| RUBY TUESDAY INC Item 1A Risk Factors Our business and operations are subject to a number of risks and uncertainties |
| The risk factors discussed below may not be exhaustive |
| We operate in a continually changing business environment, and new risks may emerge from time to time |
| We cannot predict such new risks, nor can we assess the impact, if any, of such new risks on our business or the extent to which any risk or combination of risks may cause actual results to differ materially from those expressed in any forward looking statement |
| We may fail to reach our Company’s growth goals, which may negatively impact our continued financial and operational success |
| Ruby Tuesday establishes growth goals each fiscal year based on a strategy of new market development and further penetration of existing markets |
| A significant portion of our historical growth has been attributable to opening new restaurants, and we typically set goals to open 45 to 50 Company restaurants per year |
| On the Company side, we minimize opening volatility by often identifying and acquiring sites a year or more in advance |
| Because we believe that we have mitigated our risks relative to meeting the requirements of our new restaurant opening schedule, we believe the biggest risk to attaining our growth goals is our ability to increase restaurant sales in existing markets, which is dependent upon factors both within and outside our control |
| Among others, these desired increases are dependent upon consumer spending, the overall state of the economy, our quality of operations, and the effectiveness of our advertising |
| Though believed to be smaller, there are risks associated with new restaurant openings |
| If we and/or our franchisees are unable to timely secure appropriate construction materials, financing, labor, permits, liquor licenses, or other resources, we run the risk of missing our projected growth goals |
| In addition, the locations of our restaurants (geographic areas of growth) may serve as a factor in whether we are operationally successful |
| For instance, restaurants in new markets may not perform at the same level as restaurants in established markets with high rates of profitability |
| Further, because the investment costs associated with new restaurants have increased in recent years, newer restaurants actually need to achieve higher sales volumes in order to produce the same return on investment as we have historically desired |
| Fortunately, our experience in recent years has been that our average returns on new units, despite being negatively impacted by rising construction costs, have well exceeded our cost of capital, although we can provide no assurance that this trend will continue |
| Another factor influencing our success is the management of our growth strategy |
| We must ensure that we maintain strong real estate and other operational leadership such that our expansion plans are appropriately backed by sound judgment and support |
| The risk of inappropriate growth decisions could negatively impact our growth strategy, and thus continued success |
| Once opened, we anticipate new restaurants will take four to six months to reach planned operational profitability due to the associated start-up costs |
| We can provide no assurance that any restaurant we open will be profitable or obtain operating results similar to those of our existing restaurants |
| Aside from those previously listed, other factors impacting profitability of new restaurants include, but are not limited to, competition in the restaurant market, consumer acceptance of our restaurants in new markets, recruitment of qualified operating personnel, and weather conditions in the areas in which the new restaurants are located |
| Due to the presence or absence of these factors, we may not reach our projected financial targets |
| The inability of our franchises to operate profitable restaurants may negatively impact our continued financial success |
| Ruby Tuesday operates franchise programs with franchise partnerships (franchises in which we own a 1prca or 50prca interest) and traditional domestic and international franchisees (franchisees in which we do not own any equity interest) |
| In addition to the income we record under the equity method of accounting from our investment in certain of these franchises, we also collect royalties, marketing, and purchasing fees, and in some cases support service fees, as well as interest and other fees from the franchises |
| Further, as part of the franchise partnership program, we serve as -8- ______________________________________________________________________ partial guarantor for two current credit facilities and a third facility which, while no longer in existence, has three outstanding loans |
| The ability of these franchise groups, particularly the franchise partnerships, to continually generate profits impacts Ruby Tuesday’s overall profitability and brand recognition |
| Growth within the existing franchise base is dependent upon many of the same factors that apply to Ruby Tuesday’s Company-owned restaurants, and sometimes the challenges of opening profitable restaurants prove to be more difficult for our franchisees |
| For example, franchisees may not have access to the financial or management resources that they need to open or continue operating the restaurants contemplated by their franchise agreements with us |
| In addition, our continued growth is also partially dependent upon our ability to find and retain qualified franchisees in new markets, which may include markets in which the Ruby Tuesday brand may be less well known |
| Furthermore, the loss of any of our franchisees due to financial concerns and/or operational inefficiencies could impact our profitability and brand |
| Our franchisees are obligated in many ways to operate their restaurants according to the specific guidelines set forth by Ruby Tuesday |
| We provide training opportunities to our franchise operators to fully integrate them into our operating strategy |
| However, since we do not have control over these restaurants, we cannot give assurance that there will not be differences in product quality or that there will be adherence to all Company guidelines at these franchise restaurants |
| In order to mitigate these risks, we do require that our franchisees focus on the quality of their operations, and we expect full compliance with our Company standards |
| We face continually increasing competition in the restaurant industry for locations, guests, staff, supplies, and new products |
| Our business is subject to intense competition with respect to prices, services, locations, qualified management personnel and quality of food |
| We compete with other food service operations, with locally-owned restaurants, and with other national and regional restaurant chains that offer the same or similar types of services and products |
| Some of our competitors may be better 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 management personnel and for attractive commercial real estate sites suitable for restaurants |
| In addition, factors such as inflation, increased food, labor, equipment, fixture and benefit costs, and difficulty in attracting qualified management and hourly employees may adversely affect the restaurant industry in general and our restaurants in particular |
| Economic, demographic and other changes, seasonal fluctuations, natural disasters, and terrorism could adversely impact guest traffic in our restaurants, and thus our profitability |
| Our business can be negatively impacted by many factors, including those which affect the restaurant only at the local level as well as others which attract national or international attention |
| Risks that could cause us to suffer losses include the following: • economic factors (economic slowdowns or other inflation-related issues); • demographic changes, particularly with regard to dining and discretionary spending habits, in the areas in which our restaurants are located; • changes in consumer preferences; • seasonal fluctuations due to the days of the week on which holidays occur, which may impact spending patterns; • natural disasters such as hurricanes, tornados, blizzards, or other severe weather; • concerns and/or unfavorable publicity over health issues, food quality or restaurant cleanliness; and -9- ______________________________________________________________________ • effects of war or terrorist activities and any governmental responses thereto |
| Each of the above items could potentially negatively impact our guest traffic and, thus, our profitability |
| We may be unable to remain competitive because we are a leveraged company |
| The amount of debt we carry, while believed by us to be prudent based upon our financial strategy, is significant |
| At June 6, 2006, we had a total of dlra377dtta1 million in debt and capital lease obligations |
| This indebtedness requires us to dedicate a portion of our cash flows from operating activities to principal and interest payments on our indebtedness, which could prevent us from implementing growth plans or proceeding with operational improvement initiatives |
| The three most significant loans we have are our revolving credit facility (dlra212dtta8 million outstanding at June 6, 2006) and our Series A and B senior notes (dlra85dtta0 million and dlra65dtta0 million, respectively, outstanding at June 6, 2006) |
| The revolving credit facility and the Series A senior notes both mature in fiscal 2010 |
| Although our total amount owed for debt and capital lease obligations is currently less than two times our net cash provided by operating activities, we cannot give assurance we will be able to renew either facility at terms as favorable as those we have today, or that we will be able to renew the loans at all |
| We are subject to various forms of governmental regulations |
| We are required to follow various international, federal, state, and local laws common to the food industry, including regulations relating to food and workplace safety, sanitation, the sale of alcoholic beverages, environmental issues, minimum wage, overtime, immigration and other labor issues |
| Changes in these laws, including additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements, could harm our operating results |
| Also, failure to obtain or maintain the necessary licenses and permits needed to operate our restaurants could result in an inability to open new restaurants or force us to close existing restaurants |
| We are also subject to regulation by the Federal Trade Commission and to state and foreign laws that govern the offer, sale and termination of franchises and the refusal to renew franchises |
| The failure to comply with these regulations in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on future franchise sales or fines or require us to rescind offers to franchisees, any of which could adversely affect our business and operating costs |
| Further, any future legislation regulating franchise laws and relationships may negatively affect our operations |
| Approximately 9prca of our revenue is attributable to the sale of alcoholic beverages |
| We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located |
| Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays |
| Typically, the licenses are renewed annually and may be revoked or suspended for cause at any time |
| Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing 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 terminate the sale of alcoholic beverages at one or more of our restaurants |
| In certain states we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person |
| We carry liquor liability coverage as part of our existing comprehensive general liability insurance, but we cannot guarantee that this insurance will be adequate in the event we are found liable in such an action |
| As a publicly traded corporation, we are subject to various rules and regulations as mandated by the Securities and Exchange Commission (the “SEC”) |
| Failure to timely comply with these guidelines could result in penalties and/or adverse reactions by our stakeholders |
| Changes in applicable accounting rules imposed by the SEC or private governing bodies could also affect our reported results of operations and thus cause our stock price to fluctuate or decline |
| -10- ______________________________________________________________________ The potential for increased commodity, energy, and other costs may adversely affect our results of operations |
| Although we attempt to maintain control of commodity costs by engaging in volume commitments with third parties for many of our food-related supplies, we cannot assure that the costs of these commodities will not fluctuate, as we often have no control over such items |
| In addition, we rely on third party distribution companies to frequently deliver perishable food and supplies to our restaurants |
| We cannot make assurances regarding the continued supply of our inventory since we do not have control over the businesses of our suppliers |
| Should our inventories lack in supply, our business could suffer, as we may be unable to meet customer demands |
| These disruptions may also force us to purchase food supplies from suppliers at higher costs |
| The result of this is that our operating costs may increase without the desire and/or ability to pass the price increases to our customers |
| Ruby Tuesday must purchase energy-related products such as electricity, oil and natural gas for use in each of our restaurants |
| Our suppliers must purchase gasoline in order to transport food and supplies to us |
| Our guests purchase energy to heat and cool their homes and fuel their automobiles |
| When energy prices, such as those for gasoline, heating and air increase, we incur greater costs to operate our restaurants |
| Likewise our guests have lower disposable income and thus may reduce the frequency in which they dine out and/or feel compelled to choose more inexpensive restaurants when eating outside the home |
| The costs of these energy-related items will fluctuate due to factors that may not be predictable, such as the economy, current political/international relations and weather conditions |
| Because Ruby Tuesday cannot control these types of factors, we maintain the risk that prices of energy/utility items will increase beyond our current projections and adversely affect our operations |
| Food safety and food-borne illness concerns could adversely affect consumer confidence in our restaurants |
| We face food safety issues that are common to the food industry |
| We must work to provide a clean, safe environment for both our guests and employees |
| Otherwise, we risk losing guests and/or employees due to unfavorable publicity and/or a lack of confidence in our ability to provide a safe dining and/or work experience |
| Food-borne illnesses, such as E coli, hepatitis A, trichinosis, or salmonella, as well as the prospect of “mad cow” disease and avian flu, are also a concern for our industry |
| We can and do attempt to purchase supplies from reputable suppliers/distributors and have certain procedures in place to test for safety and quality standards, but we can make no assurances regarding whether these supplies may contain contaminated goods |
| In addition, we cannot ensure the continued health of each of our employees |
| We provide health-related training for each of our staff and strive to keep ill employees away from food items |
| The occurrence of an outbreak of a food-borne illness, whether at one of our restaurants or one of our competitors, could result in negative publicity which could adversely affect our sales and profitability |
| Litigation could negatively impact our results of operations as well as our future business |
| We are subject to litigation and other customer complaints concerning our food safety, service, and/or other operational factors |
| Guests may file formal litigation complaints that we are required to defend, whether or not we believe them to be true |
| Substantial, complex or extended litigation could have an adverse effect on our results of operations if it develops into a costly situation and distracts our management |
| Employees may also, from time to time, subject us to litigation regarding injury, discrimination and other labor issues |
| Suppliers, landlords and distributors, particularly those with which we currently maintain purchase commitments/contracts, could also potentially allege non-compliance with their contracts should they consider our actions to be contrary to our commitments |
| We are dependent on key personnel |
| Our future success is highly dependent upon our ability to attract and retain certain key employees |
| These personnel serve to maintain a corporate vision for our Company as well as execute our business strategy |
| The loss of any of them could potentially impact our future growth decisions and our future profitability |
| -11- ______________________________________________________________________ While we maintain an employment agreement with Samuel E Beall, III, our chief executive officer and founder, this employment agreement may not provide sufficient incentives for him to continue employment with Ruby Tuesday |
| While we are constantly focused on succession plans at all levels, in the event his employment terminates or he becomes incapacitated, we can make no assurance regarding the impact his loss could have on our business and financial results |
| We may not be successful at operating profitable restaurants |
| The success of our brand is dependent upon operating profitable restaurants |
| The profitability of our restaurants is dependent on several factors, including the following: • the hiring, training, and retention of excellent restaurant managers and staff; • the ability to timely and effectively meet customer demands and maintain our strong customer base; • the continued success of our marketing/advertising strategy; • the ability to obtain appropriate financing; • the ability to manage our growth goals; and • the ability to provide innovative products to our customers at a reasonable price |
| The profitability of our restaurants also depends on the ability of our Company as a whole to absorb the risks associated with growth |
| In addition, the results of our currently high performing restaurants may not be indicative of their long-term performance, as factors affecting their success may change |
| Among others, one potential impact of declining profitability of our restaurants is increased asset impairment charges |
| This could be significant as property and equipment currently represent 84prca of our total assets at June 6, 2006 |