Ruth's Hospitality Group Inc (RUTH) 2016 Q2 法說會逐字稿

Good morning ladies and gentlemen thank you for standing by. Welcome to today's Ruth's Hospitality Group Incorporated second quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. 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, Christy, and good morning, everyone. Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer, Arne Haak, Executive Vice President and Chief Financial Officer and Cheryl Henry, President and Chief Operating Officer.

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 today 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.

During this call we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items as well as losses from discontinued operations. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today's call.

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

Thanks Mark and thank you all for joining us this morning. I'm so pleased with another quarter of top line incomparable to our sales growth. Although we were disappointed with this lower revenue growth and higher year-over-year labor cost for pressure on our bottom line resulting in adjusted earnings per share of $0.22. While we continue to navigate through a tough economic environment, I am very pleased to have a talented team in place that takes great -- caring for our guest every day.

This operational focus has contributed significantly to the long-term consistency of our results as well as the strength of the brand. Our total return plans got us to have focus on maintaining a consistency of our core operations and includes disciplined investment into our restaurants and live long term capital decision with regard to our free cash flow. This approach combined with a strong balance sheet, results the flexibility to enhance shareholder value even when external environment is not optimal.

Our comparable-store sales for company on restaurants increased 1.5% during the second quarter and we're positive in all three periods. Our results in the quarter were negatively impacted approximately 70 basis points as a result of these two shifting to the first quarter of 2016, compared to the second quarter of 2015.

Comparable traffic decreased 2.1% on a year-to-date basis. Our comparable sales have increased 2.3% and reflected 0.5% decrease in traffic and a 2.9% increase in average check. Through this point in the third quarter, our comparable sales remain positive in the low single-digit range.

We are pleased with the success of sales growth during Mother's Day and Father's Day in the second quarter. Each of these holidays not only showed year-over-year growth but grew at a rate faster than our overall comparable sales for the quarter. These special occasions remain an important way in which we engage with our guests and maintain our brand positioning without resorting to (inaudible).

As part of our Ruth's 2.0 initiative, we have now completed the rollout of our menu refresh to all domestic franchise restaurants. As a reminder we completed the rollout to all of our company owned locations during the first quarter. This refresh menu which features a number of new premium offerings continues to receive higher preference level compared to menu items it replaced and is driving approximately 100 basis points of additional check expansion.

Our company and franchise-owned restaurant teams executed the rollout with the highest level of quality and service without adding additional operating complexity. We also made progress in our Ruth's 2.0 restaurant remodel program during the quarter. Each remodels are part of a three to five-year initiative designed to an engage our guest experience and expand our operating capabilities.

During the quarter, we completed remodels in Texas and [part of Virginia] and in Memphis, Tennessee bringing the total number of completed in 2016 to 2017. We remain on track and complete eight to ten remodels over the course of 2016.

The strength of our brand continues to drive strong free cash flows. After ensuring that our core business remains healthy, we looked to deploy our capital in a thoughtful manner and one of the most meaningful investments we can make with our excess cash flow with the opening and the success of the restaurant.

During the quarter we opened a new Ruth's Chris Steak House in Albuquerque, New Mexico and we will open a new restaurant in El Paso Texas during the third quarter of 2016. Looking forward, we have decided to shift our plan to new restaurants in Cleveland, Ohio, in Waltham, Massachusetts to the first quarter of 2017 rather than creating additional operational pressure by opening two new company restaurants during the peak holiday season.

Our franchisees also continue to invest in our brand. We expect our franchise partners to open new restaurants in Odenton, Maryland and Greenville, South Carolina during the fourth quarter of this year. In addition to new restaurant openings, restaurant relocations allow us to adapt to changing market dynamics. Build new restaurants have the 2.0 standard and help to capture new guests with buildings that are in line with our current revenue centers.

During the quarter, our franchisee in Philadelphia, Pennsylvania, have completed the successful relocation of its restaurants to the Sonesta Hotel in the heart of center city Philadelphia. Our Huntsville, Alabama franchisee is expected to relocate their restaurant in the fourth quarter of this year and a franchise restaurant in Mississauga, Canada, is scheduled for relocation during the first half of 2017.

The third component of our total return plan calls for us to augment our operating and growth initiatives with a return of excess capital to our shareholders. During the second quarter, we paid a $0.7 per share dividend and also repurchased $1.2 million shares of stock. This was the largest share purchase in a single quarter since we bought back all of our convertibles to preferred stock for $60 million in the first quarter of 2012. The strength of our business has allowed us to return more than $90 million to our shareholders in the form of repurchases and dividends since the beginning of 2014.

Finally, earlier this week we announced the promotion of Cheryl Henry to the position of President and Chief Operating Officer of Ruth's Hospitality Group Inc. I look forward to continuing to work alongside Cheryl and the rest of the leadership team as we build the Ruth's Chris Steak House branch.

With that, I'll now turn the call over to Arne.

Thank you, Mike. For the second quarter ended June 26, 2016 we reported net income of $6.9 million or $0.21 per diluted share, compared to net income of $7.5 million or $0.22 per diluted share in the second quarter of 2015. Net income in the second quarter of 2016 was negatively impacted by a nonrecurring $465,000 charge related to the accrual for disputed rent charges from 2006 to 2015 for these company restaurants. This was partially offset by $99,000 gain related to the sale of our Columbus Ohio restaurant.

Total company owned restaurant sales for the second quarter were $87.2 million, an increase of 1.7% from $85.8 million last year. The growth was driven predominantly by the 1.5% increase in comparable restaurant sales which consisted of a 3.7% increase in average check, an offset by a 2.1% decrease in traffic. As we shared with you earlier this year, our rate of total revenue growth slowed largely due to the timing of our new restaurant openings and the closure of our Columbus restaurant after 17 years in the market.

Average weekly sales for company-owned restaurants were $101.1 in the second quarter, an increase of 1.1%, compared to the $100,000 in the second quarter of last year. Total operating weeks for company owned restaurants were 863 in the second quarter, up 0.6% year over year from 858 in the second quarter of 2015. Franchise income in the second quarter of 2016 was $4 million, compared to $4.1 million in the second quarter of last year.

The decrease in franchise income was due primarily to development fees that related to the opening of new restaurants in 2015. Total franchise comparable sales were down 0.3% year over year in the second quarter. Comparable sales in our domestic franchise restaurants were up 2.4% during the quarter while comparable sales in our international franchise restaurants declined by 11.5%. Similar to last quarter, a strong US dollar coupled with traffic weakness in Asia and Canadian oil markets continued to negatively affect our international comparable sales. Excluding the impact of foreign currency translation, international comparable sales would have still decreased 8.8%.

Now turning to our costs, food and beverage costs as a percentage of restaurant sales, improved by 90 basis points year over year to 29.6%, driven by a 5% decline in year over year beef costs combined with a 3.7% increase in the average check.

On a year-to-date basis, our beef costs were down 4.7%. Additionally, we have contracted roughly 50% our beef supply to the second half of the year at a savings of approximately 9% below year-ago levels. As a result, we now expect between 3.5% to 5.5% beef cost deflation for the full year.

During the second quarter, our restaurant operating expenses as a percentage of restaurant sales increased a 180 basis points year over year to 48.8%. This increase was primarily due to higher labor costs driven by a minimal wage increases and the timing of healthcare-related expenses in the quarter, as well as the nonrecurring $465,000 charge related to the accrual of disputed brand charges.

Our G&A expenses as a percentage of total revenues improved 60 basis points year over year to 7.6%. During the quarter, the Company repurchased $1.2 million shares of common stock under its current share repurchase program or approximately $20 million or an average price of $16.78 per share. At the end of the second quarter, we had roughly $30 million in debt outstanding under our senior credit facility largely as a result of our share repurchases.

Finally, as Mike noted subsequent to the end of the second quarter, the Board of Directors improved the payment of quarterly cash dividends of $0.07 to shareholders. This dividend will be paid on August 25th 2016 to common shareholders of record as of the close of business on August 11th, 2016. This represents a 17% year-over-year increase in our quarterly dividends.

Now I'd like to update our outlook for the full year of 2016 for some of our key cost metrics. We now expect our cost of goods sold to be in the range of 29% to 31% of restaurant sales. We expect our restaurant operating expenses to remain between 47% and 49% of restaurant sales. We continue to expect marketing and advertising costs to be 2.9% to 3.1% of total revenues. We now expect G&A expenses to be between $28.5 million and $38.5 million. We continue to expect an effective tax rate of 32% to 34%. We expect capital expenditures to remain between $28 million and $30 million.

Lastly, we now expect our fully diluted shares outstanding to be between 32.5 million and 33 million shares exclusive of any share repurchases under the Company's recently announced share repurchase program.

With that, Christy, I'd now like to turn the call over for any questions that we might have.

(Operator Instructions) Our first question is from Andy Barish with Jeffrey.

Hey, good morning. Cheryl, I guess since it's political season, do you have a sort of first 100-day plan as you look at the business in your new role that you might want to share with us?

Thanks, Andy, for the question. It is political season isn't it? You know, as I think about the last nine years in working with this iconic brand and talented management team, I think the strategy Mark shared -- I'm sorry -- Mike shared during his talk is really right on, and so we'll continue with that, Andy.

I will say as we look to the success of initiative such as Ruth's 2.0 both on the menu as well as in some of the remodel, that is another path we'll continue down in the development of our people really looking to drive the cost store level sales that we committed to in our strategy.

In addition, Mike talked about our focus on new restaurant growth so for my team that's where we'll be head and look forward to working with everyone here for our continued future success.

Great, congrats. And then just one other quick one, Mike, on the customer segmentation I know you noted special occasions were strong. Are you -- I know you don't do a regular kind of customer segmentation work, but are you seeing kind of signs of the higher end sort of business travel, et cetera, seeing a little bit of a slow down at this point?

You know, Andy, I think we're seeing sort of a modest slowdown in all of our segments. I mean, so for instance, when we talk about private dining which is often a proxy for what's going on with business travel, et cetera.

It is still quite robust. It's just not -- it's really robust as it has been. So, yes, the answer is their decline -- yes, but has it gone away, not at all. Our (inaudible) business our FDR business remains very solid. I think our biggest challenged area is really pure ala carte and some of that the mix of just -- because people. Some of that the mix of our aspirational people. But we're seeing some -- more challenges in that sort of particular piece of our business than anywhere else.

Thank you.

(Operator Instructions) And we'll take our next question from Joshua Long with Piper Jaffray.

Great thank you. Just curious if you might be able to give us a sense of forward-looking promotions that 3Q has been a more seasonably slow period of the year but you got some interesting initiatives that you've been putting and working on over the last several quarters. So I was curious if you could just kind of give us a sense for how you're looking at 3Q and then anything you'd point us to in terms of kind of 4Q as you round out the year from a promotions or a marketing focused perspective.

Sure. We continue to focus on -- as we have our very popular (inaudible) program. So we continue to offer that as well as refreshing our classic which is our [prefee] menu we do that three times a year so it's always news in the quarter to talk about as we launch into our new menu. We're also looking at a promotion that will roll out in the next week or so around fillet and [rosse] so that's exciting for us for the month of August and September. And then working on some additional menu refresh items. The success of Ruth's 2.0 is -- we're continuing that evolution so more to come on that.

Joshua, this is Mike. I think exactly what Cheryl said. But we sort of stick -- we have stayed the course in terms of our positioning. We've not been aggressive discounting people. That's not what we've done. We just continue to focus on the operating side of the business and the calendar has a sort of typical cadence to it as you're describing.

Yes, the third quarter is a little slower. You know, we've got wine dinners that we continue to do. We've got local activities at the restaurant-by-restaurant level that we continue to do. And probably as we step up anything, it's really been a lot more local and we give our restaurants the freedom to have their own wine dinners and have certain night events that we found have been very successful and we call that having a very scrappy attitude. So we're going to mix into some things like fillet and [rosse] and continue to focus on being as good as we can be at running our restaurants.

Understood. I appreciate that color. Thank you. Arne, as you think about [products] and the opportunity for beef -- contracting that beef looks like you have some good visibility in the back half of the year, is that the right number? Are you looking to maybe contract more, less or maybe play the stock market a little bit more in terms of just where beef records have been? Just curious on what your outlook there is and then in terms of anything else in the basket that may or may not be contracted but you're seeing some trends going either way outside of what you're seeing in beef.

Sure, Josh. You know, I think we've talked a lot just about we are now in year two of deflation in terms of beef costs. Last year, we saw deflation on our prime cuts in large part due to the increase in the percentage of the herd that graded prime so that caused an increase in supply of prime. We've been very transparent about talking about that and watching that. The increase in grading has helped. But it is not growing anymore.

So our opportunities around contracting have probably been more around the [fillets] and that's where we're seeing the deflation right now, in that part of the meat basket. The prime cuts are the pieces that are not contracted right now. And those are probably not going to be as much deflation as what we'll see on the [fillets], which is contracted. So I think that's kind of our outlook there in terms of beef but it's shifting now to an overall supply of cattle store versus an increase in the percentage of prime.

The rest of the basket is largely in control. There's some puts and takes around some seafood, some specific seafood items that we use but there's no material headwinds. It's still a tailwind for us here in terms of our commodity outlook for the rest of the year.

Understood. Thank you. And then in terms of the share repurchase, just curious if you had kind of what the ending with the share count one at the end of the quarter kind of as we get into 3Q?

I think we have incorporated that into our guidance. So the share count, obviously, is weighted what you see as of the end of the second quarter, but we incorporated it into our guidance because there are increases in share counts as well as part of equity compensation plans.

Got it. Thank you.

And our next question comes from Brett Levy with Deutsche Bank.

Good morning, everyone. If you could give me a favor and if you would be willing to share a little bit more [incrementality] from what Andy's question was with respect to what you're seeing on either the mix of high end products from the 2.0 or what you're seeing on the classics. In addition to that, could you just give us a little bit of sense on where you're wage rate inflation was? What you're expecting for the remainder of the year.

Michael O'Donnell. Okay. I think as I said earlier in my comments in 2.0 which for the most part has items that are more than premium level bone in steaks and seafood towers. I mean, we've seen an increase in those that replaced items and we've seen an increase in those and we've seen about 100 basis points in expansion. So I guess, Brett, I would say that the higher end, really higher end of our consumer and the business that are providing that are not -- I'm not sure who that was -- are not backing up at all.

And I think our continued -- we continue to see good and similar results to the 20% range of our Ruth's classics. And it's sort of the middle part as I described earlier, the ala carte diner that is really the weaker part of the segment. And in terms of wage inflation I'll turn that over to Arne.

Sure, Brett. You know, I think wage inflation is pretty much as we expected. I think we shared with you earlier this year numbers about $1.4 million. And if you are kind of tracking along that we expect that to continue through the rest of the year. And that's probably a constant drumbeat we're going to have is the continued legislative. And I think in the second quarter as well we had a little bit of pressure from healthcare claims, nothing unusual. It's just last year was such a great year if you remember we had some really great claims quarters. We're back now to more of a normal cadence in terms of that part of our business.

Thank you. Would you also be able to share any pockets of strength or outsized weakness in terms of regional performances?

I think it's still the same kind of cadence, Brett. I mean the oil market as we called out for our franchisees, Texas I think you're hearing from everybody is challenged. You know some of the major metropolitan areas, the urban parts of -- that there are urban locations, those like New York and Chicago are down a little bit more than some of the suburban locations. But other than that, I think it feels very consistent. You know Florida has been good, California has been good. Overall I think we're pleased with how we're holding up relatively I think on an absolute basis we want more.

Thank you very much.

I can tell you this, Brett, we really like Albuquerque a lot.

And we have no further questions at this time. I'd like to turn the conference back over to Michael O'Donnell for any additional or closing remarks.

Kristy, thank you very much. I thank everybody for joining us on the call today I would be remiss if I did not thank our talented restaurant operators for their excellence and outstanding execution and our franchise partners who remain the heart and soul of our business. So to all of you as always it's a great day to go out and eat steak. Thank you.

That does conclude today's call. Thank you for your participation. You may now disconnect.