Ruth's Hospitality Group, Inc. (RUTH) CEO Cheryl Henry on Q4 2020 Results - Earnings Call Transcript

Ruth’s Hospitality Group, Inc. (RUTH) Q4 2020 Earnings Conference Call March 5, 2021 8:30 AM ET

Company Participants

Kristy Chipman - Chief Financial Officer

Cheryl Henry - President and Chief Executive Officer

Conference Call Participants

James Rutherford - Stephens Inc.

Nicole Miller - Piper Sandler

Brian Vaccaro - Raymond James

Todd Brooks - CL King & Associates

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today’s Ruth’s Hospitality Group Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Kristy Chipman, Chief Financial Officer. Please go ahead.

Kristy Chipman

Thank you, Shamali and good morning everyone. Joining me on the call today is Cheryl Henry, our President and Chief Executive Officer.

Before we begin, I would first 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 also encourage you to refer 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. During this call, we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today’s call.

I would now like to turn the call over to the company’s Chief Executive Officer, Cheryl Henry.

Cheryl Henry

Thank you, Kristy and good morning everyone. Thank you for joining us on our call today. We hope that everyone is staying safe and healthy. 2020 was truly a challenging year for our Ruth’s Chris team and our franchisees. We managed through two significant shutdowns during the year, the first in late March and the other most recently during our fourth quarter. Despite these challenges, our amazing team both in the field and in the home office and our franchise partners, continuously displayed resilience and agility in the face of uncertainty, resulting in strong fourth quarter results. While we still remain cautious with eased restrictions and the possibility of a vaccinated population on the horizon, it feels we are approaching the other side and that the worst of the impact on our business is behind us.

With that said, I would like to touch briefly on a few observations of our business as of late. First, our business is currently being driven largely by special occasion and just because diners. We believe this is due to the trust we have built in the brand over 55 years. Our guests trust us to make the most of their dining experiences and with their health and safety as we have made that our number one priority from the beginning. Second, our buckets of business from pre-COVID are more blurred than before and that’s okay, as we are meeting the customer where they want to be, whether that’s in our new outside dining rooms or in our restaurants, safely social distanced.

Finally, in the past, we have talked about demand mainly in the context of seasonality in day of week. Today, demand is also more about regional nuances and consumer mindset and we have adjusted the guest experience accordingly. For example, our restaurants with open, but restricted dining rooms posted a comparable restaurant sales decline of 16.3% through the first 9 weeks of 2021. However, Florida, which we opened at the same 50% capacity, experienced an 11% decline. In California, with patios now open and off-premise available, performed at almost 60% of prior year sales during the month of February. When weather allows and the consumer is ready, demand there has followed.

While Kristy will walk you through the fourth quarter financials in a moment, I want to share a bit more on our most recent operating status and talk about growth. As we look at the restaurant portfolio today, 75 company managed restaurants are open and 2 restaurants remain temporarily closed. We have 63 restaurants with restricted capacity is operating into go-service only. These open restaurants have contributed to sequentially improving comparable sales in January, down 38.9% and February, down 25.6% when compared to December of 2020.

As I mentioned, company-owned comparable sales for restaurants with open dining rooms decreased 16.3% compared to 2020. This is our best sustained performance in open dining rooms since reopening after the shutdown in late March. With the evolving recovery and our solid liquidity position, I am happy to announce that we expect to open a new Ruth’s Chris Steak House in Short Hills, New Jersey early in the third quarter of this year and we will begin construction of a new restaurant in Aventura, Florida for a mid-2022 opening.

As we look ahead, we are maintaining a dual focus, ensuring we are prepared should the external environment change again, while at the same time making sure we are looking towards and planning for the future. This includes keeping our teams ready and agile, focusing on the guest experience, leveraging the efficiencies in learnings from 2020 and maintaining a strong balance sheet with ample liquidity.

I will now turn it over to Kristy to cover the specifics of the quarter.

Kristy Chipman

Thank you, Cheryl. For the fourth quarter ended December 27, 2020, we reported GAAP net income of $1.4 million or $0.04 per diluted share compared to $14.5 million or $0.50 per diluted share for the fourth quarter of 2019. Net income included a $2.5 million employee retention payroll tax credit, which reduced operating expenses. It also included roughly $300,000 in severance and accelerated stock expense, an approximate $300,000 impairment loss related to restaurants and a $1.1 million in income tax expense related to the impact of discrete income tax items. Excluding these adjustments, non-GAAP diluted earnings per share was $0.03 compared to $0.52 in the fourth quarter of 2019.

Total revenues for the quarter were $77.4 million compared to $135 million in 2019. Company-owned restaurant sales were $72.2 million compared to $127.1 million in the prior period. While our comparable sales improved sequentially from April to October, renewed COVID-related restrictions negatively impacted sales trends as the fourth quarter progressed. Comparable restaurant sales decreases by month included negative 26.1% in October, negative 35.2% in November and a decrease of 53.9% in December, leading to a fourth quarter comp sales of negative 39.7%. Restaurants that opened dining rooms have averaged unit weekly sales during the quarter of 90,200 compared to 118,800 in the fourth quarter of 2019. This decrease was largely due to the tightening COVID-19 restrictions.

Traffic during the quarter, as measured by entrees decreased 34.7% and checks decreased by 7.6% primarily related to the lower off-premise checks when compared to in-restaurant dining. Franchise income for the quarter was down 26.7% versus the same quarter last year. Other operating income was $1.6 million, down from $2.9 million in 2019 due to the impact from COVID as well as a decrease in gift card breakage income and lower income derived from our restaurants operating under management agreements. 67 of the company’s franchised/owned locations as of the end of fourth quarter, 60 offered limited mining capacity, 2 offered outdoor seating only and 5 offered to-go and delivery service only.

Turning to expenses, food and beverage costs for the quarter as a percentage of restaurant sales were down 34 basis points to 29.5% primarily related to 2% beef deflation compared to the fourth quarter of 2019. Restaurant operating expenses as a percentage of restaurant sales decreased 19 basis points to 46%. This was primarily due to the $2.5 million employee retention payroll credit that I noted earlier, offset by higher fixed operating costs, such as group insurance and rent that resulted from the sales deleverage and operating expenses that resulted from to-go and reorders. Marketing and advertising costs decreased 65.1% to $1.6 million in the quarter.

As we reopen our dining rooms, we continue to be sharply focused on regaining our sales leverage, particularly in labor. For restaurants that were opened during the quarter, we had fewer labor hours compared to last year to efficiencies built into our labor model. However, this was offset by sales leverage in restaurants that were restricted to a to-go-only operating model. We expect to see the benefit from our labor model as restaurants reopen and sales improve across the portfolio.

G&A expenses increased $2 million to $10.6 million compared to the fourth quarter of 2019, largely due to the timing of recording the bonus accrual for all home office team members. As Cheryl mentioned, maintaining our strong financial. At the end of fourth quarter, we had $95.4 million in cash and net debt of $19.6 million, down from a net debt position of over $58 million at the end of 2019. In the fourth quarter, the company paid down an additional $20 million on our revolving line of credit and secured an extension to our credit facility through February 2023. Our net debt has improved by approximately $15 million since the end of 2020. Subsequent to the fourth quarter, we entered into a sixth amendment on our senior credit facility, which we detailed in an 8-K filing on January 29, 2021. This amendment provides for a $10 million commitment reduction in April 2021. It also provides us relief from certain financial covenants for the first fiscal quarter of 2021 while limiting capital expenditures for the fiscal year.

Before I turn the call back to Cheryl, I just wanted to reiterate our confidence in the business as conditions normalize over the coming quarters. That said, I am sure we will experience some choppiness and volatility month-to-month. And for that reason, we won’t be providing any additional guidance at this time. Cheryl?

Cheryl Henry

Thank you, Kristy. As I mentioned earlier, 2021 has started off stronger than the final months of 2020. As such, we are focused on understanding our guests, anticipating demand and being ready operationally. As of today, we believe further recovery starts with a vaccinated population as they return with missed celebratory occasions and milestones, then group social dining events, followed by increased local business demand, and over time, business travelers. This transition may take months, but as I mentioned, we are ready in meeting our guests on their time lines and with the type of experience they desire. COVID has taught us much about flexibility and innovation, which includes new operating procedures at the restaurant level as well as a more flexible labor model, better capacity utilization and the adoption of technology, not only by us as an organization but by our guests. With an iconic 55-year-old brand and the best team members and franchise partners in the business behind these efforts, we are proud of where we are today and optimistic about the future.

With that, we will open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from James Rutherford from Stephens Inc. Please proceed with your questions.

James Rutherford

Well, thanks and good morning. I really appreciate all of the detail. It’s nice to see the progress you all are making. I wanted to start with that quarter-to-date result, the negative $16 million comparable sales result for restaurants open to dine-in, really quite impressive. Do you think that the headwinds on business occasions that you talked about, Cheryl, that kind of take time to get back, will that – how does that inhibit your ability to get to pre-COVID AUV, let’s say, this year for restaurants doing dine-in or is it possible that maybe towards the back end of this year as vaccinations pickup, you think we potentially could get to that sort of a level, with additional off-premise maybe helping a little bit as well?

Cheryl Henry

Yes, thanks for the question. I think there is – and everyone has been talking about it, there is certainly a pent-up demand. And I have seen – we read [indiscernible] we have been conducting a bit of our own research around how is the guest feeling, whether it’s the business guests or a special occasion diner and believe that there are folks that are still not yet coming in that as we go further through this recovery and people feel safe and are choosing to come back to dine that they will come back and done with us. The piece around business, I think there is a couple of elements of the business guests that we see in our restaurants. And so I will just mention the – when we survey folks that are in the restaurant, we still see a business guest in the restaurants. It’s not as significant as it has been pre-COVID. Having said that, there is a couple of different elements to that. And so our restaurants have been in their local markets, many of them for 15 plus years and those local markets have a local business clientele. They are not traveling to get there. They do business in their communities. And these are the folks that we still see and we believe kind of as you think about the demand coming in waves, will be back as they – as you mentioned, the vaccination program reaches out into more communities. I think the second wave of that is the business traveler. And again, we think that would be later on in the recovery, but we still believe that there is going to be a demand across our buckets of business, if you will that can help to your point offset some of the still negative trends.

James Rutherford

That’s great. And then flipping to the restaurant level margin side of the P&L, I was impressed by the cost controls here in the fourth quarter, especially given a lot of disruption in terms of operating status. But as we think about the future, can you remind how much benefit to restaurant margins you expect from closing those 9 lower profit units? And on top of that, what sort of benefit do you expect cost of normal unit volume, kind of restaurant level margin kind of at that point in time? Thank you very much.

Cheryl Henry

Great question. So, I have to first acknowledge the efforts, as you mentioned in Q4, the amazing job that the operators and the restaurants, all of the folks through the organization have done in managing the P&L and working with the new systems we have put in place and the new tools we have given them to manage through that. So they have just done an amazing job. That’s been, call it, two quarters a trend, but they have been able to hold on to that. As to the closing, it’s about 100 basis points for the 9 restaurants that closed. And I will turn it over to Kristy I think your question was more detailed as well around labor as we go forward and the maintaining of the efficiencies in the margin.

Kristy Chipman

Right. Thanks, Cheryl. Yes. We are not prepared to really give overall guidance on what that efficiency can look like. I can tell you that the labor model has efficiencies built into it. It’s – as you can expect, it gets a little bit difficult to peel apart right now, simply because of the operating status of certain restaurants and particularly in December and part of November where California closed again, which was one of our higher wage states. So, we saw somewhat of a benefit because of that being closed. So we will be teasing that apart over the next couple of months, but we do expect some savings in labor to stay with us for the remainder of the year as we implement that new labor model.

James Rutherford

Alright. Thanks very much.

Operator

And our next question is from Nicole Miller with Piper Sandler. Please proceed with your question.

Nicole Miller

Thank you and good morning and thanks for the update. Just two questions. The first is around development. So prior to the pandemic, there was some great acquisitions, I am thinking specifically on the East Coast, where it opened up an opportunity for corporate store development and so we understand the store for this year and next year. Could you talk a little bit just high level longer term, how long until that’s like a more robust pipeline? Did the pandemic create a pause or a gap? Maybe there are stores that have LOIs or leases attached, so we can understand how that might accelerate? Thank you.

Cheryl Henry

Sure. So yes, we announced 2 of the – so we had 7 leases going into the pandemic and we talked about 2 of them today. We are in the territory specific to the Marsha Brown acquisition in July of ‘19 was really about opening up some of the market in the Long Island, Pennsylvania, New Jersey area. And so we do have two leases currently in that market. We are in the process of working with those landlords. Obviously, the initial timeline of development and construction has been pushed, but they are still in play as far as part of our pipeline and our desire to add those additional units. So, we are working through the details with the landlords on those as well. And as we think about the others, there is one location that we will not be moving forward with and the others, again, are still part of our development pipeline that we’re looking at through the next couple of years.

Nicole Miller

Okay, great. And then the second and last question is around the team and when I think about your team, it’s more business and industry professionals than anything. So how many individuals that were there previously are being called back now that things are reopening and improving? Where you do have to hire, how is that going? And then how are you deploying the individuals the same or differently based on the pattern of sales that you’re seeing today?

Cheryl Henry

Yes. So we’ve obviously had some choppiness around stores opening and then closing again. So the number has shifted. California, as you know, is now open outside dining but not inside dining. So the teams are a bit smaller in those markets. At the home office, we’re at about 75% of pre-COVID levels and expect to stay there generally through this year. As we look at the different types of business we’re doing or the different functions as – sitting in January of 2020, one of the things we talked about was announcing some digital work around Ruth’s Anywhere, which was really the launch of our to-go and delivery channel. And so that’s been accelerated clearly by COVID. And so when you think about how we deploy resources against the new business line, that might be some of the changes that are happening at the restaurant level. But that’s been worthwhile endeavor to resource against that new channel, especially during COVID. Generally speaking, our restaurants that are now open, we are pulling back people as quickly as possible. We do have two restaurants still that are temporarily closed, and those folks remain on furlough.

Nicole Miller

Thank you.

Cheryl Henry

Thanks, Nicole.

Operator

Our next question is from Brian Vaccaro with Raymond James. Please proceed with your question.

Brian Vaccaro

Thanks and good morning. Certainly encouraging to see the improving quarter-to-date trends and appreciate the quarter-to-date comp disclosures you gave. I was curious though could you help level set where company-owned average weekly sales volumes were in February? And sorry if I missed it, but what were AWS in the fourth quarter as well?

Cheryl Henry

So I’ll take the second one first and – so through the 9 weeks, we were, on average, about 80,000 average unit volume, but as we started to get into February, we are seeing numbers more in the mid-90s from an average unit weekly volume perspective. As far as fourth quarter was about 90,200, which is detailed in the release, yes.

Brian Vaccaro

Okay. So the – sorry, through the 9 weeks, you said, in February, you’re seeing mid-90s. Is that for dine-in – the dine-in units only? Because I know you said those were down, what, 16%. I just want to make sure we’re talking about the same numbers.

Cheryl Henry

No. That was the average of all restaurants regardless of status.

Brian Vaccaro

Okay. So mid-90s in February company average weekly sales?

Cheryl Henry

Right. As you progress throughout the quarter, it started to move towards that mid-90 level, yes. I mean throughout the month – I’m sorry, throughout the month.

Brian Vaccaro

Okay, okay. Was that an exit rate or is that the average for the month?

Cheryl Henry

Yes. It was about post-Valentine. So the last 2 weeks of the month we’re closer to that mid-90s mark in growing.

Brian Vaccaro

Got it. Got it. Okay, great. Okay, perfect. Thank you. I appreciate the update on the operating status for company units. Could you do the same for the franchise system, if you have it handy?

Cheryl Henry

As of the end – we’re going to have to grab that for you because I don’t think I have that handy for the end. So Brian, if you – so for Q4, just to get – we mentioned it. But one of the things is they have 60 units open operating dining rooms at the end of Q4 versus our 48. So they didn’t actually have as many closures, which is I’m thrilled for them. That was great through the fourth quarter. And then the 9 weeks update, well, do you have the...

Kristy Chipman

I don’t have it here.

Cheryl Henry

We’ll get that for you.

Kristy Chipman

We’ll get that for you.

Brian Vaccaro

Okay. We can follow-up on that for sure. I guess, thinking about the outlook a little bit. I know we’re not talking about guidance, and it’s a dynamic environment. But can you ballpark for us what your expectations are in terms of COGS inflation for the year? And also maybe help us ballpark G&A. I know it was lumpy through ‘21 – or through ‘20 quarter-to-quarter for obvious reasons. But should we expect something, call it, in the low 30s on G&A? Any help on that line would be great.

Kristy Chipman

Yes. So starting with G&A overall, it’s really difficult from – to your point, to look at it from a percentage of sales perspective, just given the uncertainty with what’s going on. But I think if you look at it on a go-forward basis, we would expect that – expect it not to exceed 2020. And that’s probably the best information we can give you at this point in time.

Brian Vaccaro

Okay.

Kristy Chipman

As far as the rest of the cost of goods sold and impact on the overall business, we talked already a little bit about labor, and that’s probably the one area we’re still looking to land on what efficiencies will be there for the full year. But I can tell you from a cost of goods and food perspective, we’re looking at somewhere between 1 to 1.5 on overall inflation.

Brian Vaccaro

Perfect. Alright. Thanks. I will pass it on.

Cheryl Henry

Thanks, Brian.

Operator

[Operator Instructions] Our next question is from Todd Brooks with CL King & Associates. Please proceed with your question.

Todd Brooks

Hey, good morning to you both. I have a few questions here, if I may. One this is just running through a holiday period and doing it in a capacity-constrained fashion. I know you were looking at the restaurants differently, how do we flex certain private dining areas to accommodate more customers. I guess, Cheryl, just looking back at the holiday period, what have you learned about the boxes and what you may be able to take forward that will allow you to get more productivity out of the units in these peak periods, November, December, typically?

Cheryl Henry

Yes. So capacity has been a big – utilization of capacity has been a big opportunity for us. And I mentioned this recently prior to COVID, we’d actually done work around how we’re utilizing our – the footprint, the layout in each of the boxes. And one of the big areas of opportunity was actually table size. So if 50% of our guest demand is for two tops, and we have all four tops you’ve built in inefficiencies around your utilization. And so we have done work throughout 2019 to reset the seeding plans and the boxes in the restaurants. And so I think that was the start of our learning around how we want space going forward. As COVID hit, and we had the additional 6-foot separation and 50% – or 25% capacity, 50% capacity, flexing the space in our private dining rooms, which, again, was something we had started designing our restaurants for so that the private dining rooms didn’t feel as isolated in the building, but yet felt a part of the a la carte main space was something that we were able to implement and I believe will serve us well going forward. So if you are utilizing space for a very specified occasion, being able to open that up and use it to get more turn through an a la carte experience can be more efficient for us in the restaurant. So those are some of the general learnings. I think it is – some of this is also based on consumer demand and mindset. So we’re coming out of COVID. Does the guest still feel comfortable or desire to eat earlier in the day or later in the day? And they have now built flexibility into their schedules or work has allowed them to be more flexible. And so we’ll continue to look at it and understand how we need to continue to adjust to that demand. But there is definitely some learnings there. It’s a great question.

Todd Brooks

Very helpful. Thank you. And then a second follow-up, I know there was a plan, at least in fourth quarter, that some of the premium items were going to come back to the menu for the holidays, knowing that restaurants were likely to be capacity-constrained to try to drive higher average ticket. I guess, a), did that happen and b), if it did happen, now going into a post-holiday period, did those more unique higher-ticket items stick on the menu or have we gone back to a more streamlined menu here going into the first parts of fiscal ‘21?

Cheryl Henry

Yes. So that was in relation to our bone-in program and in Q4. And we actually did see a recovery in dining room check throughout the quarter and into the holiday season. They remain on the menu. It’s something that we found – as you mentioned, we streamlined, we cut back. And we said, okay. Where is the potential demand for the consumer here? And given the results that we saw in Q4, we believe that is an important part of our menu and our offering for our guests. So we do plan to move forward with them.

Todd Brooks

Okay, great. And then finally, now we’re through the holiday and kind of looking at the industry and your competitive sets, what’s your sense on how survivor bias and fine dining is going to play out for Ruth’s as far as market share that’s to be had out there? And how do you go and capture competitive seats that have closed? And thoughts getting budget in fiscal ‘21 to really go after what that incremental share may be that you could capture? Thank you.

Cheryl Henry

Look, I think – let me speak to the idea of quantifying what the opportunity is around potentially closing restaurants. I think that has not fully played out yet. I think there is – being – we’re based in Florida. And I traveled up and down the coast to kind of see the different things that are happening in different regional areas and understanding what that looks like. And what I can say is being here, we’ve seen restaurants that have been closed for 6 months because of capacity restraints, which is the inability – that have now reopened. And so while I appreciate that there is a strong desire to quantify exactly what that opportunity is, I don’t think we’re there yet. I think there is more aid coming to help some of the independents and the smaller chains. And so I think that’s still yet to be determined. Having said that, we are always pre-COVID for 55 years looking to gain market share and it’s why we have, over time, expanded our offerings, launched Ruth’s Anywhere pre-COVID to make sure that we are staying relevant to the guests and building our market share. So we’ll continue to focus on that. I think if there is one thing to say about area of opportunity, we’ve learned a lot about efficiencies and marketing spend and opportunities that we have in our data. We have a 3 million database e-mails. And I think we have an opportunity to leverage that going forward. And you will see some of that coming out as we think about marketing spend. And just to directly answer that, we cutback marketing spend pre-COVID, our trend has been around 3.3% to 3.5%, and we are down 2.6%. And so we’ll look at it. We continue to look at it. We’ll understanding where the consumer is going, pent-up demand and utilize it as needed. But right now, we are hanging out in that range.

Todd Brooks

Very helpful. Thank you.

Operator

And our next question is from James Rutherford with Stephens Inc. Please proceed with your question.

James Rutherford

Hey, thanks. Just wanted to hop back with one more question, if I could, what’s the average capacity in your restaurants that are open for dine-in today? And most importantly, how do you plan to handle capacity as states like Texas and Florida have given the operators that led it to decide? And clearly, you probably don’t want to flip to 100% immediately, but is there a thought towards incrementally walking up capacity slowly as your guests become more comfortable and as vaccination rates pick up just how do you want to handle that?

Cheryl Henry

Yes. That’s the question we have internally. So I’ll say this, when Florida ability for capacity, we stayed at 50%. We believe it’s driving trust and frequency in that guest base. So that has worked well for us. I think as, again, things continue to evolve and more people become vaccinated and more people feel safe with going out, we’ll keep looking at it. I do think as more states start to loosen up that capacity restrictions we’ll make incremental changes along the way, but we haven’t set that yet. Again, we’re – in this case, because of health and safety, we’re kind of let the guests lead to some extent and then obviously, looking at the business and understanding what we need to do going forward. But right now, given the two incremental sales available when you add two or three tables, it’s a balance. And so we’re still conducting that balance, and so there’ll be more to come on that.

James Rutherford

Yes, certainly that the delicate thing to handle. Thanks so much. Have a great day.

Operator

And we have reached the end of the question-and-answer session. I will now turn the call over to Cheryl Henry for closing remarks.

Cheryl Henry

Thank you all so much for joining us this morning. I look forward to speaking with you all again soon.

Operator

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.