Why Ruby Tuesday Will Never Be Great Again

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A Ruby Tuesday casual dining restaurant.
Alamy
Goodbye, Ruby Tuesday (RT) -- if not now, then soon.

Shares of the casual dining chain hit a fresh 52-week low this week after it posted the kind of quarterly results earlier this month that most sensible diners would send back to the kitchen.

Ruby Tuesday's undercooked results included a larger than expected quarterly loss, a confidence-bashing plunge in comparable restaurant sales, and the gall to blame its own malaise on the economy.

Seeing Ruby Red

Restaurant chains don't last forever. Their mortality is well documented. Just try and find a Steak & Ale, Chi-Chi's, or Lum's. In the 1960s, Howard Johnson's was the country's largest operator. Now, all that's left are a couple of renegade HoJo's that refuse to go down.

So Ruby Tuesday certainly won't be the first national chain to go belly up. It may, however, be the next national chain to go belly up.

The chain's latest quarter was a disaster. Comparable restaurant sales plunged 11.4 percent at company-owned locations in its latest quarter. This means that for every dollar that a restaurant rang up in sales last year, it's making less than 89 cents today. Eateries will have their setbacks; there are few out there that can post positive comps consistently. However, it's hard to bounce back from this kind of slide. A double-digit percentage decline isn't a hiccup. It's an exodus.

"The first quarter was challenging as the overall economy failed to realize any significant improvements which adversely affected us and the casual dining industry," the CEO explained in last week's quarterly report, but that's not fair. Where are the other restaurateurs posting 11.4 percent declines at the register?

No, the economy isn't at its best. Yes, casual dining is getting roughed up at the expense of cheaper, faster, and in some cases tastier fast casual operators. However, the factors affecting everyone in your business aren't the ones that really. If you're the slowest zebra in the herd, the lion's going to pick you out for supper.

Pretzel Bread to the Rescue

Menu changes are how a chain typically responds to slumping sales, and Ruby Tuesday isn't any different. It's shifting to emphasizing the value of its offerings, rolling out several new entrees priced between $5.99 and $9.99 apiece.

It also introduced pretzel bread burgers and flatbread in August, but is that really so impressive? Even Wendy's (WEN) has embraced pretzel bread as a premium bun for its burgers and chicken sandwiches.

Ruby Tuesday claims that the new menu tweaks are working -- but it's also forecasting another sharp drop in comps for the current quarter.

Back on Life Support

Ruby Tuesday's been close to the brink of death before. The stock traded below $1 in late 2008 -- and again in early 2009 -- when it seemed as if the financial crisis would crush the weaker restaurant concepts.

Ruby Tuesday's stock eventually bounced back, but the same can't really be said about the concept itself. Last week's larger than expected quarterly deficit has left Wall Street targeting a loss for the entire fiscal year that ends in April. Those same pros see Ruby Tuesday breaking even in fiscal 2015, but you can expect those projections to sour if restaurant-level sales don't turn positive in the springtime as the operator is now forecasting.

If Ruby Tuesday does fade away, it won't happen overnight. There are 778 Ruby Tuesday locations out there, and it's going to take more than one money-losing year to collapse that empire. However, there aren't many chains that have posted double-digit declines in comparable sales, and still managed to come back for seconds.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

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