Ruth's Hospitality Group Inc (RUTH) 2011 Q2 法說會逐字稿

Hello. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group's second quarter 2011 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. Just as a reminder, today's conference is being recorded.

At this time, I would like to turn things over to Mr. Bob Vincent, Chief Financial Officer. 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 the risks that could impact future operating results and financial conditions. Finally, I would like to remind you today that this call may not be reproduced in any form without the express written consent of Ruth's Hospitality Group, Inc.

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

Thanks, Bob, and thank you all for joining us today. Ruth's Chris Steak House Restaurants continued their strong sales momentum during the second quarter with comparable sales improving 5.8%. This marks the fifth consecutive quarter of positive comparable sales for company-owned restaurants in six straight quarter of traffic gains. Comparable sales at Mitchell's Fish Market decreased 1.4% during the second quarter, with results being positively impacted by approximately 50 basis points due to the Easter calendar shift. Currently for July, comparable sales trends for Ruth's Chris remain positive in the mid single-digits, while Mitchell's sales are flat year-over-year.

On a regional basis, Ruth's Chris' two largest markets, Florida and California, continue to generate positive sales as they outperform the system average. Florida sales rose 6.3%, while California increased 7.5%. Across the entire Ruth's Chris portfolio of 63 company locations, 53 restaurants reported positive comparable sales during the second quarter. Entrees, which serve as our proxy for traffic, increased by 3.3% during the second quarter. And as we previously noted have now been positive for six consecutive quarters. This is also the second quarter where traffic has increased against positive traffic in the prior year.

Average check also increased 2.4% for the period. Compared to the Knapp-Track benchmark's index for the steak house segment, Ruth's Chris sales were lower relative to the index by 190 basis points and 180 basis points in traffic. We continue to believe the gap is driven by competitive discounting. As we said in the past, we are taking a different approach, stressing value over discounting and a centerpiece to this conservative pricing, which has served us well.

Private dining sales at Ruth's Chris Steak House increased approximately 16% during the second quarter, as we continue to benefit from interest in our catering business and the use of our professional satellite services. Our Ruth's Chris franchise-owned domestic comparable restaurant sales increased 5% during the quarter, while international comparable franchise-owned restaurants increased 16.2%, resulting in a blended increase of 7.1%

Turning to Ruth's Chris brand, as we noted in our last call, we began testing TV spots this past spring as part of our new experience-focused advertising campaign. We plan to expand our efforts in TV as our tests showed promise. We believe the television advertising combined with an improved social media presence will create increased enthusiasm from a broader customer base. Although it's important to note that our spending may be reallocated, we will stay within our annual guidance range.

Our Ruth's Seasonal Classics Prix Fixe remains the cornerstone of our featured promotional activity and continues to comprise roughly 30% of our sales mix. We believe that our diverse guest base appreciates the option of the Prix Fixe Classics and that this strategy has supported our six consecutive quarter of traffic growth. While our results continue to show renewed enthusiasm for high-end dining, we appreciate the economic uncertainty that many consumers continue to face and our Prix Fixe pricing strategy only reinforces the value that Ruth's Chris offers its guests.

At Mitchell's, we continue to work on our brand positioning where menu marketing and operational excellence are key. While seafood will remain Mitchell's core offering, we are currently working on expanding our selection of non-seafood items, which we expect will be additive to sales as it helps us appeal to more guests. At the present time, we have several items in the test market and we will be evaluating opportunities for further rollout. In addition to broadening customer choice, we believe this can also benefit us with respect to productivity gains in the back of the house where we think we have some opportunities to improve execution at Mitchell's.

We are currently featuring a Prix Fixe price fix at $19.95 and $24.95 as our value proposition. It includes a variety of seafood offerings as well as a ten ounce ribeye. Given the seasonality of our seafood and our expanding non-seafood offerings, we see the Prix Fixe, as well as limited time offers, as a way to have guests always have something new to experience when dining with us. We have recently tested some radio advertising in selected markets and, while early, the results have been encouraging. We will also continue to focus our marketing efforts at Mitchell's online and social media and increase grassroots efforts at the local level through community involvement.

With respect to our Company restaurant development, we remain active in evaluating opportunities for 2012 and beyond. We recently announced a deal with Harrah's Casino in Cherokee, North Carolina where we will be operating under a management contract and expect this restaurant to open during the first half of 2012. This agreement supports our approach to see strategic growth partners in the casino and hotel industries, which offers a captive audience of potential guests and limited investment risk as most of these sites we've built out by the developers.

We recently completed a relocation project in Portland, Oregon, where we have taken the opportunity to move after 15 years of operations to what will be a better long-term location closer to the city's downtown district. This restaurant opened on July 11th and has been well-received by our guests thus far.

In late June, we also closed a restaurant in Santa Barbara, California, as we exercised an option to terminate the lease. While we were disappointed by this closing, the sales volume at this unit did not support continuing operations.

As for further new company-owned unit development, we are active in the marketplace. We are encouraged to be negotiating several LOIs, but will continue our practice of not announcing specifics until we have a signed lease. Our Ruth's franchise business is still projected to have two openings in the second half of this year. Exclusive of these locations, we currently have an additional 17 commitments for future franchise restaurants over the next several years, and this pipeline should allow us to generate consistent franchise income of $12-plus million annually.

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

Thank you, Mike. For the second quarter ended June 26, 2011, we generated total revenues of $92.6 million, an increase of $4.2 million or 4.8% compared to last year. Total company-owned restaurant sales increased to $87.5 million for approximately 5.1%, compared to $83.3 million in the second quarter last year. Restaurant operating weeks were 1,117 versus 1,107 last year.

Average weekly sales for all company-owned Ruth's Chris Steak House restaurants was approximately $82,000 in the second quarter, compared to approximately $77,000 in the same period last year. Ruth's Chris Steak House comparable sales increased by 5.8% and consisted of an average check increase of 2.4% combined with an increase in entrees of 3.3%, our sixth consecutive quarterly increase in entrees.

Average weekly sales at Mitchell's Fish Market were approximately $70,000 compared to approximately $72,000 in the same period last year. Comparable restaurant sales at Mitchell's Fish Market decreased 1.4% and were positively impacted by approximately 50 basis points due to the Easter calendar shift. Franchise income increased approximately 3.4% to $2.9 million from $2.8 million last year.

In terms of our cost structure, food and beverage costs as a percentage of restaurant sales increased 120 basis points year-over-year in the second quarter, primarily driven by unfavorable beef costs. At this time, we continue to project beef inflation of approximately 6% to 7% for the year, which would be similar to 2010 levels. Beef prices, in general, have trended lower recently and we have in place a 60-day lock for approximately 40% of our beef needs at pricing levels neutral to last year's costs, and we remain active in pursuing additional long-term pricing arrangements.

In the second quarter, we have the benefit of a menu price increase of approximately 90 basis points to partially mitigate the impact of overall commodity inflation. Although we continue to believe that we have additional pricing power, as we have discussed in the past, we intend to be prudent with respect to future increases.

Restaurant operating expenses, as a percentage of restaurant sales, decreased 150 basis points from the second quarter last year to 51.7%. This decrease was driven primarily by positive sales leverage. Marketing and advertising costs increased to $3.2 million from $2.9 million, and as a percentage of total revenue, increased by 10 basis points to 3.4%. G&A expenditures remain constant at $5.4 million in both periods. However, as a percentage of total revenue, decreased 30 basis points to 5.8%.

During the second quarter of 2011, we incurred $41,000 of pre-opening expenses compared to $340,000 in the prior year. Operating income was $8.4 million in the second quarter of 2011 compared to $8.3 million in the prior year second quarter. The second quarter of 2010 included a $1.1 million restructuring benefit related to a change in estimate for a terminated lease obligation.

Interest expense was approximately $700,000 in the second quarter compared to interest expense of approximately $1 million for the same period last year. 2010 results included a favorable mark-to-market noncash adjustment of $300,000 related to an interest rate swap agreement.

Net income available to preferred and common shareholders was $8.5 million, or $0.20 per diluted share on a share base of approximately $43.2 million in the second quarter of 2011, compared to $3.7 million, or $0.09 per diluted share on a share base of approximately $42.8 million in the second quarter of 2010.

Net income available to preferred and common shareholders for the second quarter of 2011 includes a tax benefit of $4 million or $0.09 per diluted share. Excluding this adjustment, net income was $0.10 per diluted share in the current quarter. Net income available to preferred and common shareholders for the second quarter of 2010 included a net benefit of $0.3 million or $0.01 per diluted share. Excluding this adjustment, net income was $0.08 per diluted share in the prior year period.

With regards to our balance sheet, long term debt at the end of the quarter was $40 million, a reduction of $5 million from the end of Q1. Based on our results for the first half of 2011, we are reiterating our previous outlook, which includes the following, cost of goods sold up 30.5% to 31.5% of restaurant sales, marketing and advertising spend of approximately 3% to 3.5% of total revenues, G&A expenses of $23 million to $25 million, effective tax rate of 25% to 30%. We anticipate fully diluted shares outstanding between $43 million and $44 million. CapEx spending is projected at $10 million to $12 million, and we are projecting that free cash flow will be in the range of $21 million to $23 million.

I will now turn the call back to Mike.

Thanks, Bob. Before we turn the call over to questions, I'd like to specifically thank and congratulate Bob Vincent as he will soon transition to the newly-created position of Senior Vice President of Corporate Strategy. Bob has provided tremendous leadership this year during a very challenging time and has proven to be invaluable to this organization. We know that he will do an exceptional job in formulating our corporate strategy as we build on our current success and lay groundwork for long-term growth of our brands.

In addition, equally as exciting, his youngest daughter gets married on Saturday. So congratulations to Bob, his family, and to his daughter Kate.

With Bob moving on to his new role, I would also like to welcome Arne Haak, who will assume the Chief Financial Officer duties on August 8. Arne comes to us from AirTran Airways, a wholly-owned subsidiary of Southwest Airlines, where he most recently served as Chief Financial Officer. During his tenure there, he put together an enviable track record of restoring the company's financial stability in 2008, which included a record cash position and the highest level of profitability in that company's history. Arne brings more than 20 years of senior level finance and planning experience to Ruth's, with an extensive and diverse financial skill set that we believe will build upon our existing financial leadership and create value for our shareholders.

So with more stability in our business, a balance sheet that's gaining strength with each quarter, and an executive team that's been strengthened, I firmly believe that the foundation for evaluating funding and executing a prudent growth strategy is in place. Combined with our strength of our franchise system, which remains the heart and soul of the Ruth's brand, and our continued hard work at Mitchell's, I am very optimistic about both brands market opportunities, as well as our ability to increase cash flow and enhance shareholder value.

As always, we appreciate your interest in our Company, and are now available to take your questions.

Thank you. The question-and-answer session will be conducted electronically today. (Operator Instructions). We'll take our first question from Nicole Miller, Piper Jaffray.

Good morning. I did join a few minutes late, so I apologize. Could you give us third quarter-to-date Ruth's Chris comp trends?

Good morning, Nicole. This is Bob. We announced that we have been positive in the mid single-digit range for the Ruth's brand, and for Mitchell's, we are flat year-over-year.

Okay. Thank you for repeating that. I apologize. And then can you talk to us about where we're at in the recovery cycle? I mean, you're now comping positive-on-positive. So as you think about calling back the lost revenue and the recession, kind of talk to us about the stages of recovery and how long this positive comp trend can persist.

Well, you know, Nicole, I think we -- consistent with what we -- sort of the actions that we've taken, we believe that the recovery, in our case, at least on the Ruth's brand, will be -- we're forecasting it to be steady, we're forecasting it to continue to be really driven by our continued excellent execution. We have not taken, as you know, aggressive pricing. We're trying to build this primarily through traffic gains and through other lines of business, like our catering business and our private dining and satellite businesses, etc.

So I think we see the improvement's really in a broad segment of our business, our special occasions business continues to show improvement, our everyday userscontinues to show improvement, our business-to-business experience shows improvement. So we think that as long as the economy continues or the higher end of the economy continues to do reasonably well, we will continue to track in that regard.

And one final question, I know it's awfully early to ask, but looking forward to this holiday season, last holiday was good. You saw more people come in; they started to spend a little bit more. What are you doing to plan for this holiday season to trump that?

Well, I think that, you know, we opened -- we were open last year, as you recall, we opened for Thanksgiving, and we were highly successful with that. We will do that, as well. We experimented with some openings at Christmas, and we will probably broaden some of that, as well. We've got aggressive plans around our gift cards business. We've got aggressive plans with our salespeople around, you know, private dining. And to the extent that, you know, the things that we did last year, we expect to repeat that and we would expect to have a strong fourth quarter.

Thank you.

Next we'll here from Jeff Omohundro with Wells Fargo.

Thanks. And first, Bob, congratulations, both on your creative development and on your family news.

Thank you very much, Jeff. Appreciate it.

Considering your new position in Corporate Strategy and the focus on development, I wonder if you could maybe take us through a little bit of thinking around or the scaling of the opportunity that you're looking at and how you would anticipate restarting development? And where do you want to be in terms of LOIs say as you progress over the next quarter or two. Thanks. That's my first question.

Okay. Well, Jeff, again, I think the new position really is to assist Mike and the Board in evaluating whatever opportunities there may be to enhance shareholder value. Specifically with development, I think we talked about it that over the last year, we have begun to ramp up resources internally to really be more active in the real estate area. I think we've come full circle, and very honestly, both Mike and I are very proud of the fact that three years ago, there were six leases that we had to negotiate our way out of, but yet now we just recently mid-July opened a new location in Portland, Oregon, which is very, very exciting for us to come full circle.

I think that we've got multiple LOIs, as Mike spoke about, that we currently have some signed, some negotiating on others. And, you know, I don't want it get into, I don't want we want to get into a numbers game as to we're going to have ten or we're going to have whatever. I think that what remains consistent with the organization is that we're very active and we're very excited about the opportunity and we're going to continue to pursue that in a very, you know, prudent way.

We're not looking to go out and, you know, over-bill, we're not going to go out and overspend or overpay for real estate. But I think we're very excited about the opportunity in front of us and we're just going to methodically go through it and seize upon it.

Thanks. My second question relates to sales building initiatives, particularly as we look at the more challenging prior year comparisons in the second half of this year. It was mentioned that you'd be resuming some television but keeping the total marketing spend in line with the forecast. How are you thinking about the weights of TV against your markets and how you might sequence that through the second half? Thanks.

Well, Jeff, we have, as I said, reallocated the funds that we had been using both locally and are looking at national television. And I'd really rather not get into the amount of weights, etc. But I can tell you that it's substantial and there's a substantial number of weeks involved in this that we feel very good about. We worked very hard on with our advertising partners.

And we'll be building up to, in the early fall, up to, through, and into the holiday season with what we think is fairly substantial weights, but it will be focused really on branding more than anything else. And then as we actually get into the holiday season where things get cluttered, you know, we'll be back really to more of our grassroots sort of thing. So we see this as an opportunity to really prepare ourselves for the holiday season, to really have a presence out there, andwe're really very excited about it.

Very good. Thanks so much.

Next we'll hear from Bart Glenn with D.A. Davidson.

Thank you. Yeah, I was just curious given the favorable mix trends, did alcohol improve as a percentage of mix?

Bart, good morning. Actually, alcohol was even with a year ago overall as a percentage of mix.

Okay. Is there any variance between comp store sales trends for weekends versus weekdays.

Well, as we have spoken before, we -- in early 2010, the Sunday through Wednesday segment of the week was outperforming the Thursday, Friday, Saturday business. Frankly, that gap closed as we move through 2010 into 2011. And it's probably running pretty consistent in terms of the strength of the growth in both segments being fairly balanced.

Great. And then just one other question. You mentioned how many stores were comping positively. I was just curious for the small portion of the base that hasn't returned back to positive comps, are there any specific initiatives to those stores or those markets to kind of regain some of that momentum?

Well, let me first as a factual piece of information, of those ten stores, five of those stores, or half of the group, were negative less than 1%. So we don't have really any real gaps, if you will, in terms of individual store performance.

I think, Bart, we are on a relatively small basis of restaurants and we have individual plans for every one of our restaurants, the ones that are doing very well and the ones that are not performing quite like we would like them to, so I think each of therestaurants -- we're really more a collection of restaurants than we are a chain, andevery restaurants have different opportunities. So some may have a stronger initiatives in terms of their outside sales efforts, some may have stronger initiatives around happy hour or early week. It's just really a store-by-store basis.

Wonderful. Thanks, guys.

Next, we'll hear from and Andrew Barish with Jefferies.

Good morning, guys. Two questions on beef costs, is it fair to assume that the tenderloins are where you're getting the flattish kind of short-term contracts and prime is still tough to lock up and any early 2012 direction would be helpful on beef, overall. And then secondly, on Mitchell's Florida, any signs of improvement? I know there were a couple units that had been impacted there. Your Ruth's Florida business is obviously strong. Anything going on on the Mitchell's front in Florida a little bit better?

Good morning, Andy. Your first question regarding beef, I think clearly tenders have moderated a little bit better more than prime cuts. You know, in June and July, our tender costs were actually less than they were in April/May.

Prime has come down a little bit, but still probably running high single-digits year-over-year. The lock, though, that we have in place for the next 60 days is actually for both cuts. It's for all our prime cuts, as well as our tenderloin cuts. And again, that's at neutral pricing year-over-year.

So I think that the folks that we work with on the beef side have a little bit more optimism that there may be some locking opportunities here in the near-term. So that's probably the update there. In terms of the Mitchell's performance in the state of Florida, we have four restaurants, as we've said before, and, yes, we have seen some improvement in all of those four restaurants.

Thank you.

(Operator Instructions). Next, we'll hear from Jason West with Deutsche Bank.

Yeah. Thanks. Good morning, guys. Can you talk a little bit about the economics of the casino units, particularly the one you're opening in North Carolina? How do we model that? Is that -- we model as full ownership or is it a JV-type of structure and is there CapEx associated with that on your books?

Good morning Jason. It is really a JV kind of structure and it's going to be kind of a profit sharing kind of arrangement. We will have no invested capital. And so whatever that revenue sharing opportunity is, it will probably be reported through other income.

Okay. Got it. And can you give us just the numbers on where you stand on the units right now, company, franchise, and Mitchell's just so we have our models updated for any closures or anything?

Okay. Well, we just closed one restaurant in the Ruth's system, so we have 63 corporate Ruth's Chris, wehave 67 franchised Ruth's Chris, and we have 20 Mitchell's Fish Market

20?

Yes.

Okay. I had you guys at 23 there. Has there been some closures in that system?

No. We have three Mitchell's Steak Houses.

Oh, okay. Got it. And then looking at the next year on the CapEx side, you know, it look like there's no money on this one unit, and I guess you don't know exactly how many other units you may open on the company side, but roughly, you know, CapEx you think flattish next year, moves up, kind of what are you thinking there?

Jason, I really think it's a little too early to speculate there. We start our planning cycle post Labor Day and I think probably at the end of third quarter, we'll have a better sense of what some of that activity might be. We're going to continue to do some remodeling as we have this year, and then again, as Mike said earlier, we've got several negotiated LOIs out there, and so we'll see how that all kind of evolves, if you will.

Okay. And then last thing, just big picture, you know, what's the strategic advantage of keeping the Mitchell's business, you know, consolidated with your Ruth's business? I guess this thing is still sort of pretty sluggish here after a couple years of recovery. Can you just remind us, you know, what the strategic advantage of keeping those businesses together is?

Well, Jason, first, Jason congratulations. I understand you're getting married tomorrow.

Yes. Thanks, Mike.

We continue to do a lot of work around the Mitchell's business. We continue to do very well in terms of the eyes and minds of consumer; we win "best of" awards. It's been a challenging time in the higher end, polished, casual business for a lot of folks. We've got very talented people refining this, and to the extent that we determine that this can get the kind of returns that we are getting with our Ruth's Chris business, then it would be a growth vehicle.

So to the extent that we have invested a substantial amount of money when we acquired the business, we've invested time in it, and the idea that we are being very patient with it because to the extent that we already have this here, if it's successful then we think we really have some exciting opportunities. If it's not long-term as successful, we'll have to deal with that, you know, later. But we currently believe that there's still an opportunity to do that. But again, I would be the first to say that three years ago when I joined the Company, I thought that that might recover very quickly and be a very aggressive opportunity.

I would say that as we've learned more about it and the complexities of it, of the business, the complexities of delivering fish every day, the volume that it needs to do per restaurant in order to be profitable to the level that we'd like, a lot of those things I don't think I particularly understood and, therefore, I thought it was going to be a faster thing. Now I think that we're making great progress in back of the house systems, we're making great progress in the way we handle fish and the way we deliver fish. We're making great progress in terms of literally how we run that business. And so to the extent that we continue to make progress, we'll be patient.

And if at some point we don't make enough progress and it does not prove to be an investment that would be a substantial growth opportunity, then we'd have to deal with it differently. But it's still a good business, a positive business that contributes to the earnings and it contributes to the cash flow of what we do.

Okay. Thanks, guys, and congrats Bob.

Thank you, Jason. You, as well.

We'll take a follow-up from Andrew Barish.

Hey, guys. Yeah, I have a bunch of follow-ups in the original question. But directionally, any early results or thoughts on beef for 2012? And then just following up on the Mitchell's comments, what's kind of the -- I think you hinted at "back of house" as sort of the key maybe improvement point, if you will. Can you just give us an area of focus or two in Mitchell's that you guys are locked in on trying to improve the profitability economics in that brand?

Right. Two things. One, if we looked at 2012 right now at this point in time, and again this is volatile and moving, but I'd say that we're looking at a year of 6% or 7% inflation in 2012. If I were -- if you said "all right, put a gun to your head and tell me what I think is going to happen now", we obviously are looking for opportunities to -- and we're hopeful there are opportunities that we can find long-term locks that will be more favorable than that.

But again, if you go back and look at our pricing strategy, we have been able to improve margins without taking aggressive price. It means I think we have more pricing opportunities, so we're trying to match those kind of opportunities together. So I hope that answers, the best I can, Andrew, 2012 on beef. In terms of Mitchell's, it's about driving the top line sales first. I mean we -- like that $4 million AUVs in the Mitchell's. If you end up in the $4 million AUV in that business, then a lot things get a lot easier.

But along the way, the complexities of this business went -- Cameron had this and did a great job and they were fairly concentrated in the mid-west, it was very chef driven, very complicated sort of processes to make certain things, and did a great job. I don't suggest to say they did not. But things -- you know, as things have changed and the AUVs are not as aggressive as they were back in 2006 and 2007, and for us to have scalability, we really need to be, you know, more efficient than we have been historically.

So we're working on things that are, not to be complicated about it, but kitchen display systems and things that create less labor demand and things that could potentially have better product delivered more ready to be used than some of the intensive labor that we use to -- having to, you know, really butcher our own fish. We have whole loin fish brought in. So there are some opportunities we can do some other things outside that would make that highly, much more efficient.

Is there anything further, Mr. Barish?

No. That takes care of it. Thank you

Thanks, Andy.

Next we'll hear from Bryan Elliott with Raymond James.

I was curious. Once Jason marries your daughter, is she going to take his name and is that part of the transition out of the CFO position so he can maintain coverage?

Very clever, Bryan. I like that.

Thank you. I really don't have any questions. Thank you.

At this time, I would like to turn back over --

That would be like a disclosable merger or some I think, wouldn't it?

At this time, there are no further questions, I'll turn things back over to management for any additional or closing remarks.

Well, thank you, all, very much for joining with us this morning. We always appreciate your participation. And, as always, it's a great day to go out and eat either steak or fish. Have fun. Thank you.

And that does conclude today's teleconference. Thank you all for joining.