Ruth’s Hospitality Group, Inc. Q3 2009 Earnings Call Transcript

Ruth’s Hospitality Group, Inc. (RUTH)

Q3 2009 Earnings Call Transcript

October 30, 2009 8:30 am ET

Executives

Bob Vincent – EVP and CFO

Mike O’Donnell – President and CEO

Analysts

Jeff Omohundro – Wells Fargo Securities

Jason West – Deutsche Bank Securities

Rob Weiler – Piper Jaffray

Paul Nouri – Noble Equity

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today’s Ruth’s Hospitality Group Incorporated third quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. Hosting today’s conference will be Mr. Michael O’Donnell, President & Chief Executive Officer and Mr. Bob Vincent, Chief Financial Officer of the Ruth’s Hospitality Group Incorporated. As a reminder, today’s conference is being recorded.

Now, I would like to turn the conference over to Mr. Bob Vincent, Chief Financial Officer. Please go ahead.

Bob Vincent

Thank you Rob 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. Finally, I would like to remind you that today’s call may not be reproduced in any form without the expressed written consent of Ruth’s Hospitality Group, Inc.

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

Mike O’Donnell

Thanks Bob and thank you all for joining us today. Our quarterly results underscored the challenges we continued to face relative to consumer spending in the broader economic environment.

From a sales perspective, comparable trends declined year over year but remained generally in line with the first and second quarters. We benefitted from lower beef cost during the period as well as cost savings from initiatives that began in the latter part of 2008. These factors enabled us to improve operating margins slightly to adjust for one-time items on both periods. On the bottom line we were able to hold the year-over-year decline to approximately $0.5 million despite a revenue decline of approximately 20%. I think that illustrates our ability to manage the business during these difficult times.

As we stated over the past year, we continued to work towards strengthening our financial condition by optimizing free cash flow, managing our capital expenditures and by paying down debt. We made progress in this front during the third quarter having reduced indebtedness by $1.5 million with nearly $12 million paid down through the first three quarters of the year.

Turning to our brands, Ruth's Chris experienced a comparable store sales decline of 24% in the third quarter and Mitchell's Fish Market experienced a decline of 12.3%. Let’s talk a little bit more on Ruth’s Chris. For the period we underperformed Knapp-Track Benchmark Index for our segment and we believed a number of factors influenced that outcome. If you recall, during last year’s third quarter we moved quickly to introduce our summer celebrations in support of the initiative with approximately $1.8 million in advertising.

In this year’s third quarter we featured our Ruth’s Classics, which is similar to the summer celebrations and it is a price fixed promotion. But we significantly pulled back on advertising and by and large the promotion was not seen as new to our customers. At the same time our peers did not introduce a similar promotion in the third quarter of last year but they stepped up their efforts in this year’s third quarter. This resulted in heightened competition and a slight setback in shares. That said through the first nine months of 2009 Knapp-Track suggests that we have held market share and we believe that is a solid accomplishment for the brand.

On a geographic basis, our two largest markets for Ruth’s Chris California and Florida on a comparable basis both performed below the system average down 25.8% and 26.3% respectively. However, our five class of 2008 Ruth’s Chris Steak House company-owned restaurants exceeded the system sales volume average by 16%. Regarding our sales mix, the private dining business at Ruth’s was down 15.9%, which was better than our comparable sales results for the period and while private dining is not as significant in the third quarter as it will be in the fourth quarter, we are pleased to have seen this progress.

Private dining certainly has growth potential for Ruth’s and in an effort to support the opportunity, we recently partnered with a third party to provide professional satellite meeting capabilities geared for live interactive sessions in over 100 Ruth’s Chris and Mitchell's Fish Market dining rooms. We think having this capability is particularly relevant today as company seeks alternatives to hosting large meetings and conference with groups from across the country. We have hosted eight of these sessions since June of this year.

In terms of the dullness [ph] there will be no company restaurants built this year. During the third quarter of 2009, one franchise Ruth’s Chris Steak House location was opened in Durham, North Carolina, while one franchise location in Las Vegas, Nevada closed. In October, our fifth franchise location opened in Kennesaw, Georgia while one franchise location in Aspen, Colorado closed. In addition the company signed a two-unit franchise development for Puerto Rico.

Rebuilding sales momentum in this environment continues to be our priority and we are working hard to connect with consumers through (inaudible) and value. As we stated attracting more guests and increasing their frequency over time is our biggest opportunity and our teams are working hard to make headway at both fronts. As I mentioned earlier at Ruth’s Chris we are featuring our Ruth’s Classics, which gives consumers two choices, this first $39.95 three-course meal featuring one of four entrées, a typical order would be a six-ounce filet with shrimp, a personal side and a dessert.

There is also an upgrade option for $49.95 that features products like our 16-ounce Ribeye. Ruth’s Classics now represents 30% of our guest’s preference and the mix between the two price points is about 50/50. Interestingly Ruth’s Classic is having only a modest impact on our average guest check, which was down approximately 3.3% to $69.48 from the prior year.

We are also continuing to test our Bistro menu which includes appetizers, Sushi soups, salads, sandwiches priced from $9 to $19. It is currently available in our lounge areas at six locations and we are accessing the feasibility of rolling it out to other restaurants as well. Lastly our early week $19.95 steak and price promotion does not have system line [ph] possibilities but does have applications in certain restaurants on a promotional basis.

Mitchell's Fish Market, as many of you know, was acquired by Ruth’s Hospitality Group from Cameron Mitchell in 2008. Mitchell’s has a ten-year history of award-winning success and we in the operations team at Mitchell’s many of which have a long history are proud to be associated with such a high-quality business. Mitchell’s position as a restaurant seafood market, as the name states, helps validate our authenticity and credibility with our customers.

Our daily market driven menu features the (inaudible) seafood prepared with exacting standards in a variety of original flavors seasonal and signature style. Our points of significant differentiation are the quality and handling of our fresh fish, our chef driven culinary approach, our highly trained and knowledgeable teams, our energetic and casually sophisticated atmosphere and our fresh fish retail market.

The initial growth of Mitchell’s is in the Mid West. It’s beginning was in Columbus, Ohio, Mitchell’s then continued its success moving outward to other cities in Ohio, Michigan, and Kentucky. Growth in recent years has included three fish markets in Florida and one in Stamford, Connecticut. The fish markets now total 19 restaurants. Two of the Florida restaurants are performing above the system average in Jacksonville and Tampa. Our (inaudible) restaurant does quite well in the summer tourist season.

The off-season let’s say creates many challenges for our management team. I asked Sam Tancredi to be the COO for this business a year ago. He along with the support of Tom Romaine [ph] and his regional directors and restaurant teams have made great progress in improving margins and identifying the areas of opportunity that we continue to work on as we chart the future for Mitchell’s.

In 2009, we commissioned a brand consulting agency of all the partners of New York to work with us on Mitchell’s brand positioning. With their help and significant customer research, we determined that Mitchell’s is well positioned, has substance, credibility and authenticity. While we have refinement work to go in the economics that relate to certain aspects of operations, we hope to start our growth of the brand in the near future. We have been looking for sites in the Florida market.

As I said, the restaurants in Tampa and Jacksonville have generated solid returns. This is giving us confidence that Florida can be a growth market for us. We do not have any signs at this point but we are in discussions that may allow us to open a Mitchell’s Fish Market during the second half of 2010. Again we acquired this business in 2008 as a growth opportunity for Ruth’s Hospitality Group. We intend to continue to evaluate if that is or it is not the case in 2010. I look forward to reporting updates along the way.

I would like now to turn the call back over to Bob.

Bob Vincent

Thank you Mike. As described in our earnings release today for the third quarter ending September 27, 2009 we generated total revenues of $77.8 million, approximately 21% lower than last year’s $98.9 million. Total company-owned restaurant sales also declined by approximately 21% to $75.6 million. Restaurant operating weeks were 1118 versus 1121 last year.

Average weekly sales for all company-owned Ruth’s Chris Steak House restaurants were approximately $67,900 in the third quarter compared to approximately $88,300 in the same period last year. Ruth’s Chris Steak House comparable sales decreased by 24% and consisted of an average check decline of 3.3% and an entrée reduction of 21.5% offset by mixed shifts. March of 2008 was the last time the company had a menu price increase.

Average weekly sales at Michell’s Fish Market were $69,500 compared to $79,200 in the prior year third quarter. Comparable restaurant sales at Mitchell’s Fish Market decreased 12.3% and consisted of an average check decline of 2.8% and an entrée reduction of 9.7% offset by mixed shifts.

Franchise income fell to $2.4 million versus $3.4 million in the third quarter of 2008. Domestic comparable franchise owned restaurant sales decreased 21.4% while international comparable franchise restaurant sales decreased 13.9%, which combined for a blended comparable franchise owned restaurant sales decrease of 20%.

In terms of our cost structure as a percentage of restaurant sales food and beverage costs decreased 330 basis points year over year in the third quarter. As Mike said earlier, favorable beef cost primarily drove most of that improvement. We are locked for the majority of our prime beef requirements for the fourth quarter and at this point are in the evaluation stage of determining what we will try to lock for 2010. Restaurant operating expenses as a percentage of restaurant sales increased 410 basis points from the third quarter last year to 57.5% resulting from the effects of fixed costs related to lower sales volumes.

Marketing and advertising cost declined by nearly half to $1.8 million and as a percentage of total revenue declined 120 basis points to 2.3%. As Mike mentioned earlier the savings were the result of not having the same level of media support for our Ruth’s Classic promotion this year versus the incremental spending we did a year ago promoting our summer celebration program. In absolute dollars, G&A declined $1.3 million or 19.2% compared to last year and was in line with our overall spending in each of our first two quarters of 2009.

In the third quarter we also incurred $400,000 in restructuring cost related to lease termination charges for two restaurant locations. These charges related to our decision in late 2008 not to build any new restaurants in 2009. For the period, operating income was $1 million. Excluding the $400,000 in restructuring cost related to the lease termination charges mentioned earlier, operating income would have been $1.4 million. This compares to operating income of $1.7 million in the same quarter last year. Interest expense was $1.9 million in the third quarter compared to interest expense of $2.5 million for the same period last year.

In 2009, we recorded a favorable mark to market non-cash adjustment of $400,000 related to interest rate swap agreements versus a mark-to-market non-cash charge of $100,000 in the third quarter of 2008. The company’s net loss was $1 million in the third quarter of 2009 or $0.04 per diluted share compared to a net loss of $500,000 or $0.02 per diluted share in the third quarter of 2008.

In terms of our balance sheet, capital expenditures during the third quarter totaled $600,000. Long-term debt at quarter end was $148.5 million a reduction of $1.5 million during the period. We are compliant with all of our loan covenants and our debt-to-EBITDA ratio at the end of the third quarter was 3.91 versus a maximum of 4.80 for our amended senior credit agreement.

In terms of our updated outlook, once again we will refrain from issuing any definitive earnings guidance for 2009 but believe that comparable same-store sales trends will be down in the range of 18% to 20% for the full year. On the cost side, food and beverage costs are projected to be between 28.5% to 29.5% of restaurant sales while our marketing spend is expected to be between 3% and 3.3% of total revenues. G&A expenses are expected to be in the range of $22.5 million to $24 million. Capital expenditures spending are now projected at $5 million to $6 million while our free cash flow is expected to be in the $17 million to $20 million range.

I will now return the call back to Mike.

Mike O’Donnell

Thanks Bob. I would like to leave you with a few thoughts before we go to the Q&A portion of our call.

Sales continued to be our top challenge and although our October trends have improved year over year we have not seen much change in the two-year comparable trend. As a result the number suggests the conditions are certainly not getting better but they are also not getting worse. Our talented leadership teams have done an excellent job of modifying cost and operating efficiently despite our topline weakness. Those actions have allowed us to make progress on maximizing free cash flow and paying down debt. Their actions will also be very beneficial for us in the future providing great operating leverage into a recovery.

In closing, we are proud that our flagship Ruth's Chris Steak House brand with its 44-year history of great service and sizzling steaks is loved by guests across the country and around the world. Our franchisees are the heart and soul of the brand and we appreciate their commitment and partnership with us as we move towards 2010. Mitchell’s is also an enduring brand and it is in its tenth year and in that time has demonstrated a passion for fresh seafood that is similarly appreciated by guests in the markets it serves. These two great brands have longevity and terrific prospects.

With that operator let us open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Jeff Omohundro.

Jeff Omohundro – Wells Fargo Securities

Thank you. Just some clarification on those comments regarding October, in light of the full year outlook for down 18% to 20%, is it fair to say that the improvement that that would suggest in Q4 primarily reflects the far easier prior year comparison rather than any pick up in fundamental traffic trends, is that the right read?

Mike O’Donnell

Yes, Jeff I think that is the right read. I think as expected the rate of decline has slowed given the overlap of last year’s fourth quarter.

Jeff Omohundro – Wells Fargo Securities

Does it feel like it has been that you have kind of passed the bottom?

Mike O’Donnell

That is a million dollar question, right, yes, I would tell you that intuitively I have that feeling, we are seeing some strength as I said in the private dining space. We are seeing some intermittent very positive days overall still challenged but I do feel like we are seeing – I hope again, I guess that hope is not a strategy but I think that we are seeing if not the bottom real close.

Jeff Omohundro – Wells Fargo Securities

Then the other thing I wanted to follow up on was the comments regarding beef and commodities in 2010. I do know it is early but can you give us any sense of direction in terms of the outlook that you are considering for beef and whether you would consider contracting or (inaudible)?

Mike O’Donnell

Jeff, I think that at this point the intelligence that we are gathering is that beef is likely to be pretty neutral here in the first half of 2010 and so we continue each week to evaluate some offers if you will to lock, our desire is to lock in 2010 and I think philosophically if we can secure pricing that is at or below our 2009 average cost we would likely do so.

Jeff Omohundro – Wells Fargo Securities

Very good thanks.

Operator

Our next question comes from Jason West.

Jason West – Deutsche Bank Securities

Yes thanks, just a couple of things. One, I wonder if you could clarify that the same-store sales guidance you gave for the full year down 18% to 20% is that for the blended company or is that just for Ruth’s Chris?

Bob Vincent

That would be for Ruth’s Chris.

Jason West – Deutsche Bank Securities

Okay and then you happen to have a number for Mitchell’s as well.

Bob Vincent

Yes, I would not provide any guidance at this point for Mitchell’s.

Jason West – Deutsche Bank Securities

Then another one on the outlook for the fourth quarter, can you remind us the percent of sales that you guys do on private dining and sort of what the trends are looking like there in terms of holiday booking, we have done some channel checks, it seems like things may be picking up a little bit versus last year when a lot of companies cut back on that type of activity, wonder what you guys are seeing right now?

Mike O’Donnell

Jason, yes it is Mike, on balance private dining runs in the neighborhood of 9% for us on a yearly basis. It runs in the neighborhood of 12% to 15% in the fourth quarter. I would tell you that we are very encouraged by what we are seeing in early bookings but that is exactly what it is, early where a lot of the bookings that we see will probably take place really more into November, so this next couple of weeks will be even a stronger indicator and there have been a trend, there was a trend last year that we would expect not to repeat itself as dramatically where they were bookings and then cancellations. But what I can say a little more color on that what we are seeing in bookings, we are seeing a decline in what the amount of spend taking place is. So while we are encouraged that the bookings at this point are actually up the revenue base of that may be a little more challenged as some of the booking, the absolute price of those events have come down some.

Jason West – Deutsche Bank Securities

Okay and then last thing just on the help of the franchisees, I noticed that the franchise revenues seem to drop a bit more than the comps did there and just wondering if there is any issues on collections right now on royalties and if you could just talk about the risks of more significant store closures within the franchisee base that would be great, thanks.

Mike O’Donnell

Yes, sure Jason. Firstly, when we talk about our franchise revenue that includes both fees for the sale of the individual [ph] the development fees related to the sale of restaurants so that number does not always tie based on a strict sales calculation. In terms of the franchise community in our receivables, we are current with every restaurant and every franchise where the restaurants are currently operating. We have some modest issues around some restaurants that most recently closed.

The general health of the franchise community I would say is good. A great deal of our franchisees have financing through limited partners as opposed to significant debt financing and I would say that they are well positioned to weather the storm for the most part.

Do we have risk in some outliers where it is really not as much a business or the fact that the business has declined as much but the possibility that some of the restaurants we are entered into at a time when things may have been more optimistic and as a result the rent and occupancy structure is a little more burdensome. We continue to work with the franchise group monitoring that and I do not see at this point that there would be any significant change in the way we are.

Jason West – Deutsche Bank Securities

Great, thank you.

Operator

Our next question comes from Nicole Regan of Piper Jaffray.

Rob Weiler – Piper Jaffray

Hi, this is Rob Weiler in for Nicole, I just want to follow up on the banquet/private dining business a little bit, what percentage do you guys usually have booked by now, I know that you mentioned that November is when you book a lot of them, what percentage do you normally book by now and where are you at as far as that versus even last year, it sounds like you are up a little bit but I am just curious to what percentage is locked in?

Mike O’Donnell

We would be in the neighborhood of 40% to 50%, if you go back and look at history over time and as I have said earlier we are ahead of that this year. So early indications are good but they are what they are is early.

Rob Weiler – Piper Jaffray

And then the banquet sales usually have a higher average check, correct, how much higher that has typically been in the past years I guess than your average check?

Mike O’Donnell

It normally runs in the neighborhood of say $15 to say $20 and that is kind of what I was speaking to earlier that we are seeing some decline in that, we have made adjustments to allow for that and we have actually gone out to try and seek new business in that regard and we are seeing new for instance people opting to use our $39.95, $49.95 Classics in their catering business again they have sort of a fixed price number they feel comfortable about. So we think that that decline could be in the neighborhood of 10% in terms of the individual guest check average but historically that number is up, as I said earlier, about $20 over our running rate and because of the fixed nature of it, it is a very profitable business.

Rob Weiler – Piper Jaffray

Sure. Then I note that you guys mentioned in your comments a comp of 15.9 down for private dining and I believe that was before the just reported third quarter, what was that in the second quarter?

Bob Vincent

Rob, my recollection was that it was about 21%.

Rob Weiler – Piper Jaffray

Down 21%.

Mike O’Donnell

Pretty much, yes.

Rob Weiler – Piper Jaffray

Okay and then just one final question here, it looks like you guys cut back on your CapEx about $3 million to $4 million, where did that cut come from because I know you guys were never planning on building any restaurants.

Bob Vincent

Yes Rob it is really a timing issue. We have a couple of major remodel projects that are still going to get done but due to some of the permitting issues and the architecturals and so forth those have been delayed so we have thought we would be further along with those two projects but we are just really launching them so with that spend we will end up falling into 2010.

Rob Weiler – Piper Jaffray

Thank you.

Operator

At this time we have one question remaining in the queue. (Operator instructions) We will take our next question from Paul Nouri of Noble Equity.

Paul Nouri – Noble Equity

I was wondering if there were any regional bright spots like in the New York area because Wall Street has recovered?

Bob Vincent

From a sales perspective on Ruth’s Chris brand, I think that the performance that Mike spoke earlier about the two largest markets we have California and Florida, I think that we would say that the Northeast probably has had a little bit more strength and in particular some of our big high profiled urban locations be it Boston, Manhattan, Chicago out on the West Coast San Diego have probably performed a little better than the system as a whole.

Mike O’Donnell

Yes I would say Paul that the bright spots are more really restaurant by restaurant as Bob just described than they are by region.

Paul Nouri – Noble Equity

Has bar or liquor revenue, have that been any better or worse than food revenue?

Mike O’Donnell

We have just seen a slight mix shift in terms of alcohol so it has not been significant and some of that really Paul is driven by a decline in what people are spending on big wines.

Paul Nouri – Noble Equity

Yes and final question, is the growing percent of your sales coming from the promotions like the two for $90 or the one meal for $45?

Mike O’Donnell

We did two for $89 a year ago in the third quarter, we now have our six Ruth’s Classics of $39.95 with an up sell to $49.95 and as I said we are running about 30%. We started with Ruth’s Classics in February of last year, it has grown sort of steadily and I think sort of leveled off in the last two quarters and hit 30% of sales range and to the extent that that has happened, we believe that we will no longer be in the promotional side of that or we will be alternatively in the promotional side of that and it will become more a permanent part of what we do.

Paul Nouri – Noble Equity

Okay great, thank you.

Operator

At this time I will turn the call back over to our host for any closing remarks.

Mike O’Donnell

Thank you all for joining us this morning and as I am trying to say it is a great day to go out and eat steaks and/or fish. Thank you very much.

Operator

This does conclude today’s conference call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!