Ruth's Hospitality Group Inc (RUTH) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Ruth's Chris Steak House Inc. Third Quarter Conference Call.

[OPERATOR INSTRUCIONS]

As a reminder, today's conference is being recorded. And now, I would like to turn the conference over to Tom Pennison. Please go ahead sir.

Thank you, Diana. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be put upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

With that, I'd like to turn the call over to our Chairman, President and Chief Executive Officer, Mr. Craig Miller. Thank you.

Thanks, very much, Tom. Good afternoon, everyone. We sincerely appreciate you being with us today. Let's begin by discussing our third quarter along with some other recent business developments. Total revenue grew 27.2% to 58.3 million, primarily due to a 7.9% increase in average unit restaurant sales and a 17.1% year-over-year growth in Company operating weeks. We generated solid 4.3% comparable restaurant sales growth against strong year-ago results, as well as contributions from 2005 and 2006 classes of restaurant openings, which we believe demonstrates the strong appeal of our concept and continues to validate our strategy.

Majority of our comp mix stemmed from favorable menu initiatives that resulted in mix shifts and higher menu pricing, while our traffic was also slightly positive. Overall, considering our 10% plus comparable sales growth in the third quarter last year and our three-year cumulative 25% result, it's probably one of the best and fine dining, and we are certainly pleased with that.

In terms of continuing with our with our momentum and despite the three-year improvement in our Company average unit volumes from 4.2 million in 2003, to a trailing 12-month 5.5 million in 2006, I will remind you that many of our newer sales initiatives are still in their early stages such as our beverage programs, online reservations systems, online advertising, and most recently in test, our Friends of Ruth loyalty program.

We also see great opportunities to grow our private dining business, which currently represents less than 10% of our total restaurant sales. Improved technology is providing more information about our guest preferences and we believe we can utilize the information we have accumulated over the past year to continue to better understand our guests and further improve their experience.

As mentioned, we continue to enjoy strong volumes in our newer units. Their average weekly sales exceeded the comp base by some 25% during the quarter, which we believe points to great execution, sound real estate decisions, and ongoing growing demand for the sizzling steak house experience that have made us the country's premier steak house for more than 40 years.

So notwithstanding some near-term pressures on the consumer that may or may not have abated, we think the public's long-term appetite for our experiential dining occasions will continue to grow. And it's this underlying secular trend that is the stimulus for our development program. As the largest system of fine-dining steak houses in the world, our formidable and expanding 37% gap over our closest competitor in number of units operating and 20% higher unit volumes, we believe we are in a preeminent position to secure additional market share and leverage our geographic distribution to drive sales and importantly profitability.

Our third quarter top line results were consistent with expectations and we believe planned higher year-over-year marketing spending helped us avoid traffic pressure, clearly felt across all industry segments during the summer months. The cost pressures from higher beef prices we experienced during the quarter were above our expectations. The higher year-over-year marketing and advertising costs are expected to also show some incremental benefits in the coming months as we move into our seasonally highest volume period. Consistent with prior years, our third quarter is the lowest revenue and toughest margin period due to the lack of leverage from our fixed expenses, primarily G&A.

The five acquired franchised restaurants that we closed on in July are now fully integrated into our company operations. As I have said in the past, these restaurants are already strong performers and are accretive to our bottom line. So, with additional focus, we think we can make these great restaurants even greater. To that point, we believe that the roughly $5 million we have budgeted to spend in capital upgrades over the next six to nine months is well justified and will generate solid returns for our shareholders.

In addition, now that we have added Chicago on October 8 and Troy, Michigan this week to our company operations, we are looking forward, where we are looking to raise the average check of all seven units through menu enhancements and the implementation of our wine and bottled-water initiatives as these restaurants have lagged company-store averages. These two efforts have had the desired effect at our other company locations over the past year or so, and we see no reason why we can't replicate that same success in these restaurants. The addition of online reservations and installation of new POS equipment are also expected to offer us traffic-building opportunities.

Despite the previously announced slippage of three 2006 openings from the fourth quarter to the first quarter of 2007, we are on track with our development plan for 2007 and expect to deliver increases in company operating weeks by 20% or better. It is noteworthy that the franchise acquisition itself has not impacted our plans for 2007, but has opened up markets that were previously undeveloped to us and we intend to evaluate the opportunities as we are studying 2008 development and beyond.

We did not open company-owned restaurants during the quarter, but we are under construction for the two restaurants we will be opening in late November and mid-December. Our domestic franchise development has been active this year with four openings year-to-date at the end of the quarter and most recently, in Mauna Lani, Hawaii and Huntsville, Alabama, as well as an additional international franchise opening in Edmonton, Canada earlier this week.

We have recently signed agreements for Japan, additional Canadian restaurants and Central America and are eager to bring Ruth's Chris to other locales as diverse as the Middle East and Europe. With ten current international restaurants, we think we have proven both the portability of the brand and importantly the universal appeal of the Ruth's Chris dining experience. This is all going to create significant future development opportunities.

Our fundamental desire remains to grow the entire Ruth's Chris system. Real estate developers continue to offer us prime locations because they appreciate the attractiveness of securing a well-known and proven brand like ours, and how that might spur interest from other luxury or near-luxury retailers to their developments. Given these circumstances, we believe we will be stepping up our unit development phase at both the company and franchise level next year, and I will take a little bit more about that at the end of the call.

For more details on our third quarter financials, I will now turn the call back over to Tom Pennison, our Chief Financial Officer, who will take us through these details, as well as some updates on our financial guidance. Tom?

Thank you, Craig. As Craig mentioned, during our third quarter, total revenues increased 27.2% to 58.3 million from 45.8 million last year, with restaurant sales increasing 28.4% to 55.5 million from 43.2 million in the same period a year ago. This increase in restaurant sales was due to a 17.1% growth in operating weeks during the quarter, which were driven by three new restaurants year-over-year, as well as the five restaurants acquired, as well as continued growth in our comparable restaurant base.

Comparable restaurant sales increased 4.3% for the quarter, consisting of a modest overall entree growth of 0.1% and an average check increase of [per entree] spending of 4.2%, which included approximately 3.5% in pricing. Once again, we experienced an increase in our dinner and banquet entrees, which were partially offset by a decline in our lunch entrees. In addition to the day part shift, the mix shift from food into beverage of approximately 1.2 percentage points, primarily due to wine and bottled-water sales, has continued to help us raise our average check beyond menu price enhancements.

This growth also, as Craig mentioned, lapped robust comparable sales growth last year of 10.7%. Our average weekly sales were 94,300 for the quarter, 7.9% higher than the prior year on a base of 588 operating weeks versus 502 a year ago. Average weekly sales volume for our comp base was 91,700, which demonstrates that our newer restaurants continue to experience higher volumes than our comp base.

Franchise income increased 6% to 2.7 million in the third quarter, due to increases in both royalties and fees. Franchise royalties benefited by seven additional locations operating on a year-over-year basis, including one new franchise location, which opened in Salt Lake City, Utah during the quarter. Comparable franchise-owned restaurant sales grew 5.7%, with strong growth by our international franchise partners. Partially offsetting this growth was the reduction in royalty income from the five franchise restaurants, which we acquired in the quarter.

Food and beverage costs were 18.3 million, compared to 13.5 million in the third quarter of 2005. As a percentage of restaurant sales, food and beverage cost increased 180 basis points to 33% from 31.2% in the prior year period. This is, of course, is higher than our long-term average and targeted 31% to 32% range. The higher food and beverage cost as a percentage was due to a sharp and unexpected rise in beef cost, particularly in tenderloins, and to a lesser extent in higher seafood cost. Taken together, more favorable other food cost, beverage cost, mix shifts and the combined price increase were insufficient to offset our deleveraging in the quarter due to beef cost.

Restaurant operating expenses were 26.8 million compared to 21.2 million in the third quarter of 2005. As a percentage of restaurant sales, operating expenses decreased 80 basis points to 48.4%, due to improved leverage on labor cost, despite hourly wage pressures, as well as on certain operating expenses and occupancy costs. Also contributing to the improvement were new restaurants that have approached normalized operating margins, as well as no new company-owned openings during the quarter.

Marketing and advertising cost increased to 1.9 million or 3.2% of total revenue from 0.6 million last year or 1.2 of total revenue. The year-over-year variance was primarily driven by changes in media mix and planned differences in the timing of expenditures during 2006 versus 2005. While unfavorable for the quarter, on a year-to-date basis marketing and advertising as a percentage of total revenues decreased by 40 basis points. Our advertising efforts in the quarter included local cable and radio spots across a number of geographies as well as a further push into our online advertising.

General and administrative cost increased to 5.4 million from 3.7 million in the third quarter last year. As a percentage of total revenues, G&A grew to 9.2% from 8.1% in the year-ago period. Beside certain public company expenses and some higher costs in the Orlando area relative to pre-storm New Orleans, we increased our managerial headcount versus a year ago in our legal, development, construction, and real estate, and operations departments.

Our investment in our franchise development business has also expanded to include more staff focused on the international front where we think we have just scratched the surface of the opportunity. These investments although largely complete at this time, were necessary to prepare for our growth plan in 2007 and beyond.

It is important to note that our G&A includes education and training cost, not only for company-owned restaurants but also certain costs for our franchised locations. As we have expanded the Ruth's Chris system with new franchise partners, we are devoting additional resources to ensure a high level of execution as these new partners become familiar with our operations methodology. We have also noted that several of our peers in the industry allocate these expenses to restaurant operations.

Also included in G&A during the quarter was $374,000 of FAS 123R cost. With a significant option grant on the anniversary of our IPO, as well as previous grants, our FAS 123R cost will be higher in future quarters. At quarter-end, there was approximately 5 million of total unrecognized compensation cost under FAS 123R, which will be expected to be recognized over a weighted average period of approximately 4.6 years.

Depreciation and amortization increased to 2.2 million in the third quarter, compared to 1.6 million last year, which is 40 basis points higher as a percentage of total revenue, due primarily to new openings and the acquisitions we have had over the past year as well as other major remodels and capital expenditures. For the third quarter of 2006, pre-opening costs were 402,000 versus 665,000 last year. We did not open any company restaurants during the quarter but are under construction for the two restaurants we will open in the fourth quarter as well as for our restaurants, we will open in the first quarter of 2007.

As previously discussed, we plan approximately 0.4 to 0.5 million of pre-opening costs per company-owned restaurant, although the timing of certain of these costs can be up to 90 to 120 days before its scheduled opening, and therefore, may be in the preceding quarter as in this case. These costs do also include non-cash rental costs expensed during the construction period.

Operating income for the quarter was 3.2 million or 5.4% of total revenues versus 3.4 million last year or 7.4% of total revenues. Interest expense, net of interest income, decreased to 0.7 million from 1.4 million in the third quarter of 2005. Total debt year-over-year increased by net 23.5 million. During 2006, we repaid 13.5 million in debt, but, during the current quarter, borrowed 37 million related to our franchise acquisition. Our debt balance as of the end of the quarter was 62 million.

During the quarter, we did receive and recognize an additional 1 million in insurance proceeds related to our Hurricane Katrina claim. On a GAAP basis, net income available to common shareholders for the quarter was 2.3 million or $0.10 per diluted share on 23.4 million shares outstanding, compared to a net income of 0.4 million or $0.02 per diluted share on a base of 23.3 million in 2005.

On a pro forma basis, adjusting for hurricane and relocation costs, discontinued operations, as well as the insurance proceeds, our pro forma net income was 1.8 million or $0.08 per diluted share. I encourage listeners to review the reconciliation of GAAP to pro forma net income located in today's press release. At this point, I'd like to discuss our financial guidance. With three full quarters of 2006 now behind us, we remain comfortable with our full-year guidance, which includes 5.5% to 6.5% growth in our comparable restaurant sales as well as a diluted earnings per share of $0.89 to $0.93.

We intend to open three company-owned and seven franchise locations this year, of which all but two company openings remain to be completed. Let me share some of the metrics that drive our confidence for our fourth quarter results. We have had a very strong start to our quarter with our sales growth driving our year-to-date comps to the higher end of our annual range. We will have approximately a 33% increase in operating weeks quarter-over-quarter considering the acquisitions as well as our openings.

Moderating year-over-year beef prices and the continuation of the successful seasonal promotions and menu initiatives will reduce our cost of sales from the third quarter high point. Better year-over-year macro trends including lower energy prices and fewer distractions from 2005 hurricane and storm activity, will help the quarter also, as well as a continuation in addition to certain marketing initiatives we continue to focus on. Also, a very large contributor to this quarter is a -- our high volume sales and profit, extra 53rd week which New Year's Eve continues to be one of our strongest days of the year and it will be a very nice 53rd week addition to our fourth quarter.

As we wind down the year, I would like to also review our 2006 capital expenditures. Our development plans for 2006 call for $18 million to $20 million, with about 10 million in maintenance CapEx. Included in this number was roughly 5 million to upgrade the seven acquired restaurants, a process which has already begun but will take about six to nine months to complete. For the first three quarters of the year, we have spent a total of 15.4 million in CapEx. Some maintenance expenditures will carry over into 2007 as we complete the work on upgrading the acquired units.

For 2007 guidance, I want to remind everyone that 2006 is a 53-week year, as I just mentioned, while 2007 will be a 52-week fiscal year. As Craig stated earlier, we expect to increase operating weeks during 2007 by not less than 20% inclusive of the full-year impact of 2006 new openings and the acquisition of seven restaurants as well as six to seven new company-owned locations in 2007. Three of the 2007 new openings are already under construction and we have already committed to all 2007 sites, which are all under lease or in the final stages of signing agreements. Additionally, we expect six to eight franchise locations to open during the year.

For guidance purposes, we expect comparable restaurant sales growth to be between 3% and 4%, made up of both positive entree traffic and for entree spending. These two factors will contribute to margin expansion coupled with some slight expected moderation in year-over-year beef prices, which will provide an earnings per share of 1.03 to 1.07 for 2007. This represents an 18% to 20% earnings per share growth after adjusting the base 2006 year for the additional 53rd week.

With that, I will return the call back to Craig for some concluding thoughts.

Thanks Tom. We recently celebrated our first anniversary as a public company. And in view of this milestone, I want to take just a moment to review how far we have come over the past year. We did face some daunting challenges in the wake of Hurricane Katrina and in many respects had to rebuild a lot of the corporate infrastructure that was lost. This entire management team has worked diligently this entire year by filling key positions at all levels of our organization, supporting our existing restaurant locations, maintaining our momentum through company and franchise expansion efforts, integrating our recently purchased restaurants and preparing for an accelerated expansion of our namesake brand in 2007 and beyond.

I want to take a moment to congratulate and thank everyone at the Ruth's Chris family for these accomplishments. In addition, we will be purchasing our current corporate office space, which should be complete by the end of the year. This will not have a dramatic effect on our overall financials but will cause us to substitute depreciation and interest expense for rent. The acquisition of this property will give us long-term stability and flexibility as we grow our business and infrastructure.

For more than 40 years, we have consistently offered the very best in fine dining and Southern hospitality at every meal occasion. And while that is certainly never going to change, we are excited about being able to replicate that experience in more and more locations. We expect to deliver six to seven high-quality locations next year in superb new facilities and generate great ROI, much like our 2005 and 2006 restaurant openings have performed for us.

We have a unique business model, which affords us the ability to enhance long-term shareholder value in a number of different ways through growth in our comparable sales, both traffic and average check, expanding our operating margins as we build scale and leverage our infrastructure, company-owned development in prime real estate locations, cultivating new franchise partnerships, and finally by making additional franchise acquisitions on an opportunistic basis. We believe we can deliver superior returns by taking full advantage of all of these considerable investment opportunities.

Thanks very much for sharing this time with us and we now like to ask the operator to open the line for questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And we will go first to Aimee Marcel of Jefferies & Company.

Thank you. I was curious on this beef issue. I would like to know how much you are hedged for the fourth quarter and for next year so far, and also, due to the results from this past quarter, is there any chance you would change your hedging practices going forward?

Right now, Aimee, we are about 20% hedged for the fourth quarter. I think we have demonstrated over a number of years that our policy and our philosophy on hedging of beef is really the type of activity that will cause us to have the lowest overall cost of sales on a continuous basis. We continue to perform at cost of sales levels that are below most of our competitors, if not all of them. And we think that our buying strategy delivers the longest-term value to our guests.

So, despite the fact that volatility will always exist in these items, we believe our strategy to be the most appropriate for our guests and for keeping our prices at a low level. We are going to take the opportunity when we feel prices are reasonable to lock in as much as 50% to 60% of the product from time to time, but that has been consistent with kind of how we have done it in the past.

And the 20% hedge, is that just on the tenderloins or is it on any prime products?

It's primarily on the tenderloins, which has been one of the biggest pressure, if not the biggest pressure point for us over the last six months.

We have been noticing a lot of scarcity on the prime beef side. Has that affected the cost at all?

No. We have not seen that and of course, our relationships with the suppliers of prime beef go back decades. One of the advantages of being the largest user of prime beef is we are in a position to take advantage of these relationships and ensure adequate supply at market prices.

Okay. And then, can I get an idea of when the price increases were taken this year and do we expect any more for the fourth quarter?

Okay. We took a small price increase at January of last year. We took another price increase also a modest one, I believe it was July 1. And the cumulative effect of that is about 3.5%. And due to higher served plate protein prices, we do anticipate taking a small price increase within the next few weeks that will carry us through the first half of next year.

And that pricing, Aimee, is also addressing -- we are also preparing for some of the other minimum wage increases we expect in January, so that we are positioned well for that.

Okay.

It's going to be at a level when you look toward total sales less than 1%.

Okay. And also the promotional and marketing expenses, was it spread out over a series of quarters last year and it just all hit third quarter this year because it seems like there is a lot of money?

Well, actually on a comparable basis, third quarter has always been one of our lowest spend periods. The way it happened in the third quarter of last year, it was relatively very low spending. I think we spent only about $500,000 or $600,000 in the third quarter last year. Keep in mind, in the third quarter of last year, major interruption due to the storm and about half the quarter was impacted by heavy levels of storm activities, in which case we pulled back a lot of advertising dollars that would have been wasted if we had continued to use them.

This has been our plan all year and is consistent with the marketing schedule that we put together. We are also trying to set ourselves up for a great fourth quarter, which is the highest seasonal period. And we believe the advertising dollars that were spent in the third quarter did help us continue to generate positive traffic, going up against some pretty heavy winds in terms of consumer spending.

Aimee also, in 2006, you will see a more normalized scheduling of media spend, whereas in 2005, a lot -- a great deal of those expenditures were moved forward to the first half of the year related to that national cable television buy we did. So, that really shifted some of the monies early in the year. On a year-to-date basis, right now, we are basically about 300,000 differential year-over-year. We are at 5.5% -- 5.5 million versus a 5.2, and that's on the increased sales. That's why on a year-to-date basis, this really comes back to an internal planning which we are consistent with our plan internally. It really becomes a timing issue.

Okay, great. Thanks.

You bet.

Thank you. We will go next to Jeff Omohundro of Wachovia.

Yes. Let me just start with a follow-up on that, maybe just a little more detail about what kind of spending you actually did that would help Q4 and why you would spend it in a seasonally weak quarter, Q3?

Okay, thanks, Jeff. Let me ask Tony Lavely, who is with us today, to answer that question for you.

To follow on what Tom Pennison just added about the spending in the prior year, 2005, and really what we are dealing with this year on a timing basis has much to do with the comparison to the timing of 2005 expenditures as anything else. So, 2005 was a higher spend rate to sales in the first six months of the year to fund the national cable television schedule. We did not do that in the 2006. So, our spend rate for the first half of the year was considerably lower year-over-year.

We were starting to catch up with that on a planned basis. In the third quarter, there was a mix of some local television and radio activity in certain markets to replicate the benefits of the earlier national campaign. The other feature was in the increase in our online spending throughout the quarter that we believe is rapidly building our database and preparing us for a much stronger online program in the fourth quarter of this year.

Also Jeff, one thing -- this is Tom -- I would like to add to that is that during the quarter, we acquired the five franchised restaurants. We had felt there wasn't a significant amount of advertising activity that had taken place earlier this year and especially post of signing the acquisition. And we did go into those markets as we are trying to build some of our initiatives and [do really a] greater advertising in those acquired markets. And as I alluded to as we talk about our fourth quarter, what we are seeing so far in our first five-week period of this quarter is very encouraging of that continued benefit, both the overall consumer as well as some of the marketing initiatives working from our traffic strength.

That's helpful. Also, Tom, maybe you can explain one other point, which is on the full-year guidance, are you incorporating the $1 million of insurance proceeds in that guidance number? And do you expect further insurance proceeds in Q4?

The number, the guidance is a pro forma guidance that excludes all insurance proceeds. So, that's not helping us unfortunately. We do have and we are still continuing work on our insurance claim. We do have a significant amount that's still outstanding as we view it. We would expect that we would have further recognition in the fourth quarter of additional funds. However, once again, from a pro forma standpoint, it will be discounted. But, we have not yet seen the lion's share of any of our business interruption in coverage or proceeds as of yet. So, we still have, from a cash standpoint, we have some great inflows still yet to come in.

Very good. Thank you.

Thank you, Jeff.

Thank you. We will go next to Steven Kron of Goldman Sachs.

Hi guys.

Hi, Steve.

Hi, Steve.

Couple of questions following up on the guidance questions. First with 2006, I think last quarter, when you talked about the integration of the franchised acquisitions that you made, it sounded as if the incremental or $0.10 accretion that you have talked about in the past was going to flow through more in '07, and that the 5 million CapEx or expenses required to kind of upgrade those assets would kind of offset any benefit. Is that still the case or are you looking at fourth quarter flow through a little bit greater than initially expected?

Well, two things in that Steven, the $0.10 incremental what we talked about as we guide to the run rate of those restaurants, of that 5 million investment, some of that will capital, some of it will be expense, some of that's going to go into 2007 also. It's really the first pure year of everything, without those items, where we have everything working for us, is going to be 2008.

That said, we will see a much stronger flow-through in the fourth quarter in all these restaurants as well as early on many had, even I know, even in the third quarter, many people had expected the acquisition to be as of the beginning of the quarter, which five of the seven took place on July 10, as you know, with the remainder just happening in the last couple of weeks.

And we will have some of those items with the recently acquired ones that we are working in that will impact some of their flow-through for October and November. But, all of these restaurants will be very strong for us in the December period, which is really the strongest period of the fiscal quarter anyway. And we see that momentum building through 2007 to realize that $0.10 we have spoken about.

I think the point that you make is a good one and that is that with all seven units now open and operating as company-owned operations, as we move into the middle and second half of the fourth quarter, which is our highest volume period, we will get some accretion from these restaurants, simply because of the seasonality nature of them.

Okay. That's helpful. If I could just flip over to 2007 guidance, I guess I am having a little bit difficulty kind of reconciling the top line guidance with the bottom line and I guess, if I look at your EPS guidance it seems as though it is about 15% growth, recognizing there is a 53rd-week impact in there that you are lapping. But, your top line guidance, it seems as though operating weeks of 20% also includes that 53rd week and you are looking at 3% to 4% same-store sales. So, it looks like a top line expectation something north of 20%, but Tom, you mentioned kind of margin expansion expectation. So, I guess am I missing something here and where might I be wrong?

I think the big -- one of the factors that you want to look at is pre-opening cost, pre-opening for three units that are going to be opening in the early part of the year that are carry-overs from 2006 in addition to the restaurants that we will be opening next year, as well as queuing up restaurants for the early part of 2008. So, the expansion of new units and the development growth is going to be having some pressure on the P&L. We will get leverage out of G&A from the restaurant operating weeks; we will be giving a great deal of that back to the higher pre-opening cost.

Okay. That's helpful. And then, last question on the tax rate, can you give us a little color on your expectation for 2006 and 2007?

Right now, for where we are expecting, we are still finalizing some items with the completion of the acquisitions. For this year, we still -- probably in the 31.5% to 32% round for 2006 and probably as we view for next year in that 32.5% to 33%.

Okay. Thank you, very much.

You bet.

Thank you.

[OPERATOR INSTRUCTIONS]

And we will go to Andrew Barish of Banc of America Securities.

Hi guys, can you give us the -- just the rough unit opening schedule for the six or seven company-owned next year? It sounds like three in the first quarter, is that accurate?

That's correct, Andy. And then, the fourth restaurant will likely be West Palm Beach. That should open in late second quarter, early third quarter. That lease is signed when the design phase of that -- the balance of the three restaurants will be late third quarter or mid-fourth quarter.

Okay. Some of the new menu stuff you guys are doing, is this kind of going to be a more regular activity, some of that Kobe beef and the venison specials you are doing now? Or is that kind of more of a function of the high beef cost environment and those are higher gross margin products? Or is that kind of a little bit of a combination of both that consumers want variety and these happen to be items you can bring in at a pretty decent food cost?

You've nailed that pretty good, Andy. It's a combination of both things. We are wanting to be able to offer some alternatives to our guests based on their choices. We also want to offer them some alternatives that can a little pressure of off certain beef items at certain times of the year. I call them kind of business levers that you can kind of pull them when you need to. We implemented them quite honestly a little bit late, this summer, when beef prices started spiking on. I think we have learned that that we can offer some products.

The venison has started off extraordinarily well for us, as did the custard halibut last spring that did actually move -- remember, when we had a spike in January, we moved 150 or 200 basis points off of beef and the seafood when we ran that selectively last spring. So, it doesn't sound like a lot of movement in menu mix but, for us, it is pretty significant when you have such a large percentage of your consumers buying one product.

Thank you.

Yes, sir.

Thank you, Andy.

Thank you.

[OPERATOR INSTRUCTIONS]

And we will go to John Glass of CIBC.

Thanks. Good afternoon. First, just a quick follow-up on the guidance. Are you including insurance proceeds in the current year guidance and next year, or excluding it?

We continue to exclude all of that, John. We always refer to our guidance as a pro forma number.

Got you. Okay, fine. And then, you talked about -- I thought you said something about current run rate of comp SKUs and confidence in the fourth quarter, could you talk maybe about how third quarter progressed and if you want to talk a little bit about if anything has changed in October?

Our third quarter did progress each month a little bit higher and we are seeing even greater strap in our October period. We did have some benefit in the October period due to lapping Hurricane Wilma, but we saw a great strap before and after that time period also. While we had several storms last year, obviously, that impacted our company, most of those restaurants are in our comp base. But, we did have -- clearly, Wilma impacted the Florida market. But we see that straps continuing as we go forward that has been bringing up our year-to-date comp sales right now toward that upper end as I said, which -- you could kind of do the math there, if it is bringing it up, it's stronger than the top side of the guidance.

Got you. Are you seeing the growth in transactions or is it still the check that's primarily then --?

Actually, very strong growth in transactions traffic.

Got you.

It's been somewhat geographic driven. We have seen improvements on the West Coast, John, in the last couple of months and that area had been a very strong performer for us during 2004 and 2005. And $3-plus gas prices, some housing challenges and other things, our California operations seem to put more pressure on traffic in the early part of the year and we have seen that come back very strongly in the last few weeks.

Great, thank you.

Yes.

Thank you. That will conclude today's question-and-answer session. At this time, I would like to turn the conference back over to management for any additional or closing remarks.

Thank you very much for joining with us today and we look forward to our fourth quarter call and a great holiday season. If you get a chance, please visit a Ruth's Chris Steak House this coming season. Thanks everyone.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.