10-K 1 rt20160509_10k.htm FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended: May 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to _________

 

Commission file number 1-12454

 

RUBY TUESDAY, INC.
(Exact name of registrant as specified in charter)

GEORGIA

 

63-0475239

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

150 West Church Avenue, Maryville, Tennessee 37801
(Address of principal executive offices and zip code)

(865) 379-5700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

   

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.01 per share

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No  ☒

 

The aggregate market value of the voting stock (which consists solely of shares of common stock) held by non-affiliates of the registrant as of the last day of the second fiscal quarter ended December 1, 2015 was $343,124,069 based on the closing stock price of $5.53 on December 1, 2015.

 

The number of shares of common stock outstanding as of August 10, 2016, was 60,137,399.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the registrant’s 2016 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this Form 10-K.

 

 

 

Index

PART I

 

 

 

 

 

Item 1.

Business

4-10

Item 1A.

Risk Factors

10-17

Item 1B.

Unresolved Staff Comments

17

Item 2.

Properties

17-19

Item 3.

Legal Proceedings

19

Item 4.

Mine Safety Disclosures 

19

 

   

PART II

   

 

 

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20-21

Item 6.

Selected Financial Data

22-23

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

24-42

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk

42

Item 8.

Financial Statements and Supplementary Data

43-90

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

91

Item 9A.

Controls and Procedures

91

Item 9B.

Other Information

91

 

 

 

PART III

   

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

92

Item 11.

Executive Compensation

92

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

92

Item 13.

Certain Relationships and Related Transactions, and Director Independence

92

Item 14.

Principal Accounting Fees and Services

92

 

 

 

PART IV

   

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

93

Signatures

 

94

 

 

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Special Note Regarding Forward-Looking Information

This Annual Report on Form 10-K contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events, including one or more of the following:  future financial performance (including our estimates of changes in same-restaurant sales, average unit volumes, operating margins, expenses, and other items), future capital expenditures, the effect of strategic initiatives (including statements relating to cost savings initiatives and the benefits of our marketing), the opening or closing of restaurants by us or our franchisees, sales of our real estate or purchases of new real estate, future borrowings and repayments of debt, availability of financing on terms attractive to the Company, compliance with financial covenants in our debt instruments, payment of dividends, stock and bond repurchases, restaurant acquisitions and dispositions, and changes in senior management and in the Board of Directors. We caution the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause our actual results to differ materially from those included in the forward-looking statements, including, without limitation, the risks and uncertainties described in the Risk Factors included in Part I, Item A of this Form 10-K and the following:

 

 

general economic conditions;

 

 

changes in promotional, couponing and advertising strategies;

 

 

changes in our customers’ disposable income;

 

 

consumer spending trends and habits;

 

 

increased competition in the restaurant market;

 

 

laws and regulations, including those affecting labor and employee benefit costs, such as further potential increases in state and federally mandated minimum wages and healthcare reform;

 

 

the impact of pending litigation;

 

 

customers’ acceptance of changes in menu items;

 

 

changes in the availability and cost of capital;

 

 

potential limitations imposed by debt covenants under our debt instruments;

 

 

weather conditions in the regions in which Company-owned and franchised restaurants are operated;

 

 

costs and availability of food and beverage inventory, including supply and delivery shortages or interruptions;

 

 

significant fluctuations in energy prices;

 

 

security breaches of our customers’ or employees’ confidential information or personal data or the failure of our information technology and computer systems;

 

 

our ability to attract and retain qualified managers, franchisees and team members;

 

 

impact of adoption of new accounting standards;

 

 

impact of food-borne illnesses resulting from an outbreak at either one of our restaurant concepts or other competing restaurant concepts; and

 

 

effects of actual or threatened future terrorist attacks in the United States.

 

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PART I
Item 1. Business

 

Background
The first Ruby Tuesday® restaurant was opened in 1972 in Knoxville, Tennessee near the campus of the University of Tennessee. The Ruby Tuesday concept, which at the time consisted of 16 restaurants, was acquired by Morrison Restaurants Inc. (“Morrison”) in 1982. During the following years, Morrison grew the concept to over 300 restaurants with concentrations in the Northeast, Southeast, Mid-Atlantic and Midwest regions of the United States. In a spin-off transaction that occurred on March 9, 1996, shareholders of Morrison approved the distribution of two separate businesses of Morrison to its shareholders, Morrison Fresh Cooking, Inc. (“MFC”) and Morrison Health Care, Inc. (“MHC”). In conjunction with the spin-off, Morrison was reincorporated in the State of Georgia and changed its name to Ruby Tuesday, Inc. Ruby Tuesday, Inc. and its wholly-owned subsidiaries are sometimes referred to herein as “RTI,” the “Company,” “we” and/or “our.”

 

We began our franchise program in 1997 with the opening of one domestic and two international franchised Ruby Tuesday restaurants. We do not own any equity in entities that hold franchises under our franchise programs. As of May 31, 2016, we had 27 Ruby Tuesday concept franchisees, comprised of nine domestic and 18 international franchisees. We have signed agreements for the development of new franchised Ruby Tuesday restaurants with six of the international franchisees. These six international franchisees hold rights as of May 31, 2016 to develop Ruby Tuesday restaurants in 15 countries.

 

During fiscal 2011, we entered into a licensing agreement which allowed us to operate multiple Lime Fresh Mexican Grill® (“Lime Fresh”) restaurants, a fast casual Mexican concept. We opened four Lime Fresh restaurants during fiscal year 2012 under the terms of the licensing agreement. On April 11, 2012, we completed the acquisition of Lime Fresh, including the assets of seven additional Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants, and the Lime Fresh brand’s intellectual property.  

 

As further discussed in Note 3 to the Consolidated Financial Statements, during fiscal year 2016, we entered into an agreement to sell the assets related to eight Company-owned Lime Fresh restaurants in Florida for $6.0 million and closed the remaining 11 Company-owned Lime Fresh restaurants.  Six of the restaurants were closed and transferred to the buyer during the fourth quarter of fiscal year 2016, after which we were paid $5.0 million. One of the remaining two restaurants closed and transferred to the buyer shortly after our fiscal year-end, and the other restaurant is expected to close and transfer to the buyer on or before the end of our second quarter of fiscal year 2017.  The remaining $1.0 million of consideration will be received when the remaining restaurant has transferred to the buyer. All of the eight restaurants involved in this transaction will be rebranded by the buyer as a different restaurant concept.  Also during the fourth quarter of fiscal year 2016, we sold the Lime Fresh brand's intellectual property and the franchise agreements associated with eight franchised Lime Fresh concept restaurants for $4.6 million.  As a result of this transaction, we had no remaining Lime Fresh concept franchisees as of May 31, 2016.    

 

Also in fiscal year 2011, we began converting certain underperforming Ruby Tuesday restaurants to other concepts. To that end, we entered into a licensing agreement which allowed us to operate multiple Truffles® restaurants, an upscale café concept offering a diverse menu. Other conversion concepts available to us were Marlin & Ray’s™, an internally-developed seafood concept, and Wok Hay®, our full service Asian concept. We converted certain underperforming Ruby Tuesday restaurants to these concepts through fiscal year 2013. However, as discussed further in Note 3 to the Consolidated Financial Statements, in an effort to focus primarily on the successful sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, in fiscal year 2013 we closed all Marlin & Ray’s, Wok Hay, and Truffles restaurants.

 

Operations

We own, operate, and franchise the Ruby Tuesday casual dining restaurant chain and operate in the bar and grill segment of the casual dining industry. As of May 31, 2016, we owned and operated 646, and franchised 78, Ruby Tuesday restaurants. Of the 78 franchised Ruby Tuesday restaurants, 27 were operated by our domestic franchisees and 51 were operated by our international franchisees. Ruby Tuesday restaurants can be found in 44 states, 14 foreign countries, and Guam. Our Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic and Midwest of the United States, which we consider to be our core markets. A listing of the states and countries in which our franchisees operate is set forth below in Item 2 entitled “Properties.”

 

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On August 11, 2016, following a comprehensive review of the Company's property portfolio, we announced a plan to close approximately 95 Company-owned restaurants with perceived limited upside due to market concentration, challenged trade areas, and other factors by September 2016.  The plan is designed to streamline the organization through asset rationalization, improve financial profitability, and ultimately create long-term value for shareholders. The approved closures, which include mall, in line, and freestanding sites, encompass restaurants spread throughout all of the geographic regions in which the Company operates. Of the restaurants expected to close, approximately two-thirds are operated on leased properties and approximately one-third are owned.

 

Ruby Tuesday restaurants offer a wide variety of menu options, including handcrafted classic burgers made with fresh 100% USDA choice beef, fresh chicken options, our signature “fall-off-the-bone” baby-back ribs, as well as steaks, seafood, and appetizers. Our Garden Bar has been a significant point of differentiation for our brand and an enduring favorite of our customers. With up to 35 fresh, high quality salad ingredients, our Garden Bar exemplifies the key attributes of our brand of freshness and quality. Our Classic Burger choices include beef, turkey, and chicken offerings. Entree selections typically range in price from $8.99 to $20.99. Where appropriate, we also offer our RubyTueGo® curbside service and a delivered-meals catering program for businesses, organizations, and group events at both Company-owned and franchised restaurants.

 

Over the last several fiscal years we developed and have been implementing a brand transformation strategy which is designed to make our brand more energetic, affordable, and broadly appealing. We believe the execution of this strategy provides opportunities for increased same-restaurant customer counts and sales growth, and increased shareholder value. Our brand transformation is supported by enhancements in the following areas: food, service, atmosphere, and communication. While the brand transformation strategy is a multi-year process, we have taken what we believe to be meaningful steps on the following initiatives:

 

 

Menu Enhancements. We continue to transform our menu to be broadly appealing, approachable, and affordable by offering compelling value throughout the menu at a wide-range of price points. Additionally, we are testing an initiative to enhance our Garden Bar which we believe is a differentiator for our brand and utilized by approximately half of our guests. Our intent is to incorporate customer feedback to continue to evolve our food offering as well as to promote menu items that customers find highly satisfying.

 

 

Service Enhancements. Enhancing our service is also a critical component of our brand transformation strategy. In January 2015, we rolled-out a new service training platform which encourages our restaurant teams to provide a genuine, customized experience to our customers while also reinforcing techniques to build add-on sales for beverages, appetizers and desserts. We believe that there are additional opportunities to improve the guest experience by simplifying the menu, recipes, and operating processes which could result in a better and more consistent service execution and guest experience.

 

 

Atmosphere Enhancements. To further enhance the atmosphere of our restaurants, we are currently developing a remodel plan and began testing prototypes in fiscal year 2016 to determine sales building potential, cost effectiveness, and return on investment. These changes are designed to create an improved dining atmosphere for our customers.

 

 

Communication Program Enhancements. Our communication and marketing programs are a key component to our brand transformation strategy. The program is designed to reshape consumer perceptions of the Ruby Tuesday brand by showcasing our brand personality in a fresh and energetic way, featuring compelling new food products, highlighting the freshness and variety of our Garden Bar, and effectively communicating value and affordability. Additionally, as we look at opportunities to enhance our existing menu offerings, we will continue to focus on value which we believe our customers perceive as a combination of food quality, service, restaurant atmosphere, menu variety, and price. Lastly, we continue to build key capabilities in our marketing organization, strengthen our culinary innovation pipeline, and become more efficient, expansive and cost-effective with our marketing spend including leveraging digital and social media platforms.

 

 

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Franchising
As previously noted, as of May 31, 2016, we had franchise arrangements with 27 franchise groups which operate Ruby Tuesday restaurants in 12 states, Guam, and 14 foreign countries. Our Ruby Tuesday franchisees opened five Ruby Tuesday restaurants in fiscal year 2016, six restaurants in fiscal year 2015, and seven restaurants in fiscal year 2014.

 

Generally, Ruby Tuesday concept franchise arrangements consist of a development agreement and a separate franchise agreement for each restaurant. Under a development agreement, a franchisee is granted the exclusive right and undertakes the obligation to develop multiple restaurants within a specifically-described geographic territory. The term of a domestic franchise agreement is generally 15 years, with two five-year renewal options.

 

For each Ruby Tuesday concept restaurant developed under a domestic development agreement, a franchisee is currently obligated to pay a development fee of $10,000 per restaurant (at the time of signing a development agreement), an initial license fee (which typically is $35,000 per restaurant to be developed for domestic franchisees), and a royalty fee equal to 4.0% of the restaurant’s monthly gross sales, as defined in the franchise agreement. Development and operating fees for international franchise restaurants vary. 

 

All domestic Ruby Tuesday concept franchisees are required to pay a marketing and purchasing fee of 1.5% of monthly gross sales. At times of economic downturn, we have occasionally chosen to temporarily lower these fees. Under the terms of the franchise agreements, we also require all domestic Ruby Tuesday concept franchisees to pay a national advertising fee, which was 1.5% of monthly gross sales as of May 31, 2016, pro rata portion of the costs associated with our national advertising campaign.  Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising feeund.

 

In prior fiscal years, we also offered support service agreements for certain domestic Ruby Tuesday concept franchisees. Under those support services agreements, we had one level of support in which we provided specified services to assist the franchisees with various aspects of the business including, but not limited to, processing of payroll, basic bookkeeping, and cash management. Fees for these services were typically contracted to be about 1.5% of revenues, as defined in the franchise agreement. Separate from those support service agreements, there was also a required level of support services in which we charged a fee to cover certain information technology related support that we provided. Our last support services agreement expired on June 30, 2015.

 

We provide ongoing training and assistance to our franchisees in connection with the operation and management of each restaurant through our training facility, meetings, computer-based training, and by written or other material.

 

Training
Ruby Tuesday University, located in our Maryville, Tennessee Restaurant Support Services Center, serves as the centralized training center for our managers and multi-restaurant operators. Facilities include classrooms, a test kitchen, and the Ruby Tuesday Culinary Center. Ruby Tuesday University provides managers with the opportunity to assemble for intensive, ongoing instruction and hands-on interaction through our training sessions. Programs include classroom instruction and various team building activities and competitions, which are designed to contribute to the skill and enhance the dedication of the Company and franchise teams in addition to strengthening our corporate culture. In addition to the centralized training at Ruby Tuesday University, we periodically conduct field training classes. These field training classes have been held for team members, managers, general managers, and operations leadership. The field classes partner the training team along with operational leadership to provide direct training and development in order to reach a large audience faster, and make an immediate impact on our team.

 

Further contributing to the training experience is the Ruby Tuesday LodgeSM, which is located on a wooded campus just minutes from the Restaurant Support Services Center. The Ruby Tuesday Lodge serves as the lodging quarters and dining facility for those attending Ruby Tuesday University. After a day of instruction, trainees have the opportunity to dine and socialize with fellow team members in a relaxed and tranquil atmosphere where they are fully immersed in our culture. We believe our emphasis on training and retaining high quality restaurant managers is critical to our long-term success and we are committed to the ongoing development of our team members.

 

 

 

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Research and Development
We do not engage in any material research and development activities. However, we do engage in ongoing studies to assist with food and menu development and the design of our restaurant prototypes. Additionally, we conduct extensive consumer research to determine our customers’ preferences, trends, and opinions, as well as to better understand other competitive brands.

 

Raw Materials
We negotiate directly with our suppliers for the purchase of raw and processed materials and maintain contracts with select suppliers for both our Company-owned and franchised restaurants. These contracts may include negotiations for distribution of raw materials under a cost plus delivery fee basis and/or specifications that maintain a term-based contract with a renewal option. If any major supplier or distributor is unable to meet our supply needs, we would negotiate and enter into agreements with alternative providers to supply or distribute products to our restaurants.

 

We use purchase commitment contracts to stabilize the potentially volatile prices of certain food commodities. Because of the relatively short storage life of inventories, limited storage facilities at the restaurants, our requirement for fresh products and the numerous sources of goods, a minimum amount of inventory is maintained at our restaurants. In the event of a disruption of supply, all essential food, beverage and operational products can be obtained from secondary vendors and alternative suppliers. We believe these alternative suppliers can provide, upon short notice, items of comparable quality.

 

From time to time, we purchase lobster inventory in advance of our needs and store it in third-party facilities prior to our distributor taking possession of the inventory. Once the lobster is moved to our distributor’s facilities, we transfer ownership to the distributor. We later reacquire the inventory from our distributor upon its subsequent delivery to our restaurants.

 

Trade and Service Marks of the Company
We and our affiliates have registered certain trade and service marks with the United States Patent and Trademark Office, including the name “Ruby Tuesday.” RTI holds a license to use all such trade and service marks from our affiliates, including the right to sub-license the related trade and service marks. We believe that these and other related marks are of material importance to our business. Registration of the Ruby Tuesday trademark expires in our 2025 fiscal year, unless renewed. We expect to renew this registration at the appropriate time.

 

Seasonality
Our business is moderately seasonal. Average unit volumes of our mall-based restaurants, which represent approximately 14% of our total restaurants as of May 31, 2016, are slightly higher during the winter holiday season. Freestanding restaurant sales are generally higher in the spring and summer months.

 

Competition
Our business is subject to intense competition with respect to prices, services, convenience, locations, employees, advertising and promotion, and the types and quality of food. We are in competition with other food service operations, with locally-owned restaurants, and other national and regional restaurant chains that offer the same or similar types of services and products as we do. In times of economic uncertainty, restaurants also compete with grocery retailers as customers may choose to limit spending and eat at home. Some of our competitors may be more established in the markets where our restaurants are or may be located. Changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the types, numbers and locations of competing restaurants often affect the restaurant business. There is active competition for personnel and for attractive commercial real estate sites suitable for restaurants.

 

Government Regulation
We and our franchisees are subject to various licensing requirements and regulations at both the state and local levels, related to zoning, land use, sanitation, alcoholic beverage control, and health and fire safety. We have not encountered significant difficulties or failures in obtaining the required licenses or approvals that could delay the opening of a new restaurant or the operation of an existing restaurant nor do we presently anticipate the occurrence of any such difficulties in the future. Our business is subject to various other regulations by federal, state and local governments, such as compliance with various minimum wage, overtime, health care, citizenship, and fair labor standards.

 

 

 

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Compliance with these regulations has not had, and is not expected to immediately have, a material adverse effect on our operations.

 

We are subject to a variety of federal, state, and international laws governing franchise sales and the franchise relationship. In general, these laws and regulations impose certain disclosure and registration requirements prior to the offer and sale of franchises. Rulings of several state and federal courts and existing or proposed federal and state laws demonstrate a trend toward increased protection of the rights and interests of franchisees against franchisors. Such decisions and laws may limit the ability of franchisors to enforce certain provisions of franchise agreements or to alter or terminate franchise agreements. Due to the scope of our business and the complexity of franchise regulations, we may encounter minor compliance issues from time to time. We do not believe, however, that any of these issues will have a material adverse effect on our business.

 

See Item 1A “Risk Factors” below for a discussion of risks related to federal, state, and local regulation of our business.

 

Environmental Compliance
Compliance with federal, state and local laws and regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have a material effect on our capital expenditures, earnings or competitive position.

 

Personnel
As of May 31, 2016, we employed approximately 28,900 employees, including approximately 245 support center management and staff personnel. We believe that our employee relations are good and that working conditions and employee compensation are comparable with our major competitors. Our employees are not covered by a collective bargaining agreement.

 

Available Information
Through the “Investors” section of our website www.rubytuesday.com, we make available free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as it is reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Our reports and other materials filed with the SEC are also available at www.sec.gov. We are not including the information contained on or available through the aforementioned websites as a part of, or incorporating such information into, this Annual Report on Form 10-K unless specifically noted in the exhibits section in Part IV, Item 15 of this Annual Report on Form 10-K. In addition, copies of corporate governance materials, including Audit Committee Charter, Executive Compensation Committee Charter, Governance Committee Charter, Code of Business Conduct and Ethics, Corporate Governance Guidelines, Whistleblower Policy, and Categorical Standards for Director Independence, are available on the web site, free of charge. We will make available on our web site any waiver of or substantive amendment to our Code of Business Conduct and Ethics within four business days following the date of such waiver or amendment.

 

A copy of the aforementioned documents will be made available in print without charge to all shareholders upon written request to the Company. Shareholders are encouraged to direct such requests to our Secretary at the Restaurant Support Services Center, 150 West Church Avenue, Maryville, Tennessee 37801.

 

 

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Executive Officers
Our executive officers are appointed by and serve at the discretion of our Board of Directors. Information regarding our executive officers as of August 15, 2016, is provided below.

 

Name

Age

Position

 

 

 

James J. Buettgen

56

Chairman of the Board, President, and Chief Executive Officer

Brett A. Patterson

47

Ruby Tuesday Concept President 

Sue Briley

53

Interim Chief Financial Officer

Mike K. Ellis

54

Chief Development Officer

Rhonda J. Parish

60

Chief Legal Officer and Secretary

David W. Skena

46

Chief Marketing Officer

Thomas A. Williams

54

Chief People Officer

 

Mr. Buettgen joined the Company in December 2012 as President and Chief Executive Officer. On October 27, 2013, Mr. Buettgen was appointed by our Board of Directors to serve as Chairman of the Board. Prior to joining the Company, Mr. Buettgen served as Senior Vice President, Chief Marketing Officer of Darden Restaurants, Inc. (“Darden”) from June 2011 to November 2012 and as Senior Vice President, New Business Development of Darden from May 2007 to June 2011. Additionally, Mr. Buettgen served as President of Darden’s former Smokey Bones Barbeque & Grill concept from November 2004 to May 2007. Prior to his tenure at Darden, among other positions, Mr. Buettgen served as Senior Vice President of Marketing and Brand Development for Brinker International, Inc., Senior Vice President of Marketing and Sales for Disneyland Resorts, a division of the Walt Disney Company, Senior Vice President of Marketing for Hollywood Entertainment Group, and held various marketing positions with General Mills, Inc.

 

Mr. Patterson joined the Company in July 2013 and was named Ruby Tuesday Concept President in July 2015. Mr. Patterson served as Senior Vice President of Operations of the Company from September 2014 to July 2015 and served as Vice President of Operations from July 2013 to September 2014. Prior to joining the Company, between 1997 and 2013, Mr. Patterson served in various roles of increasing responsibility with Darden including Director of Operations for Bahama Breeze, Vice President of Operations for LongHorn Steakhouse, and Senior Vice President of Operations for Olive Garden.

 

Ms. Briley joined the Company in July 2014 and was named Interim Chief Financial Officer in June 2016. Ms. Briley served as Vice President of Finance from July 2014 to June 2016. Prior to joining the Company, she was sole proprietor of Symmetry Financial Consulting from July 2013 to July 2014, Director of Financial Planning and Analysis at Margaritaville Enterprises from November 2012 to July 2013 and, prior to that, held a variety of progressively responsible positions in finance, accounting, and treasury at Darden.

 

Mr. Ellis joined the Company in February 2016 as Chief Development Officer. Prior to joining the Company, Mr. Ellis served as Chief Development Officer for Einstein Noah Restaurant Group, Inc. from March 2014 to February 2015, and served as Executive Vice President, Franchise & Restaurant Development for Einstein from March 2011 to March 2014. Prior to his tenure with Einstein, Mr. Ellis held a number of executive positions, including Chief Development Officer for O’Charley’s, Inc. and Burger King Corporation, and Senior Vice President of Development for Darden.

 

Ms. Parish joined the Company in March 2015 as Chief Legal Officer and Secretary. Prior to joining the Company, Ms. Parish served as Chief Legal, People and Risk Officer for Einstein Noah Restaurant Group from January 2010 to January 2015, and served as Executive Vice President, Chief Legal Officer and Secretary for Denny’s Corporation from July 1998 to July 2008. Prior to her tenure with Denny’s Corporation, Ms. Parish held a number of executive positions, including Assistant General Counsel for Wal-Mart Stores, Inc.

 

Mr. Skena joined the Company in July 2015 as Senior Vice President, Chief Marketing Officer. Prior to joining the Company, Mr. Skena served in various roles of increasing responsibility with PepsiCo, Inc. for the past nine years, most recently serving as Vice President of Premium and Value Brands. Prior to his tenure with PepsiCo, Inc., among other positions, Mr. Skena served over six years at Kraft Foods, Inc. in brand management for multiple product lines.

 

 

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Mr. Williams joined the Company in April 2016 as Chief People Officer. Prior to joining the Company, Mr. Williams served in various roles of increasing responsibility with Jo-Ann Stores for the past 18 years, most recently serving as Chief Human Resources Officer. Prior to his tenure with Jo-Ann Stores, Mr. Williams served over sixteen years at Wal-Mart Stores, Inc. in benefit planning.

 

Item 1A. Risk Factors

 

Our business and operations are subject to a number of risks and uncertainties. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occurs, our business, financial condition and results of operations would suffer. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.

 

We may be unsuccessful in driving short- and long-term profitable sales growth through our brand repositioning efforts, which may negatively impact our financial results.

 

We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which is designed to make our brand more energetic, affordable, and broadly appealing. We believe the execution of this strategy provides opportunities for increased same-restaurant customer counts and sales growth, and increased shareholder value. Our brand transformation strategy is centered around four key pillars: food, service, atmosphere, and communication. This strategy involves numerous risks, and we may not be able to maintain the brand relevance and restaurant operating excellence required to achieve sustainable growth objectives with our Ruby Tuesday core brand. For example, short-term sales growth and profitability could be negatively affected if we are unable to drive near term customer count growth, and long-term sales growth and profitability could be negatively affected if we fail to extend our brand in ways that are relevant to our customers. A failure to define and deliver a clear, relevant brand that generates sustainable same-restaurant traffic growth and produces sales and earnings growth opportunities, or a failure to evolve in-restaurant and brand support cost structures so that competitively strong sales growth results in stable and improving profit margins could have an adverse effect on our results of operations and on our ability to identify adequate sources of capital to fund strategic initiatives related to our brand transformation.

 

On August 11, 2016, we announced a plan to close approximately 95 underperforming Company-owned restaurants by September 2016.  The approved closures, which include mall, in line, and freestanding sites, encompass restaurants spread throughout all of the geographies in which we operate.  Of the restaurants expected to close, approximately two-thirds are operated on leased properties and approximately one-third are owned.  The plan is designed to streamline the organization through asset rationalization, improve financial profitability, and ultimately create long-term value for shareholders. The estimated costs and benefits associated with the plan are preliminary and may vary materially based on various factors including: the timing in execution of the plan, outcome of negotiations with landlords and other third parties and changes in management's assumptions and projections. As a result of these events and circumstances, delays and unexpected costs may occur, which could result in our not realizing all, or any, of the anticipated benefits of the plan.  Additionally, failure to properly identify or measure underperforming restaurants in connection with the plan could have a material adverse effect on our financial position and results of operations.

Competition may adversely affect our operations and financial results.

The restaurant industry is intensely competitive with respect to prices, services, convenience, locations, employees, advertising and promotion, and types and quality of food. We compete within each market with national and regional restaurant chains and locally-owned restaurants. We also face growing competition as a result of the trend towards convergence in grocery, deli, and restaurant services, particularly in the supermarket industry which offers “convenient meals” in the form of improved entrées and side dishes from the deli section. Some of our competitors may be better established in the markets where our restaurants are or may be located. We also actively compete for management personnel and for attractive commercial real estate sites suitable for restaurants. Difficulties in our ability to compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees, and other resources could adversely affect our results of operations.

 

-10-

 

We may not be successful at operating profitable restaurants, which could lead to impairment charges and other losses.

 

The success of our Ruby Tuesday concept is dependent upon operating profitable restaurants. The profitability of our restaurants is dependent on numerous factors, including the following:

 

 

the ability to provide menu items with strong customer preference at attractive prices;

 

the ability to create and implement an effective marketing/advertising strategy;

 

the ability to adapt our brand in such a way that consumers see us as relevant to their needs;

 

the ability to timely and effectively meet customer demands and maintain our customer base;

 

the hiring, training, and retention of excellent restaurant managers and staff;

 

the ability to manage costs and prudently allocate capital resources;

 

the ability to achieve and/or maintain projected cost savings in a number of key areas, including labor, procurement, occupancy, and maintenance costs; and

 

the ability to increase sales and improve margins following the opening of new or newly remodeled restaurants.

 

If we are unable to successfully manage these challenges, we could face increased costs and lower than anticipated sales, cash flows, and earnings in future periods. Declining cash flows in particular can have an unfavorable impact on the carrying value of our long-lived assets, which, under generally accepted accounting principles, are required to be reviewed whenever adverse events or changes in circumstances indicate a possible impairment.

 

Impairment charges recorded in fiscal years 2016, 2015, and 2014 are discussed in Notes 7 and 16 to the Consolidated Financial Statements. Further, restaurants with rolling 12-month negative cash flows are discussed within the Critical Accounting Policies section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

If market conditions deteriorate at either the restaurant store level or system-wide, or if our operating results decline further, we may be required to record additional impairment charges.

 

Litigation could have an adverse impact on our business and our financial performance.

 

We are subject to lawsuits, administrative proceedings, and claims that arise in the regular course of business. These matters typically involve claims by customers, team members, and others regarding issues such as food-borne illness, food safety, premises liability, “dram shop” statute liability, compliance with wage and hour requirements, work-related injuries, discrimination, harassment, wrongful termination, disability, and other operational issues common to the foodservice industry, as well as contract disputes, securities claims, and intellectual property infringement matters. We could be adversely affected by negative publicity and litigation costs resulting from these claims, regardless of their validity. Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of our insurance coverage could have an adverse effect on our financial position and results of operations. 

 

Food safety and food-borne illness concerns in our restaurants or throughout the industry or supply chain may have an adverse effect on our business by reducing demand and/or increasing costs.

 

Regardless of the source or cause, any report of food-borne illnesses and other food safety issues, whether at one of our restaurants or in the industry or supply chain generally, could have a negative impact on our traffic and sales and adversely affect our suppliers and distributors and, as a result, be out of our control. Health concerns or outbreaks of disease in a food product could also reduce demand for particular menu offerings. Even in instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the restaurant industry generally and adversely affect our sales. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.

 

-11-

 

The potential for increases in key food, labor, energy, real estate and other costs may adversely affect our results of operations.  

 

The performance of our restaurants depends on our ability to anticipate and react to changes in the price and availability of food, utilities, labor, marketing, insurance, real estate, and other commodities. Prices may be affected due to supply, market changes, increased competition, the general risk of inflation, changes in laws, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. Increased prices or shortages could affect the cost and quality of the items we buy or require us to raise prices, limit our menu options, or implement alternative processes or products.

 

Our business could also be adversely affected by increased labor costs or labor shortages. We devote significant resources to recruiting and training our managers and hourly employees. Increased labor costs due to changes in federal and state laws governing such matters as minimum wages, overtime, working conditions, and tip credits, competition, unionization, state unemployment rates, employee benefits costs, or otherwise, could adversely impact our operating expenses. Moreover, we could suffer from significant indirect costs, including restaurant disruptions due to management or hourly labor turnover or adverse guest reactions to inadequate guest service levels due to staff shortages. A shortage in the labor pool could also cause our restaurants to be required to operate with reduced staff, which could negatively impact our ability to provide adequate service levels to our guests. In addition, our success depends on our ability to attract, motivate and retain qualified employees, including restaurant managers and staff.

 

We cannot provide any assurance that we would be able to successfully offset increased costs by increasing menu prices or by other measures, as our ability to do so depends on a variety of factors, many of which are beyond our control. As a result, these events, alone or in combination with other more general economic and demographic conditions, could impact our pricing and negatively affect our sales and profit margins.

 

Any material failure, weakness, interruption or security breach of our information technology systems could prevent us from effectively operating our business.

 

We rely heavily on information systems across our operations and corporate functions, including point-of-sale processing in our restaurants, management of our supply chain, payment of obligations, collection of cash, data warehousing to support analytics, finance and accounting systems and other various processes and procedures, some of which are handled by third parties. Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Information systems are vulnerable to security breaches by computer hackers, cyber terrorists, employee error or misconduct, viruses, power outages and other catastrophic events. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could result in delays in consumer service, reduce efficiency in our operations and potentially expose us to litigation. These problems could adversely affect our results of operations, and remediation could result in significant unplanned capital investments. Additionally, our corporate systems and processes and corporate support for our restaurant operations are handled primarily at our Restaurant Support Services Center. We have disaster recovery procedures and business continuity plans in place to address events of a crisis nature, including tornadoes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.

 

Unfavorable publicity or a failure to respond effectively to adverse publicity, particularly on social media platforms, could harm our reputation and adversely impact our business and financial performance.

 

The good reputation of our restaurant concepts is a key factor in the success of our business. Actual or alleged incidents at any of our restaurants could result in harmful negative publicity. Even incidents occurring at restaurants operated by our competitors or in the supply chain generally could result in negative publicity that could harm the restaurant industry and thus, indirectly, our brand. Negative publicity may result from: allegations of illegal, unfair or inconsistent employment practices; employee dissatisfaction; guest discrimination; illness; injury; or any other matter that could give rise to litigation. Regardless of whether the allegations or complaints are valid, unfavorable publicity

 

-12-

 

relating to a few of our restaurants, or even to a single restaurant, could adversely affect public perception of the entire brand.

 

Negative publicity also may result from the following: health concerns related to food safety and flu outbreaks; publication of government or industry findings concerning food products; environmental disasters; crime incidents; data privacy breaches; scandals involving our employees; or operational problems at our restaurants. All of these concerns could make our brand and menu offerings less appealing to our guests and negatively affect our business.

 

In recent years there has been a marked increase in the use of social media platforms and similar devices which give individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their participants’ posts, often without filters or checks on accuracy of the content posted. A variety of risks are associated with the dissemination of this information online, including the improper disclosure of proprietary information, negative comments about our Company, exposure of personally identifiable information, fraud, or outdated information. The inappropriate use of social media platforms by our customers, employees, or other individuals could increase our costs, lead to litigation, or result in negative publicity that could damage our reputation. If we are unable to quickly and effectively respond, we may suffer declines in customer traffic which could affect our financial condition and results of operations.

 

We could be adversely affected if we fail to protect our customers’ credit card information or our employees’ personal data.

 

The majority of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information or other personal information of their customers has been stolen. We also maintain certain personal information regarding our employees. Despite our implementation of security measures, all of our technology systems are vulnerable to internal and external security breaches, employee error or malfeasance, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers and cyber criminals. A breach in our systems that compromises the information of our consumers or employees could result in widespread negative publicity, damage to the reputation of our brand, a loss of consumers, and legal liabilities.

 

Shortages or interruptions in the availability and delivery of food and other products may increase costs or reduce revenues.

 

Possible shortages or interruptions in the supply of food items and other products to our restaurants caused by inclement weather and natural disasters such as floods, drought, earthquakes and hurricanes; the inability of our suppliers to obtain credit in a tight credit market or remain solvent given disruptions in the financial markets; food safety warnings or advisories or the prospect of such pronouncements; or other conditions beyond our control, could adversely affect the availability, quality, and cost of items we buy and the operations of our restaurants. Our inability to effectively manage supply chain risk could increase our costs and limit the availability of products critical to our restaurant operations.

In addition, we have a limited number of suppliers for our major products and rely on one distribution company for our national distribution program in the U.S. If our suppliers or distributor are unable to fulfill their obligations under their contracts or we are unable to develop or maintain relationships with these or new suppliers or distributors, if needed, we could encounter supply shortages and incur higher costs.

 

The costs of compliance or noncompliance with government regulation related to our restaurant operations could adversely affect our business.  

 

The restaurant industry is subject to extensive federal, state, local, and international laws and regulations. These laws change regularly and are increasingly complex. For example, we are subject to:

 

 

Federal and state laws governing minimum wages, overtime, health care, unionization, and other labor issues. These include the Fair Labor Standards Act of 1938, which governs matters such as minimum wages, overtime, and working conditions, as well as family leave mandates and a variety of similar state laws that govern these and other employment law matters. They include the Immigration Reform and Control Act of 1986, which requires among other things the preparation of Form I-9 to verify that employees are authorized

 

-13-

 

 

  to accept employment in the United States.  They also include the Patient Protection and Affordable Care Act of 2010 which mandates minimum employee health care coverage;
 

Building, zoning, land use, environmental, and other regulations and requirements that impact the development and operation of restaurants;

 

Licensing and regulation by state and local authorities relating to health, sanitation, safety, and fire standards and the sale of alcoholic beverages. If we fail to comply with federal, state, or local regulations, our licenses may be revoked and we may be forced to close one or more of our restaurants;

 

"Dram Shop" statutes in certain states. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person;

 

Laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content, and menu labeling;

 

Laws relating to information security, privacy, cashless payments, and consumer protection;

 

Federal and state laws which prohibit discrimination, including employment discrimination, and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act. Compliance with these laws and regulations can be costly and increase our exposure to litigation and governmental proceedings, and a failure or perceived failure to comply with these laws could result in negative publicity that could harm our reputation;

 

Federal, state and local laws governing the use, storage, discharge, emission, and disposal of hazardous materials. There also has been increasing focus by United States and overseas governmental authorities on other environmental matters, such as climate change, the reduction of greenhouse gases, and water consumption. This increased focus may lead to new initiatives directed at regulating a yet to be specified array of environmental matters, such as the emission of greenhouse gases, that could effectively impose a new or increased tax on the Company or its suppliers, which may pass the increased cost to the Company. Legislative, regulatory, or other efforts to combat climate change or other environmental concerns could result in future increases in the cost of raw materials, taxes, transportation, and utilities, which could decrease our operating profits and necessitate future investments in facilities and equipment; and

 

Regulations throughout the world affecting the way we do business with our international franchisees. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and other international trade regulations, the USA Patriot Act, and the Foreign Corrupt Practices Act. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could adversely affect our business and financial performance.

 

A failure to comply with these or other government regulations could adversely affect our financial condition and results of operations.

 

Ineffective or increased costs of advertising and marketing may negatively affect our financial and operational success.

 

If our advertising and promotions become less effective than those of our competitors, or more costly, or if we do not adequately develop or utilize technology and data analytic capabilities needed to generate concise competitive insight, we could experience an adverse effect on our results of operations. A failure to sufficiently innovate, develop customer relationship initiatives, or maintain adequate and cost-effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.

 

A decline in the quality of the locations of our current restaurants or a lack of availability of suitable locations for new restaurants may adversely affect our sales and results of operations.

 

The success of our restaurants depends in large part on their locations. As demographic and economic patterns change, current locations may not continue to be attractive or profitable. Possible declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced sales in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a new restaurant or relocation. The occurrence of one or more of these events could have a significant adverse effect on our sales and results of operations.

 

-14-

 

Our ability to raise capital in the future may be limited or become more costly, which could make us unable to fund our capital requirements.

 

As of May 31, 2016, we had $223.7 million of outstanding indebtedness, including $212.5 million of senior unsecured notes. Our indebtedness could have any or all of the following consequences:

 

 

there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed;

 

it may limit our ability to borrow money or sell stock to fund our working capital, capital expenditures, and debt service requirements;

 

a substantial portion of our cash flow from operations could be dedicated to the repayment of our indebtedness and would not be available for other purposes;

 

it may limit our flexibility in planning for, or reacting to, changes in our business;

 

we may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and

 

it may make us more vulnerable to a downturn in our business or the economy.

 

In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements.

 

Our debt agreements contain restrictions that limit our flexibility in operating our business.

 

The indenture governing our senior unsecured notes, the agreement governing our December 2013 four-year revolving credit agreement (the “Senior Credit Facility”), and our mortgage loan obligations contain various covenants that limit our ability to engage in specified types of transactions, including transactions that may be in our long-term best interest. These covenants limit our ability to, among other things:

 

 

make certain investments, including investments in our restaurant facilities;

 

incur or guarantee additional indebtedness;

 

declare or pay dividends, redeem stock or make other distributions to stockholders;

 

create liens or use assets as security in other transactions;

 

merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;

 

enter into transactions with affiliates; and

 

sell or transfer certain assets.

 

incur or guarantee additional indebtedness;

 

declare or pay dividends, redeem stock or make other distributions to stockholders;

 

create liens or use assets as security in other transactions;

 

merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;

 

enter into transactions with affiliates; and

 

Additionally, the agreement governing the Senior Credit Facility and our mortgage loan obligations require us to maintain certain financial ratios. A breach of any of these covenants could result in a default under the indenture and the Senior Credit Facility, which could have a material adverse effect on us.

 

Loss of key management personnel could hurt our business and limit our ability to operate and grow successfully.

 

Our success depends, to a significant extent, on our leadership team and other key management personnel. These personnel serve to maintain a corporate vision for our Company, execute our business strategy, and maintain consistency in the operating standards of our restaurants. If we are unable to attract and retain sufficiently experienced and capable management personnel, our business and financial results may suffer.

 

 

 

 

-15-

 

Future deterioration or prolonged difficulty in economic conditions could adversely affect our business, results of operations, liquidity, and capital resources.

 

Job losses, foreclosures, bankruptcies, and falling home prices could cause customers to make fewer discretionary purchases, which could cause a decrease in our customer traffic and our average profit per transaction, which would in turn negatively affect our results of operations. In addition, if gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage, and other borrowing costs increase with rising interest rates, our customers may have lower disposable income and reduce the frequency with which they dine out, spend less on each dining out occasion, or choose more inexpensive restaurants. Unfavorable changes in the above factors or in other business and economic conditions affecting our customers could increase our costs, reduce traffic in some or all of our restaurants, or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse effect on our financial condition and results of operations.

  

Adverse weather conditions, natural disasters, and terrorism could adversely affect our results of operations.

 

Adverse weather conditions and natural disasters and other unforeseen events, such as winter storms, severe temperatures, thunderstorms, floods, hurricanes and earthquakes, terror attacks, war and widespread/pandemic illness, and the effects of such events on economic conditions and consumer spending patterns, could negatively impact our results of operations. Temporary and prolonged restaurant closures may occur and customer traffic may decline due to the actual or perceived effects from these events.

 

A material weakness in our internal control over financial reporting could significantly affect our financial results.

 

Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of external financial reports in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and declines in the market price of our common stock.

 

Our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could negatively impact our profitability.

 

We self-insure a significant portion of expected losses under our health, workers’ compensation, certain types of general liability claims, employment practices liability, and property insurance programs. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure, including wage and hour claims. These losses, if they occur, could have a material and adverse effect on our business and results of operations. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our financial condition, results of operations and liquidity. Additionally, if our insurance costs increase, there can be no assurance that we will be able to successfully offset the effect of such increases and our results of operations may be adversely affected.

 

Changing health or dietary preferences may cause consumers to avoid our products in favor of alternative foods.

 

Consumer tastes, demographic trends, and health needs could reduce sales. For instance, if prevailing health or dietary preferences cause consumers to avoid certain menu items we offer in favor of foods that are perceived as more healthy, our business and operating results could be harmed. The increasing prevalence of food allergies and other dietary restrictions or preferences, for example, may cause consumers to choose to dine out less frequently or choose other restaurants with different menu options.

 

 

-16-

 

Changes in financial accounting standards or management assumptions related to complex accounting matters could significantly affect our financial results.

 

A change in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. Additionally, our assumptions, estimates, and judgments related to complex accounting matters could significantly affect our financial results. Significant accounting judgments relevant to our business include but are not limited to, impairment of long-lived assets, income tax matters, lease obligations, and self-insured losses. Changes in accounting standards or changes in underlying assumptions, estimates, and judgments by our management could significantly change our reported or expected financial performance.

 

Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.

 

We are subject to income and other taxes in the United States and certain foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the outcome of income tax audits. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals. The results of a tax audit could have a material effect on our results of operations or cash flows in the period or periods for which that determination is made. In addition, our effective income tax rate and our results may be impacted by our ability to realize deferred tax benefits and by any increases or decreases of our valuation allowances applied to our existing deferred tax assets.

Our stock price is subject to volatility.

The stock market in general is highly volatile. The market price of our common stock is also highly volatile. The price of our common stock could be subject to wide fluctuations in response to a number of factors, some of which may be beyond our control. These factors include actual or anticipated fluctuations in our operating results, changes in, or our ability to achieve, estimates of our operating results by analysts, investors or management, analysts’ recommendations regarding our stock or our competitors’ stock, sales of substantial amounts of our common stock by our stockholders, actions or announcements by us or our competitors, the maintenance and growth of the value of our brand, litigation, legislation or other regulatory developments affecting us or our industry, natural disasters, terrorist acts, war or other calamities and changes in general market and economic conditions.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Information regarding the locations of our restaurants is shown in the list below. Of the 646 Company-owned and operated Ruby Tuesday concept restaurants as of May 31, 2016, we owned the land and buildings for 303 restaurants, owned the buildings and held non-cancelable long-term land leases for 252 restaurants, and held non-cancelable leases covering land and buildings for 91 restaurants. Our Restaurant Support Services Center in Maryville, Tennessee, which was opened in fiscal year 1998, consists of two office buildings owned by the Company. During fiscal year 2015, we opened a leased satellite office in Orlando, Florida.

 

Additional information concerning our properties and leasing arrangements is included in Note 5 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Annual Report on Form 10-K.

 

Under our franchise agreements, we have certain rights to gain control of a restaurant site in the event of default under the franchise agreements.

 

 

-17-

 

 

The following table lists the locations of the Company-owned and franchised Ruby Tuesday restaurants as of May 31, 2016.

 

 

Number of Ruby Tuesday Restaurants

State

Company

 

Franchise

 

Total

           

Domestic:

         

Alabama

35

 

 

35

Arizona

4

 

 

4

Arkansas

7

 

 

7

Colorado

8

 

 

8

Connecticut

14

 

 

14

Delaware

5

 

 

5

Florida

67

 

1

 

68

Georgia

45

 

 

45

Idaho

 

1

 

1

Illinois*

3

 

10

 

13

Indiana

12

 

 

12

Iowa

1

 

2

 

3

Kansas

1

 

 

1

Kentucky

8

 

 

8

Louisiana

3

 

 

3

Maine

10

 

 

10

Maryland

28

 

 

28

Massachusetts

9

 

 

9

Michigan

22

 

1

 

23

Minnesota

12

 

 

12

Mississippi

8

 

 

8

Missouri

25

 

 

25

Nebraska

6

 

 

6

Nevada

1

 

 

1

New Hampshire

3

 

 

3

New Jersey

25

 

1

 

26

New Mexico

 

1

 

1

New York

29

 

 

29

North Carolina

53

 

 

53

North Dakota

 

4

 

4

Ohio

28

 

 

28

Oklahoma

 

1

 

1

Oregon

3

 

 

3

Pennsylvania

40

 

 

40

Rhode Island

2

 

 

2

South Carolina

31

 

 

31

South Dakota

 

4

 

4

Tennessee

30

 

 

30

Texas

1

 

 

1

Utah

1

 

 

1

Virginia

57

 

 

57

West Virginia

8

 

 

8

Wisconsin

1

 

1

 

2

Total Domestic**

646

 

27

 

673

 

-18-

 
   

 

Number of Ruby Tuesday Restaurants

Country

Company

 

Franchise

 

Total

           

International:

         

Canada

 

1

 

1

Chile

 

10

 

10

Egypt

 

6

 

6

El Salvador

 

1

 

1

Guam***

 

1

 

1

Hawaii***

 

5

 

5

Honduras

 

1

 

1

Hong Kong

 

7

 

7

Iceland

 

2

 

2

Kuwait

 

6

 

6

Oman

 

1

 

1

Panama

 

1

 

1

Romania

 

2

 

2

Saudi Arabia

 

2

 

2

Trinidad

 

4

 

4

United Arab Emirates

 

1

 

1

Total International

 

51

 

51

 

646

 

78

 

724

 

* As discussed further in Note 16 to the Consolidated Financial Statements, the Company’s Illinois franchisee closed its ten locations on July 26, 2016.

**As also discussed in Notes 7 and 16 to the Consolidated Financial Statements, on August 11, 2016, we announced a plan to close approximately 95 Company-owned restaurants by September 2016.

*** Guam and Hawaii are treated as international locations for internal purposes.

 

In addition, the Company still owns and operates two Lime Fresh concept restaurants in Florida, one of which was closed and transferred to a third party buyer shortly after our fiscal year-end, with the other restaurant expected to be closed and transferred to the buyer on or before the end of our second quarter of our fiscal year 2017.

 

Item 3. Legal Proceedings

 

We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business, including claims relating to injury or wrongful death under “dram shop” laws, workers’ compensation and employment matters, claims relating to lease and contractual obligations, and claims from customers alleging illness or injury. We provide accruals for such claims when payment is probable and estimable in accordance with U.S. generally accepted accounting principles. At this time, in the opinion of management, the ultimate resolution of pending legal proceedings will not have a material adverse effect on our consolidated results of operations, financial position, or cash flows.

  

Item 4. Mine Safety Disclosures

 

Not applicable.

 

-19-

 

 

PART II
Item 5. Market for Registrant's Common Equity,

Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is publicly traded on the New York Stock Exchange under the ticker symbol RT. The following table sets forth the reported high and low intraday prices of our common stock and cash dividends paid thereon for each quarter during fiscal years 2016 and 2015.

 

Fiscal Year Ended May 31, 2016

 

Fiscal Year Ended June 2, 2015

     

Per Share

       

Per Share

     

Cash

       

Cash

Quarter

High

Low

Dividends

 

Quarter

High

Low

Dividends

First

$7.54

$6.10

--

 

First

$8.13

$5.43

--

Second

$6.92

$5.10

--

 

Second

$8.57

$5.72

--

Third

$5.74

$4.52

--

 

Third

$8.39

$5.73

--

Fourth

$5.63

$3.80

--

 

Fourth

$7.65

$5.92

--

As of August 10, 2016, there were approximately 2,576 holders of record of the Company’s common stock.

 

Our Board of Directors has approved a dividend policy as an additional means of returning capital to our shareholders. The payment of a dividend in any particular future period and the actual amount thereof remains at the discretion of the Board of Directors and is restricted by the covenants of certain of our debt agreements. Our last dividend was paid on August 7, 2007 and no assurance can be given that dividends will be paid in the future.

 

Issuer Purchases of Equity Securities

The following table includes information regarding purchases of our common stock made by us during the fourth fiscal quarter ended May 31, 2016:

 

   

(a)

 

(b)

 

(c)

 

(d)

 
   

Total number

 

Average

 

Total number of shares

 

Maximum number of shares

 
   

of shares

 

price paid

 

purchased as part of publicly

 

that may yet be purchased

 

Period

 

purchased (1)

 

per share

 

announced plans or programs (1)

 

under the plans or programs (2)

 
                   

March 2 to April 5

 

11,873

 

$ 5.44

 

11,873

 

9,892,268

 

April 6 to May 3

 

 

 

 

 

  –

 

9,892,268

 

May 4 to May 31

 

914

 

4.01

 

914

 

9,891,354

 

Total

 

12,787

 

$ 5.34

 

12,787

     

 

(1) No shares were repurchased other than through our publicly-announced repurchase programs and authorizations during the fourth fiscal quarter ended May 31, 2016.

 

(2) As of May 31, 2016, 9.9 million shares remained available for purchase under an existing January 8, 2013 authorization by the Board of Directors to repurchase 10.0 million shares. The timing, price, quantity, and manner of the purchases to be made are at the discretion of management upon instruction from the Board of Directors, depending upon market conditions.  The repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.

 

-20-

 

 Stock Performance Graph

 

The following chart and table compare the cumulative total return of the Company’s common stock with the cumulative total return of the NYSE Composite Index and a peer group consisting of companies included in the same standard industrial classification (“SIC”) industry group as the Company’s business (SIC industry group 5812, Eating Places). The graph assumes the values of the investment in our common stock and each index was $100 at May 31, 2011 and that all dividends were reinvested.

 

 

 

05/31/2011

06/05/2012

06/04/2013

06/03/2014

06/02/2015

05/31/2016

Ruby Tuesday, Inc.

$ 100.00

$ 64.15

$ 89.62

$ 72.55

$ 58.11

$ 36.60

NYSE Composite Index

$ 100.00

$ 89.08

$ 116.30

$ 137.88

$ 145.37

$ 140.78

Peer Group Index (SIC 5812 – Eating Places)

$ 100.00

$ 110.95

$ 128.17

$ 143.09

$ 147.71

$ 161.46

 

 

 
-21-

 

 

Item 6. Selected Financial Data

 

Summary of Operations

(In thousands except per-share data)

 

   

Fiscal Year

   

2016

   

2015

   

2014

   

2013

   

2012

   

Revenue:

                                         

Restaurant sales and operating revenue

  $ 1,085,034     $ 1,120,142     $ 1,162,423     $ 1,245,226     $ 1,306,025    

Franchise revenue

    6,194       6,424       6,323       6,261       5,738    

Total revenue

  $ 1,091,228     $ 1,126,566     $ 1,168,746     $ 1,251,487     $ 1,311,763    
                                           

Loss from continuing operations before

                                         

income taxes

  $ (52,862 )   $ (5,105 )   $ (69,575 )   $ (21,934 )   $ (8,626 )  

(Benefit)/provision for income taxes from

                                         

continuing operations

    (2,180 )     (1,911 )     (4,665 )     1,500       (12,152 )  

(Loss)/income from continuing operations

    (50,682 )     (3,194 )     (64,910 )     (23,434 )     3,526    
                                           

Income/(loss) from discontinued operations, net

                                         

of tax (a)

                564       (15,979 )     (3,714 )  

Net loss

  $ (50,682 )   $ (3,194 )   $ (64,346 )   $ (39,413 )   $ (188 )  
                                           

Basic loss per share:

                                         

(Loss)/income from continuing operations

  $ (0.83 )   $ (0.05 )   $ (1.08 )   $ (0.38 )   $ 0.06    

Income/(loss) from discontinued operations

                0.01       (0.27 )     (0.06 )  

Net loss per share

  $ (0.83 )   $ (0.05 )   $ (1.07 )   $ (0.65 )   $ (0.00 )  
                                           

Diluted loss per share:

                                         

(Loss)/income from continuing operations

  $ (0.83 )   $ (0.05 )   $ (1.08 )   $ (0.38 )   $ 0.06    

Income/(loss) from discontinued operations

                0.01       (0.27 )     (0.06 )  

Net loss per share

  $ (0.83 )   $ (0.05 )   $ (1.07 )   $ (0.65 )   $ (0.00 )  
                                           

Weighted average common and common

                                         

equivalent shares:

                                         

Basic

    60,871       60,580       60,231       61,040       62,916    

Diluted

    60,871       60,580       60,231       61,040       63,508    

 

Fiscal years 2016, 2015, 2014, and 2013 each include 52 weeks. Fiscal year 2012 includes 53 weeks. The extra week in fiscal year 2012 added $22.9 million to revenue and $0.03 to diluted earnings per share.

 

(a) See Note 3 to the Consolidated Financial Statements for a discussion of our discontinued operations.

 

-22-

 
   

Fiscal Year

 
   

2016

   

2015

   

2014

   

2013

   

2012

 

Other Data

                                       

Cash dividends per share of common stock

  $     $     $     $     $  

Number of Company-owned Ruby Tuesday 

                                       

  restaurants

    646       658       668       706       714  

Company-owned Ruby Tuesday same-

                                       

  restaurant sales decrease

    (1.4 )%     (0.5 )%     (5.3 )%     (1.0 )%     (4.5 )%

Number of Company-owned Lime Fresh

                                       

 restaurants

    2       19       20       18       13  
                                         

Balance Sheet Data (at year end):

                                       

Total assets (b)

  $ 837,917     $ 925,452     $ 951,697     $ 1,037,283     $ 1,166,959  

Long-term debt and capital leases, less current

                                       

 maturities (b)

  $ 213,803     $ 231,017     $ 249,831     $ 285,332     $ 308,312  

Shareholders’ equity

  $ 407,780     $ 465,583     $ 461,209     $ 516,835     $ 576,224  
                                         

Statement of Operations Data:

                                       

Closures and impairments, net (c)

  $ 62,681     $ 10,542     $ 32,831     $ 14,656     $ 16,751  

Goodwill and trademark impairments (c)

  $ 1,999     $     $ 855     $ 14,058     $ 16,919  

Interest expense, net

  $ 21,764     $ 22,735     $ 24,945     $ 26,576     $ 23,312  
                                         

Cash Flow Data:

                                       

Net cash provided/(used) by:

                                       

Operating activities

  $ 40,117     $ 54,911     $ 45,375     $ 35,954     $ 112,251  

Investing activities

  $ (19,755 )   $ (17,497 )   $ (6,203 )   $ 22,113     $ (33,755 )

Financing activities

  $ (28,352 )   $ (13,409 )   $ (40,753 )   $ (53,344 )   $ (40,034 )

Purchases of property and equipment

  $ 34,427     $ 31,010     $ 28,339     $ 37,117     $ 37,966  

 

(b) As discussed further in Note 1 to the Consolidated Financial Statements, we adopted Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) during the first quarter of fiscal year 2016. Pursuant to the guidance in ASU 2015-03, we have reclassified unamortized debt issuance costs associated with our senior notes and mortgage loan obligations from our previously reported total assets and long-term debt and capital leases, less current maturities in the table above.

 

(c) See Note 7 to the Consolidated Financial Statements for a description of closures and impairments expenses in fiscal years 2016, 2015, and 2014 and discussion of the trademark impairments in fiscal years 2016 and 2014.

 

-23-

 

 

Item 7. Management's Discussion and Analysis

of Financial Condition and Results of Operations

 

Introduction

 

Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday® casual dining restaurants. We also franchise the Ruby Tuesday concept in select domestic and international markets. As of May 31, 2016, we owned and operated 646 Ruby Tuesday restaurants located in 38 states. Our franchisees operated 27 domestic and 51 international Ruby Tuesday restaurants in 12 states, Guam, and 14 foreign countries. The Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic, and Midwest regions of the United States. We consider these regions to be our core markets.

 

On August 11, 2016, following a comprehensive review of the Company’s property portfolio, we announced a plan to close approximately 95 Company-owned restaurants with perceived limited upside due to market concentration, challenged trade areas, and other factors by September 2016. The plan is designed to streamline the organization through asset rationalization, improve financial profitability, and ultimately create long-term value for shareholders. The approved closures, which include mall, in line, and freestanding sites, encompass restaurants spread throughout all of the geographic regions in which we operate. Of the restaurants expected to close, approximately two-thirds are operated on leased properties and approximately one-third are owned. As discussed further in the Known Events, Uncertainties, and Trends section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), our fiscal year 2017 results of operations are expected to include additional charges for impairment, estimated lease settlement costs, and severance benefits, inventory write-off and other costs related to the 95 restaurants.

 

Also, as further discussed in Note 3 to the Consolidated Financial Statements, during fiscal year 2016, we entered into an agreement to sell the assets related to eight Company-owned Lime Fresh Mexican Grill® (“Lime Fresh”) restaurants in Florida for $6.0 million and closed the remaining 11 Company-owned Lime Fresh restaurants.  Six of the restaurants were closed and transferred to the buyer during the fourth quarter of fiscal year 2016, after which we were paid $5.0 million. One of the remaining two restaurants closed and transferred to the buyer on June 14, 2016. The remaining restaurant is expected to close and transfer to the buyer on or before the end of our second quarter of fiscal year 2017.  All of the eight restaurants involved in this transaction will be rebranded by the buyer as a different restaurant concept.  Also during the fourth quarter of fiscal year 2016, we sold the Lime Fresh brand's intellectual property and the franchise agreements associated with eight franchised Lime Fresh concept restaurants for $4.6 million.  As a result of this transaction, we had no remaining Lime Fresh concept franchisees as of May 31, 2016.    

 

Our same-restaurant sales for Company-owned Ruby Tuesday restaurants decreased 1.4% in fiscal year 2016 compared to fiscal year 2015, and our diluted loss per share was $0.83 in fiscal year 2016 compared to diluted loss per share of $0.05 in fiscal year 2015. Throughout this MD&A, we discuss our fiscal year 2016 financial results in detail, provide insight for fiscal years 2015 and 2014, as well as discuss known events, uncertainties, and trends. We believe our commentary provides insight as to the factors which impacted our performance. We remind you, that, in order to best obtain an understanding of our financial performance during the last three fiscal years, this MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Part II, Item 8 of this Annual Report on Form 10-K.

 

References to franchise system revenue contained in this section are presented solely for the purposes of enhancing the investor's understanding of the franchise system, which includes our traditional domestic and international franchisees. Franchise system revenue is not included in, and is not, revenue of Ruby Tuesday, Inc. However, we believe that such information does provide the investor with a basis for a better understanding of our revenue from franchising activities, which includes royalties. Franchise system revenue contained in this section is based upon or derived from information that we obtain from our franchisees in our capacity as franchisor.

 

 

 

-24-

 

Overview and Strategies

 

The bar and grill segment of the casual dining industry in which we primarily operate is intensely competitive with respect to prices, services, convenience, locations, employees, advertising and promotion, and the types and quality of food. We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do. We continue to believe there are opportunities to grow same-restaurant sales, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:

 

Enhancing Our Business Model

Over the past few fiscal years, we have developed strategies to reduce our overall cost structure in the areas of cost of goods sold, payroll and related costs, and selling, general, and administrative expenses. In April 2014, we implemented a new labor management system to facilitate more efficient staffing that is contributing to lower labor costs. We have also implemented enhanced business processes and capabilities, such as an inventory/food waste management system that should benefit our business model by reducing food waste and manager time on inventory management leading to a better customer experience and improved profitability.

 

Enhance Sales and Margins Through Repositioning of Our Core Brand

We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which is designed to make our brand more energetic, affordable, and broadly appealing. We believe the execution of this strategy provides opportunities for increased same-restaurant customer counts and sales growth, and increased shareholder value. Our brand transformation is supported by enhancements in the following areas: food, service, atmosphere, and communication.

 

As part of our transformation strategy, we have taken what we believe to be meaningful steps to improve our food, customer experience, organizational capabilities, and business model. We continue to transform our menu to be broadly appealing, approachable, and affordable by offering compelling value throughout the menu at a wide-range of price points. Additionally, we are testing an initiative to enhance our Garden Bar which we believe is a differentiator for our brand and utilized by approximately half of our guests. Our intent is to incorporate customer feedback to continue to evolve our food offering as well as to promote menu items that customers find highly satisfying.

 

Enhancing our service is also a critical component of our brand transformation strategy. In January 2015, we rolled-out a new service training platform which encourages our restaurant teams to provide a genuine, customized experience to our customers while also reinforcing techniques to build add-on sales for beverages, appetizers and desserts. We believe that there are additional opportunities to improve the guest experience by simplifying the menu, recipes, and operating processes which could result in a better and more consistent service execution and guest experience.

 

To further enhance the atmosphere of our restaurants, we are currently developing a remodel plan and began testing prototypes in fiscal year 2016 to determine sales building potential, cost effectiveness, and return on investment. These changes are designed to create an improved dining atmosphere for our customers.

 

The fourth area of our brand transformation strategy is enhancements to our communication and marketing programs. The program is designed to reshape consumer perceptions of the Ruby Tuesday brand and enhance our Fresh American Grill positioning by showcasing our brand personality in a fresh and energetic way, featuring compelling new food products, highlighting the freshness and variety of our Garden Bar, and effectively communicating value and affordability.

 

The four key areas of menu, service, atmosphere, and communication will continue to be foundational drivers of our brand transformation and key to building a stronger business model. We are hopeful that the culmination of the brand transformation strategy in conjunction with engaged restaurant and support teams will ultimately drive customer counts, sales, and average check.

 

Strengthen our Balance Sheet to Facilitate Growth and Value Creation

Our priority for the use of cash is to drive shareholder value. Our objective is to continue to maintain adequate cash levels to support business needs, while investing in our key brand transformation initiatives. Additionally, we will

 

 

-25-

 

 

consider other options such as reducing outstanding debt levels and share repurchases. Our success in the key strategic initiatives outlined above should enable us to improve both our returns on assets and equity and create additional shareholder value.

 

Results of Operations

 

Ruby Tuesday Restaurants
The table below presents the number of Ruby Tuesday concept restaurants at each fiscal year end from fiscal year 2014 through fiscal year 2016:

 

     

International

 

Fiscal Year

Company-Owned

Domestic Franchise

 Franchise

Total

2016

646

27

51

724

2015

658

29

49

736

2014

668

31

48

747

 

Lime Fresh Restaurants
The table below presents the number of other concept restaurants at each fiscal year end from fiscal year 2014 through fiscal year 2016:

   

Fiscal Year

Company-Owned

Franchise

Total 

2016

2

2

2015

19

7

26

2014

20

6

26

 

During fiscal year 2016:

 

 

Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 1.4%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants increased 3.7%;

 

One Company-owned Ruby Tuesday restaurant was opened and 13 were closed

 

Five franchised Ruby Tuesday restaurants were opened and five were closed;

 

We formulated a plan beginning in the fourth quarter of fiscal year 2016 to restructure our property portfolio, which ultimately included the planned closing of approximately 95 Company-owned restaurants by September 2016, resulting in additional impairment charges of $39.2 million in fiscal year 2016;

 

We entered into an agreement to sell the assets related to eight Company-owned Lime Fresh restaurants in Florida for $6.0 million and closed the remaining 11 Company-owned Lime Fresh restaurants.  Six of the restaurants were closed and transferred to the buyer during fiscal year 2016, while two remained pending. We also sold the Lime Fresh brand's intellectual property and the franchise agreements associated with eight franchised Lime Fresh concept restaurants for $4.6 million;

 

We prepaid and retired 16 mortgage loan obligations with an aggregate balance of $13.3 million plus prepayment penalties of $1.6 million and $0.1 million of accrued interest;

 

We repurchased and retired 1.9 million shares of our common stock at an aggregate cost of $10.1 million;

 

We repurchased $2.5 million of the Senior Notes. The repurchases settled for $2.4 million plus accrued interest. We realized a negligible gain on these transactions;

 

On April 11, 2016, Jill M. Golder voluntarily resigned as the Company’s Executive Vice President, Chief Financial Officer, and Treasurer. On June 2, 2016, Sue Briley was appointed Interim Chief Financial Officer;

 

On April 7, 2016, Tom Williams, an executive with over 30 years of experience in executing and leading human resources functions, was appointed Chief People Officer;

 

Mike K. Ellis, an executive with more than 30 years of restaurant industry experience and 24 years of restaurant development experience, predominantly in casual dining, was appointed Chief Development Officer on February 29, 2016;

 

On July 25, 2015, Todd A. Burrowes voluntarily resigned as the Company’s President, Ruby Tuesday Concept and Chief Operations Officer. On July 27, 2015, Brett A. Patterson, an executive with over 25 years of restaurant industry experience who was then our Senior Vice President of Operations, was appointed Ruby Tuesday Concept President; and

 

On July 21, 2015, David W. Skena, an executive with over 20 years of marketing experience, was appointed Chief Marketing Officer.

 

 

 

-26-

 

During fiscal year 2015:

 

 

Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 0.5%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants increased 4.7%;

 

One Company-owned Ruby Tuesday restaurant was opened and 11 were closed;

 

Six franchised Ruby Tuesday restaurants were opened and seven were closed;

 

One Company-owned Lime Fresh restaurant was closed;

 

Two franchised Lime Fresh restaurants were opened and one was closed;

 

We prepaid and retired ten mortgage loan obligations for $9.0 million plus prepayment penalties of $1.0 million and negligible accrued interest;

 

Rhonda J. Parish was appointed Chief Legal Officer on March 16, 2015 and Secretary on April 8, 2015;

 

* We define same-restaurant sales as a year-over-year comparison of sales volumes for restaurants that, in the current year have been open at least 18 months, in order to remove the impact of new openings in comparing the operations of existing restaurants.

 

Restaurant Sales
Restaurant sales in fiscal year 2016 decreased 3.1% from fiscal year 2015 for Company-owned restaurants and decreased 5.0% for domestic and international franchised restaurants as explained below. The tables presented below reflect restaurant sales and other revenue information for the last three fiscal years.

 

Restaurant Sales (in millions):

   

Ruby Tuesday Concept

   

Lime Fresh Concept

 

Fiscal Year

 

Company-Owned

   

Franchise (a)

   

Company-Owned

   

Franchise (a)

 

2016

  $ 1,070.7     $ 162.4     $ 14.4     $ 15.3  

2015

    1,100.7       171.7       19.4       15.3  

2014

    1,141.8       162.2       20.7       14.5  

 

 

(a)

Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants.

 

Other Revenue Information:

   

2016

   

2015

   

2014

 

Company restaurant sales (in thousands)

                       

Ruby Tuesday concept

 

$

1,070,679

   

$

1,100,702

   

$

1,141,771

 

Lime Fresh concept

 

 

14,355

     

19,440

     

20,652

 

Total restaurant sales

 

$

1,085,034

   

$

1,120,142

   

$

1,162,423

 

Company restaurant sales growth-percentage

 

 

(3.1

)%

   

(3.6

)%

   

(6.6

)%

 

   

2016

   

2015

   

2014

 

Franchise revenue (in thousands)

                       

Ruby Tuesday concept

 

$

5,286

   

$

5,602

   

$

5,577

 

Lime Fresh concept

 

 

908

     

822

     

746

 

Total franchise revenue (a)

 

$

6,194

   

$

6,424

   

$

6,323

 

Franchise revenue growth-percentage

 

 

(3.6

)%

   

1.6

%

   

1.0

%

                         

Total revenue (in thousands)

                       

Ruby Tuesday concept

 

$

1,075,965

   

$

1,106,304

   

$

1,147,348

 

Lime Fresh concept

 

 

15,263

     

20,262

     

21,398

 

Total revenue

 

$

1,091,228

   

$

1,126,566

   

$

1,168,746

 

Total revenue growth-percentage

 

 

(3.1

)%

   

(3.6

)%

   

(6.6

)%

 

-27-

 

  

      2016       2015       2014  

Ruby Tuesday concept same-restaurant sales growth percentage

    (1.4 )%     (0.5 )%     (5.3 )%
                         

Company average unit volumes

 

$1.64 million

   

$1.66 million

   

$1.67 million

 

Company average unit volumes growth percentage

    (1.3 )%     (0.1 )%     (3.8 )%

 

 

(a)

Franchise revenue includes royalty, license, and development fees, but is exclusive of support service fees of $0.9 million, $1.3 million, and $1.0 million, in fiscal years 2016, 2015, and 2014, respectively, which are recorded as an offset to selling, general, and administrative expenses.

 

The Ruby Tuesday concept restaurant sales and operating revenue for the fiscal year ended May 31, 2016 decreased 2.7% to $1,070.7 million compared to the prior fiscal year. This decrease is primarily a result of restaurant closings since the prior fiscal year coupled with a 1.4% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants. The decrease in Ruby Tuesday concept same-restaurant sales is attributable to a 3.9% decrease in customer traffic offset by a 2.5% increase in net check.

 

The Lime Fresh concept restaurant sales and operating revenue for the fiscal year ended May 31, 2016 decreased 26.2% to $14.4 million compared to the prior fiscal year. This decrease is primarily due to restaurant closures since fiscal year 2015. As previously discussed within this MD&A, during the current fiscal year we entered into an agreement to sell the assets related to eight Company-owned Lime Fresh restaurants and closed the remaining 11 Company-owned Lime Fresh restaurants.

 

The Ruby Tuesday concept restaurant sales and operating revenue for the fiscal year ended June 2, 2015 decreased 3.6% to $1,100.7 million compared to fiscal year 2014. This decrease is primarily a result of restaurant closings since fiscal year 2014 coupled with a 0.5% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants. The decrease in Ruby Tuesday concept same-restaurant sales is attributable to a 1.4% decrease in customer traffic offset by a 1.0% increase in net check since fiscal year 2014.

 

The Lime Fresh concept restaurant sales and operating revenue for the fiscal year ended June 2, 2015 decreased 5.9% to $19.4 million compared to fiscal year 2014. This decrease is due in part to restaurant closures since fiscal year 2014.

 

Franchise development and license fees received are recognized when we have substantially performed all material services and the restaurant has opened for business. Franchise royalties (generally 4.0% of monthly sales for franchised Ruby Tuesday concept restaurants and 5.25% of monthly sales for franchised Lime Fresh concept restaurants) are recognized as franchise revenue on the accrual basis. Franchise revenue decreased 3.6% to $6.2 million in fiscal year 2016 and increased 1.6% to $6.4 million in fiscal year 2015. Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $5.9 million and $6.2 million in fiscal years 2016 and 2015, respectively.

 

Total franchise restaurant sales are shown in the table below.

 

   

2016

   

2015

   

2014

 

Franchise restaurant sales (in thousands)

                       

Ruby Tuesday concept

 

$

162,401

   

$

171,668

   

$

162,233

 

Lime Fresh concept

 

 

15,310

     

15,338

     

14,493

 

Total franchise restaurant sales (a)

 

$

177,711

   

$

187,006

   

$

176,726

 

Franchise restaurant sales growth-percentage

 

 

(5.0

)%

   

5.8

%

   

4.0

%

 

 

(a)

Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants.

 

 

-28-

 

 

Segment Profit

Segment profit/(loss) by reportable segment for fiscal years 2016, 2015, and 2014 is as follows (in thousands):

 

   

2016

   

2015

   

2014

 

Segment profit/(loss):

                       

Ruby Tuesday concept

  $ 60,934     $ 116,408     $ 69,543  

Lime Fresh concept

    (4,642

)

    (2,630

)

    (6,070

)

Total segment profit

  $ 56,292     $ 113,778     $ 63,473  

 

Segment profit for the year ended May 31, 2016 for the Ruby Tuesday concept decreased $55.5 million to $60.9 million compared to fiscal year 2015 due primarily to a 1.4% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, increases in closures and impairments expense of $49.3 million primarily as a result of the formulation of a plan in the fourth quarter of fiscal year 2016 to close approximately 95 Company-owned restaurants by September 2016 coupled with higher impairments of poor performing open restaurants throughout the year as compared to the prior fiscal year, and increases in advertising spending of $1.9 million due primarily to higher internet, magazine, direct mail, and other promotional advertising costs offset by decreases in television advertising. These were partially offset by lower cost of goods sold, payroll and related costs, and other restaurant operating costs as further discussed later within this MD&A, and decreases in general and administrative expenses of $4.7 million as a result of lower share-based compensation expense as further discussed later within this MD&A and in Note 10 to the Consolidated Financial Statements, a lower accrual for executive bonus, and decreased management labor from reductions in staffing.

 

Segment losses for the year ended May 31, 2016 for the Lime Fresh concept increased $2.0 million compared to fiscal year 2015 to $4.6 million due primarily to increases in closures and impairments expense of $3.3 million as the current fiscal year Lime Fresh segment losses include impairment and other charges for eleven Company-owned Lime Fresh restaurants which closed during fiscal year 2016. This was partially offset by lower cost of goods sold, payroll and related costs, other restaurant operating costs, and selling, general and administrative expenses.

 

Segment profit for the year ended June 2, 2015 for the Ruby Tuesday concept increased $46.9 million to $116.4 million compared to fiscal year 2014 due primarily to reductions in cost of goods sold, payroll and related costs, and other restaurant operating costs due to initiatives discussed later within this MD&A, and decreases in closures and impairments expense of $20.7 million and advertising expense of $17.5 million. The reduction in closures and impairments expense compared to the prior fiscal year is primarily attributable to a decrease of impairments in connection with open restaurants with deteriorating operational performance ($8.7 million), early restaurant closures ($5.4 million), and upcoming lease terminations ($1.4 million). The higher closures and impairments in fiscal year 2014 were primarily a result of prior fiscal year same-restaurant sales declines of 5.3% and the closure of 38 Ruby Tuesday restaurants. The reduction in advertising spending relates to reduced cable and television advertising.

 

Segment losses for the year ended June 2, 2015 for the Lime Fresh concept decreased $3.4 million compared to fiscal year 2014 to $2.6 million due primarily to decreases in closures and impairments expense of $2.1 million as fiscal year 2014 Lime Fresh segment losses included lease reserve charges related to four undeveloped sites for which management decided to forego restaurant development and a lease reserve charge on a Lime Fresh restaurant contracted to be sold. This was coupled with reductions in cost of goods sold, payroll and related costs, and other restaurant operating costs due to initiatives discussed later within this MD&A.

 

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The following is a reconciliation of segment profit to loss from continuing operations before taxes for fiscal years 2016, 2015, and 2014 (in thousands):

 

   

2016

   

2015

   

2014

 

Segment profit

  $ 56,292     $ 113,778     $ 63,473  

Less:

                       

Depreciation and amortization

    (51,358

)

    (52,391

)

    (57,347

)

Unallocated selling, general and administrative expenses

    (39,815

)

    (42,710

)

    (47,946

)

Preopening expenses

    (48

)

    (290

)

    (395

)

Trademark impairments

    (1,999

)

          (855

)

Gain on sales of Lime Fresh Mexican Grill assets

    5,937              

Interest expense, net

    (21,764

)

    (22,735

)

    (24,945

)

Other expense, net

    (107

)

    (757

)

    (1,560

)

Loss from continuing operations before income taxes

  $ (52,862

)

  $ (5,105

)

  $ (69,575

)

 

Operating Profit

The following table sets forth selected restaurant operating data as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, for the periods indicated. All information is derived from our Consolidated Financial Statements located in Part II, Item 8 of this Annual Report on Form 10-K.

 

   

2016

   

2015

   

2014

 

Restaurant sales and operating revenue

    99.4

%

    99.4

%

    99.5

%

Franchise revenue

    0.6       0.6       0.5  

Total revenue

    100.0       100.0       100.0  

Operating costs and expenses:

                       

Cost of goods sold (1)

    27.5       27.3       27.7  

Payroll and related costs (1)

    34.5       34.2       34.8  

Other restaurant operating costs (1)

    21.2       21.6       22.2  

Depreciation and amortization (1)

    4.7       4.7       4.9  

Selling, general, and administrative, net

    10.0       10.2       11.7  

Closures and impairments, net

    5.7       0.9       2.8  

Trademark impairments

    0.2             0.1  

Gain on sales of Lime Fresh Mexican Grill assets

    (0.5

)

           

Interest expense, net

    2.0       2.0       2.1  

(Gain)/loss on extinguishment of debt

    (0.0

)

          0.1  

Total operating costs and expenses

    104.8       100.5       106.0  

Loss from continuing operations before income taxes

    (4.8

)

    (0.5

)

    (6.0

)

Benefit for income taxes from continuing operations

    (0.2

)

    (0.2

)

    (0.4

)

Loss from continuing operations

    (4.6

)

    (0.3

)

    (5.6

)

Income from discontinued operations, net of tax

                0.0  

Net loss

    (4.6

)%

    (0.3

)%

    (5.5

)%

 

(1)     As a percentage of restaurant sales and operating revenue.

 

Pre-tax Loss from Continuing Operations

Pre-tax loss from continuing operations increased $47.8 million from fiscal year 2015 to $52.9 million for the fiscal year ended May 31, 2016. The increase in pre-tax loss is due primarily to higher closures and impairments expense ($52.1 million), a decrease in same-restaurant sales of 1.4% at Company-owned Ruby Tuesday restaurants, a partial impairment of the Lime Fresh trademark ($2.0 million), and an increase, as a percentage of restaurant sales and operating revenue, of costs of goods sold and payroll and related costs. These were partially offset by gain on sales of Lime Fresh Mexican Grill assets ($5.9 million), a decrease in interest expense, net ($1.0 million) and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of other restaurant operating costs and selling, general and administrative, net.

 

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Pre-tax loss from continuing operations decreased $64.5 million from fiscal year 2014 to $5.1 million for the fiscal year ended June 2, 2015. The lower pre-tax loss is due to reductions in closures and impairments expense ($22.3 million) and interest expense ($2.2 million) and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of goods sold, payroll and related costs, other restaurant operating costs, depreciation, and selling, general, and administrative, net. In addition, fiscal year 2014 included losses on the extinguishment of debt ($1.4 million) and a charge for the partial impairment of the Lime Fresh trademark ($0.9 million).

 

In the paragraphs that follow, we discuss in more detail the components of the changes in pre-tax loss from continuing operations for years ended May 31, 2016 and June 2, 2015 as compared to the comparable prior year. Because a significant portion of the costs recorded in the cost of goods sold, payroll and related costs, other restaurant operating costs, and depreciation categories are either variable or highly correlate with the number of restaurants we operate, we evaluate our trends by comparing the costs as a percentage of restaurant sales and operating revenue, as well as the absolute dollar change, to the comparable prior year.

 

Cost of Goods Sold
Cost of goods sold decreased $6.8 million (2.2%) from the prior fiscal year to $298.5 million for the year ended May 31, 2016. As a percentage of restaurant sales and operating revenue, cost of goods sold increased from 27.3% to 27.5%.

 

The absolute dollar decrease in cost of goods sold for the year ended May 31, 2016 was primarily the result of restaurant closures, a decline in same-restaurant sales, and $1.4 million in settlement proceeds from a class-action lawsuit against a former vendor, which were offset by price increases on certain commodity items since the prior fiscal year coupled with a shift in menu mix associated with menu changes introduced in November 2015.

 

As a percentage of restaurant sales and operating revenue, the increase in cost of goods sold for the year ended May 31, 2016 is primarily the result of price increases on certain commodity items and a shift in menu mix since the prior fiscal year as discussed above.

 

Cost of goods sold decreased $16.2 million (5.0%) from fiscal year 2014 to $305.3 million for the year ended June 2, 2015. As a percentage of restaurant sales and operating revenue, cost of goods sold decreased from 27.7% to 27.3%.

 

The absolute dollar decrease for the year ended June 2, 2015 was the result of restaurant closures and cost savings on certain products due to renegotiated contracts with certain vendors since fiscal year 2014. These were partially offset by price increases on beef, seafood, poultry, and certain other products since fiscal year 2014.

 

As a percentage of restaurant sales and operating revenue, the decrease in cost of goods sold for the year ended June 2, 2015 is primarily the result of renegotiated contracts with certain vendors since fiscal year 2014.

 

Payroll and Related Costs
Payroll and related costs decreased $8.7 million (2.3%) from the prior fiscal year to $374.6 million for the year ended May 31, 2016. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 34.2% to 34.5%.

 

The absolute dollar decrease in payroll and related costs for the year ended May 31, 2016 was primarily due to restaurant closures, reductions in overtime as a result of scheduling improvements, decreased management labor costs, and lower workers’ compensation costs due to favorable claims experience since the prior fiscal year. These reductions were partially offset by higher health insurance due to unfavorable claims experience.

 

As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the year ended May 31, 2016 is primarily the result wage inflation and loss of leveraging associated with lower sales volumes.

 

Payroll and related costs decreased $21.1 million (5.2%) from fiscal year 2014 to $383.3 million for the year ended June 2, 2015. As a percentage of restaurant sales and operating revenue, payroll and related costs decreased from 34.8% to 34.2%.

 

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The absolute dollar decrease in payroll and related costs for the year ended June 2, 2015 was primarily due to restaurant closures, decreases in hourly labor as a result of scheduling improvements with the rollout of a new labor forecasting system in our restaurants, and lower management labor, which were partially offset by higher health insurance costs as a result of unfavorable claims experience and higher bonus expense as more restaurants achieved the performance goals as compared to fiscal year 2014.

 

As a percentage of restaurant sales and operating revenue, the decrease in payroll and related costs for the year ended June 2, 2015 was primarily the result of decreased hourly and management labor due to reasons discussed above.

 

Other Restaurant Operating Costs
Other restaurant operating costs decreased $12.6 million (5.2%) from the prior fiscal year to $229.5 million for the year ended May 31, 2016. As a percentage of restaurant sales and operating revenue, other restaurant operating costs decreased from 21.6% to 21.2%.

 

For the year ended May 31, 2016, the decrease in other restaurant operating costs related to the following (in thousands):

 

Repairs

  $ 3,607  

Utilities

    2,401  

Legal

    2,209  

Rent and leasing

    1,694  

Insurance

    1,693  

Supplies

    1,473  

Other decreases, net

    366  

Property and equipment losses

    (852

)

Net decrease

  $ 12,591  

 

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the year ended May 31, 2016, the decrease was a result of lower building repairs, utilities, and rent and leasing due in part to restaurant closures since the prior fiscal year, lower legal costs related to pending litigation, and insurance as a result of favorable general liability claims. These were partially offset by higher property and equipment losses due primarily to a Company-owned Ruby Tuesday restaurant that was destroyed by fire during the current fiscal year. In addition, the decrease as a percentage of restaurant sales and operating revenue was partially offset by loss of leveraging associated with lower sales volumes.

 

Other restaurant operating costs decreased $15.8 million (6.1%) from the prior year to $242.1 million for the year ended June 2, 2015. As a percentage of restaurant sales and operating revenue, other restaurant operating costs decreased from 22.2% to 21.6%.

 

For the year ended June 2, 2015, the decrease in other restaurant operating costs related to the following (in thousands):

 

Repairs

  $ 5,001  

Utilities

    3,960  

Rent and leasing

    2,053  

Legal

    1,698  

Gift card breakage

    1,388  

Business interruption recoveries

    1,060  

Other decreases, net

    1,669  

Insurance

    (1,010

)

Net decrease

  $ 15,819  

 

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the year ended June 2, 2015, the decrease in other operating costs was primarily a result of reduced building repairs, utilities, and rent and leasing due primarily to restaurant closures since fiscal year 2014, lower legal costs related to pending litigation, higher gift card breakage income, and business interruption recoveries related to claims collected for certain of our restaurants in

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the Gulf Coast area. These changes were partially offset by higher insurance due in part to unfavorable general liability claims experience in fiscal year 2015.

 

Depreciation and Amortization
Depreciation and amortization expense decreased $1.0 million (2.0%) to $51.4 million for the year ended May 31, 2016, compared to the prior fiscal year. As a percentage of restaurant sales and operating revenue, depreciation expense was consistent with the prior fiscal year at 4.7%.

 

The absolute dollar decrease in depreciation and amortization for the year ended May 31, 2016 is due primarily to assets that became fully depreciated or were impaired since the prior fiscal year coupled with restaurant closures.

 

Depreciation and amortization expense decreased $5.0 million (8.6%) to $52.4 million for the year ended June 2, 2015, compared to fiscal year 2014. As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 4.9% to 4.7%.

 

In terms of absolute dollars, the decrease for the year ended June 2, 2015 is due primarily to assets that became fully depreciated since fiscal year 2014 coupled with restaurant closures.

 

Selling, General, and Administrative Expenses, Net
Selling, general, and administrative expenses, net decreased $5.7 million (4.9%) from the prior fiscal year to $109.6 million for the year ended May 31, 2016.

 

The decrease for the year ended May 31, 2016 is due to lower general and administrative costs ($7.7 million) offset by higher advertising costs ($2.0 million). The reduction in general and administrative costs is primarily due to lower share-based compensation expense as a result of a forfeiture credit as further discussed in Note 10 to the Consolidated Financial Statements and the substantial completion during fiscal year 2015 of expense recognition related to our Chief Executive Officer’s December 2012 inducement awards, a lower accrual for executive bonus, and decreased management labor from reductions in staffing. These were partially offset by higher employee pension-related costs, fees associated with certain service contracts, travel costs associated with restaurant manager training at our Restaurant Support Services Center, and consulting fees. The increase in advertising is primarily a result of higher internet, magazine, direct mail, and other promotional advertising costs offset by decreases in television advertising.

 

Selling, general, and administrative expenses, net decreased $21.8 million (15.9%) from fiscal year 2014 to $115.3 million for the year ended June 2, 2015.

 

The decrease for the year ended June 2, 2015 is due to lower advertising costs ($17.7 million) primarily as a result of decreased television advertising, and a reduction in general and administrative costs ($4.1 million) due to lower management labor from reductions in staffing, a decrease in consulting fees, and lower legal fees. The decrease in overall television advertising is attributable to management’s desire to spend marketing dollars more efficiently, with an increased focus on supporting our national cable television advertising with print and electronic promotions. These were partially offset by higher accruals for support center bonus.

 

Closures and Impairments, Net

Closures and impairments, net increased $52.1 million to $62.7 million for the fiscal year ended May 31, 2016, as compared to the prior fiscal year. The $52.1 million increase is primarily due to higher property impairment charges ($48.3 million), closed restaurant lease reserve expense ($2.6 million), and other closing costs ($0.3 million), coupled with lower gains on the sale of surplus properties ($0.9 million).

 

The increase in closures and impairments for the year ended May 31, 2016 is primarily due to higher Ruby Tuesday concept property impairment charges coupled with $6.4 million of impairments, lease reserves, severance, and other charges associated with the closure of 11 Lime Fresh restaurants during the current fiscal year. As further discussed in Notes 7 and 16 to the Consolidated Financial Statements, on August 11, 2016, following a comprehensive review of the Company's property portfolio, we announced a plan to close approximately 95 Company-owned restaurants by September 2016. Given the status of the plan as of May 31, 2016, we concluded that there was an impairment trigger as certain restaurants would be disposed of significantly before the end of their previously estimated useful lives. Accordingly, we recorded impairment charges of $39.2 million during the fourth quarter of fiscal year 2016 related to

 

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these restaurants. Also included within Closures and impairments, net for fiscal year 2016 are impairments of $14.7 million related to open Ruby Tuesday concept restaurants with deteriorating operational performance during the first three quarters of fiscal year 2016 or not included within management’s developing closure plan during the fourth fiscal quarter, $3.4 million related to Lime Fresh Mexican Grill concept restaurants, and $0.8 million related to surplus properties.

 

Closures and impairments, net decreased $22.3 million to $10.5 million for the year ended June 2, 2015, as compared to fiscal year 2014. The decrease is primarily due to lower property impairment charges ($14.5 million), closed restaurant lease reserve expense ($5.8 million), and other closing costs ($1.2 million) coupled with higher gains on the sale of surplus properties ($0.7 million).

 

The decrease in closures and impairments for the year ended June 2, 2015 is primarily due to lower property impairment charges as the same periods of the prior fiscal year included, among other charges, larger impairments attributable to open Ruby Tuesday concept restaurants experiencing deteriorating operational performance and related to early restaurant closures. Fiscal year 2014 charges were also higher due to a plan to close approximately 30 Ruby Tuesday concept restaurants by the end of that fiscal year.

 

See Note 7 to the Consolidated Financial Statements for further information on our closures and impairment charges recorded during fiscal years 2016, 2015, and 2014. Further information regarding closures and impairments expense for the Ruby Tuesday and Lime Fresh concepts for all periods presented is contained in Note 11 to the Consolidated Financial Statements. 

 

Trademark Impairments

As previously discussed within this MD&A, during fiscal year 2016 we entered into an agreement to sell eight Company-owned Lime Fresh restaurants in Florida and closed the remaining 11 Company-owned Lime Fresh restaurants. In connection with these events, we concluded that the Lime Fresh trademark was partially impaired. Accordingly, we recorded a non-cash charge of $2.0 million representing a partial impairment of the Lime Fresh trademark.

 

During fiscal year 2014, we concluded that the Lime Fresh trademark was partially impaired by using entity specific projections for undiscounted cash flows that incorporated only those Lime Fresh assets existing as of the measurement date. Accordingly, we recorded a non-cash charge of $0.9 million representing a partial impairment of the Lime Fresh trademark.

 

As further discussed in Note 3 to the Consolidated Financial Statements, we sold the Lime Fresh brand's intellectual property during the fourth quarter of fiscal year 2016. As a result of this transaction, our Lime Fresh trademark had no net book value remaining at May 31, 2016. See Note 7 to our Consolidated Financial Statements for further information on our trademark impairment charges recorded during fiscal years 2016 and 2014.

 

Gain on Sales of Lime Fresh Mexican Grill Assets

As previously discussed within this MD&A and further discussed in Note 3 to the Consolidated Financial Statements, during fiscal year 2016, we entered into an agreement to sell the assets related to eight Company-owned Lime Fresh restaurants in Florida for $6.0 million and closed the remaining 11 Company-owned Lime Fresh restaurants.  Six of the restaurants were closed and transferred to the buyer during the fourth quarter of fiscal year 2016, after which we were paid $5.0 million. One of the remaining two restaurants closed and transferred to the buyer shortly after our fiscal year-end, and the other restaurant is expected to close and transfer to the buyer on or before the end of our second quarter of fiscal year 2017. The remaining $1.0 million of consideration will be received when the remaining restaurant has transferred to the buyer. We recognized during fiscal year 2016 a gain of $3.1 million on this transaction. All of the eight restaurants involved in this transaction will be rebranded by the buyer as a different restaurant concept.

 

Also during the fourth quarter of fiscal year 2016, we sold the Lime Fresh brand's intellectual property and the franchise agreements associated with eight franchised Lime Fresh concept restaurants for $4.6 million. We recognized a gain of $2.8 million on this transaction.

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Interest Expense, Net
Interest expense, net decreased $1.0 million to $21.8 million for the year ended May 31, 2016, as compared to the prior fiscal year, primarily due to lower interest resulting from the early payoff of certain mortgage loans and repurchases of our Senior Notes since the prior fiscal year. Partially offsetting these decreases were $0.6 million in increased prepayment premiums paid in connection with mortgage obligations that we prepaid and retired in fiscal year 2016 above those paid in the previous fiscal year.

 

Interest expense, net decreased $2.2 million to $22.7 million for the year ended June 2, 2015, primarily due to lower interest expense on our Senior Notes due to repurchases during fiscal year 2014 and the early payoff of certain mortgage loans since fiscal year 2014.

 

(Gain)/Loss on Extinguishment of Debt

Under the terms of the Senior Credit Facility we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year. During the year ended May 31, 2016, we repurchased $2.5 million of the Senior Notes for $2.4 million plus accrued interest. We realized a negligible gain on these transactions.

 

Loss on extinguishment of debt was $1.4 million for the year ended June 3, 2014 due to our repurchase of $20.0 million of the Senior Notes for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions. Additionally, we incurred a $0.7 million charge in the second quarter of fiscal year 2014 relating to the write-off of the pro rata portion of unamortized debt issuance costs associated with the previous credit facility.

 

Benefit for Income Taxes from Continuing Operations
We recorded a tax benefit from continuing operations of $2.2 million for the fiscal year ended May 31, 2016, compared to a tax benefit from continuing operations of $1.9 million for the fiscal year ended June 2, 2015. Included in our $1.9 million tax benefit for the fiscal year ended June 2, 2015 was a benefit of $3.2 million recorded during the first quarter of fiscal year 2015, representing an immaterial prior period correction to our deferred tax asset valuation allowance.

 

We recorded a tax benefit from continuing operations of $1.9 million for the fiscal year ended June 2, 2015, compared to a tax benefit from continuing operations of $4.7 million for the fiscal year ended June 3, 2014. Included in our $1.9 million tax benefit from continuing operations for the year ended June 2, 2015 was the previously mentioned benefit of $3.2 million, with the remaining $1.3 million in net expense is attributable to decreased pre-tax losses and changes in uncertain tax reserves for fiscal year 2015.   

 

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future.  A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment.  In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.

 

Our valuation allowance for deferred tax assets totaled $89.9 million and $62.8 million as of May 31, 2016 and June 2, 2015, respectively. Included within our income tax benefit from continuing operations is the expense from the additional valuation allowance of $28.2 million, $9.1 million, and $31.2 million for fiscal years 2016, 2015, and 2014, respectively, representing the amount reserved for the increase in net deferred tax assets during the periods (primarily related to general business credit carryforwards and state net operating loss carryforwards). Additionally, a valuation allowance benefit of $0.3 million was included within the income tax benefit from discontinued operations in fiscal year 2014.

 

Under ASC 740, we are required to assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As a result of, among other charges, closures and impairments and trademark impairment charges, we currently reflect a three-year cumulative pre-tax loss. A cumulative pre-tax loss is given more weight than projections of future income, and a recent historical cumulative loss is considered a significant factor that is difficult to overcome. Before consideration of the valuation

 

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allowance expense, we had an income tax benefit of $30.4 million, $11.0 million, and $35.9 million, including the tax credits, in fiscal years 2016, 2015, and 2014, respectively.

 

Discontinued Operations

In an effort to focus primarily on the sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our then Lime Fresh concept, we completed the closure of our Marlin & Ray’s, Wok Hay, and Truffles restaurants during fiscal year 2013. We have classified the results of operations of our Company-owned Marlin & Ray’s, Wok Hay, and Truffles concepts as discontinued operations for the fiscal years ended June 3, 2014. The results of operations of our discontinued operations are as follows (in thousands):  

 

   

June 3, 2014

 

Restaurant sales and operating revenue

  $  

Income before income taxes

  $ 458  

Benefit for income taxes

    (106 )

Income from discontinued operations

  $ 564  

 

Liquidity and Capital Resources

 

Sources and Uses of Cash 

Our primary source of liquidity is cash provided by operations. The following table presents a summary of our cash flows from operating, investing, and financing activities for the last three fiscal years (in thousands).

 

   

2016

   

2015

   

2014

 

Net cash provided by operating activities

  $ 40,117     $ 54,911     $ 45,375  

Net cash used by investing activities

    (19,755

)

    (17,497

)

    (6,203

)

Net cash used by financing activities

    (28,352

)

    (13,409

)

    (40,753

)

                         

Net (decrease)/ increase in cash and cash equivalents

  $ (7,990

)

  $ 24,005     $ (1,581

)

 

Operating Activities

Our cash provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees.  Substantially all of the $1,085.0 million, $1,120.1 million, and $1,162.4 million of restaurant sales and operating revenue disclosed in our Consolidated Statements of Operations and Comprehensive Loss for fiscal years 2016, 2015, and 2014, respectively, was received in cash either at the point of sale or within two to four days (when our customers paid with debit or credit cards).  Our primary uses of cash for operating activities are food and beverage purchases, payroll and benefit costs, restaurant operating costs, general and administrative expenses, and marketing, a significant portion of which are incurred and paid in the same period.

 

Cash provided by operating activities for fiscal year 2016 decreased $14.8 million (27.0%) from the prior fiscal year to $40.1 million. The decrease is primarily the result of lower Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), increases in amounts spent to acquire inventory, decreases in accounts payable, accrued, and other liabilities due to the timing of payments, and an increase in cash paid for taxes ($2.8 million). These were partially offset by lower cash paid for interest ($1.0 million) due to the prepayment of certain of our mortgage obligations and other principal payments on our debt since the prior fiscal year and a decrease in amounts spent on media advertising (approximately $1.7 million).

 

Cash provided by operating activities for fiscal year 2015 increased $9.5 million (21.0%) from fiscal year 2014 to $54.9 million. The increase is primarily the result of higher EBITDA due in part to restaurant-level cost improvements and reductions in amounts spent on media advertising. These increases were partially offset by decreases in accounts payable, accrued, and other liabilities due to the timing of payments (approximately $11.4 million) and inventory (approximately $8.9 million) as amounts for fiscal year 2014 related to levels of lobster held in inventory that were significantly lower than those of the preceding year.

 

 

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Our working capital and current ratio as of May 31, 2016 were $23.2 million and 1.2:1, respectively. While we typically carry current liabilities in excess of current assets as is common in the restaurant industry, we have reduced our accounts payable and other accrued liabilities since the prior fiscal year.

 

Investing Activities

We require capital principally for the maintenance and upkeep of our existing restaurants, limited new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for the acquisition of franchisees or other restaurant concepts. Property and equipment expenditures purchased primarily with cash on hand, internally-generated cash flows, and/or proceeds from sale-leaseback transactions for fiscal years 2016, 2015, and 2014 were $34.4 million, $31.0 million, and $28.3 million, respectively. In addition, proceeds from the disposal of assets produced $11.7 million, $11.3 million, and $15.5 million of cash in fiscal years 2016, 2015, and 2014, respectively, following actions taken to more aggressively market surplus properties in order to pay down debt and, for fiscal year 2016, to substantially exit the Lime Fresh Mexican Grill brand.

 

During the fiscal year ended June 3, 2014, we completed sale-leaseback transactions of the land and building for three Company-owned Ruby Tuesday concept restaurants for gross cash proceeds of $5.9 million, exclusive of transaction costs of approximately $0.3 million. Equipment was not included. The net proceeds from the sale-leaseback transactions were used for general corporate purposes, including capital expenditures, debt payments, and, in fiscal years prior to 2014, the repurchase of shares of our common stock. See Note 5 to the Consolidated Financial Statements for further discussion of these transactions.

 

Capital expenditures for fiscal year 2017 are estimated to be in the range of between $38.0 million to $42.0 million. We intend to fund our investing activities with cash currently on hand, cash provided by operations, proceeds from the sale of surplus properties, or borrowings on the Senior Credit Facility.

 

Financing Activities

Historically our primary sources of cash have been operating activities, coupled with sale-leaseback transactions and sales of surplus properties. When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the issuance of indebtedness or through the issuance of additional shares of common stock.

 

Our current borrowings and credit facilities include $212.5 million outstanding principal of 7.625% senior notes due 2020 (the “Senior Notes”), a four year revolving credit agreement (the “Senior Credit Facility”) under which we may borrow up to $50.0 million, and $15.7 million of mortgage loan obligations acquired upon franchise acquisitions. See Note 6 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for key terms and further information on our Senior Notes, Senior Credit Facility, and mortgage loan obligations.

 

Under the terms of the Senior Credit Facility we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year. During the year ended May 31, 2016, we repurchased $2.5 million of the Senior Notes for $2.4 million plus accrued interest. We realized a negligible gain on these transactions. We did not repurchase any Senior Notes during the year ended June 2, 2015. During the year ended June 3, 2014, we repurchased $20.0 million of the Senior Notes for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions.

 

During fiscal year 2016, we prepaid and retired 16 mortgage loan obligations with an aggregate balance of $13.3 million using cash on hand. We paid $1.6 million in prepayment premiums and $0.1 million of accrued interest in connection with the retirement of these obligations. The prepayment of this debt eliminated one mortgage lender and allowed for the release of 44 properties which had served as collateral. Additionally, during fiscal year 2015, we prepaid and retired ten mortgage loan obligations with an aggregate balance of $9.0 million using cash on hand. In connection with the retirement of these obligations, we paid $1.0 million in prepayment premiums and an insignificant amount of accrued interest.

 

During fiscal years 2016, 2015, and 2014, we repurchased 1.9 million, an insignificant number, and 0.1 million shares of RTI common stock, respectively, at an aggregate cost of $10.1 million, $0.1 million, and $0.6 million, respectively. As of May 31, 2016, the total number of shares authorized to be repurchased was 9.9 million. Additionally, there were no dividends paid during fiscal years 2016, 2015, or 2014.

 

-37-

 

Significant Contractual Obligations and Commercial Commitments
Long-term financial obligations were as follows as of May 31, 2016 (in thousands):

 

   

Payments Due By Period

 
           

Less than

      1-3       3-5    

More than 5

 
   

Total

   

1 year

   

years

   

years

   

years

 

Notes payable and other

                                       

long-term debt, including

                                       

current maturities (a)

  $ 15,956     $ 10,971     $ 3,044     $ 1,599     $ 342  

Senior unsecured notes (a)

    212,546                   212,546        

Interest (b)

    68,175       17,229       33,089       16,451       1,406  

Operating leases (c)

    613,184       45,507       84,249       72,792       410,636  

Purchase obligations (d)

    58,338       40,552       14,594       2,680       512  

Pension obligations (e)

    39,320       2,809       4,007       7,234       25,270  

Total (f)

  $ 1,007,519     $ 117,068     $ 138,983     $ 313,302     $ 438,166  

 

(a)

See Note 6 to the Consolidated Financial Statements for more information on our debt.

(b)

Amounts represent contractual interest payments on our fixed-rate debt instruments. Additionally, the amounts shown above include interest payments on the Senior Notes at the current interest rate of 7.625%.

(c)

This amount includes lease payments for certain optional renewal periods for which exercise is considered reasonably assured as well as operating leases totaling $4.3 million for which sublease income from franchisees or others is expected. Certain of these leases obligate us to pay maintenance costs, utilities, real estate taxes, and insurance, which are excluded from the amounts shown above. See Note 5 to the Consolidated Financial Statements for more information.

(d)

The amounts for purchase obligations include cash commitments under contract for food items and supplies, advertising, utility contracts, and other miscellaneous commitments.

(e)

See Note 8 to the Consolidated Financial Statements for more information.

(f)

This amount excludes $4.5 million of unrecognized tax benefits due to the uncertainty regarding the timing of future cash outflows associated with such obligations.

 

Commercial commitments were as follows as of May 31, 2016 (in thousands):

 

   

Payments Due By Period

 
           

Less than

     1-3      3-5    

More than 5

 
   

Total

   

1 year

   

years

   

years

   

years

 

Letters of credit

  $ 11,591     $ 4,491     $ 7,100     $     $  

Divestiture guarantees

    6,901       613       1,062       1,072       4,154  

Lease guarantee

    17,743       1,252       2,555       2,244       11,692  

Total

  $ 36,235     $ 6,356     $ 10,717     $ 3,316     $ 15,846  

 

At May 31, 2016, we had divestiture guarantees, which arose in fiscal 1996, when our shareholders approved the distribution of our family dining restaurant business (Morrison Fresh Cooking, Inc., “MFC”) and our health care food and nutrition services business (Morrison Health Care, Inc., “MHC”). Subsequent to that date Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group (“Compass”) acquired MHC. As agreed upon at the time of the distribution, we have been contingently liable for payments to MFC and MHC employees retiring under MFC’s and MHC’s versions of the Management Retirement Plan and the Executive Supplemental Pension Plan (the two non-qualified defined benefit plans) for the accrued benefits earned by those participants as of March 1996.

 

We estimated our divestiture guarantees at May 31, 2016 to be $6.8 million for employee benefit plans (all of which resides with MHC following Piccadilly’s bankruptcy in fiscal 2004). We believe the likelihood of being required to make payments for MHC’s portion to be remote due to the size and financial strength of MHC and Compass.

 

As of May 31, 2016, we are the guarantor of nine third-party leases associated with closed concept restaurants. Lease guarantee amounts in the table above represent lease payments for which we are contingently liable. While we believe that the likelihood of being required to make these lease payments is remote, we recorded a guarantee liability of $0.5 million and $0.1 million in our Consolidated Balance Sheets at May 31, 2016 and June 2, 2015, respectively.

 

-38-

 

 

Off-Balance Sheet Arrangements

See Note 5 to the Consolidated Financial Statements for information regarding our operating leases.

 

Recently Issued Accounting Pronouncements

Information regarding accounting pronouncements not yet adopted is incorporated by reference from Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

 

Critical Accounting Policies

 

Our MD&A is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We periodically evaluate the information used to make these estimates as our business and the economic environment changes.

 

We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements.

 

Impairment of Long-Lived Assets

We evaluate the carrying value of any individual restaurant when the cash flows of such restaurant have deteriorated and we believe the probability of continued operating and cash flow losses indicate that the net book value of the restaurant may not be recoverable. In performing the review for recoverability, we consider the forecasted future cash flows expected to result from the use of the restaurant and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the restaurant, an impairment loss is recognized for the amount by which the net book value of the assets exceeds their fair value. Otherwise, an impairment loss is not recognized. Fair value is market participant-based upon broker estimates of the value of land, building, leasehold improvements, and other residual assets, or estimated discounted future cash flows expected to be generated from continuing use through the expected disposal date and the expected salvage value.

 

Under our policies, recurring or projected annual negative cash flow signals a potential impairment. If a restaurant that has been open for at least six full quarters shows negative cash flow results, we evaluate the plan to reverse the negative performance. Both qualitative and quantitative information are considered when evaluating for potential impairments. We also perform tests for impairment of intangible assets when other events or circumstances indicate it might be impaired. 

 

As discussed in Notes 7 and 16 to the Consolidated Financial Statements, in response to a comprehensive review by management of our property portfolio, during the fourth quarter of fiscal year 2016, we tested a significant number of open Ruby Tuesday concept restaurants for impairment as we concluded it was more likely than not they would close significantly before the end of their previously estimated useful life.  We evaluated recoverability based on the restaurants forecasted undiscounted cash flows for 107 restaurants, which incorporated probability weighted scenarios of either remaining open or closing in the near term.  Sensitivity analyses were performed on the probability weighted scenarios changing by 10% and the results were not materially different. For restaurant assets that are deemed to not be recoverable, we wrote those assets down to estimated fair value. As a result of this analysis, the Company incurred $39.2 million of impairment charges during fiscal year 2016.  We also tested the Lime Fresh trademark for impairment during fiscal years 2016 and 2014 as factors were present which indicated the trademark may be impaired.  We determined that the Lime Fresh trademark was partially impaired and recorded charges of $2.0 million and $0.9 million during fiscal years 2016 and 2014, respectively.

 

At May 31, 2016, we had 75 restaurants that had been open for more than six full quarters with rolling 12-month negative cash flows of which 67 are expected to close by September 2016 either as part of the asset rationalization  plan as previously discussed or as leases expire.  Of the eight restaurants which remained, we recorded impairments for five properties based on their estimated values and we reviewed the plans to improve cash flows at the remaining

 

-39-

 

three properties and determined that no impairments were necessary. The remaining net book value of the eight restaurants was $2.2 million at May 31, 2016.

Should cash flows at these cash flow negative restaurants not improve within a reasonable period of time, further impairment charges may occur. Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, salvage value, and sublease income. Accordingly, actual results could vary significantly from quarter to quarter and from our estimates.

 

Income Tax Valuation Allowances and Tax Accruals

We record deferred tax assets for various items and a valuation allowance against those deferred tax assets when current available information raises doubt as to their ultimate realization.   Despite the existence of long carryforward periods for some of our largest deferred tax assets, such as unused employment tax credits and federal and/or state net operating losses, and a history of realizing our deferred tax assets by utilizing those credits and losses in subsequent or carryback years, a three-year cumulative pre-tax loss is an example of negative evidence that raises doubt as to the realization of the deferred tax assets.  To determine the appropriate amount of the valuation allowance, we schedule a year-by-year estimation of the reversal of existing taxable temporary differences in order to determine the availability of future taxable income which would allow for the realization of our existing deferred tax assets.   While we are able to incorporate tax planning strategies into our analysis, we do not factor projected future income until such time that the positive evidence supporting realization outweighs the negative evidence (most significantly, the three-year cumulative pre-tax loss). 

 

We recorded a valuation allowance for deferred tax assets of $89.9 million and $62.8 million as of May 31, 2016 and June 2, 2015, respectively.  Included within our income tax benefit from continuing operations is the expense from the additional valuation allowance of $28.2 million, $9.1 million, and $31.2 million for fiscal years 2016, 2015, and 2014, respectively. Additionally, a valuation allowance benefit of $0.3 million was included in income tax benefit from discontinued operations in fiscal year 2014. Given that we last recorded pre-tax income in fiscal 2011, we will likely not be able to reverse the significant valuation allowance recorded in the near future. Our recorded valuation allowance may be subject to material changes in the future, as our ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to the feasibility of certain tax planning strategies. Upon such time that we are able to reverse the deferred tax asset valuation allowance, income tax expense will be reduced, and net income will correspondingly be increased, by the amount we are able to reverse.

 

Lease Obligations

We lease a significant number of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. The primary penalty to which we are subject is the economic detriment associated with our investment into leasehold improvements which might become impaired should we choose not to continue the use of the leased property.

 

Our operating lease term used for straight-line rent expense is calculated from the date we take possession of the leased premises through the end of the lease term. There is potential for variability in our “rent holiday” period which begins on the possession date and ends on the earlier of the restaurant open date or the commencement of rent payments. Factors that may affect the length of the rent holiday period generally relate to construction-related delays. Extension of the rent holiday period due to delays in restaurant opening will result in greater preopening rent expense recognized during the rent holiday period.

 

For operating leases that contain predetermined fixed rent escalations, we record the total rent payable during the lease term, as determined above, on the straight-line basis over the term of the lease (including the “rent holiday” period beginning upon possession of the premises), and we record the difference between the minimum rents paid and the straight-line rent as deferred escalating minimum rent.

 

Certain leases contain provisions that require additional rental payments, called "contingent rents," when the associated restaurants' sales volumes exceed agreed-upon levels. We recognize contingent rental expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.  

 

 

 

-40-

 

The judgment regarding the probable term for each restaurant property lease impacts the classification and accounting for a lease as capital or operating, the rent holiday and/or escalation in payments that are taken into consideration when calculating straight-line rent and the term over which leasehold improvements for each restaurant amortized. The material factor we consider when making this judgment is the total amount invested in the restaurant at the inception of the lease and whether management believes that renewal appears reasonably assured. While a different term may produce materially different amounts of depreciation, amortization, and rent expense than reported, our historical lease renewal rates support the judgments made. We have not made any changes to the nature of the assumptions used to account for leases in any of the fiscal years presented in our Consolidated Financial Statements.

 

We record the estimated future lease obligations on leased restaurants upon closure for which we have not sublet or settled the lease with the respective landlord as of a quarter end date. Inherent in these estimates is an assumption on the time period we anticipate it will take to reach a settlement with our landlord or to execute on a sublease agreement. We calculate the lease obligation as the present value of future minimum net lease or settlement payments using a discount rate that takes into account the remaining time period prior to the estimated date of resolution. As further discussed in Note 7 to the Consolidated Financial Statements, our estimated lease obligations for closed restaurants as of May 31, 2016 and June 2, 2015 were $6.3 million and $7.1 million, respectively.

 

Estimated Liability for Self-Insurance

We self-insure a portion of our expected losses under our employee health care benefits, workers’ compensation, general liability, and property insurance programs. Specifically with our workers’ compensation and general liability coverages, we have stop loss insurance for individual claims in excess of stated loss amounts. Insurance liabilities are recorded based on third-party actuarial estimates of the ultimate incurred losses, net of payments made. The estimates themselves are based on standard actuarial techniques that incorporate both the historical loss experience of the Company and supplemental information as appropriate.

 

The analysis performed in calculating the estimated liability is subject to various assumptions including, but not limited to, (a) the quality of historical loss and exposure information, (b) the reliability of historical loss experience to serve as a predictor of future experience, (c) the reasonableness of insurance trend factors and governmental indices as applied to the Company, and (d) projected payrolls and revenue. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

 

Known Events, Uncertainties, and Trends

 

Upcoming Restaurant Closures

As discussed previously within this MD&A and discussed further in Notes 7 and 16 to the Consolidated Financial Statements, on August 11, 2016, following a comprehensive review of our Company's property portfolio, we announced a plan to close approximately 95 Company-owned restaurants by September 2016. The approved closures, which include mall, in line, and freestanding sites, encompass restaurants spread throughout all of the geographies in which the Company operates. Of the restaurants expected to close, approximately two-thirds are operated on leased properties and approximately one-third are owned.

 

We incurred $39.2 million of impairment charges in the fourth quarter of our fiscal year 2016 following an impairment analysis performed for the restaurants deemed, as of May 31, 2016, to be more than likely to be closed significantly prior to the end of their previously estimated useful lives based on the then status of management’s developing plan. In addition to the impairment charges recorded during fiscal year 2016, further impairment charges will be incurred based on changes ultimately made to the plan after May 31, 2016 and as the restaurants actually close. Accordingly, the first quarter of our fiscal year 2017 closures and impairments are expected to include additional impairment charges of approximately $3.0 million to $5.0 million for restaurants added to management’s plan subsequent to May 31, 2016, approximately $19.0 million to $21.0 million associated with estimated lease settlement costs and approximately $11.0 million to $16.0 million in severance benefits, inventory write-off and other costs. The actual amount of any cash payments made by the Company for lease contract termination costs will be dependent upon ongoing negotiations with the landlords of the leased restaurant properties and could be higher or lower than the amounts currently estimated.

 

 

-41-

 

Financial Strategy and Stock Repurchase Plan

Cash and cash equivalents as of May 31, 2016 were $67.3 million. Our overall goal is to invest in our brand and to strengthen our balance sheet to improve credit metrics. As such, our first priority is to ensure that we have adequate cash levels to run the business and internally fund our capital expenditures. Our second priority is to reduce our outstanding debt to help improve our credit metrics with the goal of improved flexibility and access to capital at reasonable rates. Lastly, we would consider share repurchases within the limitations of our debt covenants to return capital to shareholders. During the fiscal year ended May 31, 2016, we repurchased 1.9 million shares of our common stock at an aggregate cost of $10.1 million. As of May 31, 2016, the total number of remaining shares authorized to be repurchased was 9.9 million. Any of these actions, in any particular period and the actual amount thereof, remain at the discretion of the Board of Directors, and no assurance can be given that any such actions will be taken in the future.

 

Repurchases of Senior Notes

We are allowed under the terms of the Senior Credit Facility to repurchase, in any fiscal year, up to $20.0 million of indebtedness to various holders of the Senior Notes. During the fiscal year ended May 31, 2016, we repurchased $2.5 million of the Senior Notes for $2.4 million plus accrued interest. We realized a negligible gain on these transactions. As of the date of this filing, we may repurchase $20.0 million of the Senior Notes during the remainder of fiscal year 2017. Future repurchases of the Senior Notes, if any, will be funded with available cash on hand.

 

Dividends

During fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to our shareholders. No dividends were declared or paid during the three year period ended May 31, 2016. The payment of a dividend in any particular period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that dividends will be paid in the future.

 

Fiscal Year

Our fiscal year 2017 will contain 53 weeks and end on June 6, 2017.

 

Impact of Inflation
The impact of inflation on the cost of food, labor, supplies, utilities, real estate, and construction costs could adversely impact our operating results. Historically, we have been able to recover certain inflationary cost increases through increased menu prices coupled with more efficient purchasing practices and productivity improvements. Competitive pressures may limit our ability to completely recover such cost increases. Historically, the effect of inflation has not significantly impacted our net income.

 

Item 7A. Quantitative and Qualitative

Disclosure About Market Risk

 

We are exposed to market risk from fluctuations in interest rates and changes in commodity prices. The interest rate charged on our Senior Credit Facility can vary based on the interest rate option we choose to utilize. Our options for the rate are LIBOR or a Base Rate plus an applicable margin provided that the rate shall not be less than zero. The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%. The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%. As of May 31, 2016, we had no outstanding debt subject to interest rate fluctuations as our Senior Notes and remaining mortgage loan obligations are fixed-rate debt instruments and our Senior Credit Facility was undrawn. As a result, a hypothetical 100 basis point change in short-term interest rates would have no impact on our interest expense.

 

Many of the ingredients used in the products we sell in our restaurants are commodities that are subject to unpredictable price volatility. This volatility may be due to factors outside our control such as weather and seasonality. We attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients. Historically, and subject to competitive market conditions, we have been able to mitigate the negative impact of price volatility through adjustments to average check or menu mix.

 

-42-

 

 

Item 8. Financial Statements and Supplementary Data

 

Ruby Tuesday, Inc. and Subsidiaries
Index to Consolidated Financial Statements

 

Consolidated Statements of Operations and Comprehensive Loss for the Fiscal Years Ended May 31, 2016, June 2, 2015, and June 3, 2014

44

   

Consolidated Balance Sheets as of May 31, 2016 and June 2, 2015

45

   

Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended May 31, 2016, June 2, 2015, and June 3, 2014

46

   

Consolidated Statements of Cash Flows for the Fiscal Years Ended May 31, 2016, June 2, 2015, and June 3, 2014

47

   

Notes to Consolidated Financial Statements

48-88

   

Reports of Independent Registered Public Accounting Firm

89-90

 

 

-43-

 

Ruby Tuesday, Inc. and Subsidiaries

Consolidated Financial Statements

Consolidated Statements of Operations and

Comprehensive Loss

(In thousands, except per-share data)

 

   

For the Fiscal Year Ended

 
   

May 31,

2016

   

June 2,

2015

   

June 3,

2014

 

 

         

(as adjusted)

   

(as adjusted)

 
Revenue:                        

Restaurant sales and operating revenue

  $ 1,085,034     $ 1,120,142     $ 1,162,423  

Franchise revenue

    6,194       6,424       6,323  
Total revenue     1,091,228       1,126,566       1,168,746  
                         

Operating costs and expenses:

                       

Cost of goods sold (excluding depreciation and

                       

    amortization shown below)

    298,529       305,306       321,521  

Payroll and related costs

    374,561       383,261       404,379  

Other restaurant operating costs

    229,518       242,109       257,928  

Depreciation and amortization

    51,358       52,391       57,347  

Selling, general, and administrative, net

    109,627       115,327       137,151  

Closures and impairments, net

    62,681       10,542       32,831  

Trademark impairments

    1,999             855  

Gain on sales of Lime Fresh Mexican Grill assets

    (5,937

)

           

Interest expense, net

    21,764       22,735       24,945  

(Gain)/loss on extinguishment of debt

    (10

)

          1,364  
 Total operating costs and expenses     1,144,090       1,131,671       1,238,321  
                         

Loss from continuing operations before income taxes

    (52,862

)

    (5,105

)

    (69,575

)

Benefit for income taxes from continuing operations

    (2,180

)

    (1,911

)

    (4,665

)

Loss from continuing operations

    (50,682

)

    (3,194

)

    (64,910

)

                         

Income from discontinued operations, net of tax

                564  

Net loss

  $ (50,682

)

  $ (3,194

)

  $ (64,346

)

                         

Other comprehensive income/(loss):

                       

Pension liability reclassification

    831       (40

)

    45  

Total comprehensive loss

  $ (49,851

)

  $ (3,234

)

  $ (64,301

)

                         

Basic loss per share:

                       

Loss from continuing operations

  $ (0.83

)

  $ (0.05

)

  $ (1.08

)

Income from discontinued operations

                0.01  

Net loss per share

  $ (0.83

)

  $ (0.05

)

  $ (1.07

)

                         

Diluted loss per share:

                       

Loss from continuing operations

  $ (0.83

)

  $ (0.05

)

  $ (1.08

)

Income from discontinued operations

                0.01  

Net loss per share

  $ (0.83

)

  $ (0.05

)

  $ (1.07

)

                         

Weighted average shares:

                       

Basic

    60,871       60,580       60,231  

Diluted

    60,871       60,580       60,231  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

-44-

 

Ruby Tuesday, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per-share data)

 

   

May 31,

2016

   

June 2,

2015

 

 

         

(as adjusted)

 
Assets:                

Current assets:

               

Cash and cash equivalents

  $ 67,341     $ 75,331  

Accounts and other receivables

    12,827       5,287  

Inventories:

               

Merchandise

    13,799       12,861  

China, silver and supplies

    7,796       7,550  

Income tax receivable

    3,003        

Prepaid rent and other expenses

    11,508       12,398  

Assets held for sale

    4,642       5,453  

Total current assets

    120,916       118,880  
                 

Property and equipment, net

    671,250       752,174  

Other assets

    45,751       54,398  

Total assets

  $ 837,917     $ 925,452  
                 

Liabilities and Shareholders' Equity:

               

Current liabilities:

               

Accounts payable

  $ 22,141