Ruth's Hospitality Group, Inc.
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Hello. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group Inc. Third 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, Lori, and good morning, everyone. Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer of Ruth's Hospitality Group. Before I 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 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. Mike will start the call off today. After which, I will provide you with a financial update on our third quarter results as well as on our outlook on the remainder of 2013. I would like to now turn the call over to Mike.

[Michael P. O'Donnell:]

Thank you, Arne, and thanks to everyone for joining us this morning. We are pleased to report to you another quarter of solid revenue growth. Our total revenues grew 5% to $88.6 million, led largely by continued traffic growth at Ruth's Chris Steak House. Our third quarter has historically been our seasonally slowest quarter, and these results are particularly gratifying in light of what has been a challenging environment for restaurant sales. This revenue growth, coupled with solid operational execution and relatively modest beef inflation resulted in earnings of $0.05 per diluted share on an adjusted basis compared to $0.02 last year. Comparable restaurant sales at Ruth's Chris Steak House company-owned restaurants increased 4.2%. This marks the 14th consecutive quarter of positive comparable sales and comes on top of 5.9% increase in comparable sales last year. Entrees with service, a proxy for traffic, increased by 3.2% during the third quarter, while average check increased 0.9%. Our strategic initiatives are designed to drive sales growth to traffic and we are pleased to report our 15th consecutive quarter of traffic growth. Our comparable sales growth trends have slowed modestly in the fourth quarter and partly believe due to financial uncertainty around the government shutdown. Despite this, we are pleased to note that, thus far in the fourth quarter, our comparable sales trends have remained positive in the low to mid single-digit range. Our Ruth's Chris franchise-owned domestic comparable restaurant sales increased to 1.8% during the third quarter while international comparable franchise-owned restaurant sales decreased 0.6%, resulting in a blended increase of 1.4%. The decline in international comparable sales was negatively affected approximately 1.6%, as a result of unfavorable currency exchange rates. As I noted, we continue to focus on growing sales primarily through traffic across our 3 core segments, which consists of special occasion guests, corporate businesses and our core regulars. We believe this strategy has contributed significantly towards our broad guest appeal and it has resulted in consistent comparable sales growth during the last few years. Our Ruth's Seasonal Classics are 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 22% of preference in the third quarter, a slight increase in recent trends, driven largely by changes in our seasonal menu offerings During the third quarter, roughly 67% of the customers who selected the Ruth's Seasonal Classics exhibited a preference for the higher-tiered offering. Our Sizzle Swizzle and Swirl happy hour bar menu continues to be an important part of our business. Our guests appreciate the quality and variety of options, as well as the incredible value that the menu offers. Our private dining sales at Ruth's Chris Steak House, which we view as a proxy for business demand, grew 16.1% in the third quarter and continued to outpace our overall comparable store sales growth. On a year-to-date basis, our private dining sales were up 12.4%. While it is still quite early for the holiday banquet season, our absolute bookings are up year-over-year despite a shortened banquet season and due to the late timing of Thanksgiving. From a marketing standpoint, we continue to target our promotions around special events and holidays. During August, we hosted a national "Hand-Crafted Cocktail" dinner, which included 5 courses of specialty cocktails, each paired perfectly with Ruth's Chris menu items. And in October, Ruth's Chris Steak House hosted a National Dinner featuring Italian wines and regionally inspired dishes. During November, we will celebrate Thanksgiving. And in December, we will once again be open for Christmas. These events and selective promotions continue to be very successful for us and provide our guests another compelling reason to visit our restaurants. Switching to Mitchell's Fish Market, our comparable sales declined 1.4% during the third quarter, after a 4.6% growth in the third quarter of last year. Traffic decreased 4.8%, which was partially offset by a 3.5% increase in average check. Similar to the second quarter, Mitchell's sales continued to mirror the softer sales trends that have affected much of the casual dining industry since early summer. July was, by far, the weakest month for the quarter at Mitchell's. In August and September, the sales trends improved, in part due to the marketing and promotional efforts intended to improve mix. As a result, we were able to offset the decrease in traffic from a profitability standpoint. Our comparable sales at Mitchell's Fish Market in the fourth quarter are currently flat. At Mitchell's, we have employed new initiatives around special events. In August, Mitchell's locations hosted a successful National Dinner event with food and beer pairings in conjunction with Sam Adams. In October, all of our Mitchell's restaurants mirrored the Italian-themed wine dinners hosted by our Ruth's Chris units. Similar to Ruth's, we believe these special events can help raise the profile of Mitchell's and through engaging educational and interactive experiences, attract new guests and increase frequency for our regulars. Mitchell's Fish Markets will also join Ruth's Chris in being open for both Thanksgiving and Christmas. With regard to real estate during the third quarter, we relocated our company-owned Ruth's Chris restaurant in Houston, Texas. Additionally, a franchisee opened a new Ruth's Chris Steak House restaurant in Chattanooga, Tennessee. In San Antonio, Texas, our franchisee was able to relocate to a superior location after many years in its former location. I am pleased to say that these 3 locations are off to a strong start and outperforming our system-wide domestic average. Internationally, one of our restaurants in Hong Kong was successfully relocated and one of our franchise locations in Dubai was closed due to a lost lease. We continue to operate a successful Ruth's Chris Steak House in the marina district of Dubai. In the fourth quarter of 2013, we expect to open a franchise restaurant in Shanghai, China. Over the last 2 years, we and our franchise and license partners have opened or relocated 13 new Ruth's Chris Steak Houses worldwide. This represents a 5% increase in the system, an increasingly important component of our long-term revenue 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 growth. We remain active in our development efforts and are continuing to work on additional company and franchise restaurants. For 2014, we expect to open 4 new company-owned Ruth's Chris Steak Houses beginning with Denver in January. This will be followed by restaurants in Gettysburg, Maryland; Marina del Rey, California; and Dallas, Texas. Additionally, our franchise pipeline remains robust, as we have commitments for 16 future franchise restaurants in the next 5 years. In summary, we are very pleased with the momentum in our business. Our non-GAAP adjusted earnings have increased over 35% year-to-date. Our traffic gains at Ruth's continue to outpace the industry and we're off to a solid start in the fourth quarter at both Ruth's and Mitchell's. As we look ahead, we believe the strength of our brands and our franchise partners, as well as our ongoing operational focus have us well-positioned for continued success. I'd like to turn the call back over to Arne.

[Arne G. Haak:]

Thanks, Mike. For the third quarter ended September 29, 2013, we reported net income of $2.9 million or $0.08 per diluted share on a base of 35.8 million shares. This compares to net income of $802,000 or $0.02 per diluted share on a base of 35.2 million shares in the third quarter of 2012. Our net income in the third quarter of 2013 included a $1.3 million after-tax benefit from insurance settlements proceeds related to Deepwater Horizon and Hurricane Sandy. Excluding this benefit and income from discontinued operations, our non-GAAP diluted earnings per common share was $0.05 in the third quarter of 2013 compared to $0.02 in the prior year third quarter. During the third quarter of 2013, we generated total revenues of $88.6 million compared to $84.3 million last year. Total company-owned restaurant sales increased to $84.4 million compared to $80.9 million in the third quarter of last year. Our average weekly sales for all company-owned Ruth's Chris Steak House restaurants was approximately $81,000 in the third quarter, an increase of 5% compared to $77.1 thousand in the same period last year. Operating weeks for the company-owned Ruth's Chris Steak House restaurants were 816 in the third quarter of 2013 compared to 806 last year. Our AUV calculations and restaurant operating weeks excludes discontinued operations. At Mitchell's Fish Market, average weekly sales were approximately $67.6 thousand compared to $68.6 thousand in the third quarter of last year. Restaurant operating weeks at Mitchell's were flat year-over-year at 247. Our franchise income increased 7.4% to $3.5 million from $3.3 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 44 basis points year-over-year in the third quarter. During the third quarter, our beef costs were up 1.8%. Although we're pleased with the moderate level of beef inflation thus far in 2013, this has largely been driven by softer retail demand and we will remind you that the supply fundamentals of the beef industry continue to remain tenuous. Restaurant operating expenses, as a percentage of restaurant sales, were flat year-over-year at 55.5%. Marketing and advertising costs as a percentage of our total revenue decreased approximately 30 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 million a year ago. And as a percentage of revenues was 8.2% of total revenue in the third quarter of 2013, up from 7.1% 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 third quarter, the company had $37 million in debt outstanding under its senior credit agreement, down from $40 million at the end of the second quarter of 2013. Our capital expenditures during the third quarter were approximately $5.1 million and we did not repurchase any shares during the third quarter. Also, as noted in our press release, our Board of Directors have approved a payment of a quarterly cash dividend to shareholders of $0.04 per share. This dividend will be paid to shareholders on November 26, 2013 to all common shareholders of record as of the close of business on November 14, 2013. Based on our third quarter results, we would now like to update our guidelines for some of our key 2013 metrics. To start, I'd like to remind you that, for reporting purposes, 2012 was a 53-week year and 2013 is a 52-week year. As a result, our 2003 fourth quarter -- sorry, 2013 fourth quarter will be composed of 13 weeks, while last year's fourth quarter results represented 14 weeks. As we have previously disclosed, the extra week in 2012 increased revenues by $9 million and increased 2012 earnings by approximately $0.02 per share. In terms of updating our guidance for 2013, overall, we expect cost of goods sold to be within the range of 31% to 32% of restaurant sales for the year, which is a reduction of 50 basis points from our last update. For the fourth quarter, we have contracted over 70% of our beef needs at prices that average 2% to 5% above prior year levels and now expect our beef inflation to run in the low to mid single-digits for the full year. We expect restaurant operating expenses to be between 5 -- sorry, 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 year. Our G&A expenses are expected to be between $28 million and $30 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 lower remodel 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 are fully diluted shares outstanding to be between 35.5 million and 36.5 million, 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. To reiterate, we remain very excited about the health of our business and our ability to execute against a well-balanced, shareholder-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 award-winning dining experience that resonates with existing and new customers. We will continue to include high-quality development opportunities for both company and franchise locations in our strategic plans. Our franchise partners are the heart and soul of the brand 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 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 can continue as we execute over the coming years. Operator, I'll now turn it over to you for questions.

[Operator:]

[Operator Instructions] We'll go first to Nicole Miller with Piper Jaffray.

[Nicole Miller Regan:]

In thinking about the rest of the year, what, in your projections, do you think about the banquet business for holiday? And what do you think about the price component in traffic, please?

[Michael P. O'Donnell:]

As I said in our prepared remarks, our early indications are at banquets -- at banquets are above last year, so we feel very good about that. In terms of pricing, we've taken some modest price, which results in about a 1% increase for the balance of the year. And so we are -- we feel like that was a reasonable opportunity, given what we think the forecast is in beef. And I'm sorry, what was your third question?

[Nicole Miller Regan:]

What -- do the big parties do? Do they do anything differently when they come in and maybe book the private dining? I mean do you think they might come in but spend less? Or do you think they might come in and spend more this year? That part.

[Michael P. O'Donnell:]

Nicole, I think we saw some interesting things happen in the first couple of weeks when the government was going through its shutdown. Our traffic was actually still pretty good. The reduction was really in as much in the average guest check. I think we -- my instincts says and what the bookings look like is that we will have both strong numbers in terms of bookings and I think that pricing will be fine.

[Nicole Miller Regan:]

And just a last quick one on Thanksgiving and Christmas. Is that all stores will be open and is it going to be just dinner? Or lunch and dinner?

[Michael P. O'Donnell:]

It's most of the stores. There are certain restaurants where, just given the loss, particularly out in the West, it makes it very difficult. And it's a combination of lunch and dinner. It's kind -- we do not serve brunch per se. We don't make menu changes other than at Thanksgiving, we do offer a turkey dinner. But depending on the restaurant and depending on what the historic demands have been, we can open as early as noon and be open until 9

[Nicole Miller Regan:]

For this holiday, do you know for those 2 days, if you'll be, net-net, open more hours as the same as last year?

[Michael P. O'Donnell:]

I would tell you that we will be open more hours than we were last year.

[Operator:]

Our next question is from Brett Leebe [ph] from Deutsche Bank.

[Unknown Analyst:]

This is on behalf of Jason West. Few questions. Let's start off with -- I just want some clarification, if you could, on October comps. You would said slower, but then you said low to mid single-digits, which sounds similar to what you're doing in that -- what you did in 3Q?

[Arne G. Haak:]

Yes, sure, Brett. This is Arne. I think within that range of low to mid-single digits, you could be below what we were in the third quarter. And clearly, when the government was having the shutdown, that part of the quarter, so far, you could clearly see that there was some weakness in sales. But it seems to be coming back so we're not far off from where we were in the third quarter.

[Unknown Analyst:]

Do you have any initial outlook on what you're seeing for 2014 beef inflation?

[Arne G. Haak:]

Sure, Brett. I think as we've said all through the year that the supply side is still challenging. We haven't seen any significant beef building of supply in terms of the herd. That being said, every time we bring experts in or we have a forecast, we seem to be wildly stronger or lower than what we thought. I think this year, we expected a fairly strong year in terms of price increases. We did not see that because retail demand fell off. And that's kind of the unknown component. The restaurant demand has really held up for prime products. So if we had to guess, I would probably say it's somewhere between 4% to 8%, 5% to 10%, is where we would guess. We're doing our planning work right now for next year. We do not have any beef contracted at this point so -- but that would be our initial guess.

[Michael P. O'Donnell:]

I would remind you, Brett -- this is Mike. I would remind you that we have historically been very price-conscious in not taking price. And when we have, it's been very modest. So we feel like if it's that kind of a range in terms of pricing or in terms of price beef inflation, that we'll have the pricing capability to be okay there.

[Unknown Analyst:]

Okay. And one last question on cost of goods. You've obviously had a strong run rate over the last 4 quarters and you once again lowered your guidance to 31% to 32%. It looks like in the model, that implies either flat or deleverage in the fourth quarter. Is that because you're seeing something different or just the law of large numbers that you've had 4 strong quarters?

[Michael P. O'Donnell:]

I think it's more of the -- beef had 3 strong quarters. The fourth quarter, we expect beef prices to be up. Our -- the place where we are -- do not have beef locked is really in December on our filets. And last year, there was a lot of inflation on prices at that time. So that spot will be the big uncertainty there for us in terms of our outlook.

[Operator:]

And we'll go next to Andy Barish with Jefferies.

[Andrew M. Barish:]

A couple of questions. On the mix turning negative, any thoughts there? Was it just tough to read during the third quarter?

[Arne G. Haak:]

Andy, this is Arne. Which mix are you referring to?

[Andrew M. Barish:]

Just check average increases were less than the pricing I think you had during the quarter? So it appeared as if menu mix was a little bit negative?

[Michael P. O'Donnell:]

Pricing actually came down.

[Arne G. Haak:]

Yes. Andy, I mean it's very close. I don't think it's anything that we're alarmed about at all. We're actually, as Mike had said, reluctant pricers. And if we look back on the third quarter, I'd say we are very pleased. We'd rather see more traffic and growing -- sales driven by growing traffic, as opposed to a more robust check in price.

[Andrew M. Barish:]

Got you. And then on the operating expense line, this is the first time in a while you hadn't seen leverage. I know the third quarter is a seasonally slow quarter but can you give us kind of a view there of what sort of comp you think it will take going forward to get leverage on that line? I know you guys have done a really good job managing on the labor side of things while continuing to provide the great service that the brand is known for and things like that.

[Michael P. O'Donnell:]

Now Andy, I think your first part of your question kind of hit it on the nose there. It's very -- third quarter is seasonally our slowest quarter. We have our slowest -- our lowest weekly sales. And it's harder to get leverage for us when we have -- in the fourth quarter, for example, we tend to get -- if you just look at the cost as a percentage of sales, we tend to have better leverage. There is nothing I would say alarming that we see in terms of our operating expenses. I think things -- when we look at our labor, we look at our labor modeling, how we perform versus our labor modeling. They -- our operators are doing a fantastic job of being very P&L-minded without losing sight of our #1 goal, is to create great memories for our guests in the restaurant.

[Andrew M. Barish:]

Great. And then finally on health care, can you just review for us, I think you guys have a pretty generous insurance -- health insurance program already. So is there much, if any, incremental cost as you start to think about the Affordable Care Act for 2014 and that labor and benefits line?

[Michael P. O'Donnell:]

Sure, Andy. I'll tell you the answer to that question really depends on how much more enrollment we see in our plans today. We do offer benefits to employees at well below what the government is requiring. So unlike many restaurant companies, we are not faced with the challenge of having to offer health care to our employees when, in the past, we haven't. Our employees with as few as 23 hours, can receive benefits. So that part of the challenge is not that big for us. But the question really is, what is everybody else going to do? Are we going to see more participation? We've done work around this. We think that the labor cost -- or the cost that's going to come to the labor line are going to be manageable, but we're keeping a keen eye on what's happening. And obviously, I think when you look at what happened with healthcare.gov, more people may be coming to company plans because it's so challenging to find out what it costs to buy it from the government.

[Andrew M. Barish:]

Right. And just one more on -- you've got a couple more deals for company-owned openings in '14, which is great. Anything different out there in terms of the real estate development side? Or is it just these are deals that you guys have been working for a while and they're finally pushing through the pipeline?

[Michael P. O'Donnell:]

Andy, I think we continue to source what we think are going to be high performers. We're very pleased with just what's taken place in Houston, as we've relocated that. We're still pleased with what we did in Portland and in Cincinnati. We think we're taking a very disciplined approach to it. We're going to continue to do that. We said we'd do 3 -- we'd like to do 3 to 5 a year, these 4 lining up, and we'll continue to work on the pipeline.

[Operator:]

[Operator Instructions] We'll go next to James Fronda with Sidoti & Company.

[James Fronda:]

Could you, I guess, talk about any other initiatives I guess similar to what you've done with your pre-fixed menu and Happy Hour? Anything that you should talk about that you may introduce in 2014 to continue driving traffic?

[Michael P. O'Donnell:]

James, we will move on rather modestly in the things that we do. I mean I think what we know performs well. I mean, we're trying to make 500-degree sizzling plates and execution is the #1 thing that we go about doing. So the pre-fixed has been an in since 2009. Our Sizzle, Swizzle and Swirl, we rolled out starting 2.5 years ago. We continue to make changes to some of the food offerings and we do it to our Seasonal Classics. And what's very, very important to us and what's important to our consumers is that we continue to execute. We're going to do all we can to continue to create relationships and emotional attachments to the people who come to eat with us. And so it's really about execution for us.

[Operator:]

And our next question is from Bryan Elliott with Raymond James.

[Bryan C. Elliott:]

Just maybe follow-up a little more on Andy's question about site selection, and just curious, your thoughts on what you're seeing as far as availability and cost, both of the leases and are you seeing any tightening of build-out costs?

[Michael P. O'Donnell:]

Brian, Mike. Thanks. We're-- we've got a very -- we think a very disciplined model that gives us the kind of returns that we want. We're seeing -- good real estate is still good real estate, expensive. We've been able to take what we think is appropriate cost out of the development of the building regardless of what's going on in terms of construction cost. We're going to continue to focus on that. We are seeing landlords with the opportunity to provide capital if we need it. But our current capital structure really is pretty attractive. We borrow money at pretty good rates. So we don't see headwinds in terms of cost to construction. Good real estate is still expensive. And we walk away from quite a few deals because of that.

[Bryan C. Elliott:]

Okay. But as far as sort of deltas, you're not seeing anything measurable on sort of the all-in cost to get a unit out open today versus a year or 2 ago?

[Michael P. O'Donnell:]

No. I would tell you that we continue to focus on getting that to cost less and not more. And we have [indiscernible]

[Operator:]

And with no other questions in queue, Mr. O'Donnell, I'll turn it back to you for any additional or closing comments.

[Michael P. O'Donnell:]

We thank you all very much for joining us this morning on our call. As always, it's a great day to go out and eat steak or fish. Thanks a lot. I appreciate it.

[Operator:]

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