Ruth’s Hospitality Group, Inc., Q1 2009 Earnings Call Transcript

Ruth’s Hospitality Group, Inc. (RUTH)

Q1 2009 Earnings Call

May 5, 2009 8:30 am ET

Executives

Robert M. Vincent - Chief Financial Officer

Michael P. O’Donnell - President and Chief Executive Officer

Analysts

Jeffrey Omohundro - Wachovia Securities

Nicole Miller - Piper Jaffray & Co.

Paul Nouri - Noble Equity

Paul Westra - Cowen & Co.

Jason West - Deutsche Bank

Bryan C. Elliott - Raymond James

Presentation

Operator

Good morning ladies and gentlemen. Welcome to today’s Ruth’s Hospitality Group, Inc., first quarter 2009 earnings conference call. (Operator Instructions). As a reminder today’s conference is being recorded. Now, I would like to turn the conference over to Bob Vincent, Chief Financial Officer of Ruth’s Hospitality Group, Inc.

Robert M. Vincent

Thank you, and good morning. We need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions.

I would now like to turn the call over to Michael P. O’Donnell, President and Chief Executive Officer of Ruth’s Hospitality Group.

Michael P. O’Donnell

Thank you Bob, and thank you everyone for joining us today. We’re pleased with our first quarter results given the state of our industry as a whole. Sales certainly presented a challenge for the period, but we were pleased that the expense reductions we made at the end of 2008 contributed to a solid bottom line increase in earnings per share versus the fourth quarter.

As you saw from today’s release, comparable sales were down 18.5% at Ruth’s Chris during the first quarter, similar on a sequential basis to what we experienced in the fourth quarter last year. The private dining business also experienced some weakness, and while not a significant touch in the first quarter as it is in the fourth, it was down 25%. Early week dining Sunday to Wednesday was softer than the end of the week dining as we had expected. Once again based upon the upscale steakhouse Knapp Track Index that we use as a benchmark, we gained market share from a traffic perspective for the third consecutive quarter. That being said, the entire category is obviously contracting. So while are enthusiastic about our performance, we understand the context it is in.

Given the geographic distribution of company-owned locations, our Ruth’s Chris sales performance was dictated mostly by our two largest markets, California and Florida, which represents approximately 45% of our sales base with each state having 14 restaurants. California was better than the system average as it was down 16.2% on a comparable basis while Florida was a bit weaker, down 21.9%. On a more positive note our five class of 2008 Ruth’s Chris company-owned restaurants exceeded the system sales volume averaged by 13%. While this level our performance is sequentially down from fourth quarter last year, it nonetheless reflects the health of these newer locations as a group in a difficult economy.

Please recall that we are not building any company Ruth’s Chris restaurants this year although we are working with our franchise partners in their expansion efforts of between 3 and 5 restaurants. Two of these have already opened; Greenville, South Carolina and in Dubai. As you can see, we experienced significant de-leveraging on our restaurant level operating expenses as Bob will explain, but they were bright spots on the P&L. Between our supply chain restaurant level and corporate infrastructure initiatives, we are leaner and more productive and the first quarter results prove that out.

Additionally we realized a $1.3 million improvement in G&A expense on essentially the same revenues as the first quarter last year. We also demonstrated our ability to manage cost inputs that are within our control as the restaurant operating expenses were identical on a percentage basis with the fourth quarter. Also our beef cost fell approximately 15% from the fourth quarter and we were able to take advantage of this as only 50% of our prime beef needs this year are contracted.

Switching topics to our brand leadership, I am very pleased to report that Kevin Toomy at Ruth’s Chris and Sam Tancredi at Mitchell’s are really settled in. Having several months under their belt they have a clear strategy to drive operating performance through execution, with a focus on optimal staffing, and tight controls. At Ruth’s Chris we continue to focus on our positioning as a classic American steak out featuring the same approach to sizzling steak and southern hospitality that Ruth Fertel created 44 years ago. That said, we’ve made changes with regards to our value initiatives to include bundled offerings and price certain or pre-fixed menus, and we believe that these actions will attract more people and increase their frequency over time.

In early February we launched our Ruth’s Classic which is a $39.95 three-course meal featuring a choice of one of four entrées such as a 6 oz. Filet & Shrimp, a personal side, and dessert. It is being received well by our guests and is only having a modest impact on our guest check average which is down approximately 4.5% to $71 from the prior year. Our early week $19.95 steak-and-frites promotion is also being evaluated in four test markets.

In terms of Mitchell’s the sales trends were down year over year, but still exceeded the performance of Ruth’s which is not surprising given its lower average check. We are offering bundled menu items such as Mitchell’s Favorite, a three-course meal that are value oriented at $19.95 and $22.95. The two main regional challenges we face in Mitchell’s are in the Ohio and Michigan markets where we operate eight restaurants. This is primarily due to issues related to the auto industry and its effects on the local economy. Ultimately we think the concept has great potential in the other areas of the country, but given the environment, growth plans are currently on hold, but we still do believe in the growth potential in Mitchell’s.

The decisions we made centered on managing our debt and maximizing free cash flow are improving our performance. We still have limited visibility on top line, but we’re doing a good job in the variables we believe we can control.

I would like to turn the call over to Bob to review our financial results in greater detail.

Robert M. Vincent

As described in our earnings release today, for the first quarter ended March 29, 2009, we generated total revenues of $97.5 million which was approximately 1% lower than last year’s $98.6 million. Total company-owned restaurants sales growth was slightly lower at $94.7 million, and we had a 23.2% increase in restaurant operating weeks, which for the quarter totaled $1140.

Average weekly sales for all company-owned Ruth’s Chris Steak House restaurants was approximately $87500 in the first quarter compared to approximately $107200 in the same period last year. Comparable restaurants sales at Ruth’s Chris Steak House decreased 18.5%. Comparable sales consisted of an average check decrease of 4.5% and entrée reduction of 14.6% offset by mix shifts and pricing of approximately 2%.

First quarter also included $19.9 million in revenues from the Mitchell’s acquisition. Average weekly sale at Mitchell’s Fish Market was $71300 compared to $80100 in the prior year quarter and those sales results are for the full 13-week period in both years including the time period before the acquisition closed. As we have stated before, Mitchell’s Fish Market restaurants will be considered comparable in the second quarter of 2009; so beginning with next quarter’s earnings release we will include comparable sales for the Fish Market brand.

Franchise income fell 18.7% to $2.7 million versus $3.3 million for the first quarter of 2008. These results included a net addition of 7 franchise-owned locations year-over-year. Domestic comparable franchise-owned restaurant sales decreased 22% while international comparable franchise-owned restaurant sales decreased 28.1%, which combined for a blended comparable franchise-owned restaurant sales decrease of 23%.

In terms of our cost structure, as a percentage of restaurant sales, food and beverage cost decreased 280 basis points year-over-year in the first quarter. As Mike said earlier favorable beef cost primarily drove the improvement and we are locked for approximately half of our prime beef requirements for the balance of 2009. We also experienced some favorability on produce and dairy.

Restaurant operating expenses as a percentage of restaurant sales increased 550 basis points from the first quarter last year to 53.5%. The majority of this de-leveraging was due to comparable sales as many of these expenses are fixed. We continue to make progress on containing cost in our restaurants without compromising anything that touches the guest.

Marketing and advertising costs were essentially flat on an absolute dollar basis and on a percentage of total revenues as we attempt to maintain Top of Mind Awareness for our brand and promote our value-oriented message particularly for bundled menu items.

G&A cost as a percentage of total revenues decreased by 120 basis points to 5.8% of total revenue, primarily due to the corporate reorganization completed in late October combined with lower travel and general administration expenses. Depreciation and amortization rose 60 basis points as a percentage of total revenue due to comparable sales de-leveraging. In the first quarter, our operating income was $6.9 million versus operating income $9.3 million in the same period last year. Our net interest expense was $2.3 million in the first quarter this year compared to net interest expense of $3.2 million for the same period last year. In 2009 we recorded a favorable mark-to-market adjustment of $300,000 versus a charge of $1.4 million in the first quarter of 2008.

Net income for the first quarter was $3.7 million or $0.16 per diluted share compared to net income of $4.5 million or $0.19 per diluted share in the prior year period. In terms of our balance sheet, capital expenditures during the first quarter totaled $1.4 million. Long-term debt at the quarter end was approximately $157 million, a reduction of $3 million from the balance at the end of the fourth quarter. We have also had an additional pay-down of $2.25 million in the first week of April. We are compliant with all of our loan covenants and our EBITDA-to-debt ratio at the end of the first quarter was 3.98 versus a maximum of 4.75 per our amended credit facility.

Similar to last quarter, we are not in a position to offer any definitive earnings guidance. The economy continues to be very challenging and unpredictable and with respect to our business, sales trends have actually trended downward since the end of the first quarter. There is definitely from seasonality in these numbers as warmer weather and the onset of the grilling season are not great catalysts for our business. We’re also seeing a negative impact from the Easter Holiday shift into April, we’re rolling over a 2% price increase in March of ’08, and we’re overlapping some promotional activities in April of ’08.

It’s difficult to discern between these factors and the inherent volatility and consumer confidence at this time. Although we only have a few weeks of data from Knapp Track for April, our performance against our competitive set remains positive. We therefore are maintaining our previous expectation of comparable sales trends down in the low double digit range for the full year. On the cost side, food and beverage costs are now projected between 29.5% to 30.5% of restaurant sale compared to earlier expectations of 31% to 32% restaurants sales while our marketing spend is still expected to be between 3.3% to 3.5% of total revenue. G&A expenses should be in the range of $22.5 million to $24 million, similar to what we communicated on our prior call, and obviously down considerably from approximately $30 million we spent in 2008. CapEx spending is projected at $10 million to $12 million, primarily from maintenance capital along with a few previously committed remodels. Again, this is significantly below the 2008 capital expenditures of approximately $31 million. Finally, we expect to generate free cash flow in the $12 million to $14 million range.

Now, I’d like to return the call back to Mike.

Michael P. O’Donnell

I’d like to leave you with a few thoughts before we go to the Q&A portion of our call. Since coming to Ruth’s Hospitality 7 months ago, we’ve accomplished quite a bit. We’ve come through a significant reorganization, improve financing terms by lending group, hire talented leaders at both of our brands, and modified our developments. As we stated, all of these efforts stick with our highest priorities which are maximizing cash, paying down debt, and driving traffic.

As we sit here today, I would day we’ve already made progress generating free cash and paying down debt, but in terms of traffic, we obviously still have some work to do. Fortunately, we have inspired leadership at both brands and after several months of addressing corporate level challenges, we all have time to invest in our plan and how it is executed. The foundation of our plan as always is the Ruth’s Chris brand; 44-year history of great service and sizzling steaks, while Mitchell’s has also proven celebrating its 10^th anniversary this year. These two great brands have proven their longevity.

Finally, we’re working with our franchisees as they continue development of Ruth’s Chris, and we appreciate their continued partnership in working with us through these difficult times. They remain the heart and soul of the Ruth’s Chris business. I’d like to thank all of our operators and our support staff in both the Ruth’s and Mitchell’s brand for all their great work in quarter one.

With that operator, let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Jeffrey Omohundro - Wachovia Securities.

Jeffrey Omohundro - Wachovia Securities

My first question is regards to the menu strategy and your thinking around the initiatives this year to address the traffic issues. In particular, what your thinking is about further efforts in bundled offerings, value initiatives; and does the improvement in food cost give you a little bit more flexibility perhaps to push more aggressively on those efforts.

Michael P. O’Donnell

We started a year ago when we looked at Two for $89 and Summer Celebration, and research that we did said that the customer liked the price certainty, but would prefer more flexibility and as a result wanted an individual pre-fixed opportunity. So, that’s where the Ruth’s Classics came into play. We’ve seen a very high rate of preference for that on us, meaning a P-mix shift, a product mix shift, and feel like that that’s delivering an experience to folks that are predictable and maybe slightly more affordable price range, and as I said earlier that the expectation is that that will give them a greater opportunity to come back more often. In terms of what we’re seeing with food cost, and we remain aggressive as it relates to promoting our $39 and $49 which is a buy-up opportunity for the Classics. So, we’re going to stay on that strategy. We will continue to promote that strategy through the summer, and probably will have that in a variable theme through the fourth quarter although we’re refining where they’re taking place now. The issue of food cost allowing us greater flexibility is one of the reasons we’ve been taking $19.95 steak and fries as an early week promotion, and so I think we are conscious at this point of being able to do some things like that leveraging our food cost; however, recognizing that food cost may not stay there, long term, we’ve to make sure that we don’t have a complete shift in the business. So, I think we’re staying with that theme for the balance of the year.

Jeffrey Omohundro - Wachovia Securities

It seemed like in this period there’s a broadening of the delta between the company’s same-store sales and franchise same-store sales, I wonder if there’s anything behind that and how the health of the franchises would be?

Michael P. O’Donnell

Well, most of the franchises have been around for a substantial amount of time, they’re well capitalized and wonderful people, doing a great job in operating side; I think that we’ve had some geographic challenges, they operate in some smaller markets that may have been impacted by the closing of certain businesses around them or industry around them more than maybe we have; not all of our franchises have participated in the Ruth’s Classic while some of them have. I really would say that their results really reflect more of the markets that they’re in than what’s going on in the business.

Operator

We will take our next question from Nicole Miller - Piper Jaffray & Co.

Nicole Miller - Piper Jaffray & Co.

Can you quantify how much the Easter impact may be approximately in April?

Michael P. O'Donnell

Nicole, we probably estimated it’s probably about 2.5% or 3.5%.

Nicole Miller - Piper Jaffray & Co.

It’s just the negative?

Michael P. O’Donnell

Correct.

Nicole Miller - Piper Jaffray & Co.

And development, I just want to make sure, I know there’s no company but it’s two franchises open in the first quarter and does the last one come kind of in the tail end of the year?

Michael P. O’Donnell

You are correct, we have two openings in Q1, we are saying 3 to 5 so there would be 1 to 3 additional, and one is under construction in the Mid West and scheduled to open either the end of the second quarter, early third quarter and then the others would likely occur in Q4.

Nicole Miller - Piper Jaffray & Co.

The Mitchell’s average weekly sales, can you just walk me through this; I see what’s in the press release here, the 69.6 and it’s a small difference, but you talked about 71.3, but it sounds like there’s a reason for the difference?

Michael P. O’Donnell

In the press release we included both the Fish Market brand and the Steak Houses, and in the comments it’s really just the Fish Market. The business we bought was really the Mitchell’s Fish Market.

Nicole Miller - Piper Jaffray & Co.

And then just my last question; what promotions are you lapping in the second quarter, and then I noticed first quarter marketing expenses were only 2.6%, you’re still guiding for 3.3 to 3.5, so what quarter is going to have more marketing and what things are you focused on?

Michael P. O’Donnell

In terms of the overlap, a year ago we had a $25 Be Our Guest promotion where we had a targeted direct mail campaign about half the system and in terms of the spending pattern, given the economic uncertainty in Q1 here, we made a conscious decision to kind of re-allocate the funds for the balance of 2009 with a little less spending coming in Q1, but we’ll start to pick that up here in Q2 and Q3.

Operator

We’ll take our next question from Mr. Paul Nouri - Noble Equity.

Paul Nouri - Noble Equity

I was just wondering if any market did better or worse than others, I know you’ve mentioned it with the franchise, but in general?

Robert M. Vincent

Well, I think in Mike’s prepared remarks we talked about California which is our largest market with 14 restaurants performing slightly better than the system as a whole and our Florida market which also has 14 restaurants that were a little less in terms of aggregate volume than California slightly underperformed the system average; so, they represent almost 44%, 46% of our business, so those are the most significant market metrics we could share with you.

Paul Nouri - Noble Equity

And, is interest expense going to increase the next few quarters due to revised agreement in your credit line?

Robert M. Vincent

The interest rate doesn’t really change until we get into after Q3; so, for the next two quarters there really shouldn’t be significant changes in that, and then in the fourth quarter we’ll probably have a little bit higher carrying costs.

Paul Nouri - Noble Equity

Okay, and I assume that any free cash or most of the free cash is going to go through debt pay-down?

Robert M. Vincent

That is correct.

Operator

We’ll take our next question from Paul Westra - Cowen & Co.

Paul Westra - Cowen & Co.

If I can just follow up on a question on your beef; you mentioned, I think that half your beef loading in your first quarter costs dropped some 15% in the fourth quarter, but I was trying to gauge how much further your beef costs looking forward for the year; when does your contract beef come off, and what were the pricing on your contracted beef year over year?

Robert M. Vincent

Paul, I would tell you that what we’ve got contracted is prime beef which probably represents about half of our overall beef purchase, and in terms of the lock we are secure for our requirements through the calendar year ’09, and the pricing is approximately 2% below what we actually spent in Q1. The tenderloin market we’re purchasing on the spot.

Paul Westra - Cowen & Co.

So, you’re obviously seeing some significant, 20% to 30%, drops in your spot purchase of tenderloin?

Robert M. Vincent

They have been very significant; correct.

Paul Westra - Cowen & Co.

A question regarding your private party business; can you talk a little bit more about what your annual mix is and what that mix shifts from the summer to the holiday season and maybe some efforts, both the summer and as you gear up for the holiday season, maybe, you’re thinking about the perspectives?

Robert M. Vincent

Generally, our private dining business is fairly static through the first three quarters of the year, probably runs 9% to 11%, and then in the fourth quarter it’s clearly the biggest part of our business, sometimes running 13% to 14%. We have several initiatives ongoing where we’re getting into a program where we’ll have a satellite capability in our system, both in the Ruth’s system as well as the Mitchell’s system, where we’ll be able to attract large groups to broadcast throughout the country, and we’ve just launched this initiative; we’ve secured some commitments already, and we think it could be sizable business as time passes, but we think that will help mitigate at least here in ’09 some of the weakness that was experienced in the first quarter. The primary focus for that is that the changes in farmer rules and the way they are allowed to entertain and the leverage that we can create out of having satellite locations we and they view very favorably.

Paul Westra - Cowen & Co.

Lastly, just a general question; obviously it was pleasant to see no write-downs on units this quarter; can you give us an update on your most latest unit by unit review, and how many stores are added under your cash flow negative?

Robert M. Vincent

I think it’s a little premature at this point. We did a thorough and extensive analysis at year end. I don’t think in the first quarter there were any significant changes. I think that we had 3 or 4 stores that were negative cash flow, but frankly those stores were in fact impaired in Q4.

Operator

We’ll take our next question from Jason West - Deutsche Bank.

Jason West - Deutsche Bank

You mentioned on the Knapp Track, that you guys are outperforming the peer group, can you tell us exactly what the peer group; is that just high-end steakhouses or is that upscale dining in total?

Robert M. Vincent

No, it’s primarily upscale steakhouses; Capital Grille, Fleming’s, Smith & Wollensky, and The Palm are some of the names in that index.

Jason West - Deutsche Bank

In terms of pricing, can you update us where that will be as we move through the rest of the year, I think you said it was 2% this quarter and you had some rolling off.

Robert M. Vincent

The last price increase we took was March 2008, and at this point, we have no plans to initiate any price increase in ’09.

Jason West - Deutsche Bank

So, the pricing will go from 2% in the first quarter to; when does it go to 0%?

Robert M. Vincent

It is now if you will.

Jason West - Deutsche Bank

Any thoughts of lowering some pricing on some entrée items given that beef is down so significantly?

Michael P. O’Donnell

I think we’ve answered that currently with that $39.95 and $49.95 opportunity. We’re pleased with the way that’s behaving and at this point that’s the direction we’re taking from a price standpoint.

Jason West - Deutsche Bank

You’d started running that a year ago or was this something added in the last year?

Michael P. O’Donnell

No, what I said was that we ran Summer Celebration last year which is our first venture into a value-oriented opportunity and that was two dinners for $89.95. What we started in early February was Ruth’s Classic which gives you a toy sub, an entrée salad, an individual side, and dessert, and that runs between $39.95 and you have a buy-up opportunity of $49.95 of which we see a fairly even split with the preference slightly going towards the $39.95.

Jason West - Deutsche Bank

Lastly, in terms of industry overall, obviously everyone’s struggling on the top line; any increases in store closures that you guys are seeing or other companies taking the same tactics as you guys which is waiting it out and cutting costs and managing cash flow and keeping the lights on?

Michael P. O’Donnell

I honestly am not privy to the strategies of others. We’re seeing some independent closures in various markets, but from a chain perspective other than what they may have announced in terms of their closings, I am not really familiar with what their strategies are.

Operator

We’ll take our next question from Bryan C. Elliott - Raymond James.

Bryan C. Elliott - Raymond James

Just a followup to that last question; any noticeable change in business patterns when you’ve had an independent close in a trade area?

Robert M. Vincent

It’s really market by market and it really depends on how strong the competitor was in the first place. I am stating probably what the obvious is; I mean, the weaker competitors are going out earlier and as a result it does not have as much as impact as you might think it has although we do see some lift, but it’s not necessarily sustainable. So, I think where people are going out it’s because there truly is an imbalance of seats and it tries to get back to a balance. So, I think, anybody else that’s remaining gets a little bit healthier; it’s not for instance shifted dramatically towards us.

Operator

There are no other questions in queue at this time. I’d like to turn the call back over to the management.

Michael P. O’Donnell

Thank you very much for your time this morning. We look forward to seeing you out there eating steaks and seafood. Thank you.

Operator

That concludes today’s conference. Thank you for your participation.

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