Ruby Tuesday Inc. must increase television advertising to drive consumers into the company’s upgraded restaurants and reverse sagging same-store sales, executives said during a conference call with analysts.
The Maryville, Tenn.-based operator and franchisor of casual-dining restaurants released results for its fiscal 2012 second quarter, reporting a net loss of $2 million, or 3 cents per share, compared with net income of $4.6 million a year earlier.
Ruby Tuesday said same-store sales at company-operated restaurants declined 4.2 percent for the quarter, compared with a 4.2-percent increase in fiscal 2011’s second quarter.
That marked the third consecutive period of comparable sales erosion despite chain efforts to upgrade its menu, service and ambience above those of its peers in the competitive grill-and-bar segment.
“We continue to focus on taking costs out of our business — and we do an excellent job in this area — so we can invest in television and pay for a salad bar,” Ruby Tuesday chief executive Samuel E. “Sandy” Beall said.
“We need to drive awareness and trial to help close the gap between brand [perception and] actual experience in our test markets.”
Importance of trial
Driving such trial is critical in light of the positive results from recent product, marketing and service-enhancement tests and ongoing initiatives, Beall said.
“People who come in like Ruby Tuesday. People who haven’t come in, think of us as the old Ruby Tuesday [and] we’ve got to change that,” Beall said.
Earlier, Beall had said consumers were responding favorably to the chain’s test at 220 restaurants of complimentary add-on visits to the Fresh Endless Garden Bar and fresh-baked garlic cheese biscuits with the purchase of entrees starting at $8.99, among other initiatives.
Ruby Tuesday already is seeing improvements in guest experience scores from a test of a service upgrade begun late in the second quarter at 10 percent of the company’s 742 company restaurants, Kimberly Grant, executive vice president, said. The program, which will be rolled out systemwide in the third quarter, features such touches as upgraded uniforms and the grating of cheese on pasta and shaking of martinis at the table.
“We believe this new service initiative will further improve our record high internal and external guest satisfaction scores,” Grant said.
A variety of television advertising strategies were tested recently in 11 markets, Ruby Tuesday officials said, and in three of those markets sales grew by high single-digit percentage amounts.
“We plan on increasing our TV [advertising] locations from approximately 20 percent today to 50 percent of the system in the fourth quarter, so we’re excited about that,” Beall said, adding that the company believes the advertising tactics used in the three highest performing test markets can be successfully replicated elsewhere.
Beall suggested that the recent positive results from TV ad tests may be a matter of timing and the fact that there is now as much as a 20 percentage point difference between the brand perception scores of people who have tried the improved operation and others who have not.
Explaining why current TV ads touting developments at Ruby Tuesday may be spurring more trial and sales, he said the perceptions of lapsed users or people who have never dined at the chain “are so much different, and they haven't changed those perceptions because we haven't [until recently] told them anything new about the brand.”
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Beall and members of his executive team also relayed to analysts their confidence in the company’s fledgling conversion program to the Marlin & Ray’s full-service seafood concept and development of the licensed fast-casual Lime Fresh Mexican Grill concept.
However, Beall, citing the recent sales experiences at Ruby Tuesday and other casual-dining companies, acknowledged that the company was being more conservative about the back half of fiscal 2012 than it might have been a few months back.
Reflecting that new sensibility, Ruby Tuesday modified its fiscal 2012 guidance. It now anticipates same-store sales at company restaurants to be down 2 percent to 4 percent for the year, versus earlier predictions of flat to down by 2 percent.
The company said it now expected full-year earnings per share to fall within the 55 cents to 65 cents range, compared with the earlier forecasted range of 60 cents to 75 cents per share. It said that adjustment was due chiefly to year-over-year increases in advertising and interest expense.
Unit development and conversions
Related to new-store development, Ruby Tuesday officials noted they now expect to close five to seven company-owned restaurants in 2012, compared with previous guidance of three to five closures. The chain now plans to convert eight to 10 restaurants, versus the six to eight, as previously anticipated. It also will open one high-end Truffles Grill, and continues to anticipate opening a total of six to eight Lime Fresh restaurants.
The company said it now expects to close 15 to 17 franchised restaurants during the year, versus an earlier target of 14 to 16, with as many as 14 of those in international settings, including nine closings in India, where the company cancelled a franchising agreement.
Beall said Ruby Tuesday is encouraged by early results from conversion opportunities, and Marlin & Ray’s is showing potential as a stand-alone concept in addition to creating a halo effect at nearby Ruby Tuesdays, where there have been sales increases.
The company has been identifying and securing in-line development leases for Lime Fresh and is looking to open another 15 locations in the next fiscal year, Beall said.
“We think investing in growth within the high quality fast-casual segment is the right thing to do, and we look forward to growing Lime,” he said.
Balance sheet maneuvering
The company has identified at least $15 million to $20 million in savings from its cost savings initiatives to fund additional marketing dollars, Beall said.
Though just one transaction was completed during the second quarter, he said the company believes “we have a significant opportunity to strengthen our balance sheet with up to $150 million in [real estate] sale-leaseback proceeds in the future in order to invest in growth, opportunistic share repurchase and lower our debt levels.”
“We remain focused on maximizing our strong free cash flow in an effort to create additional cash and financial flexibility,” Beall said. “We’re pleased with our progress we’re making in monetizing some of this real estate.”