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RT > SEC Filings for RT > Form 10-Q on 13-Jan-2014All Recent SEC Filings

Show all filings for RUBY TUESDAY INC

Form 10-Q for RUBY TUESDAY INC


13-Jan-2014

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® casual dining and Lime Fresh Mexican Grill® ("Lime Fresh") fast casual restaurants. As of December 3, 2013, we owned and operated 703, and franchised 76, Ruby Tuesday restaurants. Ruby Tuesday restaurants can now be found in 45 states, the District of Columbia, 11 foreign countries, and Guam.

As of December 3, 2013, there were 21 Company-owned and operated Lime Fresh restaurants, as well as six domestic and two international Lime Fresh restaurants operated by franchisees.

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 strive to 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 increase customer traffic, same-restaurant sales, and profitability, we are in the process of implementing new initiatives focused on promoting the Ruby Tuesday brand as more lively and approachable. These initiatives include 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 primarily focused 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 beginning 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 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 customers.

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 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 four Company-owned Lime Fresh restaurants during the 26 weeks ended December 3, 2013.


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Strengthen our Balance Sheet to Facilitate Growth and Value Creation During the fourth quarter of fiscal 2012, we 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, obtain attractive interest rates, and extend the maturity date of the majority of our debt for up to eight years. Additionally, we recently closed on a new $50.0 million revolving Senior Credit Facility (as defined below) which replaced our existing $200.0 million revolving credit facility. Our new Senior Credit Facility, which is secured by substantially all of the shares of capital stock of the Company, real property, improvements and fixtures of 47 Ruby Tuesday restaurants, and substantially all of the personal property of the Company and each of its present and future subsidiaries, provides us with more covenant flexibility than our previous revolving credit facility and has a $35.0 million accordion feature which provides us with additional liquidity, in particular since our new $50.0 million revolving Senior Credit Facility is undrawn.

Our 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 during the first quarter of fiscal 2014, enabled us to raise approximately $82.5 million of gross proceeds through monetizing 37 restaurants during the entire program tenure, with $5.9 million of these proceeds being realized during fiscal 2014 through the monetization of three restaurants. The $82.5 million of sale-leaseback gross 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 lower 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.

Results of Operations:

The following is an overview of our results of operations for the 13- and 26-week periods ended December 3, 2013:

Net loss increased to $34.4 million for the 13 weeks ended December 3, 2013 compared to $15.1 million for the same quarter of the previous year. Diluted loss per share for the fiscal quarter ended December 3, 2013 was $0.57 compared to $0.24 for the corresponding quarter of the prior year as a result of the increase in net loss as discussed below.

During the 13 weeks ended December 3, 2013:

· Incurred severance, payroll tax, share-based compensation, and other charges of $2.5 million in connection with the elimination of approximately 50 positions at our Restaurant Support Services Center;

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

· Two franchised Ruby Tuesday restaurants were opened and one was closed;

· We replaced our existing $200.0 million credit facility with a $50.0 million four-year revolving credit agreement (the "Senior Credit Facility");

· Our President and Chief Executive Officer, James J. Buettgen, was appointed Chairman of the Board of Directors and Stephen Sadove was appointed Lead Director in connection with the resignation of Matthew Drapkin from the Board;


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· Our former Senior Vice President, Chief People Officer, Robert LeBoeuf, separated employment with the Company on October 30, 2013; and

· Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 7.8%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 5.3%.

Net loss increased to $56.6 million for the 26 weeks ended December 3, 2013 compared to $12.5 million for the same period of the previous year. Diluted loss per share for the 26 weeks ended December 3, 2013 was $0.94 compared to $0.20 for the corresponding period of the prior year as a result of the increase in net loss as discussed below.

During the 26 weeks ended December 3, 2013:

· Incurred severance, payroll tax, share-based compensation, and other charges of $2.5 million in connection with the elimination of approximately 50 positions at our Restaurant Support Services Center;

· Four Company-owned Lime Fresh restaurants were opened and one was closed;

· Three Company-owned Ruby Tueday restaurants were closed;

· Two franchised Lime Fresh restaurants were opened;

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

· We replaced our existing $200.0 million credit facility with the $50.0 million Senior Credit Facility;

· We repurchased $12.9 million of our 7.625% senior notes due 2020 (the "Senior Notes"). The repurchases settled for $13.0 million plus $0.2 of accrued interest. We realized a $0.5 million loss on these transactions;

· We prepaid and retired 16 mortgage loan obligations for $9.9 million plus prepayment penalties of $0.8 million and accrued interest of $0.1 million;

· Our President and Chief Executive Officer, James J. Buettgen, was appointed Chairman of the Board of Directors and Stephen Sadove was appointed Lead Director in connection with the resignation of Matthew Drapkin from the Board;

· Our former Executive Vice President, Chief Operations Officer, Kimberly Grant, separated employment with the Company on June 7, 2013 and Todd Burrowes was appointed President - Ruby Tuesday Concept and Chief Operations Officer on June 11, 2013;

· Our former Senior Vice President, Chief People Officer, Robert LeBoeuf, separated employment with the Company on October 30, 2013; and

· Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 9.7%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 6.9%.

* 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           Twenty-six weeks ended
                       December 3,      December 4,    December 3,     December 4,
                           2013            2012            2013            2012
Revenue:
    Restaurant sales      99 .5%           99 .5%         99 .5%            99 .5%
and operating revenue
    Franchise revenue      0 .5             0 .5           0 .5              0 .5
      Total revenue      100 .0           100 .0         100 .0            100 .0
Operating costs and
expenses:
    Cost of               28 .3            27 .7          28 .0             27 .3
merchandise (1)
    Payroll and           35 .5            33 .7          35 .6             33 .3
related costs (1)
    Other restaurant      23 .8            22 .0          23 .6             21 .0
operating costs (1)
    Depreciation (1)       5 .1             4 .9           5 .0              4 .8
    Selling, general      13 .4            12 .8          13 .1             13 .0
and administrative,
net
    Closures and           5 .1             0 .6           3 .9              0 .5
impairments, net
    Interest expense,      2 .4             2 .3           2 .4              2 .2
net
    Loss/(gain) on         0 .2            (0 .1)          0 .2              0 .0
extinguishment of debt
Loss from continuing
operations before
  income taxes           (13 .3)           (3 .6)        (11 .3)            (1 .6)
Benefit for income
taxes from continuing
  operations              (0 .7)           (2 .2)         (1 .2)            (1 .4)
Loss from continuing
operations               (12 .6)           (1 .4)        (10 .0)            (0 .2)
Gain/(loss) from
discontinued
operations, net of tax     0 .1            (3 .6)          0 .0             (1 .8)
Net loss                 (12 .4)%          (5 .0)%       (10 .0)%           (2 .0)%

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

The following table shows Company-owned Ruby Tuesday, Lime Fresh, and discontinued concept restaurant activity for the 13- and 26-week periods ended December 3, 2013 and December 4, 2012.

                                 Ruby     Lime    Discontinued
                                Tuesday   Fresh    Concepts*     Total
13 weeks ended December 3, 2013
   Beginning number                703      21              -     724
   Opened                            -       1              -       1
   Closed                            -     (1))             -     (1))
   Ending number                   703      21              -     724

26 weeks ended December 3, 2013
   Beginning number                706      18              -     724
   Opened                            -       4              -       4
   Closed                          (3))    (1))             -     (4))
   Ending number                   703      21              -     724

13 weeks ended December 4, 2012
   Beginning number                712      15             14     741
   Opened                            -       2              2       4
   Closed                          (3))      -              -     (3))
   Ending number                   709      17             16     742

26 weeks ended December 4, 2012
   Beginning number                714      13             14     741
   Opened                            -       4              2       6
   Closed                          (5))      -              -     (5))
   Ending number                   709      17             16     742

*Discontinued concepts include Marlin & Ray's, 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 26-week periods ended December 3, 2013 and December 4, 2012.

                         Thirteen weeks ended          Twenty-six weeks ended
                     December 3,     December 4,    December 3,     December 4,
                         2013            2012           2013            2012
Ruby Tuesday
    Beginning number        75              78             77              79
     Opened                  2               1              2               2
     Closed                 (1)             (2)            (3)             (4)
    Ending number           76              77             76              77



Lime Fresh
    Beginning number    8      5      6      4
     Opened             -      -      2       1
     Closed             -      -      -      -
    Ending number       8      5      8      5

Revenue

RTI's restaurant sales and operating revenue for the 13 weeks ended December 3, 2013 decreased 8.0% to $274.7 million compared to the same period of the prior year. This decrease is primarily the result of a 7.8% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants.

The decrease in Ruby Tuesday concept same-restaurant sales is primarily attributable to a decrease in customer traffic coupled with a reduction in average net check in the second quarter of fiscal 2014 compared with the same quarter of the prior year. The decrease in average net check was a result of the rollout during the latter part of the first quarter of our new menu including pretzel burgers and flatbreads which featured lower price points. These declines were partially offset by reduced discounts during the second quarter of the current year compared to the prior year.

Franchise revenue for the 13 weeks ended December 3, 2013 increased 0.1% to $1.5 million compared to the same period of the prior year. Franchise revenue is predominately comprised of domestic and international franchise royalties, which totaled $1.4 million for both 13-week periods ended December 3, 2013 and December 4, 2012.

For the 26 weeks ended December 3, 2013, sales at Company-owned restaurants decreased 9.9% to $562.8 million compared to the same period of the prior year. This decrease is primarily the result of a 9.7% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants.

The decrease in Ruby Tuesday concept same-restaurant sales is primarily attributable to a decrease in customer traffic coupled with a reduction in average net check in the first two quarters of fiscal 2014 compared with the same period of the prior year. The decrease in average net check was primarily the result of the rollout of a new menu as discussed above which was partially offset by reduced discounts as compared to the same period of the prior year.

For the 26-week period ended December 3, 2013, franchise revenues decreased 2.0% to $3.1 million compared to the same period in the prior year. Domestic and international royalties totaled $3.0 million for both 26-week periods ending December 3, 2013 and December 4, 2012.

Segment (Loss)/Profit

Our President and Chief Executive Officer, who is our chief operating decision maker, with the assistance of our senior management, reviews 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 (loss)/profit by reportable segment for the 13 and 26 weeks ended December 3, 2013 and December 4, 2012 are as follows (in thousands):


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                                               Thirteen weeks ended             Twenty-six weeks ended
                                           December 3,       December 4,     December 3,       December 4,
                                               2013             2012            2013              2012
Segment (loss)/profit:
  Ruby Tuesday concept                     $        870      $    17,026     $    10,721       $    46,573
  Lime Fresh concept                             (1,783 )         (2,032 )        (4,237 )          (2,351 )
   Total segment (loss)/profit             $       (913 )    $    14,994     $     6,484       $    44,222

Segment profit for the 13 weeks ended December 3, 2013 for the Ruby Tuesday concept decreased $16.2 million to $0.9 million compared to the second quarter of fiscal 2013 due primarily to the 7.8% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants discussed above, and higher closures and impairments expense of $12.4 million as we recorded impairments in conjunction with a plan to close approximately 27 Ruby Tuesday restaurants in the third quarter of fiscal 2014 and three more in the fourth quarter. We also recorded impairments on nine open Ruby Tuesday restaurants not planned for closure with deteriorating operational performance. These were partially offset by lower cost of merchandise ($5.8 million) and payroll and related costs ($3.3 million) compared to the same quarter of the prior year which resulted from the declines in customer traffic, and reductions in advertising spending of $4.6 million (primarily due to reduced television advertising). Segment losses for the 13 weeks ended December 3, 2013 for the Lime Fresh concept decreased $0.2 million compared to the first quarter of fiscal 2013 to $1.8 million due in part to reductions in impairment charges as compared to the same quarter of the prior year.

Segment profit for the 26 weeks ended December 3, 2013 for the Ruby Tuesday concept decreased $35.9 million to $10.7 million compared to the same period of fiscal 2013 due primarily to the 9.7% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants discussed above, and higher closures and impairments expense, for the reasons noted above, of $17.3 million. These were partially offset by lower cost of merchandise ($14.4 million) and payroll and related costs ($7.3 million) compared to the same 26 week period of the prior year which resulted from the declines in customer traffic and reductions in advertising spending of $11.2 million (primarily due to reduced television advertising). Segment losses for the 13 weeks ended December 3, 2013 for the Lime Fresh concept increased $1.9 million compared to the same period of fiscal 2013 to $4.2 million due to increases in the lease reserve of $1.7 million related to four undeveloped sites for which a management decision was reached to forego restaurant development. Excluding the increase to lease reserves of $1.7 million, segment losses for the Lime Fresh concept would have increased $0.2 million as compared to the same quarter of the prior year due to lease reserve charges of $0.9 million recorded on a Lime Fresh restaurant contracted to be sold, offset by lower impairment charges of $0.5 million and lower advertising fees of $0.3 million, due to the termination of a marketing agreement with an agency whose CEO previously sold the Lime Fresh restaurant concept to us.

The following is a reconciliation of segment profit to loss from continuing operations before taxes for the 13 and 26 weeks ended December 3, 2013 and December 4, 2012 (in thousands):

                                              Thirteen weeks ended           Twenty-six weeks ended
                                           December 3,       December      December 3,       December
                                               2013          4, 2012          2013           4, 2012
Segment (loss)/profit                      $       (913 )   $   14,994     $     6,484      $   44,222
Less:
  Depreciation and amortization                 (14,598 )      (15,529 )       (29,472 )       (31,379 )
  Unallocated general and
   administrative expenses                      (13,760 )       (3,231 )       (25,657 )        (8,251 )
  Preopening expenses                               (41 )         (204 )          (395 )          (399 )
  Interest expense, net                          (6,620 )       (6,765 )       (13,373 )       (13,555 )
  Other expense, net                               (715 )         (133 )        (1,286 )          (387 )
Loss from continuing operations
   before income taxes                     $    (36,647 )   $  (10,868 )   $   (63,699 )    $   (9,749 )

Pre-tax Loss from Continuing Operations

Pre-tax loss from continuing operations increased $25.8 million to $36.6 million for the 13 weeks ended December 3, 2013, over the same quarter of the prior year. The higher pre-tax loss is due to a decrease in same-restaurant sales of 7.8% at Company-owned Ruby Tuesday restaurants, higher closures and impairments expense ($12.3 million), higher loss on extinguishment of debt ($0.8 million), and increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of


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merchandise, payroll and related costs, other restaurant operating costs, depreciation, and selling, general, and administrative, net.

Pre-tax loss from continuing operations increased $54.0 million to $63.7 million for the 26 weeks ended December 3, 2013, over the same quarter of the prior year. The higher pre-tax loss is due to a decrease in same-restaurant sales of 9.7% at Company-owned Ruby Tuesday restaurants, higher closures and impairments expense ($19.2 million), losses on the extinguishment of debt ($1.3 million), and increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, payroll and related costs, other restaurant operating costs, depreciation, and selling, general, and administrative, net.

In the paragraphs that follow, we discuss in more detail the components of the increase in pre-tax loss from continuing operations for the 13- and 26-week periods ended December 3, 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 $5.2 million (6.3%) to $77.7 million for the 13 weeks ended December 3, 2013, over the corresponding period of the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 27.7% to 28.3%.

Cost of merchandise decreased $13.1 million (7.7%) to $157.6 million for the 26 weeks ended December 3, 2013, over the corresponding period of the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 27.3% to 28.0%.

The absolute dollar decrease for the 13-week and 26-week periods ended December 3, 2013 was the result of lower sales volumes, restaurant closures, and cost savings on certain products as a result of renegotiated contracts with certain vendors since the same periods of fiscal 2013. These were partially offset by price increases on beef, poultry, and certain other products since the prior year.

As a percentage of restaurant sales and operating revenue, the increase in cost of merchandise for the 13 and 26 weeks ended December 3, 2013 is primarily the . . .

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