U.S. Markets close in 6 hrs 26 mins

Edited Transcript of RUTH earnings conference call or presentation 1-Nov-19 12:30pm GMT

Q3 2019 Ruth's Hospitality Group Inc Earnings Call

HEATHROW Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Ruth's Hospitality Group Inc earnings conference call or presentation Friday, November 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Arne G. Haak

Ruth's Hospitality Group, Inc. - Executive VP & CFO

* Cheryl Janet Henry

Ruth's Hospitality Group, Inc. - President, CEO & Director

* Mark Taylor

Ruth's Hospitality Group, Inc. - VP of Financial Planning & Analysis

================================================================================

Conference Call Participants

================================================================================

* Andrew Marc Barish

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Brian M. Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group 2019 Third Quarter 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.

--------------------------------------------------------------------------------

Mark Taylor, Ruth's Hospitality Group, Inc. - VP of Financial Planning & Analysis [2]

--------------------------------------------------------------------------------

Thank you, Kevin, 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 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 Chief Executive Officer, Cheryl Henry.

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Good morning, everyone, and thank you all for joining us on the call today. I'm proud of the results we delivered for the third quarter in the face of several external headwinds. This included a tropical storm that affected our New Orleans area restaurants and Hurricane Dorian, which impacted Florida and parts of the Southeast. Additionally, we managed through record high beef prices, which drove a 19% increase in year-over-year total beef costs. Despite these challenges, we were able to deliver positive same-store sales growth and a 22% increase in pro forma earnings per share.

The strength of our business continues to revolve around our commitment to innovation and operational excellence, which is the foundation of our brand and long-term success. With regards to innovation, we made progress testing new initiatives during the quarter, which we're excited about, and we'll share more details as soon as these tests conclude. We believe that these initiatives will help our efforts to drive sales and increase traffic, as we look to enhance our successful Happy Hour and bar programs, launch enticing new guest experiences and evolve our main dining room offerings, while also providing value to our guests.

These initiatives can only succeed if our foundation is strong within our operations. We work continuously within our restaurants on operational excellence, ensuring our people our focused on treating every guest with the touch of hospitality they deserve. The third quarter concluded our efforts to bring every restaurant's Sales Manager, General Manager and Chef together for regional meetings. These meetings focused on our sales expertise, elevating the heart -- the art of hospitality and laying the groundwork for continuous innovation.

New restaurant openings are also an important pillar of our strategic efforts. In early October, we opened a new restaurant in Columbus, Ohio, and we expect to open in Somerville, Massachusetts later this month. We have also recently signed leases for 2 new company restaurants, one in Long Beach, California and one in Suffolk County on Long Island, New York. The first restaurant scheduled within the territory of our recent franchise acquisition.

For 2020, we currently expect to open 5 restaurants. This includes Washington, D.C; Short Hills, New Jersey; Worcester, Massachusetts; Long Island, New York and Long Beach, California. Washington, D.C. was previously expected to open late in 2019 and will replace our current Washington, D.C. restaurant whose lease expires in 2020. We continue to actively work on additional development opportunities for both 2020 and beyond and will provide updates on lease signings as they occur.

In addition to investing in our core business, we also returned over $17 million to shareholders during the quarter. This included dividend payments of $3.8 million and share repurchases of $13.5 million. In regards to the latter, this brings our annual share repurchase amount for 2019 to over $20 million. And subsequent to the end of the quarter, our Board of Directors authorized a new $60 million share repurchase program, reflecting the strength and stability of our business.

Beyond 2019, we are focused on opportunities to grow and evolve this iconic brand. These opportunities continue to be generated by our incredible team and their dedication to operational excellence and innovation. I'd like to thank them, along with our franchise partners, for the remarkable work that they do each day. And with that, I'll turn it over to Arne to review the details of our third quarter financial results.

--------------------------------------------------------------------------------

Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Cheryl. For the third quarter ended September 29, 2019, we reported net income of $4.5 million or $0.16 per diluted share. This compares to net income of $3.6 million or $0.12 per diluted share during the third quarter of 2018. Net income in this year's third quarter included a $300,000 benefit related to the impact of discrete income tax items and $300,000 in expenses associated with the acquisition of our former franchisee.

Net income in the third quarter of 2018 included an 80,000 benefit related to the impact of discrete income tax items and $400,000 in deal-related expenses associated with the acquisition of the 6 restaurants of our Hawaiian franchisee. Excluding these adjustments as well as the results from discontinued operations, our non-GAAP diluted earnings per common share were $0.15 in the third quarter of 2019 compared to $0.13 in the third quarter of 2018. Total company-owned restaurant sales for the third quarter were $97.2 million compared to $93.5 million in 2018. The increase, year-over-year, was driven by new restaurants, including the recent franchise acquisition, and a 0.6% increase in comparable restaurant sales.

Traffic during the quarter is measured by entrées, decreased 1.7% compared to last year, while average check increased 2.3%. Our sales trends improved by period during the quarter despite the unexpected weather challenges that Cheryl mentioned, which resulted in reduced sales during storm preparation as well as the loss of 11 operating days during the quarter. We estimate that these events negatively impacted our comparable restaurant sales and traffic by approximately 30 to 40 basis points. The improvement in our traffic and sales trends has also continued into the fourth quarter, and we are encouraged that our comp sales to date are running up low single digits. Franchise income in the third quarter was $3.9 million compared to $4 million in 2018.

Comparable sales in our domestic franchise restaurants increased 0.5% during the quarter, while comparable sales in our international franchise restaurants were down 0.6%. Other operating income for the third quarter was $1.9 million, up 24% from $1.5 million in 2018. The year-over-year increase was driven by the contribution from our restaurants operating under a management agreement.

Now turning to our expenses. Food and beverage costs as a percentage of restaurant sales increased approximately 140 basis points year-over-year to 29.6%. The increase was largely driven by the 19% increase in total beef cost, that Cheryl noted earlier. Looking to the fourth quarter for beef, we now expect the rate of inflation to be between 10% to 15%, primarily driven by increased retail demand for prime cuts.

Restaurant operating expenses as a percentage of restaurant sales decreased approximately 40 basis points year-over-year to 52.7%, primarily due to lower incentive-based compensation. Marketing and advertising costs as a percentage of total revenues decreased approximately 80 basis points to 3.1%. The decrease as a percentage of total revenues was primarily driven by the planned shift in marketing tactics across the periods.

G&A expenses as a percentage of total revenues were down approximately 80 basis points year-over-year to 8.1%. The decrease was primarily driven by lower performance-based compensation, cost management initiatives and lower acquisition deal costs. During the third quarter, we had capital expenditures of $30 million, which included the acquisition of 3 franchise restaurants plus the development rights to Long Island, New York, the Philadelphia area and parts of New Jersey for $18.6 million. Also during the quarter, we repurchased 664,000 shares for approximately $13.5 million for an average price of $20.26. This brings our year-to-date share repurchase total to 941,000 shares or $20.6 million with an average purchase price of $21.90 per share.

At the end of the third quarter, the company had $83 million in debt outstanding under its senior credit facility, which is up $38 million from the second quarter of 2019, due to the franchise acquisition, share repurchases and increased capital expenditures based on new restaurant openings. Subsequent to the end of the third quarter, our Board of Directors approved a $0.13 per share quarterly cash dividend, which represents an 18% increase over the dividend paid in November of 2018.

Now turning to our guidance. I'd like to provide our revised outlook based on current information for the full year 2019 for some of our key financial metrics. Based on our current expectations for beef inflation in 2019 provided earlier in this call, we now expect our cost of goods sold to be in the range of 28.5% to 29% of restaurant sales. We now expect annual restaurant operating expenses to be between 48.5% and 49% of restaurant sales. We now expect marketing and advertising cost to be between 3.3% and 3.5%. We now expect G&A expenses to be between $34.5 million and $35.5 million inclusive of integration costs related to the acquired franchise restaurants in Philadelphia and Long Island.

We continue to expect our annual effective tax rate to be between 17% and 19%, excluding the impact of discrete income tax items. We expect our annual preopening costs to be between $2 million and $2.2 million based on the timing of new restaurant openings in the fourth quarter. We expect capital expenditures to remain between $54 million and $56 million. We now expect depreciation expense to be between $21 million and $22 million. We expect our fully diluted shares outstanding now to be between 29.4 million and 29.6 million shares exclusive of any share repurchases under the company's share repurchase program.

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

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thank you, Arne. In closing, I'd like to reiterate how pleased I am with our third quarter results. They are a testament to the strength of our iconic brand as well as the resilience, agility and dedication of our entire team. We're excited about the opportunities to grow and evolve our business and believe our commitment to innovation and operational excellence will continue to create shareholder value in the long run. With that, I'd now like to turn the call back to Kevin for any questions you may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from line of Will Slabaugh with Stephens Inc.

--------------------------------------------------------------------------------

William Everett Slabaugh, Stephens Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

Wondering if you could talk a little bit more about the initiatives that you referenced. It sounds like they were more operational in nature. Is there anything else you'd be willing to say there? It'd be helpful. And I also is curious if they involved anything with the menu as well?

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Will. So yes. We talked I think in previous calls about the investments we made last year in doing some work with our guests and understanding the needs around variety as well as value seeking. And the initiatives I'm speaking to that are in test do -- they go beyond operations, so there are menu implications to some of them, in all 3 of our revenue centers, from private dining to main dining room to the bar as well. I mentioned I'd speak more about it. We're in test, so at this point that's probably what I can say. But look forward to seeing the results of those tests and sharing them with you all.

--------------------------------------------------------------------------------

William Everett Slabaugh, Stephens Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

Okay. And then a quick question about the share repurchase authorization. That was a good signal of nearly 10% of the market cap being authorized there. Just curious if you knew or had any plans about how aggressive you wanted to be with that authorization?

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Well, I'll tell you, it's been a part of our total return strategy, and it's a discussion that we have continuously with the Board. It remains a lever that when we believe the opportunity is to pull it, we make a recommendation. And it's something that we do so more to come as we go through the quarters on that.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Andy Barish with Jefferies.

--------------------------------------------------------------------------------

Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [7]

--------------------------------------------------------------------------------

I mean it seems like the real estate lease process is picking up a little bit. Can you address that? Is there anything -- obviously, you've got the new territory. But anything internal or maybe external in terms of seeing fewer competitors out there for sites? That'd be helpful.

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [8]

--------------------------------------------------------------------------------

Andy, yes, thank you for giving the opportunity to recognize the team in our development department, because they often work tirelessly behind the scenes. I will tell you, we've got a great team that's been in place now just for over 2 years, experts in what they do. It really helps to build our pipeline in the work they do. And yes, to some extent, I will say, the acquisitions helped us to have some flexibility in that. And so you saw the first site in Long Island come onboard. The competitive environment, I don't know that, that's relaxed at all. I think it's still competitive for good sites out there. But I think we have a great team that's working hard to make sure we get access to those sites.

--------------------------------------------------------------------------------

Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [9]

--------------------------------------------------------------------------------

And then, Arne, on the expense side of the equation, the restaurant operating expenses was certainly a positive variance versus at least what we and The Street were looking for. Anything more -- I mean was the labor line within there actually up and it was all incentive comp? Just any color on that would be helpful. And kind of where you're seeing wage inflation these days?

--------------------------------------------------------------------------------

Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [10]

--------------------------------------------------------------------------------

Sure. Look, Andy, I think, really, hats off to the operating teams here. They were really nimble, both at the end of the second quarter and the third quarter. We saw some challenging sales in April, and we saw kind of beef inflation moving and we challenged the team to work on this. Labor inflation and margin pressure is still there. They're working very hard against it. There are initiatives there on what can we do better around labor. There's nothing monumental or new, it's just good old-fashioned hard work around managing your business. And even in light of the hurricanes and things like that, I think, they did a really good job of managing against that. We're still seeing kind of similar pressures there, but they've just done a real nice job.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question comes from the line of Nicole Miller with Piper Jaffray.

--------------------------------------------------------------------------------

Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [12]

--------------------------------------------------------------------------------

Could you talk a little bit about the sequencing of the 5 stores next year? How those -- how it might be appropriate to model those?

--------------------------------------------------------------------------------

Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [13]

--------------------------------------------------------------------------------

Sure, Nicole. We can go through that. I think we talked a little bit about it on our call and in the press release but the first one up will be Washington, D.C. and that will be in the first quarter. Then in -- towards the end of the second quarter will be the Short Hills mall area in New Jersey, and then the rest of them are on the back half of the year.

--------------------------------------------------------------------------------

Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [14]

--------------------------------------------------------------------------------

Okay. And then when you look at the traffic being down, I know in the past the bar business has kind of gone up. So sometimes that entree count can be a little misleading. Is that still the case? Are you getting traffic or having customers essentially order other ways, drinks in apps would being example that kind of undercuts that for you?

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

It's a great question. And yes, so we're still seeing that growth in the bar revenue center. And to your point, that menu offers a variety of ways with intent for the guest to choose to eat. And so the -- each person is not necessarily counted in our traffic count, it's very entree-specific. And so you can't have people dining in that space and having very good check in sales on that. It does not necessarily impact in a positive way the traffic count. I will also say, as far as revenue centers, we saw in the third quarter private dining kind of step back up to the plate. And so we're encouraged by that as well. But to your direct question, yes, there's other ways to dine within the bar. This does not necessarily count as a direct traffic, our entree count.

--------------------------------------------------------------------------------

Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [16]

--------------------------------------------------------------------------------

Okay. Great. And then just the last question. I mean we've sat in -- on a lot of these calls, not just this earnings season, but really for the better part of this year and last year, too, and we asked everybody about digital. So how does -- what we're doing -- the consumer doing digitally today apply to the Ruth's crest?

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

When you say digitally, you're referencing online ordering and delivery? Or it's specific around loyalty programs?

--------------------------------------------------------------------------------

Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [18]

--------------------------------------------------------------------------------

Everything. I would say it's all that. And everyone uses a little bit different definition, but our premise tends to be digital, delivery, catering, all of those things combined. So I'm not sure how you guys slice and dice it, but I sure know I want to get some Ruth's crisps delivered.

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

So how we think about digital technology really is about reducing friction for the guests. And so we do have a test in some markets around delivery. I think the way we think about it, Nicole, is, it's going to -- it's not -- it doesn't necessarily make sense everywhere, but it certainly could make sense in some markets. And it's about providing that opportunity for the guest to have Ruth's anywhere they want it. So we are doing some tests around that. I think beyond that, as we think about kind of our digital data strategy, there are other opportunities we're exploring and that are included in some of our tests around, is there opportunities within the experience inside the restaurant itself to reduce some of that friction.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Brian Vaccaro with Raymond James.

--------------------------------------------------------------------------------

Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [21]

--------------------------------------------------------------------------------

Just wanted to start with the third quarter comps. And could you provide a little more color on what you saw across revenue centers during the period? And also it's obviously encouraging to hear October improving a bit. Curious what you'd attribute that to? Is it broader segment improvement or something else?

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [22]

--------------------------------------------------------------------------------

Brian, thanks for the question. So in the quarter -- I've just mentioned this within the call. Again, I think we saw private dining, which hasn't really been as strong earlier in the year, really step back up and so we were encouraged by that. The bar had continued to be an opportunity as a revenue center and the people are really enjoying. So again, we're doing some work. Some of the tests that were in place, I would say, attribute to some of the increases we've seen. I'll turn it over to Arne because I think there are some interesting comments when you look at 2-year and 3-year stack around the traffic and sales as well.

--------------------------------------------------------------------------------

Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [23]

--------------------------------------------------------------------------------

Brian, good morning. I think, Cheryl talked a lot about the -- and I think the team, again, I would kind of throw a shout-out to them as well. Our sales managers, we talked to them about the summer, we had some very specific initiatives for them. Some rewards that they could go earn. And they rallied to the charge and earned some rewards as well. As we look back, we had a pretty tough comp here in the third quarter of last year. I think 3.9 or in the high 3s in terms of the comp when we look at the Black Box data and look at versus our peers. A little bit of that was round tripping hurricanes back from 2017. So they are normal, unfortunately, part of our business, with Florida having a large presence for us. But on a 2-year basis, on a 3-year basis, I think we're really encouraged with the multi-year stack in terms of comp sales. After what was kind of really certainly a surprising and challenging April, we've seen slow, steady improvement in kind of the pace of traffic, the pace of sales. And I think, we'd like the trajectory that we are on here for the fourth quarter.

--------------------------------------------------------------------------------

Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [24]

--------------------------------------------------------------------------------

All right. That's great. And on the average check in the quarter, how much was menu pricing up year-on-year? Did you take any incremental in Q3? And what are your expectations on pricing over the next few quarters?

--------------------------------------------------------------------------------

Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [25]

--------------------------------------------------------------------------------

So Brian, we're -- we've always talked about being reluctant pricers. And so our target is normally, on an annual basis, 1% to 3%. We were kind of in the -- around 2.8% here in the third quarter. We saw a little bit of mix change there, which is more around revenue center mix when the storm comes through Florida and it cancels conferences and private dining events. Those are some of the better check parts of our business. In the fourth quarter, we're kind of running around the mid-2s in terms of our menu price. And as we look ahead to next year, we don't have -- what we have on the menu today and just let it run out, we have about 1% in price on the menu right now. But we really are trying to move this business and sales by driving traffic. That's our first priority. We're not looking to get a lot more aggressive on price unless we have to.

--------------------------------------------------------------------------------

Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [26]

--------------------------------------------------------------------------------

All right. That's very helpful. And then last topic I just wanted to -- hopefully, we could touch on, Arne, just to get your take on the beef market fundamentals, and maybe specifically what's -- what you think is driving the outside inflation on the prime side?

--------------------------------------------------------------------------------

Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [27]

--------------------------------------------------------------------------------

Sure, Brian. On the beef front, I think we knew -- even if you go back to January of this year, we knew that we were going to have inflation in the back half of the year. And I think the only thing that surprised us was the kind of the rate of inflation was higher than what we were expecting. So we still think the third quarter obviously is the worst part of it. It's being driven by really 2 things. Number one, on the supply side, supply is still flat to up a little bit. But for several years, we've seen a growth in supply driven around higher grading of cattle. And the grading still is very high. It's high historically and it's holding up and the supply looks good. But there is no growth in supply. And so there is not that to help out.

What we are seeing is -- and you and I and Mark and -- have talked about this. We've talked about this at investor conferences, we are seeing more retail demand for prime beef. The consumers are seeing it in retail channels. I think Sam's Club had a big promotion earlier this year rolling it out system-wide. So if you couple kind of flattish supply with increased demand, I think that's what we're looking at. We should be kind of round-tripping some weather issues, too, in the Midwest, and hopefully, we'll have a kind of a cleaner winter and spring. We're hopeful that it -- we get a better outlook for the next year.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

We have reached the end of our question-and-answer session. And I would like to turn the call back over to Cheryl Henry for any closing remarks.

--------------------------------------------------------------------------------

Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [29]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.