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RT > SEC Filings for RT > Form 10-K on 6-Aug-2014All Recent SEC Filings

Show all filings for RUBY TUESDAY INC

Form 10-K for RUBY TUESDAY INC


6-Aug-2014

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 customers 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 3, 2014, we owned and operated 668 Ruby Tuesday restaurants located in 38 states and the District of Columbia. Our franchisees operated 31 domestic and 48 international Ruby Tuesday restaurants in 14 states, Guam, and 12 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 3, 2014, there were 20 Company-owned and operated Lime Fresh restaurants, as well as six domestic 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. 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

The bar and grill segment of the casual dining 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. We continue to believe there are 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

We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which we believe will result in a more energetic, affordable, and broadly appealing brand. We further believe the execution of this strategy provides opportunities for increased customer counts, same-restaurant sales growth, and increased shareholder value. Our brand transformation is supported by four key pillars: core menu transformation, service and atmosphere enhancements, and communication. Over the past year, we worked aggressively to transform our menu with the introduction of new menu platforms. We introduced more compelling value throughout the menu with a wide-range of price points. Enhancing our service and atmosphere are also critical components of our brand transformation strategy. We took actions during the year to simplify operational processes which we believe resulted in better and more consistent service execution and introduced music soundscape upgrades, lighting improvements, and most recently new team uniforms. We believe these changes have combined to deliver improved customer service and create a more energetic dining atmosphere for our customers. The fourth pillar of our brand transformation strategy is our communication and marketing programs. Historically our marketing strategy has primarily focused on print promotions, digital media and local marketing programs, with a minimal amount spent on television. Over the past year, we have deployed what we believe to be a more balanced marketing program comprised of a mixture of network and national cable television advertising supported with direct mail and other print and electronic promotions. Our television advertising is designed to reshape consumer perceptions of the Ruby Tuesday brand and to more effectively showcase the Ruby Tuesday brand personality in a fresh and energetic way. The four key areas of menu, service, atmosphere, and communication will continue to be foundational drivers of our brand transformation and key to building a stronger business model.


Index

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 growing segment where demand has historically exceeded 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. Over the last year, we have made improvements to the business model which include menu improvements, including better flavor profiles and increased portion size of our proteins, as well as improvements in cost of merchandise, labor productivity, and site selection criteria. We opened four Company-owned Lime Fresh restaurants during the year ended June 3, 2014.

Strengthen our Balance Sheet to Facilitate Growth and Value Creation

During the second quarter of fiscal 2014 we closed on a new four-year $50.0 million revolving credit agreement (the "Senior Credit Facility") which replaced our previous $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's subsidiaries, real property, improvements and fixtures of 49 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. The Senior Credit Facility has a $35.0 million accordion feature which provides us with additional liquidity if needed. The $50.0 million revolving Senior Credit Facility has remained 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. 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. Third, we were able to complete the sale-leaseback transactions at low capitalization rates with a minimal tax burden.

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 and focus on prudent restaurant development. 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 5.3% in fiscal 2014 compared to fiscal 2013, and our diluted loss per share was $1.07 in fiscal 2014 compared to diluted loss per share of $0.65 in fiscal 2013, $0.27 of which was attributable to discontinued operations. Throughout this MD&A, we discuss our fiscal 2014 financial results in detail, provide insight for fiscal years 2013 and 2012, 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.


Index

Results of Operations

Ruby Tuesday Restaurants
The table below presents the number of Ruby Tuesday concept restaurants at each
fiscal year end from fiscal 2010 through fiscal 2014:

                                             International
Fiscal Year Company-Owned Domestic Franchise   Franchise   Total
2014             668              31              48        747
2013             706              33              44        783
2012             714              36              43        793
2011             750              43              53        846
2010             656             165              58        879

Other Concept Restaurants
The table below presents the number of other concept restaurants at each fiscal
year end from fiscal 2010 through fiscal 2014:

                           Lime Fresh
Fiscal Year Company-Owned Franchise* Total Lime Fresh   Discontinued Concepts**
2014             20           6             26                     -
2013             18           6             24                     -
2012             13           4             17                    14
2011              -           -             -                      4
2010              -           -             -                      2

*Fiscal 2013 includes one international Lime Fresh franchise restaurant. **Discontinued concepts include Marlin & Ray's, Truffles, and Wok Hay.

During fiscal 2014:

† † Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 5.3%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 3.0%;

· Incurred severance, payroll tax, share-based compensation, and other charges of $4.3 million in connection with the elimination of management and staff personnel at our Restaurant Support Services Center, including approximately 82 positions since November;

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

· 38 Company-owned Ruby Tuesday restaurants were closed, including two as a result of severe weather in Pensacola, Florida;

· Two franchised Lime Fresh restaurants were opened and two were closed;

· Seven franchised Ruby Tuesday restaurants were opened and five were closed;

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

· We repurchased $20.0 million of our 7.625% senior notes due 2020 (the "Senior Notes"). The repurchases settled for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions;

· We prepaid and retired 18 mortgage loan obligations for $14.9 million plus prepayment penalties of $1.1 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;

· We appointed Mark Addicks and Donald Hess to the Board of Directors;

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

· Our former Senior Vice President, Chief People Officer, Robert LeBoeuf, left the Company on October 30, 2013.


Index

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; and

· 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 minimal loss on these transactions.

* 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 2014 decreased 6.6% from fiscal 2013 for Company-owned restaurants and increased 4.0% 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)
2014               $ 1,141.8    $ 162.2       $ 20.7        $ 14.5
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             -             -

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

Other Revenue Information:
                                              2014         2013        2012
Company restaurant sales (in thousands)
  Ruby Tuesday concept                     $1,141,771   $1,229,097  $1,302,719
  Lime Fresh concept                           20,652       16,129       3,306
   Total restaurant sales                  $1,162,423   $1,245,226  $1,306,025
Company restaurant sales growth-percentage   (6.6%)        (4.7%)      4.1%

Franchise revenue (in thousands)
  Ruby Tuesday concept                         $5,577       $5,633      $5,666
  Lime Fresh concept                              746          628         72
   Total franchise revenue (a)                 $6,323        $6,261     $5,738
Franchise revenue growth-percentage            1.0%         9.1%      (19.7)%


Index

Total revenue (in thousands)
  Ruby Tuesday concept            $1,147,348       $1,234,730    $1,308,385
  Lime Fresh concept                  21,398           16,757         3,378
   Total revenue                  $1,168,746       $1,251,487    $1,311,763
Total revenue growth-percentage      (6.6%)           (4.6%)         4.0%

Ruby Tuesday concept
same-restaurant sales growth
  percentage                        (5.3)%           (1.0)%        (4.5)%

Company average restaurant       $1.67 million    $1.73 million $1.75 million
volumes (b)
Company average restaurant          (3.8)%           (0.8)%        (3.8)%
volumes growth percentage

(a) Franchise revenue includes royalty, license, and development fees paid to us by our franchisees, exclusive of support service fees of $1.0 million, $0.9 million, and $1.1 million, in fiscal years 2014, 2013, and 2012, respectively, which are recorded as an offset to selling, general, and administrative expenses.

Our Company restaurant sales and operating revenue for the year ended June 3, 2014 decreased 6.6% to $1,168.7 million compared to the prior year. This decrease is primarily a result of a 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, offset by an increase in Lime Fresh concept revenues of $4.6 million due in part to a net increase of two Lime Fresh restaurants since the prior year. The decrease in Ruby Tuesday concept same-restaurant sales is attributable to lower customer counts coupled with a decrease in average net check during fiscal 2014 compared to the prior year.

Our Company restaurant sales and operating revenue for the year ended June 4, 2013 decreased 4.6% to $1,251.5 million compared to fiscal 2012. 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 customer counts partially offset by an increase in average net check during fiscal 2013 compared to fiscal 2012. The increase in average net check was primarily the result of reduced discounts and price increases since fiscal 2012.

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 4.0% of monthly sales for franchised Ruby Tuesday concept restaurants and 5.25% of monthly sales for franchised Lime Fresh concept restaurants) are recognized as franchise revenue on the accrual basis. Franchise revenue increased 1.0% to $6.3 million in fiscal 2014 and increased 9.1% to $6.3 million in fiscal 2013. Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $6.1 million in both 2014 and 2013. 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.

Total franchise restaurant sales are shown in the table below.

                                                 2014          2013           2012
Franchise restaurant sales (in thousands)
  Ruby Tuesday concept                         $ 162,233     $ 158,001      $ 172,591
  Lime Fresh concept                              14,493        12,003          1,599
   Total franchise restaurant sales (a)        $ 176,726     $ 170,004      $ 174,190
Franchise restaurant sales growth-percentage         4.0 %        (2.4 )%       (39.8 )%

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

The 39.8% decrease in franchise restaurant sales for fiscal 2012 is primarily due to the acquisition of 109 restaurants from franchisees during fiscal 2011.


Index

Segment 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 profit/(loss) by reportable segment for fiscal 2014,
2013, and 2012 are as follows (in thousands):

                            2014         2013          2012
Segment profit/(loss):
  Ruby Tuesday concept    $ 69,543     $ 111,367     $ 123,517
  Lime Fresh concept        (6,070 )     (10,204 )      (1,954 )
   Total segment profit   $ 63,473     $ 101,163     $ 121,563

Segment profit for the year ended June 3, 2014 for the Ruby Tuesday concept decreased $41.8 million to $69.5 million compared to fiscal 2013 due primarily to the 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants and a net reduction of 38 Company-owned restaurants since the prior year, higher closures and impairments expense ($21.2 million) as we recorded impairments in connection with the closure of 33 Ruby Tuesday restaurants during the current year and also recorded impairments on 32 open Ruby Tuesday restaurants not planned for closure with deteriorating operational performance, and higher other restaurant operating costs ($2.0 million) primarily due to higher legal fees associated with the litigation discussed in Note 14 to the Consolidated Financial Statements. These were partially offset by lower cost of merchandise ($21.8 million) and payroll and related costs ($16.8 million) compared to the prior year as a result of restaurant closures, declines in customer traffic, reductions in general and administrative expenses, net ($26.9 million) due to lower allocations of support center costs, and a decrease in advertising spending ($3.5 million), primarily due to reduced television advertising.

Segment losses for the year ended June 3, 2014 for the Lime Fresh concept decreased $4.1 million compared to fiscal 2013 to $6.1 million. Excluding the impact of closures and impairments charges of $5.2 million and $8.1 million for fiscal 2014 and 2013, respectively, segment losses would have decreased $1.2 million due primarily to lower advertising fees of $0.8 million, due in part to the termination of a marketing agreement with an agency whose Chief Executive Officer previously sold the Lime Fresh restaurant concept to us. The reduction in closures and impairments charges of $2.9 million is due to lower restaurant impairments charges of $4.0 million offset by increased charges for lease reserves ($1.0 million) due predominantly to four undeveloped sites for which a management decision was reached to forego restaurant development.

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 and the closure of four additional Lime Fresh restaurants during fiscal 2013. 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 fiscal 2012 due to lower revenues on a per unit basis, which, given the fixed nature of certain costs, resulted in the loss of leverage. Additionally, during fiscal 2013 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 during fiscal 2012.


Index

The following is a reconciliation of segment profit to loss from continuing operations before taxes for fiscal 2014, 2013, and 2012 (in thousands):

                                                       2014          2013          2012
Segment profit                                       $  63,473     $ 101,163     $ 121,563
Less:
  Depreciation and amortization                        (54,828 )     (62,398 )     (66,458 )
  Unallocated selling, general and administrative
expenses                                               (47,946 )     (18,026 )     (22,069 )
  Preopening expenses                                     (395 )        (761 )        (556 )
  Goodwill and trademark impairments                      (855 )     (14,058 )     (16,919 )
  Interest expense, net                                (24,945 )     (26,576 )     (23,312 )
  Other expense, net                                    (4,079 )      (1,278 )        (875 )
Loss from continuing operations before income
taxes                                                $ (69,575 )   $ (21,934 )   $  (8,626 )

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.

                                         2014        2013        2012
Restaurant sales and operating           99.5 %      99.5 %      99.6 %
revenue
Franchise revenue                         0.5         0.5         0.4
  Total revenue                         100.0       100.0       100.0
. . .
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