Ruth's Hospitality Group, Inc.
Q1 2014 Earnings Call Transcript

Published: 28 Apr 2014

[Operator:]

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to today's Ruth's Hospitality Group Incorporated First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for questions. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mark Taylor, Vice President of Financial Planning and Analysis. Please go ahead, sir.

[Fitzhugh Taylor:]

Thank you, Greg, and good afternoon everyone. Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer; and Arne Haak, Executive Vice President and Chief Financial Officer of Ruth's Hospitality Group. Before we begin, I'd like to remind you that part of our discussion today will include forward-looking statements. These statements are not guarantees of our future performance, and therefore, undue reliance should not be placed upon them. We would like to refer you to the Investor Relations section of our website at rhgi.com, as well as the SECs website at sec.gov for copies of today’s earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating and financial results. Mike will start off the call this afternoon, after which Arne will provide you with a financial update on our first quarter results, as well as any updates to our outlook for fiscal 2014. We will then conduct Q&A and conclude with Mike providing closing remarks. I would like to now turn the call over to Mike.

[Michael O'Donnell:]

Thank you, Mark, and thanks to everyone for joining us this afternoon. We are pleased to report that we are off to a strong start in 2014. Earnings were $0.25 per share, in spite of beef inflation of 4%, severe winter weather, and the Easter and Lenten shift into Q2. Even with the weather challenges, we had a great Valentine's Day, with comp sales up double digits in both Mitchell's Fish Market and Ruth's Chris Steak House. We believe that our Valentine's Day performance is consistent with the success we have developed in our special occasion over time. As the weather normalized in March, so did our sales trends, resulting in positive comparable sales in March for both Ruth's and Mitchell's, despite the impact of the Easter and Lenten shift into the second quarter. I am very proud of the hard work and execution of our teams and franchisees, during what was certainly a difficult quarter. The first quarter, while challenging, was also a reason to celebrate, as Ruth's Chris Steak House was rated the number one consumer pick in fine dining chains for the fourth year in a row, by Nation's Restaurant News. Additionally, our beverage program received top honors at this year's [indiscernible] conference, including a 2014 Best Overall Wine program, as well as a 2014 Best Overall Spirits Program, both in the chain and multi-concept segment. In addition to our strong operating results, our first quarter was indicative of our balanced approach to reinvesting in our core business, maintaining disciplined growth and returning excess capital to our shareholders. We believe that through this approach, we can achieve consistent growth and meaningful shareholder returns over time. Turning to our first quarter highlights by brand, comparable sales at Ruth's Chris Steakhouse company-owned restaurants, increased 2.6%. In addition to the sever weather we faced during the quarter, Ruth's is lapping a 6.6% increase in the first quarter of 2013, which I believe speaks to the strength of the brand. Furthermore, the increase marked the 16th consecutive quarter of positive comparable sales for Ruth's Chris Steakhouse. Entrees, which we server as a proxy for traffic, increased by 2.1% during the first quarter, while average check increased 0.4%. Our strategic initiatives continue to focus on driving sales, largely through traffic, and we are pleased to report our 17th consecutive quarter of traffic growth. As I noted, we saw our sales trends improving during March, and I am pleased to note that those trends have continued into the second quarter. Through late April, comparable sales at Ruth's are positive in the mid single digit range. Our Ruth's Chris Steakhouse franchise-owned domestic comparable restaurant sales increased 1.1% during the first quarter, while international comparable sales of franchise-owned restaurant sales increased 0.3%, resulting in a blended increase of 0.9%. We continue to focus on growing sales, primarily through traffic across our three core segments, which consists of special occasion guests, business-to-business and our core regulars. We believe this strategy has contributed towards the consistency of our sales growth. Our Ruth Seasonal Classics remain a key component of our menu offerings, particularly to our special occasion guests, who may be looking for a value or price certainty. These prefixed selections comprise approximately 20% of preference for the first quarter, consistent with our ongoing trends. During the fourth quarter, roughly two-thirds of the customers who selected the Ruth's Seasonal Classics, exhibited a preference for the higher end tier offerings. Private dining sales at Ruth's Chris Steak House, which we view as a proxy for business demand, grew 6.8% in the first quarter From a brand standpoint, we are pleased with the results our updated Sizzle Swizzle and Swirl happy hour menu, and revised wine and cocktail list. Our marketing focus has transitioned from TV in the fourth quarter, to digital efforts in the first half of 2014. Our goal has been to drive brand awareness, as well as deliver direct call-to-action messaging around key holidays. Overall, we are confident in the combination of attractive culinary and beverage offerings and the messaging vehicles we are using to communicate in. At Mitchell's Fish Market, our comparable sales decreased 4.3% during the first quarter. Entrees would serve as a proxy for traffic, decreased by 9.1% during the first quarter, while average check increased by 0.3%. Mitchell's comps were more significantly impacted by the severe winter weather than Ruth's early in the quarter, as 14 of the 18 restaurants are located in the Midwest. However, we are particularly pleased with Mitchell's positive comparable store sales in the month of March, considering the impact of Easter, and in part of Lenten shifting into the second quarter. Those positive trends have carried forward into the second quarter and through late April, comparable sales at Mitchell's are positive in the low to mid-single digit range. At Mitchell's, we have successfully benefited from adopting best practices from Ruth's. This area of our business will continue to be developed throughout the year, with additional special wine and cocktail dinners, along with increased banquet and private dining events. In the first quarter, Mitchell's hosted its first wine dinner of the year, with our Taste of California event. Similar to Ruth's, we believe these special event dinners can help raise the profile of Mitchell's and to engaging in educational and interactive experiences, attract new guests, and increase frequency for our regulars. Switching to real estate; in the first quarter, we returned to the previously franchised Denver, Colorado market and opened one new company-owned Ruth's Chris Steakhouse Restaurant in downtown Denver. A franchisee opened a new Ruth's Chris Steakhouse in Boise, Idaho. During the first quarter, we also purchased the Ruth's Chris Steakhouse in Austin, Texas, from a long time successful franchise. We remain pleased with the early results of our recent openings and acquisition, and will continue to look for meaningful opportunities in both new and existing markets. For the full year of 2014, we expect to open a total of three new company-owned Ruth's Chris Steakhouse Restaurants, including a new Denver location, which opened in January; Gaithersburg, Maryland; and Marina del Rey, California, are both currently scheduled for the second half of 2014, and Dallas, Texas is now scheduled for the first quarter of 2015. Additionally, I am pleased to announce that we have recently signed a new lease, and the opening of restaurant in St. Petersburg, Florida, in early 2015. In addition to the recent opening in Boise, we expect one franchise opening in the third quarter in Panama, and one in the fourth quarter in Taipei. Our pipeline for the next three years has 13 commitments for future franchise restaurants. We remain active in our development efforts and are continuing to work on additional company of franchise restaurants for 2015. We continue to look for opportunities to open three to five company and three to five franchise locations per year. We believe that our franchise model and existing national footprint serves as a competitive advantage, as we expand. In fact, the success of our recent openings continues to validate our ongoing efforts, to leverage our infrastructure, thoughtfully accelerate new development, and boost our returns on capital. I'd now like to turn the call over to Arne.

[Arne Haak:]

Thanks Mike. For the first quarter ended March 30, 2014, we reported net income of $8.9 million or $0.25 per diluted share on a base of 35.8 million diluted shares. This compares to net income of $7.7 million or $0.22 per diluted share on a base of 35.5 million diluted shares in the first quarter of 2013. Last year's net income in the first quarter was reduced by $1.1 million net of tax from discontinued operations, associated with the subtenant default, which increased the company's lease exit costs. Excluding these one time charge, diluted net income from continuing operations was flat, at $0.25 per share. During the first quarter of 2014, we generated total revenues of $109.7 million, an increase of 3.6% compared to $106 million last year. Total company-owned restaurant sales increased to $104.4 million or 2.9% compared to the $101.4 million in the first quarter last year. The cumulative effect of pricing on the quarter is approximately 2% year-over-year. This is due to the combined impact of 1.2% price increase taken in the fourth quarter of 2013, and a 0.8% increase taken in the first quarter of 2014. Also, we believe that our comp sales were negatively impacted by approximately $2 million due to the widely documented severe winter weather. Average weekly sales for all company-owned Ruth's Chris Steakhouse Restaurants was approximately $104.07 thousand in the first quarter compared to $102,2 thousand in the first quarter of last year. Restaurant operating weeks for company-owned Ruth's Chris Steakhouse Restaurants were 822 weeks of the first quarter of 2014, compared to 806 weeks in the first quarter of 2013. Please note that our average weekly sales calculations and restaurant operating weeks exclude discontinued operations. At Mitchell's Fish Market, average weekly sales decreased 4.3% to $69.1 thousand compared to $72.2 thousand in the first quarter of last year. Restaurant operating weeks at Mitchell's were 234 weeks in the first quarter, which is flat year-over-year. Franchise income in the first quarter increased to $4 million from $3.7 million last year, due to a combination of improved sales volumes and new franchise unit development. As we noted on our last call, we believe that our recent change in accounting method for unused gift cards, will have an immaterial impact on our other operating income for the full year. However, the change will affect the year-over-year quarterly comparability of our other operating income line. This change resulted in an increase to first quarter other operating income of approximately $400,000 compared to 2013. We expect the change in accounting method will result in a reduction in our 2014 second quarter other operating income, when compared to 2013. In terms of our cost structure, food and beverage costs, as a percentage of our restaurant sales, increased approximately 40 basis points year-over-year in the first quarter. During the first quarter, our beef costs were up approximately 4%. For the second quarter, and the balance of 2014, we expect our beef costs to be up between 5% and 8%. Subsequent to the end of the first quarter, the company has entered into a pricing agreement, to lock pricing in, at 3% to 4% above last year, on roughly 25% of our beef needs from May through December. Restaurant operating expenses, as a percentage of restaurant sales increased 25 basis points to 48%. The increase was largely due to increased health and welfare benefit costs and higher utility costs from the severe winter weather. Our G&A expenditures decreased to $7.1 million from $7.3 million a year ago. As a percentage of revenues, G&A improved approximately 40 basis points to 6.5%. Income tax expense was $4.5 million in the first quarter, up $0.6 million from the first quarter of 2013. Our effective tax rate during the quarter was 33%, up from 30% in the first quarter of 2013, due to lower federal employment tax credits. This quarter, our Board of Directors approved a payment of a quarterly cash dividend to shareholders of $0.05 per share. This dividend will be paid to shareholders on May 29, 2014, to common shareholders of record as of the close of business on May 15, 2014. Additionally, during the quarter, we began to acquire shares under our previously announced stock repurchase program. The company repurchased approximately 250,000 shares of common stock, at an average price of $12.38 during the quarter. Finally, at the end of the first quarter, the company had $22 million in debt outstanding under its senior credit agreement, up from $19 million at the end of the fourth quarter of 2013, primarily driven by the acquisition of our Austin franchise restaurant. Now, based on our first quarter results, we'd like to reiterate our guidelines for some of our key 2014 cost metrics. Overall, we expect our cost of goods sold to be within the range of 31% to 33% of restaurant sales for the year. We expect restaurant operating expenses to range between 49% and 51% of restaurant sales. Our marketing and advertising spend is projected to be between 3% and 3.2% of total revenue for the year. Our G&A expenses are expected to be between $27.5 million and $28.5 million for the full year. We expect our effective tax rate for the full year to be between 29% and 33%. Our CapEx spending for 2014 is projected to be between $20 million and $22 million, which is reflective of additional company-owned restaurant openings in 2014. Finally, we expect our fully diluted shares outstanding to be between 36 million and 37 million shares, which does not assume additional share repurchases in 2014. With that, I'd now like to return the call to Mike.

[Michael O'Donnell:]

To wrap up, we are excited about the health of our business and our ability to execute against the well-balanced shareholder focus plan. We believe that our strong team efforts on execution and our operations driven culture have led to a consistent award-winning dining experience, that resonates with the existing and new customers. 2014 includes high quality development opportunities for both company and franchise locations, including a growing international presence. Our franchise partners remain the heart and soul of our business, and our mix of company-owned and franchise restaurants is both unique and a distinct competitive advantage, as we strategically expand. Finally, while our first priority will be to evaluate opportunities to grow and reinvest in our core business, we are also focused on making wise long term capital decisions, that include a mix of dividends, debt reduction and share repurchases. We believe this approach is working, and continue as we execute over the coming years. This quarter, we made significant progress on all fronts of our plan, by showcasing solid sales performance in our existing restaurants, leveraging our infrastructure and adding new company and franchise locations. Additionally, we continue to enhance shareholder returns by purchasing a franchise location, paying an increased dividend and buying back shares. Greg, I will now turn it over back to you to queue up the questions.

[Operator:]

(Operator Instructions) And we will take our first question today from Nicole Miller Regan from Piper Jaffray.

[Unidentified Analyst:]

[Technical Difficulty]. The sales trends through March, we appreciate the update. Was curious if you had an opportunity to quantify what that Easter and Lenten shift into 2Q would be? I just wanted to make sure we are thinking about that right? And then looking at 2Q 2013, I was curious if you could may be directionally talk about how sales trends progressed on a year-over-year basis? Just as we exit the period, where we have got a lot of weather and some calendar shifts. Just curious what that trend was on a year-over-year basis?

[Arne Haak:]

I am not sure -- we didn't get the first half or so of the question. It was blank. You came on as [indiscernible]?

[Unidentified Analyst:]

Sorry about that. My question was, thinking about this Eastern and Lenten shift from 1Q to 2Q, I was asking if you could quantify that, and then also thinking about, as we move into 2Q of this year, wanted to see if you could directionally talk about how trends progressed on a year-over-year basis, just as we are exiting this period, some lumpiness from both weather and calendar shifts, just trying to see what may be a more normalized trend was on a year-over-year basis?

[Arne Haak:]

Sure. In terms of the Easter shift, we think its somewhere between 80 to 100 bps effect on comp sales. It's probably a little bit more than that on the Mitchell's business, because obviously Lenten Fridays are important, so they lost a couple of those, and that helps Ruth's a little bit. But the loss of the Easter Sunday, which is a big day in both concepts, is the biggest part of it. In terms of the trends, as we come into the second quarter, I think we have seen as the weather has subsided that the consumer has been resilient for us. March was a -- it was a very good March for us and April so far looks that way as well. So I think we shared that. We are -- we had that trend going through the quarter, and so far as we are coming into April, that looks good as well.

[Unidentified Analyst:]

That's helpful. Thank you. On the COGS side of the equation, could you talk a little bit about the philosophy? Obviously, we have seen in the headlines, the beef inflation, its still present and likely to continue. You have locked about 25% of your beef needs. Just thinking more philosophically, is that a number we should -- if there is an opportunity to contract more going forward, we maintain that five to -- or really kind of narrow that 5% to 8% inflation rate. So just curious on how you are thinking about the need to may be balance the price certainty on the raw commodity, and then also, leave a little bit of room to may be take advantage of price moods [ph] throughout the year?

[Arne Haak:]

Sure. I think our view is anywhere from 4%, 5%, up to 8%. We had a unique opportunity here in April, to lock in beef on certain cuts, that I think will help manage that. Ultimately, we think its going to be challenging, the backdrop we talked about on these calls for the last couple of years. It’s a challenging backdrop, and I think its just something we are going to have to deal with. So we will be opportunistic about it. If we can find a price that we think is good, we will lock it in. If not, we will keep buying at the market.

[Unidentified Analyst:]

Understood. And then one more if I may. Mike, thinking about the development pipeline for the next couple of years. You have got some visibility into fiscal 2015. Was curious if may be at a high level, you could talk about how that site selection may have evolved over time? So if we think about next year's, there is two or more units that may come into play for next year. What kind of site selection characteristics, or may be how you are going in looking at the real estate markets? How that has evolved over the last couple of years, and what we might be able to see going forward?

[Michael O'Donnell:]

As you know, we got a very large national footprint. Conditions and opportunities for us to add to additional markets, makes a lot of sense to us. So if you see us thinking about places like Dallas or somewhere like Marina del Rey, we have got a big presence in California, and we already got a restaurant in Dallas and one in Fort Worth. So we are looking first at opportunities where we see that we can fill in. Second, we are looking at some new smaller markets that historically, our franchise community has really taken and developed. Not taking any territory away from any existing franchisees, as they continue to build out their territory, but some parts of the country that otherwise might have been franchised off before, we think we can develop there. So we were successful in buying a restaurant in Austin from a franchisee. We think there is a second opportunity to build another store there. So its really more filling in restaurants primarily, and secondarily finding secondary markets.

[Unidentified Analyst:]

Thank you.

[Michael O'Donnell:]

Thank you.

[Operator:]

And our next question will come from Michael Halen with Sidoti and Company.

[Michael Halen:]

Good afternoon. Could you maybe give us some color on how the Florida Mitchell's restaurants did compare to the units located in Ohio in the first quarter?

[Michael O'Donnell:]

Sure Michael. The Florida restaurants, there is four, and they are all very different. Tampa, Jacksonville, Winter Park and Destin, they were in the low single digits negative in the first quarter.

[Michael Halen:]

Okay, thank you. So I guess the difference would be weather?

[Michael O'Donnell:]

Yes. The weather and yeah, but of course, they have the Lenten shift as well.

[Michael Halen:]

Yeah, got it.

[Operator:]

(Operator Instructions) And our next question comes from Andy Barish with Jefferies.

[Andrew Barish:]

Hey guys. Wonder what the citing of the health and welfare benefit costs related to? I thought you guys already provided some of the mandatory insurance stuff or had plans that would have met the affordable care act. Was there something else going on there, more of a claims or onetime in nature?

[Arne Haak:]

No Andy. This is Arne. We have offered benefits to our employees wealth, in excess of what the government requires. You can work as few as 23 hours at Ruth's Chris and still earn benefits. That being said, even when we have been generous with our benefits, not all of our employees had benefits, in the past. So this year, [indiscernible] population, obviously some people are more focused on it, some people are -- they don't want to pay the penalty, so they are deciding to sign up. I think the underlying growth in our -- we are just north of 50% of our employees now participating. So we have seen an increase in the population of the total pool of about 10%. That being said, our claims experience is actually lower than what we were projecting in the first quarter here. So nothing precipitously bad in terms of the claims experience.

[Andrew Barish:]

Good. And then on food and beverage costs, did that come in a little bit better than you thought, given the range of 31 to 33, and inflation of what 4%? Do you expect that to creep a little bit more, may be to the middle part of that range going forward here for the next couple of quarters?

[Arne Haak:]

Yeah. I think we expect that there's probably going to be some more pressure here. If we look at -- we kind of think about it; our tenderloins tend to be one-trended than the prime cuts, tend to follow another trend. In the first quarter, we blended out at four. Tenderloins were less than that and prime cuts were around 8%, if I recall correctly. In the second quarter, the tenderloins have been much more expensive, so they are seeing more inflation. And that seems to be the trend here for the near future. So a little bit may be more benign than what we thought in the first quarter, but we are definitely seeing a higher trend here in the second.

[Andrew Barish:]

Got you. And just one more on the marketing cadence. I think Mike said a little more digital here to start out the year. I assume you're still coming back with a couple of flight to television advertising here in the spring and then before the holidays. Is that a correct assumption?

[Michael O'Donnell:]

Andy, you don't really want me to give out my marketing plan to my whole competitive set, do you?

[Andrew Barish:]

Well, no. But will you still use TV at some point this year?

[Michael O'Donnell:]

Yes. Andy we enjoy our national footprint, and we enjoy the ability to be able to exercise the use of television and I am sure we will use television again this year.

[Andrew Barish:]

Thank you very much.

[Michael O'Donnell:]

Thanks Andy.

[Operator:]

(Operator Instructions) We will take our next question from Brett Levy with Deutsche Bank.

[Brett Levy:]

Yeah. Good evening gentlemen. Just a couple of questions. If you wouldn't mind going through some of the non-beef COGS as well as, I just have another question on capital after we are done with that?

[Arne Haak:]

Sure. Brett, this is Arne again. The only other place in commodity basket, where we are seeing a lot of pressures really in the seafood area is specifically around shrimp. And I think that has been fairly well documented, talked about by other people. But obviously, we use a fair amount of shrimp as well. So shrimp prices are probably up over 30% year-over-year, and that's the most challenging other part of the commodity basket.

[Brett Levy:]

What about dairy?

[Arne Haak:]

There's pluses and minuses. The rest of it, I think is all pretty manageable. The things that we -- you can always call out something that's going up, and there's other things that are helping. So I think the rest of that is manageable. The things that we are probably most focused on or the things we use more of, which is beef and seafood.

[Brett Levy:]

Sure. And do you have any thoughts on what you're thinking for pricing going forward?

[Arne Haak:]

We've historically been price adverse and we'd like to continue to stay that way. We will dictate how we deal with it, or how we view it really is what goes on in the second half of the year, in terms of beef pricing. I'd say our bias is, we prefer not to take price increases if we don't have to. But we have to recognize that the import costs are going up. We are a business and we are here to make money. So we are trying to balance the two, but our bias would be not to take price, unless we had to. But I think you see it and our thoughts on what we are seeing on beef. We are currently averaging around 2%, that's probably higher than our average price increase over the last five years.

[Brett Levy:]

And, what would you say is the percentage right now between choice and prime?

[Arne Haak:]

What is the mix between choice and prime?

[Brett Levy:]

Yeah.

[Arne Haak:]

We are a prime steakhouse.

[Brett Levy:]

Okay. So no choice. Okay. And then I guess just one question on capital. Do you have any thoughts on -- are there additional franchises out there that you might be able to target within the next year or couple of years?

[Michael O'Donnell:]

[Indiscernible] of our franchise system, some of the people in the franchise system, have been in the system for a long time, about 20 plus years; and there may be an opportunity for some of those that don't have a succession plan, we would be the natural buyers. So we are in discussions with all of our franchisees about how their operations are going, how their sales are going and what they think the future is. So I think there is an opportunity for something else to happen in the future.

[Brett Levy:]

Okay, thank you very much.

[Operator:]

And it appears there are no further questions at this time. Mr. O'Donnell, I would like to turn the conference back to you for any additional or closing remarks.

[Michael O'Donnell:]

Well, thank you all very much for joining us this afternoon and as always, it’s a great day to go out and eat steak or fish. Have a great day. Thank you.

[Operator:]

And once again, that does conclude today's conference, we appreciate your participation.