Ruth's Hospitality Group (NASDAQ:RUTH) owns the Ruth's Chris Steak House chain and the Mitchell's Fish Market chain. Overall, the company is doing well, but only the steakhouse is flexing its muscle lately. This is consistent with other fine-dining steakhouse competition and even among the more casual space such as with Texas Roadhouse (NASDAQ:TXRH). Between these two, which is the better buy? The answer may surprise you.
The medium-well results
Ruth's Hospitality Group reported fiscal first-quarter results on April 28. Total revenue rose 3.6% to $109.7 million. Same-store sales for the company-owned Ruth's Chris Steak House concept popped 2.6%, but its Mitchell's Fish Market saw a decline of 4.3%. What's worse is that Mitchell's saw a 9.1% plunge in guest traffic. A 5.3% increase in the average check size helped offset the dive in traffic.
Luckily for Ruth's Hospitality Group, its steakhouse chain is substantially larger than its seafood chain and was able to carry it. Net income jumped 16% to $8.9 million, or $0.25 per diluted share.
For Texas Roadhouse, the numbers were mixed in strength when compared to Ruth's Hospitality Group. Revenue popped 10% compared to Ruth's just 3.6%, but that was mainly due to Texas Roadhouse's opening of new restaurants. Same-store sales growth of 2.8% for company-owned stores was a bit stronger than Ruth's Chris Steak House's. It was also the 16th straight quarter of positive same-store sales for Texas Roadhouse. Texas Roadhouse saw pre-tax income inch higher by 5.5% to $39.8 million.
Michael P. O'Donnell, chairman and CEO of Ruth's Hospitality Group, stated that the gains for the steakhouse came despite "volatility from severe winter weather" and a "challenging environment in the first quarter." Mitchell's was especially hit hard, with 14 of its 18 restaurants located in the Midwest. Interestingly, Texas Roadhouse's executives refused to even acknowledge the weather either way.
Price Cooper, CFO of Texas Roadhouse, stated during the conference call that the company doesn't bother to track the effects of weather on its business. Cooper insists Texas Roadhouse doesn't change the way it runs its business long term due to temporary disruptions. He admitted that there were probably some softer trends in certain areas, but Texas Roadhouse doesn't spend much time even thinking about it.
Texas Roadhouse appears very confident in the strength of its brand, regardless of headwinds. Ruth's Hospitality Group, despite being more vocal about excuses, also seems to have quite a solid brand when it comes to its steakhouse. Aside from the numbers, O'Donnell pointed out that "during the first quarter...Ruth's Chris Steak House was rated the [No. 1] Consumer Pick in Fine Dining Chains by Nation's Restaurant News for the fourth year in a row." During the Ruth's Hospitality Group conference call, O'Donnell stated,
Private dining sales at Ruth's Chris Steak House, which we view as a proxy for business demand, grew 6.8% in the first quarter.
April saw such a strong rebound in sales that even its seafood chain saw "low- to mid-single digit range" positive same-store sales. This bodes well for Texas Roadhouse as well going forward as it suggests possible industrywide improvement.
For Texas Roadhouse, momentum appears to be on its side as well. While same-store sales growth was 2.6% for the quarter, the breakdown by month may have been more telling. For January, February, and March, same-store sales popped 1.1%, 2.6%, and 4%, respectively. Second quarter and beyond may have some positive surprises for both chains.
And the winner is...
Both Ruth's Hospitality Group and Texas Roadhouse pay modest dividends with yields of 1.6% and 2.4%, respectively. Texas Roadhouse appears to be in better financial shape than Ruth's based on its large cash reserve, while Ruth's has far more modest amounts.
Ruth's Hospitality Group trades with a P/E of 16 based on the current share price and analyst estimates of $0.75 per share for the year ended in December. Based on the same criteria, Texas Roadhouse trades with a P/E of 20.
In terms of growth, Texas Roadhouse is expected to grow its earnings per share at around double the rate of Ruth's Hospitality Group this year and around 30% next year. Based on this, it seems that Texas Roadhouse's 25% higher 2014 P/E ratio versus Ruth's Hospitality Group's is justified.
Factor in the higher dividend yield, better financial condition, and faster growth and this leads to the better chance that Texas Roadhouse can increase its dividend at a faster rate than Ruth's Hospitality Group on top of already paying a higher yield. Texas Roadhouse appears to be the more undervalued of the two. As always Foolish investors should do their own research before making any investment decisions.
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Texas Roadhouse. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.