Ruth's Hospitality Group Inc (RUTH) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to today's Ruth's Hospitality Group, Incorporated third quarter 2009 earnings conference call.

At this time all participant's 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 Mr. Michael O'Donnell, President and Chief Executive Officer; and Mr. Bob Vincent, Chief Financial Officer of Ruth's Hospitality Group, Incorporated. As a reminder today's conference is being recorded.

And now I would like to turn the conference over to Mr. Bob Vincent, Chief Financial Officer. Please go ahead.

Thank you, Robin. 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 and, therefore, undue reliance should not be placed upon them. We refer all of you to to our recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions. Finally, I would like to remind you that today's call may not be reproduced in any form without the written--express written consent of Ruth's Hospitality Group, Inc.

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

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

Our quarterly results underscore the challenges we continue to face relative to consumer spending and the broader economic environment. From a sales perspective, comparable trends declined year-over-year, but remain generally in line with the first and second quarters. We benefited from lower beef costs during the period as well as cost savings from initiatives that began in the latter part of 2008. These factors enabled us to improve operating margins slightly if you adjust for one time items on both periods.

On the bottom line, we were able to hold the year-over-year decline to approximately $0.5 million despite a revenue decline of approximately 20%. I think that illustrates our ability to manage the business during these difficult times. As we've stated over the past year, we continue to work toward strengthening our financial condition by optimizing free cash flow, managing our capital expenditures and by paying down debt. We made progress on this front during the third quarter having reduced indebtedness by $1.5 million with nearly $12 million paid down through the first three quarters of the year.

Turning to our brands. Ruth's Chris experienced a comparable store sales decline of 24% for the third quarter; and Mitchell's Fish Market experienced a decline of 12.3%. Let's talk a little more on Ruth's Chris. For the period we underperformed Knapp-Track benchmark index for our segment and we believe a number of factors influenced that outcome. If you recall, during last year's third quarter we moved quickly to introduce our summer celebration and supported the initiative with approximately $1.89 million in advertising.

If this year's third quarter, we featured our Ruth's classics, similar to the summer celebration and it is a price fixed promotion. But we significantly pulled back on advertising and by and large the promotion wasn't seen as new to our customers. At the same time, our peers did the not introduce a similar promotion in the third quarter of last year, but they stepped up their efforts in this year's third quarter. This resulted in heightened competition and a slight setback in share. That said, through the first nine months of 2009, Knapp-Track suggests that we have held market share and we believe that is a solid accomplishment for the brand.

On a geographic basis, our two largest markets for Ruth's Chris, California and Florida on a comparable basis both performed below the system average, down 25.8% and 26.3% respectively. However, our five class of 2008 Ruth's Chris steakhouse company-owned restaurants exceeded the system sales volume average by 16%. Regarding our sales mix, the private dining business at Ruth's was down 15.9%, which was better than our comparable sales results for the period. And while private dining is not as significant in the third quarter as it will be in the fourth quarter, we are pleased to have seen this progress.

Private dining certainly has growth potential for Ruth's and in an effort to support the opportunity we recently partnered with a third party to provide professional satellite meeting capabilities geared for live interactive sessions in over 100 Ruth's Chris and Mitchell's Fish Market dining rooms. We think having this capability is particularly relevant today as companies seek alternatives to hosting large meetings and conferences with groups from across the country. We have hosted eight of these sessions since June of this year.

In terms of development there will be no company restaurants built this year. During the third quarter of 2009, one franchise Ruth's Chris steakhouse location was opened in Durham, North Carolina while one franchise location in Las Vegas, Nevada closed. In October, our fifth franchise location opened in Kennesaw, Georgia while one franchise location in Aspen, Colorado closed. In addition the Company signed a two unit franchise development for Puerto Rico.

Rebuilding sales momentum in this environment continues to be our priority. And we are working hard to connect with consumers through menu choice and value. As we've stated attracting more guests and increasing their frequency over time is our biggest opportunity and our teams are working hard to make headway at both brands.

As I mentioned earlier, at Ruth's Chris we are featuring our Ruth's classics, which gives consumers two choices this first a $39.95 three course meal featuring one of four entrees. A typical order would be a six ounce filet with shrimp, a personal side and dessert. There's also an upgrade option for $49.95 that features products like our 16-ounce ribeye. Ruth's classics now represents 30% of our guests preference and the mix between the two price points is about 50/50. Interestingly, Ruth's classic is having only a modest impact on our average guest check, which was down approximately 3.3% to $69.48 from the prior year.

We are also continuing to test our bistro menu, which includes appetizers, sushi, soups, salad, sandwiches priced from $9 to $19. It is currently available in our lounge areas at six locations and we are assessing the feasibility of rolling it out to other restaurants as well. Lastly, our early week $19.95 steak and fries promotion does not have system-wide possibilities; but does have application in certain restaurants on a promotional basis.

Mitchell's Fish Market, as many of you know, was acquired by Ruth's Hospitality Group from Cameron Mitchell in 2008. Mitchell's has a ten year history of award winning success, and we in the operations team at Mitchell's, many of which have a long history are proud to be associated with such a high quality business. Mitchell's position as a restaurant seafood market, as the name states, helps validate our authenticity and credibility with our customers. Our daily market driven menu features the freshest top of the catch seafood prepared with exacting standards and a variety of original flavors, seasonal and signature styles.

Our points of significant differentiation are the quality and handling of our fresh fish, our chef-driven culinary approach, our highly trained and knowledgeable teams, our energetic and casually sophisticated atmosphere, and our fresh fish retail market. The initial growth in Mitchell's was in the Midwest. Its beginning was in Columbus, Ohio. Mitchell's then continued its success moving outward to other cities in Ohio, Michigan and Kentucky. Growth in recent years has included three fish markets in Florida and one in Stanford, Connecticut. The fish markets now total 19 restaurants. Two of the Florida restaurants are performing above the system average in Jacksonville and Tampa. Our San Destin restaurant does quite well in the summer tourist season. The off season, let's say creates many challenges for our management team.

I asked Sam Tancredi to be the COO for this business a year ago. He, along with the support of Tom Burmane and his regional directors and restaurant teams have made great progress in improving margins and identifying the areas of opportunity that we continue to work on as we chart the future for Mitchell's . In 2009, we commissioned a brand consulting agency, Vivaldi Partners of New York, to work with us on Mitchell's brand positioning. With their help and significant customer research, we determined that Mitchell's is well positioned, has substance, credibility and authenticity.

While we have refinement work to do in the economics that relate to certain aspects of operations, we hope to start our growth of the brand in the near future. We have been looking for sites in the Florida market. As I said the restaurants in Tampa and Jacksonville have generated solid returns. This is giving us confidence that Florida can be a growth market for us.

We do not have any signed sites at this point, but we are in discussions that may allow us to open a Mitchell's Fish Market during the second half of 2010. Again we acquired this business in 2008 as a growth opportunity for Ruth's Hospitality Group. We intend to continue to evaluate if that is or it is not the case in 2010. I look forward to reporting updates along the way.

I would like now to turn the call back over to

Thank you, Mike.

As described in our earnings release today for the third quarter ending September 27, 2009, we generated total revenues of $77.8 million, approximately 21% lower than last year's $98.9 million. Total company-owned restaurant sales also declined by approximately 21%, to $75.6 million. Restaurant operating weeks were 1,118 versus 1,121 last year.

Average weekly sales for all company-owned Ruth's Chris steakhouse restaurants were approximately $67.9 thousand in the third quarter, compared to approximately $88.3 thousand in the same period last year. Ruth's Chris steakhouse comparable sales decreased by 24% and consisted of an average check decline of 3.3%, and an entree reduction of 21.5% offset by mixed shifts. March of 2008 was the last time the Company had a menu price increase.

Average weekly sales at Mitchell's Fish Market were $69.5 thousand, compared to $79.2 thousand in the prior year third quarter. Comparable restaurant sales at Mitchell's Fish Market decreased 12.3% and consisted of an average check decline of 2.8% and an entree reduction of 9.7% offset by mixed shifts. Franchise income fell to $2.4 million versus $3.4 million in the third quarter of 2008. Domestic comparable franchise owned restaurant sales decreased 21.4%, while international comparable franchise restaurant sales decreased 13.9%, which combined for a blended comparable franchise owned restaurant sales decrease of 20%.

In terms of our cost structure, as a percentage of restaurant sales, food and beverage costs decreased 330 basis points year-over-year in the third quarter. As Mike said earlier, favorable beef costs primarily drove most of that improvement. We are locked for the majority of our prime beef requirements for the fourth quarter, and at this point are in the evaluation stage of determining what we will try to lock for 2010.

Restaurant operating expenses as a percentage of restaurant sales, increased 410 basis points from the third quarter last year to 57.5%, resulting from the effects of fixed costs related to lower sales volumes. Marketing and advertising costs declined by nearly half to $1.8 million, and as a percentage of total revenue declined 120 basis points to 2.3%. As Mike mentioned earlier, the savings were the result of not having the same level of media support for our Ruth's classic promotion this year versus the incremental spending we did a year ago promoting our summer celebration program.

In absolute dollars, G&A declined $1.3 million, or 19.2% compared to last year. And was in line with our overall spending in each of our first two quarters of 2009. In the third quarter, we also incurred $400,000 in restructuring costs related to lease termination charges for two restaurant locations. These charges related to our decision in late 2008 not to build any new restaurants in 2009.

For the period operating income was $1 million. Excluding the $400,000 in restructuring costs related to the lease termination charges mentioned earlier, operating income would have been $1.4 million. This compares to operating income of $1.7 million in the same quarter last year. Interest expense was $1.9 million in the third quarter, compared to interest expense of $2.5 million for the same period last year.

In 2009, we recorded a favorable mark-to-market noncash adjustment of $400,000, related to interest rate swap agreements versus a mark-to-market noncash charge of $100,000 in the third quarter of 2008. The Company's net loss was $1 million in the third quarter of 2009, or $0.04 per diluted share, compared to a net loss of $500,000 or $0.02 per diluted share in the third quarter of 2008.

In terms of our balance sheet, capital expenditures during the third quarter totaled $600,000. Long-term debt at quarter end was $148.5 million, a reduction of $1.5 million during the period. We are compliant with all of our loan covenants and our debt to EBITDA ratio at the end of the third quarter was 3.91 versus a maximum of 4.80 per our amended senior credit agreement.

In terms of our updated outlook, once again we will refrain from issuing any definitive earnings guidance for 2009, but believe that comparable same store sales trends will be down in the range of 18% to 20% for the full year. On the cost side, food and beverage costs are projected to be between 28.5% to 29.5% of restaurant sales, while our marketing spend is expected to be between 3% and 3.3% of total revenues. G&A expenses are expected to be in the range of $22.5 million to $24 million. Capital expenditures spending is now projected at $5 million to $6 million, while our free cash flow is expected to be in the $17 million to $20 million range.

I'll now 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. Sales continue to be our top challenge and although October trends have improved year-over-year we've not seen much change in the two year comparable trend. As a result, the numbers suggest the conditions are certainly not getting better, but they are also not getting worse.

Our talented leadership teams have done an excellent job of modifying costs and operating efficiently, despite our top line weakness. Those actions have allowed us to make progress on maximizing free cash flow and paying down debt. Their actions will also be very beneficial for us in the future, providing great operating leverage into a recovery.

In closing, we are proud that our flagship Ruth's Chris steakhouse brand with its 44 year history of great service and sizzling steaks is loved by guests across the country and around the world. Our franchisees are the heart and soul of the brand and we appreciate their commitment and partnership with us as we move toward 2010. Mitchell's is also an enduring brand in its 10th year. And in that time has demonstrated a passion for fresh seafood that similarly appreciated by guests in the markets it serves. These two great brands have longevity and terrific prospects.

With that, operator, let's open the lines for questions.

(Operator Instructions)

Our first question comes from Jeff Omohundro.

Thank you.

Just some clarification on those comments regarding October. In light of the full year outlook for down 18% to 20%, is it fair to say that the improvement that that would suggest in Q4 primarily reflects the far easier prior year comparison rather than any pickup in fundamental traffic trend? Is that the right read?

Jeff, I think that's the right read. I think as expected, the rate of decline has slowed, given the overlap of last year's fourth quarter.

Does it feel like it then that you have kind of passed the bottom?

That's the million dollars question, right? I mean or multi-million dollar. Yes. I would tell you that intuitively, I have that feeling.

We are seeing some strength as I said in the private dining space. We're seeing some intermittent very positive days. Overall still challenged. But I do feel like we are seeing, I hope, again, I guess as hope is not a strategy; but I think that we are seeing, we are seeing, if not the bottom, real close.

And then the other thing I wanted to follow-up on was the comments regarding beef and commodities and 2010. I do know it's early. But can you give us any sense of direction in terms of the outlook that you are considering for beef? And whether you'd consider contracting or run spot?

Jeff, I think that at this point, the intelligence that we are gathering is that beef is likely to be pretty neutral here in the first half of 2010. And so, we continue each week to evaluate some offers, if you will, to lock. Our desire is to lock in 2010, and I think philosophically, if we can secure pricing that is at or below our 2009 average cost, we would likely do so.

Very good. Thanks.

Next question comes from Jason West.

Yes, thanks.

Just a couple of things. One I wonder if you could clarify that the same-store sales guidance you gave for the full year of down 18 to 20. Is that for the blended company or is that just for Ruth's Chris?

That would be for Ruth's Chris.

Okay.

And do you happen to have a number for Mitchell's, as well?

No. We--yes, I would not provide any guidance at this point for Mitchell's.

Okay.

And then another one on the outlook for the fourth quarter. Can you remind us the percent of sales that you guys do on private dining? And sort of what the trends are looking like there in terms of holiday booking? We have done some channel checks, it seems like things may be picking up a little bit versus last year when a lot of companies cut back on that type of activity. Wonder what you guys are seeing right now?

Jason, yes, Mike.

On balance, private dining runs in the neighborhood of 9% for us on a year basis. It runs in the neighborhood of 12% to 15% in the fourth quarter. I would tell you that we are very encouraged by what we are seeing in early bookings. But that's exactly what it is, early.

Where a lot of the bookings that we see we'll probably take place really more into November. So this next couple of weeks will be even a stronger indicator. And there have been a trend--there was a trend last year that we would expect not to repeat itself as dramatically where there were bookings and ten cancellations. But what I can say a little more color on that, what we are seeing in bookings, we are seeing a decline in what the amount of spend taking place is.

So while we are encouraged that the bookings at this point are actually up, the revenue base of that may be a little more challenged as some of the booking--the absolute price of those events have come down some.

Okay.

And then the last thing just on the health of the franchisees. I noticed the franchise revenues seemed to drop a bit more than the comps did there. Just wonder if there is any issues on collections right now on royalties and if you could talk about the risks of more significant store closures within the franchisee base that would be great. Thanks.

Sure, Jason.

First, when we talk about our franchise revenue, that includes both fees for the sale of individual--the development fees related to the sale of restaurants. So that number does not always tie based on a strict sales calculation. In terms of the franchise community in our receivables, we are current with every restaurant and every franchise where the restaurants are currently operating. We have some modest issues around some restaurants that most recently closed.

The general health of the franchise community, I would say, is good. A great deal of our franchisees have financing through limited partners as opposed to significant debt financing; and I would say that they are well positioned to weather the storm for the most part.

Do we have risk in if some outliers, where it is really not as much a business, or the fact that the business has declined as much, but the possibility some of the restaurants were entered into at a time when things may have been more optimistic; and as a result, the rent and occupancy structure is a little more burdensome.

We continue to work with the franchise group, monitoring that. And I don't see, at this point, that there would be any significant change in the way we are.

Okay. Thank you.

Our next question comes from Nicole Miller Regan of Piper Jaffray.

Hello, guys. This is Rob Wyler in for Nicole.

I just want to follow-up on the banquet/private dining business a little bit. What percentage do you guys usually have booked by now? I know that you mentioned that November is when you book a lot of them. What percentage do you normally book by now and where are you at as far as that versus even last year? It sounds like you're up a little bit, but I'm just curious what percentages are locked in?

We would be in the neighborhood of 40% to 50% . If you go back and look at history over time. And as I said earlier, we are ahead of that this

Okay.

So early indications are good. But they are what they are is early.

Then the banquet sales you usually have a higher average check, correct? How much higher has that typically been in the past years than your average check?

Well it normally runs in the neighborhood, $15 to say $20 and that's kind of what I was speaking to earlier that we are seeing some decline in that. We have made adjustments to allow for that and we have actually gone out to try and seek new business in that regard. And we are seeing, for instance, people opting to use our $39.95, $49.95 classics in their catering business again so that they have sort of a fixed price number they feel comfortable about.

We think that that decline could be in the neighborhood of 10% in terms of the individual guest check average; but historically, that number's up, as I said earlier, about $20 over our running rate. And it--because of the fixed nature of it, it's a very profitable business.

Sure.

And then I note that you guys mentioned your comp of 15.9 down for private dining and I believe that was for the just reported the third quarter. What was that in the second quarter?

Rob, my recollection was it was about 21%.

Down 21%? Okay.

Then just one final question here. It looks like you guys cut back on your CapEx about $3 million to $4 million. Where did that cut come from? Because I know you guys were never planning on building any restaurants and banks?

Yes, Rob. It's really a timing issue. We have a couple of major remodel projects that were--that are still going to get done; but due to some of the permitting issues and the architecturals and so forth, those have been delayed. So we had thought we would be further along with those two projects, but we are just really launching them. So that spend will end up falling into 2010.

Thank you.

(Operator Instructions)

We'll take our next question from Paul Murray of Noble Equity.

I was wondering if there were any regional bright spots like in the New York area because Wall Street has recovered?

Well, from a sales perspective on the Ruth's Chris brand, I think that you know the performance--Mike spoke earlier about the two largest markets we have, California and Florida. I think that we would say that the northeast probably has had a little bit more strength. And in particular, some of our big high profiled urban locations, be it Boston, Manhattan, Chicago, out in the west coast, San Diego, have probably performed a little better than the system as a whole.

I would say, Paul, that the bright spots are more really restaurant by restaurant, as Bob just described, than they are by region.

And has bar or liquor revenue held up any better or worse than food revenue?

We have just seen a slight mix shift in terms of alcohol. So it hasn't been significant.

And some of that really Paul, driven by a decline in what people are spending on big wines.

And the final question: is a growing percent of your sales coming from the promotions, like the two for $90 or the one meal for $45?

Well, the--we did two for $89 a year ago in the third quarter. We now have our pre-fixed Ruth's classics are $39.95 and an upsell to $49.95. And as I said, we're running about 30%.

We started with Ruth's classics in February of last year. It has grown sort of steadily and I think sort of leveled off in the last two quarters in that 30% of sales range. And to the extent that that has happened, we believe that we will no longer be in the promotional side of that, where we will be alternately in the promotional side of that and it will become a more permanent part of what we do.

Okay great. Thank you.

Thank you.

And at this time I will turn the call back over to our hosts for any closing remarks.

Thank you all for joining us this morning. As I am fond of saying, it is a great day to go out and eat steaks and/or fish. Thank you very much.