Ruth's Hospitality Group Inc (RUTH) 2015 Q2 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. second 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, Vicky, 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 all for joining us on the call today. We are pleased to report our second quarter results which demonstrated a continuation of the strong operating momentum we have had all year.

In the second quarter our total revenues grew 10% demonstrating the impact of both our recent new restaurant openings and continued same store sales growth. Our net income from continuing operations increased by 15%, earnings per share from continuing operations increased by 22% augmented by the impact of our share repurchase program. Both our comparable traffic and sales were positive in the quarter which along with favorable trends in food and restaurant operating cost contributing to our margin expansion. This trend has continued in to the second quarter as sales have remained positive in the low single-digit.

In May we celebrated our 50th anniversary with many of our franchise partners in New Orleans where Ruth got her start. And in June we commiserated this special occasion by ringing the opening bell at NASDAQ. The success we have had over the last 50 years is owed to staying focused on Ruth's original formula consisting of offering the highest quality food, beverage and service in a warm and inviting atmosphere. It is a simple and time less formula to our great business that still resonates strongly after 50 years.

While we are proud of our heritage we also continue to thoughtfully move forward with our Ruth's 2.0 plan which is our dynamic effort to evolve menu, operations and facilities. Part of the Ruth's 2.0 is an ongoing menu refresh. We've updated our menu with new items as well retire offerings that have declined in preference overtime. Several of the new menu items are premium offers compared to our existing menu such as tomahawk steaks and seafood towers given our customers even greater choice in which they want to spend. We have been very pleased with the results of our menu test thus far and anticipate moving out of test and into the majority of corporate locations by the end of the year. We believe our new menu will drive traffic and is attractive to both our loyal customers as well the next generation of guests. We are pleased that are tests to date are resonating with the consumer and not adding operational or labor complexity.

During the quarter we remodeled one Company location as part of the Ruth's 2.0 facility remodel initiative and an additional three restaurant remodels are targeted for completion in the third quarter. Overall we expect to have nine to 11 restaurants underway by the end of this year to our facility remodel program.

On the development front two franchise location opened during the second quarter. One located in Ann Arbor, Michigan and another in historic Charleston, South Carolina. These new restaurants reflect new Ruth's 2.0 design elements featuring lively bar scenes, eloquent dining rooms as well as intimate private dining spaces. Our franchise partners currently have two restaurants under construction with one in San Antonio, Texas and another in Jakarta, Indonesia. San Antonio is expected to open during the fourth quarter of 2015 and Jakarta is now anticipated to open in the first quarter of 2016.

On the Company side we expect our second restaurant Dallas to open early in the fourth quarter. Additionally our landlord is in the permitting stage for the next location in Albuquerque, New Mexico which is anticipated to open in the first quarter of 2016. Since our last call the Company has also sign leases for new locations in Cleveland, Ohio and El Paso, Texas which are both set to open in the back half of 2016.

In the second quarter we continued to execute on a plan of returning capital to shareholders in a balanced manner complementing our organic growth initiatives. During the quarter we repurchase $2.3 million in shares, paid off our outstanding debt, increased our dividend by 20% over the prior year. Our ability to return capital to shareholders while supporting organic growth is a true testament to the proven strength of our business. Our consistent execution would not be possible without the support of our people who we define as our team members, our vendors, our investors, our community and our franchise partners who are the heart and soul of our business.

I would now like to turn the call over to Arne who will discuss our second quarter results in more detail and give you an update on our full year guidance.

Thanks, Mike. For the second quarter ended June 28, 2015, we reported net income from continuing operations of $7.7 million or $0.22 per diluted share on a base of 34.6 million shares. This compares to net income from continuing operations of $6.7 million or $0.18 per diluted share in the second quarter of 2014.

In the second quarter our total company-owned restaurant sales were $85.8 million an increase of 10% from $78 million last year. The growth was driven by a 4.2% increase in comparable restaurant sales which consisted of a .7% increase in traffic and a 3.5% increase in average check. Comparable restaurant sales were positive in each month and consistent across the three periods.

Average weekly sales for company-owned restaurants were $100.3 thousand in the second quarter an increase 4.9% compared to the $95.6 thousand in the second quarter of last year. Total operating weeks for company-owned restaurants were 858 in the second quarter up 4.8% year-over-year from 819in the second quarter of 2014. P.

Franchise income was $4.1 million in the second quarter of 2015 up 8.1% from the $3.8 million in second quarter of last year. Comparable sales in our domestic franchise restaurants exhibiting similar trends to our Company stores and grew 4% during the quarter. Comparable sales in our International franchise markets declined by 10.7% and continued to be negatively impacted by a stronger U.S. dollar primarily in Canada, Mexico and our Asian markets. Exclusive of the impact of foreign currency translation International comparable sales would have declined 3.7%.

Other operating income was $1.2 million in the second quarter of this year essentially in line with the prior year period. For the second quarter total revenues increase 9.7% year-over-year to $91 million.

Now turning to our costs. Food and beverage cost has a percentage of restaurant sales decreased by 133 basis points year-over-year to 30.5%. About 60% of this decrease was driven by an approximately 2% decline in beef costs year-over-year. The remainder of the commodity basket declined .4% due to strong purchasing efforts in the area of lobster, seafood and dairy. While total beef costs increased sequentially from the first quarter this year it was still lower on a year-over-year basis. And while the total beef market is seeing overall inflation, we continue to see deflation in prime cuts which are benefiting from an increase in supply of prime rated cattle. Looking ahead, beef costs are currently trending up 3% and we expect 3% to six% beef cost inflation in the second half of the year.

Restaurant operating expenses as a percentage of restaurant sales decreased by 145 basis points year-over-year to 46.9%. This decrease was primarily driven by leverage from higher sales and lower healthcare claims experienced in the second quarter of 2015 versus the prior year.

Marketing and advertising costs as a percentage of revenues increased by 39 basis points year-over-year to 2.9%. This increase was due to a plan timing shift in quarterly advertising spend. Our G&A expenses as a percentage of total revenues increased by 113 basis points year-over-year to 8.2% primarily driven by an increase in performance based compensation expense.

During the second quarter we repurchased roughly 143,000 shares of stock for $2.3 million under our previously announced $50 million share repurchase authorization. Since the beginning of 2014 we have repurchased 1.6 million shares for $20.7 million. At the end of the second quarter we had $39.6 million remaining on our current authorization. We also paid off all of our debt on our senior credit facility down from $3 million at the end of the first quarter.

Finally, subsequent to the end of the second quarter our Board of Directors approved a payment of a quarterly cash dividend of $0.06 to shareholders representing a 20% increase from the dividend paid in August of 2014. This dividend will be paid on August 27 to common shareholders of record as of the close of business on August 13, 2015.

Now I would like to update you on our outlook for the year for some of our key cost metrics. Overall we now expect our cost of goods sold to be in the range of 31.5% to 32.5% of restaurant sales inclusive of 3% to 6% beef cost inflation in the second half of the year. We now also expect restaurant operating expenses to range between 46.5% and 48.5% of restaurant sales. We continue to expect marketing and advertising cost to be 2.9% to 3.1% of total revenues. Our G&A expenses are now projected to be between $27.5 million and $29.5 million driven by increased performance based compensation and recently issued long-term retention based stock grants that will invest over the next three to six years.

We continue to expect our effective tax rate to be between 31% and 34%. Our capital expenditures in 2015 are still projected to be between $20 million and $23 million reflecting the construction costs of three new company-owned stores and an enhanced capital plan that aligns with our financial operating and brand initiatives. Lastly, we continue to expect our fully diluted shares outstanding to be between 34.7 million and 35.2 million exclusive of any share repurchases under the Company's previously announced share repurchase program.

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

Thank you. (Operator Instructions). We'll take our first question from Brett Levy with Deutsche Bank.

Good morning, gentlemen. If we could go into a little bit more clarity and if you wouldn't mind sharing a little bit of the details on what you're seeing on the remodeling results, cost, how much of the system you think can be touch upon longer term as well as in 2016, anything you're seeing on sales a lift. I guess we can start with that and then I just have a couple of additional questions.

Brett, as did the remodels one of the things that we don't do is accelerate by advertising what we're doing, right. So I think we're seeing the performance in the metrics on the restaurants that we have done remodel work which again have been few relative to this new 2.0 initiative, we are seeing that check average rising some and we're seeing modest increases in the traffic. But it is early enough in this that I would be better off reporting on our next call about some of those results just because it is relatively early and our traffic doesn't repeat itself as frequently as say other casual diners or fast food restaurants do.

Right. But do you have any thoughts on the magnitude of what you could do from a project standpoint in 2016.

Sure. I think as we said we'll -- let me go back just to clarify that a little bit. Where we opened for instance where we opened in Marina del Rey and we opened in St. Petersburg with the 2.0 program and that's the style and design inclusive of the menu and operating changes, et cetera, we have seen well above system average performance out of those restaurants. And we have not see any degradation in the margin vis-a-vis food cost or labor cost so that is one of the reasons that we have gone forward into other restaurants with mostly the menu piece. Now the remodel piece as I said we should touch 11 by the end of -- well, we finished one we'll have three more done in the quarter. We'll start or touch 11 more in the fourth quarter. We would probably do an equal number next year.

Great, thank you very much. Actually do you have any thoughts on the overall labor environment from wages to availability just what you're hearing, what you're seeing.

I believe we are in control of our own wage inflation. We believe that we're still an employer of choice. We offer very good benefits for our full time people. We have not seen excessive turnover, and when we go to hire we're not having difficulty.

All go back in to the queue. Thank you.

Thank you.

We'll go next to Nicole Miller with Piper Jaffray.

Thank you. Good morning. Could you talk about any difference between price and mix if there is anything notable.

Good morning, Nicole. This is Mike. There has not been a significant change in mix although we continue to see good dynamics in our Sizzle Swizzle Swirl program or our happy hour program. Price wise we're caring --

Nicole, this is Arne. We're carrying a little bit over 3% right now.

Okay.

So there is not a big mix. For the year it will drop off now as we head in to the fall. So we have the decision in front of us how much do we want to use price. I think you know we would always prefer to grow our sales through our traffic and that remains our focus.

Okay. And then just one big picture question. Given the strength of these results I guess what I want to understand is you are now running a single concept and the team can be focused if not streamline. What are the underlying benefits or leverage that might not be obvious to us that either you're seeing right now or could see in addition to what you're experiencing now?

I think -- I'm not sure, Nicole, that there is a if lot of streamlining. I think there is certainly greater intensity around the development opportunity. There is certainly greater intensity around the remodel program and the implementation of 2.0. So the things we're doing, the initiatives we're doing are not bifurcated by management teams working on other things. But there is not a lot of streamlining so to speak or slimming I guess is maybe a better way to put it. But there is I think a greater intensity because we don't spend any time doing anything else another than Ruth Chris.

Thank you very much. I appreciate it.

Thanks, Nicole.

Nicole, I think the leverage that we have and Mike has talked about this before, is really probably in our G&A in terms of we have the distribution infrastructure in place, we have our management teams in place, we have our pool of labor. And as we've shared with you we're focused maybe not on a high level of growth but we're focused on high quality of growth and I think that has really helped us and allowed us to focus on developing our people to move the business forward.

Thanks again.

Thanks, Nicole.

(Operator Instructions). We'll go next to Andy Barish with Jefferies.

Good morning, guys. Just on the high end consumer, you seen any changes out there or any particular I guess customer groups given the breadth of consumer you have with the newer look and menu that you have been able to discern to this point?

Andy, good morning. It is Mike. Again we are going forward with the menu changes that we have implemented and some of those are as we described on the high end side. And we're seeing good results in selling tomahawk steaks, and where we have boxed it in so to speak on the menu. Even our porterhouse for two which has always not been a heavy mover is now moving more. So I think by sort of bifurcating this a little bit taking the high end piece and moving it we're seeing good solid results with that. You don't have to sell a lot of them to have an impact. I think the high end consumer even the special occasion consumer sees this as an opportunity to indulge.

Thank you.

Thanks, Andy.

We'll go next to Brian Vaccaro with Raymond James.

Thank you and good morning guys. I had a couple of just different topics I wanted to touch on. Quickly on food costs you talked about the beef deflation in the second quarter guiding to the 3% to 6% in the second half. Can you give us an update on the contracts that you might have in place for the second half, do you have any place? And then also speak to the inflation expectations on the rest of your food basket in the second half.

Sure, Brian. This is Arne. Good morning. In terms of our contracts on beef today we do not have any. We continue to talk but we haven't really found a price point that we both like, both the supplier and ourself and we are very content to keep buying at the market. That being said, from a comp perspective last year we were under contract for almost all of our prime cuts. So we actually have a little bit of a tougher comp in the third quarter of this year comparing back to last year because of how we bought our beef last year we were in the money. So we will continue to explore it. We haven't seen it yet. And I think from a supplier perspective it is probably a bit challenging when you look at the broader beef complex itself but when you look at some of these prime cuts it is hard for them to come to grips to contracting and the price is down year-over-year. In terms of the rest of the food basket there's always pluses and minuses. And our purchasing department has done a great job in managing us through it. We're running today flattish maybe to up 1% right now. It can change but there doesn't seem to be anything looming on the horizon. So I think the thing we're most concerned about as we keep an eye on it is probably the trend on beef. The grading as we talked about in the prepared remarks had been running higher in terms of prime beef but that trend began kind of last fall. So we are going to start round tripping it. It will be very interesting to see what happens there.

All right. That is helpful color. Thank you Arne. Moving on, I had a question on the second quarter other operating costs. You highlighted the healthcare claims. Can you help us with the magnitude of that in the quarter. Is it more just a year-on-year comparison issue and the second half will be normalized, or is there some fundamental underlying change that maybe changes the outlook for the second half of the year?

It is a good question, Brian. We offer our benefit we want all of our employees to be healthy, but sometimes you have severity of claims can change and that is kind of what we've seen. We have made some plan design changes to our benefits plan to help manage inflation. But I think the biggest change has been around the severity. As we look forward we're optimistic that we would like to see everyone stay healthy and that this trend continues, but at the same standpoint sometimes the wind blows it is headwind and sometimes it is a tailwind. So I don't know that I can put my -- I think what you're getting to is this something long-term sustainable that we should think about. And today I don't think we know enough yet to say that there has been a change in our trend on healthcare inflation other than a change in severity.

Okay. And just to clarify was it that your claims this year were well below normal versus a normal year last year in the second quarter, or were last year's usually high and this was sort of normal?

It is more that we had some large claims last year. So if you think about it the routine medical care costs are kind of tracking the same. The severe claims are tracking better this year.

Okay, great.

Which is more of a bad year last year.

Okay, great. And then one just clarification I think, Arne, you said on the CapEx this year you are expecting three openings, and I just wanted to make sure I heard that correctly? I think you had one in the first quarter in St. Pet and then you had Dallas. I might be missing one this year.

Albuquerque has flipped in to the first quarter, but that doesn't keep the construction guys from turning their bills in. So unfortunately we would really love to have gotten it open in December, but just where the landlord is in permitting and everything else. But we are still going to be busy working on it and we are excited to open it up hopefully early in next year.

Okay, that's great. And just quickly a couple of (Inaudible) on the cash flow statement. Do you happen to have second quarter cash from ops, CapEx and ending cash at the end of the second quarter handy?

I do. Let me fish it out here for a second. I'll tell you what, Brian, we'll follow-up with you after the call.

Okay.

All right.

Thanks so much. Have a good one.

Thank you.

We'll go next to (Inaudible) with Sidoti & Company.

My question has been answered. Thank you.

All right. Thanks.

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

Thanks, Vicky, and thanks everybody so much for joining us on the call today. And as always it is a great day to go out and eat steak. Have a great day.

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

Thanks, Vicky.