Ruth's Hospitality Group Inc (RUTH) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Ruth's Hospitality Group Incorporated second-quarter 2009 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. As a reminder, today's conference is being recorded.

Now I'd like to turn the conference over to Mr. Bob Vincent.

Thank you, Katie, and good morning.

We need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance. 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 conditions.

I would now like to turn the call over to Mike O'Donnell, President and Chief Executive Officer of the Ruth's Hospitality Group.

Thanks, Bob, and thank you all for joining us today.

As you can see from our earnings release, the key takeaways from our second-quarter performance were fairly consistent with those of our first. In both periods, we experienced double-digit decreases in comparable sales but were able to outperform on the bottom line due to the continuing benefits from 2008's cost reduction program and a more favorable commodities environment.

As we have expressed over the past few quarters, our plan is to optimize free cash flow in 2009 and repay debt, and we are making progress against that goal. Our efforts include a $7.3 million repayment in the second quarter for a total of $10.3 million in repayments through the first half of the year.

Turning to our brands, Ruth's Chris experienced a comparable store sales decline of 23.4% for the second quarter, while Mitchell's experienced a decline of 9.8%. At each concept, I want to commend our leadership teams, led by Kevin Toomy and Ruth's Chris and Sam Tancredi at Mitchell's Fish Market. They've done a great job on the variable costs they can control, but like everyone in our industry, we are facing ongoing challenges on the top line.

Let's talk a little bit more about Ruth's Chris. We continue to gain market share from a traffic perspective for the fourth consecutive quarter by exceeding the upscale steakhouse Knapp Track benchmark index. The spread narrowed slightly in the second quarter, but we still outpaced our peers. We believe that suggests our guests are still seeking the comfort and hospitality of the Ruth's Chris brand.

On a geographic basis, our two largest markets, California was better than the system average, down 22.6% on a comparable basis, while Florida was a bit weaker, down 25.3%. We also, our five class of 2008 Ruth's Chris Company-owned restaurants exceeded the system sales volume average by 15%.

Regarding our sales mix, the private dining business at Ruth's Chris Steak House was down 21.5%, which is slightly better than our comparable sales results for the period. While private dining is not as significant in the spring as it will be in the fourth quarter, it did gain some traction during the period.

In terms of development, there will be no company restaurants built this year, although our franchise partners opened one Ruth's Chris in St. Louis in the second quarter, bringing our total to three locations this year. We have also had two Ruth's Chris Steak House franchise closures in 2009, one in Salt Lake City and one in Denver. We are pleased to have our franchisee in Boise take on the Salt Lake City opportunity and are in the final stages of discussion for a multiple-store agreement in Denver. We plan to open our fourth franchise location for this year in Durham, North Carolina in late August and expect to open Kennesaw, Georgia in Q4 of this year.

In terms of Company-owned closures, we've had two this year, one in San Juan, Puerto Rico in the first quarter where we elected not to exercise a lease extension, and one in Naples, Florida in the second quarter which was an underperforming location. We are in active discussions regarding a multiple-store franchise agreement in Puerto Rico.

While I have already spoken about our ability to manage costs, optimize cash flow and reduce debt, we are also working hard to connect with the consumer. Value represents the greatest opportunity to attract more guests and increase their frequency over time. Therefore, we have implemented prefix menus at both of our brands. We actually started down this path in 2008 when we offered a two for $89 Summer celebration at Ruth's Chris. While research confirmed that customers appreciated the price certainty, it also demonstrated that they preferred more flexibility, which led us to an individual prefix opportunity this year.

In early February, we launched our Ruth's Classics, which is a $39.95 three-course meal featuring a choice of one of four entres, such as a 6-ounce filet with shrimp, a personal side and dessert. It has been well received by our guests and is representing a sizable portion of our sales mix. It is, however, having an impact on our average check, which was down approximately 6.5% to $70 from the prior year. We will continue to promote this strategy throughout the summer. Our early week $19.95 steak and fries promotion is still in test in three locations, as is a bistro menu available in our lounges at six locations.

Let's turn to Mitchell's Fish Market. Under Sam Tancredi's leadership, our dedicated operations and culinary teams have created a $19.95 three-course meal, called Summer Seafood Sensations, featuring a choice of one of three entres, such as grilled Chilean steelhead, a salad and dessert. This value proposition is in 18 of our 19 locations.

We are also testing early week commotions in several restaurants. Though it's too early to conclude results, we are seeing some small traffic gains. Michigan and Ohio represent 8 of our 19 restaurants. Those markets are even more challenged than most of the country. While we are not happy to be down in comps sales, we are pleased to have average weekly volumes in Q2 for Mitchell's Fish Market of $73,000 and to have maintained excellent variable cost controls.

Before I turn the call over to Bob, I want to touch on two other items. First, we donated our New Orleans Broad Street location to Tulane University. It had operated as a Ruth's Chris for over 25 years. After its renovations, it will become the neighborhood-based Ruth U. Fertel/Tulane Community Health Center. This building is actually located immediately adjacent to our founder, Ruth Fertel's, family home. This center will be treating 1200 patients a month, regardless of insurance or ability to pay, and it is our largest single charitable gift in the history of our Company. We are proud to be contributing to the needs of the City of New Orleans and to honor our founder.

Second, we filed a shelf registration with the SEC in June that allows us to raise capital through the sale of various types of securities not to exceed an aggregate value of $200 million. We thought it was prudent to plan in advance and provide the Company the flexibility and speed, should we pursue funding.

I would now like to turn the call over to Bob.

Thank you, Mike. As described in our earnings release today, for the second quarter ended June 28, 2009, we generated total revenues of $88.4 million, approximately 18% lower than last year's $107.6 million. Total Company-owned restaurant sales similarly declined 18% to $84 million. Restaurant operating weeks increased 2.6% to 1126 from 1097.

Average weekly sales for all Company-owned Ruth's Chris Steak House restaurants was approximately $76,500 during the second quarter, compared to approximately $98,300 last year. Ruth's Chris comparable sales decreased by 23.4% and consisted of an average check decrease of 6.5% and an entre reduction of 18.1%.

Average weekly sales at Mitchell's Fish Market were $72,700 compared to $82,100 in the prior-year quarter. Comparable sales at Mitchell's Fish Market decreased 9.8% and consisted of an average check decrease of 3.5% and entre reduction of 6.5%.

Franchise income fell 17.3% to $2.5 million versus $3 million in the second quarter of 2008. Domestic comparable franchise-owned restaurant sales decreased 23.1% while international franchise-owned restaurant sales decreased 30.2% which combined for a blended comparable franchise-owned restaurant sales decrease of 24.4%.

In terms of our cost structure, as a percentage of restaurant sales, food and beverage costs decreased 270 basis points year-over-year in the second quarter. As Mike said earlier, favorable beef costs primarily drove most of the improvement, and we are pleased to be locked for the majority of our prime beef requirement for the balance of 2009.

Restaurant operating expenses as a percentage of restaurant sales increased 430 basis points from the second quarter last year to 53.9%, resulting from the effect of fixed costs related to lower sales volumes.

Marketing and the advertising costs were down $900,000 on an absolute dollar basis, but comparable as a percentage of total revenue.

G&A costs as a percentage of total revenue decreased by 290 basis points to 6.4% of total revenue. This was due to a number of factors, including the corporate reorganization completed last October, lower travel and other administrative costs, while in last year's second quarter the Company recorded a $1.4 million charge related to the departure of our former CEO. In absolute dollar terms, G&A fell $4.4 million, or 44% compared to last year, and was in line with the first quarter of 2009.

We also recorded a $150,000 impairment charge during the second quarter relating to the closure of our San Juan restaurant and recorded a $925,000 loss in connection with the sale of our former corporate headquarters in New Orleans.

For the period, operating income was $4.5 million versus operating income of $4.9 million in the same period last year.

Net interest expense was $1.8 million in the second quarter, compared to net interest expense of $1.2 million for the same period last year. In 2009, we recorded a favorable mark-to-market adjustment of $400,000 related to interest rate swap agreements versus a favorable mark-to-market adjustment of $1.2 million in the second quarter of 2008.

Net income for the second quarter this year was $2.3 million, or $0.10 per diluted share, compared to net income of $2.8 million, or $0.12 per diluted share, in the prior-year period. Adjusting for charges in both periods, we generated earnings of $0.13 per diluted share for the second quarter in both years.

In terms of our balance sheet, capital expenditures during the second quarter totaled $1.4 million. Long-term debt at quarter end was $150 million, a reduction of $7.3 million from the balance at the end of March. We are compliant with all of our loan covenants. Our EBITDA-to-debt ratio at the end of the second quarter was 3.82 versus a maximum of 4.75 for our amended senior credit agreement.

Once again, we will refrain from issuing any definitive earnings guidance for 2009 but still maintain that comparable-store sales trends will be down in the range of 15% to 18% for the full year.

On the cost side, food and beverage costs are now projected to be in a range of 29% to 30% of restaurant sales, while our marketing spend is expected to be between $3.3 million and $3.5 million of total revenues. G&A expenses are expected to be in the range of $22.5 million or $24 million. CapEx spending is projected at $8 million or $10 million, and our free cash flow is projected to remain at $12 million or $14 million.

I would now like to return the call back to Mike.

Thanks, Bob. I would like to leave you with a few thoughts before we go to the Q&A portion of our call.

We are clearly executing on two of our three highest priorities for the year -- maximizing free cash flow and paying down debt -- but we are still having a harder time recapturing lost traffic. Still, we've put talented leadership in place but both brands, and they are working diligently on changing our recent traffic trends.

I believe this executive team, having now worked together for almost a year, has accomplished quite a bit. We have driven substantial cost savings at the corporate level, reorganized our efforts in the field, and improved financing terms with our lending group.

We've put on hold on development until we feel more comfortable with the macroeconomic picture. We are still looking forward to that point in time when we consider the business to have stabilized so that we can start thinking about growth and our long-term objectives of building out both of our steak and fresh seafood concepts to their full potential.

The foundation of our plan is always -- as the Ruth's Chris Steak House brand with its 44-year years of history, of great service and sizzling steaks. Our franchisees are the heart and soul of the brand, and we once again appreciate their commitment and partnership with us during these unprecedented times.

Mitchell's will also prove that at foundation, although younger than Ruth's Chris, we are pleased to celebrate Mitchell's tenth anniversary this year. These are two great brands with great opportunities, great prospects, and we look forward to it. Thank you.

We now open up for questions, operator.

Thank you. (Operator Instructions) Jeff Omohundro, Wells Fargo Securities.

Thanks. Just a couple of questions -- first, I guess, from a big-picture standpoint, considering the evolution of average check and your menu tests, such as the bistro menu, where do you think the right average check, given the macro environment for Ruth's Chris, will really settle out at?

When you think about unit economics, perhaps at a lower AUV, how should we think about that in terms of returns AUV needed to restart growth down the road? Thanks.

Jeff, Mike. The thing about the average guest check, I think there's a number of -- well, first of all, I think that the marketplace will sort of dictate that. But I think it's interesting that we are seeing the success we've had with our price certainty. I will remind you that it's $39.95 and there is an opportunity to buy up to $49.95. I think, again, as I said, there's some price certainty issues with that. We really feel like, in the feedback we've gotten and research we've done, is that the consumer really appreciates that. So, if you will, that's a value proposition for us. I think that we still have our special occasion diners that are comfortable with spending at maybe a what I would say a premium level certainly to our offering. So I think that, as the mix settles in, we will see that. I think that the guest check average is probably going to be in this range, may trade down a couple more dollars, may go up a couple more dollars, based on seasonality, but as I look at it today, I think that's probably where we are.

So if it stays in this range, then I guess you get a sense for where AUVs settle out and what returns at these levels might look like.

Yes. Jeff, we've done a lot of work around that. I will Bob speak to it.

Good morning, Jeff. I guess I would tell you that if you kind of look at the run rate over the last several quarters, the AUVs has certainly come back from where they were historically. But we kind of model this thing out in call it the 4-3 to 4-5 range and we believe that even with those lower volumes on an annualized basis, we can still produce store-level cash flows in the call it $750,000 to $850,000 range and on a percentage basis call that probably 18%, 19%. We think those are still pretty strong unit economics.

We think, as we move forward, when we start thinking about returns, the question -- and we're evaluating that now -- is what does the prototype look like in the future? It may be a little smaller. Maybe the tonality of it might be a little different, and I think the cost of it, the investment probably is going to be a little different. But I think when you kind of pull all those things together, we think that we still will offer investors a pretty strong and compelling unit economic story.

That's really helpful. Just one quick follow-up -- the franchisees and franchise health -- are you contemplating additional franchise closings, or what are you thinking along those lines now?

Jeff, you know, our franchise system is, first of all, as I've always said, a great, great group of people who have been, for the most part, around a long time. I think that they're feeling the struggles and difficulties as we are, but at this point, I don't contemplate that anything else will change in terms of franchisees. We still have interest in people becoming new franchisees. As I just described, we are expecting to open two more this year and probably in that same range of five or six for next year, at least at this point.

Very good, thanks a lot.

Nicole Miller, Piper Jaffray.

Good morning. Following up on Jeff's question, Mike, talking about the check and mix shift and what the check should be, is there a point in time where this new menu takes hold, the new average check at Ruth's is kind of stabilized and it actually creates an inflection point in traffic and becomes less negative and starts working positive?

Nicole, that is the plan! (laughter) Thanks!

Yes, I mean I think that, again, if you look at it and you look at where the steak space has been and where we've been, there's been, over a number of years, there's been this challenge to continue to raise prices in there, exactly where the consumer was coming from, but it seemed that there was an unlimited ability to take price. And obviously, that has reset itself.

So we are not only trying to continue to maintain viability with our core group of people that want to come for the full experience and want to come and celebrate their great anniversary, but we also need to find ways to celebrate the sort of moments to savor in that you can come and have a dining experience at Ruth's Chris that is maybe not quite as complicated and not quite as expensive.

So to the extent that takes place, the idea is that we will see an inflection point, and we are working on both reach and frequency. So we are trying and working and testing a lot of things to see where that might be.

Okay. Can you talk to us, especially with your expertise in this industry, can you talk to us about the store rationalization going on in fine dining? I mean, you guys closed a couple of stores in the quarter. How many more closures are in the future? Then if you could more broadly -- I mean we are seeing that across some of your peer concepts. Where do you think this shakes out? Maybe it is a long-term positive.

Nicole, first of all, thanks for the compliment that I have expertise. I like the sound of that.

But I think the store rationalization, I think, again, if you go back to what I just said, I mean, I think there was a lot of optimism in the fine dining space and with ourselves as well that there is a fair amount of pricing capability; your average AUVs are north of $5 million; and you got out over the [skis] maybe and made some rent real estate transactions that were not as prudent as they should have been.

I think that it's not -- you know obviously it is not unique to us. Then on an independent basis, that becomes even more problematic as they may not have the reserves to stay around as long.

In terms of ourselves, I mean we are and we've said we are in discussions with many of our landlords about what we believe would be a good win-win situation for us and them. At this point, I don't anticipate any more closings. But we also expect that we're going to have some very successful conversations with those landlords.

In terms of the balance of the restaurant system -- or the industry, I obviously don't know near as much about what that thought process is, but I can say that, as I said earlier, I think a lot of folks believe that the returns that they could get were always there and that there was always going to be pricing capabilities. Obviously, that's not the case. I certainly don't want to root against anybody because everybody knows how difficult this business is, but to the extent that there are less fine dining restaurants and less choices, I think that can be beneficial for us. I mean, we've done a lot of work around the cost control side of it that we think things are going to be in permanent position. So we are very bullish on that.

As you move the price point at Ruth's -- I mean closer to probably what is a Mitchell's price point, are there some synergies that can be tapped there? I mean, is there something you're learning from Mitchell's or are they just totally separate?

No. Well, Nicole, the Mitchell's guest check averages in the $35 range, so there is still a pretty big delta between the two. But I do think that there are some issues that we've learned from Mitchell's and vice versa. There's some discussion about the formality of fine dining -- is it too formal? Has it gotten too formal?

Mitchell's, which we would really say was in the polished casual space, is not as formal, maybe in some cases has little more energy than we typically have. So there are some learnings that take place there.

Then Bob, just a couple of questions -- you had made mention with the comment around AUVs and future growth, margins of 17% to 18%. Is that a suggestion of what, on a consolidated basis, could be in the new normal, or is there an opportunity not to get back to the peak of [22%]? I mean obviously comps are much different in 2004/2005, but can you close that gap or are you suggesting 17% to 18% on a consolidated basis?

Well again, Nicole, this is all projections at this point in time. But I would tell you, given the rent structure that is embedded in our system, when you have a drop off of call it almost $1 million on the AUV line, on a percentage basis, that fixed rent becomes a bigger percentage, as you well know. So, I don't think it is realistic to think that we can, in the installed base of restaurants that we have, produce 20%-plus returns at 4-3 or 4-5 AUVs. Having said that, I think, as we start to develop a prototype and develop a strategy for new growth, certainly we would look at real estate deals that would be more suited and more in line with what we think they should be, given those reduced volumes.

Okay. And then somewhere -- I don't remember who made the comment, but it was something about traffic again. I guess it sort of sounded to me like the implied -- or that I could imply that third quarter isn't really much better off in terms of same-store sales. Is that a fair assessment?

Well again, Nicole, we don't give forward guidance on monthly sales stats, but I guess I would just tell you that, in July here, trends haven't really been changed in any meaningful way from Q2.

Okay, understood. Just a final question on beef -- can you let us know what you're looking for in inflation for next year?

Still evaluating that -- we are not locked for 2010 at this point. We think, as September-October rolls around, there will be more activity in the marketplace, and nothing to report now other than to say we continue to study it and we hope to have something to announce in the fall.

Thank you.

Jason West, Deutsche Bank.

A few things -- one, could you remind us what your liquidity situation is in terms of access to bank lines? I think you had $1.1 million of cash at the end of the quarter. I'm just wondering what your options are outside of that cash.

Well, under our revolver right now, we have over $21 million of availability, so I don't think I would take -- read anything into just the fact that we only have $1.1 million on the books. As Mike has said, we are trying to optimize cash flow and pay down debt. I think we've demonstrated that we've done that thus far.

Okay, I wasn't sure under the covenants what you guys had available. Okay. Then on the same-store sales, could you just give the details around pricing versus mix? I know you said the average check was down but I wasn't sure what the pricing was.

Well, the last price increase that the Ruth's Chris brand has taken was in March of 2008, so we have kind of rolled over any pricing and so there is nothing embedded there.

We haven't -- we have no plans, at the moment, to take price. Obviously, Mike's remarks about the average check and where we need to be influences that thinking.

On the Mitchell's side, we haven't taken a price increase since we've controlled it in February of '08. It's my understanding that they hadn't really taken a price increase even six months before then, so it's been quite some time. There may be some opportunity there, but I think, in this environment, we are just trying to be prudent.

Okay. Now, was there any impact from Easter in the second quarter on the comps?

Yes, I would say, in the second quarter, the Easter calendar shift, you know, we overlapped some direct mail marketing efforts and rolling over this 2% price increase that I talked about from March of '08. We believe in total probably it had a negative impact on comps of approximately 2.5, 3 points.

That's including the lost pricing, or is that just from Easter alone?

No, it's all of those.

Okay, okay. Then the last thing, I am wondering if you could talk a bit more about the restaurants you decided to close. You know, what was unique I guess about the Denver market that -- well, was that a franchise? No, you guys were Naples, I believe the Company store, but just anything particularly unique about those restaurants, those particular markets, why those decided to close versus -- you know, it doesn't sound like others are really in that situation.

Well, I would tell you, on the Company side, we closed Naples. The San Juan location was really a lease issue that we chose not to extend the initial term of that lease.

In Naples, you know, it's hard to say. Personally, I think the site, the real estate was not really what it needed to be. I think, probably more than anything else, that probably drove the performance of that restaurant.

You know, when we have a situation where we are generating -- or we are not generating cash flows, positive cash flows, we look hard to see if we can find a solution. In that particular case, closing the restaurant was the best outcome.

Okay, thanks, guys.

(Operator Instructions). Jason West, Deutsche Bank.

Bob Vincent (inaudible). (technical difficulty)

(Operator Instructions). Please go ahead, Mr. West.

Jason West. Yes, I've asked all of my questions. Thank you.

At this time, there are no further questions in the queue. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thanks, everybody, for joining us today. Always, as I've said before, a great day to go out and eat a wonderful fresh fish and steak. Thanks!

This concludes today's conference. We appreciate your participation.