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Ruth's Hospitality Group Inc. (NASDAQ: RUTH)
Q2 2018 Earnings Call
Aug. 10, 2018, 12 a.m. EDT
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group Second-Quarter 2018 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. 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 -- Vice President of Financial Planning and Analyis
Thank you, Tracy. Good morning everyone. Joining me on the call today are Michael O'Donnell, our executive chairman. Cheryl Henry, our president and chief executive officer, and Arne Haak, executive vice president and chief financial officer. 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. During this call we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items as well as losses from discontinued operations. 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 our Executive Chairman, Michael O'Donnell.
Michael O'Donnell -- Executive Chairman
Thank you, Mark. Thank you all for joining us on this call this morning. We're pleased to announce second-quarter results, which demonstrated a continuation of our momentum from the start of the year. Highlights of the quarter include total revenue growth of 9.6%, net income growth of 22.6%, and non-GAAP diluted earnings-per-share growth of 26.6% to $0.32. All of our restaurants contributed to the revenue growth in the quarter, Including our camp restaurants, non-camp restaurant,s as well as the six Hawaiian restaurants we acquired in December. We continue to be very pleased with the performance of our Hawaiian restaurants, and they delivered sales and profit growth at or above our expectations.
We're in the final stages of integration. I am proud to note that there has been no turnover in the management teams of these restaurants. We remain committed to being leaders in the fine dining steakhouse category, which we have achieved through our unrelenting focus on operational excellence. The Ruth's Chris Steak House experience is the foundation of our brand and is responsible for the consistency of our results over the years. This consistency allows us to execute our total return strategy, creating long-term value for all our stakeholders. As we have discussed before, successful execution of this strategy is accomplished by investing in our core business, growing in a disciplined fashion, and returning capital to our investors.
Our first priority will always be our core business and protecting the brand that so many have worked hard for over the last 50-plus years to create. To strengthen the brand evolve today's consumer -- and evolve with today's consumer, we continued our Ruth's 2.0 restaurant remodel efforts during this quarter, which both enhances the guest experience and allows us to expand our operating capabilities. We remain on track for seven to nine remodels in 2018. Furthermore, we're investing 20% to 30% of our 2018 tax savings into our core business in the form of brand, sales driving, and people initiatives.
The second part of our strategy is growing a brand in a disciplined fashion, and we continue to work diligently to build our development pipeline. We expect to open two new restaurants during the balance of 2018. The first location will be in Jersey City, New Jersey here in the third quarter, then another in Paramus, New Jersey in the fourth quarter.
Additionally, we currently expect the management agreement restaurant in Reno, Nevada to open early in the first quarter of 2019. This partnership with Eldorado Resorts will be our third casino location operating under a management agreement similar to our successful restaurants in Tulsa, Oklahoma and Cherokee, North Carolina. We're also actively negotiating leases for additional sites that meet our investment criteria for development as we build our real estate pipeline for 2019 and beyond.
Also supporting our growth efforts are our franchise partners, who continue to invest in new restaurants and expect to open two locations in 2018. The first of these franchise locations opened quite successfully in Fort Wayne, Indiana during the second quarter, and we are currently expecting the second to open in Markham, Ontario during the fourth quarter of this year. The final component of our total return strategy is returning capital to our shareholders.
To that end, our board of directors recently approved the payment of a quarterly cash dividend of $0.11 to shareholders, which is a 22% increase over the quarterly dividend paid in August of '17. Since the beginning of 2011, we have returned over $200 million to our shareholders in the form of dividend payments and share repurchases. We continue to believe that our total return strategy is the best way to drive long-term shareholder value. Now before I turn the call over, I'd like to briefly comment on our executive management transition which we announced in early June.
Today, Cheryl Henry transitions from president and chief operating officer to president and chief executive officer, and I will assume the role of executive chairman. This transition is part of a multiyear planning process, and I couldn't be more pleased for Cheryl. During the 11 years that she has spent here, she has managed every commercial aspect of our business and is eminently qualified to lead this organization. A clear strategic direction has been set for the company.
The company is in excellent shape, and much of our success can be directly attributed to initiatives led and implemented by Cheryl and her team. I look forward to supporting Cheryl in my new role as executive chairman. With that, I will now turn the call over to Cheryl, who will give some more color on our revenue performance before Arne provides detail on the second quarter results. Madam CEO.
Cheryl Henry -- President and Chief Executive Officer
Thank you, Mike. Our restaurant operations team contributed to strong performance this quarter across all three of our key revenue segments. During the quarter, our special occasion business again drove comparable restaurant sales growth. We saw solid year-over-year sales growth on both Mother's Day and Father's Day as guests continued to choose Ruth's Chris when celebrating these special moments. We also experienced growth in our private dining and [inaudible] segment. This resulted in comparable sales growth of 1.3% against the 0.1% decline in traffic. As a reminder, we experienced a 70 basis-point headwind in the second quarter due to the timing of the Easter holiday.
I'm pleased to see that our traffic growth is significantly higher than the Black Fox fine dining index. Our franchise partners, who remain the heart and soul of our business, also had a solid quarter, with total franchise comp sales up 1.3%. While sales trends in our international markets, were not as strong as those in the U.S., our partners saw improving comparable sales trends throughout the quarter. As we look at the third quarter to date, our sales teams remain consistent with the trends we've seen so far this year. Due to this point in the third quarter, our comparable sales have been running flat to up low single digits year over year. With that, I'd like to turn the call over to Arne to go through our financial details.
Arne Haak -- Executive Vice President and Chief Financial Officer
Thank you, Cheryl. For the second quarter ended July 1st, 2018, we reported net income of $9.6 million, $0.32 for diluted share. This compared to net income of $7.8 million or $0.25 for diluted share during the second quarter of 2017. Net income in the second quarter of 2018 included $400,000 in deal-related expenses associated with the acquisition of our Hawaiian franchisee. The $300,000 income tax benefit related to the impact of discrete income tax items. Excluding these items as well as the results from discontinued operations, our non-GAAP diluted earnings per common share were $0.32 up 26.6% compared $0.25 in the Second Quarter of last year.
Total company owned restaurant sales for the Second Quarter were $103.5 million, an increase of 10% over last year. The increase was driven by the contribution from our new restaurants including those acquired in Hawaii. Total operating weeks for all company-owned restaurants were 1001 up 10% year-over-year from 910 in the Second Quarter of last year. This included an additional 78 operating weeks in the quarter from the acquisition of our Hawaii franchised restaurants.
Total franchise comparable sales increased 1.3% year-over-year. Comparable sales in our domestic franchise restaurants were up 3% during the quarter and comparable sales in our international franchise restaurants were down 7% largely driven by softness in our Asian restaurants and certain Canadian locations. Franchise income in the second quarter was $4.5 million up 4.7% verses the prior year.
The increase in franchise income was driven by an increase in comparable sales, the reclassification of franchisee, advertising, contributions from marketing and advertising to franchise income, as well as the recognition of a $100,000 in franchise development and site-specific fees. Our franchise income was also reduced by $400,000 as a result for the acquisition of our Hawaii restaurants.
Now, turning to our costs, food and beverage cost as a percentage of restaurant sales decreased a 180 basis points year-over-year to 28.1%. This decrease, was primarily driven by 10% decrease in total beef costs, as well as by 1.4% increase in average check. Last summer's beef prices, were driven to record high levels due to increased retail demand for prime beef. This year we have not experienced increased retail demand and as a result, we now expect full-year beef deflation of 1% to 4%.
We currently expect this deflation to be the highest in the third quarter before returning to more normal levels in the Fourth Quarter. For the quarter, our restaurant operating expenses as a percentage of restaurant sales increased 50 basis points year-over-year to 48.3%. The increase was primarily driven by an increase in occupancy expenses as a result of the acquisition of our Hawaiian restaurants. Our G&A expenses as a percentage of total revenues, were 40 basis points year-over-year at 8.5%.
The increase as a percentage of total revenues was also largely driven by additional costs related to the integration of the recently acquired Hawaiian restaurants. Marketing and advertising costs as a percentage of total revenues increased 80 basis points to 4.2%. The increase was primarily attributable to the previously discussed accounting and revenue recognition changes of franchise marketing contributions as well as a planned increase in advertising spending.
Pre-opening costs were $272,000 compared to $173,000 in the Second Quarter of 2017, driven by the timing of new restaurant openings. Income tax expense, declined from $3.6 million in the Second Quarter of 2017 to $1.8 million, largely as a result of the enactment of the Tax Cuts and Jobs Act. As Mike mentioned during his remarks, we are reinvesting approximately 20% to 30% of these tax savings into our core business, in the form of brand, sales driving and people initiatives.
During the quarter, we repurchased just over 224,000 shares of common stock for $5.9 million or $26.46 per share. At the end of the Second Quarter, we had $44.7 million outstanding under our previously announced $60 million share repurchase authorization. We ended the quarter with $50 million in debt outstanding, up $7 million from the previous quarter largely driven by increased capital expenditures as well as the timing of share repurchases.
Now, turning to our guidance, I'd like to provide our revised outlook based on current information, for the full year of 2018 for some of our key financial metrics. As Cheryl shared with you previously, we are pleased with the current cadence of our calendar comparable sales so far in the Third Quarter. As a reminder, the 53rd week in 2017, will have a minimal impact on our Third Quarter sales. We expect the Fourth Quarter this year to once again be our strongest revenue quarter, but as a result of last year's 53rd week, the timing of the New Year's Eve holiday, will provide a revenue headwind that we currently estimate will exceed $3 million in the Fourth Quarter.
Based on our current expectations of beef deflation in 2018 provided earlier in this call, we now expect our cost of goods sold to be in the range of 28% to 30% of restaurant sales. We continue to expect restaurant operating expenses to be between 47% and 49% of restaurant sales. We continue to expect marketing and advertising costs to be between 3.8% and 4%. We now expect G&A expenses to be between $33 million and $35 million excluding Hawaii integration costs. We now expect our annual effective tax rate to be between 17% and 19% excluding the impact of discrete income tax items.
We currently expect our capital expenditures to be between $30 million and $32 million and could grow depending on the timing of additional new unit openings. We continue to expect our fully diluted shares outstanding to be between $30.5 million and $31 million shares exclusive of any share repurchases under the company's share repurchase program. With that, I'd now like to turn the call over to Tracy for any questions that we might have.
Questions and Answers:
Operator
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask the question. We will now take our first question from Brian Vaccaro from Raymond James. Please go ahead.
Brian Vaccaro -- Raymond James -- Analyst
Good morning, and thanks for taking my questions. I wanted to start out with the sales performance during the quarter, and it's encouraging to see your traffic share gains accelerated in the period. I was wondering first, if you could quantify the outperformance versus the Black Box high-end segment that you called out, and then what do you think is driving that outperformance? It does seem that some competitors maybe have pulled back on discounting. Do you think that's reinforcing your value positioning or any other dynamics worth highlighting?
Cheryl Henry -- President and Chief Executive Officer
Yes. Brian, thanks for the question. You asked about the index and the outperformance. As we look at it, we quantify just over 200 basis points from the traffic side. I think to your question about the less discounting, more discounting? We've seen probably an increase in promotional activity from competitors, especially through June and July. I will tell you, and Mike mentioned it. I cannot stress the importance of executing the brand experience.
And Mike also talked about the investments we're making around development and retention of our employees, and ensuring that we are executing on that experience every time. Arne mentioned the strength in all of the segments of the business. So, I think some of the initiatives that we've been working on and talking about are kicking in, the continued focus on execution from the ops teams. And again, I can't say that I've seen lessening of promotions if you will, from the competitive set, but that's something I think that as we look through the year we'll probably continue to see.
Brian Vaccaro -- Raymond James -- Analyst
Okay, that's helpful. Thank you, and also curious -- there's something about industry environment within the high-end space. Is there any evidence that changes in the tax law around deductibility for certain entertainment expenses? Any evidence that that's having an impact on your business?
Cheryl Henry -- President and Chief Executive Officer
No, we're aware of it, but we haven't really seen any indication that, that's having an impact.
Brian Vaccaro -- Raymond James -- Analyst
Okay. If I could just start to shift gears, couple on the food cost line. Arne, thanks for the beef deflation comment in the second quarter. What was the overall deflation on the basket in the quarter?
Arne Haak -- Executive Vice President and Chief Financial Officer
In the quarter, we were running down around 3% for the quarter.
Brian Vaccaro -- Raymond James -- Analyst
Okay. In terms of the updated annual COGS guidance. What does that assume in terms of deflation on the overall basket? You were specific about beef, which is helpful, but are there some other items we should be cognizant of, and could you help us with the overall basket deflation expectation?
Arne Haak -- Executive Vice President and Chief Financial Officer
Yes, sure. The overall basket, I think -- we're clear I think in the trough right now, the best deflation that we're going to see. For the full year, we've actually been experiencing some pressure on some seafood items, and obviously the tariff situation can be dynamic there as well. So, I don't know that we're prepared to give you like an overall COGS basket deflation, but this is probably the strongest it's going to be in terms of the quarters, here in the second and third quarters.
Brian Vaccaro -- Raymond James -- Analyst
Okay. Last one, just on the COGS ratio, taking into account how high and different the comparisons are, if you will, third-quarter COGS ratio versus fourth-quarter. Are there any discrete items that we should keep in mind that might cause the COGS ratio third quarter versus fourth quarter to be materially different, or is it reasonable to assume sort of a more stable COGS ratio sequentially moving forward? Thank you.
Arne Haak -- Executive Vice President and Chief Financial Officer
Brian, I can't think of anything in terms of the COGS ratio that's unique to the third quarter, other than the normal seasonality of sales. I guess -- here in Florida we're always hopeful that the hurricane season stays benign, and we had a fairly active season. We had 20% of our restaurants in September of last year impacted by hurricanes. So, we're hopeful that that would not repeat itself.
Brian Vaccaro -- Raymond James -- Analyst
That's all. Thank you.
Operator
We will now take our next question from Joshua Long from Piper Jaffray. Please go ahead.
Joshua Long -- Piper Jaffray -- Analyst
Great. Thank you for taking my question. Congratulations to all in your transition. I imagine the answer is going to be a lot more of the same consistent execution and focus on the brand going forward but curious on as you go through this transition, what your kind of first order of business or how you're going to be focusing on the brands in your new role?
Cheryl Henry -- President and Chief Executive Officer
Sure, thanks for the question. I was thinking about it and I was pretty sure if someone asked me what the next 90 to 100 days looked like and I'm fortunate that I have 11 years here. So, they do look as we sat at the senior team for the past years and set the strategy as they look very similar. I think Mike stated we have our strategy, we have the teams implemented and so my sole focus is making sure we do that. I've talked, probably over the last year, about the idea that we live in a more of a constant state of evolution to meet the consumer demand, so there will be more to come and more to talk about as we start rolling things into the system. But again, the focus on the total return strategy and working with this great team to continue doing what we've been doing.
Michael O'Donnell -- Executive Chairman
Patience, she's going to do a better job than I did.
Cheryl Henry -- President and Chief Executive Officer
Thanks, Mike.
Joshua Long -- Piper Jaffray -- Analyst
Definitely makes sense, and shifting gears to the remodels, nice to see that seven to nine are still on track, curious what you've learned as you've gone through this and that we've talked over multiple conference calls that there's always a variety of packages that you can put in place and across the different systems that every unit might need something slightly different, and so curious on how you're seeing that progression roll out and then if you could remind us where we are in terms of touching all of the different units in the system and trying to get a sense of what the remodel opportunity might look like for 2019?
Cheryl Henry -- President and Chief Executive Officer
All right, I'll take a bit of it and I'll turn to Arne. So, I think when we started talking about this program we had buckets or categories of different remodels from adding capacity to really bringing them up to the brands 2.0 to changing bars. I think the early ones we've done so to your question about how many will you have done at this point, we're close to 28 or 29 and continue to look at between seven and 10 a year until we're through the system. I think the ones that we've identified as having opportunity around capacity, we've seen them pull through on that expectation. The others around brand are doing what we expected them to do and it really is about maintaining the consistency of the sales and being relevant to our guests. Arne, if you want to weigh in a little bit on expected capital and how that looks going forward.
Arne Haak -- Executive Vice President and Chief Financial Officer
Josh, I think it's going to be a fairly consistent sized [inaudible] our Capex as we go forward by a year, we've kind of targeted that, the capacity is still mentioned, the capacity, when there are opportunities to add capacity, those provide the best returns as it really provides the catalysts to growth sales. There's not a lot of those, and each one is a case-by-case situation.
So, I think we feel good about it. We have a good understanding of what the money needs to do for us and it's been delivering it. Going way back to Brian's question, I think continuing to consistently invest in the brand may be what's driving some of the traffic gains as well.
Joshua Long -- Piper Jaffray -- Analyst
Absolutely. Thank you for that. Curious on the 20% to 30% of the tax savings that are being reinvested. If you could remind us how you're using those, I know you mentioned brand, sales, driving and your people retention, but anything more specific you could add or maybe looking at it differently, does that touch the entire system and is that going to be used strategically in certain parts of the portfolio? Just trying to get a sense around how those dollars would be rolled out and spread across your portfolio?
Arne Haak -- Executive Vice President and Chief Financial Officer
I think it's a great question like where are they? They're kind of sprinkled, some of them are in the restaurant line. So, there's some very targeted people initiatives, we have key people that we think are important and we're doing some things with them. We also have some broader initiatives at the restaurant level as well, because we think that's also very important. Some of it is also in marketing and then some of it is also in the G&A line. So, those are the three places where you're seeing the money.
Joshua Long -- Piper Jaffray -- Analyst
Got it. Thank you. Then last one for me in terms of just thinking about the disparity between the franchise same store sales, the domestic has been pretty strong obviously and then the international, it seems that we've been talking about the Asian and Canadian softness here for a little while. If you could remind us what's driving that, if it's just more macro concerns, if there may be some pointed issues in some of those markets that would be worth noting and then anything that we might lap over as we go through the back half of 2018 or into 2019 that we should just keep on the radar to be aware of.
Michael O'Donnell -- Executive Chairman
Yes, this is Mike. I think we've talked about it before, there's sort of geopolitical issues and a little bit affecting ages particularly Taiwan and Hong Kong. China has changed some of their tourism rules and regulations and it's not been as robust. Canada has had some challenges around certain things, they had to do the whole business for a while and I think that they will recover a little bit faster than the Asian restaurants. Although, I'm not saying there are Asian franchisees [inaudible] , there is fabulous franchisee integrate businessman and is doing a great job in weathering the softer sales in continuing to build restaurants and continuing to invest back into his business.
Joshua Long -- Piper Jaffray -- Analyst
Great. Thank you for that, I'll pass it along.
Operator
As a reminder to ask a question, please signal by pressing star one on your telephone keypad. We will now take our next question from Andy Barish from Jefferies, please go ahead.
Andy Barish -- Jefferies -- Analyst
Good morning. Hey Arne, is there a difference in the calendar and fiscal? I'm not sure if I may have missed that same-store sales number this quarter?
Arne Haak -- Executive Vice President and Chief Financial Officer
Nothing really from the 53rd week other than the Easter shift, which we called out, which was 70 bits on the quarter.
Andy Barish -- Jefferies -- Analyst
Okay. Then, on the domestic franchise sales running higher than the company-owned, is there sort of more remodel effort going on in the franchise system as well? Maybe Cheryl can you give a sense of where the franchisees stand in terms of modernization of their restaurants.
Cheryl Henry -- President and Chief Executive Officer
Sure. Let me in I will turn to Arne in just a second. We looked at the quarter for the franchisees, I think it's a couple of things, there's some additional price, the traffic is somewhat in line, there's some price in there, and then there are four five restaurants into your point a couple of remodels that are performing well for our franchisees. They are I would say, more aligned as they go forward into the remodels. I know Mike can speak to you [inaudible] inside fantastic remodeled. They're really investing back more and bought into to 2.0, so it's really glad to see that. Now, Arne, if you just want to add.
Arne Haak -- Executive Vice President and Chief Financial Officer
Yes. The only other thing could chime on that Puerto Rico is rebounding very nicely after a very [inaudible] last year. The second thing is that Cheryl has said the remodeled restaurants and we look at the domestic franchisees that have the biggest growth in sales and traffic they are ones that have invested in remodels, or in particularly the ones that have been a couple of them but had some capacity opportunities. As we said, they are paying off as well. I think they're a little earlier in the innings of remodels so, there's some good runway there as well.
Andy Barish -- Jefferies -- Analyst
Right. Then just finally on the price mix in 2Q.
Arne Haak -- Executive Vice President and Chief Financial Officer
Sure. In terms of the mix, I think we're really pleased to all three. Cheryl mentioned our comments all three of our segments as we look at had positive sales. The bar, private dining, and business are growing a little bit faster. In the restaurant revenue center, we got a little bit of mix shift and I don't think if anything particularly concerning it. We're seeing a little bit higher preference on the routes classics but it's still in line with historical norm just moving a little bit. We have just a little bit over 2% in price across the whole restaurant.
Andy Barish -- Jefferies -- Analyst
Thank you.
Operator
There are no further questions, I would now like to turn it back to the host for any additional or closing remarks.
Michael O'Donnell -- Executive Chairman
Okay. Thank you. Thank you all very much for joining us this morning on the call. This is my last time hosting this call. Cheryl will be assuming these responsibilities going forward. I wanted to take a moment to thank all of you for your interest, your dialogue, and your thoughtful approach over the past 10 years, and for getting up on Friday morning each quarter to talk to us. It has been a great 10 years, and I thank you all for your engagement. For the last time signing off these calls, I will leave you with it's a great day to go out and eat steak at Ruth's Chris. It's the great captain Kirk or start to explain would've said Cheryl, you have the gun.
Cheryl Henry -- President and Chief Executive Officer
Thanks, Mike.
Operator
This concludes today's call, thank you for your participation ladies and gentlemen, you may now disconnect.
Duration: 29 minutes
Call participants:
Mark Taylor -- Vice President of Financial Planning and Analyis
Michael O'Donnell -- Executive Chairman
Cheryl Henry -- President and Chief Executive Officer
Arne Haak -- Executive Vice President and Chief Financial Officer
Brian Vaccaro -- Raymond James -- Analyst
Joshua Long -- Piper Jaffray -- Analyst
Andy Barish -- Jefferies -- Analyst
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