Ruth's Hospitality Group Inc (RUTH) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to Ruth's Hospitality Group Incorporated second quarter 2012 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 to Mr. 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 are Michael 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 statement. These statements are not guarantees of future performance, and therefore undue reliance should not be placed upon them. We refer all of you to today 's earning press release and 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 of the express written consent of Ruth 's Hospitality Group Incorporated.

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

Thanks Chris. And thank you all for joining us today. We are pleased to share with you an update on the second quarter results, and other recent developments at Ruth 's Hospitality Group Inc. We maintained our strong operating momentum, and are pleased to report our continued and significant improvement in our year-over-year earnings on an adjusted basis. Looking at our second quarter results, comparable sales at Ruth's Chris Steakhouse increased 6%. This year's growth came on top of 5.8% increase in the prior year period, and marks the ninth consecutive quarter of positive comparable sales growth for the Company-owned restaurant, and the 10th straight quarter of traffic gains. Entrees which serves approximately for traffic increased by 3.8% during the second quarter. This is also the 6th consecutive quarter where traffic has increased against positive traffic in the prior year. Average check also increased 2.1% for the period.

Our sales gross for Ruth's Chris was steady throughout the quarter, while we believe that an early Lenten season benefited our comparable store sales in April.. We were pleased to see the sales momentum continue into May and June. Additionally through most of July our comparable sales have continued to grow in the mid-single digits. While we are pleased with this trend, it is always worth pointing out that we still have two-thirds of the current quarter ahead of us.

On a regional basis, Ruth's Chris two largest markets, Florida and California, continue to give positive sales, as they outperform the system average. Florida sales rose 9.9%, while California increased 7%. Across the entire Ruth's Chris portfolio comparable of our Company-locations, 52 restaurants, or 84% reported positive comp sales during the second quarter. Compared to the Knapp Track benchmark Index for the steakhouse segment, Ruth's Chris comp sales increase of 6%, was 120 basis points better, while traffic which was up 3.8% was 80 basis points behind. We remain committed to our strategy of growing profits through traffic first and pricing second, in this challenging beef market, we are encouraged to see both healthy traffic and sales growth continue.

Private dining and catering sales at Ruth's Chris Steakhouse increased approximately 5% during the second quarter, on top of the last year's 16% growth. Our Ruth's Chris franchise domestic comparable restaurant sales increased 6.1% during the quarter, while international comparable franchise owned restaurant sales declined 2.7%, resulting in a blended increase of 4.4%. This growth was comprised of 0.2 increase in traffic, and a 4.2 increase in average check. International sales were impacted by lower traffic growth, primarily in Asia, as well as a stronger US dollar.

In terms of our Ruth's Chris brand we are pleased with the Sizzle, Swizzle, and Swirl Happy Hour premium bar menu that we introduced late in the first quarter. The menu features a number of high end food and drink items for $7, and deliversan incredible quality at an accessible price point, in a way that we believe doesn't compete with our dining room sales. We believe also that this offering gives us an opportunity to not only drive incremental sales at the traditional Happy Hour, but also turn first-time guests into Ruth's Chris regulars. The menu is currently in about two-thirds of our Company restaurants, and about one-third of our US franchise locations.

We continue to use our Ruth 's seasonal classics with an offering to consumers who may be looking for value or price certainty when dining at Ruth's Chris. These prefixed selections now comprise 20% of our sales mix, down 10 percentage points versus our prior year. Customers who select Ruth's seasonal classics continue to exhibit preference for higher priced of the two offerings. During the second quarter, 66% of Ruth's seasonal classics sold with a higher priced tier. In light of our continued comparable store sales growth we view that reduction in preference for the seasonal classics and the increased preference for higher priced items is a sign of continued improving consumer confidence.

At Mitchell's Fish Market, comparable sales increased 2.3% during the second quarter,compared to 1.4% decrease in the prior year. This growth is compromised of 3.2% increase in traffic, partially offset by 0.9% decrease in the average check. Our sales growth accelerated through the second quarter, while our April comparable sales at Mitchell's Fish Market were negatively impacted by an early Lenten season, we had a consistent sales growth trends in both May and June. The second quarter sales growth trend has continued through the month of July, with comparable sales up in the low-single digits. Our prefixed menu options remain strong,contributors to our sales mix, as value propositions comprise approximately 15% of sales.

We continue to be pleased with the efforts of the new leadership team at Mitchell's, led by Pete Beaudrault. While Pete and his team have been in place for only a few short months, we believe initial efforts focused on menu development and improving our operational execution are taking hold as evidenced by our recent comp stability.

Switching to real estate and development, we have been vocal about doubling our efforts and focus on new development opportunities. We believe that we are beginning to see the fruits of these efforts come to bear. In May we opened a new Ruth's Chris location in the Harrah's Casino in Cherokee North Carolina, under our management agreement with the Eastern band of Cherokee Indians, and it is off to a very strong start. We continue a target a November opening for a Company-owned Ruth's Chris restaurant in Cincinnati at the Banks development, and there is a follow-up to our comments last quarter, we have signed leases for two new sites, the first for a new location in Denver, and the second for a relocation in Houston. We would expect the Denver and Houston sites to open in the first half of 2013.

We continue to work to evaluating new opportunities and our approach to new unit development will remain disciplined and prudent with regard to capital deployment. In April our franchise partners opened a second Ruth's Chris location in Dubai. Our franchise partners currently have five signed leases for future locations, which include three additional franchise locations in 2012. Two new locations in 2013, in addition and we 13 commitments for future franchise restaurants over the next several years. We will continue to provide updates to you on our newly-signed leases and on the franchise growth in our future quarterly calls.

I would like to turn the call over to Arne.

Thanks, Mike. For the second quarter ended June 24th, 2012, we generated total revenues of $97.7 million, and increase of $5.7 million, or 6.2% compared to last year. Total Company-owned restaurant sales increased to $91.8 million, of 5.6% compared to $86.9 million in the second quarter of last year. Average weekly sales for all Company-owned Ruth's Chris Steakhouse restaurants were approximately $87.5 thousand in the second quarter,compared to $82.2 thousand in the same period last year.

Restaurant operating weeks for the Company-owned Ruth's Chris were generally flat year-over-year at 819, and exclude operating weeks from discontinued operations. Average weekly sales at Mitchell's Fish Market were $73.3 thousand, compared to $71.7 thousand in the second quarter of last year. Restaurant operating weeks at Mitchell's were flat year-over-year at 247, and exclude operating weeks from discontinued operations. Franchise income increased 12.6% to $3.2 million from $2.9 million last year, due to improved sales volume and an increased number of franchised restaurants.

In terms of our cost structure, food and beverage costs as a percentage of restaurant sales, increased 170 basis points year-over-year in the second quarter, driven by higher than anticipated increases in the non-contracted portion of our beef supply. Specifically, our beef costs were up 19% year-over-year during the quarter. We were able to partially offset this rise in beef costs through management of other operating expenses, as well as higher traffic. Restaurant operating expenses as a percentage of restaurant sales were 51.1%, a decrease of 60 basis points compared to last year. The decrease was a result of lower utilities, credit card fees, and increased sales leverage, partially offset by higher group health insurance costs.

Marketing and advertising costs increased to $2.4 million from $3.2 million, and as a percentage of total revenue decreased by 90 basis point to 2.5%. The decrease was largely due to a timing shift in local media advertising from the second quarter to the third and fourth quarters of 2012. We continue to expect to use television advertising for the Ruth's Chris brand, as we found that our television advertising flight in the fourth quarter of last year played an important role in driving increased enthusiasm and traffic.

G&A expenditures increased to $6.2 million from $5.4 million in the prior year. The increase was largely driven by increased personnel costs. For the second quarter of 2012 the Company reported net income applicable to preferred and common shareholders of $5.8 million, or $0.17 per diluted share, on a base of approximately 35.1 million shares. This compares to net income applicable to preferred and common shareholders of $8.5 million, or $0.20 per diluted share, on a base of approximately 43.2 million shares in the second quarter of 2011.

I would like to remind you that our 2011 GAAP results included a tax benefit of $4.4 million, related to the reduction of the valuation allowance on certain state deferred tax assets,as a result of a revision to the corporate structure. Excluding these tax benefits our second quarter 2011 earnings per diluted share was $0.10.

At the end of the second quarter of 2012, the Company had $71 million in debt outstanding under its senior credit agreement, down from $77 million at the end of the first quarter of 2012. Consistent with our recent practice, we would expect to continue to reduce our outstanding debt over time, given our strong cash flow generation. However, we would note that our third quarter has historically been soft in terms of debt reduction, and likely will be again in 2012, a function of our seasonally softer third quarter, and development costs associated with the timing of the new unit openings.

Based on the second quarter results we are reiterating our guidelines for some of our key 2012 cost metrics. We expect our cost of goods sold to be within the range of 31.5% to 32.5% of restaurant sales for the year. This is based on projected beef inflation being up between 10% to 15%. We currently have purchase agreements for beef representing approximately 35% to 40% of our needs through August of 2012, at a price that represents approximately a 7% increase compared to the prior year. We continue to manage our restaurant operating expenses to be between 51% and 52% of restaurant sales.

Our marketing and advertising spend for the year is projected to remain between 3% and 3.5% of total revenue, and our 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. For the third quarter our menus currently reflect an approximate 1.5% price increase. With the current economic backdrop, it is still our strategy to focus on growing sales through traffic gains, and maintaining our value orientation. As we have demonstrated, we will continue to evaluate additional menu engineering and pricing opportunities.

Our effective tax rate for the full year is currently expected to be between 28% and 32%. And our CapEx spending for 2012 is projected to remain between $10 million and $12 million.

With that I would like to return the call to Mike.

Thanks Arne. We are excited about the trajectory of our business as we enter the second half of the year. Not only have we maintained our sales momentum at Ruth's, but we continue to be encouraged by the work done by Pete and his team at Mitchell's. Our franchise partners remain the heart and soul of our brand, and are key contributors to our success. We are energized with our growth prospects, as our development pipeline continues to strengthen, and with the healthier capital structure, we are better positioned for earnings leverage, to drive improved profitability and create more value for our shareholders.

Operator I would like to turn the call over for any questions. Operator?

Thank you. (Operator Instructions). We will pause for just a moment to allow everyone the opportunity to signal. We will go to Nicole Miller Regan with Piper Jaffray.

Hi guys how are you doing, it is Josh on the call for Nicole. I just wanted to see if you could give us some commentary about how things trended through the quarter, and then maybe any sort of commentary you would be willing to share about third quarter to date? You mentioned that things sounded to be in the mid-single digits at Ruth's, but just maybe some incremental commentary around what you are seeing at the restaurant level would be helpful?

Josh, I think what we said in the call is we saw pretty steady growth throughout the quarter on fairly consistent basis, both at Ruth 's and at Mitchell 's, with the conversation around the Lenten shift causing one to be better, one to suffer a little bit more based on where Easter came, and the amount of Good Fridays that were in the period for Mitchell's and the amount of Good Fridays that were in the period for Ruth's. It was kind of a flip flop. There was solid growth throughout, solid and steady growth throughout the months in both brands. As I said earlier the trends of mid-single digit growth at Ruth's have continued, and low-single digit growth at Mitchell 's have continued in July.

Thank you, that is helpful. So then on that Lenten shift, anything we should expect into the third quarter is that going to be kind of lumpy, does that revert back, or is there much sensitivity to maybe being able to hit that mid-single digit as we go through the quarter? Just wondering how that calendar shift affects you?

Fortunately Josh that Easter shift is well behind us. We feel good about where we are to date in the third quarter. But as I said, there are still two full periods in front of us, economic uncertainty, et cetera. But so far I think the healthy thing that we can say is that our traffic continues to be strong, as well as our customer sales growth. To us has been our strategy, we have kept our prices low as best we can. We have been as scrappy as we can around controlling costs around all other areas of the P&L, so we are encouraged by the way things are happening now, and we are encouraged by what we saw in July.

Absolutely. Thanks for that. And then on the cost side with 35% to 40% of your needs contracted, and obviously we see all of the headlines about droughts, and corn prices, is there an opportunity to contract out a little bit more, maybe if you could just remind us what kind of opportunities there are to maybe step that up, if we are facing some potentially meaningful beef inflation over the next year or so?

Let me turn that over to Arne.

Hi Josh, I think two things, it is disappointing. We have gone in terms of the drought, it is disappointing. We have gone two or three months ago, everything looked great on the corn crop. We thought it was going to be a good summer. Today we are looking at one of the worst droughts we have had in years, on top of what was a tough year last year. Near term that may actually in an unfortunate way may help beef prices a little bit, because some people with the rising price of corn bring cattle to slaughter earlier. That may help in the near term.

In the long-term, it is just going to further extend the rebuilding of the cattle cycle here. I think we can continue to look, it has been quite a bull market. So the opportunities we have seen so far have been nothing to get us excited about committing to. But we continue do look and suspect that over time we may see some things here, as we get a little bit of certainty as well around where we are going.

That makes sense. Thanks so much. I will pass it on, and then requeue.

Thanks.

We will go next to Andy Barish with Jefferies.

Good morning, guys.

Good morning, Andy.

Question, and it probably doesn't require specific numbers or quantification, but as the mix kind of changes to less Ruth's classics, and now you are doing kind of doing more things like Sizzle, Swizzle, and Swirl, which is had to say early in the morning here, are you getting a little sort of relief on the cost of goods line? I'm wondering how much you can sort of manage mix on the menu, to help offset some of the big time beef inflation?

Andy, good morning, and I know it is early where you are. One of things that has sort of been a natural migration here away from the Ruth 's classics. We have done some change in positioning on the menu, but two things that we have really not tried to do is not have it be there for those that really felt that was important. And we did not do anything to make, the shift used to be 50/50 between the low end and the high end of the range. It is now 66% on the high-end. What we are fortunately seeing is sort of a natural migration there. There is actually, I would say I would characterize it as there is less demand for the lower end piece.

Now having said that as well, we have not done anything all year including the fourth quarter of last year when we did our television advertising, that has promoted anything but the brand and the brand's experience. We have not done any discounting. We have not done any focus on the Ruth's classic. That has not been our position. We have been driving the experience, and the traffic resulting from that.

I think what we are seeing is the natural migration away from that. I think our special occasion business continues to be strong. All of our levels of business we have seen some weakness in the pharma group in terms of private dining, but we are sort of counterbalancing that with some catering opportunities. We are seeing people in our private dining, which used, sometimes our group dining would use the pre-fixed menu or the Ruth's classics, and we are seeing a shift away from that as well. I don't view it as being anything other than a positive migration.

Thanks, that is helpful. Maybe one for Arne. You referenced some offsets to the 19% beef inflation in operating expense. There are a few things there that you guys are focused on, and does it continue to give you a little bit of flexibility going forward?

I think it does. And as we are, what is really happening is we, both concepts now have had great sales growth. I can't say enough to the teams that are out there working every day to grow our sales. Unfortunately, the leverage that we are getting on our operating costs there are helping. That is what is really helping us, they are very focused on every line of their P&Ls, and we continue to work hard on that.

The unfortunate part is that beef is taking some of that away from our bottom line. We are going to continue and I think the whole Company certainly understands the challenges that we face, but they also are rising to the occasion and they know our strategy, so we are going to continue to work very hard at that. To manage though this cycle, we have been through it before, we will get through it again. This is just one of those things we are going to do.

And lastly, on the group health. has this sort of been a year now, and don't you have a renewal coming up? Do you expect at least a little bit of relief? I know you can't kind of manage or predict that as well.

Sure, it is about a year. The costs are up on a year-over-year basis, I would say the good news that we have seen so far this year, is that our experiences have been in line with our budgets and our forecasts, and there haven't been,we didn't get the kind of surprises that we saw in the back half of last year. So six months into this year, while they are still up significantly, there is not a behavior change, a continued behavior change that is driving healthcare costs beyond our expectations. The renewal, our plan renews in July. So we have just gone through an open enrollment, no significant changes work calling out in terms of number of employees or anything changing, but it is anopportunity, and we are anxious to see how this plays out, but hopefully it may even get a little bit better.

Thanks.

(Operator Instructions). We will go next to Bryan Elliot with Raymond James.

Good morning, I want to go back somethingI thought I heard Arne say, I just want to get clarification, did you say you in the bull market? Are you buying bulls now as a hedge?

Not quite Bryan.

I wanted to make sure, I wasn't fully clear on that. My question is Mike, if you could speak I guess or both of you, sort of what you are seeing now that development is starting to pick up, you are starting to sign some leases. Just talk about the availability of real estate, the economics of the deals you are seeing , maybe compared to previous periods of expansion? Is there increasing competition for sites, just a little bit of flavor on that side of the business?

Yes, Bryan, I think I characterize what the development is for us, we are looking for I think those unique sites. We as we said before, we are looking for partnership relationships like with Harrah's, so I am very encouraged by what we are seeing, both in a partnership relationship kind of opportunity like Harrah's, and I am very encouraged by what we are seeing on an independent basis. We have got aggressive activity taking place in California. We have got aggressive activity taking place in south Florida, and the Northeast. And again, while we are looking for good real estate, so good real estate is still expensive, we are getting very good reaction from landlords. We are getting very favorable terms in my view, and I feel very, very confident about what we are trying to accomplish. Obviously, when we look at it, we look at can we exceed our AUV. Do we think that is possible? We have an outside service that does research for us, we are being very disciplined. We turned away more deals obviously than we have accepted. Because we really think that if we can build five restaurants, in the neighborhood of five restaurants a year, and they average $5 million AUVs, that it is a very healthy contribution to the organization. We expect that those restaurants are going to be at or above our current contribution levels from our existing restaurants. So I feel very good it about it.

Alright. Excellent, thank you.

We will go next to Howard Penney with Hedgeye Risk Management.

Thanks very much. I was curious as to what you would evaluate, the economy and your demand soften a little bit so beef prices come down, or the status quo on the economy continues, and the super cycle in beef continue, and have you pay higher beef prices for the next four or five years?

I would rather have the sales to the topline of the business continue to grow. I would rather have that be the case and we will continue to manage through the difficulty of beef pricing. As I said before, we are the cheapest house in the most expensive neighborhood. We have continued to do that. Our $70 guest check average is significantly below a large number of our organized competitors, and a large number of our independents. So we still have pricing power. We have been able to show in the research that we are doing, that we are gaining market share from our competitors as a result of this strategy. I would much prefer to stay where we are and manage through that, given that we have proven that we can do it before.

Under that scenario, how do you plan for higher beef prices for the next four or five years, which as you described the cycle, which means that in the short run you might see beef prices might go down, but in the long run they are headed higher. How do you not run the risk of losing that pricing power if you continue on the current strategy?

Again, we haven't been taking aggressive price, so I think that we have a got a fair amount of room. I am not sure that the beef cycle, I think the beef cycle will be larger for the best part of this year, and part of next year. You are seeing a lot of people getting out of this beef market, that had jumped in as recently as a year ago, people like Costco, the wholesale folks, et cetera, so I think that by the time we get to 2014, we should start to see some relief.

Thank you.

Thanks.

There are no further questions at the queue at this time. I would like to turn the conference back over to Mike O'Donnell.

Thank you very much. Thank you all for participating in this morning's conference call. I would like to remind everybody that today is an absolutely perfect day to experience the Sizzle, Swizzle and Swirl Happy Hour at Ruth's Chris, and then go on to enjoy a great meal at either Mitchell 's Fish Market or Ruth's Chris Steakhouse. Sorry, I can't help but do my own commercial. Thanks everybody.

That does concludes today's conference. Thank you for your participation.