Ruth's Hospitality Group Inc (RUTH) 2006 Q4 法說會逐字稿

Please stand by, we're about to begin. Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Ruth's Chris Steak House, Inc., Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. As a reminder, today's conference is being recorded. And now I'd like to turn the conference over to Mr. Tom Pennison, Chief Financial Officer. Please go ahead, sir.

Thank you, Erin. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may 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 Mr. Craig Miller, Chairman, President, and Chief Executive Officer, of Ruth's Chris Steak House.

Thanks, very much, Tom, and good afternoon, everyone. Since this is our year-end 2006 call, it does offer us the opportunity to recap our year, but more importantly, to establish an outlook for the future. We will be reviewing both our significant accomplishments and challenges of 2006 and an outlook of opportunities and challenges we see forward looking into 2007. We will also have an opportunity to answer questions after our remarks.

In setting the tone for our call, just as we communicate to our employees daily the importance of delivering the Ruth's Chris Steak House experience, we want to remind our investors and the financial community of the vision of our founder, Ruth Fertel. As many of you know, more than four decades ago, Ruth established a unique service style based on the finest traditions of southern hospitality. And over the years, the business has flourished from that simple idea and today it's the basis for our culture and success. We understand that it's critical to our future success that we carefully nurture and protect the values she integrated into every dining experience. Those values now drive an amazing brand and the premier fine dining company in our category with 7.1 million guests served in 2006.

This strong corporate culture we have at Ruth's Chris has our entire work force excited and energized as we look toward the future. Unlike three years ago, when we had a small management team, with less than a handful of leaders, we have built a team of industry professionals, including 15 people at the VP level and above, covering all of the major disciplines of our organization including, of course; operations, culinary, educational training, beverage, franchising, law, human resources, procurement, real estate, construction, and finance, and accounting. Our team, while keeping a careful eye on an important culture, is charging forward to bring the Ruth's Chris experience to every domestic U.S. market as well as multiple international markets.

At the same time that we've invested in infrastructure, we've been able to improve our financial results. In fact, since 2003, we've grown our average unit volumes at a compound rate of 10.3% to $5.7 million, as well as significantly increasing the cash flow from our restaurants, both in dollars and as a percentage flow-through. This improvement to our already compelling unit economics has not only benefited our shareholders, but has also made our brand more rewarding and attractive for our existing and new franchisees. And, in that regard, our franchise restaurants are approaching company averages with volumes of $5.3 million in domestic sales.

It's also noteworthy that our comparable restaurant group has not changed dramatically in the last three years as we have only began accelerating our unit growth beginning in 2005. It's noteworthy that since 2004, total revenue has grown at a compound rate of 18.9%, largely due to incremental sales at our existing core locations. We credit both positive guest traffic, mix improvements supported by our beverage program, new appetizers, promotions, private dining, and a sustainable culture of excellence has made our sizzling steaks the keystone of the fine dining landscape.

We believe many of our comparable restaurant sales initiatives are still in the early stages and have a significant opportunity to expand our private dining business, as well as other initiatives which currently represents less than 10% of our total restaurant volumes. Working with our marketing and other partners, we are increasingly utilizing information to better understand our guests and further improve their experience.

The restaurant business is not only about being relevant to today's guests, but looking forward, anticipating the desires of our guest of the future. We can appreciate that our brand appeal is broad and that to remain the steak house of choice, we need to design our facilities to accommodate the evolving needs of our guests. With this in mind, we are focused on building larger bars and grill-type seating, as well as more private dining space to meet previously untapped opportunities. We strongly believe these additions will add to our revenue and profit growth. Already we see the results of this strategy as newly-designed units are doing in excess of 20% higher sales volume, much of which is coming from these new revenue centers.

We began 2006 with an original guidance for comparable restaurant sales increasing 4.5 to 5.5% and diluted earnings per share of between $0.84 and $0.87, including $0.02 to $0.03 in stock-based compensation. We had also modeled opening 10 to 14 new restaurants, including five to seven company and five to seven franchise locations. Our financial results for 2006 were substantially better despite some slippage with regard to our development schedule and, of course, the unexpectedly high beef prices. Specifically for the full year, comparable restaurant sales on a 52-week to 52-week comparison, grew 6.2% consisting of entree growth of 0.7% and average increase in check of 5.5%. Our average unit restaurant volume for company-owned locations opened throughout the year, increased to $5.7 million versus $5.3 million in the prior year. And, finally, pro forma earnings per share were 5% above the high-end of our original range at $0.92 reflecting about 23% year-over-year growth.

We did open three company restaurants over the course of 2006 in Pasadena, California; Bonita, Estero, Florida; and our 100th worldwide location in Providence, Rhode Island. We also completed the acquisition of seven franchise restaurants including the one in; Chicago, Illinois; and Troy, Michigan in the fourth quarter. These seven restaurants were all immediately accretive and it's noteworthy that we've been able to improve their year-over-year sales by just over 10% since assuming ownership just a few months ago.

With continued focus and some physical upgrades, we think we can make these great restaurants even greater. And while the acquisition itself has not impacted our growth plans for 2007, it has opened up markets that were previously not available to us and we intend to evaluate the opportunities now that we're studying our 2008 and beyond development.

Our five most recent company openings, including three that opened in '06, all are generating volumes 20% higher than our already healthy comparable base, which we think continues to demonstrate the strong appeal of our concept and helps validate our growth strategy. In particular, we view opportunities in Texas, Florida, Illinois, California, the North East, and South East as being especially ripe for Ruth's Chris development.

In 2006, our franchise partners opened new locations in Clayton, Missouri; Ocean City, Maryland; Destin, Florida; Salt Lake City, Utah; Edmonton, Alberta, Canada; Huntsville, Alabama, and the Big Island of Hawaii. As you can see, our franchise development has been active with a combination of new partners entering our system as well as existing franchisees adding to their Ruth's Chris holdings. We currently have 20 distinct franchise partnerships including ten relationships forged since 2003. Current commitments from our franchise partners consist of 36 locations of which 11 have opened in the past 24 months. So there is still ample growth available within our current franchise system.

With regards to the fourth quarter, Tom will discuss the specifics. But I am pleased to note the strong finish of our comparable restaurant sales as well as solid contributions from our classes of '05 and '06 units. The majority of our comp mix stem from higher pricing and favorable mix shift, while our traffic was slightly positive. On a two-year stack basis, our 14.7% result is probably one of the best in the full-service segment of the restaurant industry and, specifically, the fine dining group. We are pleased with that.

Importantly, the commodities cost spike during the third quarter is apparently behind us and we have chosen to lock in 50% of our total meat purchases in 2007. We are now in a substantially better position from a hedging standpoint which should help mitigate the choppiness to cost of sales and bring us closer to our expected range for the full year 2007.

Now for some more details on our financial performance, I want to turn the call over to Tom Pennison. Tom.

Thank you, Craig. During our fourth quarter, total revenues increased 51.4% to $88 million from $58.1 million last year. Company-owned restaurant sales from continuing operations increased 48.5% to $80.4 million from $54.1 million in the same period a year ago. This increase was due to an additional $8.5 million in sales from comparable restaurants; $7.2 million in incremental sales from our 10 new restaurants and reopened Mary location and $10.6 million in additional sales from the seven restaurants acquired during 2006.

All three of these categories received benefit from the additional 14th week in the quarter versus 13 weeks in the fourth quarter 2005. The 14th week in total contributed $6.7 million in additional restaurant sales. I will comment later on the off-setting impact of this high-volume 14th week, which is the New Year's week, we'll have in our first quarter 2007.

Comparable restaurant sales on a 13-week to 13-week basis, excluding the 14th week just referenced, increased 7.4% for the quarter, consisting of an overall entree growth of 2% and an average check increase of 5.3%. The increased entree growth was partially related to the calendar shift of Christmas Day from a Sunday in 2005 to a Monday in 2006, while the higher per entree spending was partially related to increases in per guest for wine and other beverages as well as year-over-year price increases totaling 3.5%. These factors help raise our average check to $73 for the quarter. This performance laps a comparable sales growth of 8.5% at company-owned restaurants in the fourth quarter of 2005.

Our average weekly sales for the quarter were $118,502, higher than the prior year based on a base of 678 operating weeks versus 495 a year ago. Once again, about 8.4% higher than the prior year, excuse me. Average weekly sales for our comp base during the same quarter were $116,315 which, as Craig mentioned, demonstrates the strength of our sales volumes at our newer restaurants that we're experiencing over our comp base.

Franchise income increased 0.7% to $3.7 million in the fourth quarter due to increases in both royalties and fees. Franchise royalties benefited by seven additional locations operating on a year-over-year basis, but were significantly off-set by the seven franchise locations we acquired. Comparable franchise-owned restaurant sales grew 5.6% for the fourth quarter.

Other operating income was $4 million compared to $0.4 million in the same period last year. This increase was due primarily to income related to gift card breakage which, consistent with the company's existing policy, was determined based on historical redemption patterns of the company's gift cards. The breakage represents the remaining liability balance for which the likelihood of redemption by the guest have been deemed to be remote and for which there is no third-party claim. During the quarter, we were able to recognize additional breakage more so than normal related to the removal of certain third-party claims against a portion of the company's gift card liability via a sale of that liability to a third-party gift card services company. While gift card breakage will continue to be recognized going forward, the amount will be significantly less on a quarter-over-quarter basis than what we recognized in the current quarter.

Food and beverage costs were $26 million compared to $16.7 million in the fourth quarter of 2005. As a percentage of restaurant sales, food and beverage costs increased 150 basis points to 32.3% from 30.8% in the prior year period. Although this was sequentially lower than the third quarter of 2006, as we expected. Taken together, more favorable other food costs, beverage costs, mix shifts, and a combined 3.5% price increase, these were insufficient to off-set our deleveraging due to beef costs. That said, for the full year, our percentage cost of sales were 32.2% which was only slightly above our 2006 expected and targeted range of 31.5 to 32%. This was due mostly to the spike in beef costs during the third quarter. The good news, of course as Craig mentions, is that for 2007, 50% of our entire meat purchase is contracted, and we therefore expect to be at or below the 2006 percentage range this year.

Restaurant operating expenses were $35 million compared to $24.4 million in the fourth quarter of 2005. As a percentage of restaurant sales, operating expenses decreased to 140 basis points to 43.6% due to improved leverage in labor, certain operating expenses and occupancy costs.

We do not currently expect to propose future increases in mandated federal minimum wages to have a significant effect on our labor costs as we already pay higher than single federal minimum wage rates for our non-tipped employees as well as 50% of our company locations are located in higher-priced labor markets of California and Florida which already are in excess of the proposed federal increases.

Marketing and advertising costs increased to $2.8 million or 3.5% of total revenue from $1.5 million last year or 2.8% of total revenue. As we look during the period to increase our local marketing, as well as generate new brand recognition in markets across the country, on a dollar basis, we were up $1.6 million for the year, but were essentially flat on a percentage basis from 2005 to 2006. Going forward, we intend to devote more attention to local marketing initiatives and expect marketing and advertising not to exceed 3% of total revenue.

General and administrative costs increased to $6.9 million from $4.8 million in the fourth quarter last year. As a percentage of total revenues, however, G&A fell to 7.8% from 8.2% in the year ago period; benefiting somewhat by the increased gift card breakage revenue during the quarter. On a dollar basis, year-over-year, the fourth quarter was impacted by the additional week of operations as well as a significant increase in professional fees related to Sarbanes-Oxley compliance and integrated audit fees. For the full year, G&A rose by $7.8 million to 8.5% of total revenues from 7.2% in 2005. We estimate that Sarbanes-Oxley compliance alone added approximately $1.3 million into our G&A in 2006 with a significant amount of that being incurred during the fourth quarter.

While we also face higher cost in the Orlando area relative to our previous experiences in New Orleans, more importantly, we increased our managerial head count versus a year ago in anticipation of our expansion, as Craig touched on earlier. These investments, although substantially complete at this time, were necessary to prepare for our growth.

Also impacting G&A during 2006 is our FAS 123(R) expense for which there was no comparable expense in 2005. While this compensation expense was only approximately $310,000 during 2006, we expect it to increase to almost $1.7 million during 2007 as a result of additional completed grants and expected future grants as well as increased volatility in the calculations underlying the 123(R) valuations.

Depreciation and amortization increased to $2.3 million in the fourth quarter compared to $1.8 million last year, which were approximately 20 basis points lower as a percentage of total revenue. Once again, due primarily to the higher average unit volumes of our new restaurant base as we go through.

For the fourth quarter of 2006, preopening costs were $1.2 million versus $0.7 million last year. We opened two company restaurants during the 14-week fiscal period in Bonita, Florida as well as in Providence, Rhode Island. As well as made preparations for the Lake Mary, Florida restaurant which we opened earlier this month. Also included was lease expense associated with other locations under construction in Anaheim, California and Naples, Florida. Similar to what we described last year, we plan approximately 0.4 to $0.5 million of preopening costs per company-owned restaurant, although the timing of certain of these costs can be up to 90 to 120 days before a scheduled opening. And therefore may be in the preceding quarter. These costs also include, as mentioned above, certain non-cash lease costs expensed during the construction period.

Operating income was $13.7 million in the fourth quarter this year or 15.6% of total revenue versus $6.8 million last year or 11.7% of total revenue.

Interest expense, net of interest income, decreased slightly to $1.2 million. Total debt increased by a net $29.5 million from December of 2005 to December 2006, related primarily to the franchise acquisition and the purchase of the company's corporate office facility in Heathrow, Florida. Our debt balance as of the end of the quarter was $68 million.

We did receive an additional $3.2 million in insurance proceeds during the fourth quarter related to our Hurricane Katrina claim and expect to have the claim finalized in the first quarter of 2007, with no further proceeds expected after that time of the first quarter of 2007.

In addition, we recorded an impairment charge of approximately $1 million for our Columbus, Ohio restaurant during the fourth quarter, although the restaurant will continue to operate.

Our effective income tax rate for 2006 ended at approximately 30%, slightly below our expected rate and resulting in an approximate 29% rate for the fourth quarter. The lower rate benefited from one-time federal tax credits that the company received for continued employment and other payments made to employees impacted by Hurricane Katrina.

On a GAAP basis, net income available to common shareholders for the quarter was $10.6 million or $0.46 per diluted share on a 23.4 million share base, compared to net income of $4.3 million or $0.18 per diluted share on a 23.5 million share base outstanding in 2005. Also on a GAAP basis, we completed, as Craig mentioned, the fiscal year 2006 with net income available to common shareholders of $23.8 million or $1.02 per diluted share on a 23.4 million shares outstanding compared to net income of $7.2 million or $0.39 per diluted share on 18.7 million shares outstanding in 2005.

On a pro forma basis, adjusting for hurricane and relocation costs, discontinued operations, impairments as well as the insurance proceeds, our pro forma net income was $8.8 million or $0.38 per diluted share for the quarter.

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. Please note, as we've discussed previously, the company is changing its earnings guidance from a pro forma basis to a GAAP basis.

For the full 52-week fiscal year 2007, we estimate that our comparable restaurant sales growth will increase approximately 3 to 4%. It's important to note that on a fiscal basis, the first and fourth quarters of 2007 will not include the significant volume in New Year's Eve week that was included in both of these quarters during 2006. This fiscal shift will impact negatively on comparable restaurant sales in the first and fourth quarters and should be considered in allocating expected sales growth throughout the year.

While clearly the recent extreme weather conditions in the North East, especially during Valentine's week, will also have an impact to the first quarter comparable sales, restaurants unaffected by these conditions have continued to perform well. With the fundamentals still working well, we are confident with our annual expectations for the year.

We anticipate increasing system-wide restaurant operating weeks by approximately 20% including the additional 53rd operating week in fiscal 2006, which will result in the opening of approximately six to seven company-owned and six to eight franchised locations. Order to date, we have opened one new location in Lake Mary, Florida while a franchise has opened one new location in Aspen, Colorado.

In terms of the balance of 2007 planned growth, there are currently three company-owned locations under construction in Naples, Florida; Anaheim, California and Biloxi, Mississippi; four properties under lease that are already in the design and permitting phase, as well as two additional properties under lease for future openings. Additionally, there are three franchised-owned locations currently under construction.

With a previously-communicated contracting of 50% of the company's beef needs for 2007 and other commodity agreements in place, the company expects annual food and beverage costs as a percentage of restaurant sales to be between 31.7% and 32.1%, representing an approximately 20 to 60 basis point reduction versus fiscal 2006. Recent freezes have impacted some of our other costs, specifically produce; however, we still anticipate to be able to maintain this range on an annual basis.

As mentioned earlier, annual marketing and advertising expenses, as a percentage of total revenue, are expected not to exceed 3%.

The company's effective tax rate for 2007 is expected to increase to approximately 32% versus the 30% experienced in 2006. As noted earlier, the 2006 effective tax rate was benefited by some one-time credits that will not continue as we go forward.

Finally, diluted earnings per share on a GAAP basis for the full 52-week year 2007, is expected to be between $1.05 and $1.09. This increase from our prior guidance of $1.03 to $1.07 is related primarily to the expected net insurance proceeds we expect in the first quarter.

And with that, I will return the call back to Craig for some concluding thoughts about our plans for 2007.

Thanks, very much, Tom. We do have lofty, but we believe, achievable goals for what we intend to accomplish in 2007. The underlying secular trend for our experiential guiding concept continues to grow. This is the primary stimulus for our aggressive development program. Our current research indicates a domestic universe of at least 250 Ruth's Chris restaurants which suggests we have a long runway of opportunity ahead of us. Interestingly, based on the criteria we use in developing this model, many of our existing smaller market restaurants that are performing at system averages, would not have actually made the cut for this top 250. This leads us to believe that the full potential may be even higher, although time will tell.

In developing our footprint, we are particularly excited about the emergence of high-end lifestyle centers across the country and how they fit so well into our strategy. Real estate developers are offering us prime locations within these facilities because they appreciate the attractiveness of securing a well-known and proven brand like Ruth's Chris and how that might spur interest from other high-end or aspirational retailers.

Our efforts to grow the entire Ruth's Chris system are not limited to the domestic market. We spoke about this last quarter. We have proven the portability of the brand through our ten international franchise locations spanning countries like Canada, Mexico, Hong Kong and Taiwan. In addition to signed agreements for Japan and additional Canadian locations, we have also signed an agreement for five units in Central America. In addition, we're in discussions with experienced operators in other parts of Asia, as well as the Middle East to bring the Ruth's Chris dining experience to these geographies.

In aggregate, our strategy calls for developing a robust international franchise pipeline and expanding our international unit base by some 30% annually beginning in 2008.

In 2007, our goals are really more of the same. We are going to continue improving our existing operations, grow our comps by not less than 3%. We plan on maintaining our market share leadership by generating averaging of volumes that are approximately 30% higher than our closest competitors. And expand our operating weeks by more than 20% on a year-over-year basis, when you exclude the 53-week of fiscal '06. Again, this is above our long-term goal of 15 to 20%.

Specifically, all of the six to seven company locations that we're committed to open this year will be in superb new facilities and should generate great ROIs, much like our '05 and '06 openings have performed for us. And that we are equally excited about our active franchising business which should inaugurate six to eight additional locations into our system.

As I think we have demonstrated, our unique business model enables us to enhance long-term shareholder value in a number of different ways; growth in our comparable sales; expanding our operating margins as we build scale and leverage our infrastructure; company-owned development; cultivating new franchise partnerships and realizing previous franchise commitments and, finally, by making additional franchise acquisitions on an opportunistic basis. We believe we can deliver superior returns by taking full advantage of these considerable investment opportunities over the long run.

We thank you for your interest in Ruth's Chris and now we'll welcome the opportunity to answer any questions you may have. Erin, let's open the line for questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

We'll go first to John Glass with CIBC World Markets.

Thanks. Good afternoon. A couple questions. First around the breakage issue, how much was the breakage specifically in that other revenue line this quarter?

In the quarter, the breakage was a little bit north of $3 million.

Okay. And what is it, Tom, typically in a quarter?

What we expect on an annual basis is you'll be looking at an ongoing in the 800 to 1 million range. And just, because I'm sure this question will be there for a few players, is what this really relates to is we had a significant amount that we had not recognized in the past that we limited the recognition due to certain states that had escheatable claims on it. And what we were able to do through the transaction which is something we were working with throughout 2006 and had anticipated to have some of this in the fourth quarter. This allowed us to clear some of those liabilities for escheatment purposes and allowed us to recognize it. We have recognized gift card breakage current to our policies over historical periods. This is just a, really, a one-time bubble of achieving this agreement and, as I mentioned, on a go forward basis, what we're planning or forecasting, it's about 800 to $1 million that comes into play there.

On an annual basis?

On an annual basis which really is based on how the redemption rate, so it's not perfectly even from each quarter because it depends on the bulk of it which, of course, gift card sales are seasonal, as you'd expect, with the most of them being in the fourth quarter. But a lot of that breakage will come between the third and fourth quarter time frame.

And just to confirm it, it's essentially a profit, right? I mean, there is no off-setting revenue or expense item with the breakage?

That's correct.

Correct.

Okay. Okay. And as it relates to beef, are you contracted for half your beef all year or all of your beef half the year?

We're contracted for half of our beef all of the year.

So it'll be a smoothing effect throughout the quarters, not just the first half of the year, for example?

Correct.

Got you.

And it will be--the other half, there'll be some movement there, but overall that's for the entire year that the contract's in place.

John Glass. Got you, great. Okay. And then just finally last question is you talked about the mix benefit being up on in '05 0.2%, what's your current pricing run rate of that?

Right now as far as we're now into 2007, we're about 2.5% in place on pricing because we had some pricing that came off of us as we entered into the first quarter. In the fourth quarter, as I mentioned, we had 3.5% active in that quarter, but right now it's 2.5% that's active.

Great. Thank you.

And our next question will come from Nicole Miller with Piper Jaffray.

Good afternoon.

Hi, Nicole.

Hi. A couple things. I just want to get some clarity on first quarter same-store sales trends. I'm not sure what you can share, if you can quantify the number, but can you at least let us know if the price increase is enough to off-set first the difficult year comparison and then second the weather? Or would it be expected to be a range below that 2.5% active price increase?

No, I don't think it will be below that, Nicole. We're continuing to show positive traffic. We've had some weeks that have been more difficult due to the weather that Tom mentioned. And we also, of course, on a fiscal basis, have the fall-off of that New Year's week that fell into '06. But on a fiscal basis, we anticipate to be above our pricing.

Okay, great. And then also can you give us an update on the development by quarter?

Sure. We have, as we've mentioned, we have three restaurants under construction. The Biloxi restaurant is scheduled to open -- it'll actually be finished before, but the Casino and so forth is going to open around the first part of July, so that would fall into the --

Q3.

-- Q3, early part of Q3. The Naples restaurant is scheduled to open right at the end of the first quarter. And the Anaheim restaurant right at the beginning of the second quarter. So from a preopening standpoint, I would probably look at a couple in the first quarter, one in the second quarter, one in the third quarter, and then the balance in the fourth quarter.

Okay, great. And is there any plan to take additional menu price increase in 2007?

You know, we watch that on a constant basis. You know, part of it's driven by inflationary costs that we see that we're incurring. We want to see how the minimum wage law, if the federal mandate does go through, how that shakes out. We don't anticipate it having very much of an impact on us. We're watching corn prices, of course, as everyone is. But we're fairly comfortable with where our pricing is. If we were to look at it, and I were to project when we might be wanting to take some additional pricing, it would probably not be before sometime this summer.

Okay, great. Thank you, so much.

Yes.

We'll now move on to Aimee Marcel from Jefferies Company.

Thank you. What kind of rate should we be using for preopening per unit?

About $0.5 million.

$0.5 million, okay. And is there any number we should be looking for these insurance proceeds for the first quarter?

The insurance proceeds we expect the net impact as we work through some final items with the insurance company, being in the $1 million range net.

Okay.

Other item -- just so on the pro forma aspect.

Okay. Now I was looking at your third quarter release, and it looks like you were expecting 23% growth in your operating weeks and now you're saying 20%. Was there any kind of slippage or was it just--?

The 23% is if you look on a comparable basis. The 20% growth is on a 52-week 2007 versus 53-week 2006. If you look at that both on a comparable as a 52 to 52, it's 23% that falls out. So nothing has changed from the operating week growth from what we had before to now.

Okay. Thank you.

You bet.

Our next question comes from Paul Westra with Cowen.

Great. Hi. Good afternoon.

Hey, Paul.

Hi. Just a question on the breakage back to the fourth quarter. I'm curious. Were you expecting that when you initial gave guidance around that number in the number when you gave the original $0.34 to $0.38 guidance?

We had a portion of that expected in when we went through that. There's some of it, it did come in a little bit higher than what we expected when we went through the process, but we were expecting to work through that, because we're working on the process throughout 2006.

Great. And is there, as you look out for '07, above and beyond the insurance gain you noted, was there any other kind of extraordinary costs or gains in your outlook now for $1.03 to $1.07? Or no, I'm sorry, $1.05 to $1--

The only is the first quarter insurance proceeds. I think that, Paul, that to adequately answer your question, I think you were asking, were we surprised on some of our other costs in the fourth quarter? And I believe that our food costs, particularly our beef costs were a little bit higher in the fourth quarter than what we had anticipated when we went into the quarter. The rest of the operating P&L, labor, operating expenses, and so forth came in pretty much exactly as we had expected.

Only addition to what Craig mentioned would be our Sarbanes-Oxley costs did come in much higher in the fourth quarter than what we had originally had in our forecast, which drove some of the overhead line as we went through that also.

Yes. So if you balance out the kind of the additional gift card breakage that we got, the two off-setting factors there were probably 20 basis points higher in food costs than what we had planned on and the additional Sarbanes-Oxley costs that Tom just mentioned.

Okay. And then just another clarity question, you don't mind. You said the first quarter gain will be $1 million. Is that after tax, you said net?

That's going to be pretax.

That's pretax.

That's kind of a net of the pro forma aspect. And just to kind of get -- we have insurance proceeds but there's also some additional costs associated with our old home office facility in Louisiana that's going to be netting against some of that. So that's where that number comes from.

So it's a net pretax of $1 million. The insurance proceeds are covering some additional write-off on our office building in Metairie.

Got it. And then last question, I promise, is the plumpiness of the Sarbanes-Oxley, would you suspect the same impact on the quarterly basis G&A line number in '07 or will that be more normalized?

That will be in the first quarter of 2007, in our forecast, we do have--we expect some higher Sarbanes-Oxley costs. I do feel that it'll be lower in 2007 overall than what we experienced in 2006. One of the things with all the changes the company went through and really having many new players. We did have to use some outsource services throughout 2006 to help us go through the process. So with that, with most of the heavy lifting behind us on that process, at least we expect, although I know I speak like many CFOs have in the past, hoping for that and still getting surprised. Although, based on what we're seeing with the current direction the SEC's been going in, my current expectation is that it will be below what we experienced in 2006 which, as I mentioned, they're just really professional fees and a big part of that in the fourth quarter was really over $800,000 spent in the fourth quarter alone, in that area.

Great. And then, actually you--I know that the other question mentioned first quarter comp. Did you say the first quarter comps were still going to come in about your pricing of 3.5 or did I misunderstand that?

No. What I said was is that I think the question that Nicole had was our comp trend in the first quarter expected to exceed our run rate of pricing which is 2.5%. And my answer to the question was yes, that we do expect it to exceed that.

Great.

We do expect some modest traffic gains here in the first quarter.

Great. Thank you.

Yes.

Jeff Omohundro from Wachovia has the next question.

Hi. Thanks. I guess my first one's on commodities. Just a little bit more on one clarification. Are there any other commodities you're contracting now besides beef? And what is poultry as a percentage of your cost of sales?

Poultry is really insignificant, Jeff. We only have one chicken item on our menu. And we have several other items that we contract for across our P&L operating expense line as well as food cost. None of them are of the significance, of course, that beef is. And that has not changed from our historical way we've done things.

And, Jeff, as we spoke before, most of our seafood is subject to contract. Some of our major dairy items, specifically butter, which is Ruth's Chris goes through a lot of butter, is under some contract. Produce, as I alluded to, is one area that we use fresh produce in all of our restaurants that are locally sourced and we've seen some impact with that recently with the freezes that took place. But, outside of that, really nothing significant, outside of the beef component.

And when you look at your labor mix, just roughly, what is the mix on a percentage basis of the front of the house versus the back?

We look at it several different ways, Jeff. We break out both direct labor, of course, which is restaurant labor and then we look at management and bonuses and benefits. The front of the house and back of the house are fairly close to being equal. A little bit more of a skew to the back of the house, but we're such a service-oriented concept, that the actual percentage of it is not as big a disparity as you might expect.

Okay. And then my last question is on the Friends of Ruth program, just an update on that. And just how you might be leveraging technology in that program.

Well the Friends of Ruth program is still in its early stages. I think we have 15 restaurants now or so that we are actively signing up Friends of Ruth. We see it as a real long-term program to get us closer to folks that are very important to us, that dine with us frequently or are looking for opportunities for easier access to our reservation system.

One of the things we've also, I think is noteworthy here, is the changes that are taking place with what we call walk-in business. With the expansion of our bars and the addition of seating and dining experiences in our bars which are always on a first-come, first-serve basis, we are seeing good growth in that business. And as we move forward, the newer restaurants we build will have even more expanded seating to allow for impulse diners to visit us. Traditionally, Ruth's Chris has been a very, very high reservation-only system. And I think we have historically actually trained a lot of our guests to not even try to get in if they don't have a reservation. And we want to change that a little bit by providing additional seating that's available on a first-come, first-serve basis, whether it's patios or actually in the bar. And we're particularly seeing that in some of our newer restaurants and we're pretty excited about that because it's giving us the ability to get incremental sales over and above our normal dining business.

Great. Thanks.

You bet.

We'll now move on to Barry Stouffer from BB&T Capital Markets.

Good afternoon, gentlemen.

Hi, Barry.

What else was there in the other operating income line, other than the gift card breakage?

In that line item is where we also have some of the other banquet-related items, audio-visual rentals, banquet guarantees and miscellaneous other operating expenses, operating income, rather, of the restaurant operations.

Would you expect that the level in the fourth quarter be repeated or was that just unusually high?

That was unusually high because that was at the completion of the agreement where we're able to take more so than what was normal of what had previously not been recognized. As I mentioned earlier, really on an annual basis, we'll see this amount probably be in the 800 to $1 million --

I'm sorry. I meant the other, the non-gift card breakage portion of operating income was still much higher than your other operating income number had been running on a quarter-to-quarter basis. Is that going to persist or was the fourth quarter just unusually strong?

Well the fourth quarter is always strong for us because of the amount of banquet business that are done during the holidays.

Right.

So that is a higher quarter to begin with.

Okay. And how much did the extra week add to earnings per share in the quarter?

Of the $6.7 million, if you really look at the flow through there, it's probably about $0.04 to $0.06 is what we pretty much had. It's sometimes hard to split the items, so $0.04 to $0.06 is internally what we range for that period of time, depending on how you allocate some of the expenses to each week.

Okay. And the contracts you have on your beef, what's that price versus the average price you paid in '06?

It's about 20 or 30 basis points lower than when you add in the price increases that we have in place. So from an actual cost standpoint, it's pretty comparable to our average pricing for '06, maybe a hair better. But when you add the pricing in it, then we get a little leverage out of that. That's why we're fairly comfortable. We're also cautious about moving that commitment up beyond 50%. There's still a lot of volatility in the marketplace. Prices right now are coming down pretty rapidly. We're actually pleased that we're hedged 50%, but we're also pleased that we're not hedged more than 50%, because we see opportunities moving forward that might average down beef cost over the coming months; particularly in the next few months.

And, Barry, there's some quarters of the year that the contract price is slightly above the prior year. It averages out nicely, but the one thing that comes in play for that is the cases because we paid such a higher price last year, specifically in the third quarter, it averages out to be favorable for us.

Okay.

And there's a lot of other players out there who are contracted, who are now seeing higher prices this year. We paid those higher prices last year, which is why we're being able to leverage that.

Okay. That's all I had. Thank you.

You bet.

The next question comes from Larry Miller with RBC Capital Markets.

Hi, guys. If I could just follow-up on one thing, the same-store sales commentary; it has me a little confused here. Craig, you said it sounds like you're going to be above pricing in Q1, yet you have the negative impact of the New Year's Eve shift and I was hoping you might quantify that. And just so that I understand the New Year's Eve shift, am I correct in assuming it was in 2004 in the fourth quarter, I'm sorry, 2006. It shifted out here into Q1 for uneven comparison and then next year, in 2008, it's going to shift back into Q1. Is that right?

That's correct.

Yes. And, Larry, one thing; in 2006, we had the first week of fiscal 2006 was the New Year's Eve week, and the last week of fiscal 2006 was the New Year's Eve week. We had two of them in 2006. We have none of them in 2007.

So you were right, Larry. You had it right.

Yes.

We will get a New Year's Eve week again in fiscal 2008.

And can you quantify that for us so that we might be a little more accurate in our models, what you think that adds and takes away, in fact?

Well it takes away from a traffic standpoint in that particular month; somewhere in the 5% range.

Okay.

It's a big week for us and so we start it off in the hole and we've been getting it back kind of every week since then.

You've had some pretty strong weeks aside from that and you feel like--I mean, it sounds like your same-store sales guidance might be conservative, because you're pretty darn close to the low-end of the range despite the shifting. Is that correct?

Well I would characterize it that. But we always kind of start the year at being relatively conservative on same-store sales. It's like looking into a crystal ball in some respects. We're very comfortable with our new store openings. We're very comfortable with the things that are going on in our operations. And this is a little bit lower than what we started out the year last year with and I would say that it's lower primarily because of the what we're just talking about right here because we start kind of with a weak January and we know we're going to get hurt a little bit in December next year because of the strength that we had with having that in the December month last year.

All right. Got you. Perfect. And then can you just talk about -- I thought you might have said in your prepared remarks, Craig, that the acquisitions are now accretive. Is that what you're saying, immediately?

Yes. The Moran acquisition has given us a few cents already in 2006. We did invest a lot of that money back into the restaurants to get the facilities up to where we want them to be. We still have some money that we're going to spend in maintenance Cap as we move forward into this year. But in acquiring the restaurants at the multiple we did, they are immediately accretive to our earnings per share.

And I'm just trying to juxtapose it with what you said before. So you said you were going to reinvest all the accretion in Q1, and then you wouldn't see it 'til the second, third and fourth quarter, but you're not investing quite as much as you thought. Is that what you're--?

Well there's some of that that when we speak to investing, that's actually an expense item where you're hitting the earnings side. There's others that are capital items. So we are reinvesting into these restaurants, but they are providing some accretion to the earnings per share.

Even net of those expenses.

Right.

Perfect. That's what I was trying to--

[Inaudible] capitalized items.

That's it. Oh, one other thing. Have you lapped any of those stores where you've added some of those new features, the bars that you talked about that are generating higher volumes? And are they comping positive as well?

Yes. The best example is Boston, to speak about Boston which we have lapped. And it continues to have great momentum as we go forward with that bar, and the beverage mix for that one and our other new ones are much higher than our existing comp base.

That's in the new stores and then some of the older restaurants are comp restaurants that we've been working on. I can think, specifically, of our Scottsdale restaurant which was totally redone in 2006. As we move into 2007, we are looking for opportunities for stores of that nature to add to the comp store strength. And we have identified another six or seven restaurants that we would like to add that feature to where we have the square footage or the ability to actually expand the restaurants.

Sounds great. Thank you, very much, guys.

You bet.

Thanks.

We'll now return to Nicole Miller from Piper Jaffray.

Just as a follow-up on the G&A. It sounds like you are suggesting that on a dollar amount, G&A might be flat in '07. Am I understanding that correctly?

No. It will be higher in 2007. What we have achieved is if you look at where we're tracking, really, the third quarter of 2006, and then you adjust that for the extra operating week we had in 2007 and with the SOX piece, what we're not having is significant growth, year-over-year, that we were experiencing. Now that said, a lot of the additions, we were just starting to get there in Q3 and Q4, so as we're lapping over the prior year, we're going to be higher in Q1 versus the year prior.

We also, Nicole, I think if I had to gauge it, looking at our internal forecast and so forth, we expect our G&A in '07 to grow at about half of our operating week growth.

Okay. That's helpful, because I think it's a little confusing to hear that FAS 123's going to go down, but then I would like -- if maybe you could help by quantifying how much it would go down by and then are there human resource initiatives or human capital resources initiatives that you have to off-set that.

I don't think that Tom indicated that the Sarbanes-Oxley costs were going to go down significantly in 2007. Actually, it's expected to be higher in '07 than in '06. But our fourth quarter expense was pretty much a high water mark for us in '06.

Okay. I misunderstood.

Yes. And just to clarify that, we will have year-over-year probably about $1.2 million to $1.3 million incremental increase just in FAS 123 in '07 versus '06. It'll be greater.

Okay. That's very helpful. Thank you. Can you also--

I think the question is important, Nicole, because our G&A costs--we have now, I won't say we're fully staffed, but we're very close to being fully staffed from a G&A standpoint to handle our growth and handle the size of our company. We've got a couple of additional positions in the marketing area that we anticipate adding here in the first quarter, but nothing compared to the ramp-up in staffing that we've experienced over the last 18 months.

Okay. Thank you. And can you also talk about the median mix shift and I know you talked about less than 3% of sales, but can you talk to us about what that means? Is it all from -- if it's going towards local dollars, where is it coming out of?

Yes. It's coming out of primarily radio. We see more opportunities to direct market and localize our marketing for specific markets as compared to some of our national radio buys that we've had in the past. And we are going through a change in leadership in our marketing area. And we expect to gain more benefits from our marketing expenditures in '07 than we think we realized in some areas in '06. So we're keeping our expenditure level right around the 3% advertising to sales ratio, but we feel that we can spend it smarter in '07 and generate more benefits from it than what we actually had in '06.

Okay. And just one last question for me tonight. Are there any sales mix initiatives on the menu? Any new items or anything on that front?

Well we're working on -- actually we're doing a food test tomorrow on several new potential items. We continue to see opportunities on one or two seafood items. People seem to be attracted to our high-quality seafood. We're still, of course, a steak house. And we're not going to be able to move, or don't want to move, a lot of mix away from steaks.

But as people dine with us a bit more frequently, particularly our regular guests, we are seeing opportunities to shift them and we'll continue to have quarterly specials on our menu that are offered. And we're also looking at one or two new additional appetizers, because we like to mix that up some.

And, of course, our wine initiative and bottled water initiatives are going to continue. We've made some great buys on wine that we're going to be able to pass on to our guests in 2007. We continue to get an enormous amount of leverage. We do write out $1 million per restaurant in wine. We're one of the biggest sellers of fine wines in the country. And that offers us a great amount of buying opportunities from the wineries.

Thank you, so much.

Yes.

Thanks, Nicole.

And, gentlemen, there are no other questions at this time. Mr. Miller, I'll turn the conference back to you for any closing remarks.

Well thank you, very much. We are, of course, excited about what's going on at Ruth's Chris as we normally are. We are looking forward to a great 2007. We've challenged our operators and our staffs to continue to operate our restaurants in the high-caliber that we've been used to serving our guests in. And we're encouraged by some of the results that we've had, particularly in light of some strains that have been in the restaurant industry, particularly in some of the casual dining players.

We think that the fine dining segment is the sweet spot in our industry today. And we're excited to continue to roll out our concept and generate these type of financial results and shareholder value. Thanks, again, for listening to us. And we look forward to chatting with you again next quarter.

Again, that does conclude our conference. We thank you for joining us and hope you have a pleasant afternoon.