Ruth's Hospitality Group, Inc.
Q2 2013 Earnings Call Transcript

Published: 2 Aug 2013

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today Ruth's Hospitality Group, Inc. Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Arne Haak, Executive Vice President and Chief Financial Officer. Please, go ahead, sir.

[Arne G. Haak:]

Thank you, Anthony, and good morning, everyone. Before we begin, I would 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'd 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. Finally, I'd like to remind you that today's call may not be reproduced in any form without the express written consent of Ruth's Hospitality Group, Inc. I'd like to now turn the call over to Mike O'Donnell, our Chief Executive Officer of Ruth's Hospitality Group.

[Michael P. O'Donnell:]

Thanks, Arne, and thanks, everyone, for joining us this morning. We are pleased to share with you an update on our second quarter results, during which we continued our operating momentum. Total revenues in the second quarter grew approximately 5% to $101.8 million, led by continued traffic growth at Ruth's Chris Steak House. Our ongoing focus on operational efficiencies allowed us to see strong bottom line flow-through, as demonstrated by the 18% increase in diluted earnings per share on a non-GAAP adjusted basis. Our team and our franchisees take great pride in caring for guests everyday, and their operational focus has contributed significantly to our strong competitive positioning and continues to drive the strength and consistency of our sales and profits. Comparable restaurant sales at Ruth's Chris Steak House increased 4.6% during the second quarter, marking the 13th consecutive quarter of positive comparable sales for company-owned restaurants and our 14th straight quarter of traffic gains. Additionally, this year's comparable sales growth was on top of the 6% increase last year. This year's second quarter was also negatively affected on a year-over-year basis by the shift of Easter into this year's first quarter. We're pleased to note, thus far, in the third quarter, our comparable sales are currently up in the low- to mid-single digits, which is running over 5.9% sales growth in last year's third quarter. Across the entire Ruth's Chris portfolio, comparable company-owned restaurants, 50 restaurants or approximately 81% reported positive comp sales during the second quarter. Just over 1% of this increase will all -- will fall off in August of this year. Entrées would serve as a proxy for traffic increased by 2.1% during the second quarter, and average check increased 2.5% for the period. Our menu at Ruth's Chris Steak House restaurant currently reflects an approximate 2% price increase. Our Ruth's Chris franchise-owned domestic comparable restaurant sales increased 3.6% during the quarter, while international comparable franchise-owned restaurant sales increased 3.2%, resulting in a blended increase of 3.5% year. We will continue to focus on growing sales to traffic across our 3 core segments, which consists of special occasion guests, corporate business or B2B and core regulars. We believe this strategy has contributed significantly towards our consistent comparable sales growth during the last few years. Our Ruth's Seasonal Classics continue to be a key component of our menu offerings, particularly to our special occasion guests, who may be looking for value or price certainty. These pre-fixed selections comprised approximately 20% of preference in the second quarter, consistent with the trends that we saw in the first quarter. During the second quarter, roughly 60% of the customers who selected the Ruth's Seasonal Classics exhibited a preference for the higher-tiered offering. We also remain pleased with our Sizzle, Swizzle and Swirl happy hour premium bar menu, which is now in 51 restaurants. The menu features a number of high-end food and hand-crafted cocktails that deliver an incredible quality at an accessible price point in a way that we believe does not compete with our dining room sales. This offering gives us an opportunity to not only drive incremental sales to the traditional happy hour, but continue to turn many first-time, often younger guests into Ruth's Chris regulars, while contributing to our overall sales growth. Private dining sales at Ruth's Chris Steak House, which we view as a proxy for business demand, grew 12.6% during the quarter, and we are encouraged to see that it continues to exceed our comparable year-over-year store sales growth. From a marketing standpoint, we continue to target promotions around holidays and special events. During the second quarter, we had very successful promotions around both Mother's Day and Father's Day. We also had a great event of celebrating the 100th anniversary of the Robert Mondavi wine group in over 75% of our restaurants, and we are very grateful to the Mondavi family for sharing this celebration with us. We particularly like these events. They give our guests another compelling reason to visit our restaurants. Additionally, we used media in the form of television advertising for brand-focused communications during the second quarter to support Mother's Day, Father's Day and graduation season sales. To date, we have found this brand-building strategy to be an effective way to maintain top-of-mind awareness. At Mitchell's Fish Market, comparable sales declined 1.4% during the second quarter, comprised of a 2.8% decrease in traffic, partially offset by a 1.5% increase in average check. Similar to Ruth's business, Mitchell's faced a calender shift headwind of about 1 point during -- due to Easter falling in the first quarter of this year. While Mitchell's sales during the second quarter mirrored softer sales trends that appeared to affect much of the broader dining industry, unit level profitability improved year-over-year. Looking over the last few quarters, we remain encouraged by the results of our efforts at Mitchell's and the initiatives that we have planned for the remainder of 2013. Switching to real estate. Our franchisees opened 2 new Ruth's Chris Steak House restaurants since the end of the first quarter, 1 in Puerto Rico in April and the other in Chattanooga, Tennessee at the beginning of July. And on July 22, we relocated our company-owned Ruth's Chris restaurant in Houston. During the last 2 years, we, our franchisees and licensed partners have opened or relocated 11 new Ruth's Chris Steak Houses worldwide in a 2-year period. This represents an 8% increase in the system and an increasingly important component of our long-term sales growth. We continue to be pleased with the performance of our newer restaurants, which we believe validates our ongoing efforts to thoughtfully accelerate our new restaurant development. We remain active into our development efforts and are continuing to work on additional company and franchise restaurants for 2014 and beyond. We recently signed a lease for a new company-owned Ruth's Chris Steak House in Gaithersburg, Maryland, which we project to open in mid-2014. Additionally, our franchise pipeline remains robust, as we have commitments for 16 future franchise restaurants in the next 5 years. In summary, our business remains strong. Our non-GAAP earnings have increased 45% year-to-date. Our traffic gains at Ruth's continue to outpace the industry, and we believe Mitchell is continuing to make steady progress. As we enter the second half of 2013, we believe the strength of the Ruth's Chris brand and our ongoing operational focus have us well positioned for continued success. I'd like to turn this back over to Arne.

[Arne G. Haak:]

Thanks, Mike. For the second quarter ended June 30, 2013, we reported net income of $7.8 million or $0.22 per diluted share on a base of 37.5 million shares. This compares to net income applicable to preferred and common shareholders of $5.8 million or $0.17 per diluted share on a base of 35.1 million shares in the second quarter of 2012. Our net income in the second quarter of 2013 included a $600,000 income tax benefit pertaining to employment-related state tax credits from prior periods. Excluding this benefit and income from discontinued operations, our non-GAAP diluted earnings per common share was $0.20 in the second quarter of 2013 or an increase of approximately 18% compared to the prior year. During the second quarter of 2013, we generated total revenues of $101.8 million compared to $97.1 million last year. Total company-owned restaurant sales increased to $95.1 million compared to $91.2 million in the second quarter of last year. Average weekly sales for all company-owned Ruth's Chris Steak House restaurants was approximately $92,000 in the second quarter, an increase of 4.3% compared to $88,200 in the same period last year and excludes operating weeks from discontinued operations. As Mike noted, our comparable sales growth in the second quarter of this year was affected by the shift of the Easter holiday to the first quarter of 2013 from the second quarter of 2012. While this shift helped our first quarter comparison by approximately 1 percentage point, we believe it had a similar negative impact on our second quarter comparable sales growth for both of our concepts. Restaurant operating weeks for company-owned Ruth's Chris Steak House restaurants was up 13 weeks year-over-year, and that reflects the addition of our Cincinnati restaurant. At Mitchell's Fish Market, average weekly sales were approximately $72,300 compared to $73,300 in the second quarter of last year. Restaurant opening weeks at Mitchell's were flat year-over-year at 247. Franchise income increased 12.5% to $3.6 million from $3.2 million last year due to a combination of improved sales volumes and new franchise unit development. In terms of our cost structure, food and beverage cost as a percentage of our restaurant sales decreased approximately 180 basis points year-over-year in the second quarter. During the second quarter, our beef cost decreased roughly 3% year-over-year, but remained up over 15% over a 2-year period. While we are pleased with the unexpected moderation in beef cost in the first half of 2013, this has largely been driven by softer demand. We would like to remind you that the supply fundamentals of the beef industry remain tenuous. We had contracted over 70% of our beef needs for the third quarter and over 35% in the fourth quarter at prices that average 3% to 5% above prior-year levels. With the slowing of the rate of inflation in the first half of the year, we now expect our beef inflation to run in the mid- to high-single digits for the full year. Restaurant operating expenses as a percentage of restaurant sales were 50.3%, a decrease of approximately 70 basis points compared to last year. The year-over-year improvement was driven by improved occupancy cost and the positive effect of comparable store sales growth on our fixed and semi-fixed costs. As Mike mentioned, our operating margins expanded at both of our main business units and, on a blended basis, averaged 10.7%, up roughly 150 basis points over last year's second quarter margin. Marketing and advertising costs as a percentage of total revenue increased approximately 100 basis points, largely due to timing differences and planned quarterly spending compared to last year. Our G&A expenditures increased to $7.3 million from $6.2 million a year ago and, as a percentage of revenue, was 7.2% of total revenue in the second quarter of 2013, up from 6.4% in 2012. This is due to higher professional fees related in part to various tax projects, investments in our IT infrastructure, as well as higher performance-based compensation. At the end of the second quarter, the company had $40 million in debt outstanding under its senior credit agreement, down from $43 million at the end of the first quarter of 2013. Our net capital expenditures during the second quarter were approximately $3.4 million. Also, as noted in our press release, our Board of Directors approved the payment of a quarterly cash dividend to shareholders of $0.04 per share. This dividend will be paid to shareholders on August 29, 2013 to all common shareholders of record as of the close of business on August 15, 2013. Based on our second quarter results, we are now updating our guidance for some of our key 2013 metrics. We expect our cost of goods sold to be within the range of 31.5% to 32.5% of restaurant sales for the year, which is a reduction of 100 basis points from our last update. We expect restaurant operating expenses to be between 50% and 51% of restaurant sales. Our marketing and advertising spend is projected to remain between 3% and 3.5% of total revenue for the total year. However, the allocation of the quarterly spend will change in 2013 compared to 2012. For the third quarter, we currently expect marketing and advertising costs to represent approximately 3% of total revenues. Our G&A expenses are expected to be between $27 million and $28 million for the full year. And our effective tax rate for the full year is expected to be between 28% and 32%. CapEx spending for 2013 is currently projected to be between $14 million and $16 million, which reflects reduced maintenance of CapEx, but a higher number of new restaurants at the Ruth's Chris brand, as well as a significant investment in our IT infrastructure. Finally, we expect our fully diluted shares outstanding to be between $35.5 million (sic) [ 35.5 million ] and 36.5 million shares, which does not assume potential share repurchases in 2013. With that, I'd now like to return the call to Mike.

[Michael P. O'Donnell:]

Thanks, Arne. We remain very excited about the health of our business and our ability to execute against a well-balanced, shareholders-focused plan, anchored by our Ruth's Chris business. A strong team effort on execution has allowed us to make significant progress over the last few years, leading to a consistent high-quality, award-winning dining experience that resonates with existing and new customers. Evidence of this is our sales and traffic trends, which had been very encouraging for almost 4 years running and, of course, our bottom line performance, which has resulted in significant earnings growth since 2010. In addition to growing our comp store traffic, our plans include high-quality development opportunities for both company and franchise locations. Our franchise partners are the heart and soul of the brand, and our mix of the company-owned and franchise restaurants is both unique and a distinct competitive advantage, as we strategically expand. Finally, while we continue to evaluate opportunities to grow and reinvest in our business, we are focused on making wise, long-term capital decisions that include a mix of dividend, debt reduction and opportunistic share repurchases. We believe our balanced approach is working and can continue with our momentum as we look out over the coming years. Operator, I'll now turn the call over to you for any questions.

[Operator:]

[Operator Instructions] We'll take our first question from Justin Marshall with Deutsche Bank.

[Justin Marshall:]

I guess, my first question, did you give, I apologize if I missed it, the Mitchell's quarter-to-date comp?

[Arne G. Haak:]

I don't think that we did, Justin. It's running slightly negative so far in July.

[Justin Marshall:]

Okay, okay. And in your guidance for operating expenses, you guys saw some decent leverage within the quarter, and it seems like your guidance implies that, in second half, we'll see some deleverage on that line. Can you illuminate why a little bit and maybe what's driving that?

[Arne G. Haak:]

In terms of operating leverage, there are some seasonality around the revenue. And so, the third quarter in particular gets a little more challenging. So I think that is the biggest piece, but -- and also, honestly, we've outperformed our own sales projection this year. So I think that -- it may reflect some of that conservatism as well. But that's -- when we look at the full year and we look at rolling up to the full year, that's how we think about it.

[Justin Marshall:]

Okay, great. And then, maybe on just capital allocation. You guys have been continuously paying down debt. It looks like you paid down a little bit more this quarter. What is -- can you talk about your thinking in the priority of what you're looking at versus paying down debt and increasing the dividend over time? Just what are you thinking about your capital allocation plans?

[Michael P. O'Donnell:]

Well, I think -- this is Mike. The first thing is that we find high-quality sites where we can deploy capital and build restaurants. That's where we'll get our greatest return. And so, we continue to do that. But as I said before, we do it -- we think we do it in a very thoughtful way with expectations on very high sales levels and very high returns. After you get past that -- I mean, our opportunities, as we have declared a dividend, if in fact we continue to generate more free cash flow and don't have the ways to deploy capital, say, into the development of new restaurants, it's certainly possible that we could increase our dividend. So also we have an allocation of $30 million allocation to repurchase shares. It's possible that we could do that. But really, we have all pretty much all the leverage available to us. We want to be very focused on getting shareholder return.

[Operator:]

Our next question comes from Andy Barish with Jefferies.

[Andrew M. Barish:]

One clarification. I missed something in your prepared remarks. You talked about a percent or so of something rolling off in August. I don't know if that was pricing, or...

[Arne G. Haak:]

It is pricing, Andy. This is Arne. Our pricing currently is about 2%. We have about 1% rolling off in August.

[Andrew M. Barish:]

Okay, okay. And maybe that kind of follows up into my question on kind of the back half progression on cost of goods. It would seem to imply somewhere around 33%. I know you're now talking about some inflation and you probably have a pretty good luck on that just given the contracts you have. Is that reasonable with some of that pricing falling off, or -- am I looking at that correctly?

[Arne G. Haak:]

Well, I think you are looking at it correctly, Andy. We understand our lucks. We know we have pricing falling off as well. In all honesty, we probably took more pricing earlier this year than we would have if we knew that beef was going to behave this way. I think everybody thought that the prime cuts were going to be higher than where they are today. And so, that's -- I think that does reflect it. So we're expecting, certainly, higher cost of sales in the third and fourth quarter.

[Andrew M. Barish:]

Okay. And then, one other quick one. Obviously, the broad sales environment for you guys sounds like it was good. But I wonder if you could maybe discuss the characteristics of the units, the 20%-or-so of the units that had negative comps or flat comps. You talked about, I think, 80% of the units had positive comps. Is there anything across the characteristics of the negative comp in Ruth's Chris, or are they more just kind of one-off or operational issues?

[Michael P. O'Donnell:]

Kevin Toomy will kill me if I said there were operational issues. But, no -- I think we have things -- we have a convention that shows up and down in 1 -- switches from 1 quarter to the next, so it comes every other year or there's a private dining event that we had that we didn't have. We have some switching of some of the wine dinners that we've done. So there's nothing systemic, Andy, if that's your question. And it's not geographically bound. It's really location by location, and there is -- we don't have any overriding concerns.

[Operator:]

Our next question comes from Bryan Elliott with Raymond James.

[Bryan C. Elliott:]

I just like to get a little deeper dive into what you see going on in the beef market. And was this a short window where you could buy a lot? Or was the dip in place for weeks? And is it -- are we back to up year-on-year on the spot market today?

[Arne G. Haak:]

Bryan, this is Arne. I guess, I'll start with -- there hasn't been a lot of opportunities for us to lock beef prices. I guess, to your first question, we had weeks and weeks where they tend to be...

[Bryan C. Elliott:]

Well, I guess, I -- let me make sure I understood what happened in Q2 properly. That my understanding is it sounds like that you were able to buy at very favorable prices off the spot market for a while in Q2?

[Arne G. Haak:]

Yes, correct. That is correct. And we also had some locks as well in the second quarter. What's happened -- I think, part of it goes back to last year. Last year, if you remember, in the first part of the year, we had some really high inflation. I think for the first part of the year we were averaging up 16%. And seasonally, beef, particularly the prime cuts, had moved up very -- it moved up faster than 16%. This year, we see a return to a more normal seasonal trend and relief in those prime cuts year-over-year. As we look at it, it seems to be -- everything we seem to look at, it seems to suggest that it's a demand-driven phenomenon, that the supply situation is still fairly tenuous. But the demand, in particularly at the retail level, is what has fallen off.

[Bryan C. Elliott:]

And has that reversed here in the summer grilling season? And is the spot now, again, up year-on-year? Or is your guidance anticipatory of that happening soon?

[Arne G. Haak:]

I think we anticipate that we're going to move back into an up year-over-year. Our -- I think the fact that we've locked in beef at positive levels would suggest that as well. But we feel comfortable about executing against that. And we can focus on the other parts of our business.

[Operator:]

[Operator Instructions] Our next question comes from James Fronda with Sidoti & Company.

[James Fronda:]

Can you just go in some more detail, I guess, on your lower occupancy cost? I guess, how are you achieving the lower occupancy cost? Are these related to negotiating lease terms of new or relocated restaurants that you're having?

[Arne G. Haak:]

Some of it is new, some of it is leases that come up for renewal. We have locations that -- you have a location that's out of whack with the market, then we're going to go back and push and negotiate hard.

[Operator:]

And it appears we have no further questions in the queue.

[Michael P. O'Donnell:]

Okay. Well, thank you, all, very much for joining us this morning on the call. As always, it's a great day to go out and eat steak or fish. Thank you.

[Operator:]

That does conclude today's conference. Thank you for your participation.