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Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH)

Q3 2012 Earnings Call

October 30, 2012 8:30 am ET

Executives

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

Michael P. O’Donnell – Chairman, President and Chief Executive Officer

Analysts

Nicole M. Miller – Piper Jaffray, Inc.

Justin Marshall – Deutsche Bank Securities, Inc.

Andy M. Barish – Jefferies & Co., Inc.

Operator

Hello, good morning, ladies and gentlemen, and thank you for standing by. Welcome to today’s Ruth’s Hospitality Group’s Third Quarter 2012 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 and instructions will be provided at that time for you to queue for questions. As a reminder, today’s conference is being recorded.

I’d now like to turn the conference over to Mr Arne Haak, Executive Vice President and Chief Financial Officer. Mr. Haak, please go ahead.

Arne G. Haak

Thank you, Erlanda, and good morning. I would like 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 today’s earnings press release and 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 today that today’s call may not be reproduced in any form without the expressed written consent of Ruth’s Hospitality Group, Incorporated.

I’d now like to turn the call over to Mike O’Donnell, our Chief Executive Officer of Ruth’s Hospitality Group.

Michael P. O’Donnell

Thanks, Arne, and thanks to everyone for joining us today. First, we would like those impacted by Hurricane Sandy including those working in our company and franchise restaurants to know that our thoughts and prayers are with them as they were in the storm and work through the aftermath of this natural disaster.

After thoughtful deliberation, we decided to conduct this call as scheduled. For those who maybe not – maybe unable to attend this live call, we will have a recording available until November 6 in the Investor Relations section on our website.

Ruth’s Hospitality Group maintained our solid operating momentum during the third quarter and strong traffic growth from both of our brands. And despite continued commodity cost challenges, we’ve recorded significant improvement in our year-over-year earnings. Our third quarter is seasonally our weakest quarter from a sales perspective; so naturally, we are pleased that our efforts continue to produce these results.

Looking at our third quarter highlights by brand, comparable sales at Ruth’s Chris Steak House increased 5.9% and marked the 10th consecutive quarter of positive comparable sales for the company-owned restaurants and our 11th straight quarter of traffic gains. When combined with last year’s 2.6% increase, quarterly comparable sales have grown 8.5% over 2010. Entrées, which serve as our proxy for traffic, increased by 3.6% during the third quarter. Average check increased 2.2% for the period.

Our sales growth at Ruth’s Chris was steady throughout the quarter and we are pleased that our sales growth to-date in October is up in the mid single-digits. We are mindful that we are heading into very strong year-over-year comparison in November and December, where we were up nearly 10% versus 2010.

On a regional basis, Ruth’s Chris two largest markets, Florida and California, continue to generate positive sales. Florida sales rose 7.4%, while California sales increased 8.2%. Across the entire Ruth's Chris portfolio of comparable company locations, 51 restaurants or 82% reported positive comp sales during the third quarter.

Compared to the Knapp-Track benchmark index for the Steak House segment, Ruth’s Chris comp sales increased to 5.9%, was 260 basis points better, while our traffic increased 3.6%, it was 140 basis points ahead. We believe our strategy of growing profits to traffic first and pricing second continued to pay dividends as shown by our healthy comp and traffic growth and as the result of our year-over-year profit growth despite in a challenging consumer environment.

Private dining and catering sales at Ruth’s Chris Steak House were flat in the third quarter on top of last year's 8% growth. We believe that private dining will rebound in the fourth quarter and are very encouraged by our early holiday bookings.

Our Ruth’s Chris franchise-owned domestic comparable restaurant sales increased 2.9% during the quarter, while international comparable franchise-owned restaurants sales increased 3.9%, resulting in a blended increase of 3.1%.

And turning to our Ruth’s Chris brand, increased sales were good and by continued outstanding execution by Kevin Toomy and the entire Ruth’s operations team and the growth of the SIZZLE, SWIZZLE & SWIRL happy hour program, Ruth’s Seasonal Classics menu and our enhanced marketing efforts.

We were again recognized this year with awards from both Nation's Restaurant News and Consumer Reports which highlighted our food quality, ambient guest service, and hospitality.

The SIZZLE, SWIZZLE & SWIRL happy hour premium bar menu that we introduced late in the first quarter features our premium menu and drink items for $7 and continues to deliver an incredible quality at an acceptable price point in a way that we believe doesn’t compete with the dining sales. This offering gives us an opportunity to not only drive incremental sales at the happy hour, but also turns many first time guests in the Ruth’s Chris regulars. The menu is currently at about two-thirds of our restaurants and one-third of our U.S. franchise locations.

We continue to see our Ruth's Seasonal Classics as an offering to consumers who may be looking for value or price certainty in dining at Ruth’s Chris, particularly important in light of the current economic environment. These prefixed selections now comprise 19% of our sales mix, down 10 percentage points of next versus prior year, but consistent with the trends that we saw in the second quarter.

Customer who Ruth's Seasonal Classics continue to exhibit preference for the higher price for the two offerings. During the third quarter 66% of the Ruth's Seasonal Classics were sold at the higher price tier. In light of our continued comparable store traffic and sales strength, we view the reduction in preference for the Seasonal Classics and the increased preference for higher price value is a sign of improved consumer confidence.

Our marketing efforts in the quarter included the launch of our new RuthsChris.com website, increased partnerships with key influencers, and targeted demographics, such as the NFL and our Women in Business Speaker Series in partnership with Marie Claire magazine.

We continue to be pleased with the efforts of the new leadership team at Mitchell’s growth. Our efforts are focused on many developed and operational executions, which are taking hold as evidenced by the increase in comp stability at Mitchell’s.

Our Mitchell’s Fish market comparable sales increased 4.6% during the third quarter. This growth was comprised of 5.2% increase in traffic partially offset by 0.6% decrease in the average check. The sales efforts at Mitchell’s have also focused around targeting specific underperforming days and day parts. As part of this effort, we launched our real delicious lunch program promotion in August. This value price promotion contributes to the decrease in average check that helped drive a 10% increase in lunch traffic.

So far in October, our sales trends at Mitchell’s Fish market are up from a low single digit. Our price fixed menu options remain strong contributors to our sales mix, as value propositions have comprised approximately 15% of sales.

Switching to real estate development, we’ve been vocal about we governing our focus on new development opportunities, and we believe we’re beginning to see the fruits of these efforts comes to bare. The latest Ruth’s Chris opening just took place on October 15, when we opened a new company-owned location in Cincinnati, Ohio.

During the third quarter our franchise partners opened new Ruth’s Chris locations in Singapore and El Salvador. We also remained pleased with the results of the trends at our Cherokee, North Carolina locations, which we opened under our management agreement with us and Eastern Band of Cherokee Indians.

Finally we had experienced impressive sales growth in Dubai due to the opening of the second franchise location in that city. We will continue to maintain our policy of not announcing new development specifics until we have a signed lease. But we are pleased with the way our potential pipeline is taking shape for 2013.

Last week we further expanded our relationship with the Harrah’s Casino and the announcement of the arrival of Ruth’s Chris Steakhouse at Harrah's Las Vegas Casino & Hotel. As part of this licensing agreement, Harrah’s will be replacing the Casino’s The Range Steakhouse, a 400 feet restaurant that will offer views of the Strip through floor-to-ceiling windows. This location marks the return of the Ruth’s Chris for Las Vegas and it is expected to open in the first quarter of 2013.

As we previously noted we have signed leases for two new sites, the first for a new location in Denver, the second for a relocation of our restaurant in Houston. Both of these restaurants are expected to open in the first half of 2013.

In 2013, our franchise partner’s has signed leases to open three new locations. Our franchise pipeline remains robust as we have thirteen commitments for future franchise restaurants over the next several years. By mid-2013, we and our franchise and licensing partners will have opened or relocated 13 new Ruth’s Chris Steakhouses worldwide in a two year period. This represents a 10% increase to the system and an increasing important component of our overall sales growth.

While we are encouraged by recent development activity at our first new unit development, we’ll remain disciplined and prudent with regard to capital deployment. We will continue to provide updates to you on our newly signed leases and on the franchise growth in our future quarterly calls.

I’d now like to turn the call back over to Arne.

Arne G. Haak

Thanks, Mike. For the third quarter ended September 23, 2012, we generated total revenues of $84.8 million, which is an increase of $4.6 million or 5.7% compared to last year. Total company-owned restaurant sales increased to $81.4 million or 5.5% compared to $77.1 million in the third quarter of last year.

Average weekly sales for all company-owned Ruth’s Chris Steak House restaurants were approximately $76.4 thousand in the third quarter, an increase of 5.8% compared to $72.2 thousand in the same period of last year. Restaurant operating weeks for company-owned Ruth’s were up slightly to 819 weeks this year versus 817 weeks last year.

Average weekly sales at Mitchell’s Fish Market were $68.6 thousand compared to $65.5 thousand in the third quarter of last year, an increase of 4.6%. Restaurant operating weeks at Mitchell’s were flat year-over-year at 247 and exclude operating weeks from discontinued operations. Franchise income increased to 11.2% to $3.3 million from $2.9 million last year due to improved sales volumes and an increased number of franchise restaurants.

In terms of our cost structure, food and beverage costs, as a percentage of restaurant sales, increased 70 basis points year-over-year in the third quarter, driven by increases in the non-contracted portion of our beef supply. Specifically our beef costs were up approximately 14% year-over-year during the quarter a slight moderation from the 19% increase we saw in the second quarter of 2012.

Restaurant operating expenses as a percentage of restaurant sales were 55.5%, a decrease of 80 basis points compared to last year. We were able to offset the increase in beef cost and careful management of other operating expenses, as well as leveraging our fixed expenses, as a result of our strong comparable sales growth.

Marketing and advertising costs increased to $2.2 million from $1.6 million, and as a percentage of total revenue increased by 60 basis points to 2.6%. The increase was largely due to a timing shift in advertising from the second quarter to the third and fourth quarters of 2012. We are currently running television advertising for the Ruth’s Chris brand and we believe that this is an effective marketing tactic for our nationwide brand.

G&A expenditures increased to $6 million from $5.8 million a year ago. For the third quarter of 2012, the company reported net income of $809,000 or $0.02 per diluted share on a base of approximately 35.2 million shares. This compares to net income applicable to preferred and common shareholders of $85,000 or breakeven per diluted share, on a base of approximately $43.3 million shares in the third quarter of 2011.

As Mike noted, our third quarter has historically been our seasonally weakest from a sales perspective. And last year’s third quarter net income was our first third quarter profit in four years. So we’re pleased with our quarter’s results and the efforts of our entire team in a very challenging environment.

At the end of the third quarter of 2012, the company had $69 million in debt outstanding under its senior credit agreement, down from $71 million at the end of the second quarter of 2012. Consistent with our recent practice, we would expect to continue to reduce our outstanding debt over time, given our strong cash flow generation.

Based on our third quarter results, we are reiterating our guidelines for some of our key 2012 cost metrics. We expect our cost of good sold to be within the range of 31.5% to 32.5% of restaurant sales for the year based on beef inflation. We continue to manage our restaurant operating expenses to be between 51% and 52% of restaurant sales.

Our marketing and advertising spend is projected to remain between 3% and 3.5% of total revenue. And our G&A expenses are expected to be between $25 million to $26 million.

While we believe we have additional pricing power, we expect to be thoughtful and prudent with respect to future increase. For the fourth quarter, our menus currently reflect approximately 2.4% price increase. With the current economic backdrop, it’s still our strategy to focus on growing sales to traffic gains and maintaining our value orientation. As we have demonstrated, we will continue to evaluate additional menu engineering and pricing opportunities.

Our effective tax rate for the full-year is currently expected to be between 28% and 32%. And our CapEx spending plan for 2012 is projected to remain between $10 million to $12 million. For further detail on our outlook for 2012, I’d like to refer you to today’s press release, which can be found in the Investor Relations section of our website.

With that, I’d now like to return the call to Mike?

Michael P. O'Donnell

Thanks, Arne. We remain excited about the trajectory of our business, not only that we maintain our sales momentum at Ruth’s, but we continue to be pleased by the efforts of Mitchell’s Fish Market team. Our franchise partners remain the heart and soul of our brand and are key contributors to our success through the pride they take in the quality of their operations and the state they demonstrate in the Ruth’s Chris brand through their invested capital.

We are energized by our growth prospects as our development pipeline continues to strengthen and with healthier capital structure, we are better positioned for earnings leverage to drive improved profitability and create more value to our shareholders.

Erlanda, open it up for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) We’ll hear first from Nicole Miller, Piper Jaffray.

Nicole M. Miller – Piper Jaffray, Inc.

Good morning. Thanks for the update. I’m wondering can you share with us how you’ve done so far, fourth quarter to-date and really not a number per se, but why things might be sequentially up or down?

Michael P. O'Donnell

Good morning, Nicole, and I’m – once again you are first. Congratulation. As I said, we are up in the mid single-digits on the Ruth’s Chris side, in the low single-digits on the Mitchell’s side. We will as I – again, as I said in the call, we start to get higher and higher paid accounts last year, so that would be a point that we have to claim over.

Nicole M. Miller – Piper Jaffray, Inc.

Okay.

Michael P. O'Donnell

I am feeling good about the trajectory of the business.

Nicole M. Miller – Piper Jaffray, Inc.

I am sorry, I think, I missed that in the prepared comments, I apologize. With that in mind then I did hear you say you’re pleased with how holiday bookings are coming in. Just a big picture for the industry, how should holiday bookings come in this year, should they come in earlier or later? Should they come in more traffic or more check, what should we expect?

Michael P. O'Donnell

I think for us, I don’t know the bigger picture. I can’t really speak to what everybody else is doing, but we are seeing earlier bookings. But I think that that to some degree it maybe being full forward, because a lot of people have been making a lot of noise around getting prebookings done. So I don’t know whether it’s go forward or whether it’s just growth, but we’ll look for traffic growth that’s what our expectation is. We are not – other than the price that we take into our retail business, we won’t be looking at taking any additional price just specific around private dining or those holiday bookings.

Nicole M. Miller – Piper Jaffray, Inc.

And then a last question. The competitive environment changed over the past couple of years, I mean it seems on the one hand you have an ability to recapture lost sales from the recession and you have some closing at some of your peers, yet I assume everybody that is still up and running, is going to go after holiday bookings or just day-to-day sales. How do you gauge that competitive environment and align that right now please?

Michael P. O’Donnell

Its interesting Nicole. We’ve continued to stay on our brand message all year and we are going to continue to stay on our brand message, we’ve done that with our television, we did it earlier in the year, we’ve done it through – basically everything that we’ve done this year has been brand message, it’s going to remain that way in the fourth quarter. And competitors in some degree have come out, at the same time they run a television with some reasonably big discounts.

So I’m not comfortable and I wouldn’t want to do that, I’m comfortable doing what we’re doing. And I feel good about, we’ve been gaining on traffic and we’ve been gaining in check and we’ve been gaining in sales. So I think we continue to work on our execution everyday. We’ve been rewarded as I said by Restaurant News and Consumer Reports for both of those and remain in the number one position there. So – and we are going to keep doing that.

Nicole M. Miller – Piper Jaffray, Inc.

Thank you.

Michael P. O’Donnell

Thanks, Nicole.

Operator

(Operator Instructions) Our next question comes from Jason West with Deutsche Bank.

Justin Marshall – Deutsche Bank Securities, Inc.

Hi, this is Justin Marshall in for Jason this morning. I have a question about beef inflation, do you know what you might be expecting for the fourth quarter and maybe any sort of early take on 2013 and any of your thoughts on pricing trends around that as well?

Arne G. Haak

Sure, Justin. This is Arne. For the fourth quarter, I think things look pretty inconsistent with what we’ve seen so far this year. I don’t think we’re seeing anything dramatic. There’s been a little bit of narrowing as we’ve gone through the year in terms of the year-over-year price increase.

Part of that comes from the fact that prices were running up pretty fast last year. So you have some very high comps that are going again. And part of it is also coming from the fact that we’ve had a second summer of drought, that has brought more cattle into the feed lots and so you’re seeing a little bit of temporary relief on the supply side.

So that being said, you have to take a guess and probably say 10% to 15% here in the fourth quarter. For next year, it’s a really broad number, I mean the future is, if you look at the whole cattle, you’re looking at up, the market is probably up 10% to 15% again next year.

We go USDA Prime beef, which is the top 2% to 3% and there is only certain cuts of the cattle that we want. So we’re going after the premium part of the cattle in premium cattle. So its wide range, it could be – it looks like it could be another year. There is no relief insight on supply. Whatever your forecast is going to be, it’s going to be driven around demand and strength of dollar and export demand.

Michael P. O'Donnell

So Justin, just a follow-on from what Arne is saying, and one of the reasons we feel pretty good about even though we’re looking at fairly – the perpetual have fairly – it still have fairly high beef inflation. We’ve been very cautious in taking price. So we think we still have price opportunities in front of us.

Justin Marshall – Deutsche Bank Securities, Inc.

Okay. Thanks that’s helpful. And then just shifting gears a little bit to Mitchell’s, is there anything more specific about what kind of drove the traffic increase there. I mean, it didn’t look like comparison got that much easier in the quarter and so just a little bit more color about what drove the traffic and anything going forward that you might see that might be different from what has, how you’re performing in the first couple of quarters of this year?

Michael P. O’Donnell

Yeah, thanks, Justin. I think that, whereas I said in the prepared remarks that we had some specific day parts out there, we went after the lunch business. I think Pete and his team has done a great job in terms of just discovering where we may have had some execution or operational weakness and have improved that. We’ve reorganized the leadership team there in a significant way, so I think that we are really feeling the impact of that, really from an operating basis and again a specific approach to specific day parts that I think was very helpful. We increased some of our labor costs as a result, but we are seeing a payback in the leverage of that and we increased or decreased some of our guest record I said in the prepared remarks, as we went after the lunch growth opportunity.

What I would say, broadly speaking, it’s across the board, increases in day and night, or lunch and dinner and with some emphasis on the week-ends.

Justin Marshall – Deutsche Bank Securities, Inc.

Thank you.

Michael P. O’Donnell

Thanks.

Operator

(Operator Instructions) We’ll go next to Andy Barish with Jefferies.

Andy M. Barish – Jefferies & Co., Inc.

Hey good morning guys.

Michael P. O’Donnell

Hi, Andy.

Andy M. Barish – Jefferies & Co., Inc.

Just a question on sort of the September price increase and how that was implemented.

Arne G. Haak

Sure, Andy this is Arne again. Our pricing strategy this year has largely been around the custom beef, that’s where we are feeling the input cost pressure and that’s I think the consumer understands that, the consumers sees it in the grocery store. And so when we reviewed pricing, we’ve done so on the beef, it’s come both at the individual cuts and the Ruth’s Classics level. But the higher tier that we have on the Ruth’s Classics used to be $49.95. We’ve now pushed into the low 50s, the trend is still 20% in terms of preference. The preference is still at the higher end. So we are watching it carefully, but that’s where, that has been our approach to point this year, we haven’t gone to subsidize it with other parts of the menu, but that’s how we’ve approached it.

Andy M. Barish – Jefferies & Co., Inc.

Thanks. And then can you give us a little bit of color on kind of what you are seeing out there in terms of the balance, the sales growth across your three main sort of customer categories, I know you don’t get real-time data, but just kind of what you feel is happening out there with business, special occasion and then sort of your regular, upper income guests?

Michael P. O’Donnell

Yeah, Andy, it’s Mike, it’s really across the board and then we’ve seen a return of some private dinning that we – as I said, it was relatively flat in the third quarter. We’ve seen some return, modest return there and we would expect that – we actually expect that pharma will make a greater contribution next year in terms of drug rollout, so there’s been some weakness there, but we’re still seeing a little bit of recurring there, the balance has really been organic across all three buckets, I’m including the first bucket. So it’s across our regulars and it’s across special occasions.

Andy M. Barish – Jefferies & Co., Inc.

Great. And then any updates in terms of the capital plan next year for some of the bigger remodels, you’ve done that have been successful, are you sort of coming to the end on major remodels in the system?

Michael P. O’Donnell

Well, I mean it’s a bit of a – it’s just painting a bridge, right. I mean, we are in a constant upgrade, so we really at this time of the year, where we are finalizing what we will do for next year, but we don’t see any real significant remodels in front of us. We will continue to do the refreshes and those things, but that does not – it’s something significant. We’ve been able to this last year do some additional, some mix – in addition to doing the reprices to be able to add some sequence specific restaurants that we’re at pretty good capacity. So that’s kind of where we are looking to deploy the capital.

Arne G. Haak

Andy, the biggest variable popping in our CapEx plan for next year will be on the new restaurant front. And what do we do? The first half of the year is pretty much nil, we’ve shared that with you, to the extend that we are – as Mike said, we are working actively on multiple sites and potentially some of these could start work on in the back half of next year. So that’s probably, I would say if you are looking at kind of any change in CapEx, that’s probably where the biggest (inaudible) would come from.

Andy M. Barish – Jefferies & Co., Inc.

Okay. And then just finally, how do we – how do we think about Las Vegas in terms of –just making sure, we model that correctly. I assume it won’t show up in company revenues or restaurant sales, but just want to make sure and do you have any CapEx associated with that or is that all being handled by Harrah’s?

Michael P. O’Donnell

Yeah, we do not have any CapEx in it and it will fill up in franchise revenue.

Arne G. Haak

Yeah, it’s – as well as the licensing agreement functionally from a modeling perspective, it will model like for franchise.

Michael P. O’Donnell

We expect it to be significant volume.

Andy M. Barish – Jefferies & Co., Inc.

Good. Thank you.

Michael P. O’Donnell

Thanks, Andy.

Operator

We are seeing no further questions in our queue at this time. Mr. Haak, I’ll turn the conference back over to you for any additional or closing remarks.

Michael P. O’Donnell

I’ll take it. Thank you very much everybody for participating in this morning’s conference call. Remember that today is a perfect day to go out and eat steak or fish. Thank you very much.

Operator

That will conclude today’s conference. Thank you all once again for your participation and have a wonderful day.

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