Ruth's Hospitality Group Inc (RUTH) 2010 Q1 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 first quarter 2010 earnings conference call. (Operator Instructions). Hosting today's conference will be Michael O'Donnell, President and Chief Executive Officer, and Bob Vincent, Executive Vice President and Chief Financial Officer of Ruth's Hospitality Group, Incorporated. As a reminder, today's conference call is being recorded.

And now I would turn the conference over to Bob Vincent. Please go ahead, sir.

Thank you, 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, 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 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 express written consent of Ruth's Hospitality Group, Inc. I would turn the call over to Michael O'Donnell, President and Chief Executive Officer of Ruth's Hospitality Group.

Thanks, Bob, and thank you all for joining us today. We were encouraged by our first quarter and view our performance as a continuation of the strategic and operational momentum we experienced at the end of 2009. Our year-over-year net income growth, adjusted for non-recurring items, was approximately 40% and demonstrates the benefits of the difficult decisions and work we have done since late 2008 to adjust our business model to a new sales reality. While comparable sales at Ruth's Chris Steakhouse were down .5% for the quarter, we continue to believe that sales have stabilized.

In March, just about two-thirds of our Ruth's Chris restaurants generated year-over-year sales growth; and in both March and April, I'm proud to say sales growth for the brand was in the mid single digit range. Our Mitchell's Fish Market also has enjoyed sales improvement, as comparable store sales for the quarter increased 2.4%, and during April sales growth continues to be in the low single digit range. On a geographic basis, Ruth's Chris two largest markets, California and Florida, had mixed results, as Florida generated sales growth of 1.5% while California experienced a decrease of 5%. This represents progress from a year ago, when Florida and California were down 22% and 16% year-over-year, respectively. Our private dining sales increased by 11% for the quarter as we continue to make inroads with our catering and professional satellite business. In the quarter, entrees -- which serve as a proxy for traffic -- increased by 1.9% for the first time in three years, while our average check decreased by 2.3%.

Our performance first at the Knapp-Track benchmark index for the steakhouse segment declined by approximately 100 basis points in sales and approximately 300 basis points in traffic. Discounting from our competitive set continued to be a factor; but as we have said before, all traffic isn't creating equal. In fact, we are pleased with what we are seeing on the ground, which is the frequency of our regulars increasing, due to our brand building and awareness efforts. These folks appreciate value and tend to return when they have had a great experience. In 2010, Ruth's Chris Steakhouse marketing campaign is centered on a brand enhancing message as we encourage people to say savor the moment of life with sizzling steak and genuine hospitality at Ruth's Chris. We are spending 3% to 3.5% of sales, using print, direct mail and radio to reach our targeted audience, and we have already started in the Lifestyle section of USA Today, where we will running ads there every other Thursday throughout the year.

While we continue to feature our Ruth's Classics with its $39.95, $49.95 price fix, the movement away from this promotion in our messaging at this point has not led to a fall off in its mix, which continues to be in the 30% range. In terms of pricing, we have not taken an increase in over two years, but are currently running a test in selected markets on a very limited number of menu items. Turning to Mitchell's, we are pleased that comparable sales have returned to positive territory, including a year-over-year traffic gain. The brand's positioning within the the polished seafood sector offers such significant points of differentiation and authenticity, and in its ten-plus years, Mitchell's has emerged as a hometown favorite in its markets. The focus of Mitchell's concept is on superior execution of fresh fish, and we are solidifying our reputation as seafood experts to the training of our service staff, as well as the messaging created by Mitchell's new ad agency. Specifically, we are utilizing a mix of brand enhancing messages supplemented by new early week promotions and new product endorsements, which are resonating with our guests. We expect to open a new Mitchell's Fish Market in Winter Park, a suburb of Orlando, in June. Longer term, we foresee additional opportunities for the brand in Florida, given the success we have experienced with Mitchell's in Jacksonville and in Tampa. Our focus also includes development of both concepts in the coming year.

In fact, 0ur work has begun in terms of refining our prototype to ensure a terrific guest experience and adequate returns for our shareholders. We are actively evaluating sites for both brands and seeking and seeking new strategic growth partners. Given Ruth's reputation in the steakhouse category, along with Mitchell's positioning within fresh seafood, we believe that we can be a highly sought after tenant, and therefore be opportunistic. So with cost reductions and balance sheet improvements behind us, we are focused on building traffic and satisfying customers, many of which have become (inaudible) users of our concept. We are pleased to be doing this in the context of what appears to be a stable economy, and believe targeted brand building will ultimately lead to long-term market gain shares as we see sales growth sustain itself. We believe we are in great shape to drive operating leverage in our model and bottom line growth. I'll turn the call back over to Bob.

Thank you, Mike. As described in our earnings release today for the first quarter ended March 28, 2010, we generated total revenues of 94.7 million, which matches the same total from last year. Total Company-owned restaurant sales declined slightly to 91.2 million compared to 91.4 million for the first quarter last year. Restaurant operating weeks were 1,118 versus 1,127 last year. Average weekly sales for all Company-owned Ruth's Chris Steakhouse restaurants was approximately 85.6 thousand in the first quarter compared do approximately 85.9 thousand in the same period last year.

Ruth's Chris Steakhouse comparable sales decreased by .5% and consisted of an average check decrease of 2.3%, offset by an increase in entrees of 1.9% -- our first increase in entrees in three years. Total sales for Ruth's Chris were impacted by the loss of 26 operating days due to winter weather conditions, primarily in February. Average weekly sales at Mitchell's Fish Market were 70.5 thousand compared to 68.8 thousand in the same period last year. Comparable restaurant sales at Mitchell's increased 2.4% and consisted with an average check decrease of 2.1% and an entree increase of 4.6%. Mitchell's also experienced the impact of winter weather, as it lost two operating days and also lost ten dinner meal periods throughout the system. Franchise income increased 8.3% to 2.9 million from 2.7 million last year.

Domestic comparable franchise-owned restaurant sales increased 1.8%, while international comparable franchise-owned restaurant sales increased 9.9%, which combined for a blended comparable franchise-owned restaurant sales increase of 3.2%. These results represent solid progress from a year ago when domestic comparable sales were down 22% while international comparable sales were down 28.1%. In terms of our cost structure, as a percentage of restaurant sales, food and beverage cost decreased 80 basis points year-over-year in the first quarter. Continued favorability in beef cost primarily drove most of the improvement. As we reported last quarter, we have approximately 50% of our prime beef requirement locked for 2010, slightly below our actual average cost in 2009.

Most recently, we have locked approximately 10% of our tenderloin needs for the balance of this year at pricing slightly above our average cost versus a year ago. Restaurant operating expenses as a percentage of restaurant sales decreased 90 basis points from the first quarter last year to 51.3%, as sales have stabilize asked we realize the full impact of our various cost containment initiatives implemented throughout 2009. Marketing and advertising cost declined to 2.5 million, and as a percentage of total revenue, decreased by 30 basis points to 2.7 of total revenues. G&A expenditures were essentially flat compared to last year. For the period, our operating income was 9.8 million, which compares to operating income of 6.9 million in the same quarter last year. Included in operating income this year is a recapture of 0.6 million in restructuring charges relating to the termination of our lease obligation.

Interest expense was $2 million for the first quarter compared to interest expense of 2.3 million for the same period last year. In the first quarter this year, we had a non-cash charge of 0.6 million related to deferred financing costs associated with our recent debt amendment. In the first quarter of 2009, we also recorded a non-cash charge of 0.4 million related to deferred financing costs associated with our first debt amendment which we signed in February of 2009. Additionally in the first quarter of both years, we recorded a favorable mark-to-market non-cash adjustment of 0.3 million related to interest rate swap agreements. Net income available to common shareholders was $6 million in the first quarter of 2010 or $0.19 per diluted share on an outstanding share base of 32.5 million, compared to 3.7 million or $0.16 per diluted share on an outstanding share base of 23.6 million in the first quarter of 2009. Net income for the quarter includes a $0.7 million benefit from a prior year income tax adjustment. Excluding this adjustment, net income for the current quarter was $0.17 per diluted share.

With regards to our balance sheet, long-term debt as of March 28 was 74 million. For the quarter, cash generated from operations, as well as the approximate $45 million of net proceeds from our recent financings, allowed us to reduce our debt by 51.5 million for the quarter. In terms of our outlook for 2010, we believe there will be one franchise Ruth's Chris Steakhouse opening this year, scheduled for May, as well as one Mitchell's Fish Market opening, which is expected late in the second quarter. On the cost side, food and beverage costs are projected to be between 29% and 30% of restaurant sales, while our marketing spend is expected to be between 3% and 3.5% of total revenue. G&A expenses are expected to be in the range of 22 million to 24 million, with our effective tax rate projected to be in the 25% to 30% range. CapEx spending is projected at $7 million to $8 million, while our free cash flow is expected to be in the $18 million to $20 million range. I'd now like to turn the call back to Mike.

Thanks, Bob. Once again. we are very encourage by first quarter results and how the quarter progressed. Today, there is a much different feeling at Ruth's Hospitality Group than there was just a year ago. While there are still many challenges ahead, I believe our team should celebrate the progress they have made during the past 18 months. We are clearly on offense for the first time in two year, and we are all very excited about that. Our excitement and enthusiasm is based on having one of the most iconic brands in America, one that has withstood numerous economic cycles, and now we have a terrific second brand that as we get economics properly aligned, we have a real opportunity for long-term expansion.

In closing, Mitchell's team has shown a passion for what they do best -- serving best seafood prepared with exacting standards in a polished, casual atmosphere, while ensuring that their guests are made to feel welcomed and appreciated. Ultimately, Ruth's Chris stands for a great sizzling steak and genuine hospitality, and it is these core values that are the cornerstone of everything we do. Our franchisees, many of whom who have been with the brand 20 plus years, have also been through some very trying times, and we thank them for their partnership and fortitude. They remain the true heart and soul of the Ruth's Chris Steakhouse business. With that, operator, I'll open for questions.

(Operator Instructions). And our first question comes from Nicole Miller Regan with Piper Jaffray.

Good morning.

Good morning.

I missed just literally like the first 60 seconds or so, so if you did cover this, I apologize; but can you give us an update, Mike, on the current trends -- if you are not giving a number, that's okay. But have these obviously recent improvements continued into this current quarter?

Nicole, as I said in my remarks, that both March and April in the Ruth's business were demonstrating mid single digit growth, and in the Mitchell's --

Positive?

Pardon me?

Positive?

Yes.

I apologize. Okay.

And Mitchell's business in the low single digit positive growth.

And are you seeing the same kind of split between check and entree, or has anything shifted there?

No. As we said, we've seen the first time in the first quarter we saw traffic increase, and we believe that our strategy with the prefixed opportunity has been doing well for us. We have seen a decline in the guest check modestly, but an increase in the entree count. So our traffic is actually up.

Okay, and then just as it relates to Mitchell's, obviously like you said standing out here and turning into the positive comp territory, can you just talk to us bit picture? Is this something more about the supply demand dynamic of that segment, or why is the seafood segment outperforming steak, I guess, right now to this degree? Or is there something specific to Mitchell's about where they are regionally?

Nicole, I'm not sure I said that seafood was outperforming steaks, but I think Mitchell's is a very good concept. We have been doing a lot of work around it. We have got the new opening of the new restaurant in the second quarter in Winter Park. We've still got a lot of good work to do around that. We have had great consumer acceptance, and we need to make sure that the economics are right before we declare that we are going to go forward faster.

Thanks, and congrats on a good quarter.

Thanks, Nicole.

Our next question comes from Jason West with Deutsche Bank.

Yes, thanks. Good morning, guys.

Good morning, Jason.

A couple of questions. One, on the food cost outlook, can you update us kind of what you guys are seeing in the market and the concern you may have looking out to -- or really, the rest of this year and into 2011 with the elevated beef prices that we are seeing? And also you mentioned you are looking at some pricing. Can you give us a rough estimate of how much that might be on a net basis if you do take some pricing on what you are testing there?

Well, let me answer the first question in terms of our outlook. I mean, I think as we've said, we've been in the market actively trying to lock our beef supply here, and to date we have half of our prime supply locked and 10% of our tenderloin for the balance of the year. We are hoping that we'll be able to find some counterparties to make a deal for the balance of the year, but that's a TBD at this point. I think it's too early to speculate for 2011. And in terms of pricing, we are just running a limited test here. We've got probably about 20, 25 restaurant, and we are probably only going to take about four or five items and measure over the next four to six weeks how much demand changes and whether there's any trading. And so once we get some intelligence from that, I then think we'll be in a position to determine what we'll do going forward. So I think in the near-term, I would quantify it as very minor.

Okay. And then can you give us just the numbers on the prime versus tenderloins? How big are those two of your total food cost?

Well --

Go ahead.

I'm sorry.

I was going to say in terms of the pricing that you guys see in the market, how much are those up right now year-over-year?

Well, in the first quarter, we -- in both prime and tenders -- were favorable versus the prior year; though in March, the tender market started to get a little hot, if you will. I think as we look at our whole demand -- again, half of our beef supply the prime, half of our beef supply is tender -- and beef as a whole represents somewhere between 35% and 40% of our total cost of good sold.

Okay, great. And just one last quick one, can you quantify the weather impact at all in the quarter on the two brands?

Yes, we would estimate that it is approximately about $500,000, and clearly on the Ruth's side -- most of it was in Ruth's Chris. It was in the mid-Atlanta for the DC market, it was a couple of weekends which were obviously our prime time. So kind of adjusting for that, the Ruth's brand would probably have been slightly positive.

Okay, great. Thanks guys.

Our next question comes from Jeff Omohundro with Wells Fargo Securities.

Thanks. Mike, in the release, there was some comments that you are looking at development opportunities. I wonder if you could just maybe elaborate what your thinking is around development, maybe update us on what the real estate pipeline is looking like going into 2011? And then I had one other quick question. Thanks.

Hey, Jeff, what we are talking about in terms of development, I think you may be specifically referring to some comments I've been making around alliances. We've had some success both on the Company and franchise side historically in the Ruth's brand around relationships both in casinos and hotels, and we've expanded that opportunity. In terms of the exact pipeline for 2011, we'd be better prepared to talk about that at the end of this next quarter. We are doing a lot of work around the development. We are active in the marketplace. We are out looking at real estate. We are seeing some pretty good things as a result of that. But I think it's a little early for us right now to talk about 2011.

All right. And then I think you have pretty diverse sources of supply for Mitchell's, but just any thoughts about what is happening in the Gulf with the oil spill and maybe any impact on food costs, I guess shrimp in particular? Thanks.

Yes, at this point, we are not. We are preparing for that, having conversation around it, but you are correct. We have quite a diverse source of places for shrimp, and the Gulf of Mexico is not the only place that we source that. So whether there's a longer term impact, I think, really depends what the longer term impact of that catastrophe ends up being, how fast they solve that.

Yes, and Jeff, I would just add that in terms of the shrimp product itself, we are actually locked on that commodity for the balance of 2010.

That's helpful. Thanks. Good quarter. I appreciate it.

Thank you.

(Operator Instructions). And our next question comes from Bryan Elliott with Raymond James.

Good morning. I'd like to get a little further clarification on the beef situation. I guess I'll ask it this way. Within your guidance range -- let's take the top end at 30% -- I mean, what's your assumption embedded in that on how much steak might up up -- might be up? I'm just trying to get a sense of the risk, just given that we're seeing, at least by our work, tenderloins possibly running up in the 30% range here year-over-year and up substantially in the last six to eight weeks. I'm trying to get a sense of what is embedded in that guidance number and what risk there might be to it.

I would say two things, Brian. One is, as we look at what is going on in the current market, all of the folks that we work with believe that it's temporary and it's not long-term, and it's been isolated to the tender market and not the prime market. So given the fact that we have a balance between those two products, we feel reasonably secure that this isn't going to get away from us. Having said that, in terms of your first question or your real question about what is embedded in the guidance, I think we have kind of put in a 5% increase year-over-year for the entire beef supply. So I still think that again, given what we've been told and what we believe, we are going to be okay there.

Great. Thank you.

And that does conclude our question-and-answer session. I'd like to turn the call back over to our speakers for any closing remarks or comments.

Thank you very much. I appreciate everybody being with us today, and as always, it's a great day to go and eat steaks and fish. Thank you very much.

And that does conclude today's conference. We appreciate your participation.