were converted into Marlin & Ray's concept restaurants later in the year;

· Six franchised Ruby Tuesday restaurants were opened and 23 were closed;

· We recorded impairment charges of $12.2 million, which included $9.7 million resulting from management's decision to close approximately 25 to 27 restaurants;

· We closed on an eight-year, $250.0 million unsecured high yield bond offering and an amendment to our revolving credit facility;

· We recorded a goodwill impairment charge of $16.9 million; and

· We repurchased two million shares of common stock at an aggregate cost of $18.4 million.

* 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.

Restaurant Sales
Restaurant sales in fiscal 2013 decreased 4.7% from fiscal 2012 for Company-owned restaurants and decreased 2.4% for domestic and international franchised restaurants as explained below. The tables presented below reflect restaurant sales for the last five years, and other revenue information for the last three years.

Restaurant Sales (in millions):
                 Ruby Tuesday Concept          Lime Fresh Concept
Fiscal Year  Company-Owned   Franchise (a) Company-Owned Franchise (a)
2013               $ 1,229.1    $ 158.0       $ 16.1        $ 12.0
2012                 1,302.7     172.6           3.3            1.6
2011                 1,254.0     289.4             -             -
2010                 1,185.9     368.9             -             -
2009                 1,237.2     383.7             -             -

(a) Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants.

Other Revenue Information:
                                     2013             2012          2011
Company restaurant sales (in
thousands)
  Ruby Tuesday concept            $1,229,097       $1,302,719    $1,254,026
  Lime Fresh concept                   16,129           3,306             -
   Total restaurant sales         $1,245,226       $1,306,025    $1,254,026
Company restaurant sales             (4.7%)            4.1%          5.7%
growth-percentage

Franchise revenue (in thousands)
  Ruby Tuesday concept                $5,633           $5,666        $7,147
  Lime Fresh concept                    628              72             -
   Total franchise revenue (a)         $6,261          $5,738        $7,147
Franchise revenue                     9.1%            (19.7)%        5.8%
growth-percentage

Total revenue (in thousands)
  Ruby Tuesday concept            $1,234,730       $1,308,385    $1,261,173
  Lime Fresh concept                   16,757           3,378             -
   Total revenue                  $1,251,487       $1,311,763    $1,261,173
Total revenue growth-percentage      (4.6%)            4.0%          5.7%

Company same-restaurant sales        (1.0)%           (4.5)%         0.9%
growth percentage (b)

Company average restaurant $1.73 million $1.75 million $1.81 million volumes (b)


Company average restaurant volumes growth percentage (0.8)% (3.8)% 1.5%

(a) Franchise revenue includes royalty, license, and development fees paid to us by our franchisees, exclusive of support service fees of $0.9 million, $1.1 million, and $3.1 million, in fiscal years 2013, 2012, and 2011, respectively, which are recorded as an offset to selling, general, and administrative expenses.

(b) As the Lime Fresh concept restaurants have not been under Ruby Tuesday management for an amount of time sufficient to meet our "same-restaurant" definition, company same-restaurant sales and average restaurant volume information is for our Ruby Tuesday concept only.

Our Company restaurant sales and operating revenue for the year ended June 4, 2013 decreased 4.6% to $1,251.5 million compared to the prior year. This decrease is primarily a result of the impact of a 53rd week in fiscal 2012, which contributed $22.9 million in revenue, restaurant closures since the prior year, and a 1.0% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, offset by an increase in Lime Fresh concept revenues of $12.8 million due to our acquisition of seven Lime Fresh restaurants on April 11, 2012 and a net increase of seven additional Lime Fresh restaurants since then.

The decrease in same-restaurant sales is attributable to lower guest counts partially offset by an increase in average net check during fiscal 2013 compared to the prior year. The increase in average net check was primarily the result of reduced discounts and price increases since the prior year.

Our Company restaurant sales and operating revenue for the year ended June 5, 2012 increased 4.1% to $1,306.0 million compared to the prior year. The increase primarily resulted from the acquisition of 109 restaurants from franchisees in fiscal 2011 coupled with the revenue associated with the 53rd week in fiscal 2012, partially offset by a 4.5% decrease in Ruby Tuesday concept same-restaurant sales. Included in our Restaurant sales and operating revenue for fiscal 2012 is $173.9 million of restaurant sales for 109 restaurants acquired from our franchisees during fiscal 2011. These same restaurants generated sales of $76.1 million in fiscal 2011 from the various dates of acquisition through May 31, 2011.

The fiscal 2012 decrease in same-restaurant sales was attributable to lower guest counts, which was partially offset by an increase in average net check compared with the prior year. The increase in average net check was a result of menu price increases and a shift in menu mix.

Franchise development and license fees received are recognized when we have substantially performed all material services and the restaurant has opened for business. Franchise royalties (generally 4% to 5.25% of monthly sales) are recognized as franchise revenue on the accrual basis. Franchise revenue increased 9.1% to $6.3 million in fiscal 2013 and decreased 19.7% to $5.7 million in fiscal 2012. Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $6.1 million and $5.5 million in 2013 and 2012, respectively. The increase in franchise royalties in fiscal 2013 is due in part to higher domestic franchise royalties attributable to our Lime Fresh franchise restaurants and higher international franchise royalties due to increased sales at certain international restaurants compared to fiscal 2012. The decrease in franchise royalties in fiscal 2012 is due to a $0.7 million decline in royalties from our traditional domestic franchisees due in part to a 5.7% decline in same-restaurant sales for domestic franchise Ruby Tuesday restaurants during fiscal 2012 and a $0.5 million reduction in royalties from our franchise partnerships due to the acquisition of 109 restaurants from our franchise partnerships during fiscal 2011.

Under our accounting policy, we do not recognize franchise fee revenue for any franchise with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has borrowed directly from us. We also do not recognize additional franchise fee revenue from franchisees with fees in excess of 60 days past due. Accordingly, we have deferred recognition of a portion of franchise revenue from certain franchises. Unearned income for franchise fees was $0.2 million and negligible as of June 4, 2013 and June 5, 2012, respectively, which are included in Accrued liabilities - Rent and other in the Consolidated Balance Sheets. The increase in unearned income is primarily attributable to unearned fees associated with a traditional domestic franchisee that emerged from bankruptcy during the current year.


Total franchise restaurant sales are shown in the table below.

                                               2013       2012     2011
Franchise restaurant sales (in thousands)
  Ruby Tuesday concept                       $158,001   $172,591 $289,446
  Lime Fresh concept                           12,003      1,599        -
   Total franchise restaurant sales (a)      $170,004   $174,190 $289,446
Franchise restaurant sales growth-percentage  (2.4)%     (39.8)%  (21.5)%

(a) Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants.

The 39.8% and 21.5% decreases in franchise restaurant sales for fiscal 2012 and 2011, respectively, are primarily due to the acquisition of 109 restaurants from franchisees during fiscal 2011.

Segment Profit
During fiscal 2013, our new President and Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), with the assistance of our senior management, began to review discrete financial information for both the Ruby Tuesday and Lime Fresh restaurant concepts to assess performance and allocate resources. We consider the Ruby Tuesday and Lime Fresh concepts to be our reportable segments as we do not believe they have similar economic and other characteristics to be aggregated into a single reportable segment. Segment profit by reportable segment for fiscal 2013, 2012, and 2011 are as follows (in thousands):

                            2013          2012          2011
Segment profit:
  Ruby Tuesday concept    $ 111,367     $ 123,517     $ 152,826
  Lime Fresh concept        (10,204 )      (1,954 )        (166 )
   Total segment profit   $ 101,163     $ 121,563     $ 152,660

Segment profit for the Ruby Tuesday concept decreased $12.2 million from fiscal 2012 to $111.4 million in fiscal 2013 due to increases in advertising spending of $23.4 million, as we increased our television spending, offset by decreases in closures and impairment expenses of $10.6 million due to costs in fiscal 2012 associated with our decision to close 25-27 Ruby Tuesday restaurants. Segment losses for the Lime Fresh concept increased $8.3 million from fiscal 2012 to $10.2 million in fiscal 2013 due to increased closure and impairment charges of $8.0 million, primarily associated with four underperforming Lime Fresh concept restaurants still open and our new management's decision to close four additional Lime Fresh restaurants during the year. Excluding the increased closure and impairment charges of $8.0 million, the segment losses for the Lime Fresh concept would have increased $0.3 million as compared to the prior year. The increase in Lime Fresh segment losses during fiscal 2013 excluding closures and impairments was primarily due to lower revenues on a per unit basis, which resulted in the loss of cost leverage on the operating side. Additionally, during the current year we closed four of our internally-developed restaurants which were not meeting our revenue or profitability expectations, and whose operating performance was more dilutive to the fiscal 2013 segment profit than the prior year. We have embarked on a number of initiatives during the fourth quarter of fiscal 2013 which we believe have the potential to generate incremental sales, including engaging a company to assist with local store marketing efforts, testing menu boards at certain locations to improve the ordering process, and increasing the flavor profile of certain entrees.

Segment profit for the Ruby Tuesday concept decreased $29.3 million from fiscal 2011 to $123.5 million in fiscal 2012 due to increases in advertising spending of $19.7 million primarily as a result of increased television advertising, higher closures and impairment expenses of $13.3 million as a result of our decision to close 25 to 27 Ruby Tuesday restaurants, and a 4.5% decrease in Company-owned Ruby Tuesday concept same-restaurants sales. Segment losses for the Lime Fresh concept increased $1.8 million to $2.0 million due to underperformance of several of our first Lime Fresh concept restaurants, four of which were closed during fiscal 2013.


The following is a reconciliation of segment profit to (loss)/income from continuing operations before taxes for fiscal 2013, 2012, and 2011 (in thousands):

                                                      2013          2012          2011
Segment profit                                      $ 101,163     $ 121,563     $ 152,660
Less:
  Depreciation and amortization                       (62,398 )     (66,458 )     (64,073 )
  Unallocated general and administrative expenses     (18,026 )     (22,069 )     (15,036 )
  Preopening expenses                                    (761 )        (556 )           -
  Goodwill and trademark impairments                  (14,058 )     (16,919 )           -
  Interest expense, net                               (27,117 )     (23,312 )     (13,508 )
  Other expense, net                                     (737 )        (875 )      (2,925 )
(Loss)/income from continuing operations
   before income taxes                              $ (21,934 )   $  (8,626 )   $  57,118

Operating Profits
The following table sets forth selected restaurant operating data as a
percentage of restaurant sales and operating revenue or total revenue, as
appropriate, for the periods indicated. All information is derived from our
Consolidated Financial Statements located in Part II, Item 8 of this Annual
Report on Form 10-K.

                                         2013         2012        2011
Restaurant sales and operating           99.5 %       99.6 %      99.4 %
revenue
Franchise revenue                         0.5          0.4         0.6
. . .
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