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Ruth’s Chris Steak House, Inc. (NASDAQ:RUTH)

Q3 2010 Earnings Conference Call

October 29, 2010 8:30 AM ET

Executives

Bob Vincent – EVP and CFO

Michael O’Donnell – President and CEO

Analysts

Jeffrey Omohundro – Wells Fargo Securities

Jason West – Deutsche Bank

Andy Barish – Jefferies

Bart Glenn – D.A. Davidson

Operator

Welcome to today’s Ruth’s Hospitality Group Incorporated third quarter 2010 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 Bob Vincent, Chief Financial Officer of Ruth’s Hospitality Group. As a reminder today’s conference is being recorded. And now I’d like to turn the conference over to Mr. Vincent. Please go ahead sir.

Bob 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 discussions of the risk that could impact future operating results and financial condition.

Finally I would like to remind you that today’s call may not be reproduced in any form without the express written consent of Ruth’s Hospitality Group Inc. I would now like to turn the call over to Michael O’Donnell, Chief Executive Officer at Ruth’s Hospitality Group.

Michael O’Donnell

Thanks Bob and thank you all for joining us today. In the third quarter we were pleased with our financial performance, as positive same-store sales growth at Ruth’s Chris Steakhouse helped narrow our net loss compared to a year ago period. Comparable sales at Ruth’s Chris increased 4.9% versus the prior period. Mitchell’s Fish Market comparable sales decreased 2.8% ending what had been a solid track record of positive sales from December of 2009 to the second quarter of 2010.

Currently October’s comp trends are positive in the middle single digit range for Ruth’s Chris while Mitchell’s trends remain in a negative low single digit range. On a geographic basis, Ruth’s Chris two largest markets California and Florida, both generated positive sales for the quarter as Florida sales rose 3.4% while California sales improved by 2.6%. Overall in the Ruth’s Chris portfolio, 50 of the 64 company locations generated positive comparable sales in the third quarter, which underscores the stability of the brand’s top line recovery. In the Ruth’s Chris Franchise system, domestic comparable franchise-owned restaurant sales increased 6.2% while international comparable franchise-owned restaurant sales increased 9.2%, which combined for a blended comparable franchise-owned restaurant sales increase of 6.8%.

Private dining sales at Ruth’s Chris Steakhouse increased approximately 18% during a three-month period. So we continue to make inroads with our catering and professional satellite businesses.

Given the traction we have generated in private dinings throughout this year along with the fact that our holiday private dining reservations are up approximately 17% over last year, we’re looking forward to what should be our most successful holiday private dining season since 2007.

Entrees, which serve as a proxy for traffic increased by 5.3% were positive for the third consecutive quarter while their average check decreased by 0.3. Compared to the Knapp Track benchmark index for the Steakhouse segment, Ruth’s Chris outperformed the index by 20 basis points in sales but lacked by 180 points in traffic. Still we narrowed the gap in traffic by 220 basis points from the previous quarter. Relative discounting certainly remains a factor to Ruth’s Chris in this environment but we are comfortable with our current strategy, execution, and messaging.

By 2010 Ruth’s Chris campaign encouraged people to savor the moments of life with sizzling steak and genuine hospitality, which we believe is resonating with our intended demographic. While our marketing spend rose in the third quarter compared to the second quarter due to timing, we are still spending 3% to 3.5% of sales on an annualized basis in the form of print, direct mail radio placement.

In addition, our Ruth’s Classics with its $39.95, $49.95 price fix have become main stays in our menu. As of November 1, we’re updating the offerings under this program on a seasonally adjusted basis. We would expect classics to continue to represent approximately 30% of our sales mix. As we discussed in our previous call, we did implement a very modest price increase on a limited number of items during the third quarter of 2010. The benefit will be approximately $1 million in sales. On an annualized basis given no change in mix, it will positively impact our sales by approximately 1%.

We also continue to test the brand enhancing initiatives at seven locations, which center on improvements to the guest experience and atmosphere, the menu, the service desk, uniforms and background music.

Turning to Mitchell’s comparable sales trends reversed direction from the previous two quarters, and this was in part driven by our weakness in the Florida market where sales were down 6.5%. Additionally, we had a shift in our promotional strategy that may have had a negative impact during the quarter but we view this as temporary.

Although we’re not ready to discuss our specific development plans for Mitchell’s, we are pleased with the sales at the Winter Park, Florida opened in June and are incorporating many of its design elements in our current development work. We remain focused in Florida for expansion as we look to replicate the performance of our existing Tampa and Jacksonville restaurant at future sites. Both of these restaurant locations generate volumes in excess of $4 million.

As we have stated previously Mitchell’s Fish Market has built a well-deserved reputation within the polished sea food sector over the last decade and viewed as having great potential in a long runway of opportunity. Seafood is generally viewed as a healthy protein and there is not a great deal of regional or national competition in the fresh seafood category.

Regarding Ruth’s Chris development, we recently signed an agreement for a new franchise location in Ashville, North Carolina, which will be our eighth restaurant in that state upon completion. In addition a new agreement for the Niagara Falls territory in Canada was signed during the quarter. In total we currently have 17 commitments for future franchise restaurants over the next several years and this pipeline should allow us to continue to generate a consistent stable franchise income in the $11 million to $12 million range annually.

On the company’s side we evaluating sites and seeking new strategic growth partners in the casino and hotel industries where our system has had great success in the past. Both the gaming and hospitality environment offer us many favorable attributes such as captive audience, potential guests and more limited investment risk as many of the spaces would be built out for us by the developers.

In terms of more traditional development, we’re particularly focused on the West Coast and North East as these regions generate the highest average volumes in our current portfolio. While we were actively seeking restaurants, we do not have any signed agreement at this time.

Of course given current volumes at Ruth’s Chris relative to past performance, our largest growth opportunity is organic that is our rebuilding traffic through superior food and service and upholding our 45 year reputation for the best sizzling steaks anywhere and that remains our focus each and every day.

In summary I know I have mentioned this in the last call but it’s certainly worth a continued emphasis that financing we completed earlier this year offers our company great flexibility to weather the ups and downs of the macro environment and removes the worry of bank covenant from our day to day discussion. Our balance sheet strength will allow us to pursue an investment growth when it is prudent to do so. As always we will manage expenses closely in the deployment of capital we reserve for high return projects that will create long-term shareholder value.

Let me turn this back over to Bob.

Bob Vincent

Thank you, Mike. As described in our earnings release today, for the third quarter ended September 26, 2010 we generated total revenues of $79.8 million, an increase of $3.7 million or 4.9% compared to last year.

Total company-owned restaurant sales increased $76.9 million or 4.4% compared to $73.6 million in the third quarter last year. Restaurant operating weeks with 1131 versus 1118 last year.

Average weekly sales for all company-owned Ruth’s Chris Steakhouse restaurants was approximately $69,000 in the third quarter compared to approximately $66,000 in the same period last year. Ruth’s Chris Steakhouse comparable sales increased by 4.9% and consisted of an average check decrease of 0.3% combined with an increase in entrees of 5.3%; our third consecutive quarterly increase in entrees.

Average weekly sales at Mitchell’s fish market were approximately $66,000 compared to approximately, $68,000 in the same period last year. Comparable restaurant sales at Mitchell’s Fish Market decreased 2.8% as our average check was down 0.3% while entrees decreased 2.5%.

Franchise income increased 11.7% to $2.6 million from $2.4 million last year.

In terms of our cost structure as a percentage of restaurant sales, food and beverage cost increased 80 basis points year-over-year during the third quarter. Higher beef cost primarily drove the increase; however, we did have some produce and dairy pressure as well.

For the fourth quarter we have approximately 50% of our prime beef requirements locked and approximately 75% of tenderloin requirements locked, both at prices approximately 8% to 10% higher year-over-year. At this time we have no forward contracts for beef in 2011.

Restaurant operating expenses as a percentage of restaurant sales decrease 40 basis points from the third quarter last year to 56.1%. This decrease was driven in part by sales leverage.

Marketing and advertising cost increased to $2.8 million from $2 million and as a percentage of total revenue increased by 90 basis points at 3.5% of total revenues due to a shift in timing of national radio advertising.

G&A expenditures remained constant at $5.4 million in both periods. Last year, we had incurred $0.4 million in restructuring cost related to lease termination charges for two restaurant locations. These charges related to our decision in 2008 not to build any new restaurants in 2009 and there were no comparable charges in 2010.

For the period, our operating income was $1.6 million which compares to operating income of $1 million in the same quarter last year including the aforementioned $0.4 million charge for lease termination.

Interest expense was $1 million in the third quarter compared to interest expense of $1.9 million for the same period last year. In the third quarter of 2010 in connection with an expiring interest rate swap agreement, we recorded a favorable mark-to-market non-cash adjustment of $0.3 million compared to a favorable mark-to-market non-cash adjustment of $0.4 million last year.

We had a net loss of $0.5 million in the third quarter of 2010 or $0.01 per diluted share and a share base of $34 million compared to a net loss of $1 million or $0.04 per diluted share on a share base of $23.6 million during the third quarter of 2009. Included in our 2010 net loss is $0.06 million in preferred stock dividends related to the financing transaction we completed earlier this year and $0.04 million in restructuring expense in the net loss for 2009.

With regards to our balance sheet, long-term debt as of September 26 was $67 million, a reduction of $2 million for the quarter.

In terms of our outlook for 2010 we are reaffirming our second quarter guidance which includes the following. Food and beverage cost of 29% to 30% of restaurant sales; marketing expenditures of 3% to 3.5% of total revenue; G&A expense of $22 million to $24 million; and an effective tax rate of 25% to 30%. Finally, CapEx spending is projected at $5 million to $6 million while our free cash flow generation is expected to be between $20 million and 22 million. Let me turn the call back to Mike.

Michael O’Donnell

Thanks Bob. Our third quarter saw continued improvement particularly with respect to the Ruth’s Chris brand. Our targeted, marketing and brand building message is bearing fruit and by building on our recent momentum, we are ideally positioned to drive bottom line improvement over the long haul. Ruth’s Chris Steakhouse is celebrating its 45th anniversary of sizzle this year. Looking back we’re pleased to be partnering with a franchise community many of whom have been with the branch since 1970s, and providing our guests with great steaks and genuine hospitality.

Our franchise remain the heart and soul of the Ruth’s Chris legacy and together with their leadership we look forward to resuming our build out of the Ruth’s Chris system over the next several years. Mitchell’s also has great potential in the polished casual segment with its freshly prepared sea food and exacting standards. We’re going to be building new restaurants in that brand as well.

We look forward to updating you on the progress in the coming quarters and are now available to take your questions. Operator?

Operator

(Operator Instructions) First we’ll hear from Jeffrey Omohundro with Wells Fargo Securities.

Jeffrey Omohundro – Wells Fargo Securities

My first question is related to the beef cost outlook. Maybe you can update us on your discussions around initial contracting on 2011. Where that stands and what your thinking is in terms of how contracted you might want to be?

Bob Vincent

Good morning, Jeff. In terms of ‘11, it’s a bit early right now to get any partners if you will to secure any of our requirements for 2011. The guidance that we have been given with the folks that we work with indicate that it’s probably going to be late January early February before such time where there’ll be a reasonable counterparty to potentially lock for 2011. As we’ve always expressed, we have a desire to lock in whatever we can for the predictability and certainty. But again we’re also cognizant of whatever that cost of that lock is. And so I think that when we think about our brand going forward in ‘11 given some pricing opportunities, we could probably cover 5%, 6% inflation in 2011 and so if we had an opportunity to lock at that kind of range, we probably would do so.

Jeffrey Omohundro – Wells Fargo Securities

You’ve had some impressive growth in your private dining business. When you dig into the components of that growth, are you seeing more business related reservations or is it a blend? Also In terms of that average check information that you provided, how is the average check trending in your private dining business?

Michael O’Donnell

Private dining, we’re really seeing – we’ve put together an aggressive plan for our sales management people of which most restaurants in the system has a sales manager. And so we’re seeing private dining increases across the board, really the three components really of that. We are seeing an increase in the business side. We are seeing an increase of sort of an organized traditional customer side. And then the satellite business that we talked about before is doing quite well for us. So those three segments have really been all behaving well and that’s really been driven by the – we’ve got an aggressive plan internally in terms of the outreach with our third-party provider on the satellite plan and then our sales managers out in the field have been quite aggressive.

In terms of the pricing, we are seeing a little more spend and we expect that that’s going to take place in the holiday season. We are still seeing a fair amount of lunch reservations for some of this, so that kind of offsets that, but for the most part we are starting to see a little bit of loosening in terms of price point.

Jeffrey Omohundro – Wells Fargo Securities

On Mitchell’s and that reversal in comp, you mentioned related to Florida, and you also mentioned a shift in the promo strategy. What will you be doing at Mitchell’s? Is it going to be a heavier promo or more value in order to pick up sales in that division?

Michael O’Donnell

Well, I guess the answer to that is yes. I think that we saw some very good traction from a value and utilizing a value promotion strategy and beginning last December and then to the second quarter. We may have thought that we were a little further along and backed away from some of that. So we’re actually returning to that sort of 1995, in some cases 2295 prefixed value sort of proposition. We’ve already started that. We will have a holiday promotion running on a go-forward basis. But in particular when you only have 20 restaurants and we had a significant decline in the two restaurants in Florida particularly in the early part of the quarter, that had a bigger impact on us.

Operator

Next we will hear from Jason West with Deutsche Bank.

Jason West – Deutsche Bank

Just one question on the private dining side. You gave a number of 17% bookings growth so far for the holidays, and it’s a little early. Is that usually a good sign of where you’ll end up for the holidays or could it move around quite a bit?

Michael O’Donnell

That’s a good question. We’re really looking at the data point of saying where were we a year ago and versus where we are today. So there are early bookings as we’re saying, we’re up 17%. Could there be changes? Yes, but again consistently along the way this year we’ve seen that kind of spread, so we have an expectation, we’re planning for that kind of spread to be out there but frankly hopefully that spread gets wider.

Jason West – Deutsche Bank

On the beef outlook, could you tell us what the beef inflation was, I guess in aggregate in the third quarter?

Bob Vincent

It was probably somewhere in the 2% range. Actually tenders for the third quarter were fairly normalized year-over-year and we had a little bit of pressure from the prime beef side. But again, our lock there had absorbed some of that pressure. So overall about 2%.

Jason West – Deutsche Bank:

So you guys saw about 80 basis points in margin pressure on that. What should we expect on the fourth quarter if we see quite a bit more inflation? I know you took a little bit of pricing but it sounds like maybe only about 1%. Should we expect that gross margin line to see quite a bit more pressure or is it going to look somewhat like the third quarter, or –

Bob Vincent

Well, I think that’s two things; one is clearly there’ll be a little bit more pressure because there’ll be more inflation in the beef category. Again, beef though doesn’t represent the whole basket of commodities. And secondly, I think that we provided an update or reaffirmed our guidance overall for the year in cost to goods sold. So, we clearly still expect to be within that range.

Jason West – Deutsche Bank

I’m assuming you guys are planning for some more pricing for next year as it looks like beef costs. I’m guessing the fourth quarter may be an indicator of what next year is going to look like as well in terms of inflation, or is that not necessarily the case?

Bob Vincent

Yes, I think it’s a little too early to speculate about 2011. But in terms of your earlier question on pricing, I think we talked about the fact that we did put some pricing in place here in August and we’ve also got another test running and I think that as we think about ‘11 and some of the pressures that might be facing us, we would be looking very closely at other pricing opportunities.

Jason West – Deutsche Bank

It looked like business did pick up a bit sometime after the last conference call. I think you guys were seeing low single digits on the Ruth’s Chris brand in July. You ended up at mid-single digits. So can you talk about how things paced through the quarter? Was it August when things picked up or even more so in September and it sounds like that trend has continued in October.

Michael O’Donnell

Well, Jason again, company policy is we don’t provide any of the monthly splits but I think your sub position is good given the fact that we did report low single digits in the July period and obviously we picked up some momentum I think both in August and September.

Operator

Next we’ll hear from Andy Barish with Jefferies.

Andy Barish – Jefferies

Just a couple of quick modeling questions. On the third quarter share count being lower, is that just given there was a loss in the quarter, and I guess the preferred doesn’t show up in that share count. And then in 2011, it’s a 53 week year, I believe. Do you have any kind of metrics around what that might mean for ‘11?

Bob Vincent

Good morning Andy. In terms of your first question, yes, when we’re in a loss position, trading the shares as convert would only dilute the loss, so that’s just the accounting treatment. In terms of 2011 calendar, we do have a 53rd week and at this point we really haven’t given and probably will in our next call provide some guidance as to what that might mean.

Operator

(Operator Instructions) And next we’ll hear from Bart Glenn with D.A. Davidson.

Bart Glenn – D.A. Davidson

I was just curious if you could give us any color on how your alcohol trends looked in the quarter.

Bob Vincent

Overall, our mix was slightly down 20 basis points year-over-year. What we have seen is a continuation throughout the year where particularly in the wine category the number of transactions in the wine category actually is up year-over-year but the average selling price is down.

Bart Glenn – D.A. Davidson

Just a follow-up, you provided some good color on the Mitchell’s business. I was just wondering if you look at seafood trends across your entire portfolio, would it be fair to say that the kind of negative publicity from the Gulf oil spill has faded away over time?

Michael O’Donnell

I do think that it did have an impact on us throughout the summer and then particularly in the Florida market. There is obviously a lot less conversation around it today. So I would say that that’s clearly in our rearview mirror.

Operator

That is all the questions we have at this time. I will turn the call back to management for closing or additional remarks.

Bob Vincent

Thank you all very much for spending the time with us this morning. We appreciate your participation in our call and as in everyday, it’s always great to go out and have a steak or eat fish. Enjoy yourself, thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.

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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.

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