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Ruby Tuesday Seriously Lacks Luster

Shares of Ruby Tuesday (RT) sizzled on Thursday, rising more than 15.6% after the restaurant chain reported better-than-expected earnings.

The stock closed at $6.85, with more than 3.6 million shares trading hands. That represents a seven-fold increase over its 30-day average trading volume of 506,000 shares.

When you dig deeper, though, it doesn’t take long to discover that the company is little more than a chronic underperformer.

If you’ve been struck by the recent hysteria over Ruby Tuesday, it’s time for a dose of reality…

Don’t Get Caught Owning This Lackluster Stock

Ruby Tuesday reported EPS of $0.04 per diluted share, which was $0.16 better than expected.

This compares to the Q1 2014 results, where the company reported a loss of $22.2 million, or $0.37 per share.

Now, even after Thursday’s surge, the stock was still down 2.1% for the year, and down 9.3% over the last 12 months.

A Long Way to the Top: Ruby Tuesday (RT) 12-month Share Price

Now, CEO J.J. Buettgen argues that the company has outperformed the Knapp Track™ benchmark on both same-store sales and same-store guest counts for three consecutive quarters.

He believes that’s a strong signal that Ruby Tuesday is set to “sparkle.”

Is Buettgen’s optimism justified?

While the EPS and Knapp Track beats are relatively good news, that doesn’t mean the stock is a good investment right now. The company faces several serious weaknesses that run very deep.

Take the company’s extremely low quick ratio of 0.27, for example. This low level implies that the company could have problems meeting its short-term debt obligations. And given such weak earnings and flat revenue, it doesn’t appear that trend will change anytime soon.

Some might argue that a current ratio would be a better metric for a restaurant, since there would be no need to discount inventory in an emergency. But the current ratio of 0.63 doesn’t significantly change the equation.

Another major concern for Ruby Tuesday is its consistently declining profit margins. The company’s net profit margin has declined in nine of the last 10 years – falling from 9.21% in 2005 to -5.51% currently.

But, perhaps the biggest headwind for Ruby Tuesday is the overall economy.

In Q2 2014, U.S. GDP increased at an annual 4.2% rate. Yet Ruby Tuesday experienced little success in growing its revenue or guest counts.

And with recent pronouncements that the U.S. economy may be peaking – as evidenced by recent downward revisions to real GDP expectations by the International Monetary Fund (IMF) and other international organizations – the question must be asked: “What happens to Ruby Tuesday when the economy weakens?”

In its latest quarterly release, Ruby Tuesday’s revenue showed a 2.93% decline, falling from $289.7 million in Q1 2014 to $281.2 million.

Its net income from continuing operations for the quarter rose to $2.6 million from a loss of $21.9 million the previous year. But taking out certain items, the company still reported a negative diluted loss per share of $0.01.

Ruby Tuesday raised the lower end of its guidance for same-store sales, and now expects to see same-store sales rise 1% to 2% in FY 2015. Its original measurement called for sales to be flat to up 2%.

But at the end of the day, Ruby Tuesday only knows how to underperform. There’s nothing new here to suggest that the future will be any better for the restaurant.

But there’s much to suggest that if the United States and global economies slow as expected, Ruby Tuesday could experience deteriorating results rather quickly.

As such, there’s not enough shine on this ruby to justify the risk to its investors.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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