Ruby Tuesday, Inc. (RT) Outlook Raised to Stable by S&P

Standard & Poor's Ratings Services today revised the outlook on Maryville, Tenn.-based Ruby Tuesday Inc. (NYSE: RT) to stable from negative and affirmed the 'B-' corporate credit rating. At the same time, we affirmed our 'B-' issue-level rating on the company's unsecured debt. The'3' recovery rating remains unchanged, indicating our expectation for meaningful (50% to 70%) recovery in the event of a payment default or bankruptcy.

"The outlook revision reflects what we see as better margin performance and improved headroom under the secured revolving credit facility covenants leading to improved liquidity over the past two quarters," said credit analyst Mathew Christy. "We think margins improved because of better cost management and cost initiatives, offsetting the lack of consistent improvement in customer traffic or sales growth. It is likely that the company will benefit from these initiatives over the next two quarters, but continued weak sales trends could hurt profits beyond that point. Nonetheless, we expect the company to maintain profits and credit ratios that support our financial risk assessment."

The stable rating outlook on Ruby Tuesday Inc. reflects our expectation for margin stabilization upon implemented cost saving initiatives. Our forecast for continued revenue decline could offset this as the company continues to close restaurants and the company attempts to bring back its core customer.

Upside scenario

We could raise our ratings if the company improves operating performance and shows consistent revenue and same restaurant sales growth in conjunction with maintaining recent gains in gross and EBITDA margins. This would coincide with a reversal of negative sales growth trends and an arrested reduction in the restaurant count. We would also expect credit metrics do not weaken from current levels.

Downside scenario

We could lower our ratings if we believed the company's capital structure was unsustainable. This could occur if gross margin falls more than 150 basis points (bps) and operating costs grow at a mid-single-digit percent rate, resulting in an EBITDA decline more than 25% from our forecast for the fiscal year ending November 2015. This would likely occur in conjunction with a sustained declined in revenue.

You May Also Be Interested In

• Jefferies Upgrades Husqvarna AB (HUSQB:SS) to Buy
• Express (EXPR) Files Chapter 11
• Morgan Stanley Upgrades EPAM Systems (EPAM) to Equalweight