Ruth's Hospitality Group Inc (RUTH) 2007 Q1 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 Incorporated First Quarter 2007 Conference Call.

(OPERATOR INSTRUCTIONS)

And now I'd like to turn the conference over to Mr. Tom Pennison. Please go ahead, sir.

Thank you Tom. 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, our Chairman, President and Chief Executive Officer.

Thanks very much, Tom and good afternoon to everyone.

The first quarter of 2007 marked several milestones for our company, not only as the country's premier fine dining restaurant chain, but also as a public entity. On a trailing 12-month basis, we generated over $500 million in restaurant revenues across our entire Ruth Chris system.

This is an outstanding achievement for our family and one which we're very proud of, the first fine dining restaurant chain to achieve this sales level.

It has taken us a little over 43 years, with some peaks and valleys, to reach this milestone, but at the rate we're growing, we'll certainly get beyond that mark and move toward $1 billion shortly.

One of the hallmarks of our brand has been its ability to stay relevant in the eyes of our guests and part of that relevance includes anticipating the desires of our guests into the future.

To that end, we always strive to gain a better understanding of what makes us the premier steak house of choice for such a broad, diversified audience and we are constantly evaluating how we can make our facilities accommodate the evolving needs of our changing guests.

With this in mind, we've recently added focus on our luxury lounge concept, that important component in restaurants we began building in 2004. This luxury lounge concept incorporates warmer and more exciting design elements, larger bars, some grill-type seating as well as more private dining space to meet previously untapped opportunities.

These facilities enhancements offer a gathering place for friends, couples, small groups and individuals who desire a comfortable environment to relax and enjoy their favorite beverage and our legendary U.S. Prime Steaks.

This is a new business opportunity for Ruth's Chris. As we have noted before, our most recently opened restaurants, those not yet in the comparable restaurant base, and more generally those opened since 2004, continue to outperform their older units by some 20%.

These results, in our view, validate the appeal of our more casual, yet luxurious bars and more generally our continued relevancy and growth strategy.

Another strategic use of our capital was the recent franchise acquisition announced for the three units in the Pacific Northwest, Portland, Oregon, Bellevue, and Seattle, Washington.

These restaurants generate an average sales volume of approximately $5.3 million, which is in line with our current domestic franchise base, although slightly below our company operated base average of $5.7 million.

The total purchase price of this acquisition is $13.25 million and will be financed through our borrowings under our revolving credit facility. These restaurants were acquired at a multiple that is on par with last year's seven-unit franchise acquisition.

Similar to the restaurants acquired last year, we see opportunities to upgrade the facilities, improve the education of the staff and raise some operational execution. In addition, this acquisition will open up the Pacific Northwest for further development, although we don't have any current plans for expansion there.

Nonetheless, we will now have the contiguous company operated restaurant presence on the West Coast and that's a positive from a supervision standpoint. The transaction is expected to close in July and we do expect these units to be accretive to earnings in year one.

More on franchising. In the first quarter of '07, our franchise development continued with a combination of new partners entering our system as well as existing franchisees adding to their Ruth's Chris portfolio.

Franchise partners opened new locations in Aspen, Colorado and Charlotte, North Carolina as well as a new unit in Waikiki, our fifth location in that state.

We currently have 20 distinct franchise partnerships, including 10 relationships forged just since 2003. Commitments from our franchise partners consists of 36 locations, of which 14 have opened in the past two years.

In terms of company development, we opened two locations in Florida during the first quarter, bringing our statewide total to 14. The first near our corporate headquarters here in Heathrow, was in Lake Mary, Florida.

And the second was on the West Coast in Naples. In addition, we opened our 106th restaurant in Anaheim, California so far in the second quarter.

With regards to the first quarter's overall performance, it was one of the more challenging quarters for the company from an earnings standpoint. We were able to deliver our 16th consecutive quarter of same store sales increases, but did feel margin pressure in most cost areas.

We have spoken previously about the holiday shift and unfortunate timing of inclement weather impacting our quarterly same store sales volume. These costs were high in January, but moderated as the quarter progressed and ended slightly favorable from '06.

This however was more than offset by higher year-over-year produce and other food costs.

The balance of our core operating P&L was pretty much as expected. However, the combination of softer sales and higher cost of sales were tough to overcome, as we layered on heavier development related costs for depreciation, 10 new and acquired corporate units, pre-open expenses and slightly higher G&A.

We are pleased with our ability to generate positive comparable restaurant sales against a challenging industry backdrop as we lapped a 6.8% gain last year and noteworthy a cumulative three-year gain in excess of 30%.

As we have stated before, we believe many of our comparable restaurant sales initiatives are still in their early stages and we do have opportunities in all areas of our business, including a la carte dining, private dining and luxury lounge business.

We continue to add to our site inventory for openings planned in '08 and '09 and we have a large selection of quality properties in the queue that will allow for a more balanced development schedule beginning in 2008.

Finally, during the quarter, in March, we were added to the prestigious S&P Small Cap 600 Index, the preferred small cap index in the United States covering approximately 3% of the U.S. equities market. We are pleased to have been chosen and we believe this will increase our visibility in the investment community and potentially expand our investment base.

Okay, I'm going to let Tom Pennison, our Chief Financial Officer, discuss in more detail our financial results for the first quarter. Tom?

Thank you, Craig. During our first quarter, total revenues increased 26% to $81.5 million from $64.7 million last year.

Company-owned restaurant sales from continuing operations grew 27% to $78.1 million from $61.5 million in the first quarter of 2006, primarily as a result of a 25.3% increase in company restaurant operating weeks, which included an additional 10 net restaurants in operation versus the same period last year.

Our average weekly sales for all company-owned locations were 118,573 for the quarter, 1.4% higher than the prior year. Average weekly sales for our comp base in the quarter was 117,045.

Our newly opened restaurants continue to exceed the comparable restaurant base average weekly volume by about 19%, demonstrating the strength of sales volumes that our newer restaurants are experiencing.

The strength of the new restaurants not yet in the comp base was somewhat offset by the seven acquired restaurants, as current average volume is slightly below the comparable restaurant base.

Company-owned comparable restaurant sales increased 1.9%, marking the 16th consecutive quarter of comparable sales growth.

Our comp sales consisted of an average check increase of 5.2%, driven by non-entree increases in bar and lounge traffic, menu selection shifts and a year-over-year menu pricing of approximately 2.5%. This was partially offset by an entree reduction of 3.1%.

In examining our traffic this quarter, we were negatively impacted by the shift of the seasonally high volume week of New Year's to the fourth quarter 2006, as well as to a lesser extent, the onset of the earlier Lenten season in 2007 versus last year.

To quantify the New Year's shift for you, if you compare the first week of fiscal 2007 to the first week of fiscal 2006, we saw an entree or traffic reduction of 31.5%. If you exclude this one week, our traffic was flat for the remaining 12 weeks.

While entree traffic was negatively impacted by winter storms in the Northeast and in the Midwest during Valentine's week as Craig mentioned, impacting us by approximately 0.6% in entrees.

As we clearly learned in 2005, we cannot control the weather and as a management team, we want to focus on what we can impact.

In that vein, we were focusing on our bottom five locations. If we adjust these locations from our comp group and exclude that week one, the remaining locations are positive traffic of 1.5% and a total comparable sales growth of 6.3% in that period. We see these locations as opportunities for targeted marketing and are currently addressing them.

Also as Craig noted, company-owned comparable restaurant sales lapped last year's first quarter growth of 6.8% and a cumulative three-year growth from '04 to '06 of 30.6% in the first quarter.

Moving to franchise income, franchise income increased 4.8% to $3.2 million, due primarily to domestic and international increases and comparable franchise-owned sales of 0.7% and 13.6% respectively, as well as additional franchise-owned locations year-over-year.

This increase was largely offset by the acquisition of seven franchise locations during 2006.

On the Food and Beverage side, food and beverage costs were $25.4 million compared to $19.7 million in the first quarter of 2006. As a percentage of restaurant sales, food and beverage costs increased 50 basis points to 32.6% from 32.1% in the prior year period.

Higher produce and dairy costs were partially offset by modestly favorable beef costs, mix shifts, beverage costs as well as the combined 2.5% price increase.

As a reminder, we continue to have 50% of our entire meat purchase contracted for 2007. While January costs were higher than we planned, we currently still expect to be at or below the 2006 percentage on an annual basis.

Restaurant operating expenses were $34.4 million compared to $26.8 million in the first quarter of 2006.

As a percentage of restaurant sales, operating expenses increased 50 basis points to 44.1% due to higher costs for management education, higher credit card fees, and a sharp increase of course in year-over-year property insurance rates.

Marketing and advertising costs increased to $2.3 million or 2.9% of total revenue from $1.5 million last year or 2.4% of total revenue as we look to increase our local marketing and generate new brand recognition in markets across the country.

We intend to devote more attention to local market initiatives and expect marketing and advertising not to exceed 3% of total revenue for the full year.

General and administrative costs increased to $6.6 million from $5 million in the first quarter of last year.

As a percentage of total revenues, G&A rose 30 basis points to 8% from 7.7% in the year ago period, due in part to higher Sarbanes-Oxley compliance expenses as well as other infrastructure costs.

We are pleased to have successfully completed our first year of Sarbanes-Oxley costs and Section 404 compliance review.

During the quarter, the company incurred approximately $500,000 related to SOx and the integrated audit for 404 purposes. In total, the last 12 month impact has been a positive $1.3 million related to this endeavor, which doesn't include the internal time spent and distractions thereof as we went through the process.

Also impacting overhead for the quarter is a year-over-year increase in FAS 123 costs that were approximately $260,000.

The good news related to G&A is that we feel we have reached a quarterly run rate that will not significantly grow as we go forward, as well as we will -- as well as will allow us to start seeing leverage in this area as we go later this year.

Depreciation and amortization increased to $2.9 million in the first quarter compared to $2 million last year. This was about a 40 basis points higher as percentage of total revenue, due primarily to the 10 additional restaurants in operation as well as other maintenance capital expenditures.

Additionally it should be noted, as we go forward with our -- with more newer restaurants making up our population, our depreciation, if one looks as a percentage, will be higher than what we ran historically due to the newer assets placed in service.

For the first quarter of 2007, pre-opening costs were $1.4 million versus $400,000 last year. We opened two company restaurants in the period in Lake Mary and Naples, Florida.

Also included was lease expense associated with other locations and the pre -- and some pre-opening costs for Anaheim, California, which is set to open in mid-April.

Similar to what we have described in the past, we plan approximately $400,000 to $500,000 of pre-opening costs for company-owned restaurants, 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 certain non-cash lease cost expenses during the construction period of our new sites.

Operating income was $8.3 million in the first quarter this year or 10.6% of total revenue versus $9 million last year or 13.9% of total revenue for the reasons described above.

Interest expense, net of interest income, increased to $1.1 million. Total debt increased by a net $12.5 million from December 31, 2006 to April 1, 2007 and our debt balance as of the end of the quarter was $80.5 million.

During the quarter, we received a final payment of $3.7 million in insurance proceeds related to our Hurricane Katrina claim.

Additionally, in an effort to improve the suitability for sale or lease of our former home office building in Metairie, Louisiana, the first level was returned to its original parking use from the enclosed office space. As a result, the company disposed of all improvements and assets related to the first level of the building.

We also decided during the quarter to donate the former Broad Street restaurant location in New Orleans to a non-profit organization and reported in total a $1.1 million loss on the disposal of these two properties or assets.

Pre-tax insurance proceeds net of the additional hurricane-related costs in these disposals was approximately $2.4 million during the quarter.

Our effective income tax rate for the quarter -- first quarter 2007 was approximately 32.3%, which was above the 30.6% rate last year.

Our 2006 effective tax rate, as you may recall, benefited from one-time federal tax credits we received last year for the continued employment and other payments made to employees impacted by Hurricane Katrina.

Net income available to common shareholders for the quarter was $6.8 million or $0.29 per diluted share on a 23.4 million share base outstanding compared to net income of $5.9 million or $0.26 per diluted share of the prior year.

On the capital planning side, during the first quarter we had approximately $14.5 million in capital expenditures that were funded by operating cash flows and borrowings under our line of credit.

For the year, we expect total capital expenditures to be between $45 million and $50 million, excluding franchise acquisitions.

At this point, I would like to discuss our financial guidance. While we initially did not anticipate modifying our annual guidance at this time, as a result of current trends and new restaurant development activity, the company has made some revisions to its annual financial guidance.

For the full 52-week fiscal year 2007, we estimate that comparable restaurant sales will increase approximately 2% to 3%, which we have reduced from the 3% to 4% previously and that system wide restaurant weeks will grow by approximately 20%.

We now anticipate opening seven to eight company-owned restaurants, which is an increase from the prior six, seven and six to eight franchise locations this year, of which two company and three franchise locations respectively were opened as of the end of the quarter as well as Anaheim, California opened mid-April.

All 2007 sites are either under construction or in the design and permitting phase. All additional -- the additional location will bring the expected openings in the fourth quarter of this year to four and will add additional pre-opening and depreciation expenses as well as new opening operating efficiencies to that quarter.

As previously communicated, we have contracted 50% of all beef needs for 2007 as well as reached agreements on all other key commodities with suppliers, excluding produce and some dairy, which is not currently contracted.

We expect that annual food and beverage costs as a percentage of restaurant sales will range between 31.8% and 32.2%, representing a 10 to 50 basis point reduction versus fiscal 2006.

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

Our effective tax rate for 2007 is expected to be approximately 32.3% versus the 30% in 2006.

Based on the above revisions and the related increases in pre-opening and depreciation expenses, the company expects full year 2007 diluted earnings per share of between $1.00 and $1.05, including the impact of FAS 123(R) in that number.

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

Thank you very much, Tom.

In revising our estimation for sales to 2% to 3% versus 3% to 4%, we are recongnizing our current year-to-date performance and trying to be as responsible as we can with the visibility we have moving forward.

I would like to say, however, that we do have easier comparisons in the second half of 2007 than we did in the last six months.

With the final payment of our Katrina-related insurance claim, we are very happy to have closed that chapter in our company's history. As we've stated, we think there is the potential for at least 250 domestic Ruth's Chris restaurants and perhaps even more as many of our existing smaller market restaurants don't meet the criteria we've used in reaching that number.

Our 2007 opening schedule is proceeding as intended and we do not foresee any delays at this time in meeting our seven to eight new company-owned restaurants for the year. These are all superb new facilities that should generate great ROIs, in line with our 2005 and 2006 restaurant classes.

We are equally excited about our active franchising business, which will bring six to eight additional locations to the Ruth's Chris system this year alone.

For company development, we are well into our 2008 and 2009 plans, taking into consideration new markets and existing markets, including those that are now open to us because of our recent franchise acquisitions. We are particularly excited about how nicely we fit into high-end lifestyle centers where our brand is a powerful complement to other high-end retailers.

Our international reach now extends to 10 franchise locations spanning Canada, Mexico, Hong Kong and Taiwan and we have signed agreements for Japan, Central America and additional Canadian locations.

We are also 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.

Building a restaurant company for the long term includes more than choosing great locations and serving great food. We need to keep a careful eye on our culture of service and hospitality, which mandates that the Ruth's Chris experience is delivered by a premium wait staff.

That's why we are making additional investments in our managers and staff, so that we can improve our already high levels of service and make a Ruth's Chris experience as enjoyable as it possibly can be.

We have added bench strength to our human resource, real estate development and educational teams to support the accelerated growth we have planned over the next few years. The underlying secular trend of our experiential dining continues to grow, which is the stimulus behind everything we do.

For the balance of the year, we continue to improve our existing operations and expect to grow our comps by no less than 2%.

We plan on maintaining our market share leadership by generating average unit volumes that are significantly higher than our closest competitors and expand our operating weeks by more than 20% on a year-over-year basis.

Ultimately, our business model incorporates numerous levers to create long-term value, including our company-owned development, franchising, franchise acquisitions. And we're clearly executing on all three of these this far in 2007.

Thanks for your continued interest in Ruth's Chris and we'll now open the lines to questions.

Thank you (OPERATOR INSTRUCTIONS) We'll go first to Larry Miller with RBC Capital Markets.

Yes, thank you. Can you guys hear me?

Yes, Larry, go ahead.

Yes, I just want to clarify something first before the question. The net gain, is that $0.07, Tom, is that right? And is that included in the guidance of $1.00 to $1.05?

The guidance is a GAAP guidance and it's a $0.06 is what the net works out to be on that.

Okay. Thanks. Great. Also I understood there might have been some missteps with Open Table, the reservation system that's online. Can you guys talk about how you might have an opportunity to better manage that system and potentially benefit from traffic going forward?

Yes, the reservation system that -- the engine, Open Table, that we've been using now for about 18 months, has been very successful for us, Larry. It is of course the underlying underpinning for our online reservation system.

We're continuing to look at opportunities of -- for how we manage that process and be able to optimize the seating of our restaurants. As we've said before, many of our restaurants if not most of them, getting a seat at a Ruth's Chris on a Friday and Saturday night is extremely difficult during peak hours.

But we are continuing to tweak that system. And we do think that there are some opportunities to enhance our customer traffic by how we manage that system moving forward.

And when will that come into play?

Well we're currently working on it. And in essence it comes to a coordination between the hostess stand, the general management and when you can open tables that based on the reservation flow that you're getting.

And there is some flexibility that management has to add a human element to the process that at times can be beneficial.

Okay. Great. And one more question and I'll hop off the line. The accretion time table for the seven stores now, the three acquired -- the three newly acquired stores.

Can you kind of give us an update on when, as I know you were reinvesting back into the seven stores, when we might start seeing that accretion to the fiscal '07 earnings?

Well the seven that we're getting ready to lap, we expect them to be accretive in the full year beginning the second half of this year. And the three that we're going to acquire, on a full year basis, they'll probably be generally flat.

So as we roll them over next year, we should start seeing accretion. Those three restaurants, I might add, we expect to require less investment capital in terms of the facilities and the average that was spent on the seven that we bought last year.

Okay. Thank you, guys.

Yes, thank you.

We'll take our next question from Steven Kron with Goldman Sachs.

Thanks. Good afternoon.

Hi Steve.

Hi. A question on your guidance and the same store sales. I guess firstly, what ultimately has changed here in the last few weeks since you guys put out your sales release?

And if I look at your same store sales guidance, I guess given the color that you provided on the calendar shift that traffic or entree growth would have been flattish, it would have implied more of a run rate basis of around 5-ish percent for the quarter if I'm reading that correctly.

So is this somewhat of a reflection of how April trends are developing to date, or are you taking a different bent on what you might do with pricing when it rolls off? If you could just give us a little bit of color on those things?

Well I -- the pricing roll off, we are pretty much priced for this year, unless we see some significant increases coming in the second half of the year, which we're not really anticipating.

We priced up our menu for the minimum wage increase that we experienced in the states and in some cases expectations of the potential for a modest change in the Federal minimum wage.

So we have our pricing pretty much done for this year. We will look at it again in mid-summer. We have not built into our guidance for same store sales any additional pricing in 2007.

In terms of the last few weeks, the trend overall for our traffic, Steve, has been generally in the flat to up 1% or so for a trailing 12-month period. And we are now lapping softer traffic gains, but we don't really have any visibility beyond kind of our current trends.

So we're modestly bringing it down by 100 basis points based on the fact that we're coming up on six months of the year and we are not hitting our 3% to 4%. So we felt it was better to modify that slightly so that we could set ourselves up, I guess, for success in the second half of the year.

Craig, are April traffic trends -- I know you guys provided color in the past as to kind of recent month trends on these calls. Have the traffic trends been flat to positive or have they been more negative in April?

They've been flat to positive just like we've been experiencing for the last 12 months. And again, I reiterate that we're getting ready to lap the period of time last year.

The second half of last year, the first half of this year, has been flat to up 1% in traffic. And we would like to see 2% or better in traffic gains and we're working hard to see if we can generate that. We are changing some of our marketing strategies in the second half of the year to focus more on specific markets.

If you look at it geographically, the Midwest continues to be a tougher place for us. We have about a half a dozen restaurants in our system. And keep in mind, our company-owned system is 50 -- what 54 restaurants, 53 restaurants.

So about 10% of them are in the Midwest and then the -- in the recent time, those restaurants continue to be kind of mid-single digit down. We continue to be generally up in all other regions. Very strong in the Atlantic region, up in the D.C. area. And California and Florida continue to be kind of mid-1% or so up.

So generally speaking, we believe that we can target some of the underperforming stores with a little bit more advertising. So we're shifting some of our focus to that in hopes of driving traffic into some of our slower restaurants.

And Steve, just to clarify, to reemphasize on Craig's point regarding pricing, we'll have about just shy of 1% to 1.25% fall off in August. And since right now we're not anticipating doing any additional pricing, then that factors into that decision also.

Okay. Thanks very much.

Okay. I hope that's helpful.

We'll take our next question from Jeff Omohundro with Wachovia.

Thanks. Just wanted to follow-up a bit on this environment that you're facing right now and the traffic issues. And maybe if you could elaborate a little bit on what you're seeing within the stores. Is there much of a shift in entree mix or alcohol trade down? Or is it really just the lack of customers that are coming through the door?

Well I think that it's important, Jeff, to keep things a little bit in perspective. Our average traffic count, 1% on that is probably no more than two or three guests a day in a Ruth's Chris Steak House.

So we're not talking about a huge number of people, although percentage-wise it may sound that way. We have not seen trade down in alcohol. In fact, we're just slightly up year-over-year.

But we have significantly raised our traffic counts over the last three years. So we're going up against traffic counts that had three years of very solid growth from '04 to '06.

So we're, as I said to Steve earlier, we're in a little uncharted territory as we move into lapping kind of a year of flat traffic. So we're cautiously optimistic, I guess.

But we also, as we segment our business, very strong in Florida, very strong in California. Not any real changes in the traffic patterns there to speak of. Increased traffic in the Atlantic region, up in the D.C. and area.

And continued softness in some of the Midwest stores, which are also some older properties. So we're looking at opportunities where we can improve some of those restaurants and hopefully get traffic moving.

And just one clarification. The comment in the release regarding the higher investment in new restaurants -- in newer restaurants rather. Is that part of the luxury lounge concept?

Well the restaurants, when we decided to add the luxury lounge component in 2004, we increased the size of our restaurants from approximately 8,600 square feet to close to 10,000 square feet. We've also been adding additional banquet capacity where we can.

So these restaurants are slightly bigger, they do contain most of the square foot addition come in the lounge -- comes in the lounge area and private dining areas. So I guess the answer to the question is yes.

Although these investments are continuing to generate, based on the sales volumes, the hurdle rates that we've articulated before, which is a fully capitalized returns in the mid-20s and cash-on-cash returns in the 30s.

Very good. Thanks.

Yes.

We'll go next to Andrew Barish with Banc of America Securities.

Hey guys. I guess just trying to get my arms around sort of the margins moving forward, it appears as if there's real kind of growth related costs.

Is some of that just front-end loaded on timing? I guess management education, is that training? Is that your annual meeting that kind of cost a little bit more? The Moran acquisition, is that kind of still weighing on some of the numbers?

And as you move forward a little bit, you just get some leverage on that? Or are these more kind of full-year things that you're building in right now?

Well the -- let's take them kind of piece by piece. The management meeting is not that big a dollar amount for it, but it will fall in the second quarter and -- but the dollars aren't significant as you compare it to some other companies that I see reporting.

I think you've hit on a very valid point, Andy, and that is that when you're growing in a little bit of a step function, and that's one the things that we mentioned in our notes here, is that by '08 we expect to have a more even roll out. We've opened about six restaurants between company and franchise here in the last four or five months.

That's a pretty aggressive growth for a company our size and we are also, because we are opening restaurants at a rapid pace, we're also learning ways that we can improve on the education and training component so that we can bring the restaurant profitability online quicker.

So we have up-front spending being done, that's why you see slightly higher pre-opening costs.

But you also have a situation where the management training that's required for the number of restaurants we have is higher than it previously has been.

We're bringing managers in at about the same time frame, but we have more of them in the queue for planned openings for '07 and then now we're starting -- we've got restaurants that are in the queue for the first quarter of '08 that we are starting to bring people on board for.

So I think the most important thing about G&A is we have -- we are now, what I would call, fully staffed from a discipline standpoint. You will see modest inflationary type of spending in G&A.

We've made a huge investment in our financial area and literally I have to really pat our finance team and Tom Pennison for rebuilding an entire staff of finance people over the last 12 months after the Katrina incident when all of those employees had to be rehired and trained here in -- at our new headquarters.

So there are things that continue to impact us, but for the first time I can say that we're fully staffed, we're not out building departments or creating a lot of new overhead.

So our run rate at where it is in the $6 million to $6.5 million range is where our expectations are and we think that through increased productivity, you'll start seeing significant leverage coming out of that, certainly in the latter part of this year and on into '08.

Thanks.

Yes.

(OPERATOR INSTRUCTIONS) We'll go next to Barry Stouffer with BB&T Capital Markets.

Good afternoon gentlemen.

Hi Barry.

Hi there.

Any thoughts on contracting for the remaining 50% of your beef requirements?

We're not at this time. We've been very pleased with where the market's come down to us over the last couple of months. We'll keep an eye on it. We're about 50% hedged, Barry, as I said. Or as we've stated.

We've seen improvement sequentially every month this year. And we are now performing at lower costs of sales than we did a year ago. And we're anticipating that we will end the year in a positive way.

So year-to-date we're still a little high, based on the first quarter, but we expect to recoup that as we move through the year.

So this is a delicate projection system, you have to stay very close to the market and some folks may look at hedging as being a true protection, but we know from the way this works is that at times, if prices really get out of whack, you're going to get shorted product and you're going to end up going into the open market anyway.

So we like to cover ourselves and not be kind of fully hedged at the prices, particularly that folks had to buy into earlier this year.

And one of the areas, Barry, we are focusing on is -- what really was dramatic for us in the first quarter was the produce and some dairy items. And we're seeing some modest opportunities, which historically that hasn't impacted us significantly.

But we're seeing that there's some opportunities we can work to better control our pricing in those areas that could provide us some opportunities through the end of the year.

Yes, I think to put an accent on that, Barry, we, as you know, all of our company's system, we have customized distribution. So we're able to really leverage the size of our system.

We're looking for opportunities where we can do that in produce and pick up some efficiencies through buying power as -- and also better control the quality of produce. Because as of now, we're continuing to buy that on a local basis.

I know it's early yet. Any thoughts on what the commodity environment might look like in '08?

We're not out there that far. There's a lot of moving parts there with grain prices and size of herds and things like that that we're going to continue to look at. I think until we get to kind of the September crop reports, it'll be a little bit hard to project where those might be in '08.

The market, except for the first three weeks in January, has been performing pretty much as we expected it would this year today.

And one of the things I want to add there is that our contracts that we did for this year just kicked in, in the third week of January. So we weren't protected the first few weeks relative under our beef contracts. So that added to some of the higher costs we experienced in the first part of the year.

Okay. Do you think you saw any benefit in the quarter from higher gift card sales?

Well our gift cards have been a growing part of our business. We usually get a redemption on that within the first six to nine months, the heaviest part of it and our system is bigger and our sales are of gift cards and I don't -- I haven't checked, I don't know if Tom is going to comment on what the percentage of [resemption] this year versus last year is, but it's -- I don't think it's a material one way or the other, Barry.

Okay. And I was a little bit confused on what you were trying to say about what traffic would have been like in the first quarter if you excluded that New Year's weekend.

Well the first week, of course we're talking fiscal week, so we lost that week to the fourth quarter last year and traffic was down that -- one out of 13 weeks was down 31%.

We're closed for the most part one day, I think, New Year's Day. And we've got -- some restaurants are. And we've got the lack of New Year's Eve. So -- .

You're flat the rest of the way, is that what you're trying to say?

Yes, if you do no other adjustments, just take out that first week and look at the 12 weeks, the last 12 weeks of the quarter, traffic was flat.

Okay. That's what I was trying to clarify.

And that's without getting into any weather, anything else, the bottom five, it was flat.

Okay.

And that's pretty consistent, Barry, with what we've been seeing for the last four quarters. And then that's why we're kind of looking forward to the next couple of quarters to see how we're going to lap a little bit softer traffic.

Okay. Thank you.

Yes.

Thank you Barry.

We'll take our next question from John Glass with CIBC World Markets.

I apologize in advance, I missed some of the beginning of the call, so if some of these are redundant, I apologize. The $1.00 to $1.05, does that exclude the most recent acquisition and did you quantify that on this call as to what that accretes as to --?

Yes, we did answer that question. We haven't put anything into the projection for 2007 for this acquisition.

And generally what we learned from our seven unit acquisition, that the accretion really is not going to begin until probably six months or so into the acquisition just simply because of the education component and the -- integrating the employees and so forth into our system.

And we're also viewing these as opportunities, restaurants, to bring them up to some of the standards of our company restaurants.

Although I did mention earlier that these particular three restaurants are going to require less investment than the average that was spent on the prior seven.

And John, just to expand on that on a 12-month basis, we expect to see some slight accretion of this.

But if you just, as to Craig's point, in 2007 we go into these restaurants with an education team and really based on the timing of when it takes places and that's -- can be uncertain based on the licensing process.

We don't really -- we're not that -- we're factoring it's pretty much with the increased interest expense and what it provides in the shortened remainder of 2007 that it will be basically a wash for 2007.

Okay. And then the last one I think closed, what, around in the summer about a year ago. Maybe in July of '06 and --.

We actually had some in the fourth quarter -- we had some in the beginning of the fourth quarter that closed last year.

Okay. I mean are you seeing the run rate of it, now that you've had that six month period or getting up on that? Are you seeing the amount of accretion you initially expected from that first acquisition?

We are. We're -- the revenue from these restaurants are running on average up about 10% I think. So we're getting increased sales from these, all the investments have been made in I think three out of the five restaurants that we originally bought. And we've got some more rehabs.

Most of that is going to be capital though rather than expensed and we're getting the EBITDA flow through that we anticipated out of those restaurants.

The one thing John, they -- we still have some of the initiatives that we started. One thing we learned with some of the initiatives we put to expand our check base is that it really takes a little while for it to build and to the system.

And while we've started that with the education, they haven't fully realized that as of now.

We're still -- those restaurants are still averaging slightly below our comp average restaurants and that's why when you look at the overall operating -- average operating weeks, it's below our comp right now, which is the -- it's really that acquired group.

But those are opportunities, as we go forward, and we are seeing continued growth and momentum in those locations.

And do you think, as you look at your restaurant expense line in particular or restaurant operations line, and this is sort of part of an earlier question, are you starting -- are you seeing some incremental pressure, greater pressure than you have in the past, on immature units as they open up?

In other words, are you -- do you think you're more efficient as you open up new units? Has it become a little less efficient for some reason? Is that a component to what's putting some pressure on that line?

Clearly our comp group is better flow throughs right now than the acquired group. We're having -- there's some pressures with new restaurants, but they're improved from where we were last year.

And a big part of that, as Craig alluded to, we have focused on the up front education greater and quite honestly we have a little bit better resources on the financial and accounting side to help those teams monitor where they're achieving to get them to our operating metrics quicker than they did in the last 18 months.

Got you. So when the restaurants are actually opened, they're doing better than you would have thought or better than a year ago, but you are putting more money at that in advance of those openings to make sure that is the case?

Well it's more the education -- there's a slight increase in the education we do of the staff in the restaurants. As far as them coming up to margins quicker, that's just really better focus and less distractions, we have really from a financial and accounting side than what we did a year ago.

Great. Thank you.

Not to mention the distractions of the Sarbanes-Oxley.

Thanks.

Thanks, John.

We'll take our next question, actually a follow-up, from Andrew Barish with Banc of America Securities.

Hey, guys. Just maybe one more thing to help us understand on the beef side of things. I've got that you've got half your needs both prime and then the tenderloins for the year.

Is there something different in the other half going on between those two markets -- like is prime off while the tenderloins are still seeing pressure or have they generally kind of tracked together?

Well sometimes they track together and sometimes they don't, Andy. We are a little bit more hedged on the tenderloins than we are -- excuse me, on prime than we are on tenderloins.

I think we're 60% on prime and about 40% on tenderloins. Tenderloins tend to be at times more volatile on both the downside and the upside.

But, you know at -- if we get the opportunity to tack on a little bit more coverage on the tenderloins, we'll certainly do that. Right now we are not unhappy with the market of where we're paying relative to the 40% that we have hedged.

Okay. Thanks.

You bet.

Thanks, Andy.

And we have a follow-up question from Steven Kron with Goldman Sachs.

Thanks guys. A couple more if I may. I was just wondering more recently whether you've seen any change in purchases? If you look at maybe like your credit card receipts, if you track this, whether it's business type purchases versus more individual consumer type purchases?

Well two things in that. First of all, in a kind of a recap because I think your last question had to do with the mix of what people are purchasing.

In our first quarter, year-over-year we did further shift mix from food to beverage by about 50 basis points and that's further to expand our check. One of the things we hear, well it's not perfect, of business versus consumer.

One of the items we do look at is our mix of American Express versus other credit cards, which American Express tends to be more majority business use. And that really has not dramatically changed from a transactional standpoint.

In 2006 it ran about 34% of our transactions and it's right now about 35%. So it's not a significant differential, other than the basis points that American Express charges you. It's pretty good.

Alright. Thanks. And secondly, if you look at the stores where you've retrofitted some bigger bar areas, can you give us maybe a little bit sales to investment ratio? Like what type of comp lift have you seen versus perhaps the cost that it took to kind of retrofit that store?

Let me take that one, Steve. The -- we have a select number of existing restaurants that we have expanded bars in some cases and in more cases probably just dressed them up. Because it's difficult to take square footage out of a restaurant and rededicate it to lounge once it's built.

The Scottsdale restaurant, we were able to enlarge the restaurant and add some additional lounge seating. The Winter Park restaurant, for example, we just were able to bring in flat screen TVs, move out some low seating, bring in higher seating and those restaurants are experiencing different patterns. But it's too easy to tell kind of what the return on investment will be on those.

We look at them as strategic decisions to position our restaurants for the long term and we know the business is out there. We're certainly experiencing in our new restaurants.

So partially it's a situation of having a brand that represents kind of the future of what we see the fine dining segment going to.

And a lot of it has to do with the demographics of our consumer, what we see them wanting to do in terms of their -- the type of visits.

These bars for example in newer restaurants, like Bonita Springs and others, we're able to greatly increase what we call non-reservation a la carte dining.

Because we don't take reservations for the tables in these luxury lounges. It gives people the opportunity to visit Ruth's Chris on an impulse as compared to a reservation.

And we're pretty excited about what we're seeing that in the new restaurants. But we've had 40 years of training people that if you don't have a reservation, then you don't -- probably shouldn't bother coming to Ruth's Chris.

So we're trying to change some of that based on the newer restaurants and getting our guests trained a little bit differently that they can stop in and have an appetizer at the bar or a full meal if they desire, given the fact that we have the capacity to handle them.

So we're going to monitor it as we move forward, but it's really a -- I view it as a strategic move and some of the restaurants that we've redone so far are 10 to 12 year restaurants and it's just too early to tell.

Okay. Thanks.

Yes.

And that does conclude our question and answer session. At this time, I'd like to turn the call back over to Mr. Miller for any closing comments.

Thank you very much. We appreciate you calling in this afternoon to chat with us. We look forward to the balance of 2007.

We do believe that the way we're running our restaurants, the strategic direction we're taking our brand and our legacy and history of providing high quality food and service will continue to drive our long-term profitability and success and we appreciate your interest in our company. Thanks very much for joining us today.

This does conclude today's conference call. We appreciate your participation. You may disconnect.