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Insiders Spy Diamond in the Rough in Ruby Tuesdays
By Michael Brush
Exclusively for InvestorIdeas.com
October 18, 2007
For Ruby Tuesday (RT) investors, almost every trading day is like Black Monday.
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The stock is down 40% since early June. And it’s easy to see what bothers investors about the casual dining chain with faux Tiffany-lamps, which came on the scene back in the 1980s fern-bar era.
- Ruby Tuesday has big exposure to Florida, a ground zero for the sub-prime mortgage mess. Gasoline prices have been going up, adding more strain to the budgets of casual diners.
- So overall revenue at the chain increased just 2.4% in the most recent quarter. Margins at the restaurant level slipped.
- What’s worse, the 935-outlet restaurant chain predicted more weakness in both sales and margins for the rest of the fiscal year.
- Meanwhile, the company has lots of debt, and debt increased in relation to cash flow in the last quarter.
Investors don’t find these kinds of trends too tasty, so they have been pushing aside the Ruby Tuesdays plate.
Insiders, in contrast, are snapping up Ruby Tuesday stock like a tasty appetizer which hints of a rewarding meal to come. Their buying says that early signs of benefits from an ongoing store remodeling and menu overhaul will continue to kick in.
Insiders have purchased an impressive $1.5 million worth of stock in the past week, according to InsiderScore.com. The company has also been buying back stock – 8.8 million shares in the past three quarters, or about 15% of the outstanding stock.
This combo – insider buying plus share buybacks – is often a good sign of value. Indeed, Ruby Tuesday stock trades at a trailing price earnings ratio of 11.4 which is well below the 14-22 range its held for the past five years, and also a deep discount to the sector average of 27.4 times trailing earnings, according to Reuters.
The turnaround effort
I took a close look at the company’s turnaround effort and it basically boils down to three fairly simple parts.
- First, the company is stepping up advertising to try to keep up with the beefed up marketing efforts of competitors like Applebee's International (APPB) and the Olive Garden, a division of Darden Restaurants (DRI).
- Next, the company is trying to improve the freshness and quality of its food, while re-pricing the menu to offer more value options.
- The company is also remodeling restaurants, replacing Tiffany lamps with different lighting, and updating the décor to bring the ambience out of the 1980s fern bar era.
Founder, chairman and chief executive Sandy Beall describes the effort as “a multi-step plan to more aggressively fight for and attract guests in this challenging environment.”
The hope is to draw customers with higher incomes, and get them to spend more. The company’s goal is to increase same-restaurant sales 3% or greater per year and to increase average restaurant sales by $100,000 a year, with a long-term objective of hitting $2.5 million in sales per restaurant per year.
Perking up
While analysts trip over themselves to downgrade the stock, there are already signs that the revamping effort is paying off. Here are some of the signs of progress that the insiders were probably banking on when they decided to plunk down $1.5 million last week to buy Ruby Tuesday stock.
- First, even though same-restaurant sales declined for the older outlets in the most recent quarter, which was reported October 10, the company saw sales increases in the newer and remodeled restaurants. Remodeled stores saw year-over-year sales gains of 2.5%. That’s a sign that something is going right.
- Next, studies by the market research firm NPD showed that customer ratings on food in September were the highest ever for the chain in areas like quality, value and portion size. The restaurant also scored high for factors like intent to revisit. “We get more positive comments on our food than we ever have, that I can remember, in the history of Ruby Tuesday,” says Beall.
- The difference is showing up in hard numbers. For example, customers with higher incomes are coming through the doors. About 38% of customers in the most recent quarter had incomes over $75,000 a year, compared to 36% a year ago. They are buying more wine and premium products. So average check size is increasing.
The bottom line : Sure these changes are relatively small so far. But big trends always start with small steps – and the insiders are telling us loud and clear they expect the progress to continue. So I would buy right here. The problem with trying to wait to catch a falling knife until “after it has stopped falling” is that by definition it is always impossible to know exactly when that point was until well after the fact. So it is tough advice to follow. I’m sure these insiders don’t spend much time in the kitchen at Ruby Tuesdays. But given the size of their buying, I’ll go with their call, over the Wall Street analysts, on when this knife has lodged firmly in the cutting board.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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