Ruth's Hospitality Group Inc (RUTH) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to today's Ruth's Hospitality Group, Inc. second quarter 2010 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 is Bob Vincent, Chief Financial Officer of Ruth's Hospitality Group, Inc. As a reminder today's conference is being recorded. And now I'd like to turn the conference over to Bob Vincent. Please go ahead, sir.

Thank you and good morning. First of all let me tell you that Mike O'Donnell, our President and Chief Operating Officer, Executive Officer, excuse me, is stuck in traffic and I will be hosting the entire call today. 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 conditions.

Finally I would like to remind you today that the call may not be reproduced in any form without the express written consent of Ruth's Hospitality Group, Inc.

In terms of our second quarter, we are pleased with our performance from both a revenue and net earnings standpoint. Comparable sales were positive at both brands. Net income grew 34% to $3.7 million, as we benefited from the operational improvements we've made to our business model over the past year and a half. Comparable sales at Ruth's Chris Steakhouse were up 2.9%, the first time we've generated positive comparable store sales at the brand since the second quarter of 2007.

Mitchell's Fish Market similarly demonstrated sales improvement, as comparable store sales for the quarter increased 0.9%, the second consecutive quarter of positive results. Currently July's comp trends are positive in the low single digit range for Ruth's Chris Steakhouse. However, Mitchell's comp trends are running down in the low single digit range.

On a geographic basis, Ruth's Chris' two largest markets, California and Florida, had mixed results for the quarter. Florida generated sales declines of 0.7% for the quarter, while California experienced an increase of 0.1%. This represented progress from a year ago when Florida and California were down 22.6% and 25.3% year-over-year, respectively. Our private dining sales increased by 16% for the quarter, as we continue to make inroads with our catering and professional satellite businesses.

During the quarter, entrees, which serves as a proxy for our traffic, increased by 3.2% and were positive for the second time in three years, while our average check decreased by 0.3%.

Our performance versus the Knapp-Track benchmark index for the steakhouse segment declined by approximately 130 basis points in sales and approximately 340 basis point in traffic. And we believe this is a product of continued discounting by our competitors. As we've said the past, we won't chase traffic for traffic's sake and we feel good about our brand-enhancing message. Our general managers tell us they are encouraged to see their regulars more often and that guests are pleased with the value we're offering, so it is our intent to build on that.

In terms of our brand-enhancing messaging, our campaign this year encourages people to savor the moment of life with sizzling steaks 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 audiences. Many of you have already probably seen our brand-enhancing ads in the lifestyle section of the USA Today, where we can be found every other Thursday throughout the year.

In addition, we continue to offer our Ruth's Classics with our $39.95 and it's $49.95 prix fixe and these items continue to represent approximately 30% of our sales mix.

Just two final points with regards to Ruth's Chris Steakhouse. We have not taken a price increase in over two years, but continue to test pricing in about half of our company markets on a very limited number of menu items. We've also been testing what we view as improvements to the guest experience and atmosphere, the menu, service staff uniforms and background music at six locations. In both cases, we have not yet made a determination if a rollout to all units is warranted.

Turning to Mitchell's, we are pleased that its comparable sales remained in positive territory including year-over-year traffic gains. Mitchell's has great consumer acceptance within the polished seafood sector and is highly regarded for its significant points of differentiation and authenticity.

With the new leadership we put in place at the brand over a year ago, we are solidifying our reputations as seafood experts and are involving the brand's positioning with culinary promotions that encompass broader themes. These include our lobster duo and flavors of the Pacific Rim earlier this year, while this summer we're inviting our guests to enjoy our new flavors of New England with a three-course meal for $22.95.

We have also improved our marketing efforts with our new ad agency, as we focus on social media and enhanced community presence through PR and more impactful local activities.

During the second quarter we converted an existing retail space into a new Mitchell's Fish Market, which opened in mid-June. This restaurant is located in Winter Park, a suburb of Orlando, Florida. Although it is still early, sales volumes are meeting our expectations and we are encouraged by the positive buzz we have generated from the media and guests alike. We expect to apply the learnings from this location to our current prototype development work.

In terms of future development plans for Mitchell's, we are actively looking for restaurant sites in South Florida on both the east and west coasts. Our existing Tampa and Jacksonville restaurants both generate sales volumes in excess of $4 million and we believe we can replicate this success at other locations throughout the state. We view Mitchell's Fish Market as having great potential and a long runway of opportunity, with seafood generally viewed as a healthy protein and not a great deal of national competition in the fresh seafood category.

One last point on Mitchell's, which carries over to a degree to Ruth's Chris, we've been asked numerous times about the Gulf oil spill and its effect on our business. Obviously, we continue to monitor the situation very closely and have been reassuring our guests that all seafood served at our restaurants is safe and of the highest quality.

In the second quarter seafood represented 20% of total revenues across the company and, despite the spill starting in April, we have not seen a noticeable shift in mix. As you may know we source most of our seafood from overseas and have numerous options to get the product we want when we want it.

The bigger question is what the long-term impact will be on the region, as there are eight Ruth's Chris Steakhouse restaurants in the Gulf area. While headline news could certainly affect seafood consumption or cause consumers in the area to be more cautious, premature to speculate on the big picture. As far as we're concerned, any effect on our consolidated results would be negligible.

Moving to Ruth's Chris development, in the second quarter our franchise partners opened a new Ruth's Chris Steakhouse restaurant in the heart of the dining and entertainment district in downtown Salt Lake City. We have also just recently signed a single unit agreement for the Niagara Falls territory in Canada. In total we have 16 commitments for future franchise restaurants over the next several years, which should help us to generate a consistent and stable franchise income of $12 million annually.

In terms of the company development at Ruth's Chris Steakhouse, we are also actively evaluating sites and seeking new strategic growth partners. Historically, both the company and franchisees have had success in casinos and hotels, and we are, therefore, concentrating on these opportunities as we restart development. The gaming and hospitality industries offer us many favorable attributes, such as a captive audience of potential guests and a more limited investment risk as many of the spaces are built out for us by the developer.

We are also focused on locations on the west coast and in the northeast, as these regions generate the highest average volumes in our current portfolio.

We are clearly excited to be talking about development of both our steak and seafood brands and we are pleased that prudent growth will become a more prominent part of our stories in the coming years.

Still our primary objective and greatest opportunity remains rebuilding traffic and delighting our guests at our existing restaurants. While we have made some headway, there is still a lot of capacity and lost ground to make up to reach the sales volumes we generated just a few years ago. To that end, we are focused on brand revitalization, delivering superior food and service, and living up to our reputation as the destination for the best sizzling steaks anywhere.

One last point I would emphasize. We are very strong -- we feel very strongly about our balance sheet and that gives us a significant competitive advantage and that the financing we have completed in the first quarter allows us the greater flexibility with regards to weathering the ups and downs of the macro environment. And while we remain disciplined with regards to deploying capital, we no longer have to be concerned with our bank covenants on a day-to-day basis. We now are free to pursue development opportunistically and pursue elements that will reinvigorate the brand and create long-term value.

As described in our earnings release today, for the second quarter ended June 27, 2010, we generated total revenues of $89 million, an increase of $2.6 million compared to last year. Total company-owned restaurant sales increased to $83.8 million compared to $81.7 million for the second quarter last year.

Restaurant operating weeks were 1,120 versus 1,118 last year. Average weekly sales for all company-owned Ruth's Chris Steakhouse restaurants was approximately $77,000 in the second quarter compared to approximately $75,000 in the same period last year. Ruth's Chris Steakhouse comparable sales increased by 2.9% and consisted of an average check decrease of 0.3% combined with an increase in entrees of 3.2%, our second consecutive quarterly increase in entrees.

Average weekly sales at Mitchell's Fish Market were approximately $72,000 compared to approximately $71,000 in the same period last year. Comparable restaurant sales at Mitchell's Fish Market increased 0.9%, as our average check was flat while our entrees increased 0.9%, our second consecutive quarterly increase in entrees.

Franchise income increased 13.5% to $2.8 million from $2.5 million last year. Domestic comparable franchise-owned restaurant sales increased 4.3%, while international comparable franchise-owned restaurant sales increased 14.7%, which combined for a blended comparable franchise-owned restaurant sales increase of 6.1%. These results represent solid progress from a year ago when domestic comparable sales were down 23.1%, while international comparable sales were down 30.2%.

In terms of our cost structure, as a percentage of restaurant sales, food and beverage cost increased 60 basis points year-over-year in the second quarter. Higher beef costs primarily drove the increase. We have approximately 50% of our prime beef requirement locked for 2010, slightly below our actual average cost in 2009. We have also locked approximately 10% of our tenderloin needs for the balance of the year at pricing slightly above our average cost a year ago.

Restaurant operating expenses, as a percentage of restaurant sales, increased 20 basis points from the second quarter last year to 53.4%. This increase was driven in part by higher workmen's comp costs. Marketing and advertising costs declined to $2.9 million and as a percentage of total revenue decreased by 140 basis points to 3.3% of total revenues, as the Company reduced its level of national radio and regional TV. G&A expenditures were down $200,000 compared to last year. In connection with our Mitchell's Fish Market opening in Winter Park, the company recorded a $340,000 of pre-tax costs during the quarter.

For the period our operating income was $8.3 million, which compares to operating income of $4.5 million in the same quarter last year. Included in operating income this year is a recapture of $1.1 million in restructuring charges related to the termination of a lease obligation. Interest expense was $1 million for the second quarter compared to interest expense of $1.8 million for the same period last year.

For the second quarter of 2010 in connection with an interest rate swap agreement, we recorded a favorable mark-to-market non-cash adjustment of $300,000 compared to a favorable mark-to-market non-cash adjustment of $400,000 last year. The Company also recorded a pre-tax charge in discontinued operations of $1.1 million during the quarter related to a change in estimate of lease exit costs for two closed restaurants.

Net income available to common shareholders was $3.7 million in the second quarter of 2010 or $0.09 per diluted share on an outstanding share base of 42.8 million compared to $2.3 million or $0.10 per diluted share on an outstanding share base of 23.8 million in the second quarter of 2009.

With regards to our balance sheet, long-term debt as of June 27th was $69 million, a reduction of $5 million for the quarter.

In terms of our outlook for 2010, we completed our scheduled openings for the year as a franchise Ruth's Chris Steakhouse opened in Salt Lake City in May, while a company Mitchell's Fish Market opened in Orlando in June.

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, while our effective tax rate is projected to be in the 25% to 30% range.

CapEx spending is projected at $5 million to $6 million, while our free cash flow is expected to be in the $20 million to $22 million range. We have not committed to any specific new restaurant development schedule for 2011, but we are actively pursuing restaurant opportunities at both brands.

At this point, Mike O'Donnell has joined us and I'll ask him to close the call.

Sorry. Due to the nuances of the traffic of Interstate 4, here I am. But I want to say thanks, Bob, and thanks for stepping in while I was stuck. And before I turn it over to Q&A, I want to emphasize the following points, really. We're very proud of what we've accomplished in the second quarter, positive comparable sales, operating leverage, and strong net income growth. By engaging our customers through targeted marketing and brand-building messaging, we look to sustain our momentum, gain market share, and drive bottom-line improvement over the long run.

As I have mentioned before, our two brands have potential for expansion. We are currently refining our prototypes to ensure a terrific guest experience and stronger returns for our shareholders. And we'll realize the opportunities available to us in a disciplined manner.

Ruth's Chris Steakhouse is synonymous with great sizzling steaks and genuine hospitality and together with our franchise partners, who remain the heart and soul of our brand, we'll continue to build our Ruth's Chris system over the next several years. Mitchell's also has great potential in the polished casual segment, with freshly prepared seafood and exacting standards -- to exacting standards and we are going to be building new restaurants in that brand as well. We look forward to updating you in the coming quarters. We are now available to take questions.

(Operating Instructions) We'll first go to [Jeff Alejandro], Wells Fargo Securities.

Thanks. Just two questions. First could you maybe touch on just the spread between the Company and franchise comps in Q2. And then the second question was if you could give us an update on your menu pricing tests that you've been executing? Thanks.

Good morning, Jeff.

Good morning.

In terms of the franchise comps, I think, if you kind of look at it on a two-year roll basis, I don't really think there's been any significant change in trend. These are national markets, which we have 14 restaurants, had the strongest performance on an absolute basis, but again, they had the weakest performance a year ago. Though I would say in the country of Canada there has been a very strong sales increase, but fundamentally I think it's nothing more than kind of the two-year overlap.

In terms of your second question, with regards to the pricing test, we ran the test for about eight weeks and we received no negative feedback, no trade changes, if you will, and so we are going about making plans to roll it out for the balance of 2010 and that's probably going to get done here in the next couple of weeks.

Roll it out across the system?

Against the Company system; that's correct.

And what impact on check and traffic would you expect?

On the balance of the year, I think it will be less than $1 million in total. On an annualized basis, given no change in mix, it's probably worth about $2.2 million, $2.4 million.

Very good, thank you.

Thank you. We'll next hear from Jason West, Deutsche Bank.

Yes, thanks. Just to clarify that last comment, you were saying that the pricing would be, just the pricing alone would be about an incremental $1 million in revenue this year on the Company's side?

Just a little short of that, Jason, yes.

Okay, okay. And then I had a question, just one thing clarifying the income statement. It looked like you guys had the fully diluted share count of close to 43 million shares and you also had the charge in there for the preferred dividends. It seemed to me that you have included the preferred as if it's converted and included the preferred dividend charge. Just want to understand, I thought it would be one or the other.

No. The accounting rules, basically, it's a two-class method of computing EPS and fundamentally whichever the most dilutive is is the method that you have to. So at this point when you do the calculation for the quarter, we had to treat the preferred as converted.

But then wouldn't you not include the preferred dividend cost then? If you're treating it as common, why is the preferred dividend charge in there?

You know, Jason, I can only respond that the accounting -- we're following the appropriate accounting for the recognition of the dividend.

Okay. I'll follow up with you on that, if that's okay. And then on the marketing side, you guys looked like you lowered that this quarter. Are you expecting the marketing spends to pick up in the third quarter a bit and why did you decide to pull back this quarter versus last year, and if you had maybe as a percentage of sales you think the way it will mix out in the back half, that would be helpful.

Yes, I think fundamentally we're planning to kind of spend the same dollars that we spent a year ago, it's just the timing that has shifted.

For the back half?

Correct.

Okay, okay. And then if you could update us on where you see beef prices today and, I guess, for the piece that's not locked in on the prime and on the tenderloins, what kind of inflation that looks like and what that might mean for your overall food inflation in the back half.

Well, all I can tell you is what currently is happening in the market and that is the tender market on a year-over-year basis for the last two weeks has been flat and the prime market is probably running somewhere between 6% and 7% inflation year-over-year. But again, we have half of our prime locked in at basically last year's cost.

Okay. And what about on the seafood side? Are you guys seeing any pressure there given what we've seen in some of the shrimp markets around the world?

No. As we said before, all of our shrimp it is locked for the entire year for both brands, so there is -- frankly we have a favorable year-over-year position there. So that's not been the case. And then in Mitchell's, salmon is probably a little higher than a year ago, but cod is a little less than a year ago, so all that net-net is probably fairly neutral.

Okay. Thank you.

We'll next move to Nicole Miller, Piper Jaffray & Co..

Good morning. I hopped on a couple minutes late, if I missed it I can just read the transcript later, but did you give the monthly -- can you give us some idea of the monthly comps, how they played out in the second quarter and July to date?

Good morning, Nicole. No. Our Company policy is not to provide monthly comp numbers.

Can you just direct -- well, I guess, on the last quarter call April was up mid-single digit for Company. So clearly things -- did they slow in May, or just in June?

Again, Nicole, I'm not going to provide any monthly splits. What we did say we will announce, as we did last quarter, as we did this quarter, what the current month has been, but otherwise we're not going to divulge any of those monthly splits.

Okay and then I guess I just missed it. So July whatever it is, is it pretty similar -- .

Oh, okay, I'm sorry. We did say that July at the Ruth's Chris brand was positive in the low single digit range and that Mitchell's was negative in the low single digit range.

And on the Ruth's side does the price and the mix or how we speak about at the entrees, is that relatively stable or has something shifted there?

No, it's relatively stable.

Okay. And then also back on the marketing, it sounds like the dollar, dollar-wise this year is flat to last year. How about looking forward to fiscal 2011, should that be flat dollar-wise or do you think that you could benefit from increasing that marketing spend?

Well, at this point we haven't begun our planning, so I think it's premature to speculate.

Just theoretically or philosophically, I guess, is the question?

Nicole, theoretically, this is Mike, we've been comfortable with the 3% to 3.5% range. Unless there was some significant reason for us to change that, which at this point we don't see, I would say right now 2011 would stay in the same range.

Okay. And then I might be asking a question that was previously asked, but we were also wondering the $1.1 million, the pre-tax for the termination of the lease, where is that in the P&L? Is that in G&A or operating expenses, where was that?

If you looked at the release this morning in the income statement there's a line item called restructuring benefit.

Okay. So that is that charge.

There's one charge there and then the other charge is really in discontinued operations.

The two restaurants in discontinued ops?

Correct.

Okay. Got it. Thank you.

(Operator Instructions) We'll next go to Andy Kurita, Kettle Hill Capital Management.

Hi, good morning. With the level of CapEx that you're spending right now, you ought to be able to generate close to $30 million of free cash flow this year. I just wanted to -- hope you could elaborate a little bit on what your main uses of this capital will be, whether to pay down debt, repurchase shares or for additional capital expenditure, and just how sustainable is this level of CapEx and what is the sort of normal maintenance CapEx level?

Well, Andy, we adjusted our CapEx guidance down a bit due really to timing and as I said in my prepared remarks, our projected free cash flow is $20 million to $22 million. In terms of sustainability of that, I think as we move forward the question becomes how much development, new development do we engage in.

I think our CapEx and our remodel capital is fairly consistent year-over-year. So I think that as we go forward I think our ability to -- what we generate for free cash flow will be a function of how we pursue development.

Okay. And then, assuming you don't do a big aggressive development spend, which based on your comments I didn't think that to be the case, what are you going to do, just pay down debt or are you going to look at repurchasing shares?

Well, Andy, at this point, again, I think it's fairly early for us to say, but we'd continue to pay down debt at this point.

Okay. Thank you.

(Operator Instructions) We'll now go to Jason West with Deutsche Bank.

Yes, thanks. Just a couple follow-ups. I guess one, given it looks like comps did slow a little bit later in the quarter and July is up low single digits, against a pretty easy compare, just wondering what you guys are seeing out there. Have you seen a change in trend that you can note, any color kind of times -- geographically or times of the week, or do you think you're losing some share because of you're not doing as much discounting and the marketing is down? You just kind of talk about what's going on out there?

Jason, I think what we're seeing is a general sort of weakness or a softening. I don't want to say weakness, because I think, as I think Bob said earlier, we're seeing some strength returning here early in July.

But, we've seen some -- our private dining business has continued to behave well. Some of our mid to early week business has continued to behave well as a result of the private dining business. There's been a little bit more weakness, I would say, on the weekends, but for the most part it's really been sort of general across the board. But I can say that we are seeing some surprising ups in certain restaurants and then, obviously, some disappointing downs. So I think it's moving around a little bit. I think it's just choppy is the best way to put it.

Okay. And given that we are in positive comp territory, are we out of the woods in terms of having franchisees that may be on the verge of closing stores or still struggling a bit given the business is still down pretty dramatically from where it was two or three years ago, or is there a risk that we could see some closures at some point?

Jason, at this point, I don't see where there is any risk. We have had -- our franchisees, for the most part, again, great people, have been around for a long period of time. Most of them have raised money by virtue of limited partners and are not highly leveraged, and the result is that I think they've come through this position very well, or through this downturn very well, and are excited about where they are and what the future is.

Okay. Thanks, guys.

It appears there are no further questions at this time. Mr. O'Donnell, I would like to turn the conference back to you for any additional or closing remarks.

Thank you very much. Thank you, everybody, for participating in our call this morning and as always it is a great day to go out and eat steak and fish. Thank you.

And that does conclude today's conference. Thank you all for your participation.