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EX-10.3 - PLEDGE AGREEMENT WITH REVOLVING CREDIT AGREEMENT, DATED MAY 26, 2017 AMONG RUBY - RUBY TUESDAY INCex10-3.htm
EX-32.2 - EXHIBIT 32.2 SECTION 906 CERTIFICATION FOR CFO - RUBY TUESDAY INCex32-2.htm
EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATION FOR CEO - RUBY TUESDAY INCex32-1.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CERTIFICATION FOR CFO - RUBY TUESDAY INCex31-2.htm
EX-31.1 - EXHIBIT 31.1 SECTION 302 CERTIFICATION FOR CEO - RUBY TUESDAY INCex31-1.htm
EX-23.1 - CONSENT OF KPMG - RUBY TUESDAY INCex23-1.htm
EX-21.1 - EXHIBIT 21.1 - RUBY TUESDAY INCex21-1.htm
EX-12.1 - COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES - RUBY TUESDAY INCex12-1.htm
EX-10.5 - EXHIBIT 10.5 OFFER LETTER, DATED AS OF APRIL 4, 2017, BY AND BETWEEN RUBY TUESDA - RUBY TUESDAY INCex10-5.htm
EX-10.4 - LOAN MODIFICATION AGREEMENT DATED MAY 25, 2017 AMONG RUBY TUESDAY, INC. AND THE - RUBY TUESDAY INCex10-4.htm
EX-10.2 - SECURITY AGREEMENT WITH REVOLVING CREDIT AGREEMENT, DATED MAY 26, 2017 AMONG RUB - RUBY TUESDAY INCex10-2.htm
EX-10.1 - REVOLVING CREDIT AGREEMENT, DATED MAY 26, 2017 AMONG RUBY TUESDAY, INC. AND UBS - RUBY TUESDAY INCex10-1.htm

 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: June 6, 2017

 

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.)

 

333 East Broadway Avenue, Maryville, Tennessee 37804
(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, emerging growth company, 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 ☐

         Emerging growth company ☐     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

 

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 November 29, 2016 was $184,147,115 based on the closing stock price of $3.04 on November 29, 2016.

 

The number of shares of common stock outstanding as of August 16, 2017, was 60,943,588.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the registrant’s 2017 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

24-41

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk

41

Item 8.

Financial Statements and Supplementary Data

42-88

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

89

Item 9A.

Controls and Procedures

89

Item 9B.

Other Information

89

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

90

Item 11.

Executive Compensation

90

Item 12.

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

90

Item 13.

Certain Relationships and Related Transactions, and Director Independence

90

Item 14.

Principal Accounting Fees and Services

90

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

91

Signatures

 

92

 

 

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.

 

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. 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 June 6, 2017, we had 22 Ruby Tuesday concept franchisees, comprised of five domestic and 17 international franchisees. We have signed agreements for the development of new franchised Ruby Tuesday restaurants with seven of the international franchisees. These seven international franchisees hold rights as of June 6, 2017 to develop Ruby Tuesday restaurants in 16 countries.

 

 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 June 6, 2017, we owned and operated 543, and franchised 62, Ruby Tuesday restaurants. Of the 62 franchised Ruby Tuesday restaurants, 17 were operated by our domestic franchisees and 45 were operated by our international franchisees. Ruby Tuesday restaurants can be found in 41 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.”

 

 

Ruby Tuesday restaurants offer a wide variety of menu options, including handcrafted classic burgers made with 100% USDA choice beef, fresh chicken options, our signature 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 55 fresh, high quality salad ingredients, our Garden Bar exemplifies our key brand attributes of variety, 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. 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.

 

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 our same-restaurant sales, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:

 

Review of Strategic Alternatives

On March 13, 2017, we announced that our Board of Directors had authorized an exploration of  strategic alternatives in order to maximize shareholder value.  We are considering all strategic alternatives including, but not limited to, a potential sale or merger of the Company, and have retained a financial advisor to assist in the process.  The strategic alternatives process is ongoing and entering its final phase. 

 

Fresh Start Initiatives

In August 2016, we announced the launch of our Fresh Start initiatives which are intended to streamline our organization, improve financial profitability and ultimately create long-term value for our shareholders. The Fresh Start initiatives were developed to drive more significant top line growth and profitability over time.  The key components of the Fresh Start initiatives include:

 

 

A new menu which is intended to provide culinary innovation and value to our guests while simplifying recipes and procedures for our kitchen. As consumer preference continues to migrate toward healthier food options, we will continue to make meaningful improvements in our core menu that will incorporate hand-crafted American favorites but will contain more lean proteins and fresh vegetables.

 

A new Garden Bar which we restaged and improved to offer over 50 items in order to provide more desirable offering in a cost effective way. The Garden Bar is a key brand differentiator that we believe sets us apart from our competition and is the most important item on our menu. Approximately half our guests utilize the Garden Bar when they dine with us, either as an add-on or as a main course.

 

A Fresh New Experience which is focused on revitalizing our brand through improving our service and overall guest experience. As part of our work in this area, we completed 13 store remodels in two test markets. Additionally, we are working with our teams at the restaurant level with service initiatives to improve the pace of meals and attentiveness, particularly through menu simplification. We have placed a hold on further remodels while measuring the combined results from our new menu, new Garden Bar, and Fresh New Experience.

 

 

Franchising
As previously noted, as of June 6, 2017, we had franchise arrangements with 22 franchise groups which operate Ruby Tuesday restaurants in 11 states, Guam, and 14 foreign countries. Our Ruby Tuesday franchisees opened two Ruby Tuesday restaurants in fiscal year 2017, five restaurants in fiscal year 2016, and six restaurants in fiscal year 2015.

 

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. Additionally, under the terms of the franchise agreements, we also require all domestic Ruby Tuesday concept franchisees to pay a national advertising fee of up to 3% of monthly gross sales to cover their pro rata portion of the costs associated with our national advertising campaigns.  As of June 6, 2017 this national advertising fee was 1.5% of monthly gross sales.

 

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.

 

 

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 8% of our total restaurants as of June 6, 2017, 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, promotions, 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, food safety, citizenship, and fair labor standards.

 

 

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
We are subject to a variety of federal, state and local environmental laws and regulations that have been enacted or adopted, including those regulating the discharge of hazardous and other materials into the environment, or otherwise relating to the protection of the environment. Compliance with these laws and regulations has not had and is not expected to have a material effect on our capital expenditures, earnings or competitive position.

 

Personnel
As of June 6, 2017, we employed approximately 25,000 employees, including approximately 200 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, Governance Committee Charter, Code of Business Conduct and Ethics, Corporate Governance Guidelines, and Whistleblower Policy are available on our 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, 333 East Broadway Avenue, Maryville, Tennessee 37804.

 

 

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 1, 2017, is provided below.

 

Name

Age

Position

 

 

 

James F. Hyatt, II 

61

President and Chief Executive Officer

Sue Briley

54

Chief Financial Officer

Mike K. Ellis

55

Chief Development Officer

Rhonda J. Parish

61

Chief Legal Officer and Secretary

David W. Skena

47

Chief Marketing Officer

Thomas A. Williams

55

Chief People Officer

 

Mr. Hyatt joined the Company in April 2017 as President and Chief Executive Officer.  Prior to joining the Company, Mr. Hyatt served as Chief Executive Officer of Church's Chicken from September 2011 to November 2016 and remains a member of its Board of Directors.  Prior to Church's Chicken, Mr. Hyatt served as President and Chief Executive Officer of Cosi, Inc. from September 2007 through September 2011.  Prior to Cosi, Inc., Mr. Hyatt spent 31 years with Burger King Corporation, including serving as Executive Vice President and Chief Operations Officer responsible for over 13,000 restaurants, after 11 years as one of the company's most successful multi-unit franchisees.

 

Ms. Briley joined the Company in July 2014 and was named Chief Financial Officer in September 2016.  Ms. Briley served as Interim Chief Financial Officer from June 2016 to September 2016 and 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 Restaurants, Inc. 

 

Mr. Ellis joined the Company in February 2016 as Chief Development Officer, assuming additional duties for oversight of the Company's supply chain in March 2017.  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 Restaurants, Inc.

 

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.

 

 

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 cannot assure you that our exploration of strategic alternatives will result in a transaction or that any such transaction would be successful, and the process of exploring strategic alternatives or its conclusion could adversely impact our business and our stock price.

 

On March 13, 2017, we announced that our Board of Directors had authorized an exploration of  strategic alternatives in order to maximize shareholder value.  We are considering all strategic alternatives including, but not limited to, a potential sale or merger of the Company, and have retained a financial advisor to assist in the process.  The strategic alternatives process is ongoing and entering its final phase. 

 

There can be no assurances that the strategic alternatives process will result in the announcement or consummation of any strategic transaction, or that any resulting plans or transactions will yield additional value for shareholders.  Any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with the Company and the availability of financing to potential buyers on reasonable terms. 

 

The process of exploring strategic alternatives could adversely impact our business, financial condition and results of operations.  We have incurred costs related to the strategic alternatives process of $3.3 million during fiscal year 2017 and have spent an additional $0.4 million during the first two months of fiscal year 2018.  We could continue to incur substantial expenses associated with identifying and evaluating potential strategic alternatives, including those related to employee retention payments, equity compensation, severance pay and legal, accounting and financial advisory fees.  In addition, the process may be time consuming and disruptive to our business operations, could divert the attention of management and the Board of Directors from our  business, could negatively impact the Company’s ability to attract, retain and motivate key employees, and could expose us to potential litigation in connection with this process or any resulting transaction.  The public announcement of a strategic alternative may also yield a negative impact on operating results if prospective or existing service providers are reluctant to commit to new or renewal contracts or if existing customers decide to shift their business to a competitor.

 

Further, we do not intend to disclose detailed developments or provide regular updates on the progress or status of the strategic alternatives process until our Board of Directors deems further disclosure is appropriate or required.  Accordingly, speculation regarding any developments related to the review of strategic alternatives and perceived uncertainties related to the future of our Company could cause our stock price to fluctuate significantly.

 

Our business could be negatively affected as a result of the actions of activist shareholders.

Publicly traded companies have increasingly become subject to campaigns by activist investors advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases or even sales of assets or the entire company. It is possible that activist shareholders may attempt to effect such changes or acquire control over the Board of Directors. Responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, disrupt our operations and divert the attention of our Board of Directors and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of the Board of Directors may lead to the perception of a change in the direction of the business, instability or lack of continuity.  This may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel.

 

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

 

We are in the process of executing strategic initiatives which are designed to address our sales and operational challenges, improve financial profitability, and enhance long-term value for our shareholders.  We believe the execution of these initiatives provides opportunities for increased same-restaurant customer counts, sales growth, and increased shareholder value.  These initiatives involve numerous risks, and we may not be able to maintain the brand relevance and restaurant operating excellence required to achieve sustainable growth objectives. 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 the strategic initiatives related to our brand transformation.

 

Competition may adversely affect our operations and financial results.

 

The restaurant industry is intensely competitive with respect to prices, services, convenience, locations, employees, advertising, promotions, 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.

 

 

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

 

Our success 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 2017, 2016, and 2015 are discussed in Note 7 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 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 can 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.

 

 

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 concept is a key factor in the success of our business. Actual or alleged incidents at any of our restaurants could result in harmful 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 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 to accept employment in the United States.  They also include the Patient Protection and Affordable Care Act of 2010 which mandates minimum employee health coverage;

 

 

 

Building, zoning, land use, environmental, and other laws and 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 federal, state, local, and international 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, which could effectively impose new or increased costs on the Company or its suppliers, who may pass the increased costs 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 could affect 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.

 

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.

 

 

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 June 6, 2017, we had $213.7 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 and debt service 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 May 2017 364-day senior secured 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;

 

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 certain or substantially all of our assets; and

 

enter into transactions with affiliates.

     

Additionally, the agreement governing the Senior Credit Facility and our mortgage loan obligations require us to maintain minimum appraised value of eligible restaurants and a maximum leverage financial ratio. A breach of any of these covenants could result in a default under the indenture, the Senior Credit Facility, and our mortgage loan obligations 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.

 

 

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.

 

 

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.

 

Ability to Issue Preferred Stock

 

The Board of Directors, pursuant to the Company's Certificate of Incorporation, has the authority to issue 250,000 shares of preferred stock in one or more series. The Board of Directors has the power to establish the dividend rates, rights of conversion and redemption, liquidation prices, and other terms or conditions of such preferred stock. This preferred stock may be issued at the discretion of the Board of Directors with preferences over shares of our common stock in a manner that is materially dilutive to shareholders. In addition, blank check preferred stock can be used to create a shareholder rights plan, or "poison pill", which is designed to deter a hostile bidder from buying a controlling interest in our stock. While we have not adopted such a "poison pill" or issued any preferred stock as of the date of this filing, the Board of Directors has the ability to do so in the future, very rapidly and without stockholder approval.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Information regarding the locations of our restaurants is shown in the list below. Of the 543 Company-owned and operated Ruby Tuesday concept restaurants as of June 6, 2017, we owned the land and buildings for 269 restaurants, owned the buildings and held non-cancelable long-term land leases for 205 restaurants, and held non-cancelable leases covering land and buildings for 69 restaurants. Our Restaurant Support Services Center in Maryville, Tennessee, which was opened in fiscal year 1998, consists of one office building 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.

 

 

The following table lists the locations of the Company-owned and franchised Ruby Tuesday restaurants as of June 6, 2017.

 

 

Number of Ruby Tuesday Restaurants

State

Company

 

Franchise

 

Total

 

 

 

 

 

 

Domestic:

 

 

 

 

 

Alabama

32

 

 

32

Arizona

4

 

 

4

Arkansas

3

 

 

3

Colorado

5

 

 

5

Connecticut

10

 

 

10

Delaware

5

 

 

5

Florida

63

 

1

 

64

Georgia

42

 

 

42

Illinois

3

 

 

3

Indiana

11

 

 

11

Iowa

1

 

2

 

3

Kentucky

7

 

 

7

Louisiana

2

 

 

2

Maine

7

 

 

7

Maryland

23

 

 

23

Massachusetts

6

 

 

6

Michigan

19

 

1

 

20

Minnesota

4

 

 

4

Mississippi

7

 

 

7

Missouri

20

 

 

20

Nebraska

5

 

 

5

Nevada

1

 

 

1

New Hampshire

3

 

 

3

New Jersey

20

 

1

 

21

New Mexico

 

1

 

1

New York

20

 

 

20

North Carolina

49

 

 

49

North Dakota

 

4

 

4

Ohio

26

 

 

26

Oklahoma

 

1

 

1

Pennsylvania

35

 

 

35

Rhode Island

2

 

 

2

South Carolina

29

 

 

29

South Dakota

 

4

 

4

Tennessee

26

 

 

26

Texas

1

 

 

1

Virginia

43

 

 

43

West Virginia

8

 

 

8

Wisconsin

1

 

1

 

2

Wyoming

 

1

 

1

Total Domestic

543

 

17

 

560

 

 

 

Number of Ruby Tuesday Restaurants

Country

Company

 

Franchise

 

Total

 

 

 

 

 

 

International:

 

 

 

 

 

Canada

 

1

 

1

Chile

 

8

 

8

Egypt

 

3

 

3

El Salvador

 

1

 

1

Guam*

 

1

 

1

Hawaii*

 

5

 

5

Honduras

 

1

 

1

Hong Kong

 

6

 

6

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

 

45

 

45

 

543

 

62

 

605

 

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

 

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.

 

 

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 2017 and 2016.

 

Fiscal Year Ended June 6, 2017

 

Fiscal Year Ended May 31, 2016

 

 

 

Per Share

 

 

 

 

Per Share

 

 

 

Cash

 

 

 

 

Cash

Quarter

High

Low

Dividends

 

Quarter

High

Low

Dividends

First

$4.22

$2.94

--

 

First

$7.54

$6.10

--

Second

$3.25

$2.08

--

 

Second

$6.92

$5.10

--

Third

$3.68

$1.80

--

 

Third

$5.74

$4.52

--

Fourth

$2.88

$1.73

--

 

Fourth

$5.63

$3.80

--

As of August 16, 2017, there were approximately 2,243 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 June 6, 2017:

 

 

 

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 

 

per share

 

announced plans or programs (1)

 

under the plans or programs (1)

 

 

 

 

 

 

 

 

 

 

 

March 1 to April 4

 

 

 

 

9,884,829

 

April 5 to May 2

 

 

 

 

9,884,829

 

May 3 to June 6

 

 

 

 

9,884,829

 

Total

 

 

 

 

 

 

 

(1) As of June 6, 2017, 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.

 

 

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 June 5, 2012 and that all dividends were reinvested.

 

 

 

 

   

06/05/2012

   

06/04/2013

   

06/03/2014

   

06/02/2015

   

05/31/2016

   

06/06/2017

 

Ruby Tuesday, Inc.

  $ 100.00     $ 139.71     $ 113.09     $ 90.59     $ 57.06     $ 33.82  

NYSE Composite Index

  $ 100.00     $ 130.55     $ 154.77     $ 163.18     $ 158.03     $ 181.43  

Peer Group Index (SIC 5812 – Eating Places)

  $ 100.00     $ 115.75     $ 128.89     $ 138.57     $ 151.11     $ 187.72  

 

 

Item 6. Selected Financial Data

 

Summary of Operations

(In thousands except per-share data)

 

 

 

 

 

 

 

Fiscal Year

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales and operating revenue

 

$

948,403

 

 

$

1,085,034

 

 

$

1,120,142

 

 

$

1,162,423

 

 

$

1,245,226

 

 

Franchise revenue

 

 

3,568

 

 

 

6,194

 

 

 

6,424

 

 

 

6,323

 

 

 

6,261

 

 

Total revenue

 

$

951,971

 

 

$

1,091,228

 

 

$

1,126,566

 

 

$

1,168,746

 

 

$

1,251,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

$

 (107,856

)

 

$

(52,862

)

 

$

(5,105

)

 

$

(69,575

)

 

$

(21,934

)

 

(Benefit)/provision for income taxes from continuing operations

 

 

(1,716

)

 

 

(2,180

)

 

 

(1,911

)

 

 

(4,665

)

 

 

1,500

 

 

Loss from continuing operations

 

 

(106,140

)

 

 

(50,682

)

 

 

(3,194

)

 

 

(64,910

)

 

 

(23,434

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

 

 

564

 

 

 

(15,979

)

 

Net loss

 

$

(106,140

)

 

$

(50,682

)

 

$

(3,194

)

 

$

(64,346

)

 

$

(39,413

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(1.76

)

 

$

(0.83

)

 

$

(0.05

)

 

$

(1.08

)

 

$

(0.38

)

 

Income/(loss) from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

0.01

 

 

 

(0.27

)

 

Net loss per share

 

$

(1.76

)

 

$

(0.83

)

 

$

(0.05

)

 

$

(1.07

)

 

$

(0.65

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(1.76

)

 

$

(0.83

)

 

$

(0.05

)

 

$

(1.08

)

 

$

(0.38

)

 

Income/(loss) from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.01

 

 

 

(0.27

)

 

Net loss per share

 

$

(1.76

)

 

$

(0.83

)

 

$

(0.05

)

 

$

(1.07

)

 

$

(0.65

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

60,139

 

 

 

60,871

 

 

 

60,580

 

 

 

60,231

 

 

 

61,040

 

 

Diluted

 

 

60,139

 

 

 

60,871

 

 

 

60,580

 

 

 

60,231

 

 

 

61,040

 

 

 

Fiscal year 2017 includes 53 weeks.  Fiscal years 2016, 2015, 2014, and 2013 each include 52 weeks.  The extra week in fiscal year 2017 added $15.7 million to revenue and $0.02 to diluted earnings per share.

 

 

           

Fiscal Year

 
   

2017

   

2016

   

2015

   

2014

   

2013

 

Other Data

                                       

Cash dividends per share of common stock

  $     $     $     $     $  

Number of Company-owned Ruby Tuesday restaurants

    543       646       658       668       706  

Company-owned Ruby Tuesday same- restaurant sales decrease

    (3.1

)%

    (1.4

)%

    (0.5

)%

    (5.3

)%

    (1.0

)%

Number of Company-owned Lime Fresh restaurants

          2       19       20       18  
                                         

Balance Sheet Data (at year end):

                                       

Total assets

  $ 723,642     $ 837,917     $ 925,452     $ 951,697     $ 1,037,283  

Long-term debt and capital leases, less current maturities

  $ 213,341     $ 213,803     $ 231,017     $ 249,831     $ 285,332  

Shareholders’ equity

  $ 307,366     $ 407,780     $ 465,583     $ 461,209     $ 516,835  
                                         

Statement of Operations Data:

                                       

Closures and impairments, net (a)

  $ 69,808     $ 64,680     $ 10,542     $ 33,686     $ 14,656  

Goodwill impairments

  $     $     $     $     $ 14,058  

Interest expense, net

  $ 20,855     $ 21,764     $ 22,735     $ 24,945     $ 26,576  
                                         

Cash Flow Data:

                                       

Net cash (used in)/provided by:

                                       

Operating activities

  $ (18,934

)

  $ 39,780     $ 55,054     $ 45,375     $ 35,954  

Investing activities

  $ 6,687     $ (19,755

)

  $ (17,497

)

  $ (6,203

)

  $ 22,113  

Financing activities

  $ (13,003

)

  $ (28,352

)

  $ (13,409

)

  $ (40,753

)

  $ (53,344

)

Purchases of property and equipment

  $ 33,509     $ 34,427     $ 31,010     $ 28,339     $ 37,117  

 

(a) See Note 7 to the Consolidated Financial Statements for a description of closures and impairments expenses, including impairment of the Lime Fresh trademark, in fiscal years 2017, 2016, and 2015.

 

 

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 June 6, 2017, we owned and operated 543 Ruby Tuesday restaurants located in 35 states. Our franchisees operated 17 domestic and 45 international Ruby Tuesday restaurants in 11 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 was designed to streamline the organization through asset rationalization, improve financial profitability, and ultimately create long-term value for shareholders. The approved closures, which included mall, in line, and freestanding sites, encompassed restaurants spread throughout all of the geographic regions in which we operate. Of the restaurants closed, approximately two-thirds were operated on leased properties and approximately one-third were 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 included additional charges for impairment, estimated lease settlement costs, severance benefits, inventory write-offs, and other costs related to the 95 restaurant closures.

 

Our same-restaurant sales for Company-owned Ruby Tuesday restaurants decreased 3.1% in fiscal year 2017 compared to fiscal year 2016, and our diluted loss per share was ($1.76) in fiscal year 2017 compared to diluted loss per share of ($0.83) in fiscal year 2016. Throughout this MD&A, we discuss our fiscal year 2017, 2016 and 2015 financial results , 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.

 

 

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:

 

Review of Strategic Alternatives

On March 13, 2017, we announced that our Board of Directors had authorized an exploration of  strategic alternatives in order to maximize shareholder value.  We are considering all strategic alternatives including, but not limited to, a potential sale or merger of the Company, and have retained a financial advisor to assist in the process.  The strategic alternatives process is ongoing and entering its final phase. 

 

Fresh Start Initiatives

In August 2016, we announced the launch of our Fresh Start initiatives which are intended to streamline our organization, improve financial profitability and ultimately create long-term value for our shareholders. The Fresh Start initiatives were developed to drive more significant top line growth and profitability over time.  The key components of the Fresh Start initiatives include:

 

 

A new menu which is intended to provide culinary innovation and value to our guests while simplifying recipes and procedures for our kitchen. As consumer preference continues to migrate toward healthier food options, we will continue to make meaningful improvements in our core menu that will incorporate hand-crafted American favorites but will contain more lean proteins and fresh vegetables.

 

A new Garden Bar which we restaged and improved to offer over 50 items in order to provide more desirable offering in a cost effective way. The Garden Bar is a key brand differentiator that we believe sets us apart from our competition and is the most important item on our menu. Approximately half our guests utilize the Garden Bar when they dine with us, either as an add-on or as a main course.

 

A Fresh New Experience which is focused on revitalizing our brand through improving our service and overall guest experience. As part of our work in this area, we completed 13 store remodels in two test markets. Additionally, we are working with our teams at the restaurant level with service initiatives to improve the pace of meals and attentiveness, particularly through menu simplification.  We have placed a hold on further remodels while measuring the combined results from our new menu, new Garden Bar, and Fresh New Experience.

 

The Asset Rationalization Plan involved a comprehensive restaurant-level review and analysis of the sales, cash flows and other key performance metrics of our corporate-owned restaurant properties, as well as site location, market positioning and lease status. Based upon our findings, we concluded that it was in the Company's and our shareholders' best interest to close 95 underperforming restaurants during the first quarter of fiscal year 2017.

 

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 key components of our Fresh Start initiatives. In fiscal year 2017, as a result of our Asset Rationalization Plan, we experienced fluctuations in cash balances.  We generated cash through the sale of surplus properties while using cash to settle leases for closed restaurants. Additionally, from time to time, we consider other options for cash such as reducing outstanding debt levels and share repurchases within the limitations of our debt covenants. 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.

 

This “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 continually evaluate the information used to make these estimates as our business and the economic environment changes.

 

 

Our fiscal year ends on the first Tuesday following May 30.  Once every five or six years, we have 53 week year.  Fiscal 2017 was a 53 week year.  All other years discussed throughout this MD&A section contained 52 weeks.  In fiscal year 2017, the 53rd week added $15.7 million to restaurant sales and operating revenue and $0.02 to diluted earnings per share in our Consolidated Statement of Operations and Comprehensive Loss.  We remind you that, in order to best obtain an understanding of the significant factors that influenced our performance during the last three fiscal years, this MD&A section should be read in conjunction with the Consolidated Financial Statements and related Notes. 

 

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 2015 through fiscal year 2017:

 

 

 

 

International

 

Fiscal Year

Company-Owned

Domestic Franchise

 Franchise

Total

2017

543

17

45

605

2016

646

27

51

724

2015

658

29

49

736

 

Lime Fresh Restaurants
The table below presents the number of other concept restaurants at each fiscal year end from fiscal year 2015 through fiscal year 2017:

 

Fiscal Year

Company-Owned

Franchise

Total 

2017

2016

2

2

2015

19

7

26

 

During fiscal year 2017:

 

 

Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 3.1%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 0.6%;

 

Eight Company-owned Ruby Tuesday restaurants were closed as expected at, or near, lease expiration;

 

Two franchised Ruby Tuesday restaurants were opened and 18 were closed;

 

Two Company-owned Lime Fresh restaurants were closed;

 

95 Company-owned Ruby Tuesday restaurants were closed in connection with our Fresh Start initiatives, which resulted in additional closed restaurant lease reserves, inventory write-offs, severance benefits, and other closing expenses of $31.5 million;

 

Paid $11.1 million of principal payments on long-term debt, including $9.6 million related to two mortgage loan obligations that had balloon payments due during the third quarter of fiscal 2017;

 

On April 4, 2017, James F. Hyatt, II was appointed President and Chief Executive Officer of the Company, replacing F. Lane Cardwell, Jr.  Mr. Hyatt also serves on the Board of Directors; and 

 

On September 13, 2016, James J. Buettgen resigned as Chairman of the Board of Directors, President, and Chief Executive Officer of the Company.  On that same date, F. Lane Cardwell, Jr., a member of the Company's Board of Directors since October 2012 and an executive with approximately 38 years of leadership experience in the restaurant industry, was appointed Interim President and Chief Executive Officer.  Sue Briley, who had been serving as Interim Chief Financial Officer since June 2016, was appointed Chief Financial Officer on September 13, 2016. 

 

 

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 closing of 95 Company-owned restaurants during first quarter of fiscal year 2017, 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 the remaining two were closed and transferred to the buyer during fiscal year 2017. 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; and

 

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.

  

* 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 2017 decreased 12.6% from fiscal year 2016 for Company-owned restaurants and decreased 42.4% 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)

 

2017

  $ 947.4     $ 135.6     $ 1.0     $  

2016

    1,070.7       162.4       14.4       15.3  

2015

    1,100.7       171.7       19.4       15.3  

 

 

(a)

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

 

Other Revenue Information:

 

   

2017

   

2016

   

2015

 

Company restaurant sales (in thousands)

                       

Ruby Tuesday concept

  $ 947,403     $ 1,070,679     $ 1,100,702  

Lime Fresh concept

    1,000       14,355       19,440  

Total restaurant sales

  $ 948,403     $ 1,085,034     $ 1,120,142  

Company restaurant sales growth-percentage

    (12.6

)%

    (3.1

)%

    (3.6

)%

 

 

   

2017

   

2016

   

2015

 

Franchise revenue (in thousands)

                       

Ruby Tuesday concept

  $ 3,568     $ 5,286     $ 5,602  

Lime Fresh concept

          908       822  

Total franchise revenue (a)

  $ 3,568     $ 6,194     $ 6,424  

Franchise revenue growth-percentage

    (42.4

)%

    (3.6

)%

    1.6

%

                         

Total revenue (in thousands)

                       

Ruby Tuesday concept

  $ 950,971     $ 1,075,965     $ 1,106,304  

Lime Fresh concept

    1,000       15,263       20,262  

Total revenue

  $ 951,971     $ 1,091,228     $ 1,126,566  

Total revenue growth-percentage

    (12.8

)%

    (3.1

)%

    (3.6

)%

  

   

2017

   

2016

   

2015

 

Ruby Tuesday concept same-restaurant sales growth percentage

    (3.1

)%

    (1.4

)%

    (0.5

)%

                         

Company average unit volumes (in millions)

  $ 1.66     $ 1.64     $ 1.66  

Company average unit volumes growth percentage

    1.2

%

    (1.3

)%

    (0.1

)%

 

 

(a)

Franchise revenue includes royalty, license, and development fees, but is exclusive of support service fees of  $0.9 million and $1.3 million, in fiscal years 2016 and 2015, respectively, which are recorded as an offset to general and administrative expenses.  We discontinued franchise support service programs during fiscal year 2016.  Therefore, there were no support service fees during fiscal year 2017.

 

Restaurant sales and operating revenue for the fiscal year ended June 6, 2017 decreased 12.6% to $948.4 million compared to the prior fiscal year. This decrease is primarily a result of restaurant closings since the prior fiscal year, 95 of which were closed during first quarter of fiscal year 2017 in connection with our Asset Rationalization Plan as discussed previously in this MD&A, coupled with a 3.1% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants. The decrease in Ruby Tuesday concept same-restaurant sales is primarily attributable to a decline in customer traffic offset by a slight increase in net check.  The 95 restaurants that closed during the first quarter of fiscal year 2017 generated $22.8 million in revenue for the current fiscal year and $116.5 million in revenues during fiscal year 2016. In fiscal year 2017 the 53rd week added $15.7 million in sales and operating revenue in our Consolidated Statement of Operations.

 

Two Lime Fresh restaurants with $1.0 million of sales were closed and transferred to the buyer during fiscal year 2017.  As previously discussed within this MD&A, during the last 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 May 31, 2016 decreased 2.7% to $1,070.7 million compared to fiscal year 2015. This decrease is primarily a result of restaurant closings since fiscal year 2015 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 since fiscal year 2015.

 

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 fiscal year 2016 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.

 

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 are generally 4.0% of monthly sales.  Franchise revenue decreased 42.4% to $3.6 million in fiscal year 2017 and decreased 3.6% to $6.2 million in fiscal year 2016. Franchise revenue is predominantly comprised of domestic and international royalties.  The decrease in franchise revenue for fiscal year 2017 was primarily due to franchise restaurant closures.

 

 

Total franchise restaurant sales are shown in the table below.

 

   

2017

   

2016

   

2015

 

Franchise restaurant sales (in thousands)

                       

Ruby Tuesday concept

  $ 135,579     $ 162,401     $ 171,668  

Lime Fresh concept

          15,310       15,338  

Total franchise restaurant sales (a)

  $ 135,579     $ 177,711     $ 187,006  

Franchise restaurant sales growth-percentage

    (23.7

)%

    (5.0

)%

    5.8

%

 

(a)

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

 

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.

 

   

2017

   

2016

   

2015

 

Restaurant sales and operating revenue

    99.6

%

    99.4

%

    99.4

%

Franchise revenue

    0.4       0.6       0.6  

Total revenue

    100.0       100.0       100.0  

Operating costs and expenses:

                       

Cost of goods sold (1)

    28.3       27.5       27.3  

Payroll and related costs (1)

    35.7       34.5       34.2  

Other restaurant operating costs (1)

    21.0       21.2       21.6  

Depreciation and amortization (1)

    4.4       4.7       4.7  

General and administrative expenses

    7.0       5.3       5.9  

Marketing expenses, net

    5.7       4.7       4.4  

Closures and impairments, net

    7.3       5.9       0.9  

Gain on sales of Lime Fresh Mexican Grill assets

          (0.5

)

     

Interest expense, net

    2.2       2.0       2.0  

Total operating costs and expenses

    111.3       104.8       100.5  

Loss before income taxes

    (11.3

)

    (4.8

)

    (0.5

)

Benefit for income taxes

    (0.2

)

    (0.2

)

    (0.2

)

Net loss

    (11.1

)%

    (4.6

)%

    (0.3

)%

 

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

 

Pre-tax Loss 

Pre-tax loss increased $55.0 million from fiscal year 2016 to $107.9 million for the fiscal year ended June 6, 2017.  The increase in pre-tax loss is due primarily to higher closures and impairments expense ($5.1 million), a decrease in same-restaurant sales of 3.1% at Company-owned Ruby Tuesday restaurants, and an increase, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of costs of goods sold, payroll and related costs, general and administrative expenses, and marketing expenses, net. These were partially offset by a decrease in interest expense, net ($0.9 million) and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of other restaurant operating costs and depreciation and amortization. 

 

 

Pre-tax loss 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.

 

In the paragraphs that follow, we discuss in more detail the components of the changes in pre-tax loss for fiscal years ended June 6, 2017 and May 31, 2016 as compared to the comparable prior fiscal 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 fiscal year.

 

Cost of Goods Sold
Cost of goods sold decreased $29.9 million (10.0%) from the prior fiscal year to $268.6 million for the fiscal year ended June 6, 2017. As a percentage of restaurant sales and operating revenue, cost of goods sold increased from 27.5% to 28.3%.  Excluding the $26.9 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, cost of goods sold decreased $3.0 million.

 

The absolute dollar decrease in cost of goods sold for the fiscal year ended June 6, 2017 not attributable to the closing of 95 restaurants was primarily the result of other restaurant closures, a decline in same-restaurant sales, and commodities deflation since the prior fiscal year. 

 

As a percentage of restaurant sales and operating revenue, the increase in cost of goods sold for the fiscal year ended June 6, 2017 is primarily the result of a shift in menu mix driven by changes to our core menu and promotional activity. 

 

Cost of goods sold decreased $6.8 million (2.2%) from fiscal year 2015 to $298.5 million for the fiscal 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 fiscal 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 fiscal year 2015 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 fiscal year ended May 31, 2016 is primarily the result of price increases on certain commodity items and a shift in menu mix since fiscal year 2015 as discussed above.

 

Payroll and Related Costs
Payroll and related costs decreased $35.6 million (9.5%) from the prior fiscal year to $338.9 million for the fiscal year ended June 6, 2017. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 34.5% to 35.7%.  Excluding the $38.4 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, payroll and related costs increased $2.8 million.

 

The absolute dollar increase in payroll and related costs for the fiscal year ended June 6, 2017 not attributable to the closing of 95 restaurants was primarily due to wage inflation, which was partially offset by lower health insurance due to favorable claims experience.  

 

As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the fiscal year ended June 6, 2017 is primarily the result wage inflation and loss of leveraging associated with lower sales volumes.

 

Payroll and related costs decreased $8.7 million (2.3%) from fiscal year 2015 to $374.6 million for the fiscal 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 fiscal 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 fiscal year 2015. 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 fiscal year ended May 31, 2016 is primarily the result of wage inflation and loss of leveraging associated with lower sales volumes.

 

Other Restaurant Operating Costs
Other restaurant operating costs decreased $30.8 million (13.4%) from the prior fiscal year to $198.7 million for the fiscal year ended June 6, 2017. As a percentage of restaurant sales and operating revenue, other restaurant operating costs decreased from 21.2% to 21.0%. Excluding the $26.0 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, other restaurant operating costs decreased $4.8 million.

 

For the fiscal year ended June 6, 2017, the decrease in other restaurant operating costs not attributable to the 95 restaurant closings related to the following (in thousands):

 

Rent and leasing

  $ 4,748  

Repairs

    866  

Utilities

    391  

Other decreases, net

    331  

Supplies

    (1,543

)

Net decrease

  $ 4,793  

 

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the fiscal year ended June 6, 2017, the decrease was a result of lower rent and leasing, building repairs, and utilities due primarily to restaurant closures other than the 95 that closed as part of our Asset Rationalization Plan since the prior fiscal year.  These were partially offset by higher supplies expense related to our new Garden Bar rollout.  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 $12.6 million (5.2%) from the prior fiscal year to $229.5 million for the fiscal 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 fiscal 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  

Loss on sale of property and equipment

    (852

)

Net decrease

  $ 12,591  

 

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the fiscal 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 fiscal year 2016. 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.

 

 

Depreciation and Amortization
Depreciation and amortization expense decreased $9.6 million (18.7%) to $41.8 million for the fiscal year ended June 6, 2017, compared to the prior fiscal year. As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 4.7% to 4.4%.  Excluding the $4.7 million dollar decrease attributable to the 95 restaurants closed during the first quarter of fiscal year 2017, depreciation and amortization decreased $4.9 million.

 

The absolute dollar decrease in depreciation and amortization for the fiscal year ended June 6, 2017 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 $1.0 million (2.0%) to $51.4 million for the fiscal year ended May 31, 2016, compared to fiscal year 2015. 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 fiscal 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.

 

General and Administrative Expenses
General and administrative expenses increased $8.8 million (15.2%) from the prior fiscal year to $67.0 million for the fiscal year ended June 6, 2017.

 

The increase for the fiscal year ended June 6, 2017 is primarily due to higher executive severance and share-based compensation expense as a result of the accelerated vesting of share-based awards in connection with departure of our former Chief Executive officer and Ruby Tuesday Concept President, coupled with a forfeiture credit in the prior fiscal year, and a higher accrual for executive bonus.  Additionally, costs associated with strategic alternatives ($3.3 million) and higher legal fees contributed to the increase in general and administrative expense as compared to the prior fiscal year.  These were partially offset by lower management labor and employee pension-related costs.

 

General and administrative expenses decreased $7.7 million (11.7%) from fiscal year 2015 to $58.2 million for the fiscal year ended May 31, 2016.

 

The decrease for the fiscal year ended May 31, 2016 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 former 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. 

 

Marketing Expenses, Net
Marketing expenses, net increased $2.7 million (5.3%) from the prior fiscal year to $54.1 million for the fiscal year ended June 6, 2017.

 

The increase in marketing expenses, net for the fiscal year ended June 6, 2017 is primarily a result of higher television advertising due to advertising associated with our new Garden Bar, higher direct mail and other promotional advertising costs, which were partially offset by decreases in newspaper, magazine, and internet advertising costs since the prior fiscal year.

 

Marketing expenses, net increased $2.0 million (4.1%) from fiscal year 2015 to $51.4 million for the fiscal year ended May 31, 2016.  

 

The increase for fiscal year ended May 31, 2016 is primarily a result of higher internet, magazine, direct mail, and other promotional advertising costs offset by decreases in television advertising. 

 

Closures and Impairments, Net

Closures and impairments, net increased $5.1 million to $69.8 million for the fiscal year ended June 6, 2017, as compared to the prior fiscal year. The $5.1 million increase is primarily due to higher closed restaurant lease reserve expense ($13.9 million), and other closing costs ($9.0 million), which were partially offset by lower property impairment changes ($12.2 million) and higher gains on the sale of surplus properties ($3.6 million).

 

 

As discussed in Note 7 to the Consolidated Financial Statements, during fiscal year 2017, we closed 103 Company-owned Ruby Tuesday restaurants, 95 of which were closed in connection with an Asset Rationalization Plan announced on August 11, 2016. The plan was formulated in response to a comprehensive review of our property portfolio which included the planned closure of restaurants with perceived limited upside due to market concentration, challenged trade areas, or other factors. Included within Closures and impairments, net for the fiscal year ended June 6, 2017 are closed restaurant lease reserves, inventory write-off, severance benefits, and other closing expense of $31.5 million related to these closures in connection with the Asset Rationalization Plan.

 

Closures and impairments, net increased $52.1 million to $64.7 million for the fiscal year ended May 31, 2016, as compared to fiscal year 2015. 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 fiscal 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 Note 7 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 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.

 

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.

 

See Note 7 to the Consolidated Financial Statements for further information on our closures and impairment charges recorded during fiscal years 2017, 2016, and 2015. 

 

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 closed and transferred to the buyer later in fiscal year 2017. The remaining $1.0 million of consideration was received when the remaining restaurant was 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 were 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.

 

 

Interest Expense, Net
Interest expense, net decreased $0.9 million to $20.9 million for the fiscal year ended June 6, 2017, as compared to the prior fiscal year, primarily due to lower interest resulting from the maturities of certain mortgage loans since the prior fiscal year.

 

Interest expense, net decreased $1.0 million to $21.8 million for the fiscal year ended May 31, 2016, primarily due to lower interest expense resulting from early payoff of certain mortgage loans and repurchases of our Senior Notes since fiscal year 2015. 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 fiscal year 2015.

 

Benefit for Income Taxes
We recorded a tax benefit of $1.7 million for the fiscal year ended June 6, 2017, compared to a tax benefit of $2.2 million for the fiscal year ended May 31, 2016. Included in our $2.2 million tax benefit for the fiscal year ended May 31, 2016 was a current benefit of $0.4 million for a net operating loss carryback and $1.5 million deferred benefit to reduce our net deferred tax liability to zero.  Our $1.7 million tax benefit for fiscal year ended June 6, 2017 is primarily a result of the remaining net operating loss carryback to fiscal 2015.

 

We recorded a tax benefit of $2.2 million for the fiscal year ended May 31, 2016, compared to a tax benefit 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 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 $135.9 million and $89.9 million as of June 6, 2017 and May 31, 2016, respectively. Included within our income tax benefit is the expense from the additional valuation allowance of $49.2 million, $28.2 million, and $9.1 million for fiscal years 2017, 2016, and 2015, respectively, representing the amount reserved for the increase in net deferred tax assets during the periods (primarily related to general business credit carryforwards and federal and state net operating loss carryforwards).

 

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 allowance expense, we had an income tax benefit of $50.9 million, $30.4 million, and $11.0 million, including the tax credits, in fiscal years 2017, 2016, and 2015, respectively.

 

 

Liquidity and Capital Resources

 

Sources and Uses of Cash 

The following table presents a summary of our cash flows from operating, investing, and financing activities for the last three fiscal years (in thousands).

 

   

2017

   

2016

   

2015

 

Net cash (used in)/provided by operating activities

  $ (18,934

)

  $ 39,780     $ 55,054  

Net cash provided by/(used in) by investing activities

    6,687       (19,755

)

    (17,497

)

Net cash used in financing activities

    (13,003

)

    (28,352

)

    (13,409

)

                         

Net (decrease)/increase in cash and cash equivalents

  $ (25,250

)

  $ (8,327

)

  $ 24,148  

 

Operating Activities

Our cash (used in) or provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees.  Substantially all of the $948.4 million, $1,085.0 million, and $1,120.1 million of restaurant sales and operating revenue disclosed in our Consolidated Statements of Operations and Comprehensive Loss for fiscal years 2017, 2016, and 2015, respectively, were 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 used in operating activities for fiscal year 2017 was $18.9 million as compared to cash provided of $39.8 million for fiscal 2016. The decrease is primarily the result of lower Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) for reasons discussed in MD&A and decreases in accounts payable, accrued, and other liabilities due to the timing of payments, partially offset by lower cash paid for taxes ($4.2 million), decreases in amounts spent to acquire inventory (approximately $3.1 million),  and lower cash paid for interest ($2.5 million) due to the prepayment of certain of our mortgage obligations and other principal payments on our debt since the prior fiscal year.

 

Cash provided by operating activities for fiscal year 2016 decreased $15.3 million (27.7%) from fiscal year 2015 to $39.8 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).

 

Our working capital and current ratio as of June 6, 2017 was negligible and 1.0:1, respectively.  

  

 

Investing Activities

We require capital principally for the maintenance, upkeep, and remodeling of our existing restaurants, limited new restaurant construction, investments in technology, equipment, and on occasion for the acquisition of franchisees or other restaurant concepts. Property and equipment expenditures purchased primarily with cash on hand, and/or internally-generated cash flows for fiscal years 2017, 2016, and 2015 were $33.5 million, $34.4 million, and $31.0 million, respectively. In addition, proceeds from the disposal of assets produced $34.8 million, $11.7 million, and $11.3 million of cash in fiscal years 2017, 2016, and 2015, respectively, following actions taken to more aggressively market surplus properties in order to pay down debt and, for fiscal years 2017 and 2016 to substantially exit the Lime Fresh Mexican Grill brand.

 

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 under the Senior Credit Facility.

 

Financing Activities

Historically our primary sources of cash have been operating activities, coupled with sales of surplus properties and sale-leaseback transactions.  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 364-day senior secured revolving credit agreement (the “Senior Credit Facility”) under which we may borrow up to $20.0 million, and $4.6 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. We did not repurchase any Senior Notes during the fiscal year ended June 6, 2017.  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. We did not repurchase any Senior Notes during the fiscal year ended June 2, 2015.

 

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 2017 and 2015, we repurchased a minimal number of shares of RTI common stock at an aggregate cost of a negligible amount and $0.1 million, respectively.  During fiscal year 2016, we repurchased 1.9 million shares of RTI common stock at an aggregate cost of $10.1 million. As of June 6, 2017, the total number of shares authorized to be repurchased was 9.9 million. Additionally, there were no dividends paid during fiscal years 2017, 2016, or 2015.

 

 

Significant Contractual Obligations and Commercial Commitments
Long-term financial obligations were as follows as of June 6, 2017 (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)

  $ 4,868     $ 1,535     $ 2,528     $ 587     $ 218  

Senior unsecured notes (a)

    212,546             212,546              

Interest (b)

    50,912       16,600       32,825       133       1,354  

Operating leases (c)

    506,415       41,397       73,606       64,104       327,308  

Purchase obligations (d)

    42,762       27,431       11,586       3,745        

Pension obligations (e)

    34,026       3,839       4,698       13,548       11,941  

Total (f)

  $ 851,529     $ 90,802     $ 337,789     $ 82,117     $ 340,821  

 

 

(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 $2.6 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 $3.9 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 June 6, 2017 (in thousands):

 

   

Payments Due By Period

 
           

Less than

   

1-3

   

3-5

   

More than 5

 
   

Total

   

1 year

   

years

   

years

   

years

 

Letters of credit

  $ 14,795     $ 14,795     $     $     $  

Divestiture guarantees

    6,279       528       1,070       1,072       3,609  

Lease guarantee

    16,386       1,274       2,485       1,911       10,716  

Total

  $ 37,460     $ 16,597     $ 3,555     $ 2,983     $ 14,325  

 

At June 6, 2017, 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 June 6, 2017 to be $6.3 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 June 6, 2017, 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 $0.4 million and $0.5 million in our Consolidated Balance Sheets at June 6, 2017 and May 31, 2016, respectively.

 

 

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 undiscounted future cash flows is less than the carrying value of the restaurant, an impairment loss is measured based on the difference between the estimated fair value of the restaurant and its carrying value. We estimate the fair value of our restaurants based on the highest and best use from the perspective of a market participant. Estimating the fair value of a restaurant requires judgment and includes consideration of discounted future cash flows, third party appraised value, broker opinions of value, and estimates of salvage value. 

 

Based on our experience, restaurants with marginal, sharply declining or negative trailing twelve month cash flows are key indicators of potential impairment.  If a restaurant that has been open for at least six full quarters, that has not previously been impaired to salvage value, demonstrates any of the previously mentioned scenarios under which a potential impairment may exist, we evaluate the plan to reverse declining performance.  Both qualitative and quantitative information are considered when evaluating for potential impairments.  Reacquired franchise rights and favorable leases (amortizable intangible assets), are included in the net book values of our restaurants that are evaluated for potential triggering events, and evaluated for impairment as facts and circumstances dictate.  

 

We recorded impairments to property and equipment of $46.0 million, $58.2 million, and $9.8 million for fiscal years 2017, 2016, and 2015, respectively. Considerable management judgment is necessary to estimate future cash flows and the fair value of our properties.  Accordingly, actual results could vary significantly from quarter to quarter and from our estimates and further impairment charges may occur.  As of June 6, 2017, the Company has 3 restaurants with net book value of $3.0 million, excluding land, that have generated negative trailing twelve month cash flows where no impairment has been recorded due to the fact that the Company expects recovery of the net book value based on estimates of future cash flow from restaurant operations.

 

 

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 $135.9 million and $89.9 million as of June 6, 2017 and May 31, 2016, respectively.  Included within our income tax benefit is the expense from the additional valuation allowance of $49.2 million, $28.2 million, and $9.1 million for fiscal years 2017, 2016, and 2015, respectively.  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.  

 

 

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. 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 June 6, 2017 and May 31, 2016 were $16.2 million and $6.3 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

 

Review of Strategic Alternatives

On March 13, 2017, we announced that our Board of Directors had authorized an exploration of  strategic alternatives in order to maximize shareholder value.  We are considering all strategic alternatives including, but not limited to, a potential sale or merger of the Company, and have retained a financial advisor to assist in the process.  The strategic alternatives process is ongoing and entering its final phase. 

 

There can be no assurances that the strategic alternatives process will result in the announcement or consummation of any strategic transaction, or that any resulting plans or transactions will yield additional value for shareholders.  Any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with the Company and the availability of financing to potential buyers on reasonable terms. 

 

The process of exploring strategic alternatives could adversely impact our business, financial condition and results of operations.  We have incurred costs related to the strategic alternatives process of $3.3 million during fiscal year 2017 and have spent an additional $0.4 million during the first two months of fiscal year 2018.  We could continue to incur substantial expenses associated with identifying and evaluating potential strategic alternatives, including those related to employee retention payments, equity compensation, severance pay and legal, accounting and financial advisory fees.  In addition, the process may be time consuming and disruptive to our business operations, could divert the attention of management and the Board of Directors from our  business, could negatively impact the Company’s ability to attract, retain and motivate key employees, and could expose us to potential litigation in connection with this process or any resulting transaction.  The public announcement of a strategic alternative may also yield a negative impact on operating results if prospective or existing service providers are reluctant to commit to new or renewal contracts or if existing customers decide to shift their business to a competitor. 

 

Further, we do not intend to disclose detailed developments or provide regular updates on the progress or status of the strategic alternatives process until our Board of Directors deems further disclosure is appropriate or required.  Accordingly, speculation regarding any developments related to the review of strategic alternatives and perceived uncertainties related to the future of our Company could cause our stock price to fluctuate significantly.

 

Impact on Cash from Sale of Surplus Properties and Lease Settlements

As further discussed in note 5 to the Consolidated Financial Statements, as of June 6, 2017, we had surplus properties classified as assets held for sale of $12.8 million and surplus properties of $17.1 million not classified as held for sale as we had yet to conclude for accounting purposes that we can sell these assets within 12 months of the balance sheet date.  Additionally, as discussed in Note 7 to the Consolidated Financial Statements, as of June 6, 2017, we had a liability for future lease obligations of $16.2 million.  While we settled three of these leases for $0.2 million since June 6, 2017, the amounts of future settlements could be higher or lower than the amounts recorded, and 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 properties.  During fiscal year 2018, we expect to generate cash through the sale of surplus properties while using cash to settle closed restaurant lease obligations. 

 

 

Financial Strategy and Stock Repurchase Plan

Cash and cash equivalents as of June 6, 2017 were $41.7 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 June 6, 2017, our share repurchases were minimal.  As of June 6, 2017, 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 June 6, 2017, we had no repurchases.  As of the date of this filing, we may repurchase $20.0 million of the Senior Notes during the remainder of fiscal year 2018. 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 June 6, 2017. 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 2018 will contain 52 weeks and end on June 5, 2018.

 

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 results of operations.

 

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, in each case, 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 0.5%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%. The applicable margin for the LIBO rate-based option is 4.0% and for the Base Rate option is 3.0%.  As of June 6, 2017, 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.

 

 

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 June 6, 2017, May 31, 2016, and June 2, 2015

43

 

 

Consolidated Balance Sheets as of June 6, 2017 and May 31, 2016

44

 

 

Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 6, 2017, May 31, 2016, and June 2, 2015

45

 

 

Consolidated Statements of Cash Flows for the Fiscal Years Ended June 6, 2017, May 31, 2016, and June 2, 2015

46

 

 

Notes to Consolidated Financial Statements

47-86

 

 

Reports of Independent Registered Public Accounting Firm

87-88

 

 

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

 
   

June 6,

2017

   

May 31,

2016

   

June 2,

2015

 
                         

Revenue:

                       

Restaurant sales and operating revenue

  $ 948,403     $ 1,085,034     $ 1,120,142  

Franchise revenue

    3,568       6,194       6,424  

Total revenue

    951,971       1,091,228       1,126,566  
                         

Operating costs and expenses:

                       

Cost of goods sold (excluding depreciation and amortization shown below)

    268,622       298,529       305,306  

Payroll and related costs

    338,918       374,561       383,261  

Other restaurant operating costs

    198,696       229,518       242,109  

Depreciation and amortization

    41,779       51,358       52,391  

General and administrative

    67,009       58,191       65,907  

Marketing expenses, net

    54,140       51,436       49,420  

Closures and impairments, net

    69,808       64,680       10,542  

Gain on sales of Lime Fresh Mexican Grill assets

          (5,937

)

     

Interest expense, net

    20,855       21,754       22,735  

Total operating costs and expenses

    1,059,827       1,144,090       1,131,671  
                         

Loss before income taxes

    (107,856

)

    (52,862

)

    (5,105

)

Benefit for income taxes

    (1,716

)

    (2,180

)

    (1,911

)

Net Loss

    (106,140

)

    (50,682

)

    (3,194

)

                         

Other comprehensive income/(loss):

                       

Pension liability reclassification

    2,127       831       (40

)

Total comprehensive loss

  $ (104,013

)

  $ (49,851

)

  $ (3,234

)

                         

Loss per share:

                       

Basic

  $ (1.76

)

  $ (0.83

)

  $ (0.05

)

Diluted

  $ (1.76

)

  $ (0.83

)

  $ (0.05

)

                         

Weighted average shares:

                       

Basic

    60,139       60,871       60,580  

Diluted

    60,139       60,871       60,580  

 

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

 

 

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

 

   

June 6,

2017

   

May 31,

2016

 
                 

Assets:

               

Current assets:

               

Cash and cash equivalents

  $ 41,714     $ 66,964  

Restricted cash

    6,445       377  

Accounts and other receivables

    7,315       12,827  

Inventories:

               

Merchandise

    10,701       13,799  

China, silver and supplies

    6,477       7,796  

Income tax receivable

    3,061       3,003  

Prepaid rent and other expenses

    10,499       11,508  

Assets held for sale

    12,825       4,642  

Total current assets

    99,037       120,916  
                 

Property and equipment, net

    583,097       671,250  

Other assets

    41,508       45,751  

Total assets

  $ 723,642     $ 837,917  
                 

Liabilities and Shareholders' Equity:

               

Current liabilities:

               

Accounts payable

  $ 17,570     $ 22,141  

Accrued liabilities:

               

Taxes, other than income and payroll

    11,028       10,769  

Payroll and related costs

    15,505       14,561  

Insurance

    5,740       5,109  

Deferred revenue – gift cards

    15,051       16,354  

Rent and other

    33,812       18,838  

Current maturities of long-term debt, including capital leases

    368       9,934  

Total current liabilities

    99,074       97,706  
                 

Long-term debt and capital leases, less current maturities

    213,341       213,803  

Deferred escalating minimum rent

    43,464       51,535  

Other deferred liabilities

    60,397       67,093  

Total liabilities

    416,276       430,137  
                 

Commitments and contingencies (Note 11)

               
                 

Shareholders’ equity:

               

Common stock, $0.01 par value; (authorized: 100,000 shares; issued: 2017 – 60,755 shares, 2016 – 60,137 shares)

    607       601  

Capital in excess of par value

    79,531       75,938  

Retained earnings

    235,210       341,350  

Deferred compensation liability payable in Company stock

    303       521  

Company stock held by Deferred Compensation Plan

    (303

)

    (521

)

Accumulated other comprehensive loss

    (7,982

)

    (10,109

)

Total shareholders' equity

    307,366       407,780  

Total liabilities and shareholders' equity

  $ 723,642     $ 837,917  

 

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

 

 

Ruby Tuesday, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands)

 

                                           

Company Stock

                 
                                           

Held by the

   

Accumulated

         
   

Common Stock

   

Capital In

           

Deferred

   

Deferred

   

Other

   

Total

 
   

Issued

   

Excess of

   

Retained

   

Compensation

   

Compensation

   

Comprehensive

   

Shareholders

 
   

Shares

   

Amount

   

Par Value

   

Earnings

   

Liability

   

Plan

   

Loss

   

Equity

 
                                                                 

Balance, June 3, 2014

    61,442     $ 614     $ 76,269     $ 395,226     $ 622     $ (622

)

  $ (10,900

)

  $ 461,209  

Net loss

                            (3,194

)

                            (3,194

)

Pension and post-retirement benefit plans, net of taxes of $0

                                                    (40

)

    (40

)

Shares issued pursuant to compensation plans, net of cancellations

    665       7       549                                       556  

Share-based compensation, including taxes of $(13)

                    7,125                                       7,125  

Stock repurchases

    (9

)

            (73

)

                                    (73

)

Changes in Deferred Compensation Plan

                                    59       (59

)

             

Balance, June 2, 2015

    62,098       621       83,870