Ruth's Hospitality Group Inc (RUTH) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to today's Ruth's Hospitality Group third quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Following the formal remarks we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. Hosting today's conference, will be Bob Vincent, Chief Financial Officer. As a reminder, today's conference is being recorded. I would like to turn the conference over to Mr. Vincent, please go ahead.

Thank you, and good afternoon. We 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 placed 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 future operating results and financial condition. I would now like to turn the call over to Mike O'Donnell President and Chief Executive Officer of Ruth's Hospitality Group.

Thank you for joining us today to discuss the state of our business It's no secret that the environment is the most challenging this industry has ever seen and the fundamentals are under tremendous pressure. Although a short-lived recession would be welcome, we have no choice but to plan for a long downturn, understanding that our debt levels and covenants are of primary concern to us. For this reason, we're taking a very conservative approach, essentially managing our business to maximize free cash flow and paying down debt.

Since taking the job in August, I have spent considerable time evaluating the business and speaking with people at all levels of our organization. I must say on a very positive note, that we have two great brands with great people and long histories of success. In fact, we will be celebrating significant milestones for both in the near future. Ruth's Chris will celebrate it's 44th year in business in 2009 and Mitchell's Fish Market will celebrate its 10th anniversary next Tuesday. I have found our field operations staff at both brands to be highly dedicated, motivated, talented and anxious to return to the financial success they've experienced in the past. I also spent time with our Ruth's franchise partners on an individual basis and enjoyed meeting with 90% of the system several week ago in New Orleans. This group is outstanding and committed to the same high standards of food and service as you as our staff is. They remain committed to building a national brand with more restaurants both now and in the future. I'm very please together have such a talented group of entrepreneurs as partners. While we remain excited about the future growth of Ruth's, we're likely to put company owned unit growth on hold in the near term.

After the opening of our South Barrington, Illinois restaurant this coming weekend, we will have completed our development for 2008. 2009 will be a transition year, with three to five new franchise units opening and in all likelihood either zero or a very limited company-owned expansion. We will resume company-owned growth of both brands in 2010 or once micro-conditions stabilize or when balance sheet support it's. In terms of Mitchell's, I'm convinced the brand can provide excellent growth prospects when run efficiently and in the right markets. We have growth plans on hold at this point, however, not because we don't have confidence in the concepts. In fact, the opposite is true. But because we are very focused on deploying capital that keeps us within our debt covenant compliance. As we grow Mitchell's, we'll be offering it as a franchise opportunity, alongside our highly successful Ruth's franchise system.

As far as immediate actions we will take, Bob will certainly comment on specifics in his section but at a high level, we need to turn the page and focus on three things immediately. Reorganizing, repositioning and re-energizing. In terms of reorganizing, we have reduced our run rate G&A by about $7 million, essentially rationalizing our corporate infrastructure to match current sales and a significantly-reduced development strategy. I know Bob had spoken on previous calls about taking costs out of the business But conditions have deteriorated since that time and we thought it was prudent to take further action. As our announcement stated, we focused on incremental G&A to complement previous infrastructure savings and those expected from supply chain and other restaurant level cost savings activities. In total, we should see $10 million to $12 million in 2009. We're examining every process we undertake in our support center and in the restaurants and asking, do we need to do this? Can we be more effective? Can we do this less expensively? We know in this environment, the consumer will not pay for the inefficiencies of an organization. We all know that this kind of change is difficult for any organization but it is, and was necessary given what we're facing.

Reorganization is about more than operating cost touched, however, and we're currently examining our entire restaurant portfolio in view of return on assets. As we sit here today, there is a strong likelihood that we'll be taking significant impairment charges, but it's premature to speculate what the magnitude might be. Our goal is to make the assessment as quickly as possible and communicate the facts in as timely a manner as possible. I would remind you that these potential charges would be non-cash in nature and have no bearing on our covenants or our ability to operate the business.

Our second R, repositioning, entails making sure that the Ruth's Chris Steakhouse brand is first and foremost a steakhouse. We can not be all things to all people and while we certainly compete in the upscale dining segment, our menu is and should be deliberately narrow. As part of the plan, we're going to accentuate what being a true steakhouse is all about. The most popular item on our menu is our Sizzling Tender Prime Steaks and no one does Sizzling Steak better than Ruth's Chris.

In recent years I believe we have allowed ourselves to aggressively take price and that pricing has put us in a place where customers challenge our value and reduce the frequency of our visits. We need to reverse this trend. To help us get there we've hired Kevin Toomy to the Chief Operating Officer of the Ruth's Chris brand and he's already started. Kevin brings a lot of experience and common sense to the task and he understands the perspective of owners and franchisees and has significant experience with such great brands as Houston's Outback Steakhouse, Roy's Hawaiian Fusion, a chef-driven fine dining concept owned by Outback Steakhouse and chef Roy Yamaguchi. Kevin also owned and operated two highly successful and critically acclaimed restaurants in south Florida, the Old Gold Coast Grill. We welcome Kevin.

I've spoken a lot about playing defense in these tough times, but our marketing, culinary and operation teams are working hard on developing items and products that will create value for our customers. Essentially, they are working on both a strategic and tactical basis to generate a value-oriented offense. Repositioning but never leaving the Ruth's Chris sizzling experience. Between now and the end the year we will have tested, and in some cases implemented, several new marketing and product initiatives.

We just launched for the remaining months in 2008, a Steak and Stuff Lobster special for $39.95, that is getting great feedback from our customers. It is a slightly smaller fillet at six ounces with a five ounce lobster tail stuffed with crab meat. Almost all of our company restaurants and about 90% of our franchise community are participating in this promotion. One of our highest franchise participation rates in a long time. We are following up on this special with a very strong incentive, a $25 off direct mail piece. This messaging calls out, "tough times calls for tender steaks". A similar offer ran last March before my time here, but produced as much as a nine point swing in traffic in certain markets. We think these two offers are a great one-two punch for the holiday season.

While doing this, we are testing several other value promotions. The first is what we call Ruth's Classics. A $39.95 three course meal, featuring a choice of one of four entrees, such as six ounce fillet with shrimp, a personal side and dessert. We offer a trade up were for $49.95 that offers full size fillet, ribeye, lamb chops or lobster tail. We have seen a very high preference for this during our testing with about 58%, to 42% split, 58% ordering the $39.95, 42% ordering the $49.95. Between our lower and higher offer and we're finding that a lot of our customers like the price certainty associated with a price fixed offer.

We're also working our Ruth's Trio which we have tested at a price of $44.95. It consists of three smaller portions of meat, fish and chicken, along with a personal side and dessert. Although we've seen good sell through, we believe frankly it's too much food. We are reworking this offer and expect to have a similar idea with smaller portions and fewer items in the $29.95 range, which is still again, the Ruth's sizzling experience but just more modestly priced. We're in the middle of selecting an agency that will help us define and build our brand and get us back on track as an upscale steakhouse rather than a fine dining restaurant. As part of this effort, I believe we need to move back to our previous position as a classic Steakhouse, that for years was priced below our more formal steakhouse competitors. Finally, I want to get back to our food focus delivery on sizzling steaks with great friendly southern hospitality. We'll protect our long-term low customer base and find ways to reach new demographics in.

A little more color on building new steakhouses in '09. We're taking a very hard look at the three leases that were signed back in 2007 and early 2008. The organization that planned to move ahead with these restaurants, although given the severity of the economy and our strategy to manage cash and reduce debt, we continue to evaluate what is in the best interest of shareholders at this time. So we're keeping all options open. Beyond these locations we're also taking a hard look at any major remodels that were scheduled and asking the same tough questions. Is this the best time to proceed. The answer is probably not, although no final decisions have been made. In either case, we have little interest in pursuing incremental capital investments right now, unless we're convinced that our appropriate returns will be there.

In terms of Mitchell's Fish Markets, it will be the same story. We will not be rolling out lots of new restaurants, but will likely build a single unit near our Orlando headquarters over the next 12 to 24 months for three reasons. First, we need to show that we can build and operate Mitchell's Restaurant successfully, not just buy one. Two, the restaurant will serve as a showcase for a potential franchise model that we would pursue in the future. While we have not previously discussed our vision for Mitchell's outside of a company-operated model, again we believe we can build a healthy franchise operation similar to the Ruth's Chris Steakhouse. Three, two existing restaurants in Jacksonville and Tampa performed above the Mitchell's average and long-term we think Florida will be a very vibrant market for Mitchell's. I'm also pleased to say we have re-established the relationship with Cameron Mitchell, the founder of Mitchell's Fish Market and he has kindly agreed to be available to us on a limited basis. I very much appreciate having access to Mitchell's founder.

On the marketing front, we will again be prompting more bundled offers that are high value but less in the pure dollar off promotions. Our more modest per person ticket average, as a chef-driven concept with fresh seafood, puts us in a good place with our customers. We have vibrant bars, energetic staff and a classic 1940's supper club look. With both brands, despite what I would call a development freeze, we will continue to evaluate real estate opportunities, because of the significant lead time in identifying choice locations. But to be clear again, our goal is to live within our means and maintain a disciplined approach. And lastly, we will re-energize by prudently investing in our two brands and our people. Our intent is to allocate some of the dollars that were previously committed to a growth infrastructure and target them, at least in part, to stabilizing traffic and sales with focus on increase training, education and operational excellence.

And finally, regardless of concept, we're going to energize our people, our biggest asset. Admittedly, we have had to make some very tough decisions recently, but we need to move ahead, look to the future, work on our culture and foster a great sense of ownership. To that point, we have instituted in what I would hope will formally become a partnership program by 2010, where our restaurant managers share in the profit of the businesses they run. I strongly believe this is the direction we need to move in, essentially aligning compensation with overall shareholder goals. In short, those are my preliminary thoughts. I will now turn the call over to Bob.

Thank you, Mike. Our third quarter is historically our weakest period in terms of average unit sales volumes as well as operating earnings, as we absorb the same fixed cost base on lower sales volumes. This quarter's sales volumes reflected the challenges, and anxieties of our core customer and as Mike mentioned, we are doing everything in our power to manage cost inputs that are within our control. Given the high fixed cost nature of our concept, however, the falloff in sales volumes negatively impact both margins and profitability. Overall, sales and traffic for the quarter remain negative, although we did see some improvement in trends from the first half of the year.

Performance was dictated in large part by our two largest markets, California and Florida which represent approximately 45% of our comp base, along with hurricanes Ike and Gustav, which eliminated 37 restaurant operating days that impacted our comp sales by approximately 50 basis points during this quarter. As for California, our comp sales were down 6.7% versus down 10.4% in Q2, while Florida was down 10.6% versus down 7.8% in Q2. While traffic trends were still weak, they ease somewhat during the quarter as our Summer Celebration promotion insulated us from a further reduction in traffic.

As described in our earnings release today, for the third quarter ended September 28, 2008, we generated total revenues of $99.3 million, which was 41.4% higher than last year's $70.2 million. Company-owned restaurant sales grew 43% to $95.8 million from $67 million in the third quarter of 2007, largely due to a 57.7% growth in restaurant operating weeks, which totaled 1,121 for the quarter. This included an additional 124 weeks at company-owned Ruth's Chris Steakhouse restaurant in operations year-over-year. And 286 additional operating weeks related to the Mitchell's acquisition.

Average weekly sales for all company-owned Ruth's Chris Steakhouse restaurants were $88.6 thousand in the third quarter compared to $94.3 thousand in the same period last year. Comparable restaurant sales at Ruth's Chris Steakhouse decreased 6.9%. The average check fell 1.5%, driven by menu mixed shifts and year-over-year pricing of approximately 2%. We also experienced a 5.2% reduction in entrees. Our comparable restaurant sales at Ruth's Chris Steakhouse during last year's quarter were down 0.4%.

With regard to our Mitchell's acquisition, we generated $22.1 million in restaurant sales from our Fish Market and Steakhouse brands for the third quarter of 2008. We are combining the Fish Market and Steakhouse brands for the purposes of both average weekly sales and operating weeks, although once again the latter reflects less than 15% of both metrics. We will not consider Mitchell's to be comparable until the end of the second quarter of 2009, at which point we have operated these locations for more than a full year. We, therefore, will only provide Mitchell's average weekly sales in fiscal 2008, which, for the third quarter, were $77.1 thousand compared to $83.8 thousand in the third quarter of 2007.

Franchise income grew 15.8% to $3.4 million versus $2.9 million in the third quarter of 2007, due primarily to the net addition of eight franchise owned locations year-over-year. Domestic, comparable franchise owned restaurant sales decreased 6.6%, while international franchise owned restaurant sales decreased 9.1%, which combined for a blended comparable franchise-owned restaurant sales decrease of 7.1%. Other revenue was $86,000, down from $236,000 last year as a result of lower gift card breakage. Please note that we calculate breakage on an 18 month basis so, therefore, breakage recognized in Q3 of '08 reflects unredeemed gift cards purchased in Q1 of 2007.

In terms of our cost structure, as a percentage of restaurant sales, food and beverage costs decreased 20 basis points to 31.8% from 32% in the prior period. Favorable beef and lobster costs offset higher beverage, seafood, groceries, produce and dairy costs through the period. Once again, beef prices have been very favorable as we continue to purchase on the spot market. We are constantly monitoring the market as it relates to our purchasing requirements and at this time we continue to be satisfied with our position. Restaurant operating expenses as a percentage of restaurant sales increased 340 basis points to 53.5% from 50.1% in the prior year. The majority of this deleveraging was due to weak comparable sales as many of these expenses are fixed. That being said, we're actively focused on containing costs in our restaurant without compromising anything that touches the gap.

Marketing and advertising costs were $3.6 million in the third quarter, compared to $1.7 million in the prior year or 3.6% of total revenue versus 2.5%. As we had said previously, our annual marketing expenditures are projected to be approximately 100 basis points higher than in 2007 in an effort to create more brand awareness and promote a value-oriented message. G&A costs as a percentage of total revenue decreased by 120 basis points, largely due to lower incentive compensation which offset higher FAS 123R costs and increased professional fees. Operating income was $1.4 million compared to $3.9 million last year. Net interest expense was $2.5 million in the third quarter this year compared to $1.5 million for the same period last year due to higher debt levels as a result of the Mitchell's acquisition. The net loss for the quarter was approximately $500,000 or $0.02 per diluted share compared to net income of $1.8 million or $0.08 per diluted share for the prior year.

I would now like to make a few comments regarding our balance sheet. Long-term debt at the quarter end was approximately $167 million and this includes a reduction of approximately $17 million from the proceeds of our recent sale/leaseback transactions. Our leverage ratio at the end of the third quarter, which is essentially total debt divided by adjusted LTM EBITDA as defined in our credit agreement was 3.23 times versus a maximum covenant level of 3.5 times. Also, we've mentioned in calculating LTM, EBITDA for covenant purchases, we get to add back certain non-cash charges and we also get to treat the EBITDA from the Mitchell's acquisition as if we owned the business for a full trailing 12 month period at the time of the calculation. We continue to focus on our liquidity. As I mentioned, we completed a sale/leaseback transaction involving five restaurants raising over $17 million.

As we announced last week, we are pursuing another transaction involving our corporate headquarters. There is a due diligence period through November 24th and then a 30 day closing requirement thereafter. We therefore hope to close this transaction by year-end. As Mike stated, we are focused on maximizing free cash, maintaining maximum operating flexibility and reducing our covenant compliant risk. CapEx during the quarter totaled $6.9 million including $5.5 million for new restaurants, $600,000 for remodeling and $800,000 for maintenance capital.

So, as we look to the remainder of 2008 of the five company-owned Ruth's Chris restaurants, slated to open this year, the only one remaining is in South Barrington, Illinois, which is scheduled to open November 10th. During this quarter, the performance of our class of 2008 restaurants have outperformed our system average by approximately 35%. Our franchise partners have opened six locations in 2008 and one additional unit is scheduled to open by year-end.

In terms of offering an outlook for the fourth quarter, that has become increasingly difficult due to the volatility of our comparable restaurant sales in this unprecedented environment. Given these trends, we will deviate from our traditional practice for guidance and tell you that October's comps at Ruth's Chris company owned restaurants were down approximately 15%. Furthermore, assuming this metric doesn't significantly improve in November and December, we will clearly be below the 2008 earnings range we had communicated on our last call. At this point we're not sure if October is a reflection of a new base level of sales or if results are a short-term reaction to the daily headlines surrounding the global financial crisis, unemployment fears and recession. If we assume company operated, comparable restaurant sales at the Ruth's Chris Steakhouse decreased 15% for the entire 13 week period, we would expect earnings per share between zero and $0.02 for the fourth quarter and between $0.33 and $0.35 for all of 2008. These ranges exclude any severance related to the departure of former company officers as well as the October 30th cost reduction program. These ranges also exclude any impairment charges the company might take in the fourth quarter.

In terms of 2009, with the exception of the $10 million to $12 million in cost savings that we previously announced, we'll provide additional information on 2009 during our fourth quarter call in February. I will now return the call to Mike for some concluding thoughts.

Thanks, Bob. We have a lot of work to do. But from my standpoint pulling back on development, maximizing cash flow, focusing on great brands and reducing debt is achievable, even under today's extreme circumstances. But success in these areas will take time. In an effort to define that time frame, I would realistically say that remainder of 2008 and 2009 will be a time for continued evaluation and implementation. As well as operating with the mind set that maximizes cash and managing our debt and related covenants as our highest priority.

I wish I could predict a specific time when I can see a significant turn in the business, but I can't. But I am fond of saying I can't change the way the wind blows, but I can trim the sails. And we intend to be aggressive in trimming our sails, finding the things that customers want, even in these difficult times while reducing our expenses. We have great people in our support center, the field and in our franchise group. All dedicated to making Ruth's Chris and Mitchell's achieve the financial success our shareholders deserve. With that, operator, let's open the lines for questions.

Thank you, very much. (OPERATOR INSTRUCTIONS).

Our first question today will come from Steven Rees of JPMorgan.

Can you talk about your debt covenant and load it with some more color specifically if that down 15% trend in October continues into '09. How much room would you have under that scenario and what additional real estate would you have on beyond the headquarters that you could monetize, or additional cost cuts that you announced to prevent breaking your covenant?

Well, I think we would project that the sale of the headquarters would probably provide approximately 20 basis points in the calculation, which obviously would give us some cushion on the downside. If that transaction doesn't close and comps are down at the level that you suggest, that we suggested in the guidance, certainly it will be tight. However, having said that, I think one of the things that benefits us in Q4 that some people probably haven't recognized. From a cash flow prospective, we really get the benefit of gift card sales. And if we hit kind of the target we sold last year, which we think is pretty reasonable, given the fact that we have more stores in our system and the additions of Mitchell's, we think that kind of helps us get cleared.

Okay, and then just on the CapEx in 2009, assuming that those stores don't get built and their remodels don't happen, what could be the best case scenario for CapEx in '09?

I think at this point it's premature to conclude or speculate what the CapEx might be. Clearly, if we had no new unit growth, we would have obviously some remodel stuff, which we may or may not do, and we would have maintenance capital. So I think it would be overall, it would be pretty modest.

Okay, and just what's the run rate of maintenance capital you would expect on an annual basis?

Again, in my remarks I indicated that we spent $800,000 in maintenance capital here in Q3. I don't know if that is the right proxy, but gives you some sense.

Maybe in that $3 million to $4 million range on an annual basis?

Yes, again, I'll give you more color when we really gone through and prepared an outlook for '09.

Okay, thank you very much.

Next we'll hear from Jason West, Deutsche Bank.

Yes, thanks. I wonder if you can talk a little bit more about the trend in October. Was it the mix the same as you saw in the third quarter and the traffic was a difference, or was there some other complexion in the comps that changed in terms of pricing or mix, and then I know you don't want to get too specific on daily trends, but has November seen any kind rebound or you guys still in that same kind of range?

I guess I would say this. We've had no changes in price and no changes in preference in terms of menu mix. What I would say, I would say two things, one is though we don't provide monthly guidance, last year's fourth quarter, the October period, was the strongest of all three months. Having said that, all three were negative, but yet October really was the best of the three months. I would also say to you that we have purchased a service, Malcolm Knapp and he has done -- he launched a Steakhouse index in January of this year and we obviously benchmark our performance against that.

And what I would tell you is the fact that our performance is consistent with our competitive set, i.e., we've not lost any market share to any of our major competitors, vis-a-vis the tracking that we're following. So I think it's the entire category that's feeling the pressure and I don't think Ruth's is being rejected in any way, and frankly the last couple of weeks in spite of these pretty significant declines, we've actually outperformed the index.

Okay. And then another question around the G&A, I know you talked about some pretty big reductions in the next year. But it's a little tough to know exactly on a dollar basis what we should be thinking about, because you did have the acquisition this year and there's always some things the plus side. So any dollar number you could give us for '09 G&A. Or it looks like we're on a run rate of about $30 million this year. Would next year be something like 20 then based on the cuts you made? Or any help there would be great?

Well, I would say this, is that I don't have a hard number for you but I guess I would say that in the release, we indicated that in '09, the G&A savings would be seven. So as a starting point, if you took kind of the run rate and subtracted the seven it gets you kind of to a baseline, but I think overall that we're not prepared to talk in terms of hard numbers. As Mike said, we continue to challenge everything we do, question why we do it and do we need to do it and so it would be my expectation as we continue to go through that process. We would hope or I would hope that we would be able to find other opportunities.

Okay, thanks a lot.

Next we'll hear from Nicole Miller Reegan, with Piper Jaffray.

Hello, this is Rob Wiler on behalf of Nicole Miller. I want to verify on the commodities side that you're still buying. You have nothing locked on the commodity side for FY '09 or the remainder of the quarter.

That's correct.

Anything else locked, any other commodities?

Some small products, but in the scheme of things beef is obviously our number one product.

Okay, so nothing else significant. Okay, and then also maybe I'm getting little bit confused on the building, but do you guys still own or lease a building in New Orleans? At the previous headquarters?

Yes, we do.

Is that owned or leased?

We own it.

Okay, is that what you're talking about the 20 basis points for sales of the headquarters or is that a different building?

We're talking about our headquarters here in Heathrow, outside Orlando and Florida.

Okay, and then that would in addition to the benefit of selling the service center, correct? The sales leaseback?

No, the support center here in Orlando, Heathrow, is what we've announced as having a purchase and sale agreement on. We have the building in New Orleans up for sale or lease as well.

Okay. Okay. And then finally, sales repurchased or shares repurchased, is that $50 million been -- is that authorization gone or are you guys not even looking at that anymore?

I don't believe there is an official authorization. I think in the credit agreement there's a carve out for additional funding for a share repurchase, but the board has not endorsed or approved any share repurchase program.

Thank you very much.

Joe Fisher, Goldman Sachs has a question.

Hi, guys calling in for Steven Kron. Couple of questions. One, just wondering if you could update us or remind us on kind of the composition of your franchisee base and what kind of shape they're in these days and if they're looking for capital. If they have access to it, if they need it. Just kind of make some comments that?

There are 13 franchisees, 65 restaurants and for the most part, barring some significant geography issues, they are behaving about the same as we are in terms of sales. In fact I met with a franchise group this morning that has reported October's numbers to be exactly the same as ours. In terms of their financial health, to the best of our knowledge they're all in good shape. The good news is most of our franchisees have been franchisees for a long period of time. They're very committed to the long-term success of the business and we're working closely as a group now to solve the system-wide problem.

Okay. Great. Just wanted to followup also on the covenant side. Couple of things, one, can you tell us -- can you share with us what you would expect the addback to be in the fourth quarter related to Mitchell's on the EBITDA line? And also what kind of gift cards -- what kind of gift cards sales you'll get -- you're expecting or I guess compared to last year?

Well, to the first question, we have not disclosed the specific addback from Mitchell's. In terms of your second question, all I can tell you is that last year we had approximately $12 million to $13 million of gift card sales. So, again, we've added more stores to the system. We've added the Mitchell's piece and so we think that if we can generate at least last year's total, which obviously, given the added stores would fundamentally on a per store basis, be a reduction in line with obviously where comp store sales are, we still think we would end up with $12 million to $13 million, $14 million.

How much of that 12 to 13 was in the fourth quarter?

That is the fourth quarter.

That was the fourth quarter. Okay. Great. And then finally just one other question. You have been having discussions with your bank group and does is sound like, if worse came to worse they would be interested in negotiating as opposed to putting any kind of default action on?

Well, we have good relations with our bank group and we are scheduled to have a bank meeting sometime here before the end of November to kind of apprise them of where we are and what we're thinking. So I think at this point it's premature to speculate what, (A) whether there would be a default and (B) what the actions would be if in fact that took place. So again I would emphasize we have good strong relationships with them, they believe in the brand. Obviously Madison Dearborn who is our largest shareholder has strong relationships with the bank as well, and we think all of that, if necessary, would provide a reasonable outcome to anything that we would have to do if it came to that.

Okay great, Thanks a lot.

Next is David Tarantino with Robert W. Baird.

Hi, good afternoon. Just a followup question on the debt covenants. I know you're comments suggested that at the end of the fourth quarter meeting, that covenant would likely be safe, but as you look out into the first half of 2009, if comps were to remain in the negative double digit area, what's the likelihood that you would trip that covenant?

Well, David, first, in terms of Q4, I didn't say safe. I said tight and we think we and can get over the top, but I don't want to suggest that it's a layup, if you will. I think in the first half of Q1 of '09, again, I don't want to speculate. I think that you know the model as well as anyone and if you kind of continue it at that clip, there's only so many things we can do. But I could lay out a scenario that basically says, look at, if we don't get the headquarters building sold in Q4 here, and we get enough gift card revenue when we get by that transaction probably closes. If it doesn't close in Q4 it closes in Q1.

I think that again, I'm not suggesting that we've got this great cushion here in Q1, but I do think there are levers and there are things that we'll continue to to look at. Liquidity is our key focus, maintaining or managing CapEx, both in Q4, in Q1 next year will be top priorities for us. So we really are looking at all of those things to make sure that we stay compliant.

Okay. Thanks. And then just a broader question on franchising. You have looked at the possibility of a refranchising program?

David, we're evaluating all of that and that is not something that is off the table. We would only look at that, if in fact we were to sell restaurants that then would produce additional development on the part of the franchisee.

Okay. Thanks that makes sense and last question on October comps did you have any marketing going on during that period or had the marketing stopped temporarily?

At the beginning of October, we had a direct mail piece with American Express that we did not realize the redemption on that we anticipated. So, we did not have as much marketing effort then, as we will now through the end of the year.

Okay, thank you very much.

Next is Michael Perna with AAD Capital.

Good afternoon. Thank you for the very detailed call. Just question for Mike, please. Could you give more color on the partnership program that you mentioned at end of your prepared remarks. Would that take the same form as the implemented previous concepts and could you just remind everyone what that structure was?

Sure, Mike, I think you were referencing fact that I have a heritage of sorts with Outback Steakhouse, and really the idea is that we would have -- create a partnership plan at the unit level, whereby as I said in my earlier remarks that the partners have an opportunity to share in the profits of the business they run and fundamentally it requires them to make an investment.

It has a time frame in terms of years, somewhere maybe in the five to seven year range, and then has an opportunity for those people to be bought out or to reinvest. I believe strongly that sort of stability represented in the restaurants in the field is a very positive thing for any restaurant company, but particularly where in our restaurants in the higher volume and upscale position that we're in, having that stability there creates stability at the employer and creates long-term relationships between our customers, our managers and the community. So that is really fundamentally Mike, the plan. We have not worked out the details. We're working on that now, but as we've discussed it with our existing management teams, they seem to be excited about the opportunity to both realize short-term cash payments and hopefully substantial long-term wealth-creating opportunities.

Just given that program, could you discuss please what that might entail for the future breakdown between local and national marketing?

Well, Mike, I think, again, as we become more aggressive in creating a partner-like behaving opportunities, we try to give those people more and more authority in the local markets. So we will continue to represent a balance of the advertising expenditures, but we will give the local restaurants more authority to do more local things. They frankly have that authority today, but it goes against their individual P&L and we may subsidize some of that in the future, but again this is something that if it takes place, would take place closer to the second half of '09 as we organize this than it will early.

Great, thank you very much.

Thanks, Mike.

(OPERATOR INSTRUCTIONS)

Our next question will come from Jeff Omohundro with Wachovia.

Just two questions. First, wonder if you could give us a little bit of an update on the transition in senior management at Mitchell's, and just in general the staffing and turnover at that concept?

Well, in terms of the leadership at Mitchell's, we had a fellow that -- a wonderful guy who actually has joined the company previously in a marketing position, had been asked to take over the presidency of Mitchell's. And he and I agreed that it was probably in his best interest and ours, that he go back and find something may be more in the marketing business, than actually running or operating a business. Tom Vermane has been the Senior Vice President of operations at Cameron Mitchell's, and came with the acquisition and so on an interim basis, I'm taking over the strategic direction, along with shared resources from our Ruth's side for marketing, and Jill [Ranzier] to do the strategic side. And Tom and his team in the field will continue to operate the business on a day-to-day basis.

That's helpful. Thanks. And also just may be an update overall on your private dining programs and what the booking outlook is trending through the holidays?

That's a great question. Our private dining, we've placed more emphasis on private dining this fall. We may have been a little late in starting frankly, but we've placed more emphasis on private dining this fall than we have in the past. We actually have a dedicated executive here at the corporate office in addition to our sales force in the field. Historically, we have run a lower percentage of sales in private dining than some of our competitors, so we think there is upside there.

We also have reached out to create sort of -- I almost doesn't like the cliche but a B to B relationship, where from a corporate standpoint we were reaching out to create a dining, meeting, opportunities on a broader corporate level. In terms of '08 versus '07, et cetera, I think we've seen a similar softness in that position as we have in the Ala cart business. We are being as aggressive as we can be frankly, some of the promotions that we're talking about doing like the lobster -- steak and lobster, which is the six ounce filet, the stuffed lobster with crab meat for $39.95.

We've been using that aggressively as an opportunity for folks to chose that offer and create great value in a private dining setting. And we're seeing a fair amount of success with that, but I guess I would say overall the trend in private dining is really following somewhat, the ala cart and we're reaching out to past customers that we have history with. To try and book as early as we can in terms of private dining but frankly, we've seen a shift or a trend in some of our customers actually electing not to have Christmas parties this year, and in fact are donating smaller amounts of money to charities. So we're putting a lot of emphasis on it, because we like it and we like the exposure we get from it but frankly, it's not been as robust as we would like it to be.

Thank you.

And next we'll take a question from David Rainey with Acre Capital.

Thank you. I've several questions. The first would be can you compare and contrast response rates to either to the direct mailings that you pursued over the last three to four months versus what you would have expected a year ago or a year and a half ago? Can you just give us some sense for the stress of the consumer?

That's a great question. I mean I think that we would have expected to see in some cases 20% to 30% greater response than what we're seeing. We may have an expectation, we do a direct mail that we would again, we're looking historically at getting a probably a 20% or 30% greater response than we're getting over the last couple of months.

Okay. And you mentioned that the sale of the headquarters building could produce an extra 20 basis points of cushion, and if I've done the math right is that somewhere between $10 million and $15 million of gross proceeds -- of net proceeds. It's approximately $12 million. And maybe a little more sensitive question -- I can certainly understand your comments on the gift card program fourth quarter centric cash upfront, there is some decay after 18 months, but it's effectively -- but in this environment and given all of the questions about potential covenants and technical defaults, do you think that you all are at all under an obligation to put those funds for the gift card in escrow? So that a gift card folder didn't become an unsecured creditor in the event of a problem?

I don't know that I thought about that but no.

Okay. I just bring that up as -- just thinking that if I was looking to purchase a gift card, I would want to make sure it was money good for someone.

I'm highly confident it's going to be money good.

Okay. And then last question, is if I calculate EBITDA correctly for the quarter was it a little over $6 million?

As we said in previously calls, David, we don't talk about specific EBITDA dollars because there's a number of different ways people calculate it and we don't want to get into it. There's no universal, if you will, standard. So I don't think it does us well to reveal that number and I'm sure you can kind of go through the income statement and do your proxy.

Okay, so my followup to that is just that if by using your fourth quarter guidance of $0.00 to $0.02 a share, it looks to me like the EBITDA run rate for the second half of the year would be about $12 million to $14 million. If I were to annualize that, it would be $24 million, $28 million and the implied adjusted last 12 months EBITDA number based upon the calculation of 3.23 versus debt is about $51 million. So it would look like that second half EBITDA run rate is effectively half of what it is on a trailing 12 month basis. Am I generally correct there?

Again, I don't want to provide specific guidance on that metric.

Okay. Would you expect the relationship between EBITDA and earnings in the fourth quarter to parallel that relationship from third quarter?

Well, I would tell you that in the fourth quarter seasonally the -- it is actually the strongest quarter for Ruth's Chris, so where as in Q3 it's frankly the weakest quarter, so when you look at average unit volumes between those two periods historically, it's a pretty significant difference.

Right, but I'm just trying to normalize it given the current environment.

Well, my point, I guess is you really can't take Q3 and use that as your basis for a run rate.

Well, I wasn't, I was obviously trying to use the second half of the year, given the particular de-coupling between seasonal strength and economic weakness overall. So thats right, I'm not trying to annualize the third quarter, I'm trying to broaden it a bit using the guidance you all have provided, but okay, thank you.

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At this time, we'll take a followup question from Steven Reece, JPMorgan.

I know you don't want to talk about same-store sales trends at MItchell's, but perhaps maybe you could talk about the directionally or the magnitude of the decline in that business, and if it was similar to Ruth's in the October time frame?

Again, to stay with our statement upfront, we're not going to reveal those comp numbers until we get into the second quarter of 2009, but in fairness having said that, I would tell you no, that the volumes are not mirroring that of Ruth's brand in October.

Great. Thank you, very much.

We currently have no questions in the queue. I will now turn the conference over to the host for any closing remarks.

Thank you very much, I appreciate everybody joining us and we look forward to updating you again soon.

And that does conclude our conference call. Thank you for joining us today.