Ruth's Hospitality Group Inc (RUTH) 2011 Q3 法說會逐字稿

Good day, everyone and welcome to Ruth's Hospitality Group third quarter 2011 earnings conference call. (Operator Instructions). I now would like to turn the conference over to Mr. Chris Olson, Vice President of Financial Planning and Analysis. Please go ahead, sir.

Thank you and good morning. Joining us on the call today are Mike O'Donnell, our Chairman and Chief Executive Officer, and Arne Haak, our Chief Financial Officer. 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, 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 now like to turn the call over to Mike O'Donnell, Chief Executive Officer of Ruth's Hospitality Group.

Thanks, Chris. And thank you all for joining us today. As this is Arne's inaugural call I'd first like to like to publicly welcome him to Ruth's Hospitality Group from AirTran Airways where he was the Chief Financial Officer for over three years. He is a seasoned executive who is highly regarded for his broad range of financial and operational expertise, and I am most pleased to have him as partner in our business.

Despite a challenging cost environment, along with other factors including hurricane Irene, we were pleased to have our recorded first profitable third quarter in four years. The third quarter has historically been our seasonally weakest from a sales perspective, and we are pleased that our efforts continue to bear fruit.

Ruth's Chris Steak House Restaurant continued their sales momentum during the third quarter, with comparable sales improving 2.6% on top of a 4.9% gain in the prior year period. Despite loosing about 50 basis points in comparable sales due to flooding and other storm-related issues, we managed to post our sixth consecutive quarter of positive comp sales for Company-owned restaurants, and our seventh straight quarter of traffic gain.

Looking at October, trends have continued with comparable sales growth in the low to mid single digits. On a retail basis, Ruth's Chris' two largest markets, Florida and California, continue to generate positive sales as they outperformed the system average. Florida rose 8%, while California increased 4.6%.

Across the entire Ruth's Chris portfolio of 62 comparable Company locations, 44 restaurants or 71% reported positive comparable sales during the third quarter. Entrees that serve as our proxy for traffic increased by 1.2% during the third quarter, as we previously noted has now been positive for seven consecutive quarters. This is also the third sequential quarter where traffic has increased against positive traffic of the prior year.

Average check increased 1.4% in the period. Compared to Navtrak's benchmark index for the steak house segment Ruth's Chris sales were lower by 420 basis points while traffic was lower by 270 basis points. Despite the negative comparison, we continue to believe that stressing value over discounting has been an important part of our recent success.

Private dining sales at Ruth's Chris Steak House increased approximately 8% during the third quarter on top of last year's growth of 17%. As we continue to benefit from interest in our catering business and the use of our professional satellite services. Results were tempered during the period however as the anticipation of Irene caused many of our customers to cancel or postpone their events. Our Ruth's Chris franchise-owned domestic comparable sales increased 5.2% during the quarter while international comparable franchise-owned restaurant sales increased 10.1% resulting in a blended increase of 6.1%

In terms of the Ruth's Chris brand, we began a seven-week flight of national cable television advertising in early October. An expansion of our use of TV as an effective traffic driving tool. The spots will continue to feature an experienced focused theme. We believe the television advertising will continue to reach new and existing customers. In fact we have seen a significant increase in visits to our website since the campaign began. But it's still too early in the campaign to comment on conversion to reservation. But we're very encouraged by our progress.

Our Ruth's Chris seasonal classics, prix-fixe remains a part of our marketing effort and continues to comprise roughly 30% of our sales mix. As of late in the quarter we took the lower tier pricing on our prix-fixe offering up to $40.95 from $30.95 -- I'm sorry, $39.95, to help offset a portion of the increases of our beef costs. We're convinced that our diverse guest base appreciates the option of the prix-fixe classic and this strategy has supported us seven consecutive quarters of traffic growth.

While the results continue to show improved enthusiasm for high-end dining, we appreciate the economic uncertainty that many consumers continue to face, and our prix-fixe strategy continues to reinforce the value that Ruth's Chris offers its guests. At Mitchell's, comparable sales decreased 0.7% compared to a 2.8% decrease during last year's third quarter. Traffic decreased by 2.4% year-over-year while our average check increased 1.8%

In October, comparable trends for Mitchell's are down slightly in the year-ago period. We continue to focus on our menu, marketing, and operational excellence to enhance the brand's position. Based on consumer research which identified that a key contributor to declining visits at Mitchell's was a limited selection of non-seafood offerings, we have expanded the turf section of our menu adding rib eye steaks, additional chicken dishes, USDA prime hamburgers and other non-seafood offerings during the quarter. While it's still early we are pleased to have seen our preference for non-seafood items increase. Seafood will remain Mitchell's core offering, however we believe we have an opportunity to broaden the overall feel of the concept through further menu engineering.

Additionally we continue to implement initiative to increase the productivity in the back of the house, where we believe we can enhance the unit economics of Mitchell's. Our $19.95 and $24.95 prix-fixe menu options remain strong contributors to our sales mix as value propositions comprising approximately 20% of sales. It includes a variety of seafood offerings as well as a new, 10 oz. rib eye. Given the seasonality of seafood and our expanding non-seafood offerings we see the prix-fixe and limited time offers as a way for our guests to always have something new to experience when dining with us.

Switching to development, we remain active in evaluating opportunities for 2012 and beyond, and our pipeline is in the best shape it has been since 2008. And although the current economic environment requires a disciplined and prudent approach to capital deployment, we're encouraging to be negotiating LOIs on several company-owned locations. As we have in the past, we'll continue our practice of not announcing specifics until we have a signed lease. But what I will say is that we're very encouraged by our development strategy and should have more details to tell you about in early 2012.

We recently relocated a Ruth's Chris in Portland after our lease expired and the new restaurant is doing very well in its first quarter of operation. And on the franchising side of the business, we opened a new Ruth's Chris unit in the Amway Grand Plaza hotel in Grand Rapids, Michigan in September and it is off to just a great start.

Looking forward in 2012, we will be opening a Ruth's Chris location at Harrah's Casino in Cherokee North Carolina under a management agreement with the Eastern brand of Cherokee Indians. Certain franchise partners have also signed leases and are planning to open Ruth's Chris locations in Asheville, North Carolina, Niagara Falls and Panama. Exclusive of these locations we currently have an additional 16 commitments for future franchise restaurants over the next several years. I would like to now turn the call over to Arne.

Thank you, Mike. For the third quarter ended September 25th, 2011, we generated total revenues of $80.2 million, an increase of $1.6 million or 2% compared to last year. Total company-owned restaurant sales increased to $77.1 million, or 1.9%, compared to $75.7 million in the third quarter of last year. Average weekly sales for all company-owned Ruth's Chris Steak House restaurants were approximately $72,000 in the third quarter, compared to approximately $70,000 in the same period last year.

Ruth's Chris Steak House comparable sales increased by 2.6% and consisted of an average check increase of 1.4% combined with an increase in entree counts of 1.2%. Again, this represents our seventh consecutive quarterly increase in traffic. Average weekly sales at Mitchell's Fish Market were approximately $66,000, compared to approximately $67,000 in the same period last year.

Restaurant operating weeks were flat year-over-year. Franchise income increased 10.7% to $2.9 million from $2.6 million last year, due to higher sales and the new location late in the quarter. In terms of our cost structure, food and beverage costs as a percentage of restaurant sales, increased 120 basis points year-over-year, primarily driven by unfavorable beef costs as well as higher dairy, soybean oil, and grain-based products.

Restaurant operating expenses as a percentage of restaurant sales increased 40 basis points from the third quarter of last year to 56.3%. This increase was driven by the timing of health insurance claims, which was partially offset by sales leverage. On a year-to-date basis, our restaurant operating expenses are 52.2%. Marketing and advertising cost decreased to $1.6 million from $2.8 million, and as a percentage of total revenue decreased by 150 basis points to 2%. The increase was largely a timing shift to accommodate our fourth quarter national cable advertising.

G&A expenditures increased to $5.8 million from $5.4 million. The slight increase, which is a one-time item, was largely driven by higher communications costs as we transition to a new provider. During the third quarter of 2011, we incurred $150,000 of pre-opening expenses compared to $38,000 in the prior year.

These expenses are related to the relocation of our restaurant in Portland, Oregon which as Mike noted has thus far exceeded our expectation. Net income available to preferred and common share holders for the third quarter of 2011 was $85,000 or break-even per diluted share on the base of approximately 43.3 million shares in the third quarter of 2011. This compares to a net loss of $477,000 or a $0.01 loss per diluted share on a base of approximately 34 million shares in the third quarter of 2010. During the quarter, we continued to pay down our debt.

At the end of the third quarter the Company had $39.4 million of debt outstanding under its senior credit agreement, down 41% from $67 million a year ago. This contributed to a $300,000 reduction in interest expense year-over-year. This is our 13th consecutive quarter of paying down debt, and we expect to continue paying down debt in the fourth quarter. Based on our results to date, we are updating our previous outlook for 2011.

Our cost of goods sold estimate remains the same at 30.5% to 31.5% of restaurant sales. We project beef inflation to be between 7% to 8% for the year. We have purchase agreements for tenders representing approximately 20% of our needs from November 2011, through August of 2012. This represents an approximately 7% increase compared to prices paid in the prior year. In the fourth quarter, we have the benefit of an additional menu price increase of approximately 20 basis points intended to partially mitigate the impact of overall commodity inflation. We will continue to evaluate additional menu engineering and pricing opportunities. While we believe we have additional pricing power, we expect to be thoughtful and prudent with respect to future increases. Given the current economic backdrop it is our strategy to maintain a value orientation and build long-term traffic gains. We anticipate marketing and advertising spend to be consistent with what we discussed at 3% to 3.5% of total revenue.

G&A expenses will also stay the same at $23 to $25 million. We expect our effective tax rate in the fourth quarter to be 30% with the full-year tax rate to be 13% to 15%, which includes the one-time tax benefit we received in the second quarter as a result of a taxable entity reorganization. Our CapEx spending is now projected at $8 to $10 million from the previous $10 to $12 million. And subsequently free cash flow was expected to be in the range of $23 to $25 million versus our previous expectations of $21 to $23 million. With that I would now like to turn the call to Mike.

Thanks, Arne. In conclusion, given the seasonal low point for our business in Q3, along with some external challenges during the quarter, we were pleased with our sales growth and our ability to generate a profit. I credit our operational excellence and our continuing focus on offering the same high-qualify food and service that has made Ruth's Chris an iconic leader in the upscale steak category.

But quarterly results aside, I think it's noteworthy to mention how far the business has come since 2008. Our franchise system has never been healthier, and as always it remains the heart and soul of the brand and a key contributor to our future growth. Our development pipeline is the strongest it has been since I joined the Company, and we look forward to sharing more specific news in the quarter to come. People-wise, we've assembled a great team. We have attracted Arne to the organization, while retaining the trusted council of Bob Vincent who remains fully engaged. Cheryl Henry is also a key part of our senior team taking on the role of Chief Branding Officer. And her promotion signifies not only her effectiveness as a restaurant executive, but also the growing depth of our internal talent.

Our Ruth's Chris operations team, led by Kevin Toomy has been exemplary and we were recently awarded a first place in Nation's Restaurant News 2011 Consumer Picks survey among all casual and fine-dining restaurants. In terms of Mitchell's fish market, we continue to make good progress. Mitchell's is a positive contributor to our earnings, and we are encouraged by the result of our initiative.

Finally our profitability, balance sheet and financial strength is greatly improved from 2008, and we maintained our 2009 mindset as it relates to expenses and our cash generation ability has allowed us to reduce our leverage with each passing quarter, which gives us flexibility to allocate capitol to uses that we believe will create long-term shareholder value. To sum it up, we believe the business is really moving in the right direction, and we believe we're increasingly positioning it for significant earnings leverage into the future. As always we appreciate your interest in our company. Operator, I would now like to turn the call over for any question.

And ladies and gentlemen, if you do have a question at this time -- (Operator Instructions). And we'll go Nicole Miller with Piper Jaffray.

Good morning, I had a question on the TV commercials because they look great. I can't recall seeing any last year, so can you talk about how many weeks you were on in the third quarter, the spend, and also the plan for the fourth quarter?

I'm sorry, Nicole, first of all, thanks. You are always the first question, which I know how early you have to get up in the morning. The question is we did not run television except in very small markets a year ago in tests. These commercials started in October, run for seven weeks.

And how many weeks will they run -- or starting in October they run for seven weeks. Okay. I got you.

Right.

And then in terms of the fourth quarter holiday sales, I recall last year I think by the segment in general and then (inaudible) Of course there's positive traffic and then there is also a skew back towards positive (inaudible.) Well what do you kind of expect generically around more of the (inaudible) and the private party? What kind of trends do you expect for this holiday period in terms of traffic and check and mix shift?

Right. You know, Nicole it is a little early we do track our forward bookings, and they are in probably in about the same place they were a year ago at this time. But we do that manually so there's a fair amount of movement around that. You know, we're encouraged by what I think is going to take place in the fourth quarter. We're encouraged by our early results of television that we think will carry us forward. We talk about our three pockets of business, and, you know, we're seeing reasonable strength in all of those positions. Now, you know, we continue to see that our $39.95 or our $40.95 now and our $49.95, we continue to see that as about 30% of sales.

There has actually been a mix shift. That used to run at an even 50/50 or 15% and 15%. And we have actually seen that shift to the higher piece, that $49.95. So we're actually seeing a five-point move there which is actually favorable for us. So we are encouraged. We have 62 restaurants that will be open for Thanksgiving which will be our third year of that, and we saw an increase last year sequentially over the prior year. And we've almost doubled the number of restaurants that will be open for Christmas. So all in all, while we are concerned about the overriding issues of consumer confidence, et cetera, you know, we believe that things should be favorable for us in the fourth quarter.

Thank you.

We'll go next to Bart Glenn with D. A. Davidson.

Thank you, I was just curious on what is your view towards taking price increases in the future might be given the inflationary outlook, particularly on beef.

Yeah, Bart, thanks, and good morning. Our strategy has been to be as cautious as we can be on price and to try to protect our traffic growth. It doesn't bother me to be the least expensive house in the most expensive neighborhood. So we'll continue to be very thoughtful around that. We have been able to show some -- the ability to maintain and in some cases increase margins while not having to take aggressive price. And so that's really where we are. We do think we have pricing capability which we have now taken in the lower end of our pirx-fixe and we think that there may be some other opportunities, but we would like to pull those levers last. You know, the future of beef commodities is unclear. We're forecasting anywhere from 7% to 10% inflation on beef in 2012, and so to the extent that it is less than that, then I would probably say we will be less aggressive in price. If it is we -- if it sees those levels or higher, we may continue to review price. But our strategy is to take -- our preference is to take less than more price.

Thank you, one other question, as it relates to development discussions, just trying to find out if you are still looking for company-owned units to partner with the gaming and lodging companies? Or if you are open to the idea of doing more historical development where it's your own commitment?

Bart, thanks. Our primary focus is to look at opportunities where we're partnering whether that's in office buildings or hotel and casinos. The Harrah's development that we talked about is an indicator of that, the Amway business that we just opened is an indicator of that, and the discussions that we're involved with right now would be equal. However, that doesn't preclude us from finding an iconic sort of opportunity if for instance the State Street opportunity that we have in Boston were to open again, and it's not a casino and it's not a hotel, I would sure do that all over again. But our focus is to find third-parties that help one plus one equal three.

All right. Thank you.

Thank you, Bart

Our next question comes from Jason West from Deutsche Bank.

Yes, thanks, good morning.

Good morning, Jason.

Hey. So just one on the debt development question. The CapEx out look would that mean you go on a 50/50 on the CapEx on these types of opportunities. Or is it more the partner spending most of the capital and you guys wouldn't see CapEx moving up very much next year even if open some stores?

You know, I think that's deal by deal. You know, in the Cherokee situation, we do not have a substantial amount of capital involved in that. In some of the other situations we're looking at, we're putting more capital in. It really is deal by deal basis. (inaudible) So our CapEx forecast for the future, you know, would stay the same if we were to find that to be significantly different, we would be talking about it.

Okay. Got you. And can you talk about how trends pace through the quarter. Did you feel a hit when the stock market started to sell off, and within certain segments of the business, or was it just a broader kind of slow down, you know, across all segments and geographies, and as it compares and maybe a little cost and -- you talk about the overall field of business right now, and you think things maybe pick back up if the market recovers a bit?

Jason that's a good question. We don't spend a lot of time talking about month-to-month, because it's tough. But as we said on our last call things were really pretty solid through July. You know, we started to see some weakening that you could attribute to the sort of increased disgruntlement over the debt ceiling debate and things like that. The weakness in the stock market. We had Irene, we had an earthquake, we had all of the other stuff that took place that we're -- I'm not going to spending a lot of time on that, because something like that seems to happen all the time. We probably have more weakness in August, a little more strength in September, and as I said we're running in the low single digits now, but I do feel optimistic around what I think that the television, which is the first time we have done it, and can add to what we're doing,

I think our execution is doing really well. I'm encouraged by -- we had a recent Vice President meeting, and I'm encouraged by their optimism in the field. I'm cautious because I keep hearing things about consumer sentiment, and you get a lot of mixed results in terms of retailers saying they think they are going to have a great holiday season, and they are not. And others -- we're going forward, we're going to be aggressive in promoting our gift cards, we're aggressive in promoting private dining which is the best time of the year for us, and we're going to be aggressive in execution towards our consumer. So, you know, I'm feeling good about it.

Great. Thanks, guys.

(Operator Instructions). And next we'll go to Andy Barish with Jefferies.

Good morning, guys. Just to get Arne involved here on his first call. The two (Inaudible -- multiple speakers) expense items you called out on the health insurance claims timing in the 3Q, and then G&A item that you mentioned, can you give us a little quantification or at least sort of a sense of how that -- does that continue at least on the restaurant operating expense side into the fourth quarter?

Sure. First of all, Andy, on the health insurance side, you know, it's largely driven by our claims experience, and it's an actuarial calculation, and just what we have seen kind of change over the summer was we experienced a higher volume of claims, and it kind of goes month-to-month. I think this is a pretty consistent trend in the -- across all businesses in times of economic uncertainty, people value and use their health care benefits. We haven't seen anything of the same magnitude yet, so I think we're still in line for our annual guidance on that line item. But obviously, it's something that changes as our employees and their family members use their benefits. On the telecom costs on that side that really was a one time -- we moved the home office building. We transitioned some of our providers, and there is a little bit of overlap there that shouldn't be happening again in the fourth quarter.

Great. Thanks very much.

Sure.

We'll go next to Jeff Omohundro with Wells Fargo.

Thanks. Another question tied into the macro. When you look at the business and the trends you are seeing, are there particular traunches where there are standouts in either direction? Such as weekday versus weekend, the business diner, and are you seeing intracheck movement? You mentioned some shifting around the prix-fixe mix. Maybe just a little more detail on this customer segmentation.

Jeff, thanks, and good morning. You know, we have seen some -- if there's anywhere that we have seen some shift it's actually when things got a little bit softer, we saw some private dining business go away. Some of that, really, was driven by the -- as the hurricane moved up the East coast, we saw a lot of cancellations. We have actually seen that part of the business have some bit of a rebound. So I would say that when we have seen -- what we have seen has gone across most buckets, so that business-to-business bucket has shown some weakness and then is gaining strengthening again.

Our consumer -- the one that uses us most as a frequent casual dining experience. We saw a little weakness there that really is driven by what takes place in the stock market and consumer confidence, and that seems to have picked back up again a little bit. And the special occasion business continues to remain strong. We have done some things internally. I think a lot of you saw that we had had an announcement, some -- a couple of weeks ago, and we had a very large and successful private dining opportunity with the Antinori wine group that was hugely successful. That is the third one we have done this year, we have seen that the number opinions in that go up by a third in each new private dining. So we're being aggressive around all those pieces. In terms of the intracheck movement, we have actually seen people spending a little more money.

As I said earlier, the $39.95 to $40.95, we have seen a movement to the higher end of that. Some of it is because I think we have taken the price up on the lower end, and that pushes you up a bit. So I think we're seeing some movement there. In all things on a macro basis, I'm still feeling reasonably good about things. I think it would be -- we will -- our consumer will have more confidence if the government decides to solve a lot of its internal strife and give us a little more consumer confidence but I think we're doing fine.

Sure. That's helpful. And I might have missed it but what was the reason for the decrease in the 2011 CapEx outlook?

Jeff, this is Arne. It's really a little bit of a shift in some of the projects going over into 2012, and also I think some good cost management on our existing projects. So...

Great. Thanks so much.

And with no further questions in the queue, I would like to turn the conference over to Michael O'Donnell for any closing remarks.

Thank you all very much for joining us this early hour this morning. I appreciate very much your interest in our company, and as always it's a great day to go out and eat steak or fish. Thank you all very much.

Ladies and gentlemen, that does conclude today's conference. We thank you all for joining.