Ruth's Hospitality Group Inc (RUTH) 2010 Q3 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. third quarter 2010 earnings call. At this time all participants are in a listen-only mode. Following the formal remarks we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

Hosting today's conference will be Bob Vincent, Chief Financial Officer of Ruth's Hospitality Group. As a reminder, today's conference is being recorded. And now I'd like to turn the conference over to Mr. 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 undo reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for more detailed discussions of the risks that could impact future operating results and financial condition. Finally, I would like to remind you that today's call should not be reproduced in any form without the express written consent of Ruth's Hospitality Group, Inc. I would like to now turn the call over to Michael O'Donnell, Chief Executive Officer at Ruth's Hospitality Group.

Thanks, Bob. And thank for joining us today.

In the third quarter we were pleased with our financial performance, as positive same source sales growth at Ruth's Chris Steak House helped narrow our net loss compared to a year ago period. Comparable sales at Ruth's Chris increased 4.9% versus the prior period. Mitchell's Fish Market comparable sales decreased 2.8%, ending what has been a solid track record of positive sales from December of 2009 to the second quarter of 2010. Currently October comp trends are positive in the middle single-digit range for Ruth's Chris, while Mitchell's trends remain in the negative low single-digit range.

On a geographic basis, Ruth's Chris' two largest markets, California and Florida, both generated positive sales for the quarter, as Florida sales rose 3.4% while California sales improved by 2.6%. Overall in the Ruth's Chris portfolio, 50 of the 64 Company locations generated positive comparable sales in the third quarter, which underscores the stability of the brand's top line recovery.

In the Ruth's Chris franchise system franchise, domestic comparable franchise-owned restaurant sales increased 6.2%, while international comparable franchise-owned restaurant sales increased 9.2%, which combined for a blended comparable franchise-owned restaurant sales increase of 6.8%. Private dining sales at Ruth's Chris Steak House increased approximately 8% during a three month period, so we continue to make inroads in our catering -- with our catering and professional satellite businesses. Given the traction we have generated in private dinings throughout the year, along with the fact our holiday private dinings reservations are up approximately 17% over last year, we are looking forward to what should be our most successful holiday private dining season since 2007.

Entrees, which serve as a proxy for traffic, increased by 5.3%, for a positivefor the third consecutive quarter, while our average check decreased by 0.3%. Compared to the Knapp Track benchmarkindex steakhouse segment, Ruth's Chris outperformed 20 basis points in sales, but lagged by 180 points in traffic. Still we narrowed the gap in traffic from 220 basis points from the previous quarter.

Relative discounting certainly remains a factor for Ruth's Chris in this environment, but we are comfortable with our current strategy, execution and messaging. Our 2010 Ruth's Chris campaign encouraged people to savor the moments of life with sizzling steak and genuine hospitality, which we believe is resonating with our intended demographic. While our marketing spent rose in the third quarter compared to the second quarter due to timing, we are still depending 3% to 3.5% of sales on an annualized basis in the form of print, direct mail, and radio placements.

In addition, our Ruth's Classics, with its $39.95, $49.95 price fix, have become mainstays on our menu. As of November 1, we are updating the offerings under this program on a seasonally adjusted basis. We would expect Classics to continue to represent approximately 30% of our sales mix.

As we discussed in our previous call, we did implement a very modest price increase on a limited number of items during the third quarter of 2010. The benefit will be approximately $1 million in sales. On an analyzed basis, given no change in mix, it will positively impact our sales by approximately 1%. We also continue to test brand enhancing initiatives at seven locations, which center on improvements to the guest experience and atmosphere, the menu, service staff, uniforms and background music.

Turning to Mitchell's, comparable sales trends reversed direction from the previous two quarters, and this was in part driven by our weakness in the Florida market, where sales are down 6.5%. Additionally we had a shift in our promotional strategy that may have had a negative impact during the quarter, but we view this as temporary. Although we are not ready to discuss our specific development plan for Mitchell's, we are pleased for sales at the Winter Park, Florida, location, opened in June, and are incorporating many of its design elements in our current development work. We remain focused in Florida for expansion as we look to replicate the performance of our existing Tampa and Jacksonville restaurants at future sites. Both of these restaurant location generate volumes excess of $4 million.

As we have stated previously, Mitchell's Fish Market has built a well-deserved reputation within the polished seafood sector over the last decade and view it as having great potential in a long runway of opportunity. Seafood is generally viewed as a healthy protein, and there is not a great deal of regional and national competition in the fresh seafood category.

Regarding Ruth's Chris development, we recently signed an agreement for a new franchise location in Asheville, North Carolina, which will be our eighth restaurant in that state upon completion. In addition, a new agreement for Niagara Falls territory in Canada was signed during the quarter. In total we currently 17 commitments for future franchise restaurants over the next several years, and this pipeline should allow us to continue to generate a consistent and stable franchise income in the $11 to $12 million range annually.

On the Company side, we are evaluating sites and seeking new strategic growth partners in the casino and hotel industries, where our system has had great success in the past. Both the gaming and hospitality environments offer us many favorable attributes, such as a captive audience, potential guests, and more limited investment risk, as many of the spaces would be built-out for us by the developers.

In terms of more traditional development, we are particularly focused in the West Coast and Northeast, as these regions generate the highest average volumes in our current portfolio. While we are actively seeking restaurants, we do not have any signed agreements at this time. Of course, given volumes at Ruth's Chris relative to past performance, our largest growth opportunity is organic. That is, our rebuilding traffic through superior food and service and upholding our 45 year reputation for the best sizzling steaks anywhere, andthat remains our focus each and every day.

In summary, I know I've mentioned this in the last call, but it is certainly worth a continued emphasis. The financing we completed earlier this year offers our Company great flexibility to weather the ups and downs of the marco environment and removes the worry of bank covenants from our day-to-day discussions. Our balance sheet strength will allow us to pursue and invest in growth when it is prudent to do so. As always we will manage expenses closely, and the deployment of capital will be reserved for high-return projects that will create long-term shareholder value. Let me turn this back over to Bob.

Thank you, Mike. As described in our earnings release today, for the third quarter ended September 26, 2010, we generated total revenues of $79.8 million, an increase of $3.7 million or 4.9% compared to last year. Total Company-owned restaurant sales increased to $76.9 million or 4.4% compared to $73.6 million in the third last year. Restaurant operating weeks 1,131 versus 1,118 last year.

Average weekly sales for all Company-owned Ruth's Chris Steak House restaurants was approximately $69,000 in the third quarter, compared to approximately $66,000 in the same period last year. Ruth's Chris Steak House comparable sales increase by 4.9% and consisted of an average check decrease of 0.3%, combined with an increase in entree of 5.3%, our third consecutive quarterly increase in entrees.

Average weekly sales at Mitchell's Fish Market were approximately $66,000, compared to approximately $68,000 in the same period last year. Comparable restaurant sales at Mitchell's Fish Market decreased 2.8%, as our average check was down 0.3%, while entrees decreased 2.5%.

Franchise income increased 11.7% to $2.6 million from $2.4 million last year.

In terms of our cost structure, as a percentage of restaurant sales, food and beverage cost increased 80 basis points year-over-year during the third quarter. Higher beef costs primarily drove the increase; however,we did have some produce and dairy pressure as well. For the fourth quarter, we have approximately 50% of our prime beef requirements locked and approximately 75% tenderloin requirements locked. Both are prices approximately 8% to 10% higher year-over-year. At this time, we have no forward contracts for beef in 2011.

Restaurant operating expenses as a percentage of restaurant sales decreased 40 basis points from the third quarter last year to 56.1%. This decrease was driven in part by sales leverage. Marketing and advertising costs increased to $2.8 million from $2 million, and as a percentage of total revenue increased by 90 basis points to 3.5% of total revenues due to a shift in timing of national radio advertising. G&A expenditures remain constant at $5.4 million in both periods. Last year, we had incurred $0.4 million in restructuring costs related to lease termination charges for two restaurant locations. These charges related to our decision in 2008 not to build any new restaurants in 2009, andthere were no comparable charges in 2010.

For the period our operating income was $1.6 million, which compares to operating income of $1 million in the same quarter last year, including the aforementioned $0.4 million charge for lease termination. Interest expense was $1 million in the third quarter, compared to interest expense of $1.9 million for the same period last year. In the third quarter of 2010, in connection with an expiring interest rate swap agreement, we recorded a favorable mark-to-market noncash adjustment of $0.3 million compared to a favorable mark-to-market noncash adjustment to $0.4 million last year.

We had a net loss of $0.5 million in the quarter 2010, or $0.01 cent per diluted share on a share base of 34 million, compared to a net loss of $1 million, or $0.04 per diluted share on a share base of 23.6 million during the third of 2009. Included in our 2010 net loss is a $0.6 million in preferred stock dividends related to the financing transaction we completed earlier this year and $0.4 million in restructuring expense in the net loss for 2009.

With regards to our balance sheet, long-term debt as of September 26 was $67 million, a reduction of $2 million for the quarter.

In terms of our outlook for 2010, we are reaffirming our second quarter guidance, which includes the following. Food and beverage cost of 29% to 30% of restaurant sales, market expenditures of 3% to 3.5% of total revenue,G&A expense of $22 million to $24 million, and an effective tax right of 25% to 30%. Finally, CapEx spending is projected at $5 million to $6 million, while our free cash flow generation is expected to be between $20 million and $22 million.

Let me turn the call back to Mike.

Thanks, Bob.

Our third quarter saw continued improvement, particularly with respect to the Ruth's Chris brand. Our targeted marketing and brand building message is bearing fruit, and by building our recent momentum, we are ideally positioned to drive bottom line improvement over the long haul. Ruth's Chris Steak House is celebrating its 45th anniversary of sizzle this year. Looking back we are pleased to be partnering with a franchise community, many of whom have been with the brand since the 1970s, in providing our guests with great steaks and genuine hospitality. Our franchisee remain the heart and soul of the Ruth's Chris legacy, andtogether with their leadership, we look forward to resuming our build-out of the Ruth's Chris system over the next several years.

Mitchell's also has great potential in the polished casual segment, with its freshly prepared seafood and exacting standards. We're going to be building new restaurants in that brand as well.

We look forward to updating you in the progress in the coming quarters and are now available to take your questions. Operator?

Thank you. (Operator Instructions). And first we'll hear from Jeff Omohundro are Wells Fargo Securities.

Thanks. My first question is related to the beef cost outlook. Have you begun the -- or updated us on your discussions around initial contracting on 2011, where that stands, and what your thinking is in terms of how contracted you might want to be?

Good morning, Jeff. In terms of 2011, it is a bit early right now to get any partners, if you will, to secure any of our requirements for 2011. The guidance that we've been given with the folks that we work with indicate that it's probably going to be late January, early February before such time were there will be a reasonable counter-party to potentially lock for 2011.

As we've always expressed, we have a desire to lock in whatever we can for the predictability and certainty. But again, we also cognizant of whatever the cost of that lock is. And so I think that when we think about our brand going forward in 2011, given some pricing opportunity, we could probably cover 5%, 6% inflation in 2011. And so if we have an opportunity to lock at that kind of range, we probably would do so.

That's helpful. And you've had some impressive growth in your private dining business. In terms of the -- when you dig the components of that growth, are you seeing more business related reservations or is it a blend? And also, in terms of that average check information that you've provided, how is the average check trending in your private dining business?

Jeff, this is Mike. Private dining, we're really seeing -- we've put together an aggressive plan for our sales management people, of which most restaurants in the system have a sales manager. And so we're seeing private dining increases across the board. There's really the three components really of that. We are seeing an increase in the business side. We are seeing an increase of sort of an organized traditional customer side. And then the satellite business that we've talked about before is doing quite well for us. So those three segments have really been all behaving well. And it's really been driven by the -- we've got an aggressive plan internally in terms of the outreach of our third-party provider on the satellite plan. And then our sales managers out in the field have been quite aggressive.

In terms of the pricing, we are seeing a little more spend, andwe expect that that is going to take place in the holiday season. We are seeing some -- we are still seeing a fair amount of lunch reservations for some of this. So that kind of offsets that. But for the most part we are starting to see a little bit of a loosening in terms of price point.

Thanks. And my last question was on Mitchell's and that reversal in comp you mentioned related to Florida, and you also mentioned a shift in the promo strategy. What will you be doing at Mitchell's? Is it going to be a heavier promo or more value in order to pick up sales in that division?

Well, first we -- I guess the answer to that is yes. I think that we saw some very good traction from a value -- in utilizing the value promotion strategy, beginning last December, andthen through the second quarter. We, I guess, we may have over -- we may have thought that we were a little further along and backed away from some of that. So we're actually returning to that $19.95, in some cases $22.95 pre-fixed value proposition. We've already started that. We will have a holiday promotion that will be running on a go-forward basis. But in particular, when you only have 20 restaurants and you have a significant decline in two restaurants in Florida, particularly in the early part of the quarter, that had a bigger impact on us.

Very good. Thanks so much.

Next we will hear from Jason West with Deutsche Bank.

Thanks. Just one question on the private dining side. You gave a number of 17% bookings growth so far for the holidays, andit's a little early. Is that usually a good sign of where you'll end up for the holidays, or could it move around quite a bit?

Jason, that's a good question. We're really looking at the data point of saying where were we a year agoversus where we are today, so that our early bookings, as we're saying, are up 17%. Could there be changes? Yes. But, again, consistently along the way this year we've seen that kind of spread,so we have an expectation. We're planning for that kind of spread to be out there. Hopefully -- frankly, hopefully that spread gets wider.

Okay. Hope so. And then on the beef outlook, can you tell us what the beef inflation was, I guess, in aggregate in the third quarter?

It was probably somewhere in the 2% range. Actually, tenders for the third quarter were fairly normalized year-over-year, and we have a little bit of pressure from the prime beef side. But again, our lock there had absorbed some of that pressure. So overall about 2%.

Okay. So you guys saw about 80 basis points in margin pressure on that. What should we expect on the fourth quarter if we see quite a bit more inflation. I know you took a little bit of pricing but it sounds like maybe only about 1%. Should we expect that gross margin line to see quite a bit more pressure? Is it going to look somewhat like the third quarter, or --

Well, I think there are two things. One is clearly there will be a little bit more pressure because there will be more inflation in the beef category. Again, beef, though, doesn't represent the whole basket of commodities. And secondly, I think that we've provided an update or reaffirmed our guidance overall for the year in our cost of goods sold. So we clearly still expect to be in that range.

Okay. And I'm assuming you guys are planning for some more pricing for next year, as it looks like beef costs -- I'm guessing the fourth quarter may be an indicator of what next year is going to look like as well in terms of inflation, or is that not necessarily the case?

Yes, I think it is a little too early to speculate for 2011. But in terms of your earlier question on pricing, I think we talked about the fact that we did put some pricing in place here in August. And we've also got another test running. And I think as we think about 2011 and some of the pressures that might be facing us, we would be looking very closely at other pricing opportunities.

Okay. That's great. And then the last thing, just -- it looked like business did pick up a bit sometime after the last conference call. I think you guys are staying in low single digits on the Ruth's Chris brand in July. You ended up at mid-single digits. So can you talk about how things pace through the quarter? Was it August when things picked up or even more so in September? It sounds like that trend has continued in October.

Well, Jason, again, our Company policy is we don't provide any of the monthly splits. But I think your supposition is good given the fact that we did report low single digits in the July period, and obviously we picked up some momentum both in August and September.

Okay. Thank you.

Next we'll hear from Andy Barish with Jefferies.

Just a couple of quick modeling questions. On the third quarter share count being lower, is that just given there was a loss in the quarter, and I guess the preferred doesn't show up in that share count?And then in 2011, it's a 53 week year, I believe. Do you have any kind of metrics around what that might mean for 2011?

Good morning, Andy. In terms of your first question, yes. When we're in a loss position, treating the shares as converted would only dilute the loss, so that's just the accounting treatment. In terms of 2011 calendar, we do have a 53rd week. And at this point, we really haven't given and probably will in our next call provide some guidance as to what that might mean.

Okay. Thanks.

(Operator Instructions). And next we'll hear from Bart Glenn with DA Davidson.

Thank you. I was just curious if you can give us any color on how your alcohol trends looked in the quarter.

Bart, good morning. Overall our mix was slightly down 20 basis points year-over-year. What we've seen is a continuation throughout the year where, particularly in the wine category, the number of transactions in the wine category actually is up year-over-year, but the average selling price is down.

Thank you. And then just a follow-up. You broke out -- provided some good color on the Mitchell's business. I was just wondering if you look at seafood trends across our entire portfolio, would it be fair to say that the kind of negative publicity from the gulf oil spill has faded away over time?

I do think -- Bart, I do think it did have an impact on us throughout the summer and particularly in the Florida market. There's less -- obviously a lot less conference around it today. So I say that that is clearly in our rearview mirror.

Thank you.

That is all the questions we have at this time. I'll turn the call back to management for closing or additional remarks.

Thank you all very much for spending the time with us this morning. We appreciate your participation in our call. And as in every day, it is always great to go out and have a steak or eat fish. Enjoy yourself. Thank you.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.