Ruth's Hospitality Group Inc (RUTH) 2011 Q4 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Ruth's Hospitality Group Incorporated fourth 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.

(Operator Instructions). As a reminder today's conference is being recorded. I would like to turn the conference over to Mr. Chris Olson, Vice President of Finance Planning and Analysis. Please go ahead, sir.

Thank you and good morning. Joining us on the call today is 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, I would like to remind you that today's call may not be reproduced in any form without the express written consent of Ruth's Hospitality Group, Incorporated. 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. We are very pleased to have concluded 2011 with strong operating results. During the year we believe we have made great progress toward strengthening our Ruth's Chris and Mitchell's FIsh Market brands. As a result we are able to see healthy and consistent traffic gains at Ruth's during the year. Furthermore, we reduced our indebtedness by $29 million during the year to a debt balance of $22 million. At Mitchell's we are pleased with the continued positive trajectory of our sales trends and recently announced transition in leadership.

At Ruth's Chris Steak House our fourth-quarter comparable sales increased 7.7%. The strong growth during the quarter came on top of a 9.2% increase in the prior-year period and marks the seventh consecutive quarter of positive comparable sales for the Company-owned restaurants and our eighth straight quarter of traffic gains. Looking at January these encouraging trends have continued with comparable sales growth in the mid-single digits. While we still have two more months to go, we are pleased with this strength, particularly on top of last year's 5.2% comp growth in the first quarter.

On a regional basis, Ruth's Chris's two largest markets, Florida and California, continue to generate positive sales as they outperformed the system average in the fourth quarter. California rose 10.6%, while Florida increased 9%. Across the entire Ruth's Chris portfolio, 62 comparable Company locations, 57 restaurants, or 92% reported positive comparable sales during the fourth quarter. Entrees, which serve as a proxy for traffic, increased by 6.1% during the fourth quarter, and, as we previously noted, have now been positive for eight consecutive quarters. This is also the fourth sequential quarter where traffic has increased against positive traffic in the prior year. Average check increased 1.5% for the period.

Compared to the Navtrak benchmark index for the Steak House segment, Ruth's Chris sales are better by 220 basis points, while traffic was better by 500 basis points. This quarter's results and our consistent traffic and revenue growth validate our strategy of growing profits through traffic first and pricing second. We continue to see strength in our three key customer segments -- our private dining, our business to business and our special occasion business.

Private dining sales at Ruth's Chris Steak House increased approximately 10% during the fourth quarter on top of last year's 16% growth, as we continue to benefit from interest in our catering business and the use of our professional satellite services and improved business environment. Our Ruth's Chris franchise owned domestic comparable restaurant sales increased 8.5% during the quarter, while International comparable franchise-owned restaurants resulted in 6% increase resulting in a blended increase of 8%. This growth is comprised of a 7.8% increase in traffic and 0.2% increase in average check.

In terms of the Ruth's Chris brand, our seven-week flight of national cable television advertising spots began in early October and ran through November featuring an experience focused theme geared toward driving our brand awareness. We are encouraged by the results of the ads, which resulted in increased visits to our website, dove higher reservation sales and contributed to our strong fourth-quarter sales growth. The benefits of this advertising created momentum that carried through the entire fourth quarter.

We continue to believe that the television advertising can play an important role in driving increased enthusiasm from our customer base, and we will continue to evaluate how to effectively utilize television advertising going forward. Our Ruth's classic seasonal prix fixe menu remains an important part of our marketing efforts and comprises roughly 20% of our sales mix. Late in the third quarter we repositioned this offering on our menu and took a slight increase to the lower tier price on our prix fixe offering up to $40.95 from $39.95 in an effort to shift preference and to help offset a portion of the increase from our beef costs.

We believe that increased consumer confidence and the effect of our menu repositioning and pricing strategies are largely responsible for the 9% shift in preference from the third quarter. We remain convinced that our guests appreciate the option of the prix fixe classics and that this strategy has supported our traffic growth by offering value to those customers who are seeking price certainty in their dining options.

At Mitchell's we're pleased to report that comparable sales increased 0.4% during the fourth quarter compared to a 2.1% decrease in the prior-year period. Traffic decreased by 0.9% year-over-year while average check increased 1.4%. In January comparable trends for Mitchell's remain positive up in the low single digits from the year ago period.

On Tuesday we announced the transition in leadership from Sam Tancredi to Pete [Boudreau], who has become our President and Chief Operating Officer at Mitchell's. Pete brings to Mitchell's a broad multi-unit operator history and a record of positioning concepts for growth and profitability. We are thankful for Sam's efforts over the last three years and look forward to Pete's future contributions.

Our efforts at Mitchell's continue to center around menu development, marketing and operational excellence to enhance Mitchell's brand position. We remain pleased with our expanded turf section of our menu where we have added rib eye steaks, additional chicken dishes, USDA prime hamburgers and other non-seafood offerings to broaden the concept's overall appeal.

Preference for these non-seafood items remains, and has grown from less than 5% last year to nearly 10% in the fourth quarter. Seafood will remain Mitchell's core offering. However, we believe we have an opportunity to further broaden the overall appeal of the concept through continued menu innovation.

Our $19.95 and $24.95 prix fixe menu options remain important contributors to our sales mix as value propositions comprising approximately 15% of sales. This reflects a five-point decline in preference from the third quarter which we believe reflects increased consumer confidence and growing preference for our new menu items. The prix fixe menu includes a variety of seafood offerings, as well as a 10% -- a 10 ounce rib eye.

Given the seasonality of seafood and our expanding non-seafood offerings, we see the prix fixe and limited time offers as ways for our guests to always have something new to experience when dining with us. Our marketing strategy at Mitchell's remains to expand our loyal fan base by enhancing our local area marketing initiatives and to take advantage of smaller operating -- of our smaller operating base including increased community involvement and furthering our on-line and social media tactics.

Switching to development, we continue to be active in evaluating opportunities for 2012 and beyond, and are encouraged by the current pipeline. Our first in new unit development remains disciplined and prudent with regard to capital deployment. LOI negotiations continued on several potential sites and we look forward to announcing specific locations as we have in the past when we have a signed lease.

As far as a signed leases, as we have noted, 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. We anticipate that the Cherokee location will be a June, 2012 opening. We have also executed a lease for the Banks Development in Cincinnati and are anticipating a fourth-quarter opening there. Certain franchise partners have also signed leases and are planning on opening Ruth's Chris locations. one in Dubai, Niagara Falls, Canada, San Salvador and Panama during 2012.

Exclusive of these locations we currently have an additional 17 commitments for future franchise restaurants over the next several years. We expect to report on additional signed leases in 2012 and plan to continue to provide updates on our newly signed leases on our future quarterly calls. As far as openings are concerned we continue to be very pleased with the operations of our recently relocated Portland Oregon restaurant, as well as our franchise openings in the Amway Grand Plaza in Grand Rapids and the Biltmore Village in Asheville, North Carolina.

I would now like to turn the call over to Arne to take you through our financial results. Arne?

Thank you, Mike. For the fourth quarter ended December 25, 2011, we generated total revenues of $99.6 million, an increase of $6.6 million or 7.1% compared to last year. Total Company owned restaurant sales increased to $95.4 million or 6.8% compared to $89.3 million in the fourth quarter last year. Average weekly sales for all Company-owned Ruth's Chris Steakhouse restaurants were $94,000 in the fourth quarter up from $86.8 thousand in the same period last year.

Average weekly sales at Mitchell's Fish Market were $64,000 compared to $63,800 in the same period last year. Restaurant operating weeks were flat year-over-year. Franchising income increased 13.4% to $3.6 million from $3.2 million last year due to higher sales and an increased number of franchise locations. In terms of our cost structure, food and beverage costs as a percentage of restaurant sales increased 110 basis points year-over-year in the fourth quarter driven by unfavorable beef crop cost trends which were up 13% year-over-year.

Restaurant operating expenses as a percentage of restaurant sales increased 10 basis points to 50.9% compared to last year at 50.8%. Our sales leverage on operating expenses were adversely affected by the impact of higher health insurance costs during the fourth quarter.

This is a continuation of a trend that began in the third quarter and has been largely driven by a rise in the severity of our claims versus an increase in the number of our claims. Marketing and advertising costs increased to $4.1 million from $3.4 million and as a percentage of total revenue increased by 50 basis points to 4.1%. This increase was a result of the timing of our fourth quarter national cable advertising. For 2011 our marketing and advertising costs were 3.2% of total revenues for the full year, which was in line with our guidance of 3% to 3.5%.

G&A expenditures decreased to $5.8 million from $6.5 million in the prior year. The $0.7 million decrease was largely driven by lower compensation expense in the quarter. During the quarter we incurred a $3 million non-cash charge for the impairment of an intangible asset which was Mitchell's Fish Market trade name. In the fourth quarter of 2010 we had an $800,000 non-cash impairment charge in connection with lease settlements.

The fourth quarter of 2011 also included a $400,000 non-cash asset disposal charge which was largely related to the 12 restaurant renovations we began in 2011. Net income available to preferred and common shareholders for the fourth quarter was $1.9 million or diluted earnings per share of $0.04 on a base of approximately 43.3 million shares.

This compares to net income of $3.9 million or $0.09 per diluted share on a base of approximately 43,000,000 shares in the fourth quarter of 2010. Excluding the previously mentioned non-cash charges, our pro forma diluted earnings per common share was $0.11 in the fourth quarter of 2011 compared to diluted earnings per common share of $0.09 in the fourth quarter of 2010. We've included a schedule in our press release that reconciles our GAAP diluted earnings per common share to this non-GAAP EPS for the fourth quarter.

During the quarter we continue to pay down our debt. At the end of the fourth quarter company had $22 million of debt outstanding under its senior credit agreement down from $39.4 million at the end of the third quarter. This is the 14th consecutive quarter in which we have reduced our debt balance. This is a significant accomplishment which represents a 57% decline in debt from a year ago.

Looking ahead to 2012, we would like to provide you with the following preliminary guidelines for some of our key cost metrics. We expect our cost of goods to be within a range of 31% to 32% of restaurant sales for the year. We project 2012 beef inflation to be between 5% and 8%. We currently have purchase agreements for beef representing approximately 30% of our needs through August 2012 which represents an approximate 7% premium compared to the prior year.

We plan restaurant operating expenses to be between 51% and 52% of restaurant sales. We anticipate marketing and advertising expense will remain between 3% and 3.5% of total revenue. G&A expenses are expected to be between $25 million and $26 million. While we believe we have additional pricing power, we expect to be thoughtful and prudent with respect to future increases.

With the current economic backdrop, it is our strategy to focus on growing sales through traffic gains and maintaining a value orientation. As we have demonstrated in the fourth quarter, we will continue to evaluate additional menu engineering and pricing opportunities. Our expected tax rate for the full year is expected to be between 28% and 32%, and our CapEx spending for the year is projected to be between $10 million and $12 million. With that I would now like to turn the call back to Mike.

Thanks, Arne. I want to thank all of our team members and franchisees for their efforts in 2011. We take great pride in our results and our number one ranking in the nation's restaurant news consumer picks survey. Our franchise system has never been healthier, and, as always, it remains the heart and soul of our brand and a key contributor to our future growth. We are pleased with trends at Mitchell's and accomplishment Sam has achieved during his last three years. The Mitchell's concept is profitable and contributing to our earnings. As we transition to Pete's leadership we're excited about his talent and energy in furthering this brand.

On the heels of a fruitful 2011 we really look forward to what we believe will be another successful year ahead. While the economic outlook remains uncertain and beef inflation will likely continue to pose a challenging headwind in 2012, we expect that our continued focus on menu innovation, marketing and superior service can help us offset these headwinds and lead to traffic sales and earnings growth. What that, Jim, I would like to turn the call back to you for questions.

(Operator Instructions) Nicole Miller, Piper Jaffray.

Good morning. Arne, I was wondering could you please give us the actual revenue numbers for Mitchell's and then, if it's available, any color on free cash flow expectations for 2012.

Nicole, this is Arne and good morning. We appreciate you once again have shown that you get to the front of the line every time. In terms of the Mitchell's concept, we don't comment on specific unit economics other than just the comp sales and the weekly sales for the quarter. In terms of cash flow, we have taken away the cash flow guidance, and I think we have chosen to focus more on our operating cost guidance. I think if you look at it, our guidance is largely similar to what we had last year. And our free cash flow is largely going to be similar.

Okay. Yes, the early bird does get the worm. On the Mitchell's we're just looking for the actual revenue in the fourth quarter. If that's something you can provide later, it just helps us tie out our modeling.

Okay.

Just the dollar sales revenue. And then Michael or Arne -- but I was wondering, last question, about the renovation updates. Can you talk to us about how the look and the experience has changed and then about the returns or the upside sales that you are seeing from the renovation so far?

Yes, Nicole, good morning. This is Mike. In the work that we have done over the last couple of years, we have challenged ourselves with the notion that we are a classic American steakhouse with a touch of whimsy. And the result of what we've done in terms of our remodels is really sort of brighten and lighten and give them a little bit more energy as it relates to the core and the feel of the restaurants. And that also has actually gone into our service section et cetera. But we continue to see I would say an increase in the restaurants or we have done remodels. And some of the remodels, you have to understand, were significant upgrades in the way the restaurant looked, and some of them are really more defensive. They still looked really good before, but it was just time for us to spend money on them. But I would say the overall, that they would if you took the group in total that they are outperforming the balance of the system.

Thank you.

Nicole, one last thing. The math -- we did give you the weekly sales for Mitchell's in the fourth quarter which was $64,000 a week. And the math on that for the whole quarter will get you to just under $16 million in sales.

Perfect. Thank you.

Jason West, Deutsche Bank.

Good morning guys. Just a few things. Just want to confirm you guys to at have an extra week in 2012. Is that right?

That's correct.

Okay. And then could you guys help us out a little bit on how to model the two Company units. Are those going to be sort of standard revenue margin units, or is that a little bit different the way those are going to flow into the model?

The restaurant in Cincinnati will be a standard Company-owned restaurant. The restaurant in North Carolina -- we're doing that for management fee.

Okay so that is not -- that's going to flow in other income or something like that.

Yes.

Okay. And then you said you have -- of the franchise you have four units opening throughout the year?

Yes.

Okay. Just want to confirm that.

Jason, on the Cincinnati -- it is not going to have a big impact in this year. It will be a fourth-quarter opening, but we are excited about it. We think it is a really great location in Cincinnati for us right there on the waterfront next to downtown, between the sports venues.

Right. Great. And then on the top line just a couple things. If you could talk about any impact from weather or holiday shifts that may have helped you in the fourth quarter or the first quarter?

Well, I'm not sure in the fourth quarter you were talking about where Christmas fell, et cetera. I think that probably had a bit of an impact. We've been very fortunate weather wise, on both the fourth quarter and in the first quarter primarily in the Midwest. It was interesting to look back, just for instance, to the Super Bowl Sunday and see what we went through last year in Dallas and Fort Worth with ice storms and snow and all of that stuff. And we clearly didn't have that this year. It's been an impact. We track that. I think some of our early January results were fairly favorable. But we did have some weather challenges a little bit this one week, and it gave us -- it actually made me feel good that we overcame some of those things in other markets showing really I think pretty strong consumer demand.

Okay. That's helpful. And lastly, do you think the competitor closures going on out there will help you guys it in any material way that we could see in the numbers, or would it be just too few to really matter?

You know, I think in some particular markets it may have a bigger impact short-term. I am more than happy to take their canceled reservations and canceled private parties. But there is a reason that they close those restaurants. And for the most part, they are not highly successful restaurants. So we're I guess not disappointed to have not in the marketplace. But I don't think we can count on that as being a significant sustainable issue.

Makes sense. Thanks guys.

Moving on Andy Barish from Jefferies.

Just a little bit more color on two expense items. Can you give us sort of a flavor on the healthcare side of things as it hits the operating expense line moving forward -- just how much of that continues? Do you expect it to get better in the second half as you lap some of the higher claims? And then on the G&A line -- you guys have kept that essentially flattish for the last couple years -- little growth in dollar is going forward. Is there some new initiatives or investment spend going on there or something else?

There is, Andy. On the healthcare -- what is going on there, as we said, is largely bigger claims, and they tend to come in lumps. And so our outlook includes that it remains higher but maybe not quite as lumpy as what we've seen in the back half of the year. Our plan year renews in the middle of the year, and so we're looking at -- are there things we can do to kind of help manage this a little bit better? Until then, we are kind of at the whim of just the claims experience. It hasn't been -- so far this year hasn't been that severe as what we saw in the back half of the year but it changes, obviously, week to week.

On the G&A side, there is a couple things going on. The big item is we had a lot of open headcount last year, particularly I think in our marketing area. We had a change there and we didn't fill the position until the end of the year. There is other -- some compliance things that are going on that we have -- that we will have to do this year and a little bit on the IT side, in terms of an investment. Mike, I don't know if you have more you want to add on.

Andy, we've got a certain amount of non-cash expense that continues to show up relative to stock compensation. But I think that we have been very -- we've been a very scrappy organization for a fair amount of time and now as-- and we continue to expect to be scrappy. But as we begin the development process and filling up a pipeline in growth that that we requires certain expenditures for us around real estate expenses and legal expenses and other things that we have not had over the last couple of years. So we're being very diligent here.

In order for us to add a head, there has to be an offset in terms of what they can do for us in terms of increased revenue or increased profitability. I think good examples of that -- that we have seen is where specifically we've added people in the culinary and in the beverage. And both of those have resulted in increased experiences for our customers in the way of wine dinners and those sorts of things. And it actually -- it increased the way that we've been able to do certain purchasing and promotional events that we think are helping us on the -- helping mitigate some of the food cost increases and certainly helping to offset some of our beverage expenses. So I think it is a great question, and I think it is something we're paying an awful lot attention to. But it takes somewhat of an investment as we begin to grow, and I think it is being very well managed.

Thanks. One other, not related to the expense side, more on the sales driving side. Can you share with us your media thoughts in terms of cable this year, or is it not yet formalized? And then secondly, some of the brand initiatives outside of the physical plant changes in the Ruth's business, some of the service and uniform and music tests you been doing at some locations. Any update there would be helpful.

Sure, Andy. In terms of national cable thing, this is very interesting for us. And I have to say last year was the first time we did that. Our strategy there was to advertise into -- going into the holiday season, and we are very pleased with the results there. Those seven weeks of national cable and again, one of the things that is unique to us as we have a the national footprint, and therefore, we are more efficient than most. And it benefits us and our franchisees. So we are really very pleased with the results from that. Now we're in negotiations on that for this next coming year. Obviously, it's the election year. Some of those things will cause some of the consideration. We were able to get actually some network bleed over from some of our cable buys which was very favorable that did not cost us any incremental amounts. So what you saw happening, or what we saw happening, was a build up into the holidays that then carried forth which means to us that that is the best time for us to do this. The halo effect was quite positive.

The other thing that took place, which was sort of an unintended consequence of this, which we are very pleased by, was it drove a lot of people to our website and as a result increased reservations, increased gift card sales -- increased private dining. So all things were positive as a result of our advertising in that regard. Franchisees were very favorable to it. So we will be -- if it is possible for us to repeat that in a meaningful way, then we will -- it's highly likely that we will do that. One of the things they it did tell us which I think is very interesting that we're now working on, is that what was our conversion rate and terms of the number of people that visited our site and then actually made a reservation. And so we're going to make some adjustments to the way our site works so we may be able to make that a little easier. So the net net on television was all very bullish and very favorable. The other initiatives that we've continued to work on that go around sort of cultural change continue to be positive. I think -- again, I'm very proud of our people, Andy. Us being ranked number one by Restaurant News and that survey really was a validation to what we've been working on for the last couple of years.

We're working on other initiatives in terms of what we -- I think we've talked about this before -- our test on Sizzle, Swizzle and Swirl which is sort of our happy hour at a price that -- the results of that in test have been very favorable. They've shown significant traffic increases. So I'm very pleased with the way that is taking place and will probably see more activity around moving that out into more restaurants. In terms of our remodels, I talked -- when Nicole asked about that earlier, we were talking about that, and I think that we continue to see favorable results from that. And our training -- our changes in training and education -- changes we made in terms of our wine positioning and changes we've made relative to things like classic cocktails -- all of those things are contributing, I believe, to increasing sales and traffic.

Thank you.

(Operator Instructions)

Bart Glenn, DA Davidson.

Thank you guys. I was curious -- could you give us a little bit of insight into what sort of comp assumptions the restaurant operating costs guidances are based on?

That's a great question, Bart. This is Arne. No. I think if you look at the restaurant operating expenses over the last several years, I think you've seen we've done a very good job of keeping them fairly consistent. In terms of adding that to the guidance, we tried to give guidance on things we feel we are -- are controllable, and we haven't figured out yet how to control the top guidance on the revenue. But I think Mike's comments in his prepared remarks in terms of what we are seeing so far this year are kind of a fair indication of where we think we are going, at least in the first quarter, which is about all we have in terms of visibility.

We think, Bart -- that is a very good question, and we're not trying to be completely evasive here, but we remain -- I would say we feel good about 2012 as we sit here today, in terms of continuing comp. Just for a bit of a trip down memory lane. This concept at one point, and there's been some real estate changes, but at one point, not that many years ago, averaged almost $5.5 million per store on an average unit volume basis. If you do the math, we get somewhere close to just under $4.5 million now. And so, as we move forward, we are still looking for growth back to the neighborhood of $5 million. And so we expect that we will continue to drive traffic first and not take -- take the minimum amount of price, drive traffic knowing that we have price capabilities I think in our pocket if we need it. But that we want to continue to do that. So we would expect that we would perform -- or we would hope to perform in a positive comp range that would be consistent with what has taken place in the past.

Okay then just a follow-up question. I was curious -- you are aggressively paying down debt. Any thought on uses of cash -- may not be that long and you may not have any debt any more, just curious what high-level thoughts you might have in terms of future uses of cash.

Bart, I think -- not to be cliche about it, but our challenge is to return value to the investors -- and to our shareholders. So as we go forward, we certainly are having conversation around what that looks like and what is the best thing for our shareholders. Obviously, we want to build restaurants, and we're excited about the opportunity there. And, as I said earlier, we have got a lot of activity going on that we choose not to speak to it until it is actually a signed lease. There is opportunities for us to deploy capital in other areas that would make sense and we will continue to do our remodel work. In terms of something more significant than that, it would be premature for us to talk about it, really.

All right. Thank you.

Bryan Elliott, Raymond James.

May have missed it, but did you give CapEx and cash flow from ops, or could you share that if you didn't?

Brian, we did give CapEx -- the CapEx was $10 million to $12 million. We did not give --

I'm sorry. No -- for '11. For history.

For '11? One second here -- the cash flow for 2011 for the full year? Cash flow from ops for 2011 -- for the full year, Bryan, or are you looking for the fourth quarter?

Yes. Whatever you have.

Cash flow from ops for 2011 is about $39 million, and our CapEx was right around $9 million.

Thank you.

And at this time and that will conclude our question-and-answer session. I'd like to turn it back over to our speakers for any additional or closing remarks.

Thank you very much for joining us today. We certainly appreciate your interest in Ruth's Hospitality Group. And, as always, it is a great day to go out and either eat at Ruth's Chris Steak House or Mitchell's Fish Market. Thank you very much.

Thank you. That will conclude today's conference. We thank you for your participation.