Ruby Tuesday Inc. has agreed to acquire the fast-casual Lime Fresh Mexican Grill chain for $24 million, but the casual-dining operator also plans to close up to 27 underperforming locations of its namesake brand in coming months.
The announcement Wednesday came during Ruby Tuesday’s Feb. 28-ended third quarter report, which officials said showed disappointing results with a 71-percent drop in profit, largely due to impairment charges from the planned closure of 25 to 27 restaurants in the fourth quarter.
However, Sandy Beall, Ruby Tuesday’s founder, chair and chief executive, said the acquisition of Lime Fresh’s intellectual property rights, along with the assets of seven company-owned restaurants, offers the Maryville, Tenn.-based chain an opportunity for growth.
Ruby Tuesday in 2010 signed on as a master franchisee of the Miami-based Lime Fresh brand and currently operates four locations.
Lime Fresh has a total of 15 locations — including franchised units — though future openings will be company operated. Beall said the company plans to add another 20 next year with 30 more planned for 2014.
“The acquisition opens up development opportunities for us all over the United States, in particular Florida, where the brand has realized much success to date,” Beall said.
John Kunkel, Lime Fresh’s founder, will join Ruby Tuesday’s board, Beall said.
Kunkel, who will step down as chief executive of the brand, will retain ownership of the original South Beach location of Lime Fresh as a franchisee.
Through a separate company 50 Eggs Restaurant Group, based in Miami, Kunkel last year opened the “relaxed fine-dining” Yard Bird Southern Table & Bar. A second pork-variation on the concept is scheduled to open later this year called Swine Southern Table & Bar, and Kunkel said two more limited-service concepts are in the works.
For Lime Fresh, Kunkel said the change in ownership will be a “very easy transition,” given Lime Fresh has been working with Ruby Tuesday to develop the brand for more than a year.
“We feel very confident the brand will move in the right direction with the right operator,” he said.
Lime Fresh is seeing same-store sales in the high-single-digit to low-double-digit range year-to-date, he noted.
Ruby Tuesday’s core brand, however, saw same-store sales decline 5 percent in the third quarter at company-owned locations.
Ruby Tuesday Inc. operated 740 locations at the end of the quarter, while franchisees operated another 85 of the brand’s restaurants in the United States and internationally.
The company’s net income also took a hit in the third quarter, dropping to 4.5 million, or 7 cents per share, including $9.6 million in impairment charges, compared with $16 million, or 25 cents per share, a year ago, when the company benefited from accounting gains from franchise partner acquisitions.
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Some of the closed properties in the fourth quarter will be sold, the company said, which could offset some of the impact.
Excluding pre-tax impairment costs and accounting gains, income was $11.6 million, or 18 cents per share, for the quarter, compared with $15.7 million, or 24 cents per share, last year — a 26-percent decline.
Revenue for the quarter grew 1.8 percent to $324.8 million from the prior year.
Beall blamed the disappointing results on the competitive promotional environment, saying Ruby Tuesday has not competed well against the heavy advertising of peer brands.
As a result, Ruby Tuesday in late February began expanding its TV advertising to cover more of the system, with plans to communicate “a stronger value proposition,” Beall said.
Roughly 50 percent of the restaurants are in markets with TV advertising, compared with about 20 percent before. Ads are promoting the chain’s Fresh Endless Garden Bar and fresh-based garlic-cheese biscuits, both of which are free with the purchase of entrées starting at $9.99.
“Our March sales were the best sales results we’ve had this fiscal year by far, actually beating Knapp-Track performance in the most recent weeks,” Beall said.
Next week, Beall said 100 percent of the system will be covered by TV advertising with a mix of network and local cable ads. The increased marketing spend will be covered by the company’s expected $35 million to $40 million in cost savings this year.
The emphasis on TV advertising will allow the chain to reduce its coupon and promotional expense, Beall said, maintaining that the focus on value will boost traffic and same-store sales over time.
Ruby Tuesday also is continuing to grow its secondary Marlin & Ray’s seafood concept, which was developed in 2010 initially as a conversion vehicle for underperforming Ruby Tuesday locations.
During the quarter, Ruby Tuesday opened two Marlin & Ray’s seafood restaurants. One Ruby Tuesday was closed permanently and another temporarily shuttered to be converted to a Marlin & Ray’s, the company said.
Now with a total of eight Marlin & Ray’s, the company has plans to open two more locations before the end of the fiscal year and another 10 are planned for 2013.
“While still early, we’re pleased with the sales results of Marlin & Ray’s,” Beall said. “We continue to believe the brand position of fun, casual and high-value seafood is an opportunity, especially in underperforming assets.”
The company also plans to open a high-end Truffles Grill before the end of the year.
For the year, Ruby Tuesday is projecting same-store sales will be down between 4 percent and 4.5 percent, with earnings per share in the 27 cents to 32 cents per share range, including impairment and exit costs.
Including the closures anticipated to take place in the fourth quarter, the company plans to close a total of 31 to 33 Ruby Tuesday locations, and another eight to 10 will be converted to other brands.
Franchisees are expected to close 18 to 20 Ruby Tuesday locations, most of which will be international locations. Nine restaurants closed in India, for example, where the company is seeking a new franchise partner.
Six to eight franchised locations will open in 2012, up to five of which will be in other countries.
Contact Lisa Jennings at [email protected]
Follow her on Twitter @livetodineout
