Ruth's Hospitality Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 13 Feb 2015

[Operator:]

Hello, good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group, Inc. Corporated Fourth 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, Orlando, and good morning, 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 O'Donnell:]

Thanks Mark, and thanks to everyone for joining us on the call today. We are pleased to report our fourth quarter results, highlighted by total restaurant sales growth of nearly 10% which finished off another strong year for Ruth’s Hospitality Group. It was a year where we saw some external challenges both from a difficult weather we faced in the first quarter to a continued inflationary cost environment. Even with those headwinds, our steadfast focus on improving the strength and consistency of the brand experience along with the hard work of our people allowed us to deliver another year of strong operating results and earnings growth. I’d like to begin by discussing the priorities that we believe will maintain the strength of the brand and continue to drive shareholder value well into the future. Our first priority is maintaining a healthy core of Ruth’s Chris Steak House restaurants. The sale of the Mitchell's restaurants which closed on January 21st of this year was a strategic decision that now allows us to focus all of our efforts on the Ruth’s Chris Steak House brand. 50 years ago our founder, Ruth Fertel brought Chris Steak House and started a legacy of success by delivering the highest quality of food, beverage and service in a warm and inviting atmosphere. This is what we strive to replicate each and every day. As we look forward to the next 50 years, we continue to build upon these basic ideals and values which are illustrated in our recent marketing campaign, “This is how it's done”. As a part of our efforts to continually strengthen our competitive position, we have recently completed a comprehensive evaluation of all of our existing restaurants. This evaluation combines learnings from the successes of our recent restaurant openings along with an assessment of how we align our building designs with our growth initiatives. As a result of this exercise we have developed a plan to enhance our base restaurants. This will be a three to five year initiative for us that will invest additional capital into our restaurants ensuring that the Ruth’s Chris Steak House experience stays relevant for our guests. Our focus on food, service and hospitality is reflected in the fact that we achieved our 19th consecutive quarter of positive same store sales growth during the fourth quarter of 2014. Our same store sales at company owned restaurants increased 5% during the quarter with the growth evenly split between traffic and check. This was a strong performance on top of the 5.5% year-over-year comp growth in the fourth quarter of 2013. We have historically been reluctant to use our pricing power to drive revenues and prefer to drive sales first and foremost through traffic. We know our average check often lies 10% to 30% below our competitors and believe this positioning gives us the ability to use pricing appropriately to protect margins In 2015 we expect continued pressure on food cost along with increases in labor and healthcare. We view our pricing power as a strategic advantage and expect to use this in 2015 through a greater expense than we traditionally have in prior years. Our second priority is thoughtful development. In the fourth quarter we opened our second and third company-owned restaurant of 2014. These opened in Gaithersburg, Maryland, and Marina del Rey, respectively. We currently have two leases signed for 2015 openings. St. Petersburg, Florida which we are very proud of opened this past Monday on February 9th and we currently expect to open a second Dallas Texas location late in the second quarter. We believe that opening three to five company-owned restaurants per year or mid-to-high single digit growth rate is the right pace for us and we are currently working on additional opportunities for late 2015 and beyond. Turning to franchise side of the business. Our franchisee opened our fourth restaurant in Taiwan in the fourth quarter further strengthening our presence in Asia. Our franchise partners have also been active in re-locating restaurants. In both Indianapolis and Suburban Atlanta our franchisees have completed a dramatic re-location of the restaurants which reflects the company’s new brand standards while adding significant private dining space. We remain unique in the high end space with just over 50% of our restaurants owned by franchisees and nearly $16 million in annual franchise revenues. Our franchisees remain the heart and soul of our business. They will be key partners in our growth and we will continue to lead the charge of our international expansion. We now have 30 franchisees worldwide operating 57 restaurants domestically and 20 internationally in 11 different countries. Our franchisees are set to open four locations in 2015 and we have 11 commitments for the next three years. Our third priority in creating long term value is returning capital to our shareholders. Thanks to the strong cash flow generated by our restaurants and our franchisees combined with a strong, yet flexible balance sheet we were able to fund sustainable growth while returning access capital in a disciplined manner. In conjunction with the sale of Mitchell's restaurants we announced a new $50 million share repurchase program during the fourth quarter to replace the previous $30 million authorization. We repurchased approximately 377,000 shares under this new increased authorization during the fourth quarter. This brings our total repurchases for 2014 to 1.2 million shares or $15.4 million. Additionally the Board of Directors has approved a 20% increase to our quarterly cash dividend which now stands at $0.06 per share. As part of our balanced total return approach, we have returned over $200 million to shareholders since 2010 through debt repayments, share buybacks and cash dividend payments. I’d now like to turn the call over to Arne who will provide details on the fourth quarter and our 2015 outlook.

[Arne Haak:]

Thanks Mike. Before we get started I want to remind everyone that due to the sale of the Mitchell's restaurants which we completed on January 21, the operating results for Mitchell’s have been reclassed to discontinued operation. In the following discussion discontinued operations are excluded unless otherwise stated. On January 27, we filed the current report on Form-8K containing unaudited proforma consolidated financial statements giving effect to the sale of substantially all the assets related to the Mitchell’s restaurant. For the fourth quarter ending December 28, 2014 we reported net income from continuing operations of $8.9 million or $0.26 per diluted share on a base of 35 million diluted shares. This compares to net income from continuing operations of $6 million or $0.17 per diluted share in the fourth quarter of 2013. During the fourth quarter last year, we changed from the delayed method to the preferable redemption method for recognizing gift card breakage revenue. The resulting cumulative effect of the change in estimate and the change in accounting principle was recorded in the fourth quarter of 2013 and reduced other operating income by $2.1 million. Excluding this adjustment and income from discontinued operations our non-GAAP diluted earnings per common share was $0.23, an increase of 15% year-over-year compared to $0.20 in the fourth quarter of 2013. In the fourth quarter, total company-owned restaurant sales were $93.1 million, an increase of 9.9% from $84.7 million last year. This growth was driven by a 5% increase in comparable restaurant sales which consisted of 2.5% increase in traffic and a 2.5% increase in average check. The fourth quarter marked our 19th consecutive quarter of positive same store sales and our 20th consecutive quarter of positive traffic growth. We are pleased to know the deposit of trends we saw in the fourth quarter have continued as the first quarter 2015 comparable sales to date are positive in the mid single digit range. As a reminder, the first quarter of 2014 faced severe winter weather throughout much of the country and impacted Ruth’s Chris Steak House sales by over $1 million in the quarter. Average weekly sales for company-owned restaurants were approximately $112.2 thousand in the fourth quarter, an increase of 4.5% compared to $107.3 thousand in the fourth quarter of 2013. Total operating weeks for company-owned restaurants were 836 in the fourth quarter, up 5.4% year-over-year from 793 in the fourth quarter of 2014. Franchise income in the fourth quarter increased $4.4 million up 4.7% year-over-year from $4.2 million in the fourth quarter of 2013. The increase was driven by a 3.2% increase in comparable franchise restaurant sales as well as by new franchise unit developments during the last 12 months. Other operating income increased to $1.4 million in the fourth quarter, up from negative $1.3 million in the fourth quarter last year. As I mentioned previously the change in accounting for gift cards was recorded in the fourth quarter of last year. All in all, fourth quarter total revenues increased 12.9% year-over-year to $98.9 million Turning to our cost structure. Food and beverage cost as a percentage of restaurant sales increased 72 basis points year-over-year to 31.8%. The increase is driven primarily by higher beef, seafood and dairy costs. Beef costs were up approximately 5% year-over-year in the fourth quarter. While current beef inflation is modest, we expect increased inflation in the latter part of this year. At this point we are currently expecting beef inflation for the full year to be in the range of 5% to 8% year-over-year and currently we do not have any of our beef needs locked in. Restaurant operating expenses as a percentage of restaurant sales increased 36 basis points year-over-year to 45.6%. The increase was driven by higher labor and benefit cost. Marketing and advertising cost as a percentage of total revenues increased 69 basis points year-over-year to 4.5%. This increase was due to a planned timing shift in quarterly advertising spend. For the full year marketing and advertising cost as a percentage of total revenues remained flat at 2.9%. Our G&A expenses decreased by approximately $900,000 to $6.9 million from $7.8 million in the fourth quarter of 2014. The decline was driven marginally by lower variable performance based compensation. As a percentage of total revenues, G&A expenses improved 198 basis points year-over-year to 7%. As Mike mentioned, the board of directors recently approved a 20% in the quarterly cash dividend to $0.06 per share. This dividend will be paid on March 12, 2015 to common shareholders of record as of the close of business on February 26, 2015. Lastly at the end of the fourth quarter, the company’s outstanding debt under the senior credit agreement was $13 million, down from the $30 million outstanding at the end of the third quarter. Overall we reduced debt outstanding by a total of $6 million during 2014, while opening three new restaurants, acquiring a franchise location increasing our dividend and buying back over $15 million worth out of outstanding shares. Now, looking ahead to 2015 I’d like to provide some guidelines for some of our key cost metrics. Overall we expect our cost of goods sold to be in the range of 31.5% to 33.5% of restaurant sales. We expect restaurant operating expenses to range between 47% and 49% of restaurant sales. Marketing and advertising costs are expected to be 2.9% to 3.1% of total revenues. G&A expenses are expected to be between $25 million and $27 million. We expect our effective tax rate to be between 31% and 34%. Capital expenditures in 2015 are projected to be between $20 million and $23 million. Reflecting two new company-owned stores and an enhanced capital plan that aligns with our financial operating and brand initiatives. Lastly we expect our fully diluted shares outstanding to be between 34.7 and 35.4 million shares exclusive of any share repurchases under the company’s previously announced share repurchase program. With that, Orlando I’d now like to turn the call over for any questions that we might have.

[Operator:]

[Operator Instructions] We'll take our first question from Joshua Long with Piper Jaffray.

[Joshua Long:]

Great, good morning. I wanted to see if we might be able to talk about some of the dynamics in fourth quarter that probably showed up at the top line, specifically around the private party and holiday dining period. I would imagine that you had very strong results there, with a lot of the initiatives and efforts you put in place over the last several years. But just wanted to see if you could provide some high-level comments around that, and then I have a follow-up.

[Michael O'Donnell:]

Well I would say Josh that we had as you described it a very strong holiday season, both in private dining you know that Christmas -- our Thanksgiving and Christmas openings which are now in our third and fourth year, continued to do very well. We really saw solid performance across all our buckets of business that really are B2B business or private dining business and our a la carte business. So it was all in all a very good solid revenue quarter.

[Joshua Long:]

Great. Thank you. And then, looking forward, it sounds like you might be on the lower end of taking – as far as utilizing menu price this year, just given some of the pressures you'll be facing, and then also carrying that up with the 5% to 8% inflation on the beef side. Curious on, if there's an opportunity to lock that – you had mentioned that you're not locked now, but really just trying to reconcile both maintaining and supporting the value side of it to the consumer, but then, also, maybe locking in some visibility on the cost side, as you go through 2015?

[Arne Haak:]

Sure, Joshua, this is Arne. You know right now, the beef environment is fairly benign. We expect that it will be higher later in the year. The challenge we face as we’ve shared with you before is that we buy prime beef and it’s the top 2% to 3% of cattle. And so, it’s not something we can – a price risk we can manage through the buying of contract. So we need to contract with our suppliers and right now I think the supplier appetite is not at a price point that we would say is attractive for us to lock in. But we’re active in the market. We look at it all the time and if the opportunity presents itself and typically they present later – early in the second quarter, if the opportunity is there we’ll take advantage of it. If we have to continue to buy at the market I think we’re very comfortable of doing that as well.

[Joshua Long:]

That’s helpful. On the check side for the quarter, 2.5% check, how percent – how much menu price did you have in the fourth quarter?

[Arne Haak:]

It was right around in line with our check increase.

[Joshua Long:]

Okay. And then, thinking about the three to five-year plan around food service hospitality, it sounds like you've completed that initial program. And obviously, you have a long runway of initiatives trying to work with, but what kind of initial CapEx is associated with it or what kind of timing on the rollout would we expect to see as we're out in the restaurants and just kind of interfacing with the brand? Over what time frame should we be seeing those initiatives start to show up?

[Arne Haak:]

We’re getting started right now. We have planned to begin work on 15 restaurants this year. It’s fairly - if you redeployed - if you look at the capital we were deploying at Mitchell’s, some of that, instead of deploying it at Mitchell’s now we’re deploying it back focusing on the Ruth's Chris restaurants. We expect – I don’t think all 15 will get done this year, but we’ll begin work on 2015. And I think it’s a dynamic process and as we continue to go forward we’re going to look at what are the returns are we getting. How do we tweak? How do we manage? But I think we’ve put some of the more – it’s a good mix of both financial which is we’re expanding capacity, adding the ability to increase sales from operational, how do we improve efficiencies back to the brand. How do we keep the brands standard current so it doesn’t get stale and it still resonates with the consumers. So we’re going to balance it between those three. We’ll try and do – we’re going to start work on 2015, we probably won’t finish all in 2015. And in terms of dollars around CapEx it’s mid to high single-digit in the millions of dollars, so somewhere between I would say $6 million to $10 million is probably what we’ll spend in that area this year.

[Joshua Long:]

Great. That's helpful. And then, last one for me. The Ruth's Chris brand has some very memorable and important milestones that it's approaching. I'm curious about how that might work its way into the marketing this year and just your ever-evolving interface with the consumer via media, whether that's TV, social media, et cetera. I'm just trying to think about that as we go through the year, as well?

[Michael O'Donnell:]

I think Josh, we’re very proud of the fact that we’re 50 years old. And we’re even more proud of the fact we think there is at least another 50 years in front of us. I think from a consumer standpoint what they care about is that there is great food and service in the restaurant, not how old they are. Probably you’ll see more noise in a public relation atmosphere maybe some more on digital around our 50th Anniversary. We will do a fair amount of celebrating internally, because I think that’s really where – it’s very important. Our franchisees are very proud of it and we look forward to celebrating the actual anniversary date. You could probably see or expect to see or hope to see some more noise around that in the spring time and more in the public relation side.

[Joshua Long:]

Understood. Thanks so much.

[Michael O'Donnell:]

Thank you.

[Operator:]

[Operator Instructions] We’ll now hear from Andy Baris with Jefferies.

[Andy Baris:]

Hey, good morning guys, couple of things, I’ll do them kind of one at a time. I guess on the unit growth on the company side it sounds like you may be able to sneak one more in and addition to the two leases. Am I reading into that correctly for 2015? And then how does the evaluation of sort of smaller markets for company owned growth start to play in over the next couple of years?

[Michael O'Donnell:]

Andy, Mike. Thanks and good morning. We do think we have a very good change to getting one in in the fourth quarter, which obviously will not have - the biggest effect will be more expense than with the income probably, but to the extent that we can get it open we will. In terms of small market we’re really starting to see a lot of more opportunities and in fact the restaurant that I hope the next time we’re talking, we’ll talk about that would be at the end – is in a small market. So we think that small market on a going forward basis could be 50% of what we develop.

[Andy Baris:]

Okay. And then, on the – I guess the remodel or retouches, can you give us a little bit more color? I know you've gone through and done the major remodels over the last handful of years. But what's the emphasis of this refresh program that you're talking about now?

[Michael O'Donnell:]

I think Andy, there’s a number of things and you’re correct. We have been investing substantial amount over the last [indiscernible], but we continue to look at where it’s opportunities where we can add capacity. So, that if we can add a private dining room, if we can add additional seat to bar or expand the bar, that becomes a priority for us. The things that we’ve been learning from our new restaurants and the success of those restaurants kind of gives us some indication about where we think we need to be in terms of the design, look and feel. Also some operational improvements that you won’t see, but in fact, in the kitchen where we’ve been able to sort of redesign some of the way that systems work, Kevin Toomy has done fabulous job in that regard and therefore it creates more efficiency. So I think you’re going to see and when Arne was talking about in the 15 restaurants, is you are going to see a continuation of those kinds of things and bringing into play some of the things we’re learning. We’ve learned all the way from back first sort of significant endeavor within Portland and up to and including what we’ve has done recently in St. Pete. So we’re starting to see some of things that have happened there that we’ve done that we would like to put into place. And those 15 restaurants are identified. Then we’ll go to the next 15 restaurants, and we’ll go to the next 15 restaurants. So that’s kind of the story.

[Andy Baris:]

And where are the franchisees along that continuum? Are they starting to look at some of the things you guys have been doing, as well, and putting some capital to work?

[Michael O'Donnell:]

Andy, that’s a great question. I’m happy to say, yes. When I was talking about these dramatic relocations, they really – I mean, Indianapolis and Atlanta, and the balance of the franchise communities is investing to starting to step up the investments. So these two in particular and just a very recent, we’re really dramatic and are spot on with what we’ve been doing in St Pete and what we did in Marina del Rey, so it’s really very exciting. And its balance that we’ve had a number of meeting around that and one of the meetings was actually in the Indianapolis restaurants with lot of franchisees and I think you could easily say there’s a great deal of interest in following along.

[Andy Baris:]

Okay. And then just one more, and I'll turn it over to others. On pricing, I just want make sure, it sounds like you've been judicious in the past that kind of less than 2%. It sounds like this year we should expect 2% plus for realized menu price increases?

[Arne Haak:]

Yes. Well, we hope for realized menu. But what we have put in place, Andy, is probably the high end of the 2s in the front half of the year than it kind falls off, but it certainly averaging more as we stand today, more than two. So we are solidly I think higher if I look at our business plan against what we’ve done the last several years, we’re probably planning, as of right 75 to 100 basis points higher than what we’ve typically done, which I think that’s fairly significant change for us from that perspective. And as we’ve talked about with you at your conference at ICR, I think it’s just the reality of the inflation you saw all across the food basket last year in labor and healthcare.

[Andy Baris:]

Right. Okay. Thanks, guys.

[Michael O'Donnell:]

Thanks, Andy.

[Operator:]

[Operator Instructions] And next we’ll hear Megan Yang with Raymond James.

[Megan Yang:]

Hi, guys, it’s Megan on for Ryan Bickel [ph]. So what’s the ending cash balance for last quarter and also if you could give some color on how you plan on using the proceeds from Mitchell’s. Is it all going to Ruth’s or do you have any other initiatives or any other plans in the pipeline?

[Arne Haak:]

So the ending cash balance, it was $4.3 million, I don’t know, Mike if you want to take that.

[Michael O'Donnell:]

Megan, as we’ve said, when we did sold Mitchell’s business we’ve increased our share repurchase plan to $50 million. In addition as Arne described, our CapEx expenditures for the year were going to be spending some increased capital on the 15 restaurants you talked about, building new restaurants we’ll continue to pay back – pay down debt, buy back shares and pay our dividend.

[Megan Yang:]

Okay. Thank you.

[Arne Haak:]

Thanks, Megan.

[Operator:]

There are no additional questions in the queue. I would like to turn the conference back to Michael O'Donnell for any additional or closing remarks.

[Michael O'Donnell:]

Thank you everybody for joining us this morning on the call. It’s always just a great day to go out and eat steak, particularly if you don’t already have your Valentine’s Day reservations. Happy Valentine’s Day to everybody. Thanks.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.