Ruth's Hospitality Group Inc (RUTH) 2013 Q1 法說會逐字稿

Hello, good morning ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group, Inc. first quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Following the formal remarks we will conduct a question and answer session. Instructions will be provided at that time for you to queue for questions. As a reminder, today's call is being recorded. At this time I would like to turn the call over to your host, Mr. Arne Haak, Executive Vice President and Chief Financial Officer. Please go ahead sir.

Thank you Alan. Good morning everyone. I would like to remind you that part of our discussion today will include forward-looking statements. These statements are not guarantees of our future performance, and therefore undue reliance should not be placed upon them. We refer all of 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 the 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 like to turn the call over to Mike O'Donnell, Chief Executive Officer or Ruth's Hospitality Group.

Thanks Arne. And thanks to everyone for joining us today. We are pleased to see our operating momentum carryover from 2012, with a strong start to 2013. Both of our brands generated solid traffic growth during the first quarter, on their way to positive comparable sales growth, including a 6.6% comp increase at Ruth's Chris Steakhouse, and a 1.5% comp increase at Mitchell's Fish Market. We continue to manage our costs as well, expanding our operating income by 32%, and growing our earnings per share to $0.22. Our team and our franchisees take great pride in caring for our guests every day, and their operational focus has contributed significantly to our strong competitive positioning and continues to drive the strength and consistency of our sales and profits.

The stability of our results combined with strategy initiatives, we have undertaken to improve our capital structure have resulted in increased financial flexibility to our business. Our solid free cash flow generation allowed us to pay down our debt by $34 million from a year ago. Today we announced that our Board has approved the initiation of a quarterly cash dividend of $0.04 per share, as well as a $30 million share repurchase program.

These new measures facilitated by the strength of our balance sheet and the confidence we have in the ongoing health of our business are rooted in the shareholder focused initiatives we have undertaken over the last five years. The core of that work has been done at the restaurant level, where our hospitality focused team has produced 12 consecutive quarters of traffic, driven same store sales growth, and has led to numerous awards detailing our leadership and fine dining. Complementing these efforts has been a focus of growing cash flow and strengthening balance sheet. Since 2008 we have rationalized our cost structure, raised capital, repaid over $175 million of debt, and reinvested over $30 million of capital expenditures back into our business. With these major facets of our business in place, we are now adding a quarterly dividend and stock repurchase program that will allow us to return cash to or shareholders without limiting our ability for new restaurant development which will continue to be a key component of our growth strategy.

Turning to our first quarter highlights by brand, as I noted comparable restaurant sales at Ruth's Chris Steakhouse increased 6.6%, marking the 12th consecutive quarter of positive comparable sales for Company-owned restaurants and our 13th straight quarter of traffic gains. When combined with last year's 30.7% increase, our first quarter comparable sales have grown over 10% from 2011. Our sales growth for our Ruth's Chris restaurants were steady throughout the quarter, benefited from Easter being on the last day of our first quarter. So far this quarter our comparable sales are currently up in the low-single digits year-over-year, in part due to the shift in Easter into the first quarter.

Entrees with service [proxied] for traffic increased by 2.9% during the first quarter, and average check increased 3.6% for the period. In anticipation of continued beef inflation, we took a modest 1% price increase in February, in anticipation of higher beef costs. When combined with last year's increases this accounts for the majority of the increase in average check. We rolled over a 2012 increase at the beginning of April, so our menu at Ruth's Chris Steakhouse restaurant currently reflects an approximate 2.0% increase.

While we believe that we have additional pricing power, we will continue to be thoughtful and prudent with respect to future increases. It is still our strategy to focus on growing sales primarily through trafficking, to maintain our value orientation. We believe this will contribute towards consistent comp and traffic growth going forward. Across the entire Ruth's Chris portfolio of comparable Company-owned restaurants, 56 restaurants are 90% reported positive comp sales during the first quarter. Private dining sales at Ruth's Chris Steakhouse, which we view as a proxy for business demand, grew 8% during the quarter, and we are encouraged to see that it exceeded our comparable year-over-year store sales growth.

Our Ruth's Chris franchise-owned domestic comparable restaurant sales increased 1.8% during the quarter, while international comparable franchise-owned restaurant sales decreased 2%, resulting in a blended increase of 1%. The decrease in international comparable sales was the result of a stronger dollar, and weakness in certain Canadian and Asian markets.

In terms of our Ruth's Chris brand, our increased sales were driven by outstanding execution by the entire Ruth's team. We were again recognized the third straight year with awards from Nation's Restaurant News for the Top Fine Dining Brand, and earned the highest overall score among all categories. Our Sizzle, Swizzle, and Swirl Happy Hour premium bar menu, which we introduced last year continues to gain traction, delivering high quality and accessible price points in a way that we believe does not compete with our dining room sales. This offering gives us an opportunity to not only drive incremental sales to the traditional Happy Hour, but continue to turn many first-time often younger guests into Ruth's Chris regulars, while contributing to our overall sales growth.

Our Ruth's Seasonal Classics continue to be a key component of our menu offerings, particularly to consumers who may be looking for value or price certainty. These prefixed selections comprised approximately 20% of sales in the first quarter, consistent with the trends that we saw in the fourth quarter. During the first quarter, customers who selected the Ruth's Seasonal Classics exhibited a more balanced approach for preference between our two price tiers, compared to preference weighted towards the higher end of the tier in recent quarters. Our marketing efforts in the quarter included improved digital initiatives, increased public relations, social media efforts, and expanding our strategic partnerships.

Switching to Mitchell's Fish Market, we continue to be pleased with the ongoing improvement and growing consistency of our operating results. Comparable sales increased 1.5% during the first quarter, comprised of a 2.7% increase in traffic, partially offset by a 1.2% decrease in average check. We have positive comparable sales at Mitchell's Fish Market in all three months of the quarter, and 74% of Mitchell's Fish Market restaurants reported positive comp store sales during the first quarter.

Our sales efforts at Mitchell's continue to target specific underperforming days and day parts. We are currently testing a number of new products at Mitchell's that have lower price points, but also higher returns. We remain focused on increasing our value to the guests while increasing our traffic and profitability. Mitchell's is moving in the right direction, and we are increasingly encouraged by the results of our efforts, and the initiatives that we have planned for 2013.

Switching to real estate. One new restaurant opened during the first quarter in the heart of the strip in Harrah's Las Vegas Casino and Hotel under a licensing agreement. The sales performance to-date has been extremely encouraging, and we are excited to expand our partnership with Harrah's. At the end of the first quarter we closed our restaurant in Phoenix, whose lease has expired after 27 years. While the market has unfortunately changed in those 27 years, the commitment and hard work of our Phoenix team members was unwavering, and we want to thank them for their years of service and dedication to the Company.

During the last two years we and our franchisees and licensing partners have opened or relocated 13 new Ruth's Chris Steakhouses worldwide in a two-year period. This represents a 10% increase in the system, and an increasing important component of our long-term sales growth. We continue to be pleased with the performance of our newer restaurants in Portland, Cincinnati, and Cherokee, which we believe validates our ongoing efforts to thoughtfully accelerate our new restaurant development.

In addition to our new Las Vegas restaurant, our current development plans for 2013 include the relocation of our Houston, Texas restaurant in the third quarter, the opening of a new Company-owned restaurant in Denver, Colorado in the fourth quarter. Our franchise partners have opened a second restaurant in Puerto Rico in April, and an additional two to three franchise restaurants are expected to open in the fourth quarter of 2013, for a total of four to five new franchise restaurants in 2013.

We remain active in our development efforts and are continuing to work on additional Company and franchise restaurants for 2014 and beyond. Overall our franchise pipeline remains robust, as we have commitments for 19 future franchise restaurants in the next five years. While we are encouraged by recent development activity, our approach to new restaurant development will remain disciplined and prudent with regard to capital deployment. We will continue to provide updates to you on our newly signed leases, and on franchise growth in our future quarterly calls.

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

Thanks, Mike. For the first quarter ended March 31, 2013, we generated total revenues of $107.4 million, which is an increase of $7.1 million or 7% compared to last year. Total company-owned restaurant sales increased to $102.8 million, or 6.5% compared to $96.6 million in the first quarter of last year. Average weekly sales for all Company-owned Ruth's Chris Steakhouse restaurants were approximately $101,400 in the first quarter, an increase of 6.3% compared to $95,400 in the same period last year, and exclude operating weeks from discontinued operations.

Our comparable sales growth in the first quarter of this year was affected by the shift of the Easter holiday. As a result of this shift, we experienced two additional Lenten Fridays in the first quarter of 2013, as well as the benefit of Easter Sunday falling on the last day of the quarter. We believe that this shift represented approximately a 1 percentage point increase in our first quarter comparable sales growth year-over-year. Restaurant operating weeks for Company-owned Ruth's Chris Steakhouse restaurants was up 13 weeks year-over-year to 819 weeks due to the addition of our Cincinnati restaurant. Average weekly sales at Mitchell's Fish Market we approximately $71,300,compared to $70,200 inthe first quarter of last year, for an increase of 1.5%. Restaurant operating weeks at Mitchell's were flat year-over-year at 247. Franchise income increased 6% to $3.7 million from $3.5 million last year, due to improved sales volumes.

In terms of our cost structure food and beverage costs as a percentage of our restaurant sales decreased approximately 80 basis points year-over-year in the first quarter, as pricing more than offset overall food cost inflation. During the first quarter our beef costs up approximately 1% year-over-year, and over a two-year period are up over 17%. While we are pleased with the moderation that we have seen in first quarter beef costs, we would caution that the overall supply fundamentals of the beef industry remain tenuous. We have contracted 40% of our beef needs for the remainder of the year, at prices that average 4% to 6% above prior year levels. With the slowing of the rate of inflation in the first quarter, we now expect beef inflation to run in the high-single digits for the full year.

Restaurant operating expenses as a percentage of restaurant sales were 48.1%, a decrease of approximately 70 basis points compared to last year. The year-over-year improvement was driven by improved occupancy costs, and the positive effect of higher sales on our fixed costs. Marketing and advertising costs as a percentage of total revenue increased approximately 20 basis points, largely due to timing differences in planned quarterly 2013 spending compared to last year. G&A expenditures increased to $7.3 million from $6.9 million a year ago, in large part due to increases in performance based compensation. As a percentage of revenues, G&A expense now represents 6.8% of total revenue, down from 6.9% in 2012.

For the first quarter of 2013 we reported net income of $7.7 million, or $0.22 per diluted share, on a base of approximately 35.5 million shares. This compares to a loss applicable to preferred and common shareholders of $30.3 million, or a loss of $0.89 per diluted share in the first quarter of 2012.

Net income in the first quarter of 2013 was reduced by a $1.1 million net of tax loss from discontinued operations associated with the sub-tenant ceasing operations and exiting the property they subleased from us. Net income applicable to preferred and common shareholders in the first quarter of 2012 was reduced by $36.4 million due to the refinancing of our credit facility, and subsequent retirement of the Company's preferred shares. Excluding these charges and income from discontinued operations, non-GAAP diluted earnings per common share was approximately $0.25 in the first quarter of 2013, an increase of approximately 66% compared to $0.15 in the first quarter of 2012.

At the end of the first quarter of 2013, the Company had $43 million in debt outstanding under its senior credit agreement, down from $45 million at the end of the fourth quarter of 2012. Our net capital expenditures during the first quarter were approximately $1.2 million, which is comprised of approximately $2.3 million in acquisition of property and equipment , and $1.1 million of proceeds from the sale of one of our restaurant locations.

Based on our first quarter results, we are reiterating our guidelines for some of our key 2013 cost metrics. We expect our costs of goods sold to be within the range of 32.5% to 33.5% of restaurant sales for the year. 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 total year. However the allocation of the quarterly spend will change in 2013 compared to 2012.

For the second quarter we expect marketing and advertising costs to represent approximately 3.5% of total revenues. Our G&A expenses are expected to be between $27 million and $28 million. Our effective tax rate for the full year is expected to be between 28% and 32%. 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 restaurants at the Ruth's Chris brand, as well as a significant investment in our IT infrastructure. Finally, we our expect fully diluted shares outstanding to be between 35.5 million and 36.5 million shares, which assumes no share repurchases in 2013.

With that, I would now you like to return the call to Mike.

Thanks, Arne. In closing we remain very excited about our business. Not only have we maintained our sales momentum at Ruth's, but we continue to be pleased by the recent success of Mitchell's Our development pipeline continues to strengthen, and with a healthy capital structurewe are well-positioned for earnings leverage. Furthermore our management and Board remain focused on increasing total shareholder returns.

We have put our Company in a position where our growing free cash flow affords us the opportunity to reinvest in our existing business, and continue to invest in new restaurant development, which we are accelerating again this year, while simultaneously returning a share of our excess cash to shareholders, through the new quarterly dividend payment and opportunistically buying back our stock. This is an exciting time to be at Ruth's, and we believe an exciting time for our shareholders as well.

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

Operator, I would now like to turn the call over to you for any questions.

Thank you sir. (Operator Instructions). We will take our first question from Jason West with Deutsche Bank.

Thanks, good morning guys.

Good morning, Jason.

Congratulations on a great start to the year. Several things I had, just first of all, on the Easter shift if you guys could quantify how much that would have been in the first quarter, and maybe the second quarter impact to comps?

Sure, Jason. As we said in our prepared comments, it is about 1 percentage point of comp shift.

Oh you did, okay. Sorry, I missed that.

That went into the first and comes out of the second. That is one of the reasons we wanted to highlight for low-single digits so far in the second quarter.

Away from that would you say you have seen a bit of a downshift in the second quarter? I don't know if anything jumps out there, or is it really just that?

I think we talked about it a little bit. We have a calendar shift because of the 53rd week. So our weeks don't necessarily line up. So you have an Easter shift, you have a calendar shift. When we strip all of that away, I think the overall trend for the year has been fairly consistent. There are inflations for shifts in the holidays, the day of the week of holidays, and things like that, like Valentine's Day. I don't think we have seen anything that is a marked slowdown.

Okay. I think your compare is a little bit tougher as well in the second quarter.

It is.

And then on the franchise side I think you said that the franchise comp domestically was like 1.8, I believe. What are your thoughts on why that was such a big gap between the franchise comp and the Company comp?

I think the biggest reason probably is the shift of the Super Bowl. Last year the Super Bowl was in Indianapolis, and this year it was in New Orleans. So it went from a franchised location back to a company location. So that is the single biggest contributor to what is going on with the franchise growth domestically.

Okay. Okay.

It is big. It is hundreds of thousands of dollars of sales.

Right, okay. Got you. On the balance sheet, you announced the dividend today, wondering on the debt pay down, are you kind of happy leaving the debt where it is, and we should expect free cash flow to go to the other uses, such as dividends and buy backs and CapEx, or would you take down some more debt over time? And then, if you could talk about the right running cash balance is for the business?

Well, Jason, I think one of the key things when we refinanced our credit facility last year, which was kind of the start of this journey, is the design of our credit facility, and that is that it as revolver, so we can pay down, draw, we can go up and down, and use the $100 million facility how we wish. We will continue, our first priority is going to be the existing business. Our second priority would be if we can find high quality sites to build new restaurants, we would like to do that. Mike has talked quite a bit about that, but we will be disciplined about it. After that we have committed to a dividend. If you look at last year's 52 week earnings, where we are committing to about 30% of last year's earnings to pay back to our shareholders in a dividend. Then I think we can continue to go down the path with capital, and we can pay down the debt. It there is an opportunity to buy back our stock that our Board believes is an appropriate price, we can do that and the two will probably compete with each other. But should an opportunity present itself, we have the ability to draw down more debt, and I think we are very comfortable with where we are, in terms of our leverage and the amount of flexibility that we have.

Okay. And then the last thing just on the COGS. You didn't change the guidance there, and you had a pretty significant improvement in the first quarter. Sounds like beef costs not quite as bad as you thought. Just wondering the thinking on not lowering that COGS outlook?

I think we are still in that range. We probably moved lower in that range. I think the reason that we are not moving it, is what drove the prices lower in the first quarter was largely changes in retail demand. And what concerns us is the supply, and that has been well documented how constrained the supply is, and we can't predict whether retail demand is going to come back. We think it likely will with grilling season and as beef narrows its gap to other proteins, that the retail will pick up again. As evidenced by the fact that we had 1% beef inflation in the first quarter, and we committed 40% of our beef to being on average for the three quarters up 4% to 6%. It is hard for us to get excited and commit to a component of the pricing, which is driven by demand that we don't control.

Okay. Fair enough. I will let someone else jump on. Thanks.

Our next question from [Andy] Morris with Jefferies.

Hi, guys. Can you first just give us the Mitchell's Fish Market, kind of the holiday shift impact there, and how 2Q started there?

Andy, this is Arne. Good morning. The shift at Mitchell's isn't quite as big as what the Ruth's Chris shift was. I would say it is less than a point. We did get a little bit of a bump on the Lenten shift, but we don't expect as big of an impact as we do on the Ruth's Chris business in terms of shift from Q2 to Q1.

And has 2Q started out positive still?

It is flattish to a little positive.

Okay.

But again the calendar shift and everything else, I think we are comfortable with the direction it is going in.

Got you. And on the development side, I guess we could characterize it as starting to pick up. I am wondering if there is a shift in focus, the last couple of units in Denver are certainly, city center, urban, as we hear about more, sort of life style centers again kind of starting to come out of the ground, is that the type of real estate you want to look at, or are you going to stay focused on sort of the Portlands, and the Cincinnati, Denver types of locations?

Andy, I mean just to add something to your first question and I said in the prepared remarks, that we are pleased with the fact that Mitchell's has shown throughout the first quarter showed positive comps in all three months. Just to highlight that I think you were asking about whether or not we got a bigger shift from Easter, and I think Arne's comments are absolutely correct, but it was consistent growth throughout the first quarter.

In terms of our real estate selection, and we are very focused on what we think will exceed our average unit volumes. We have an outside group that we work with on the modeling side of things that is proving to work very well for us, in terms of the restaurants that we have built over the last couple of years. Yes, some lifestyle centers are coming out of the ground. We look at a lot of things. And we really evaluate every opportunity on the merits, on the individual merits of each opportunity. So I don't think there is a specific, we really like the urban markets. They have typically been higher volumes for us, but there also are some great opportunities that are sort of developing markets that are outside of the urban area. So I think it is not fair to characterize, we say no to certain economics, and we say no if the demographics don't work. But if the demographics and economics are favorable, we do a lot of work around sites whether they are in town or out of town.

Okay, helpful. And then, on the average check increase at Ruth's, so you had about 3.5 of price in, for all parts of the first quarter?

Andy, we had a little bit over 2% of price on the menu. Our check moved up as people were consuming more, but the price on the menu was a little bit over too.

Where do you get the mix shift? I guess that is where that question was heading. You saw Classics kind of actually shift lower I think you mentioned, and how does Sizzle, Swizzle, Swirl that was tough to stay at 6 in the morning, how does that factor into check average, or is that really not a check influencer because it is not an entree count?

Correct, Andy, most of Sizzle Swizzle Swirl does not count, so that does drive it. But I would tell you that one of the places that we are seeing a pickup is in the sale of alcohol, and particularly in the area of liquor.

I am sorry Arne, but the other thing that takes place is when we are seeing an increase in our private dining business, that has typically got a higher guest check average, and sometimes a substantially higher guest check average than our ala carte business.

Any major remodels on tap for this year?

We have probably eight restaurants that are, would be slightly above, well, it is ongoing for us. I mean so one of the reasons that we are able to reduce our capital expenditures as we talked about in the remarks, is that we have done a boatload over the last four years.

Right.

But we still have, we have our store in Metairie, Louisiana that is undergoing a significant remodel. We have got a number of others that some of them have significant back of the house remodels. We just reinvested a substantial amount of money in New York City, that you won't see because it is back of the house stuff. We had already done the front of the house there. We have got, we have an ongoing list of restaurants, and next year we will do another five or six significant remodels, and keep going in that direction.

Thank you.

Thanks, Andy.

(Operator Instructions). We will take our next question from James Fronda with Sidoti & Company.

Hey guys, how are you?

Good morning, James.

Good morning. Are there any other initiatives that you can tell us about in the pipeline that I guess are similar to the Sizzle, Swizzle, Swirl, or seasonal offerings that can help you to continue to drive sales growth going forward, or are you just going to stick with those two for now?

One of the things that I think that people value from us is the sort of consistent delivery, and our significant focus has always been on the execution of the base business. Sizzle Swizzle and Swirl is intended to create another dining, or another reason to visit the restaurant, and we have seen some healthy skews towards younger people, which we think becomes somewhat of a feeding opportunity for other events, so that continues to be a strong focus. And the Classics is really a value proposition for us, and we rotate the Seasonal Classics, so that those menu items change up, we rotate the items that are on the Sizzle, Swizzle, and Swirl, but really at end of the day what we are trying to do at Ruth's and the purpose of what we are about, is creating memories on 500 degree sizzling plates, and to the extent that we execute against that, we do well.

Okay. I guess that was the other question I have, do you have any details on the demographic of your customers in the restaurants? I guess you are obviously seeing a benefit of the younger generation, right?

We are working and continue to work on attracting first-time customers generally, and we were happy to have them at any age, but the notion that we can skew to younger is something that we think is very important for us.

Right, okay. Alright, thanks, guys.

And we take our next question from Nicole Miller with Piper Jaffrey.

Thanks, good morning. You talked about 2% price at Ruth's. What was the menu price increase at Mitchell's, please?

There was not a menu price increase. If fact, there has been a decrease.

Okay. So not just a mix shift but also in price?

Pardon me?

Not just a mix shift but also at price for Mitchell's?

Correct.

Okay. And then I have been catching a lot of new commercials lately for Ruth's, and I am just wondering if you could talk about if it is new advertising, or just a new commercial, and if you are getting more impressions year-over-year?

Nicole, we elected to run advertising, television advertising in the spring for the first time. And we felt like we wanted to look to see whether advertising there was, and this was a five week flight and we are still actually in it, and we did that because we recognize that we have been doing it for the last three years in the fall, and whether or not there was too long of a lag between doing it year-over-year. And we are pleased with the buy, and the advertising is actually the same brand-based advertising that we have run in the fall for the last three years, and we are getting equally a lot of comments like you just described from people, that actually think they are seeing it for the first time. So we are very pleased with the fact that has been running.

And is there anything strategic about that I guess there is, not having it run once a year just in the fall, but also with Mother's Day coming up, is there a component of private dining still that you can do, that could also lift transaction and check coming out of the end of the second quarter?

Nicole, our strategy there really is to be advertising particularly in the fall, in advance of the holiday season, when we believe that people, there is a natural tendency for people to be going out, or propensity for people to be going out, and we want share. Similarly as we go into graduation, we go into Mother's Day, we go into Father's Day, that we would be making some brand impressions, and would influence people to come in our direction.

Okay, thank you.

Thanks, Nicole.

It appears there are no further questions at this time. Mr. O'Donnell, I would like to turn the conference back over to you for any additional or closing remarks, sir.

Alright. Thank you very much. I want to thank everybody for joining us today, and as always, this is a great time to go out, have steak or eat fish. Thanks a bunch.

And that does conclude today's conference. Ladies and gentlemen, we would like to thank you for your participation. You may now disconnect.