Ruth's Hospitality Group Inc (RUTH) 2012 Q4 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to today's Ruth's Hospitality Group fourth-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 now like to turn the conference over to Mr. Arne Haak, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you Cecelia and good morning everyone. I'd like to remind you 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 you to today's earnings 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.

I would also 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.

Finally I'd like to address a technical matter regarding our comparative sales reporting for 2013. Our 2013 comparative sales reporting will be done on a fiscal week basis, not a calendar week basis. This is an important distinction.

Because of the 53rd week in our 2012 fiscal year, our 2013 fiscal calendar is one week ahead of the same fiscal week in 2012. So, our first quarter 2013 will be comparing the 13 weeks ended March 31, 2013 against the 13 weeks ending March 25, 2012.

We do not believe that this will cause a meaningful variance on a quarterly basis versus the calendar week comparison. If there is a significant variance, we will provide the appropriate explanation on the applicable earnings call in 2013. As a result, the calendar and fiscal comparisons will be properly aligned in 2014.

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

Thanks Arne. And let me apologize up front for sounding a bit froggy, because I am. So, if anything I end up saying is unclear, I'm sure you'll make it clear in the question-and-answer.

We are very pleased to have concluded another strong quarter of operating results in a fitting way to end a great year.

Before we go any further, I want to thank all of our franchisees and team members and aficionados at both Ruth's and Mitchell's for their efforts in 2012. We are a hospitality company and a key differentiating point of our business lies in the great treatment our employees strive to give our guests every day. Whether it is a business dinner, a celebratory occasion or just a special night out it is our franchisees and team members and aficionados who bring all of this together and help make us a successful business.

I'd now like to take a few minutes to cover some of the highlights and significant developments of the quarter before turning it over to Arne to take us through the financials. Ruth's Hospitality Group saw healthy momentum throughout the year, led by the continued traffic growth at Ruth's Chris Steak House and resurgent sales in Mitchell's as the year progressed.

And despite continued commodity cost challenges, we recorded significant improvements in our year-over-year sales and earnings. During 2012 we also undertook strategic initiatives to improve our capital structure that we believe will pay significant benefits going forward. In February, we successfully refinanced our credit facility, resulting in increased financial flexibility and lower borrowing costs.

Additionally, in March, we repurchased and retired our entire class of preferred shares which had been owned by affiliates of Bruckmann, Rosser, Sherrill. We introduced our fully diluted common share count by approximately 8.6 million shares and eliminated 10% dividend on the preferred stock, which amounted to $2.5 million annually.

Furthermore we saw our new unit pipeline grow stronger and gained momentum with increased openings during the year. So, as you can imagine, we are very pleased as we look back at our accomplishments during 2012.

Turning our fourth quarter highlights by brand, comparable sales at Ruth's Chris Steak House increased 5.4% and marked the 11th consecutive quarter of positive comparable sales for the Company-owned restaurants and our 12th straight quarter of traffic gains. Even more impressive is that our strong comp gains came on top of a 7.7% increase in last year's fourth quarter, and over a three-year period our sales growth has been over 20%.

Entrees, which serve as proxy for traffic, increased by 1.7% during the fourth quarter and our average check increased 3.6%. Our sales growth at Ruth's Chris is once again steady throughout the quarter, and we're pleased to note that our sales growth to date through early February is up in the mid-single digits.

Across the entire portfolio of 64 Company-owned Ruth's Chris restaurants, all but one location reported positive comp sales during the full fiscal fourth-quarter, in part due to the additional week in the fourth quarter of 2012. The only restaurant that experienced a year-over-year decline was Weehawken, which was closed for over three weeks due to damage from Superstorm Sandy. On a comparable 13-week basis, 84% of Company-owned restaurants reported positive comp sales.

We believe our strategy for growing profits through traffic first and pricing second continues to pay dividends, as shown by the continuation of our healthy comp sales and traffic growth. While we believe we have additional pricing power, we expect to be thoughtful and prudent with respect to future increases.

Our menus currently reflect an approximately 2% increase -- 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.

Private dining and catering sales at the Ruth's Chris Steak House grew 12.2% in the fourth quarter on top of last year's 10% growth, reflecting very strong holiday bookings. Our Ruth's Chris franchise-owned domestic comparable restaurant sales increased 4% during the quarter while international comparable franchise-owned restaurant sales increased 0.7%, resulting in a blended increase of 3.4%.

In terms of our Ruth's Chris Brand, increased sales were driven by continued outstanding execution by a strong group of executives and the entire Ruth's operations team, the success of Sizzle, Swizzle & Swirl happy hour program, our Ruth's Seasonal Classics menu and our enhanced marketing efforts. We were once again recognized this year with awards from both Nation's Restaurant News and Consumer Reports which highlighted our food quality, ambience, guest service, and hospitality.

The Sizzle, Swizzle & Swirl happy hour premium bar menu that we introduced late in the first quarter features our premium menu and drink items continues to deliver an incredible quality and at an accessible price point, in a way that we believe is does not compete with our dining room sales. This offering gives us an opportunity to not only drive incremental sales after traditional happy hour, but also turns many first-time, often younger guests into Ruth's Chris regulars.

The menu is currently in about two-thirds of our Company-owned restaurants and one third-of our US franchise restaurants. While the program may experience additional growth in our franchise restaurants, we believe that the deployment in Company-owned restaurants is largely complete.

We continue to use our Ruth's Seasonal Classics as an offering to consumers who may be looking for value or price certainty when dining at Ruth's Chris, particularly important in light of the current economic environment. These prix-fixe selections now compromise -- comprise approximately 20% of sales, consistent with the trends that we saw in the third quarter. Customers who select the Ruth's Seasonal Classics continue to exhibit preference for the higher priced of the two offerings. During the fourth quarter, 60% of the Ruth's Seasonal Classics sold were in the higher-priced tier, which is flat year-over-year.

While there still remains economic uncertainty, we view the continued growth in comparable store sales, traffic and sales, the reduction in preference for the Seasonal Classics and the increased preference for higher priced items as a sign of continued improvement in consumer confidence.

Our marketing efforts in the fourth quarter included a seven-week campaign of national cable television, our new RuthsChris.com website and continued efforts around improved customer segmentation. For the year, we increased our partnership with key influencers in targeted demographics such as the NFL, Wine Enthusiast Magazine, and our Women in Business speaker series in partnership with Marie-Claire Magazine.

Switching to Mitchell's Fish Market, we continue to be pleased with the efforts of the leadership and operating teams. Our efforts continue to focus on menu development, operational execution, which are taking hold as evidenced by the increase in comp stability at Mitchell's. At Mitchell's Fish Market, comparable sales increased 3.4% during the fourth quarter. This growth was comprised of 5.4% increase in traffic, partially offset by 1.9% decrease in the average check.

The sales efforts at Mitchell's continue to focus around targeting specific underperforming days and dayparts as part of this effort. And as part of this effort, we launched our Real Delicious lunch promotion in August. This value-priced promotion contributed to the decrease in average check, but helped drive a 10% increase in our lunch traffic.

Similar to the trends we're seeing at Ruth's, we are also seeing slight declines in preference for our prix-fixe menu options, which currently comprise approximately 11% to 12% of sales.

Year-to-date, our sales trends at Mitchell's Fish Market were flat to up low single digits. During the fourth quarter 68% of the Mitchell's Fish Market's restaurants reported positive comp store sales on an equivalent 13-week basis. Mitchell's is clearly moving in the right direction and we are encouraged about the initiatives that we've planned for 2013.

On the topic of real estate, development has been a key area of focus for our team during 2012. And as I noted before, our development pipeline has gained momentum with increased openings during the year.

During the fourth quarter, one Company-owned Ruth's Chris Steak House restaurant opened in Cincinnati, Ohio and a franchised Ruth's opened in Niagara Falls, Canada. All in all, six new Ruth's Chris Steak Houses opened during 2012 which is comprised of four franchise restaurants, one Company restaurant and one restaurant under management agreement with the Eastern Band of Cherokee Indians in Cherokee, North Carolina.

Looking at 2013 development, in early February the new restaurant opening at the Harrah's Las Vegas Casino and Hotel under a licensing agreement. This is a remarkable 400-seat restaurant that truly reflects our brand standards of a classic American steakhouse with a touch of whimsy. We are pleased with our growing partnership with Harrah's and the fitting return of Ruth's Chris to the heart of the Strip in Las Vegas.

In addition, our current and development plans for 2013 include the relocation of our Houston, Texas restaurant in the second quarter and the opening of new Company-owned restaurant in Denver, Colorado in the third quarter. Our franchise partners are also expected to open two restaurants in the second quarter and an additional 2 to 3 restaurants in the third quarter of 2013, for a total of 4 to 5 new franchise restaurants. We remain active in our development efforts and are continuing to work on additional Company and franchise restaurants for 2014 and beyond.

Finally, we recently announced that we assigned an agreement have signed an agreement with the Ko Group for development of four new franchised Ruth's Chris Steak House restaurants to be opened in mainland China over the next three years. The new restaurants are planned for Shanghai and Beijing and will be the first Ruth's Chris Steak House restaurants in mainland China.

The Ko Group has had great success as an existing franchisee with seven restaurants in Japan, Taiwan, and Singapore. And we're excited to partner with them as they further expand the presence of Ruth's Chris Steak House brand internationally.

Overall, our franchise pipeline remains robust as we have commitments for 20 future franchise restaurants over the next five years. It is worth noting that by mid-2013 we and our franchise and licensing partners will have opened or relocated 13 new Ruth's Chris Steak Houses worldwide in a two-year period. This represents a 10% increase to the system and an increasingly important component of our overall sales growth.

While we are encouraged by recent development activity, our focus on new unit development will remain disciplined and prudent with regard to capital deployment. We will continue to provide updates to you on newly signed leases and on franchise growth in our future quarterly calls.

I will now turn it over to Arne, whose voice I hope is clearer than mine.

Thanks Mike. For the quarter ended -- fourth quarter ended December 30, 2012 we generated total revenues of $115 million, which is an increase of $15.4 million or 15.5% compared to last year. As most of you know, our fourth quarter of 2012 consisted of 14 weeks compared to 13 weeks in the fourth quarter of 2011, and we estimate that approximately $0.02 of earnings can be attributed to the extra week.

Total Company-owned restaurant sales increased to $110.5 million, or up approximately 16% compared to $95.4 million in the fourth quarter of last year. We estimate that approximately $9 million of the increase in revenues in the fourth quarter can be attributed to the extra week.

Average weekly sales for all Company-owned Ruth's Chris Steak House restaurants were approximately $101,000 in the fourth quarter, an increase of 7% compared to $94,400 in the same period last year. Restaurant operating weeks for the Company-owned Ruth's Chris Steak Houses increased to 893 weeks this year versus 819 weeks last year, including 64 weeks attributed to the 14th week.

Average weekly sales at Mitchell's Fish Market were $67,400 compared to $64,000 in the fourth quarter of last year for an increase of 5.2%. Restaurant operating weeks at Mitchell's increased to 266 from 247, and include 19 weeks attributed to the 14th week. Our numbers at Mitchell's exclude operating weeks from discontinued operations.

Franchise income increased 7.9% to $3.9 million from $3.6 million last year due to improved sales volumes, the 14th week and an increase in franchise development.

In terms of our cost structure, food and beverage costs as a percentage of restaurant sales decreased 40 basis points year-over-year in the fourth quarter. While our beef costs were up approximately 5.1% year-over-year during the quarter, we benefited from about a 2% increase in pricing in the quarter, increased alcohol mix and lower costs on other commodities.

Restaurant operating expenses as a percentage of restaurant sales were 47.8%, a decrease of 310 basis points compared to last year. The year-over-year improvement was a result of lower benefit costs, favorable utility costs and the effect of higher sales on our fixed costs. Marketing and advertising costs as a percentage of total revenue increased 10 basis points due to the timing shift in our advertising from the second into the third and fourth quarters of this year.

G&A expenditures increased to $9.2 million from $5.8 million a year ago. This was caused by increases in performance-based compensation, higher contract labor, the filling of open positions and higher stock-based compensation than last year.

During the fourth quarter we recognized a $683,000 gain on the settlement of unclaimed liabilities, a $4.96 million net charge related to the relocation of a Company-owned restaurant, the impairment of assets at two units and a gain on the disposal of property and equipment. In 2011 our fourth quarter included a $3.4 million net non-cash charge for the impairment of an intangible asset and the disposal of property and equipment related to restaurant renovations.

For the fourth quarter of 2012, the Company reported GAAP net income of $3.7 million or $0.11 per diluted share on a base of approximately 35.3 million shares. This compares to net income applicable to the preferred and common shareholders of $1.9 million or $0.04 per diluted share on a base of approximately 43.3 million shares in the fourth quarter of 2011.

Excluding the previously mentioned non-cash charges, our pro forma diluted earnings per common share was $0.18 in the fourth quarter of 2011 compared to non-GAAP diluted earnings per common share of $0.09 in the fourth quarter of 2011. We estimate that the 14th week in the fourth quarter of 2012 increased earnings by approximately $0.02 per share.

For the full-year 2012, we had roughly $36.9 million in charges related to the refinancing of our credit facility and subsequent retirement of our preferred shares. In 2011 we had a one-time tax benefit of $4 million. Excluding income from discontinued operations, the fourth quarter and full-year charges we just described, our non-GAAP diluted earnings per share increased over 70% to $0.55 during 2012 compared to $0.32 during 2011.

We have 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.

At the end of 2012, the Company had $45 million in debt outstanding under its senior credit agreement, down from $69 million at the end of the third quarter of 2012.

Now, looking ahead to 2013, we'd like to provide you with the following preliminary guidelines for some of our key cost metrics. We expect our cost of goods sold to be within the range of 32.5% to 33.5% of restaurant sales for the year based on beef inflation that is likely to again be north of 10%. We expect restaurant operating expenses to be between 50% and 51% of restaurant sales.

Our marketing and advertising spend is projected to remain between 3% and 3.5% of total revenue for the full year. However, the allocation of our quarterly spend is likely to change in 2013 compared to 2012. For the first quarter, we expect marketing and advertising costs to represent between 2% and 2.5% of total revenues.

Our G&A expenses are expected to be between $27 million to $28 million. Our effective tax rate for the full year is expected to be between 28% and 32%. And finally, our CapEx spending for 2013 is projected to be between $14 million and $16 million, which reflects reduced maintenance CapEx but a higher number of new units at the Ruth's Chris Brand, as well as approximately $2 million in IT investments.

With that, I'd now like to return the call to Mike.

Thanks Arne. Not only have we maintained our sales and earnings momentum in 2012, but we are pleased to see high and solid improvements at both the Ruth's and Mitchell's Fish Market teams. Therefore, on the heels of a fruitful 2012, we eagerly look forward to the year ahead. And while the economic outlook remains uncertain, and beef inflation will likely pose a headwind, we believe our shareholders remain in a favorable position for the following reasons.

First, the business has performed very well over the last few years as evidenced by our key metrics. Second, we have a great management team in place that I have tremendous confidence in, and they're working on initiatives that I believe will maintain our momentum.

Third, our balance sheet and ability to generate free cash flow are in great shape. And finally, I'm confident that we can smartly allocate capital over the coming years with the goal of optimizing shareholder returns. All in all, it remains an exciting time for this Company.

Before closing I would like to once again recognize our franchise partners as the heart and soul of our brands. They are key contributors to our success through the pride that they take in the quality of their operations and the faith they demonstrate in the Ruth's Chris brand through their invested capital.

Operator, I'd now like to turn over the call for any questions.

(Operator Instructions). Andy Barish, Jefferies & Co.

Mike, it sounds like you had a good Valentine's yesterday.

I wish that was the case, although I will blame my wife for this cold. She got it first.

Yes, I hope you're feeling better. A couple of quick questions; just want to make sure on the Harrah's Las Vegas deal, that that's just going to run through -- I guess the fees will run through as a franchise. Is that --?

Correct. Andy, that's right. It's a licensing agreement, but from a P&L presentation perspective it will run through franchise income.

Okay. And then just a couple of maybe clarifications on two things; the international same-store sales looked like they slowed down. Is there a region or something going on there? And then I was intrigued on your comments on your domestic alcoholic beverage sales actually picking up a little bit. Do you think that was -- was that a holiday, sort of people feeling a little bit better or something you guys are doing internally to try to drive that mix?

Andy, I'll take the first question and then maybe Mike can bark out the answer on what we are doing in terms of alcohol initiatives.

On the international, it's really related to one thing in terms of the comp sales that's largely influencing it, and as one of our franchise partners opened a second location in Dubai. And so while the new location is not in the comp sale, the old sale is seeing a slight loss in sales. But net-net when you put the two together, I think they're very happy with. But it is weighing on the international franchise comp.

If you exclude the Dubai location, the first Dubai location from our comps sales, they all kind of align much more closely.

Andy, I think that the fourth quarter is really a result of a lot of things that have taken place throughout the year. Helen, our Director of Beverage, has done a fabulous job in revisiting our wine menu, revisiting our wines by the glass, introducing classic cocktails and wine dinners that we've had.

I think we're seeing great momentum there. And I think that was culminating in the fourth quarter and continues, and we expect to see it continue. And additionally, our interest around Sizzle, Swizzle & Swirl, our happy hour program, which as I said in my comments, is in about three quarters of the restaurants. And the reason the other quarter can't is mostly governmental regulation.

You know, all of those initiatives that Helen has been driving with our operating people have really resulted in improvement there. So I know we're going a little bit against trend, but we think we can maintain that.

Thanks guys.

Justin Marshall, Deutsche Bank.

Thanks. I'm on for Jason West. Just had a couple questions, one about beef. Could you talk about how much you have locked and through when? And then secondly, could you maybe talk a little bit about the pricing that you have going on in 1Q and what we might expect for the full year? Thanks.

Sure. Good morning Justin. This is Arne. In terms of beef we're pretty much riding with the market right now. We've been able to kind of find some spot locks here and there, but nothing for the size or duration that we have found in past years.

And the reason, I think, for that is if you look at the supply dynamics across any front, they are very supportive that suppliers don't really want to lock in. Like, why do I want to lock when the cattle herd is at the lowest since 1952? So we are largely riding with the market on beef prices.

But we are looking into the extent that opportunities present themselves, so I think we're prepared. We know what numbers we would be willing to commit at, and we'll be ready should the opportunities present themselves.

In regards to pricing, we currently have about 2% on pricing right now. It's a culmination of three pieces. We did some pricing in -- a modest price increase in the spring of 2012. It was a pretty broad-based increase -- about a dollar across the menu in various spots. And some of the Ruth's Classics menus came up, particularly on the lower tier.

We have another about 1% that was probably our most aggressive increase, which went into place in the fall of 2012. So that hit in about October. Again, mostly -- this time it was more focused on proteins and the Ruth's Classics is where that increase is.

And now in the winter, we just implemented a modest increase -- not nearly as aggressive as what we did in the fall. We are not putting anymore price increases on the Ruth's Classics. We feel that's kind of where we want it to be. But we have kind of reviewed our restaurants' performance, moved them around within the tiers and that has produced -- as the restaurant improves and moves into a higher tier, that has provided some price increases, but again, probably more around proteins.

And we've also kind of pulled some of our price increases on appetizers. You know we are very focused -- we are reluctant pricers as Mike said. We prefer to offset our costs with traffic, and we are mindful of the elasticity that we observe of our customers as well as what the competitive pricing is.

And so, on the appetizers side, there we actually took some prices back down. So, I think we feel good. We don't have anything planned or contemplated at this time for later in the year but we obviously have to be mindful of that and balance that against our business. But again, the bias is traffic.

Thanks.

(Operator Instructions). James Fronda, Sidoti & Co.

Just the $7 million in your books, would you guys be using any of that for anything specific, like a stock buyback? Or do you think you'll just keep it on there for the most part?

I'm sorry. Ask the question again. I'm sorry (multiple speakers)

What was the front part of your question?

The $7 million in cash. Have you thought about a stock buyback?

You know, I think if you look at our investor materials, we talked about we're focused on returning value to our shareholders. You know, we do have $45 million in debt. We have a credit facility that allows us to borrow up to $100 million.

Our first focus is around organic growth. And to the extent we can find organic growth of new restaurants with higher -- above-average sales volumes and above average returns, that's the first place we'd go. You know, so, that's how I would characterize where our priorities are right now.

Right, okay, and in terms of the franchises, obviously they're doing pretty well. I was just curious to know what sort of help that you give these franchises. Is it just the upfront money when they start up? Or do you help them along with purchasing as well during the year?

I'm sorry, I'll bark a little bit. Sorry. We have, I think, a very good relationship with our franchisees and we have -- I believe we approach it as a partnership.

They can contribute and participate in all our marketing efforts. They contribute and participate in our purchasing efforts. They contribute and participate in the creative side of what we do. And we're always taking feedback from them on an operational side.

At the same time, we offer to support that each individual franchisee may think that they need. We have recertification that goes on an annual basis when franchisees come and send their management people that we host and sponsor. We have ongoing conversations with them and review with our franchisees on an ongoing basis. So we continue to supply the support that we need.

Now many of our franchisees have been franchisees for in excess of 20 years, and as I said before, remain the heart and soul of the business and do a fabulous job. So it's really an interactive relationship.

Right, okay. All right, thanks guys.

And with no further questions, I'd like to turn the conference back over to Mike O'Donnell for any additional or closing remarks.

Thank you very much for joining us today. I appreciate very much you listening to my barking voice. And as always, though, it's a great day to go out and have a great meal at either a Mitchell's Fish Market or Ruth's Chris. Thank you very much.

And this does conclude today's conference. We appreciate everyone's participation today.