Ruth's Hospitality Group, Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group, Inc. Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call 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.

[Mark Taylor:]

Thank you, Melissa, 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 SEC's 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. I would now like to turn the call over to our Chairman, President and CEO, Mike O'Donnell.

[Michael P. O'Donnell:]

Thank you, Mark, and thanks, everyone, for joining us this afternoon. I'm very pleased to share our third quarter results with you on the call today. On a pro forma basis, we grew our earnings by over 20% in the third quarter despite persistent food inflation led by beef, seafood and dairy. While Arne will be providing more specifics on our third quarter financials and fourth quarter outlook, I'd like to spend a few minutes discussing the priorities that we believe will create long-term value for our shareholders. The first priority is maintaining a healthy core at Ruth's Hospitality Group. We've made great progress here in terms of the strength and consistency of the brand experience underscored, in our view, by our continued positive comparable sales growth. We are pleased with the restaurant high-level, day-to-day execution in our restaurants. We must also focus on the evolution and relevance of the Ruth’s Chris Steak House brand. Many of you may have heard me touch on the long-term success of Ruth’s Chris Steak House through our strategy of making memories on 500-degree sizzling plates. On October 20, we launched the new marketing campaign that reinforces this strategy. The new campaign, which kicked off with a national television, is rooted in the deals and values of our founder, Ruth Fertel. Her lasting legacy remains an important and differentiating part of our brand as well as deep component of our culture. Ruth's influence is summed up in our new tagline, this is how it's done, which is a reflection of how our operating teams bring her vision of the brand to life for the first time and existing guests. It's about exposing people to the quality of our brand. The dining and service experience must also be matched by the physical ambience and location of our restaurants, so we are updating our facilities through remodels, and in certain cases, relocations. During the last 4 years, we have spent nearly $20 million in remodels and relocations in an effort to give the restaurant an up-to-date feel while still maintaining the elegant, classically American ambiance that our customers have enjoyed for nearly 50 years. We are also testing new designs and layouts, one of which will be visible in our new company-owned Marina del Rey location in Southern California, which is scheduled to open in the next week. Our second priority is creating long-term shareholder value in development. With the opening of Marina del Rey, we will have opened 3 new company locations in 2014. In addition, we currently have 2 signed leases for new restaurants, one in St. Petersburg, Florida and one in the uptown area of Dallas, Texas, both of which should be open in the first half of 2015. With the completion of these restaurants, we have relocated or opened 7 restaurants in the preceding 24 months. And we are encouraged by the additional development opportunities that we are seeing for late 2015 and '16. In addition to our company-owned restaurants, we are unique in the high-end space and that just over 50% of our restaurant locations are franchise owned. Many of our franchisees have ties back to Ruth herself and continue to be the heart and soul of our brand. These restaurants generate a stable annuity-like royalty stream for our shareholders and affords our company the luxury of expanding more quickly than we normally would otherwise, given the many opportunities we evaluate every day. Our franchisees will continue to be key partners in our domestic growth. More importantly, they are leading our growing international presence as demand for Ruth’s Chris Steak House restaurants outside of the U.S. continues to expand. This growth will continue in the near future with 10 franchise openings already planned through the end of 2016. Our final priority in creating value for our shareholders is capitalizing the strength of our earnings, balance sheet and cash flow. As a management team, we believe it is incumbent upon us to build a sustainable, growing business, one that has the capacity to create value over the long term. The strength of our balance sheet, cash flow, along with our increasing net income, will allow us to do this. Through increased earnings, we continue to fund our brand building and new development efforts, to pay a dividend, all while further increasing our shareholder returns by reducing our share count over time. We've done this before. In fact, since 2010, we've returned over $200 million to investors through a combination of debt repayment, stock buybacks and dividends. Over that same period, our pro forma net income has more than doubled and our pro forma earnings per share has grown nearly 120%. We believe this highlights our balanced approach to shareholder returns that we have stressed over the years. The thought process today at Ruth's Hospitality Group revolves around a 3- to 5-year strategic vision and evaluating all options I just spoke about to drive long-term value for our investors. We continue to demonstrate our commitment to returning shareholder value again in the third quarter with the payment of a $0.05 dividend and the repurchase of 325,000 shares for approximately $3.5 million. Year-to-date, the company has repurchased approximately 866,000 shares for $10.3 million. With that, I'd like to turn the call over to Arne to provide details on our third quarter results. Arne?

[Arne G. Haak:]

Thanks, Mike. For the third quarter ended September 28, 2014, we reported a net loss of $7.3 million or $0.21 per diluted share compared to net income of $2.9 million or $0.08 per diluted share in the third quarter of 2013. Our net income in the third quarter of 2014 included a noncash impairment charge of $9.3 million, net of tax, related to the write-down of long-lived assets and trademarks of our Mitchell's business. This charge is more reflective of the current revenue and growth trends at Mitchell's as well as broader trends in the polished casual restaurant market. The Mitchell's restaurants remain profitable enterprises and we are appreciative of their contributions to our cash flow and earnings. Additional details regarding the fair value measurements of the Mitchell's restaurants will be in our 10-Q filing, which will be filed later this week. Net income in the third quarter of 2013 included a $1.3 million after-tax benefit from insurance settlement proceeds related to Deepwater Horizon and Hurricane Sandy. Excluding the impairment charge and the insurance settlements as well as income from discontinued operations, our non-GAAP diluted earnings per common share was $0.06 in the third quarter of 2014 compared to $0.05 in the prior year third quarter. Total company-owned restaurant sales in the third quarter were $86.9 million, an increase of 5.4% compared to last year. Company-owned sales at our Ruth's Chris Steak House restaurants were $69.6 million during the quarter, a 7.5% increase from the $64.7 million in the third quarter of last year. The increase in company-owned Ruth’s Chris Steak House sales was driven by 4.8% increase in comparable sales. Entrees, which serve as a proxy for traffic, increased by 3.3% during the quarter while average check increased 1.4%. In fact, the third quarter marked our 18th consecutive quarter of same-store sales growth and our 19th quarter of continued traffic growth. We remain focused and confident that we can continue this trend with a combination of initiatives that Mike has laid out. Average weekly sales for company-owned Ruth's Chris Steak House restaurants are approximately $85,000 in the third quarter compared to $81,900 in the third quarter of last year. Additionally, I'm pleased to note that the positive trends we saw in the third quarter have continued as fourth quarter comparable sales to date are positive in the low to mid-single-digit range. At Mitchell's Fish Market, average weekly sales decreased 2.8% to $66,900 dollars, compared to 66 -- $68,800 in the third quarter of last year. The comparable sales trends at Mitchell's to date in the fourth quarter are flat to negative in the low single-digit range. Franchise income in the third quarter was approximately $3.5 million, up slightly from last year. Ruth’s Chris Steak House franchise-owned domestic comparable restaurant sales increased 3.6% during the third quarter while international comparable franchised-owned restaurant sales increased 1.3%, resulting in a blended increase of 3.1%. Other operating income in the third quarter increased to approximately $1.1 million from $700,000 last year as a result of both the growth in gift card sales and changes in our accounting method for unused gift cards that went into effect at the beginning of this fiscal year. All in all, we generated total revenues of $91.4 million in the third quarter compared to $86.6 million last year. Moving on to our cost structure. I'm going to touch on just a few key line item variances for the third quarter. Our food and beverage costs, as a percentage of restaurant sales, increased approximately 90 basis points year-over-year in the third quarter, largely due to higher beef, seafood and dairy costs. Beef costs were up approximately 7% year-over-year during the third quarter. Since our last quarterly update, we have engaged in additional purchasing locks for beef. We have currently entered into agreements to lock pricing in at approximately 4% above last year on roughly 75% of our fourth quarter beef needs. We expect our total beef costs to be up between 6% and 8% for the balance of 2014. Our G&A expenditures decreased approximately $1.3 million to $5.9 million from $7.3 million a year ago. The decline in dollars was largely driven by the reduction in performance-based compensation. As a percentage of revenues, G&A improved approximately 200 basis points to 6.5%. This quarter, our Board of Directors approved the payment of a quarterly cash dividend to shareholders of $0.05 per share. This dividend will be paid to shareholders on December 4, 2014, to common shareholders of record as of the close of business on November 20, 2014. Finally, at the end of the third quarter, the company's outstanding debt under its senior credit agreement was $30 million, up approximately $8 million from the end of the second quarter. The increase from last quarter resulted from the timing of credit card receivables, planned CapEx spending for new development and the previously noticed repurchase of our common stock during the quarter, combined with the fact that our third quarter is traditionally our seasonally slowest period in terms of sales and profits. Now based on our third quarter results, we'd like to provide you an update on our guidelines for some of our key 2014 full year 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 outlook remains between 3% and 3.2% of total revenue for the year. We have slightly lowered our guidance on G&A and expenses are now expected to be between $26 million and $28 million for the full year. We expect our effective tax rate, applicable to continuing operations, excluding the impact of the Mitchell's asset impairment, to be between 32% and 35%. Our CapEx spending for 2014 is projected to be between $16 million and $18 million, which is reflective of additional company-owned restaurant openings in 2014. Finally, we expect our fully diluted shares outstanding to be between 35 million and 36 million shares. This reflects the share repurchases made to date, but does not assume additional share repurchases in 2014. With that, Melissa, I'd now like to turn the call over for any questions that we might have.

[Operator:]

[Operator Instructions] And we'll take our first question from Andy Barish with Jefferies.

[Alexandra Chan:]

It's Alex on for Andy here. A couple of quick questions. Can you guys talk a little bit about the comp trends through the quarter, whether you guys saw any differences by region, how the Happy Hour is doing and then maybe if you could give some color on why you think that Mitchell's really hasn't participated in the kind of category growth that we've seen over the past couple of months?

[Arne G. Haak:]

Sure, Alex. I think the comp trends through the whole quarter were solid across all 3 months. And I think, as we look at the different buckets of our business at Ruth's Chris, whether it's in the bar, in the banquet or in the restaurant, they are also positive there as well. So I think we're encouraged by the trends. We're pleased with them. We're pleased with the efforts of everybody. And certainly, the outlook has continued here into the fourth quarter. At Mitchell's, I don't feel that the performance is that different from what you're seeing in the -- it leans closer to polished casual than fine dining. And I think if you look at what's happening broadly in the seafood part of the restaurant business, I think it seems to be consistent with what other people are seeing as well.

[Michael P. O'Donnell:]

Alex, this is Michael. I also -- I think some of the improvements that's been made in -- that, I think, you're calling out on the polished casual business or in the casual theme business, these are really all media-driven companies and we don't have that same sort of leverage. So I mean, we actually think we've been relatively stable given the fact that we don't have a big voice. And our AUV still substantial. So we're good there.

[Alexandra Chan:]

Got it, got it. Have you guys gotten any responses kind of on this early -- it's early still, but a new creative, whether is it resonating more at millennials? Is it helping the bar? I guess, if we can get a little more color on that and what kind of the fourth quarter might look like? It looks -- it's going to be pretty heavy, obviously. But any kind of more additional weeks advertising than last year?

[Michael P. O'Donnell:]

I know that we ran 6 weeks of advertising last year. We'll run approximately the same. I think, anecdotally is what we have in response so far and it's all been very positive across most of the demographics there. Everybody I've talked to, there's been a diverse group, whether it's people my age and people substantially younger, which isn't hard to be. I think, again, that there's a connection that we're trying to make there. We're talking about making memories on 500-degree sizzling plates and we've finished with, this is how it's done, which is really comes right out of, literally, out of a Ruth-ism. So I think it comes across genuinely and I think it's right on target in terms of who we want to connect with in this time of the year.

[Alexandra Chan:]

Got it, that's helpful. And then, I guess, last question would be beef and thoughts on 2015. Another kind of 5% or 6% to 8% year? How should we think about that?

[Michael P. O'Donnell:]

Eat more chicken. No.

[Arne G. Haak:]

Alex, this is Arne. I think 2015 probably looks similar to 2014. If you look at what beef economists are saying and you look at the size of the herd and the amount of time it takes to rebuild the cattle herd, you're not likely to see any slowing of inflation probably until 2016.

[Alexandra Chan:]

Got it. And you think you'll still run kind of 2% price or so?

[Michael P. O'Donnell:]

That probably is what we'll average next year. And we've been -- historically, we've been anti-price in anticipation that we would need it at some point and we still think we have the ability to take further pressure.

[Operator:]

[Operator Instructions] We'll take the next question from Nicole Miller Regan of Piper Jaffray.

[Joshua C. Long:]

This is Josh on for Nicole. I wanted to follow up on the cost of goods sold side. Mike, you had mentioned that seafood and dairy, along with beef were also a little bit of pressure points as well in the quarter. So wanted to just kind of put that in context with beef as well. I would imagine beef is still the primary driver there. But any sort of commentary on those other pieces that you had mentioned and any sort of trends you're seeing there?

[Arne G. Haak:]

Josh, this is Arne. I think you've heard, I think, similar drumbeats from other restaurant companies as well through this earnings season. Shrimp has been a challenge all year and so nothing really new there. But you're well into double-digit inflation there. In the third quarter, kind of higher trends for us in crab in terms of the seafood basket. And also, butter, which I think your Cheesecake Factory talk about how that's affecting their costs. Our costs are up over 50% in terms of butter. And we use a fair amount of butter in our business, so whether it's with the steak or in sauces or what have you. So those are the primary drivers.

[Joshua C. Long:]

And we appreciate all that butter. What kind of outlook do you have? And then I know butter is not something that you can contract. I mean, is there a contracting opportunity around shrimp? Do you expect -- for your projections, are you kind of expecting similar trends from 3Q to carry on through the end of year? I mean, any sort of outlook there on those other 2 pieces?

[Arne G. Haak:]

I would say our outlook for food costs are probably similar in the fourth quarter to what we saw in the third quarter. There could be some mixing around. I think the butter and the dairy could come down a little bit. And -- but going into next year, beef is probably the biggest thing on our mind that has the biggest volatility at this point.

[Joshua C. Long:]

Understood. And you all have done a good job managing the value proposition and just maintaining that overall experience by putting a little bit -- putting limited price in place. How much did you have in place during the quarter? And then how do you think about or maybe remind us how you think about when you pulled the trigger on that pricing? Obviously, you want to save it for when you really need it. And is that something that you expect could happen this year? Or is that, really, let's reevaluate early next year depending on what the cost outlook and the overall environment looks like?

[Arne G. Haak:]

So our pricing is really a layered approach. We don't -- it's not all-in-one increment. So they kind of come on 3 or 4 different times a year we revisit our pricing. In the third quarter, our pricing averaged about 2.5% to 3% in the third quarter. In the fourth quarter, we're in a similar place, maybe at the high end of that range. And as we go to next year, I think Mike's comments before are fairly reflective of it, is that we are reluctant pricers in terms of we prefer to grow our sales through traffic as opposed to always solving for price. That being said, the biggest change we probably made in terms of consumer facing is what we did on the Happy Hour where we took our Sizzle, Swizzle, Swirl pricing from $7 to $8.

[Joshua C. Long:]

Got it, that's helpful. And so then as we think about a lot of the initiatives you've had in place on check building, managing the experience and opening up opportunity for either new guests or maybe different dayparts across your portfolio, how does that play into the holiday outlook? It might be still a little early. But each year over the last several years, as we've been coming out of 2009, we've seen improved holiday trends and maybe also some opportunity around the operator side to build check and get a little bit more creative with how customer demands that experience. So what are you thinking about for the holiday period? And what kind of leverage do you have to pull either on the marketing side, the mix side, the check-building side to kind of make sure everyone can kind of get in and get that Ruth's Chris experience that they'd like to see?

[Michael P. O'Donnell:]

Well, I think we're very excited about the upcoming holiday season. And our early bookings are running ahead of last year and we're very excited about that in terms of private dining and banquet business. We're continuing to see great growth in our Sizzle, Swizzle and Swirl Happy Hour, that daypart and that continues to feed into the regular dining piece. We're seeing very high and good numbers relative to our Thanksgiving, which will now be our, I think, it's our fourth year now that we've been in the Thanksgiving business and in addition to early discussions around Christmas. So I think we -- last year, we moved some private dining banquets, et cetera, to the lunch period as we started to reach capacity in some restaurants and we're already working on that. We've got a great sales force out there that are doing -- that really are doing great things for us in our restaurants. So I -- we're very -- we feel very good about the fourth quarter.

[Operator:]

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

[Michael P. O'Donnell:]

Thanks, Melissa. I want to thank everybody for being here and not going to the Noodles conference. As always, it's a great day to go out and eat steak and fish. Thank you very much for being with us.

[Operator:]

This concludes today's conference. Thank you for your participation.