Ruth's Hospitality Group's (RUTH) CEO Michael O'Donnell on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Ruth's Hospitality (RUTH)

Ruth's Hospitality Group (NASDAQ:RUTH)

Q2 2014 Earnings Call

August 01, 2014 8:30 am ET

Executives

Mark Taylor -

Michael P. O'Donnell - Chairman, Chief Executive Officer and President

Arne G. Haak - Chief Financial Officer and Executive Vice President

Analysts

Brett M. Levy - Deutsche Bank AG, Research Division

Andrew M. Barish - Jefferies LLC, Research Division

Operator

Hello. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group Incorporated Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Mark Taylor, Vice President of Financial Planning and Analysis. Please go ahead, sir.

Mark Taylor

Thank you, Deanna, and good morning, everyone. Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer; and Arne Haak, Executive Vice President and Chief Financial Officer of Ruth's Hospitality Group.

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.

Mike will start off the call this morning, after which Arne will provide you with a financial update on our second quarter results as well as any updates to our outlook for fiscal 2014. We will then conduct Q&A and conclude with Mike providing closing remarks.

I would like to now turn the call over to Mike.

Michael P. O'Donnell

Thanks, Mark, and thanks to everyone for joining us this morning.

I'm pleased to report that our second quarter results built on the operating momentum that we experienced in the first quarter. Despite significant year-over-year increases in beef costs, our company and franchise team members executed at a high level, resulting in another quarter of solid sales and profits.

Our second quarter results were led by a 2.8% increase in comparable sales at Ruth's Chris Steak House company-owned restaurants. This marked the 17th consecutive quarter of positive comp sales for Ruth's and comes on top of a 4.6% increase in the second quarter of 2013. Entrees with service, a proxy for traffic, increased by 2.3% during the second quarter, while average check increased 0.4%. Our strategic priorities continue to focus on sales growth through traffic gains, and we are pleased to report our 18th consecutive quarter of traffic growth.

Breaking down same-store sales during the quarter, all 3 months were positive, although our year-over-year gains in May were lower than trends in April and June. I'm pleased to note that the positive trends we saw in June have continued into July as third quarter comparable sales to date are positive in the low to mid-single-digit range.

We are focused on growing sales primarily through traffic across our 3 core segments, which consists of special occasion guests, business-to-business and our core regulars. We believe this strategy versus aggressive discounting has preserved the integrity of our brand and has contributed to the consistency of our sales performance over a long period of time.

Total sales in Ruth's Chris Steak House grew 5.6% in the second quarter, which reflects our comp sales increase and the growing contribution of our new restaurants. Private dining sales at Ruth's Chris Steak House, which we view as a proxy for business demand, grew 1.4% in the second quarter.

Since 2009, we have actively showcased our Ruth's Seasonal Classics, particularly to our special occasion guests who may be looking for value or price certainty. These prefixed -- price fixed selections continue to comprise approximately 20% of preference. And during the second quarter, roughly 2/3 of the customers who had selected the Ruth's Seasonal Classics exhibited a preference for the higher tiered offering. Ultimately, our approach to Seasonal Classics is just one example of the consistent and steady game plan that continues to work very well for us.

At Ruth's Chris, in Q2, we shifted our marketing efforts toward targeting digital advertising from the television we ran last year in the second quarter. Our goal was to be efficient with our efforts to drive brand awareness and expand the connection with our guests. To that end, we believe educational events are a large part of the brand connection, so we've continued with the promotion of our wine dinners targeted towards our core regular guests. In fact, during May, we hosted a 5-course prix fixe dinner at over 100 Ruth's Chris Steak House restaurants, featuring food-friendly wines from Silver Oak. In June, we partnered with Ste. Michelle Wine Estates to host another dinner featuring Cabernets from multiple countries around the world, each paired with creative culinary selections specifically designed by our chefs.

Our Ruth's Chris Steak House franchise-owned domestic comparable sales increased 1.5% during the second quarter, while international comparable sales franchised restaurants increased 0.4%, resulting in a blended increase of 1.3%.

Shifting to Mitchell's Fish Market, our comparable sales decreased 0.7% during the second quarter. Entrees that serve as a proxy for traffic decreased by 3.1%, while average check increased 2.5%. At Mitchell's, we continued to adopt best practices from Ruth's, including the use of special wine and cocktail dinners, increased banquet and private dining events. In April, Mitchell's teamed with Bacardi U.S.A. to host a national handcrafted cocktail dinner featuring a 4-course island-inspired menus. We also partnered with wines from Rioja to host an Evening in Spain, pairing dinner at 17 participating Mitchell's restaurants in early June.

Similar to Ruth's, we believe these special-event dinners will raise the profile of Mitchell's Fish Market and, through engaging in educational and interactive experiences, attract new guests and increase the frequency of our regulars.

In terms of development, we continue to expect to open a total of 3 new company-owned Ruth's Chris Steak House restaurants in 2014, including our new Denver location, which opened in January. Our development will include new restaurants in Gaithersburg, Maryland and Marina del Rey, California. These restaurants are both currently under construction and scheduled for openings in the fourth quarter of '14.

As we've previously announced, we also have signed leases for restaurants in Dallas, Texas and St. Petersburg, Florida. Both of these restaurants are currently expected to open in the first half of 2015.

With regard to franchise development, in addition to the opening of a restaurant in Boise, Idaho in February, we expect an additional franchise opening in the third quarter in Panama and one in the fourth quarter in Taipei, Taiwan. Subsequent to the end of the second quarter, we entered into franchise agreements for restaurants in Ann Arbor, Michigan and Jakarta, Indonesia, both of which we expect to open in late 2015. Our pipeline for the next 3 years includes 14 commitments for our future franchised restaurants.

As we look ahead, we expect our development strategy to remain largely unchanged as we will target 3 to 5 company and franchise locations per year. And as we stressed over the years, we believe that our franchise model and existing national footprint serves as a competitive advantage as we expand.

I'll now turn the call over to Arne.

Arne G. Haak

Thank you, Mike.

For the second quarter ended June 29, 2014, we reported net income of $6.9 million, or $0.19 per diluted share, on a base of 35.6 million diluted shares. This compares to net income of $7.8 million, or $0.22 per diluted share, on a base of 35.7 million diluted shares in the second quarter of 2013.

As a reminder, net income in last year's second quarter included a nonrecurring $600,000 income tax benefit related to state employment tax credits. Excluding this benefit and excluding results from discontinued operation in both years, non-GAAP diluted earnings per share was flat at $0.20.

During the second quarter of 2014, we generated total revenues of $103 million, an increase of 2.5% compared to $105.5 million last year. Total company-owned restaurant sales increased to $97.9 million, or 4.3%, compared to $93.8 million in the second quarter of last year.

Average weekly sales for all company-owned Ruth's Chris Steak House restaurants was approximately $95,000 in the second quarter compared to $92,700 in the second quarter of last year. At Mitchell's Fish Market, average weekly sales decreased 0.7% to $72,900 compared to $73,400 in the second quarter of last year.

Franchise income in the second quarter increased to $3.8 million from $3.6 million last year due to a combination of growth in comparable restaurant sales and new franchise unit development.

Other operating income in the second quarter decreased to $1.3 million from $3 million last year primarily as a result of changes in our accounting method for unused gift cards that went into effect at the beginning of this fiscal year. As we have noted, the annual impact on other operating income from the accounting change is immaterial. However, due to the smoother recognition of income from unused gift cards in 2014, other operating income on a year-over-year basis was negatively affected by approximately $1.7 million or $0.03 per share in the second quarter.

In terms of our cost structure, food and beverage costs as a percentage of restaurant sales increased approximately 150 basis points year-over-year in the second quarter due to higher beef and seafood costs. Specifically, beef costs were up approximately 8% year-over-year during the second quarter.

Currently, the company has entered into agreements to lock pricing in at approximately 5% above last year on roughly 50% of our beef needs through December. As a result, we expect beef costs to be up between 5% and 8% for the balance of 2014.

Restaurant operating expenses as a percentage of restaurant sales increased 20 basis points to 50.2% largely due to increased occupancy costs.

Marketing and advertising costs for the second quarter were $2.6 million, down $1 million over the second quarter of 2013. As Mike discussed, we continue to seek ways to maximize the effectiveness of our marketing spend.

Our G&A expenditures decreased $0.9 million to $6.4 million from $7.3 million 1 year ago. The decline in dollars was driven by the reduction in performance-based compensation. As a percentage of revenues, G&A improved approximately 110 basis points to 6.2%.

Income tax expense was $2.8 million in the second quarter, up $200,000 from the second quarter of 2013. Our effective tax rate during the quarter was 28.8%, up from 25% in the second quarter of 2013 due to lower state income tax credits.

This quarter, our Board of Directors approved a payment of a quarterly cash dividend to our shareholders of $0.05 per share. This dividend will be paid to shareholders on August 28, 2014, to common shareholders of record as of the close of business on August 14, 2014.

Additionally, during the quarter, we continued to acquire shares under our previously announced share repurchase program. The company repurchased approximately 292,000 shares of common stock for $3.6 million during the quarter. Year-to-date, the company has purchased approximately 542,000 shares for $6.7 million.

Finally, at the end of the second quarter, the company's outstanding debt under its senior credit agreement remained steady at $22 million. That said, because the third quarter is traditionally our seasonally slowest period in terms of sales and profits, our planned CapEx spending for new development will likely result in a modest uptick in our outstanding debt for the current quarter.

Now based on our second quarter results, I'd like to provide you with an update on our guidance for some of our key 2014 cost metrics.

Overall, we expect our cost of goods sold to be within the range of 31% to 33% of restaurant sales for the year. We expect restaurant operating expenses to range between 49% and 51% of restaurant sales. Our marketing and advertising spend is projected to be between 3% and 3.2% of total revenue for the year.

We have slightly lowered our guidance on G&A, and expenses are now expected to be between $26.5 million and $28.5 million for the full year.

We expect our effective tax rate for the full year to be between 29% and 33%.

Our CapEx spending for 2014 is projected to be between $20 million and $22 million, which is reflective of additional company-owned restaurant openings in 2014.

Finally, we expect our fully diluted shares outstanding to be between 35 million and 36 million shares. This reflects the share repurchases made to date but does not assume additional share repurchases in 2014.

With that, I'd now like to return the call to Mike.

Michael P. O'Donnell

Thanks, Arne.

The results we have shared with you today are due to the efforts of our teammates and franchise partners. We appreciate these tireless efforts and are proud to be -- to partner with our franchisees, who remain the heart and soul of our business. As we look toward the second half of 2014, we remain confident in the health of our business and in our ability to execute and deliver a total shareholder return.

Our strong team effort on execution and operations-driven culture has led to a recognized award-winning dining experience. It has also built our brand in a way that uniquely connects with our customers and translates into long-term sales, consistent traffic trends and increased earnings.

Smart development is also a part of our strategy, and we continue to invest in high-return development opportunities for both company and franchise locations, including a growing international presence.

Finally, operational excellence, brand building and development must be viewed as the context -- in the context of the total shareholder return. Therefore, our goal is to maintain a strong and flexible balance sheet and focus on generating returns for our shareholders. This allows us to create additional value through the use of dividends, debt reduction and share repurchases. To highlight this fact, we're proud and, in fact, in the last 3 years, we've invested in our core business by opening new restaurants, paying off over $120 million of debt, returning over $75 million to shareholders in the form of stock repurchases and dividends. In total, the strength of our business has allowed us to return nearly $200 million to investors since 2011.

Operator, I'll now turn the call over to you for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Brett Levy of Deutsche Bank.

Brett M. Levy - Deutsche Bank AG, Research Division

Just a couple of questions. First, you've got $1 million lower marketing spend in this quarter. Is that something that you're looking to shift from this spend from this quarter to next quarter? Or is this something where we can pretty much anticipate a lower spend going forward?

Michael P. O'Donnell

Brett, Mike O'Donnell. No, we did shift to digital with approximately $1 million save. We expect that we will still incur that expense. We actually shifted some of those funds or a majority of those funds into development on new creative for what we will be using in '14 -- in second half of '14 and '15. Periodically, as you would imagine, we want to refresh our creative, so we will be showing new television, new print, et cetera. And we diverted the funds there and substituted that with digital.

Brett M. Levy - Deutsche Bank AG, Research Division

Okay. You gave us a little bit of color on the second half of 2014 with beef. Do you have any insight into '15? Have you locked anything? What are you seeing on pricing for '15?

Arne G. Haak

Sure, Brett. First of all, the opportunities to lock don't -- they come along few and far between. So I think we have our view. And if the opportunities present themselves, we would. But it's -- it would be pretty unusual to have something this early for the USDA Prime beef that we buy. We've done some initial work on 2015. We have some economists coming to see us later this month to talk to us about it from a bunch of different places, but it looks a lot to be like a 2014 year. I think a lot of things are helping, but -- and people are retaining cattle, so that's good, but I don't think there's going to be any major change in the direction for next year.

Michael P. O'Donnell

So Brett, I think we're confident -- we've been -- we've kept our pricing as lean as we can be, and so we're confident that we have pricing capabilities throughout the second half of '14 if we need them, and we have them into '15.

Brett M. Levy - Deutsche Bank AG, Research Division

And then just one last question on comps. Given the fact that you said you had a number of marketing programs and dinners and pairings in May, why do think we saw such a significant -- why do we see a falloff in May versus the rest of the period? And what are we thinking for the back half of the year?

Michael P. O'Donnell

I don't know, Brett, that we'll talk a lot about what we're thinking for the back half of the year at this point. I mean, we -- like I said, currently, we're in the low to mid-single-digit range, which is what we talk about. And we would focus or we would think that, that those -- that kind of performance -- it's our expectation that kind of performance could sustain itself. But this -- at this a high end -- at this high end of things, political unrest across the world, et cetera, starts to give people the jitters, and we often trade in concert with the mentality around the stock market. But in terms of what happened in May, I don't know that -- we saw weakness pretty much across all the buckets of business that we talk about. It seemed to be universal. It bounced back quickly and nicely in June. So I think there was some dynamic that was going on vis-à-vis the consumer that I'm not sure we completely grasp. But again, it was positive. It just was higher in April and then we finished stronger in June.

Brett M. Levy - Deutsche Bank AG, Research Division

One more question, then I'll let you guys go to the next caller. What's the real -- what's the dynamic between the breakdown of the franchise comps, why the international continues to stay modestly slower than the domestic?

Arne G. Haak

Sure, Brett. The franchise -- the international franchise, there is about 50 basis points of pressure there on currency exchange, largely Canada, year-over-year.

Operator

[Operator Instructions] We'll go next to Andy Barish of Jefferies.

Andrew M. Barish - Jefferies LLC, Research Division

On the comp number, I mean, it appears as if mix sort of slowed down in the quarter. Was there anything you were able to dig into on that front as a component of the same-store sales?

Arne G. Haak

Sure, Andy. The one thing that, as you've -- we went through the total sales and then kind of the banquet sales. The banquet business last year really led -- if you think about the 3 buckets, they had the strongest growth. This year, while they're still positive, both on a comp and a total basis, they're running a little bit slower. In part, it's the timing of the farmer banquets, and how they do business is a little bit different with the Affordable Care Act. They've kind of had to change how they do some of their marketing, but it's not big. But that -- so if you think about the mixes, the richest mix isn't quite as strong. And the bar mix with Sizzle, Swizzle and Swirl is just going great. I mean, we're having a lot of success with that. The à la carte in the restaurants is right in the middle, right kind of on top of our comps. So that is what you're seeing in the mix.

Andrew M. Barish - Jefferies LLC, Research Division

So you do -- with the growth in that -- at the bar, that drives mix a little bit lower that, that's factored into kind of your check average?

Arne G. Haak

Yes.

Andrew M. Barish - Jefferies LLC, Research Division

Okay. And then anything in terms of -- do you continue to have sort of franchise acquisition discussions? I know those are ongoing, but any update there for us?

Michael P. O'Donnell

I think you accurately reflected it, Andy. There is the discussions that we continue to have. We're delighted to continue to do that. But we don't have anything to announce.

Operator

With no further questions holding, I'd like to turn the conference back over to Mike O'Donnell for any additional or closing remarks.

Michael P. O'Donnell

Listen, thank you all very much for being here this morning. We appreciate it. As always, it's a great day to go out and eat steak or fish. Thank you.

Operator

Thank you for your participation. That does conclude today's conference.

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: transcripts@seekingalpha.com. Thank you!