Goodbye -- but Not Good Buy -- Ruby Tuesday

By Rick Munarriz Markets Fool.com

What if Ruby Tuesday (NYSE: RT)threw a buyout party and nobody came? Shares of the struggling casual-dining chain popped higher on Tuesday after announcing that it would be exploring strategic alternatives, which is Wall Street speak for putting itself up for sale. Ruby Tuesday is retaining UBS to serve as its financial advisor for assisting in the process that could end in a potential sale or merger of the company.

Continue Reading Below

Speculators zooming in on the hopes of scoring a juicy buyout premium may want to read the rest of the press release. Ruby Tuesday is also putting out preliminary fiscal third-quarter results, and once again, we see a chain that's fading in relevance. Things have been going pretty bad for the chain for some time, and those banking on an acquirer stepping up may want to consider that sometimes the move to purse "strategic alternatives" is not so strategic when there's no other alternative.

Image source: Ruby Tuesday.

You can't always get what you want

Lost in the flurry of speculative buy orders this morning, Ruby Tuesday had a pretty rough quarter. Preliminary results for its fiscal third quarter ending in February show revenue clocking in at $225.7 million, a brutal 17% below the $271.5 million it disappointed investors with a year earlier.

Ruby Tuesday has been closing down company-owned stores, and franchisees are moving on. It also unloaded what was left of its Lime Fresh burrito concept. The sharp reduction in restaurants -- we've gone from 749 eateries to just 613 locations through the 12 months that ended in November -- accounts for the lion's share of the top-line debacle, but things aren't going well at the unit level, either. Comps declined 4% during the fiscal third quarter, and that's stacked on top of -- or more fittingly, below -- a 3.1% slide a year earlier.

Continue Reading Below

How long has Ruby Tuesday been sinking? I had to go all the way back to 2006 -- 11 years ago -- to find the last time that the chain posted positive comps for its company-owned restaurants.

The problem at Ruby Tuesday goes beyond the "restaurant recession" that we're experiencing now, or even the arrival of the once-trending fast-casual and better-burger concepts that were giving casual dining throwbacks fits a couple of years ago. Ruby Tuesday's brand has been fading for more than a decade, and there's no way a potential buyer isn't going to know that.

Investors bidding up the stock now in the hopes of a buyout premium aren't smarter than the shrewd private equity pros who realize that time is their friend in picking up Ruby Tuesday for pennies on the dollar in the near future. Cash is trickling away at this leveraged and deficit-riddled operator.

Ruby Tuesday is trying. It's gone through more makeovers and costume changes than a Katy Perry show. It's tried to go upscale by swapping out its bric-a-brac decor and Tiffany lamps for leather banquettes and dark woods, only to steer back to the value-end of the market by pumping up its menu with items at single-digit price points. One day it's streamlining the menu to speed things up, and the next it's tacking on 14 new items.

The chain opened its first restaurant 45 years ago near the University of Tennessee campus, outliving many other concepts that have come and gone in that time. However, the days now appear to be numbered for Ruby Tuesday. Speculators buying the stock now in the hopes that a well-financed suitor will pay even more later have missed the point. Ruby Tuesday is on sale because it's failing, and all too often, we'll see that the auction bidding block is actually a chopping block.

10 stocks we like better than Ruby Tuesday
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and Ruby Tuesday wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.