Ruby Tuesday: Healthcare Law A Factor In Fast-Casual Foray

Ruby Tuesday Inc.'s (RT) plan to operate other brands, including a competitor to Chipotle Mexican Grill Inc. (CMG) in the rapidly growing fast-casual space, comes as the restaurant company faces waning growth for its namesake brand as well higher costs mainly due to changes to the healthcare law.

Ruby Tuesday's founder and Chief Executive Samuel "Sandy" Beall said in an interview Thursday that the prospect of higher labor costs was "definitely a factor" in the company's recent licensing agreement to open and operate up to 200 Lime Fresh Mexican Grill locations over the next decade.

Lime Fresh, currently with seven locations in Florida, operates fast-casual restaurants, a format similar to Chipotle and Panera Bread Co. (PNRA) that offers meals at higher prices than fast food chains but without some of the costs, like table service, of a full-service restaurants.

"It's a little simpler of an operation when it comes to healthcare -- Obamacare -- which could be devastating for the industry," Beall said of Lime Fresh. Each Lime Fresh location may have about 20 full-time employees, compared with 60 to 70 at a typical Ruby Tuesday restaurant.

The concerns highlight how restaurants are looking to head off higher costs from new health care requirements -- most of which don't go into effect until 2014 -- by finding ways to make do with fewer employees. The principal concerns for restaurants are stipulations that require employers to provide a minimum amount of medical coverage to employees or face penalties. The amount of the coverage required has yet to be defined.

Lime Fresh also offers Ruby Tuesday and its investors exposure to the fast-casual space, a segment of the restaurant industry that has been growing strongly as it attracts a younger demographic. The bar-and-grill segment, where Ruby Tuesday competes with DineEquity Inc.'s (DIN) Applebee's Neighborhood Grill & Bar and Brinker International Inc.'s (EAT) Chili's Grill & Bar, which have struggled in part because they opened more stores than demand could support.

"There's less opportunity to grow our primary brand yet we have all this free cash flow," Beall said. "Therefore, you have to find some new vehicles for growth."

Ruby Tuesday plans to open the Lime Fresh stores over the next five to 10 years under a pact with the brand's owner, Beall said. They'll be operated under a licensing agreement, with Ruby Tuesday paying Lime Fresh's owner 2% of sales.

Ruby Tuesday also plans to convert some of its underperforming Ruby Tuesday locations to the barbecue chain Jim 'N Nick's Bar-B-Q; the higher-end casual-dining chain Truffles; or to a seafood chain currently under development.

"Ruby's is becoming a story stock with the potential to generate some awfully impressive returns but there's a lot of 'ifs' to be answered," Morgan Keegan analyst Robert Derrington said in an interview. "The market's going to take a wait and see approach."

The development plans are part of Ruby Tuesday's long-term strategy after the company staged a turnaround over the past two years by offering discounts to win back customers. The company has also paid down debt and closed money-losing stores, helping to boost the stock above $12 recently from under $1 in early 2009. On Wednesday, the company said its fiscal first-quarter profit doubled from last year.

Plans for growing sales include getting more brunch and bar sales, as well as a new menu. Ruby Tuesday also recently started working with consultants dunnhumby, which has helped develop customer loyalty programs at Panera and supermarket chain Kroger Co. (KR).

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

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