Ruth's Hospitality Group Inc (RUTH) 2018 Q4 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 2018 Fourth Quarter 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, Marguerite, and good morning, everyone. Joining me on the call today are Cheryl Henry, President and Chief Executive Officer; and Arne Haak, Executive Vice President and Chief Financial 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 adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items as well as losses from discontinued operations, which 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 like to now turn the call over to our Chief Executive Officer, Cheryl Henry.

Good morning, everyone, and thank you all for joining us on the call. The fourth quarter marked a fitting end to another year of strong results for our team at Ruth's Chris Steak House. As you will see, there are a lot of moving parts in the quarter. This includes 1 less operating weak and the loss of the New Year's Eve holiday, which Arne will walk you through shortly. Excluding the loss of the New Year's Eve holiday, revenue growth was positive across all 3 of our key segments, led by the strength of our special occasion business. The Thanksgiving, Christmas Eve and Christmas Day holidays were each up year-over-year.

Our comparable restaurant sales accelerated in the back half of the quarter. After adjusting for the loss of New Year's Eve holiday, our comparable sales growth for the quarter would have increased 1.4% after starting out flat in October. We continued to outperform the Black Box Fine Dining Index for both sales and traffic and are pleased with both our performance and the performance of our franchisees who also had a strong quarter.

On the operating side, our team members continued to execute in our restaurants at the highest level, with a focus on operational excellence and enhancing the guest experience. I am proud of these efforts, particularly their focus on pleasing our guests while diligently managing margins. Their dedication drove the highest annual restaurant-level margins we have had in over 10 years. The ongoing consistency of our operations, combined with the acquisition of the Hawaii restaurant, beef deflation and tax savings, generated double-digit adjusted EPS growth in the quarter to $0.50 per share.

Let's now turn to development. During the quarter, we accelerated the opening of 2 company restaurants that were originally targeted for opening in the first quarter of this year, the first in Paramus, New Jersey and the second in Reno, Nevada, which operates under a management agreement. Additionally, we closed 1 restaurant late in the fourth quarter in Washington, D.C., which was at the end of its lease term.

Looking ahead to 2019, we have a strong pipeline of new restaurant development plans. This includes today's announcement of a new lease for a restaurant in Somerville, Massachusetts, which we expect to open in the fourth quarter of this year. We now expect to open new restaurants in Columbus, Ohio; Washington, D.C.; and Somerville, Massachusetts in the second half of 2019. We also have a lease for a new restaurant in Oklahoma City that we expect to open in 2020, and we continue to work on opportunities for additional restaurant openings.

On the franchise side, our partners opened 1 new restaurant in the fourth quarter in Markham, Ontario. For 2019, our partners are currently expected to open 2 new restaurants, 1 in China during the first half of the year and 1 in St. George, Utah in the second half of the year.

Looking back at 2018, I am extremely proud of all of the team has accomplished this year. We seamlessly integrated our 6 Hawaiian franchise locations while opening 3 new company-operated and 2 new franchise restaurants. In addition, 2018 marked our ninth consecutive year of comparable restaurant sales and earnings growth including full year revenue up 9% and adjusted EPS up 26%. This success continues to be driven by our operational approach of executing in our restaurants at the highest level, and I'd like to thank our team members and franchisees for the incredible work they do each day.

Lastly, I think it's worth noting that in 2018, we invested over $30 million in CapEx back into our core business and still returned over $41 million back to shareholders in the form of dividends, share repurchases and debt paydown. We believe these results reflect our success of our total return strategy, which is predicated on the strength of our brand and our people and a disciplined approach to capital allocation.

With that, I'll turn it over to Arne to review the details of our fourth quarter and full year financials.

Thank you, Cheryl. For the 13-week fourth quarter ended December 30, 2018, we reported net income of $14.9 million or $0.49 per diluted share, compared to net income of $9.6 million or $0.31 per diluted share during the 14-week fourth quarter of 2017.

Net income in the fourth quarter 2018 included $250,000 in expenses associated with the acquisition of our Hawaiian franchisee. Net income in the fourth quarter of 2017 included a $3.9 million noncash charge related to the impairment of assets at 1 restaurant location, $600,000 in expenses associated with the acquisition of our Hawaiian franchisee and discrete income tax charge of $1.2 million, primarily related to the reduction of deferred tax assets from the Tax Cuts and Jobs Act. Excluding these expenses as well as the results from discontinued operations, our non-GAAP diluted earnings per common share were up 12.5% to $0.50 compared to $0.44 in the fourth quarter of last year.

Total company-owned restaurant sales for the fourth quarter of 2018 were $120 million compared to $117.4 million in 2017. The increase was driven by the contribution from our new restaurants including those acquired in Hawaii.

Our fourth quarter company-owned restaurant sales were also negatively impacted by approximately $8 million as a result of last year's 53rd week and the shift of the New Year's Eve holiday. Company-owned comparable restaurant sales decreased 0.1% during the fourth quarter. Comparable restaurant sales and traffic in the quarter included an approximately 150 basis point headwind from the loss of the New Year's Eve holiday. Traffic in the quarter, as measured by entrées, was down 2.5% and check was up 2.5%. Adjusting for the loss of New Year's Eve, comp restaurant sales would have been up approximately 1.4% in the quarter.

Total franchise comparable restaurant sales increased 1.1% year-over-year. Comparable sales in our domestic franchise restaurants were up 2.1% during the quarter. And comparable sales in our international franchise restaurants were down 3.9%.

Franchise income in the fourth quarter was $5 million, up 7.1% versus the prior year. The increase in franchise income was driven by a 1.1% increase in comparable franchise restaurant sales as well as the change in accounting from the new revenue recognition standard and the contribution from new restaurant openings.

Now turning to our expenses. Food and beverage costs as a percentage of restaurant sales decreased 160 basis points year-over-year to 27.7%. The decrease was primarily driven by a 6.4% decrease in total beef costs as well as by the 2.5% increase in average check.

For the quarter, our restaurant opening -- restaurant operating expenses as a percentage of restaurant sales increased 110 basis points year-over-year to 45.8%. The increase in restaurant operating expenses as a percentage of restaurant sales was primarily due to the loss of sales leverage from the extra week in the fourth quarter of 2017 as well as the planned increase in occupancy-related expenses.

Our G&A expenses as a percentage of total revenues were up 40 basis points year-over-year to 8%. The increase as a percentage of total revenues was primarily driven by the loss of sales leverage from the extra week in the fourth quarter 2017 as well as an increase in performance-based compensation and costs related to the integration of the Hawaiian restaurants.

Marketing and advertising costs as a percentage of total revenues increased 80 basis points to 3.7%.

Income tax expenses declined from $6 million in the fourth quarter of 2017 to $3.4 million, largely as a result of the enactment of the Tax Cuts and Jobs Act. As a reminder, we reinvested approximately 20% to 30% of these tax savings into our core business in the form of brand, sales-driving and people initiatives.

During the fourth quarter, we repurchased approximately 464,000 shares for $12.6 million at an average price of $27.12 per share.

At the end of the fourth quarter 2018, we had $41 million in debt outstanding.

Additionally, subsequent to the end of the fourth quarter, our Board of Directors approved a $0.13 per share quarterly cash dividend, which represents an 18% increase over the dividend paid in March of 2018.

Now I'd like to provide our outlook based on current information for the full year of 2019 for some of our key financial metrics. Because of last year's extra week, New Year's Eve, traditionally a strong day for us, was pushed from the fourth quarter 2018 into the first quarter 2019. As a result of this shift, comp sales in the first quarter 2019 have been positively impacted by approximately 150 basis points. In addition, the Easter holiday will shift back into the second quarter in 2019 from the first quarter in 2018. We believe that first quarter comparable sales last year benefited by approximately 70 basis points due to the shift of Easter.

Aside from the benefits of the New Year's Eve holiday, we have seen some early headwinds from unusual winter weather in the northern parts of the country as well as the shift of the Super Bowl from a company market in Minneapolis to a franchise market in Atlanta. Excluding the impact of New Year's Eve and weather, our comp sales and traffic would be running up low single digits.

For our cost of goods sold, we see an uncertain year in terms of beef prices. In 2018, we expected beef prices to be up, and ultimately, we saw full year deflation of 8%, driven by prime cuts, which were down 14.5%. This volatility was driven by the improved supply of overall beef and record-high prime grading percentages. Although the supply of prime beef continues to remain at historically high levels, retail demand is expected to continue, resulting in modest beef inflation for 2019. We currently expect total beef inflation to accelerate through the year and to average 3% to 4% for the full year. We expect our cost of goods sold to be in the range of 28% to 30% of restaurant sales.

We currently expect our annual restaurant operating expenses to be between 48% and 50% of restaurant sales.

We expect our marketing and advertising costs to be between 3.4% and 3.6% of total revenues. While marketing and advertising costs will be down slightly over 2018 for the full year, we expect a slight increase in year-over-year marketing spend in the first quarter as we continue to focus our tactics and investments.

We expect our G&A expenses to be between $35 million and $36 million.

We expect our annual effective tax rate to be between 17% and 19% excluding the impact of discrete income tax items.

We expect our capital expenditures to be between $30 million and $32 million and depreciation expense to be between $19.5 million to $21.5 million.

We expect our fully diluted shares outstanding to now be between 30 million and 30.5 million shares exclusive of any additional share repurchases under the company's share repurchase program.

With that, I'd now like to turn the call back to Cheryl for some closing remarks.

Thank you, Arne. We have built a strong foundation over the last 54 years with an intense focus on operational excellence and an amazing group of people. This focus has generated broad appeal across generations and demographics, resulting in incredible brand loyalty.

While operational excellence remains the cornerstone of our strategic efforts, we continue to search for ways to evolve our brand and increase our connection with our guests. We set clear directions for our innovation efforts with any new initiatives needing to deliver at least 1 of 3 things: reducing friction for our guests, enhancing the guest experience or creating efficiency to improve productivity for our team. With those criteria in mind, we are continually looking at a number of potential opportunities that we will update you on as the year progresses.

As I look ahead to 2019 and the future, I am excited about the opportunities to grow and evolve our iconic brand, building upon this strong foundation and to create shareholder value through our total return strategy.

With that, I'd now like to turn the call back to Marguerite for any questions you may have.

(Operator Instructions) We can now take our first question from Nicole Miller from Piper Jaffray.

I had 2 questions. The first is, could you frame up the industry, and I'm thinking specifically as you talk about your growth objectives for this year. It's a great pipeline, and some are in major cities and some are in just relatively smaller cities. So how do you frame up the competition just overall in the industry? And then as you go into those smaller cities, are you the first entrant? Or are there other of your peers there?

Sure, Nicole. So I believe you're talking about specifically to development. So I think we've talked in the past about our ability just given the strength of the brand and the broad awareness of the brand, to be able to go into smaller markets, and I think those are the markets that you're referencing. Generally, we look at smaller markets. There may be 1 or 2 independents that have been in the marketplace. But generally, from a more national brand standpoint, there is an opportunity to be the first one in. So that's certainly part of the attractiveness of our smaller market strategy. From the larger market, that has been kind of our traditional development, especially on the company side over the years. And I think given the environment around development and construction costs, we're just -- we've said before we are patient. We look for the right sites. We won't just do a site because it's there. We want to make sure we're hitting all of our return hurdles on that. And so I think that's -- if there's a way to look at them differently, one is kind of what we think about is our standard marketplace where there may be competitors, whether they're independent or existing national brands, but then smaller markets where there's an opportunity to be the first ones in.

That's helpful. And then the second is wanting to talk over beef costs a little bit more. I wanted to make sure I understood the 3% to 4%, is that just beef inflation? Or was that the overall basket? And if it's just beef, how about the overall basket? And then it seems right now any price you have really, and this would be true across industries, offset labor. And so if beef does inflate, do we just think either as an industry in total or for yourself specifically that margins go down or prices will go up to cover?

Sure, Nicole. Let me take the beef question, first of all, and then I'll turn it over to Cheryl to talk about how we think about price and margins. So in terms of beef, that was just for beef inflation. And I think we do see, because we have beef inflation, that we likely will have some modest inflation in the food basket this year. We don't see it snapping back all the way to where it was 2 years ago, like we don't see us giving all of the benefit we got from beef last year back. But we certainly see, I think as we go through the year and particularly when you get past kind of March, April, that we're likely to see some inflation there. So let me turn it over to Cheryl for the second part of the question.

The question on price, we've seen years in the past where we had inflation both on the labor side as well as on the beef side. Traditionally, our price target, we talk about between 1% and 3%. We haven't had to go outside of that. We have price planned just slightly under 2% for the year and I think there's certainly opportunity there. We take it reluctantly. But if there's an opportunity, we will take it if we need to. I will say I give the teams at the restaurant level an enormous amount of credit. They have become experts at understanding the balance between managing margins, managing labor but also understanding that is the quality of the experience that brings guests back and drives the top line. And so that's our first and foremost focus is not necessarily cutting labor, understanding, but delivering on top line, delivering on the guest experience, driving the top line and be able to leverage that against some of the cost inflation.

(Operator Instructions) We can now take our next question from Andy Barish from Jefferies.

On the composition of the same-store sales, it looked like menu mix actually turned positive in the fourth quarter, so I'm assuming pricing was around 2% as well in the 4Q after kind of a year of some negative mix with the bar program and things like that. Was there something going on there that changed during the 4Q?

No. Andy, I think you said it, at the beginning of the year, we had some mix going on just with the bar program. We're starting to see that settle out in the back half of Q3 and I think we saw that kind of flowing through in Q4. And so we were slightly over 2 and picked up right about that. Arne, if you have anything to add.

Andy, and I think we did round-trip the middle of the year what Cheryl talked about. And I think the other thing that we're kind of seeing is the consumer, particularly on special occasion days, is doing really well. Those days are the comp sales, they -- we set a record last year and we beat it again this year. And you see people spending a little bit more as well on those special occasions, more than what you have in terms of price on the menu.

That's a good point. On the holidays, you're getting not just the traffic beats, but also around check and some of the things people are willing to move around the menu.

Makes sense. And just early on for '19, I mean, anything we should realize on mix shift? Or should we kind of think about that as sort of flattening out as it's generally been over a longer period of time?

Well, I -- we hope for the second, it's always -- we've tried to be very thoughtful about how we put in price and that if we put it in, we know what we're going to get and if we're taking any traffic risk, if we're pushing any particular item moving. But we think it's -- we generally get what we put in there aside from any big programs, but there's nothing currently that we think is disruptive to mix.

Okay. And then on -- actually on the restaurant operating expense line, I was a little surprised on occupancy was -- I think you mentioned it was intentional. Increases are expected to continue. I don't get the sense that's from new openings and higher rents shifting, just given there aren't a ton of those. But is that Hawaii? Or what's driving the occupancy increases? And is that expected to continue? And I guess, why no mention of labor if comps were kind of flattish and labor has been inflating 3%, 4%? Was that just a line item you guys did a particularly good job on this quarter? And what do we expect for wage inflation in '19, please?

So kind of 2 questions there, first on the occupancy and then we can talk a little bit about the labor. First, on the occupancy, your intuition is right. A big piece of that is Hawaii. There is a little bit of an underlying -- some upward pressure as we -- some of our longer-leased restaurants are -- as we have to go and renegotiate a new term, you're seeing a little bit of that. And the newer restaurants right now are coming in probably at the high end of -- if you look at the range of what we pay for rent in terms of occupancy as a percentage of sales. Going into 2019, you've heard a couple other people talk about this, we'll see a little pressure on that line as well, but it's not entirely big. It's maybe $0.01 a share from the new lease standard. So that's kind of the -- there's a couple of different moving pieces there, but the biggest one last year was Hawaii.

In terms of labor, we didn't really call it out. It's kind of been going on for several years. I mean, we -- as we were going through our planning, it's like this is another year. It's going to be kind of 3% to 5%. 3%, 4% is kind of the goalpost that we've been. In 2018, I think the team did a really nice job and their productivity actually picked up a little bit on a full year basis. So it's just one of those things that we have to keep managing and we keep pushing on. And so at the restaurant level, we certainly -- if things play out the way we think they will in terms of food costs and labor, we're probably going to face some pressure there. And it's certainly very manageable. It's not big. And if you look at kind of the rest of our guidance, you'll see we're kind of scaling back some other things. Marketing's a little lower, G&A should be a little lower as a percentage of sales and we're trying to manage the overall margin as well.

We can now take our next question from Brian Vaccaro from Raymond James.

Arne, just back to that comment on the lease standard, the change in lease accounting rules. I think you said about a net $0.01 headwind. Could you walk through how that will flow through the model into '19?

So it'll show up in the first quarter and it's just -- we're going to lose the gain on sale leasebacks that we've been amortizing into lease expense. That is not -- we don't have a lot of -- recent sale leasebacks, but it's kind of throughout the full year.

Okay. All right, certainly understand that dynamic. Okay. And on the marketing and advertising, I wanted to ask, it looks like you increased the spend in the fourth quarter with reinvesting some of the tax savings, spend coming down a little bit in '19 as a percent of sales. I guess, could you comment on how the broader marketing strategy performed versus expectations in '18 and how you might be adjusting tactics heading into '19, whether it be where you're spending, just how you're communicating with the guests?

Brian, so I won't give a full playbook on our marketing plan and our tactics. What I'll say is 2018 was a year we talked about making investments, though somewhere along the lines of building foundational things for initiatives that we want to in the future. So whether that be a new e-commerce site that we invested in that allows us now to sell experiences versus just gift cards and that's something we'll be looking at, and so those types of investments were really in 2018. I think what you'll see is kind of a shift back to, okay, let's get some of those now in place. Let's go and test them and roll them in, in addition to kind of our traditional approach that we use for digital, e-mail, et cetera.

Okay. And Arne, back to the fourth quarter comps, sorry, if I missed this, but the average check you said was up 2.5%. How much pricing was in the menu in the fourth quarter? And how are you approaching pricing or thinking about pricing into '19 relative -- given the certain labor backdrop that you had mentioned before?

And so pricing was just -- we had about 2.3%, 2.4% in the fourth quarter. As we look towards '19, I mentioned to Nicole, we're, for the year, looking just under 2% right now. And again, as we go through the year, that's something we do on a regular basis, is review opportunities, being reluctant pricers. But if there is an opportunity to take it and we need to do that, we will do that.

The first quarter prices is around 2.2%, Brian.

Okay, great. Great. And then just last one, I wanted to ask you about labor and Andy was asking about the wage inflation, but can you help us just put in context, what was wage inflation in '18? And what does wage inflation look like in '19?

They're pretty similar numbers. It was just under 4% for us in '18. We think kind of the goalposts are 3% to 5% and about half of that inflation is coming from minimum wage.

Okay, great. And sticking with that theme, the last one for me, just can you give us an update on turnover at both the manager and hourly level? So where that absolute level is and how is that compared to 12 or -- over the last 12 to 18 months? And any initiatives that are currently in the works or planned through '19 to hopefully drive retention going forward? And that's it for me.

Thanks, Brian. Sure. So we've talked about frequently our turnover. It's something we invest in from a standpoint of developing our people and providing benefits for them as well as some of the initiatives that we talked about, taking our tax savings and investing in retention efforts around our people. Those are ongoing. Our turnover at the management level is well below what is in the fine dining category, as it is for the hourly as well. And again, it's something we invest on for years. So I realize the labor market is getting tighter and it's become quite a topic for everyone. Because of the level of our service and the level of what we produce for our guests, people have always been an important investment for us and so that continues every year and whether, again, that's in the form of training, education, development opportunities for the team, our actual retention efforts that are more on the monetary side.

That concludes today's Q&A session. I would now like to turn the call back to the host for any additional or closing remarks.

Again, thank you all for joining us on the call this morning, and I look forward to speaking with you all in the near future. Have a great day.

Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen.