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Edited Transcript of RUTH earnings conference call or presentation 2-Aug-19 12:30pm GMT

Q2 2019 Ruth's Hospitality Group Inc Earnings Call

HEATHROW Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Ruth's Hospitality Group Inc earnings conference call or presentation Friday, August 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Andrew Marc Barish

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

* Brian M. Vaccaro

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

* Joshua C. Long

Piper Jaffray Companies, Research Division - Assistant VP & Research Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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

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

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Thank you, Annette, 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. 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.

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

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Thank you, Mark. Good morning, everyone, and thank you all for joining us on the call today.

This morning, we reported second quarter results that included diluted earnings per share of $0.31 with comparable restaurant sales that were slightly negative. While the quarter's comparable sales started out slowly, we were pleased to see results improve throughout the quarter, including positive comp sales in June. Now in July, comps are running flat to slightly up despite challenges from the recent blackout in Manhattan and closures in New Orleans, Metairie and Lafayette from tropical storm Barry.

Our special occasions business also improved throughout the quarter, and after a soft Easter in April, we saw year-over-year growth in both Mother's Day and Father's Day. These results, as always, are a function of our team's continued commitment to operational excellence, which is also the foundation of our long-term success. That commitment, combined with the steady cash flows we generate, enables us to consistently return capital to shareholders, while investing in our core business, including the development of new restaurants and the opportunistic acquisition of franchisees. With regards to the last point, we're very pleased to have closed earlier this week on the previously announced acquisition of 3 franchise restaurants plus the development rights to Long Island, New York; the Philadelphia area; and parts of New Jersey. This prized territory contains a population of close to 8 million people.

We're also pleased to welcome our new team members into the Ruth's Chris corporate family and believe that this territory will help us solidify our long-term development strategy of 3 to 5 new company-owned restaurants per year.

In terms of development for this year, we've signed leases for restaurants in Columbus, Ohio; Washington, D.C.; and Somerville, Massachusetts, which are all expected to open in the second half. We also have a solid year shaping up for 2020. As today, we announced the recent signing of 2 new leases for restaurants in Short Hills, New Jersey and Worcester, Massachusetts. We expect these 2 new restaurants to open in the second half of 2020, along with the restaurant in Oklahoma City, which was previously announced. We continue to actively work on additional opportunities for late 2020 and into 2021 and will continue to provide quarterly updates on lease signings as they occur.

As we look to the remainder of 2019 and beyond, we are focused on the opportunities to grow and evolve this iconic brand. These opportunities continue be generated by our incredible team and their dedication to excellence, creativity and innovation. I'd like to thank them, along with our franchisees, for the remarkable work they do each and every day.

With that, I'll turn it over to Arne to review the details of our second quarter financial results.

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

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Thank you, Cheryl. For the second quarter ended June 30, 2019, we reported net income of $9.3 million or $0.31 per diluted share compared to net income of $9.6 million or $0.32 per diluted share during the second quarter of 2018. Net income in this year's second quarter included $122,000 benefit related to the impact of discrete income tax items and $71,000 in expenses associated with the acquisition of our former franchise, which Cheryl just mentioned.

Net income in the second quarter of 2018 included a $273,000 benefit related to the impact of discrete income tax items and $409,000 in expenses associated with the acquisition of our Hawaiian franchisee. Excluding these adjustments as well as the results from discontinued operations, non-GAAP diluted earnings per share were $0.31 in the second quarter of 2019 compared to $0.32 in the second quarter of 2018.

Total company-owned restaurant sales for the second quarter were $104 million compared to $103.5 million in 2018. The increase year-to-year was driven by new restaurant development partially offset by a 0.5% decrease in comparable restaurant sales.

Traffic during the quarter, as measured by entrées, decreased 1.3% compared to last year, while average check increased 0.9%. Company-owned comparable restaurant sales and traffic included a 50 to 70 basis point tailwind from the shift of Easter into the second quarter of 2019.

As Cheryl mentioned, our comp sales improved by period during the quarter despite facing some geographical challenges, most notably in the New York area. In fact, second quarter comp sales, excluding the impact from this trade area, would have been positive.

Franchise income in the second quarter was $4.4 million compared to $4.5 million in 2018. Comparable sales in our domestic franchise restaurants increased 0.9% during the quarter, while comparable sales in our international franchise restaurants were up 2.4%.

Other operating income for the second quarter was $1.8 million compared to $1.6 million in 2018. The year-over-year increase was driven by the addition of new -- of a new restaurant operating under a management agreement in Reno, Nevada and slightly offset by the loss of 29 operating days at our Tulsa, Oklahoma restaurant as a result of flooding of the Arkansas River. This restaurant, located on the second floor of a hotel and casino property, suffered minimal damage and is back to full operations. However, we've estimated that our EPS would have been $0.01 higher if the restaurant had not closed during the quarter.

Now turning to our expenses. Food and beverage costs as a percentage of restaurant sales decreased approximately 20 basis points year-over-year to 27.9%. After a spike in April, we saw our beef cost moderate in the second half of the quarter, resulting in a 1% year-over-year increase. Restaurant operating expenses as a percentage of restaurant sales increased approximately 90 basis points year-over-year to 49.2% due to higher labor and occupancy costs. Marketing and advertising costs as a percentage of total revenues decreased approximately 50 basis points to 3.7%. This change was driven by a shift of spend across the periods. G&A expenses as a percentage of total revenues were down approximately 40 basis points year-over-year to 8.1%. The decrease was largely driven by higher franchise acquisition costs in the second quarter of 2018.

Year-to-date, we have repurchased approximately 276,000 shares for $7.1 million at an average purchase price of $25.84 per share. At the end of the second quarter, we had $45 million in debt outstanding, up $6 million from the first quarter of 2019. Subsequent to the end of the second quarter, our Board of Directors approved a $0.13 per share quarterly cash dividend, which represents an 18% increase over the dividend paid in September of 2015.

Now I'd like to provide an update to our 2019 outlook for cost of goods sold and reaffirm prior guidance on all other points. We have seen beef inflation reaccelerate here in the third quarter and currently expect it to continue through the balance of the year. As we shared on previous calls, in the third quarter last year, we experienced a 20% decline in beef prices to multi-year lows. And as a result, we were expecting higher inflation in the second half of this year with the third quarter likely having the highest quarterly inflation. So far this quarter, this is certainly proving to be true with beef costs up in excess of 10% to date.

In the second quarter, we entered into negotiated set pricing on approximately 70% of our tenderloin supply from August 2019 into early 2020, representing approximately 35% of our total beef supply. The contract price during the entire period will be down 1% over prices paid in the previous year. As a result, we now expect our total beef supply to average 3% to 4% for the full year and our cost of goods sold to be in the range of 28% to 29.5% of restaurant sales.

With respect to all other guidance points from our last earnings conference call, they remain unchanged and are affirmed. Our earnings press release issued earlier this morning details all these points.

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

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

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Thank you, Arne. As I look to the back half of 2019 and into 2020, I'm excited about the opportunities to grow and evolve our iconic brand, building upon a strong foundation of operational excellence and creating shareholder value through our total return strategy. This includes investing in organic growth, opportunistically acquiring franchisees and remaining committed to smart capital allocation, including our ongoing dividend and share repurchase program.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take your first caller from Will Slabaugh from Stephens Inc.

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

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Just wondering if you could talk a little more broadly about what you think worked well in the quarter and maybe what didn't work as well as it had been or how you were hoping it would have worked in the quarter and if this changes any way that you're thinking about either your promotional strategy or how you're approaching your rest of the year.

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

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Thanks, Will. So I think as we look at where we saw some softness early in the quarter is really, as we talked about on the previous call and Arne just mentioned again, around the shift in Easter and with that spring break weeks, et cetera. And so from a promotion standpoint, I don't know that the impact of kind of consumer behavior changes around those holidays. If there's anything to learn from that, I will say as we got through the quarter further, the trends we saw were more in relation to what we've been seeing for the past couple of years.

I know that we talked about on the last call briefly the idea that our bar program has been really strong, and we're driving a lot of traffic into the bars. And so we're looking at different opportunities. We're not prepared quite yet to share that with you, but around all the revenue centers. And so I think more to come probably on the next call, but looking at private dining business as well as our à la carte business there.

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

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Got it. That's helpful. And then given we're getting into debate season, there's simultaneously tariff and other issues circling around. I was curious if any of your core customer groups that we often talk about were showing any different behavior from what we've been seeing over the past quarters or years?

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

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No. Again, I think we saw a little bit of a shift in the private dining just based on where Easter fell this year but not necessarily related to some of the noise and I think kind of media headlines. Again, when you peel that back and then some of the softness in the New York market, I think the trends that you see are generally in line with what we've seen over the last couple of years in those segments.

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Operator [6]

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We'll hear next from Andy Barish from Jefferies.

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

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Wondering if you've sort of delved into the New York weakness a little bit more. Obviously, big market and one where you're going to start building more restaurants given the franchise acquisition.

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

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We have, Andy, and I -- we've really isolated those locations and looked -- took a deep dive around what might be impacting that. And there are plans against each of those individual restaurants that have kicked off late in the second and then into the third quarter. We're still seeing softness there, but it's improving from where it was.

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Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [9]

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Andy, this is Arne. And I think as -- I mean without getting too much into individual restaurants, though, Manhattan, though, I think is the area that is -- has been the softest and there is tourism if you see hotel occupancy dropping a little bit. And as you go further out from Manhattan, the impact is -- while it's still the New York area and it's still softer than what we're seeing in the rest of the country, it lessens as we go out further.

So I think as we look at Marsha Brown's restaurant out in Garden City, its sales cadence is slow, but it's still good and it's -- but it's definitely more around the center of the city is where we've seen the biggest weakness.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [10]

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And was Short Hills part of the Marsha Brown acquisition? Or is Northern New Jersey not part of that territory?

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Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [11]

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It was not, Andy. That was a company territory prior to the acquisition.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [12]

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Okay. And then just finally on -- I guess on April, I'm just trying to understand. So Easter -- the Easter shift and spring breaks were positive. Just it seemed like there was a lot of choppiness and volatility and not positive enough, I guess, or what you were expecting?

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

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Well, Andy, this is Arne. So it was really choppy. If you remember back on our last call, we talked about like we've seen good weeks, we've seen bad weeks, and it was really the week around Easter itself. So the Easter holiday was an improvement versus a normal Sunday. And so that's where you get the benefit. As we look at, though, like the -- all of Easter week, it was down more than any week we've really had, if you did like Easter week to Easter week.

And so if you adjust kind of the April comp sales for the holiday just in 1 month, you would see that it was a comp sale decline that was negative. It's approaching probably about 2% -- 1.5%, 2%. If you hadn't had the Easter shift, April would've been down like 1.5% to 2%. That's a 1-month blip that we haven't seen since like the hurricanes of 2017. So it was very unusual April. And I think we were concerned about it. We did a lot of work. The team, I think, did a great job of kind of rallying. And the June positive comp sales was great because it was really against our toughest comp a year ago in the second quarter.

So it looks like things are back to normal. But I think in its -- from an industry perspective, a lot of people saw some choppiness in April as well.

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Operator [14]

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(Operator Instructions) We'll hear next from Brian Vaccaro from Raymond James.

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Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [15]

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Wanted to go back to the second quarter comps and you mentioned the shift in marketing tactics. And just a little more color on the changes you're making there? Is that mostly timing or something else? And do you think that, that had a negative impact on comps in the quarter?

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Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [16]

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Thanks, Brian. So this was really related to investments we made. If you recall, we talked about making some investments last year related to use of some of the tax dollars into research and understanding the consumer. And so that was really the shift out. So not necessarily in media tactics as you would think, which I think is your question around was there some impact. So I would say, no, not necessarily related to that specifically in the quarter.

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Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [17]

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Okay. And then you talked about the quarter-to-date comps being flat to slightly up despite some one-timers, the blackouts and the storm activity. I guess curious, can you help us take -- extract that and get a view of the underlying trends? I don't want to make too much of 1 month of results, but obviously, we're talking about 30 days so it can be meaningful. Would you say that you're in the low single digits if you strip those out? Or any color there.

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Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [18]

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I think that would -- yes, you could say low single digits.

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Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [19]

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Okay. Shifting gears just to the margins for a second. So on the food cost outlook, Arne, I think you said beef is seen up 3% to 4%. I think that's unchanged versus your prior forecast for the year. Is that correct?

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Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [20]

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That is correct, Brian. We -- the full year has kind of 2 moving parts. I think the fillet lock that we announced in the quarter was a little bit below our expectations and that's one of the reasons why we committed to it. We expected inflation here in the third quarter. It's currently in the double digits and -- but it's against the down 20% last year.

So you're certainly seeing beef prices return to kind of the normal to the mean. I know you do a lot of work with this data, so you're probably seeing it as well. But we're seeing more inflation here kind of in the third quarter than what we had thought. And so when those 2 balance out, it kind of offsets the fillet benefit. So we're still thinking it's going to be 3% to 4% for the year. We think fourth quarter should be a little bit normal, but the third quarter will be choppy here.

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

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Okay. That's helpful. And thinking about the non-beef basket or maybe just put it in terms of the total food cost outlook, if beef is seen up 3% to 4% for the year, where do you see the overall basket inflation for the year?

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Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [22]

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Right now, I'd say, we think it's like probably 1.5% to low 2s depending on where beef goes.

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Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [23]

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Okay. So on the overall basket, so meaning non-beef, you expect some deflation if you were ex beef, correct? I'm interpreting that right?

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Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [24]

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Yes. It's all -- there's all kinds of pluses and minuses, but that you would -- we're going to see on the other stuff, we'll see some benefit come back at us.

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Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [25]

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Okay. Okay. Great. And then last one for me. Back to the tenderloin contract. Can you remember -- remind us when that expires in early '20?

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Arne G. Haak, Ruth's Hospitality Group, Inc. - Executive VP & CFO [26]

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Middle of February.

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Operator [27]

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We'll move next to Joshua Long from Piper Jaffray.

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Joshua C. Long, Piper Jaffray Companies, Research Division - Assistant VP & Research Analyst [28]

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Wanted to see how you thought about the price/value setup. With beef inflation coming back a little bit, but having some visibility in the cost basket, do you feel good with where that's at? Is there an opportunity to take some price either through mix or straight menu price in the back half of the year? Is that even really needed at this point?

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

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Yes. Thanks, Josh. So we -- I mentioned before on calls, we look at price fairly consistently through the year. We are carrying about 2.5% in this quarter, and yes, we'll continue to look at it. I think where we've gone, Josh, in the past is allowing the consumer to move around the menu so to have the continued traffic-driving focus of offering value on the menu, but then also offering opportunities to buy up. So to your point around mix, we'll be -- there's the option to just take direct price, I think that we still have, but there's also an option I think to have a consumer move throughout the menu and offset some of that as well.

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Joshua C. Long, Piper Jaffray Companies, Research Division - Assistant VP & Research Analyst [30]

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Great. That's very helpful. I appreciate that. And then can you remind me where we're at in terms of kind of investing in the physical plans? Have you -- do we do any remodels or any touch-ups to any of the stores in the quarter? And is that needed in the back half of the year?

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Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [31]

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Yes. So we are completely -- we talked about 7 for this year, and that puts us, again, about -- at the end of this year, about 2/3 through the addressable system, if you will. And we've completed 3 of those, another 1 should be completed here in the quarter, and then with 3 remaining for the year.

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Operator [32]

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At this time, there are no additional callers in the queue. I'd like to turn the conference back over to management for any additional or closing comments.

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Cheryl Janet Henry, Ruth's Hospitality Group, Inc. - President, CEO & Director [33]

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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.

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Operator [34]

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That does conclude today's teleconference. We thank you all for your participation.