Ruth's Hospitality Group Inc (RUTH) 2017 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 Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call 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, Deanna, 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; as well as 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 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 non-GAAP net income and adjusted earnings per share. These non-GAAP measurements were calculated by excluding certain items as well as losses from discontinued operations. We believe that these measures represent a useful internal measure of performance. You can find a reconciliation of non-GAAP net income and 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 on the call this morning. Today, I'm pleased to announce second quarter results, which were highlighted by accelerating sales momentum and a return to positive traffic growth.

For the period, an 8% revenue increase drove operating margin expansion and resulted in a 19% earnings growth quarter-over-quarter. We're proud of these results, which continue to be driven by an exceptional team and their ability to successfully execute against our total return strategy.

Our second quarter comparable restaurant sales increased 2.9%, driven by a 2.1% increase in traffic and a 0.8% increase in average check. As discussed on our first quarter call, comparable sales were positively impacted by approximately 70 basis points due to the calendar shift of Easter in the second quarter. Arne will go through the details of that in a moment, but I am pleased with our performance, specifically the return to positive traffic both for the quarter and on a year-to-date basis.

Looking at where we are today, at this point in the third quarter, sales and traffic trends are flat year-over-year. Our holiday business again performed extremely well during the quarter with Easter, Mother's Day and Father's Day all showing strong year-over-year growth.

Our operations team and our franchisees continue to execute at a superior level helping to make memories on 500-degrees sizzling plates for our guests.

Our marketing team continues to do a great job refining our communication strategy and changing the way we are talking and connecting with our guests.

On the development front, we are successful -- we've been successfully generating meaningful returns by building new restaurants to perform at and above our expectations in regards to both sales and store-level margins. We opened 3 new restaurants earlier this year: one in Waltham, Massachusetts; one in Cleveland, Ohio; and one in Tulsa, Oklahoma. All 3 restaurants are performing at and above our expectations.

We expect our fourth new opening of the year to occur during the fourth quarter in the Tech Center of suburban Denver, Colorado.

Today, we are also excited to announce the signing of a lease for a new company-owned location in Jersey City's Newport district. This location is expected to open in the second half of 2018.

In addition to our new unit openings, we remain committed to our remodel program. We completed 2 remodels in the first half of this year, currently have 4 remodels underway. We expect to complete approximately 8 to 9 for the full year. These remodels drive sales through expanded capabilities and an updated restaurant design.

Our franchise partners, who remain the heart and soul of our business, continue to invest alongside us in new locations and restaurant remodels. In the second half of this year, our franchisees expect to open one new restaurant in Shandong, China, the capital of the Sichuan province. This will join our successful Shanghai restaurant and be our second location in China. Franchise partners will also open a new restaurant in Hawaii, which will be our sixth in the State of Hawaii. Our franchise partners will also relocate the restaurant in Mississauga, Canada in the fourth quarter.

Additionally, in 2018, our franchise partners expect to open a new location in Fort Wayne, Indiana. We are committed to maintaining our position as the leaders in the fine dining steakhouse category. And in doing so, we feel we continue to position Ruth's Chris to deliver on our total return strategy. Underpinning this strategy is an intense focus on operational excellence, a trusted brand and our proven business model that generates healthy cash flow.

Our priority for the cash first and foremost is investing in our core business, in order to protect the brand we built over the last 52 years. This includes successful new restaurants, which we continue to believe is the most impactful investment we can make.

Second, we want to return excess capital to our shareholders through increasing dividend payments and ongoing share repurchase programs. In fact, since 2011, we've complemented organic growth by returning over $200 million to shareholders, while growing our store count by 15%, our revenues 35% and nearly doubling our earnings. With this strategy in place, we continue to believe it's the best way for us to create long-term value for our shareholders.

Now I'd like to turn the call over to Arne to provide more detail on our second quarter results.

Thank you, Mike. For the second quarter ended June 25, 2017, we reported net income of $7.8 million or $0.25 per diluted share. This compares to net income of $6.9 million or $0.21 per diluted share in the second quarter of 2016. Net income in the second quarter of 2016 included a $465,000 expense related to disputed rent charges as well as a $99,000 gain related to the sale of our closed Columbus, Ohio restaurant.

Excluding the disputed rent charges, gain on sale and the results from discontinued operations, our non-GAAP net income increased 13.6% from $7.2 million or $0.22 per diluted share in the prior year to $7.8 million or $0.25 per diluted share in the second quarter of 2017. Total company-owned restaurant sales for the second quarter were $94.1 million, an increase of 7.9% from $87.2 million last year. The increase was primarily driven by the contribution from our new restaurants as well as the 2.9% increase in our comparable restaurant sales.

As Mike mentioned, there was a calendar shift of Easter from the first quarter in 2016 into the second quarter of 2017. This shift positively impacted second quarter comparable restaurant sales by approximately 70 basis points. Average weekly sales for our company-owned restaurants were $103,500 in the second quarter, up 2.3% from the $101,100 in the second quarter of last year. Total operating weeks for company-owned restaurants were 910, up 5.4% year-over-year from 863 in the second quarter of 2016.

Our franchise income in the second quarter was $4.3 million compared to $4 million in the year-ago period. Total franchise comparable sales were up 3% year-over-year. Comparable sales in our domestic franchise restaurants were up 3.3% during the quarter. And comparable sales in our international franchise restaurants were up 1.5%. Excluding the impact of foreign currency exchange rates on our international sales, international comparable sales were up 3% and total franchise comparable sales were up 3.3%.

Now turning to our costs. Food and beverage costs, as a percentage of restaurant sales, increased 20 basis points year-over-year to 29.9%. The largest driver of this increase was a 3.8% year-over-year increase in total beef costs. While we had expected the beef cost deflation that we experienced throughout 2016 and 2015 to moderate this year, our beef cost in the second quarter were significantly higher than expected. The overall supply side of the beef equation remained strong. However, it appears as if prices are being driven by up an increased retail demand for prime cuts.

Looking ahead, we are currently locked on approximately 50% of our filet needs for the rest of the year and now expect beef costs for the full year to be up in the low single-digit range. Our full year expectation includes third quarter total beef cost inflation in the range of 5% to 10%, before moderating later in the year. In light of these pressures, we continued to maintain pricing power and have -- and expect to have slightly more pricing in the back half of the year with approximately 1.3% on the menu.

For the quarter, our restaurant operating expenses, as a percentage of restaurants sales, decreased 100 basis points year-over-year to 47.8%, primarily due to the $465,000 charge in the second quarter of 2016 related to disputed rent charges.

Our G&A expenses, as a percentage of total revenues, increased 40 basis points year-over-year to 8%, primary driven by an increase in performance-based compensation.

Marketing and advertising costs, as a percentage of total revenues, increased 60 basis points to 3.4%. As discussed on the last call, this increase was driven by a shift in marketing spend across the quarters. While our marketing mix remains dynamic, we expect our marketing expense in both the third and the fourth quarter to be similar to the amount spent in the second quarter.

Preopening costs were $200,000 compared to $700,000 in the second quarter of 2016, driven by the timing of new restaurant openings.

During the second quarter, the company repurchased 400,000 shares of common stock for $8.4 million or $21.08 per share. At the end of the second quarter, we had $18.2 million remaining on our previously announced $60 million share repurchase authorization. The Board of Directors recently approved the payment of a quarterly cash dividend of $0.09 to shareholders, representing a 29% increase over the quarterly dividend paid in August of 2016. At the end of the second quarter, we had $21 million in debt outstanding under our senior credit facility, up from $14 million at the end of the first quarter.

Now I'd like to update our outlook for the full year of 2017 for some of our key cost metrics. We continue to 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 between 2.9% to 3.1% of total revenues. We expect our G&A expenses to remain between $32 million and $34 million. We continue to expect an effective tax rate of 31% to 34%. We now expect capital expenditures to be between $23 million and $25 million. Lastly, we now expect our fully diluted shares outstanding to be between 31.2 million and 31.5 million shares, exclusive of any share repurchases under the company's share repurchase program.

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

(Operator Instructions) We'll go first to Brett Levy of Deutsche Bank.

Can you -- obviously, impressive comp numbers, not just the company operated, but franchise and franchise international. What are you seeing across the landscape that's giving you continued confidence in your ability to not only draw in customers, but still execute? And how do you feel about the labor situation?

Brett, it's Cheryl. I think what we're seeing -- I can't specifically mention one thing, but I think over the past few months, several initiatives that the team has been working on are really resonating with our guests from the remodels that were mentioned as well as introductions to third-party gift card, which is doing very well. And our continued focus on Ruth's 2.0 around menu evolution and consistently upgrading the opportunities on our menus for people to come back with different types of visits and then working on things like Sizzle, Swizzle & Swirl to continue to refresh that and offer opportunities for guests to come back, and it's all, I think, driving what we briefed on the performance.

I think your second question, Brett, was how do we feel about the labor situation. I think our labor backdrop, we feel pretty good about. We have a great team of people, dedicated long-term employees, and we are really proud of the results that they've helped deliver today.

And just one follow-up on sales. Can you give any segmentation in what you're seeing in terms of value-conscious consumers, your bar, your Sizzle, Swizzle, the initiatives such as your steak and wine programs and just also the 2.0 side of the menu. Can you give a little bit more segmentation on that?

Sure, Brett. I think -- and what you're mentioning on the Filet & Rosé, and Filet & Cabernet in our bar, what we've done historically with our menu is try to offer different price points and different opportunities for guests to come in. So from your $9 Sizzle, Swizzle & Swirl experience up to our Tomahawk steak. And I think, again, that continues to resonate. So we work consistently on offering those opportunities. So if you are in the bar and it's a Sizzle, Swizzle & Swirl experience, or you might want to consider the Filet & Cabernet that we currently have running. And I think we see kind of consistency around the guests in choosing those opportunities, so Sizzle, Swizzle & Swirl classics, Filet & Cabernet and then a full dining room experience.

Brett, I think every segment, whether it's special occasion, have all been growing this quarter. And so we're really pleased about that. The only thing that I would say is surprised that dining kind of business segment is not growing quite as fast as some of the other segments.

And just do you have any color on regionality? And then I'll turn it back to everyone else.

No, Brett, I think we're seeing reasonable good strength across the entire system.

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

I just want to circle back on the comps. First on the quarter-to-date and the little bit of slowing there. Is that mainly due to the July 4 shift? Can you help us quantify that? Or is there something else that might be impacting the category?

Brian, this is Arnie. A little bit of July 4, and this is really our softest time of the year too. So for whatever reason, when it gets to be 90 degrees out, the idea of sitting inside around a 500-degree plate isn't as popular as it is in the fourth quarter. I think if you look kind of back over 2 years, where we've seen pretty consistently we're growing somewhere around 2% on an annual basis on a compounded year. Last year, we grew 2.1%. I don’t think that's out of the question, but it's certainly slower this part of the quarter so far.

Okay. And on the second quarter strength, I appreciate your highlighting the sort of more balanced advertising spend through the year, and we've obviously seen the increased weights in the first half. Can you give some color where is that spend being directed? And how we should think about potentially later this year as your spend goes down in the fourth quarter, how do you anticipate that impacting the business, but mainly on the first part sort of where is this spend and...

Yes. I really don't want to go into the details of where we're spending at, because I think we've developed a way to reach out to specific customers that we think is somewhat proprietary to the work that we're doing. I would tell you that our branding marketing team has done a lot of work in terms of segmenting our customer base and making sure that we're reaching out individually to, whether it's Millennials or whether it's the Baby Boomers or whether it's people that are just coming for Sizzle, Swizzle & Swirl. And I think I'd rather not give you any more detail than that, otherwise I'm giving it to everybody else.

All right. Fair enough. On the store margins, obviously another pretty impressive quarter of underlying cost controls within that other OpEx line even adjusting for the one-timers, et cetera. Obviously, the positive comps helped there. But, Arnie, can you speak to the labor line specifically? What was wage inflation in the quarter? And were there any other positive swings, insurance, other things we should be mindful of in that line?

Sure, Brian. I think we have a pretty consistent backdrop of labor inflation. The minimum wage component this year is around $1.2 million, again, and then plus the normal merit increases that might come through the business as well. So I think our teams have done a really good job. They're very effective at managing their individual restaurants. And they spend a lot of time on making sure we maintain or improve our productivity. We are having -- and we did have a pretty good quarter in terms of benefits. There weren't any large. We are self-insured up until a certain point, and we haven't seen an increase in claims. So it's been a fairly good quarter from that perspective as well.

Okay. And then just last one from me. Arnie, you mentioned you locked in the tenderloin, I think, for the -- or half your tenderloin the rest of the year. What's the pricing that you're able to lock in on that contract?

Flat year-over-year.

Okay. All right. And for the '17 food cost outlook, what's the overall sort of food and beverage inflation expectation as you bring everything together? What's embedded in your COGS ratio guidance?

Inflation, I think it will really depend on where beef is going. We're hoping that this retail demand will step back after -- we were hoping after July 4. Now we're hoping for after Labor Day, after grilling season that there is some relief on beef prices. I think it could be anywhere from up flattish to up 1% to 2% is kind of the range of outcomes, I think, we are looking at right now.

We'll go next to Andy Barish of Jefferies.

And just following-up on that. I mean, does that kind of dictate maybe a move towards the higher end of your food and beverage guide in the back half of the year more with the 3 in front of it instead of the 29s we've been seeing?

Yes. Andy, this is Arnie. I think, certainly, the third quarter has some risk there, just the nature of the sales levels. And -- so typically, that's the most -- the highest number we see in terms of percentage of sales. We did take some price. We talked about that a little bit. We had some price fall off. We put about -- another 50 basis points of price back on. For the back half of the year, we have like 1 3, so that should help manage it to some extent. But certainly, I think we're keeping an eye on the prime cuts, particularly the Ribeye -- Cowboy Ribeyes. Those prices are as high as we've seen in the last 4 years. And we're hoping that there's some relief there, because there's some over double-digit inflation on those cuts.

Andy -- this is Mike, Andy. We think there's more -- as we said in the prepared remarks that there's possibility of more (inaudible), but at the same time when you're seeing return to positive traffic. And so to the extent there's a correlation there, we like positive traffic. So we'll be -- we will continue to be reluctant pricers, but it will somewhat be dependent upon what takes place in the beef market.

Got you. And then just a follow-up on -- it looks like mix in the 2Q slipped to flat to negative after being positive with 2.0. And is there something else going on there? Or some changes on the margin? Or some shifting around on the menu that we should be aware of?

Couple of things, Andy, to kind of bring your attention. One, you have Easter shift, which comes with a lower price point. There's less alcohol consumed on Easter and that's a significant component of most checks that we have. So Easter shift will affect it a little bit. We are round tripping the 2.0 initiative. And so while we're still seeing benefit, it's not as big as what it was last year, because most of those menu offerings were at higher price points, particularly on the entrée side. And then finally, when you think about the mix between kind of revenue centers, when you have kind of private dining slowing a little bit, that tends to come with a higher-average check. So that's putting some pressure on mix as well. Overall, I think we like what we see. We like to see traffic-driven sales growth. And if it means, we've given up a little bit of mix because we're growing sales, I think we like that. We're really focused on traffic.

Understood. Mike, quick question for you. Which franchise opening are you visiting, Sichuan or Hawaii?

Both Andy. It's an easy ride, I'd say tongue in cheek.

(Operator Instructions) We'll go next to Joshua Long with Piper Jaffray.

I wanted to circle back to the menu price that you mentioned. I think it was 1.3% in 3Q. I was curious if that level of pricing is something that we're going to see more or less consistent to the back half of the year into 4Q as well? Or if there's still a step down in 4Q that -- I think we had talked about previously?

That's both 3Q and 4Q.

Got it. And then, I believe, this year in 4Q has an extra week. I wanted to see if you could review that in terms of how impactful that is if there's maybe any other sort of moving pieces in there that we should be aware of, so we don't get overly excited about adding an extra week in terms of being able to leverage fixed costs or add in sales from a modeling perspective?

Yes. I guess, I don't have the numbers right in front of me now. But I will tell you that it is a good week to add. It's kind of the week after Christmas to New Year's, which is typically a pretty good week. It's an above average. If you look at the annual sales, it's an above-average sales week. There is some leverage on it. I think if you go back to the last time this happened, you can kind of get a sense of the impact. It's a very similar kind of timing and dynamic in terms of its impact to the quarter.

Okay, great. And then in terms of the work on the remodels. It seems like you're still able to have quite a few of those in the pipeline and work around those. I know -- or I think previously you've discussed the opportunity. When you have capacity increases, that's where you get a lot of bang for your buck in terms of the remodel. So was just curious in the remaining remodels for the year. How that -- how they're split up between capacity increases? Maybe a focus on private dining? Or just what that mix of remodels looks like? Is -- or what that pipeline of remodels looks like for the rest of the year?

So for the ones that we have remaining, I think you have a mix of both and then a couple that are mixed in there really just focused around rent. So some you'll see bar expansion. Others are working on enhancing the private dining side. So probably a mix of all 3.

Great. And then in terms of the, kind of, relative slowing down on the private dining business you mentioned. Do you see that as just being more seasonal? Something you work through? Do you have specific initiatives address that? Maybe reinvigorating that? Or is that something that kind of fixes itself as we go through the back half of the year and get into the stronger -- seasonally stronger 4Q period?

Well, I think this is the slowest time of the year for the B2B part of the business, as vacations come and go. So I mean, we're every bit as aggressive out in the marketplace with our sales force. I think there is just a little less business out there today. I would expect -- we would expect that it would normalize as we visit with our sales force, et cetera. There is no indication that holiday won't be good in the fourth quarter. So I think we're just seeing a little bit of a change in the way 4th of July fell and some of that here more recently, but I would expect that we would see that come back. Having said that, we've been very -- I mean, it's been a very robust part of our business over the last couple of years. So we're growing on growth.

Thank you. At this time, I'd like to turn the conference back over to the management team for closing remarks.

Okay. Thank you all very much for joining us this morning. And as always, it's a great day to go out and eat steak. Thank you.

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