Ruth's Hospitality Group Inc (RUTH) Q4 2018 Earnings Conference Call Transcript

RUTH earnings call for the period ending December 30, 2018.

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Ruth's Hospitality Group Inc  (NASDAQ:RUTH)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group 2018 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct the 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 Analysis

Thank you, Marguerite, and good morning everyone. Joining me on the call today are Cheryl Henry, 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 rghi.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 like to now turn the call over to our Chief Executive Officer, Cheryl Henry.

Cheryl Henry -- President and Chief Executive Officer

Good morning, everyone, and thank you all for joining us on the call. The fourth quarter marked a fitting end to another year of strong results for our team at Ruth's Chris Steak House. As you will see, there are lot of moving parts in the quarter. This includes one less operating week and the loss of the New Year's eve holiday, which Arne will walk you through shortly. Excluding the loss of the New Year's eve holiday, revenue growth was positive across all three of our key segments led by the strength of our special occasion business. The Thanksgiving, Christmas Eve and Christmas Day holidays were each up year-over-year.

Our comparable restaurant sales accelerated in the back half of the quarter. After adjusting for the loss of New Year's eve holiday, our comparable sales growth for the quarter would have increased 1.4% after starting out flat in October. We continued to outperform the Black Box Fine Dining Index for both sales and traffic, and are pleased with both our performance and the performance of our franchisees, who also had a strong quarter.

On the operating side, our team members continue to execute in our restaurants at the highest level with a focus on operational excellence and enhancing the guest experience. I am proud of these efforts, particularly, they're focused on pleasing our guests, while diligently managing margins. Their dedication drove the highest annual restaurant level margins, we have had in over 10 years.

The ongoing consistency of our operations, combined with the acquisition of the Hawaii restaurants, beef deflation and tax saving generated double-digit adjusted EPS growth in the quarter to $0.50 per share.

Let's now turn to development. During the quarter, we accelerated the opening of two company restaurants that were originally targeted for opening in the first quarter of this year. The first in Paramus, New Jersey and the second in Reno, Nevada, which operates under a management agreement. Additionally, we closed one restaurant late in the fourth quarter in Washington DC, which is at the end of its lease term.

Looking ahead to 2019, we have a strong pipeline of new restaurant development plans. This includes today's announcement of a new lease for a restaurant in Somerville, Massachusetts, which we expect to open in the fourth quarter of this year. We now expect to open new restaurants in Columbus, Ohio, Washington DC, in Somerville, Massachusetts in the second half of 2019. We also have a lease for a new restaurant in Oklahoma City, that we expect to open in 2020, and we continue to work on opportunities for additional restaurant openings.

On the franchise side, our partners opened one new restaurant in the fourth quarter in Markham, Ontario. For 2019, our partners are currently expected to open two new restaurants, one in China, during the first half of the year, and one in St George, Utah, in the second half of the year.

Looking back at 2018, I am extremely proud of all the team has accomplished this year. We seamlessly integrated our six Hawaiian franchise locations, opening three new company-operated and two new franchise restaurants. In addition, 2018 marked our ninth consecutive year of comparable restaurant sales and earnings growth, including full year revenue up 9% and adjusted EPS up 26%. This success continues to be driven by our operational approach of executing in our restaurants at the highest level, and I'd like to thank our team members and franchisees for the incredible work they do each day.

Lastly, I think it's worth noting that in 2018, we invested over $30 million in CapEx back into our core business and still returned over $41 million back to shareholders in the form of dividends, share repurchases and debt paydown. We believe these results reflect our success of our total return strategy, which is predicated on the strength of our brand and our people, and a disciplined approach to capital allocation.

With that, I'll turn it over to Arne to review the details of our fourth quarter and full year financials.

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

Thank you, Cheryl. For the 13-week fourth quarter ended December 30th, 2018, we reported net income of $14.9 million or $0.49 per diluted share compared to net income of $9.6 million or $0.31 per diluted share during the 14-week fourth quarter of 2017.

Net income in the fourth quarter of 2018 included $250,000 in expenses associated with the acquisition of our Hawaiian franchisee. Net income in the fourth quarter of 2017 included a $3.9 million non-cash charge related to the impairment of assets at one restaurant location. $600,000 in expenses associated with the acquisition of our Hawaiian franchisee and discrete income tax charge of $1.2 million, primarily related to the reduction of deferred tax assets from the Tax Cuts and Jobs Act. Excluding these expenses, as well as the results from discontinued operations, our non-GAAP diluted earnings per common share were up 12.5% to $0.50 compared to $0.44 in the fourth quarter of last year.

Total company-owned restaurant sales for the fourth quarter of 2018 were $120 million compared to $117.4 million in 2017. The increase was driven by the contribution from our new restaurants, including those acquired in Hawaii. Our fourth quarter company-owned restaurant sales were also negatively impacted by approximately $8 million, as a result of last year's 53rd-week and the shift of the New Year's eve holiday.

Company-owned comparable restaurant sales decreased 0.1% during the fourth quarter. Comparable restaurant sales and traffic in the quarter included an approximately 150 basis point headwind from the loss of the New Year's eve holiday. Traffic in the quarter is measured by entrees was down 2.5% and check was up 2.5%. Adjusting for the loss of New Year's eve, comp restaurant sales would have been up approximately up 1.4% in the quarter.

Total franchise comparable restaurant sales increased 1.1% year-over-year. Comparable sales in our domestic franchise restaurants were up 2.1% during the quarter and comparable sales in our international franchise restaurants were down 3.9%. Franchise income in the fourth quarter was $5 million, up 7.1% versus the prior year. The increase in franchise income was driven by 1.1% increase in comparable franchise restaurant sales, as well as the change in accounting from the new revenue recognition standard and the contribution from new restaurant openings.

Now, turning to our expenses. Food and beverage costs, as a percentage of restaurant sales, decreased 160 basis points year-over-year to 27.7%. The decrease was primarily driven by 6.4% decrease in total beef costs, as well as by the 2.5% increase in average check. For the quarter, our restaurant opening -- restaurant operating expenses, as a percentage of restaurant sales increased 110 basis points year-over-year to 45.8%. The increase in restaurant operating expenses, as a percentage of restaurant sales was primarily due to the loss of sales leverage from the extra week in the fourth quarter of 2017, as well as the planned increase in occupancy related expenses.

Our G&A expenses as a percentage of total revenues were up 40 basis points year-over-year to 8%. The increase, as a percentage of total revenues was primarily driven by the loss of sales leverage from the extra week in the fourth quarter 2017, as well as an increase in performance-based compensation and costs related to the integration of the Hawaiian restaurants.

Marketing and advertising costs, as a percentage of total revenues increased 80 basis points to 3.7%. Income tax expenses declined from $6 million in the fourth quarter of 2017 to $3.4 million, largely as a result of the enactment of the Tax Cuts and Jobs Act. As a reminder, we reinvested approximately 20% to 30% of these tax savings into our core business in the form of brand sales driving and people initiatives.

During the fourth quarter, we repurchased approximately 464,000 shares for $12.6 million at an average price of $27.12 per share. At the end of the fourth quarter 2018, we had $41 million in debt outstanding. Additionally, subsequent to the end of the fourth quarter, our Board of Directors approved a $0.13 per share quarterly cash dividend, which represents an 18% increase over the dividend paid in March of 2018.

Now, I'd like to provide our outlook based on current information for the full year of 2019 for some of our key financial metrics. Because of last year's extra week, New Year's eve traditionally a strong day for us was pushed from the fourth quarter 2018 into the first quarter 2019. As a result of the shift, comp sales in the first quarter 2019 have been positively impacted by approximately 150 basis points. In addition, the Easter holiday will shift back into the second quarter in 2019 from the first quarter in 2018. We believe that first quarter comparable sales last year benefited by approximately 70 basis points due to the shift of Easter.

Aside from the benefits of the New Year's eve holiday, we have seen some early headwinds from unusual winter weather in the northern parts of the country, as well as the shift of the Super Bowl from a company market in Minneapolis to a franchise market in Atlanta. Excluding the impact of New Year's eve and weather, our comp sales and traffic would be running up low-single digits.

For our cost of goods sold, we see an uncertainty here in terms of these beef prices. In 2018, we expected beef prices to be up and ultimately we saw full year deflation of 8% driven by prime cuts, which were down 14.5%. This volatility was driven by the improved supply of overall beef and record high prime grading percentages. Although, the supply of prime beef continues to remain at historically high levels, retail demand is expected to continue resulting in modest beef inflation for 2019. We currently expect total beef inflation to accelerate through the year and to average 3% to 4% for the full year. We expect our cost of goods sold to be in the range of 28% to 30% of restaurant sales.

We currently expect our annual restaurant operating expenses to be between 48% and 50% of restaurant sales. We expect our marketing and advertising cost to be between 3.4% and 3.6% of total revenues. While marketing and advertising costs will be down slightly over 2018 for the full year, we expect a slight increase in year-over-year marketing spend in the first quarter, as we continue to focus our tactics and investments.

We expect our G&A expenses to be between $35 million and $36 million. We expect our annual effective tax rate to be between 17% and 19% excluding the impact of discrete income tax items. We expect our capital expenditures to be between $30 million and $32 million and depreciation expense to be between $19.5 million to $21.5 million. We expect our fully diluted shares outstanding to now be between 30 million and 30.5 million shares, exclusive of any additional share repurchases under the Company's share repurchase program.

With that, I'd now like to turn the call back to Cheryl for some closing remarks.

Cheryl Henry -- President and Chief Executive Officer

Thank you. Arne. We've built a strong foundation over the last 54 years through an intense focus on operational excellence and amazing group of people. This focus has generated broad appeal across generations and demographics, resulting in incredible brand loyalty. While operational excellence remains the cornerstone of our strategic efforts, we continue to search for ways to evolve our brand and increase our connection with our guest.

We set clear direction for our innovation efforts with any new initiatives needing to deliver at least one of three things, reducing friction for our guests, enhancing the guest experience, while creating efficiency to improve productivity for our teams. With those criteria in mind, we are continually looking at a number of potential opportunities that we'll update you on, as the year progresses.

As I look ahead to 2019 and the future, I am excited about the opportunities to grow and evolve our iconic brand building upon the strong foundation and to create shareholder value through our total return strategy.

With that, I'd now like to turn the call back to Marguerite for any questions, you may have.


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Questions and Answers:

Operator

(Operator Instructions) We can now take our first question from Nicole Miller from Piper Jaffray. Please go ahead.

Nicole Miller -- Piper Jaffray -- Analyst

Thank you. Good morning, and thank you for the update. I have two questions. The first is, could you frame-up the industry and I'm thinking specifically, as you talk about your growth objectives for this year, it's a great pipeline and some are in major cities and some are in just relatively smaller cities. So how do you frame-up the competition just overall in the industry? And then as you go into the smaller cities, are you the first entrant or are there other of your peers there? Thanks.

Cheryl Henry -- President and Chief Executive Officer

Sure. Nicole, so I believe you're talking about specifically to development. So it -- and I think we've talked in the past about our ability, just given the strength of the branding, the broad awareness of the brand to be able to go into smaller markets, and I think those are the markets that you're referencing. Generally, we look at smaller markets, we, there may be one or two independents that have been in the marketplace, but generally from a more national brand standpoint, there is an opportunity to be the first one in and so, that's certainly part of the attractiveness of our smaller markets strategy.

From the larger market that has been kind of our traditional development especially on the Company side over the years. And I think given the environment around development and construction costs, we're just -- we've said before, we are patient, we look for the right size, we won't just do it size because it's there we want to make sure we're hitting all of our return hurdles on that. And so I think if there is a way to look at them differently, one is kind of what we think about is our standard marketplace, where there may be competitors, whether they're independent or existing national brands, but then smaller markets, where there is an opportunity to be the first one then.

Nicole Miller -- Piper Jaffray -- Analyst

That's helpful. Thank you. And then the second is wanting to talk over beef cost a little bit more. I wanted to make sure, I understood the 3% to 4% is that just beef inflation, I was at the overall basket and if it's just beef, how about the overall basket? And then it seems right now, any price you have really and this would be true across the industries to offset labor. And so if beef does inflate, do we just think either as an industry in total offer yourself specifically that margins go down or prices will go up to cover? Thanks.

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

Sure, Nicole. Let me -- let me take the beef question, first of all and then, I'll turn it over to Cheryl, who will talk about how we think about price and margins. So in terms of beef that was just for beef inflation. And I think we do see because we have beef inflation that we likely will have some modest inflation in the food basket this year. We don't see it snapping back all the way to where it was two years ago, but we don't see us giving all of the -- the benefit we got from beef last year back. But we certainly see I think, as we accelerate -- as we go through the year and particularly when you get past kind of March-April that we're likely to see some inflation there. So let me turn it over to Cheryl for the second part of the question.

Cheryl Henry -- President and Chief Executive Officer

The question on price, we've -- we've seen years in the past, where we had inflation both in -- on the labor side, as well as on the beef side are traditionally our price target. We talk about between the 1% and 3%. We haven't had to go outside of that. We have price plan just slightly under 2% for the year, and I think there's certainly opportunity there. We take it reluctantly, but if there is an opportunity, we will take it if we need to.

I would say, I give the teams at the restaurant level an enormous amount of credit. They've become experts at understanding the balance between managing margins, managing labor, but also understanding that is the quality of the experience that brings guests back and drive the top line. And so that's our first and foremost focus is not necessarily cutting labor understanding, but delivering on top line, delivering on the guest experience, driving the top line and be able to leverage that against some of the cost inflation.

Nicole Miller -- Piper Jaffray -- Analyst

Thank you.

Operator

(Operator Instructions) We can now take our next question from Andy Barish from Jefferies. Please go ahead.

Andy Barish -- Jefferies -- Analyst

I'm sorry, I was muted there. Good morning. Hey on the -- on the composition of the same-store sales, it look like menu mix actually turned positive in the fourth quarter if I'm assuming pricing was around -- around 2 as well in the 4Q after kind of a year of some negative mix with the bar program and things like that. Was there something going on there that changed during the 4Q?

Cheryl Henry -- President and Chief Executive Officer

No, Andy, I think -- I think you said, at the beginning of the year, we had some -- some mix going on just with the bar program. We're starting to see that settle out in the back half of Q3, and I think we saw that kind of flowing through in Q4. And so we were slightly over 2 and picked up right about that. Arne, if you have anything to add?

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

Yeah. No, Andy, and I think, we did round trip the middle of the year what Cheryl talked about. I think the other thing that we're kind of seeing is the consumer particularly on special occasion days is doing really well. Those days are the comp sales. They -- we set a record last year, and we beat it again this year, and you see people spending a little bit more as well on those special occasions more than what you have in terms of price on the menu.

Cheryl Henry -- President and Chief Executive Officer

That's a good point. So on the holidays, you're getting, not just the traffic feeds, but also walk around the check and some of the things, people are willing to move around the menu.

Andy Barish -- Jefferies -- Analyst

Makes sense. And just early on for '19, I mean, anything we should realize on mix shift or should we kind of think about that as sort of flattening out, as it's generally been over a longer period of time?

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

Well, I -- We hope for the second. It's always -- we've tried to be very thoughtful about how we put in price and that if we put it in, we know what we're going to get, and if we're taking any traffic risk, if we're pushing any particular item moving. But we think it's -- we generally get what we put in there aside from any big programs, but there's nothing currently that we think has disrupted the mix.

Andy Barish -- Jefferies -- Analyst

Okay. And then on -- actually on the restaurant operating expense line, I was little surprised on occupancy was, I think, you mentioned, it was intentional, increases are expected to continue. I don't get the sense that's from new openings at higher rents shifting just given there aren't a ton of those, but is that Hawaii or what's driving the occupancy increases and is that expected to continue. And -- and I guess, why no mention of labor if comps were kind of flattish and labor has been inflating 3%, 4%, was that just a line item, you guys did a particularly good job on this quarter, and what do we expect for wage inflation in '19, please?

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

So kind of two questions here, first on the occupancy, and then we can talk a little bit about the labor. First on the occupancy. Your intuition is right. A big piece of that is Hawaii. There is a little bit of an underlying -- some upward pressure, as we -- some of our longer lease restaurants are -- as we have to go and renegotiate new term, you're seeing a little bit of that. And the newer restaurants right now are coming in probably at the high end of -- if you look at the range of what we pay for rent in terms of occupancy, as a percentage of sales. Going into 2019, and you've heard a couple of other people talk about this, we'll see a little pressure on that line, as well, but it's not entirely big. It's maybe a penny a share from the new lease standard. So that's kind of the -- there's a couple different moving pieces there, but the biggest one last year was Hawaii.

In terms of labor, we didn't really call it out. It's kind of been going on for several years. I mean, we -- we -- as we -- we are going through our planning. It's like this is another year, it's going to be kind of 3% to 5% -- 3%, 4%, it's kind of the goal post that we've been. In 2018, I think the team did a really nice job and their productivity actually picked up a little bit on a full year basis. So it's just one of the things that we have to keep managing, and we keep pushing on.

And so at the restaurant level, we certainly -- if things play out the way we think they will, in terms of food costs and labor, we're probably going to face some pressure there. And it's certainly very manageable, it's not big. And if you look at kind of the rest of our guidance, you'll see we're kind of scaling back some other things, marketing is a little lower, G&A should be a little bit lower, as a percentage of sales. We're trying to manage the overall margin as well.

Andy Barish -- Jefferies -- Analyst

Thank you.

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

Sure. Thanks, Andy.

Operator

We can now take our next question from Brian Vaccaro from Raymond James. Please go ahead.

Brian Vaccaro -- Raymond James -- Analyst

Hi, good morning, and thank you. Arne just back to that -- that comment on the lease standard, the change in lease accounting rules, I think you said about a net $0.01 headwind. Could you walk through how that will flow through the model into '19?

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

No, it -- it will show up in the first quarter and it's just -- it's -- we're going to lose the gain on sale leasebacks that we've been amortizing into lease expense. That is not -- we don't have a lot of (multiple speakers) recent sale leasebacks, but it's kind of throughout the full year.

Brian Vaccaro -- Raymond James -- Analyst

Okay. All right. Certainly, understand that dynamic. Okay. And -- and on the marketing and advertising, I wanted to ask, it looks like you've increased the spend in the fourth quarter with reinvesting some of the tax savings, spend coming down a little bit in '19, as a percent of sales. I guess could you comment on how the broader marketing strategy performed versus expectations in '18? And how you might be adjusting tactics heading into '19 whether it would be where you're spending just how you're communicating with the guests?

Cheryl Henry -- President and Chief Executive Officer

Well, Brian, so we'll give a full playbook on our marketing plan and our tactics. What I'll say is, 2018 was the year, we talked about making investments. Those are more along the lines of building foundational things for initiatives that we want to do in the future. So whether that be a new e-commerce site that we invested in, that allows us now the sell experiences versus just gift cards and that's something we'll be looking at. And so those types of investments are really in 2018. I think what you'll see is kind of a shift back to, OK, let's get some of those now in place, let's go test them and roll them in, in addition to kind of our traditional approach that we use for digital email et cetera.

Brian Vaccaro -- Raymond James -- Analyst

Okay. And are we back to the fourth quarter comp, sorry, if I missed this, but the average check you said was up 2.5%, how much pricing was in the menu in the fourth quarter? and how are you approaching pricing or thinking about pricing into '19 relative -- given the food and labor backdrop that you had mentioned before?

Cheryl Henry -- President and Chief Executive Officer

The pricing was just under at about 2.3%, 2.4% in the fourth quarter. As we look toward '19, I mentioned in the call where for the year looking just under 2%, right now. And again as we go through the year that's something we do on a regular basis during review opportunities like being reluctant prices, but if there is an opportunity to take it and we need to do that we'll do that.

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

The first quarter price is around 2.2%, Brian.

Brian Vaccaro -- Raymond James -- Analyst

Okay. Great. Great. And then just -- just last one, I wanted to ask you about labor and Andy was asking about the wage inflation, but can you help us just put in context, what was wage inflation in '18? And what does wage inflation look like in '19?

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

They're pretty similar numbers. It was just under 4% for us in '18. We think kind of the goalposts are 3% to 5% and about half of that inflation is coming from minimum wage.

Brian Vaccaro -- Raymond James -- Analyst

Okay. Great. And sticking with that theme last one for me, just can you give us an update on turnover at both the manager and hourly level. So maybe were that absolute level is and how is that compared to 12 -- over the last 12 months to 18 months. And any initiatives that are currently in the works or plans for '19 to hopefully drive retention going forward? And that's it from me? Thank you.

Cheryl Henry -- President and Chief Executive Officer

Yes, fine. Sure. So we -- we talk about frequently our turnover, it's something we invest in from a standpoint of developing our people and providing benefit for them as well as some of the initiatives that we talked about taking our tax savings and investing in retention efforts around our people. Those are ongoing. Our turnover at the management level is well below, especially in the fine dining category, as it is for the hourly as well. And again, it's something we invest on -- for years.

So I realized the labor market is getting tighter and (technical difficulty) become quite a topic for everyone. Because of the level of our service and the level of what we produce for our guests, people have always been an important investment for us and so that continues every year and whether again that's the form of training, education, development opportunities for the team, our actual retention efforts that are more on the monetary side.

Brian Vaccaro -- Raymond James -- Analyst

Thank you.

Operator

That concludes today's Q&A session. I would now like to turn the call back to the host for any additional or closing remarks.

Cheryl Henry -- President and Chief Executive Officer

Again, thank you all for joining us on the call this morning, and I look forward to speaking with you all in the near future. Have a great day.

Operator

Thank you. That concludes today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

Duration: 30 minutes

Call participants:

Mark Taylor -- Vice President of Financial Planning and Analysis

Cheryl Henry -- President and Chief Executive Officer

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

Nicole Miller -- Piper Jaffray -- Analyst

Andy Barish -- Jefferies -- Analyst

Brian Vaccaro -- Raymond James -- Analyst

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