RT Ruby Tuesday, Inc. (delisted)

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 an d 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 r esult 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 strate gic 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 developm ents 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 c ompanies 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:

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:

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:

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:

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.