Ruby Tuesdays
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TUESDAY
FINANCIAL RESEARCH
REPORT AND RECOMMENDATION
Analyst Recommendation
Jerome Smith Hold
May, 4th 2006
EXECUTIVE SUMMARY
Founded in 1920, Ruby Tuesday is one of the largest restaurants in America. They operate over 750 restaurants in the United States that cover more than 40 states. The company has a small but growing presence in the international market and is currently in 13 different countries. Ruby Tuesday is a casual full service restaurant offering menu items from ribs and salmon to more cultured items such as glazed peppercorn and Louisiana fried shrimp. The company focus has grown to where it is today with a market focus on the middle to upper class consumers as well as the health conscious individuals.
Over the last year Ruby Tuesdays has seen its market value increase while it competitors and the service industry have lagged or become marginal. This could be attributed to a more aggressive campaign to attract health conscious eaters as well as building new stores. Ruby Tuesdays finances have become a plus as their market price for their stock has improved over 80 percent from the previous year.
Ruby Tuesdays future consists of more store expansion as well as product diversification. The biggest threat for Ruby Tuesdays comes from macroeconomic indicators such as unemployment, interest rates, and the volatility of the stock market. If Ruby is to maintain its current market presence, it must hedge for these indicators. I believe that Ruby Tuesdays will continue to grow and be profitable. Yet, I also believe that because the economy has such an affect on the service industry, any thoughts of investing should be curtailed. I recommend a HOLD on Ruby Tuesdays current stock.
FINANCIAL ANALYST
Macro Economy and the Elements
Gross Domestic Product
(1) One of the biggest indicators of economic growth in the US is the gross domestic product. While in recession in the early 2000s, restaurants declined in sales Ruby Tuesdays was no exception. As consumers spent less restaurant profits decline. Yet the major indicators that pushed the GDP such as consumer confidence, employment rate and interest rates are the same indicators that has proven to make Ruby Tuesdays consistently solvent even during a recessional period and as the economy grows so does Ruby Tuesday.and it continues today…
Although the GDP has leveled in the last couple of years Ruby Tuesday stock price has risen. This gives credence to the Ruby Tuesday product as well as the service they provide.
Consumer Confidence
The consumers willingness to spend is measured by consumer confidence. The consumer confidence index of the conference board has been on a steady rise since an initial decline in the earlier part of the year (2006). In April of 2006 the consumer conference board reported that consumer confidence index has risen to 109.6. its highest level in 4 years As the economy has grown so has the overall belief of the consumer that the current conditions will remain steady. There are some factors that may change the consumers confidence such as the increase in gas prices, rising interest rates and a volatile stock market. This will ultimately have an effect in Ruby Tuesdays as well as other service industries.
Employment
Employment is the cornerstone of every consumers well being. In order to necessitate spending consumers must believe in the employment of our nation.
(2) In the beginning of 2001 the unemployment rate drastically increased after a period of decline. The major reason for the increase stems from company layoffs to decrease operating expenses. By 2003 the unemployment rate had dropped due to people becoming frustrated with the job market so they stopped pursuing jobs. A decreasing unemployment rate is a very positive sign in the consumer service region. It goes to say that the more people that are in the workforce making money the more disposable income there will be for people to spend on goods and services while giving them the ability to dine at Restaurants such as Ruby Tuesdays.
Disposable Personal Income
The disposable personal income measures the amount of income the consumer has after taxes. The more income that people have to spend, the more likely it is that people will be dining out. During the past year disposable income has increased by 5.7 percent. As people have more money to spend they tend to spend more on meals and beverages. Ruby Tuesday will continue to increase its revenue as the trend of having more money to spend continues.
Interest Rates
(3) Interest rates are on the steady rise so that there can be some control over inflationary pressures. As the Federal Reserve continues to raise interest rates most companies in the restaurant industry will not fill the effect. Most of the companies in the industry including Ruby Tuesday have a very reasonable debt to equity ratio. For this reason, Ruby Tuesday interest expense should not be greatly affected by the increasing interest rates.
Oil Prices
Oil price increases have caused the price of gas to increase. This has had a direct impact on Ruby Tuesdays. (4) Consumers do not come out to spend as much because of the high gas prices. The prices are currently at an all time high. As the market starts to improve, so will the consumers confidence in spending. People will get out more and inevitably spend more on other expenditures including dining out.
Stocks
The market normally dictates stock prices. In the consumer service industry, it has been no different. Ruby Tuesday stock prices fluctuated with the market. The market took a big hit in 2001 with the events of 911 but has constantly been on the rise since.