Invest in the Right Pretzel Burger

A hesitant consumer has led quick service and casual-dining companies to innovate. One of the most popular recent innovations is the Pretzel Burger. Both Ruby Tuesday and Wendy's offer the pretzel burger, but only one of these companies would make a good long-term investment.

Ruby Tuesday's burns its investors
Once Ruby Tuesday released its first quarter results and guidance, (or lack thereof), the stock dropped more than 17%.

Prior to getting to more forward-looking information, here's a quick glance at the company's performance:

  • Comps for company-owned restaurants: Down 11.4%
  • Comps for domestic franchise restaurants: Down 8.4%
  • Net loss: $21.9 million (vs. Net Income of $3.1 million in the year-ago quarter)
  • Cash position: $35.9 million (vs. $65.5 million in the year-ago quarter)

Management blamed the macroeconomic environment for its weakness, which is understandable.

Looking ahead, the bad news is that Ruby Tuesday didn't offer any 2014 earnings guidance -- never a good sign. On the bright side, Ruby Tuesday expects new menu offerings, and its marketing campaign is expected to improve comps over the long term. While management expects comps to drop in the high single digits in the second quarter, it expects sequential improvements in the third quarter, with comps turning positive in the fourth quarter.

Searching for hope
Ruby Tuesday is attempting to reestablish its brand through an improved customer experience and innovation. In regards to the former, it wants Ruby Tuesday to be a fun and energetic environment. This might work, but not if people simply want to spend less money on their food than in the past. In regards to the latter, Ruby Tuesday is transforming its menu, and the Pretzel Burger has played a big role.

The Pretzel Burger comes several ways: Spicy Jalapeno Pretzel Cheeseburger, Portabello Crispy Onion Pretzel Cheeseburger, Blue & Black Pretzel Burger, and Bacon Cheese Pretzel Burger. The Pretzel Burger can be ordered for as low as $8.99 (fries included.)

Wendy's Pretzel Bacon Cheeseburger costs just $4.69, which is a price point that has much more potential in a new economy featuring a cautious consumer. In addition to the Pretzel Bacon Cheeseburger, Wendy's has introduced several other innovative products to its menu, like, the Dave Hot 'n Juicy Burger, the W Burger, and the Double-Patty Baconator.

While Wendy's might be a fast-food restaurant (or quick-service restaurant) and Ruby Tuesday offers a casual dining experience, the only thing that matters is making the correct investment decision between these two pretzel-burger-wielding eateries. 

Peer performance comparisons
If you look at the top and bottom-line comparisons for Ruby Tuesday and Wendy's over the past five years, you will see that Wendy's has outperformed Ruby Tuesday on the top and bottom lines over the past several years:

RT Revenue TTM Chart

RT Revenue TTM data by YCharts

RT EPS Diluted TTM Chart

RT EPS Diluted TTM data by YCharts

You might have noticed DineEquity in the charts above. DineEquity's two brands, Applebee's Neighborhood Grill & Bar and International House of Pancakes or IHOP are now 99% franchise operated, which greatly reduces costs. However, you might have also noticed that DineEquity has performed poorly.

Going forward, DineEquity plans on driving sustainable comps growth via improved operational performance and innovation. Though DineEquity's Applebee's brand doesn't have a Pretzel Burger on its menu, if it sees the Pretzel Burger as a growth driver for other restaurant chains, this type of innovation might be considered. Still, DineEquity is still highly leveraged, which isn't a good thing considering the revenue decline:

Company 

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Ruby Tuesday

33

(3.15%)

(4.29%)

N/A

0.58

Wendy's

29

0.58%

0.65%

2.40%

0.75

DineEquity

15

16.45%

43.30%

4.50%

4.45

While DineEquity is very good at turning revenue and investor dollars into profits, investing in a highly leveraged company in a challenging economic environment is risky. As far as Ruby Tuesday is concerned, it's not good at turning revenue and investor dollars into profit. Though Wendy's doesn't impress in a big way fundamentally, it's clearly the most impressive of this group. That 2.40% yield doesn't hurt, either.

What to order
Ruby Tuesday is facing too many headwinds at the moment. While a turnaround is always possible, it's fighting against industry trends, and industry trends are the most powerful force in business. DineEquity is in the same boat, but it owns stronger brands, which gives it more potential. However, Wendy's offers the most potential, as its innovation also comes at lower prices for consumers, which better matches current consumer demands. 

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The article Invest in the Right Pretzel Burger originally appeared on Fool.com.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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