Ruth's Hospitality Group Inc (RUTH) 2015 Q1 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, Inc. first quarter 2015 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mark Taylor, Vice President of Financial Planning and Analysis. Please go ahead, sir.

Thank you, Lauren, and good morning everyone. Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer; and Arne Haak, Executive Vice President and Chief Financial Officer of Ruth's Hospitality Group.

Before we begin, I'd 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 would like to refer you to the Investor Relations section of our website at rhgi.com as well as the SEC's website at sec.gov for copies of today's earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating and financial results.

I would now like to turn the call over to our Chairman, President and CEO, Mike O'Donnell.

Thanks, Mark, and thank you to everyone for joining us on the call this morning. We are pleased to report a solid start to 2015 with strong first quarter results. Our earnings per share from continuing operations grew 24% compared to last year, lead by a combination of continued sales growth from our comparable locations, the contributions from our new restaurants along with modest relief from beef inflation. The timing of weather year-over-year however did slow our sales trend somewhat during the quarter. Arne will share more color on this during our financial overview. But the health of our customer remains strong as our traffic trends have returned to the positive low single-digit range and our sales are running in the low to mid single-digit range through this point in April.

Many of you are aware that next month we celebrate the 50th anniversary of Ruth's Chris Steakhouse. As we approach this occasion, I would like to take a moment to reflect on the legacy of our founder Ruth Fertel, who in May of 1965 purchased a single steakhouse in New Orleans and laid the foundation for the International restaurant brand that exists today. She placed the utmost on delivering the highest quality food, beverage and service in a warm and inviting atmosphere. A simple but exacting formula that continues to produce results to this day. We are very proud that our focus on food, service and hospitality is once again recognized by our guest. For the fifth year in a row we have received top honors in the Nation's Restaurant News Consumer Pick Survey. We are thrilled at the honor and want to thank all of our people who have worked tirelessly to take care of our customers day in and day out. Our people are defined as our teammates, our franchise partners who remain the heart and soul of our business, our vendors, our guests, our shareholders and the communities that we call home. While we are very proud of our historical success, we recognize the need to continually strengthen our competitive position, which includes keeping the Ruth's Chris dining experience relevant to our current quest as well as new generations.

In addition to the restaurant brand remodel initiative we announced last quarter, we have recently begun testing in two of our new restaurants what we refer to as Ruth's 2.0. This is a dynamic effort to begin to evolve our facilities, menu and operations all to expand the engagement with our quests. We are very pleased with the early results of our initial test, and expect to expand Ruth's 2.0 to three additional restaurant locations by the end of the second quarter.

On the development front we opened a company-owned restaurant in February in St. Petersburg, Florida featuring an elevated bar, out patio dining and two state of the art private dining rooms. This restaurant opened to rave reviews and reflects the Ruth's 2.0 design, which is consistent with the Company and franchise locations which have opened over the past year. Our second company-owned owned location in Dallas is now expected to open early in the third quarter. And we have recently executed a lease to open a company-owned restaurant in Albuquerque, New Mexico. We currently expect this new unit to open late in the fourth quarter of this year. Our franchise partners are expected to open four restaurants this year including in locations in Ann Arbor, Michigan and Charleston, South Carolina slated to open in the second quarter. Two additional franchise owned restaurants are scheduled to open late in the fourth quarter of this year.

During the quarter we continued to execute on our balanced plan of returning to capital to our shareholders to complement our organic growth initiatives. In the first quarter this took the form of share repurchases of $3 million, $10 million of debt repayment and 20% increase in our dividend. We are very proud of being able to accomplish that in quarter one.

I would now like to turn the call over to Arne, who will provide details on the first quarter as well 2015 outlook.

Thanks, Mike. Before I get started I want to remind everyone that during the quarter we completed the sale of the Mitchell's restaurant. And that the operating results for Mitchell's have been reclassified to discontinued operations. In the following discussion discontinued operations are excluded unless otherwise stated.

For the first quarter end March 29, 2015, we reported net income from continuing operation of $10.8 million or $0.31 per diluted share on a base of 34.5 million shares. This compares to net income from continuing operation of $9 million or $0.25 per diluted share in the first quarter of 2014. In the first quarter total company-owned restaurant sales were $92.1 million an increase of 8.2% from $85.1 million last year. The growth was driven by a 2.8% increase in comparable restaurant sales which consisted of a 3.3% increase in average check partially offset by a 0.5% decrease in traffic.

While comparable restaurant sales were positive during all three months of the first quarter, we witnessed some deceleration of sales throughout the month of the first quarter. January sales were helped by the lapping of last year's winter storms. While both late February and March of this year were effected by severe winter weather that impacted sales in the mid Atlantic and north east region. Average weekly sales for our company-owned restaurants were approximately $108.6 thousand in the first quarter an increase of 2.9% compared to the $105.5 thousand in the first quarter of 2014.

Total operating weeks for company-owned restaurants were 852 in the first quarter up 5.3% year-over-year from 809 in the first quarter of 2014. Franchise income of $4 million in the first quarter was that when compared to the first quarter of 2014. Comparable sales in our domestic franchise restaurants exhibited similar trends to our Company stores and grew 2.4%. Comparable sales in our International franchise restaurants declined 11.5% and were effected by weak traffic in several Asian markets and a stronger U.S. dollar exchange rate. Other operating income was $1.3 million in the first quarter of this year essentially unchanged from the prior year period. For the first quarter total revenues increased 7.7% year-over-year to $97.3 million.

Now turning to our costs. Food and beverage cost as a percentage of restaurant sales decreased 83 basis points year-over-year to 30.5%. While we expected beef inflation to be the most subdued in the first quarter we are pleasantly surprised by the trend in beef cost which declined 4.3% year-over-year in the quarter. This is in sharp contrast to the broader trends for cattle and beef. We are currently seeing a modest year-over-year benefit in beef costs through April. However beef costs are currently increasing at a faster rate than normal seasonal trends. For the full year we now anticipate beef inflation in the 3% to 6% range. While we have had discussions with suppliers to determine if there is any interest in contracting at these levels, we have been unwilling to secure prices at the levels being offered.

Restaurant operating expenses as a percentage of restaurant sales decreased 37 basis points year-over-year to 45.3%. The decrease was primarily driven by leverage from higher sales and lower healthcare claims experienced in the first quarter of 2015 versus the prior year. Marketing and advertising costs as a percentage of total revenues decreased 30 basis points year-over-year to 1.6%. This decrease was due to a planned timing shift in quarterly advertising spend.

Our G&A expenses increased by approximately $300,000 to $6.5 million in the first quarter of 2015 from $6.2 million in the first quarter of last year. As a percentage of total revenues G&A expenses improved 27 basis points year-over-year to 6.6%.

During the first quarter we repurchased roughly 208,000 shares of stock for $3 million under our previously announced $50 million share repurchase authorization. Since the beginning of 2014 we have repurchased $1.5 million shares for $18.4 million or an average price of $12.65 per share. At the end of the first quarter we had $41.9 million remaining on our current authorization. We also paid down debt on our senior credit facility by $10 million during the quarter.

Finally subsequent to the end of the first quarter our Board of Directors approved a payment of a quarterly cash dividend of $0.06 per share to shareholders. Representing a 20% increase in the dividend paid in May of 2014. This dividend will be paid on May 28, 2015 to common shareholders of record as of the close of business on May 14, 2015.

Now I would like to provide some updates to our outlook for the year for some of our key cost metrics. Overall we expect our cost of goods sold to be in the range of 31.5% to 33% of restaurant sales. We expect restaurant operating expenses to range between 47% and 49% of restaurant sales. Marketing and advertising cost are expected to be 2.9% to 3.1% of total revenues. G&A expenses should be between $25 million and $27 million. We expect an effective tax rate of 31% to 34%. Our capital expenditures in 2015 are projected to be between $20 million and $23 million reconnecting three new company-owned stores and an enhanced capital plan that aligns with our financial operating and brand initiatives.

Last we expect our fully diluted shares outstanding to be between 34.7 million and 35.2 million shares exclusive of any share repurchases under the Company's previously announced share repurchase program.

With that, Lauren, I would now like to turn the call over for any questions we might have.

Thank you. (Operator Instructions). Our first question comes from Joshua Long with Piper Jaffray.

Great, thank you. Mike, I appreciate the color on comps through the quarter and then also the comps quarter to date. I was just trying to reconcile that a little more and wanted to see if you might be able to elaborate. It sounds like you saw the deceleration through the first quarter and then turns to more or less bounced back or at least trending back up in to the positive territory in 2Q to date. Any sort of calendar shifts or other pieces you would call out that might be impacting those numbers or things you would call our attention to?

I think relatively the same. I can't say a lot more than what I've said I guess, but I'll try to enhance it a little bit. We did have Easter last year was in April and Easter this year end up being in March. So the challenge there is that the two weeks around Easter for our business change fairly drastically in terms of private dining and business travel, et cetera, people on vacation that kind of stuff. So we generally see declines in those pieces of business around that and we did again this year. So we have seen since that, and again we talked about the weather throughout the year as Arne said we had a difficult year the year before in January and then we really saw a lot more weather this year in to February and March. So it is weather related. There is a bit of a shift there in Easter. And what I said is our traffic has returned back to the low single-digit positive range through today actually, and our comp store sales are in the low to mid single-digit range. So we're seeing it back to what we think are healthy levels.

That is helpful. Then as we think about the 3.3% average check in 1Q how much price did you have on the menu and could you provide a little bit of context in how you are thinking about pricing as we go through the remainder of the year given that beef is coming in a little bit better than maybe where we expected previously?

Sure, Josh. This is Arne. We have just a little bit, right around 3% in price in our menu right now. So it is showing up in the average check. So that is good. And how do we think about it? It is kind of funny, every time we start leaning heavy on price beef tends to cooperate with us. It happened two years ago and we seem to be on to this trend again. We are reluctant to price increaser. That being said, our pricing is staggered. It is layered on and it can fall off in several points. There are some fall off points here later in the summer and in the fall. If we don't do anything else from here on out the back half of the year we will probably have just under 2% pricing.

Got it. That is helpful. And then as we start thinking about the 50th anniversary and maybe tying in to the commentary around some of the marketing shift. Do we reallocate some marketing to push towards the anniversary or was this more normal pushes and pulls on the marketing advertising side?

Normal pushes and pulls. There is nothing big or dramatic planned externally around the 50th. That is probably more of an internal celebration.

Understood. Thanks so much.

Our next question comes from Brian Vaccaro with Raymond James.

Good morning and thank you for taking my question. I wanted to ask if you could provide a little bit more color on the Ruth's 2.0 remodel program, and maybe just talk about the most significant changes that you're making both as it relates to the quest experience but also from an operating efficiency standpoint.

Brian, let me tell you Cheryl Henry is actually in the room with us. She is our Chief Branding Officer and she's the brains behind it. So we're going to let her explain to you how 2.0 and the CapEx program all fit together in our plans this year.

Thanks for the question, Brian. Really the program itself is really a culmination of two years of work going out and really listening to our guests and pulling insights off of every phase to your questions point of the experience from menu to guest service to the design of the building to how we use technology et cetera. So as we look at it the piece specifically about the design I think we announced last quarter we would be looking at about 15 remodels for the year and that will include building out some spaces and adding some multi functions to them as well as adding some design elements that are significant and signature to our brand. Really there is several initiatives across each of those categories from the menu so we started rolling out in two restaurants soon to be three some new menus items as well. So that is really the start of that 2.0 that Mike was talking about.

Okay. And then how should we think about the cost on the two units that were completed and is that a good estimate to use for the three that you're expected to complete here by the end of the second quarter?

Brian, I think we are doing this with monies we have already set aside from our CapEx plan and for normal operating. We're a steakhouse, so despite all desires and studies to evolve it is very subtle. It is part of the CapEx, our CapEx guidance. We're look to start work on 15 restaurants. We'll see how many we get through. We don't want to be in construction during the holidays for obvious reasons or expanding our restaurants. We want those times of the year to go smoothly. But a lot of it too is happening when we build the new restaurant and that is just reallocating the same roughly $3 million that we spend on building a restaurant in a different way.

Okay. That is helpful. Wanted to ask a quick one also if I could on the cost of goods line, the foods cost inflation. You said it was down 4% on beef year-on-year in the first quarter. What was the overall in your inflation on your basket?

I want to say it was around 2%. I will pull it up here in one second.

Okay. And then I guess just the same question on annual basis, you're now looking for 3% to 6% beef inflation. How should we think about the overall basket of inflation?

It seems to be push and pull. I think we're going to see low to mid single-digit. There is still some pressure around certain seafood costs. But we're kind of pleased with what is happening with beef. It is a bit unusual too. The filet part of the business was actually flat during the first quarter. It was really the prime cuts that were down. They were down 8% year-over-year. Now that trend is not sustaining through the second quarter, so we'll see where we end up. But we had some locks last year that helped us in the third quarter, they hurt us in the fourth, net we came out ahead. That makes our comps just a little bit tougher year-over-year.

Okay, that is helpful. Thank you.

(Operator Instructions). Our next question comes from Andy Baris with Jefferies.

Yes, one other follow-up on 2.0 on some of the reserve cuts and the higher-end items is that all part of a big part of the menu testing that is going on right now?

Hi, Andy It is Cheryl. Yes, that is part of it.

Okay. And is there -- I guess it is early on, but is there a thought that that could be system wide or does that apply to a certain subset of the Ruth's Chris footprint?

It is early but we like where it's going. I think it is something we could see throughout the system.

Okay. Anything on 2.0 that is different on the service model versus where you are today? And I'm thinking about it more from a cost perspective. I know it is early here and a lot of moving pieces but just wondering how you are thinking about service overall from a cost basis.

Andy, this is Arne. I think one of the things that really changes a little bit when you build bigger bars and you're changing the menu to make it more current and we are seeing that there are diners come in and they don't want a three hour plus experience. And so having a really busy happy hour and then people coming in at the same time for a dinner service but they want it quickly because they want to go to a movie or a show this is just one stop along the way, has presented opportunities for us around how do you staff, how do you do the labor on that. I think we've got some really good learnings from what we've seen in the first two restaurants which is why we test these things. We're going to do continue to expand it. We open in St. Pete in February with a lot of these learnings and they did a really great job of executing it and they have I think probably the biggest bar and patio that we have in our system.

Andy, this is Mike. We remain a high touch business, so we look forward to having technology do some work for us. But it does not -- we don't currently have technology replacing people. We really will remain in the high touch position.

Good point.

Okay. And then just one final one on the operating expense line getting some leverage here in the first quarter even though the sales softened up a little bit. You were kind of flattish on that line last year. Was that mostly healthcare or anything else going on there?

Healthcare is probably the biggest piece, Andy. We made some changes to our benefit plan. Those seem to be working well, but the biggest variance is in the severity of the claim or the large claims. We're hopeful that our people stay healthy and that continues to be the trend. But that piece of the expense can be a little bit volatility so we'll keep an eye on that.

Thanks, guys.

Thank you.

I would like to turn the conference back to our speakers today for any additional or closing remarks.

Thanks everybody for joining us this morning on the call. And as always it is a great day to go out and eat steak. Thank you very much.

This concludes today's conference. Thank you for your participation.