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Ruth's Hospitality Group Inc  (NASDAQ:RUTH)
Q1 2019 Earnings Call
May. 03, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group 2019 First Quarter 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 hear the questions. As a reminder, today's conference call 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, Tony, 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 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 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 today. We started 2019 with results that demonstrated a continuation of the solid trends achieved last year. For the first quarter, comparable restaurant sales grew 1.8%. Total revenue grew 2.8% and pro forma earnings per share were $0.45. The quarter have holiday timing shifts as well as some unique winter weather events. But the underlying trends remain consistent for the period and we achieved growth across all three of our revenue segments. Arne will discuss this in greater detail in a moment.

Our special occasion business once again experienced significant growth on both New Year's Eve and Valentine's Day. Additionally, we continue to outpace the Black Box fine dining index for traffic. During the quarter, our teams continue to focus on operational excellence and their ongoing commitment has driven the consistency of our results for many years. As a result of that consistently is steady cash flow generation. This is the foundation of our total return strategy, which centers on investing in our core business, returning excess capital to shareholders, and selectively growing our footprint through new unit development and the opportunistic acquisition of franchisees.

In terms of development, we have a strong pipeline including four signed leases for company owned restaurants. We expect to open Columbus, Ohio, Washington DC and Somerville, Massachusetts in the second half of this year, and Oklahoma City in 2020. We continue to actively work on leases for 2020. However, we only announce a new restaurant location once we have successfully negotiated and signed the lease.

On the franchise side, our partners opened one new restaurant in the first quarter in China and we expect to open a new franchise restaurant in St. George, Utah in the first half of 2020.

As I mentioned, we will also continue to grow our footprint through the opportunistic acquisition of franchisees. On that front, I'm excited to announce the acquisition of three franchise restaurants from longtime partner, Marsha Brown. Along with these restaurants, we have purchased the development rights to the Philadelphia area, including parts of New Jersey, as well as Long Island, New York. This is a unique acquisition of price territory that will help us solidify our overall growth strategy of three to five new company owned restaurants per year going forward.

Before I move on, I would like to recognize Marsha, who had a very special relationship with our founder Ruth Fertel. First is our banker in New Orleans and then working for Ruth in the corporate office, before ultimately becoming a successful franchisee. We're thrilled to welcome Marsha's team members into the Ruth's Chris corporate family.

As you look to the remainder of 2019 and beyond, we remain excited about the opportunities to grow and evolve this iconic brand. These opportunities continue to be generated by our incredible team and their focus on operational excellence, creativity and innovation. I'd like to thank them along with our franchisees for the remarkable work they do each day. And we understand that their effort positions us to execute our total return strategy of investing in organic growth and augmenting those returns by returning capital to our shareholders in the form of dividends, share buybacks and debt reduction.

With that, I'll turn it over to Arne to review the details of our first quarter financial results.

Arne G. Haak -- Chief Financial Officer

Thank you, Cheryl. For the first quarter ended March 31, 2019, we reported net income of $13.9 million, or $0.47 per diluted share, compared to net income of $13.6 million, or $0.45 per diluted share during the first quarter of 2018.

Net income in the first quarter included a $500,000 benefit related to the impact of discrete income tax items and $39,000 in expenses associated with our acquisition of three restaurants, that Cheryl just mentioned. Net income in the first quarter of 2018 included a $400,000 benefit related to the impact of discrete income tax items and $500,000 in expenses associated with the acquisition of our Hawaiian franchisee.

Excluding these adjustments, as well for results from discontinued operations, non-GAAP diluted earnings per common share were $0.45 in the first quarter 2019, compared to $0.45 in the first quarter of 2018. Total company-owned restaurant sales for the first quarter were $113 million compared to $110.4 million in 2018. The increase was driven by the 1.8% increase in comparable restaurant sales, as well as contributions from new restaurants.

Company-owned comparable restaurant sales and traffic included a 200 basis point tailwind from the shift to the New Year's Eve holiday as well as a two -- sorry, as well as a 90 basis point headwind from the shift of Easter into the second quarter of 2019 from the first quarter of 2018.

Traffic for the quarter was flat, as measured by entrees, while check was up 1.8%. Adjusting for these holiday shifts, unusual winter weather and unplanned closures in the Northern parts of the country, as well as the shift of the Super Bowl, our comp restaurant sales would have been up approximately 1.4% in the quarter.

Our franchise income in the first quarter was $4.6 million, up 3.2% versus the prior year, driven by a 3.1% increase in comparable restaurant sales. Comparable sales in our domestic franchise restaurants were up 3.8% during the quarter and comparable sales in our international franchise restaurants were down 0.3%. The strength of our domestic franchise comparable sales was largely driven by the lack of an Easter shift as over 75% of our franchisees report their sales on a monthly versus a weekly basis.

Now, turning to our expenses. Food and beverage costs, as a percentage of restaurant sales, decreased 30 basis points year-over-year to 28.2%. This was primarily driven by a 3.7% decrease in total beef costs, as well as by an 1.8% increase in average check.

For the quarter, our restaurant operating expenses, as a percentage of restaurant sales, increased 60 basis points year-over-year to 47.4%. The increase was primarily due to higher labor costs.

Marketing and advertising costs, as a percentage of total revenues, remained constant at 3%. G&A expenses, as a percentage of total revenues, were down 40 basis points year-over-year to 7.3%, driven primarily by $500,000 in acquisition related expenses included in the first quarter of 2018.

Income tax expense in the first quarter of 2019 was $2.5 million, as compared to $2.4 million in the first quarter of last year. Excluding the discrete income tax items, our first quarter 2019 tax rate would have been approximately 118.3%.

During the first quarter, we repurchased 26,000 of our shares for $600,000 for an average purchase price of $22.03 per share. At the end of the quarter, we had $39 million in debt outstanding, down $2 million from the fourth quarter of 2018.

Subsequent to the end of the first quarter, our Board of Directors approved a 13% -- $0.13 per share of quarterly cash dividend, which represents an 18% increase over the dividend paid in June of 2018.

Additionally in the first quarter, we adopted new accounting guidance that required our operating leases to be recorded on the balance sheet. This does not have a material impact on our Statement of Cash Flows, but will reduce our earnings per share by approximately $0.01 in 2019.

Finally, I would like to give some preliminary insight on the effect of the acquisition of the Philadelphia and Long Island restaurants on 2019. In 2018, these three restaurants generated total revenues of approximately $15 million and contributed $790,000 to franchise revenue. We expect the acquisition to close in the third quarter and be about $0.01 dilutive to 2019 earnings per share and neutral to 2020 earnings per share.

With that in mind, I'd like to provide an update to our 2019 outlook based on current information. As we look at our April revenue trends, we have seen some volatility in our sales. For the first four weeks so far in the second quarter, we've had two positive weeks and two weeks around negative. This dispersion was particularly noticeable in the weeks leading up to and right after Easter. As a result, our comparable sales are running flat quarter-to-date. We believe that this volatility is a result of the Easter shift and corresponding spring break shifts particularly in the mid-Atlantic and Northeast.

Aside from sales, we expect total beef inflation to accelerate through the balance of the year and average 3% to 4% for the year and we expect our cost of goods sold to remain in the range of 28% to 30% of restaurant sales. Quarter-to-date, we've already experienced beef inflation of 5%. We continue to expect annual restaurant operating expenses to be between 48% and 50% of restaurant sales. We expect marketing and advertising costs to remain between 3.4% and 3.6% of total revenues.

We continue to expect G&A expenses to be between $35 million and $36 million, exclusive of integration costs related to the franchise acquisition. We continue to expect our annual effective tax rate to be between 17% and 19%, excluding the impact of discrete income tax items. We now expect our capital expenditures to be between $54 million and $56 million inclusive of the $19 million purchase price for the franchise acquisition. This will result in depreciation expense between $20 million and $22 million. And we expect our fully diluted shares outstanding to now be between 29.9 million and 30.3 million shares, exclusive of any future share repurchases under the company's share repurchase program.

That concludes our prepared remarks. With that, I'd like to turn the call back to you Tony to open the lines for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We will now take our first question from Will Slabaugh of Stephens Inc. Please go ahead.

Will Slabaugh -- Stephens Inc -- Analyst

Yeah, thank you, and congrats on the acquisition in the quarter. Two quick ones if I could. First on the territory that you're acquiring along with the franchisee acquisition. Is there anything more you're willing to discuss in terms of store potential of that territory, and how we could think about of any stores rolling into that territory in the coming years?

Cheryl Henry -- President and Chief Executive Officer

Yeah, thanks, Will. So, I mentioned earlier, we don't really discuss specific leases or a number of leases until we're signed. So, what I will say is, we currently have one location in Long Island and a population base of about 3 million people. So we certainly think, there's a valuable opportunity there as well as the surrounding metro area of Philadelphia. We'll have more to say as we go through the -- our process of site selection and so forth. But I think the opportunities are there, it's certainly part of why this acquisition is so unique for us and thinking about our growth and solidifying our three to five years.

Will Slabaugh -- Stephens Inc -- Analyst

Got it. Thank you. And then a follow up on the beef commentary if I could. Can you talk a little bit more about what you're seeing and hearing in the beef market. What could be behind that 5% inflation quarter-to-date. And then, any thought you may have on the African Swine Fever, if that's already factoring and you think or something that, that you're watching and that could sort of bubble up later on.

Arne G. Haak -- Chief Financial Officer

Sure, Will, this is Arne. In terms of the beef commentary, I think our outlook remains very much the same as what we've started the year. And if you look at it in terms of absolute prices we actually have pretty good prices today. Or we have this great prices last year. In particular, beef prices in the second quarter of last year were down 10% and in the third quarter they were down over 20%.

So while the supply looks good, the grading still looks good. I just think there is a little bit more demand that we're giving back a little bit of the big declines that we had last year. But overall, I think we're not surprised by this and it's consistent with the same outlook we had at the beginning of the year. In regards to the swine flu, we're paying attention to it, but we think it's going to take a while so for that, if there's demand for other proteins to work its way all the way over to beef and then up to prime. But we certainly keep an eye on it as it's a fairly significant issue to the worldwide food basket.

Will Slabaugh -- Stephens Inc -- Analyst

Understood. Thank you.

Operator

Our next question comes from Andy Barish of Jefferies. Please go ahead.

Andy Barish -- Jefferies -- Analyst

Hey, guys. On the pricing side, I mean, are you looking a little bit more closely as you kind of maybe or coming through this period of down beef prices into what may be a little bit more inflationary input costs on the beef side is pricing something that you're looking a little bit more closely at?

Cheryl Henry -- President and Chief Executive Officer

Yeah, Andy, we have been looking at, we look at it as I mentioned before a few times a year, we remain reluctant in it and having said that we're currently carrying about 2%. We will look at it again and if there's opportunity we believe to not have a negative impact around the traffic side of the business. We'll take that opportunity where we think we can.

Andy Barish -- Jefferies -- Analyst

Okay. And then, Arne, on the CapEx, the overall CapEx for the year is going up more than the $19 million for the acquisition. Is that anticipating, putting some capital back into the acquired restaurants or is there something else going on on the development side that maybe added a little capital to the full year CapEx.

Arne G. Haak -- Chief Financial Officer

Hey, good morning, Andy. It is both -- there's a little bit more for the acquisition territories and what kind of capital we think we're likely to put in immediately. And then the second one is really around timing of the Somerville, Massachusetts site. Whether or not it was going to come in the fourth quarter or the first quarter there were still some questions. And I think we feel concretely now that it looks like it's going to be a fourth quarter opening. So that's the only change, so.

Andy Barish -- Jefferies -- Analyst

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from Brian Vaccaro of Raymond James. Please go ahead.

Brian Vaccaro -- Raymond James & Associates, Inc -- Analyst

Thanks, and good morning. Just a quick one back on the reacquired franchise rights. And Cheryl, you mentioned, I think, you have a store in Long Island in a population of 3 million people. Just curious what's your average store per pop in an average market.

Cheryl Henry -- President and Chief Executive Officer

So I'm trying to answer the question Brian, without saying exactly how many stores we'd be looking to put in there. What I can say is that we have different format stores. We can do stores in smaller populations that have worked for us. We can do stores in larger populations and I think that actually what equally interesting about these different territories that we're acquiring is that when you think about our ability to go into smaller markets, smaller apartments and larger ones and be equally successful based on rent et cetera. There's some good opportunity for us here and sort of by our growth strategy.

Brian Vaccaro -- Raymond James & Associates, Inc -- Analyst

Okay. And thinking about the performance of these units or any appreciate that the 15 million (ph) last year. How about the margins, any help on the store margins how these stores perform. And then, could you also -- it sounds like you've got some maybe remodel plans here in the near term or is there perhaps an already planned opening within the pipeline that's part of that CapEx budget?

Arne G. Haak -- Chief Financial Officer

Okay. Hey, Brian. So first of all, in terms of additional plant openings there is not anything in that CapEx budget for that. There is some money that we have for equipment, IT hardware, we would upgraded to our package that is the capital component of this acquisition that we expect to see this year. As we move further into next year that's any kind of significant remodel or anything like that would probably be in 2020 or 2021.

In regards to the performance you can see on a system basis there is -- there are little bit below our system average, and in terms of margin when you tend to have slightly lower sales you tend to have a little bit less than the system average margin as well. So I think, they run great restaurants there, the Philadelphia restaurant is relatively new Long Island, it's great, and the people are great, so we're excited about the opportunity. We think these opportunities both in the existing restaurants and to grow and we're thrilled to. I think you know we've talked about this for some time, we're glad that we can now do this.

Brian Vaccaro -- Raymond James & Associates, Inc -- Analyst

Okay. Great. That's helpful. And then on the margin the food costs in the Q1 period you mentioned that the beef was down three and a half (ph) but it -- by our math it would seem like your overall basket might have been flat if not slightly up, taking into account roughly 2% checks. So just curious what you're seeing in the restaurants, your food basket, and is that expected to continue sort of that non beef side of things, is that inflation expected to continue for the rest of the year.

Arne G. Haak -- Chief Financial Officer

For the first quarter we were actually flat to slightly down a little bit on the food basket. We do expect that we are going to have our most significant inflation here in the second quarter and again even more so in the third quarter. Overall aside from beef, I think the basket some pretty good shape. There are some pluses and minuses on seafood, but we haven't seen any other big surprises in terms of our food basket and inflation.

Brian Vaccaro -- Raymond James & Associates, Inc -- Analyst

Okay. And then just lastly on the quarter-to-date. So Easter was a 90 basis point bad guy to Q1. How do you -- should we think about the Easter shift as being that -- that magnitude in Q2, but maybe even more importantly as you look to kind of peel back the onion a little bit on quarter-to-date trends, is there any particular choppiness in a segment that might explain some of it. Or I think you mentioned geographically maybe some softness that's concentrated in a given market which is any incremental color on the choppiness you mentioned in April would be helpful.

Arne G. Haak -- Chief Financial Officer

Sure. So we had Easter moved back three weeks this year. And so when Easter comes earlier it tends to do a little bit better. Easter is not as big a day for us as some of our other special occasion days. It's not as big as Mother's Day, Father's Day, Valentine's Day, any of those, but it is an above average Sunday. When holiday moves further back in the quarter you tend to see a slower sales cadence and when spring breaks align with Easter then you can have a pretty big impact. And so what we saw was more muted sales on Easter this year, because it was further back in the year. And you can particularly see the effect on like Florida, California, the spring break locations. When you're at home for Easter versus out on vacation that tends to seem to affect it as well. So that's kind of the color. I want -- Cheryl wants to add anything else?

Cheryl Henry -- President and Chief Executive Officer

Yeah. We're kind of just out of that shift Brain. So it's early or kind of five days out of that. The impact shift and I would say, generally you like the direction, I think it's early again, but I think there was certainly that noise was caused around those timing of Easter and the spring break.

Brian Vaccaro -- Raymond James & Associates, Inc -- Analyst

All right. Thank you.

Operator

Our next question comes from Joshua Long of Piper Jaffray. Please go ahead.

Joshua Long -- Piper Jaffray -- Analyst

Great. Thank you for taking my question. Sure it sounds like you were pretty pleased with just the balanced trends across all your three consumer day part or consumer segments. I'm curious if you could talk to us about the trends you're seeing there and maybe how you're evolving the communication with those different groups over the course of the year?

Cheryl Henry -- President and Chief Executive Officer

Yes. So we were positive in all, see -- and I think the way you ask the question is exactly right. We think about the business from a standpoint whether it's revenue centers and private dining kind of main dining room a la carte dining and then the bar opportunity where we're working through this year, and I mentioned before on some different things to touch within those different revenue centers to drive traffic. And so I think pleased so far with Q1 there are some things to come in each of those. We look forward to talking more about those as they roll in.

Joshua Long -- Piper Jaffray -- Analyst

Great. Thank you for that. And could you remind us where we are in terms of just the refreshing of the overall asset base. You've done a great job going in and investing in 2.0 remodels, expanding capacity where it's available and maybe an update there in terms of how we should think about 2019 and maybe opportunities in the out years.

Cheryl Henry -- President and Chief Executive Officer

Sure. We are -- after this year we will be about two thirds through the system of those that are that can be done. So some of the remodel if you recall is looking at opportunities to expand. So the bar or the private dining footprint, we can make larger and we have that opportunity in some locations, we don't have it anywhere. So as we look at kind of the base of attainable which ones we can make changes and we're about two thirds, Joe, we'll finish about eight this year.

So that's really where we are and just to remind everyone the idea of these remodels was not just to freshen up, but it was really to align the offerings and the experience with the footprint and what the restaurant can deliver and atmosphere itself. And so expanding our bar is where we can. And then we can program our bars for that area. Working on the main dining room to work on the atmosphere there and then looking at the menu and how we evolve that as well as private dining and expanding that where we can, so we are pleased with where the program has gone. We continue to work it as we think about evolving in the future. I would say it will be more around the guest experience and how we use technology to do things like reduce friction and enhance the guest experience. And that's still some of those efforts are still to come. But as we work our way through the remodel program we're pleased with what it's done for the system.

Joshua Long -- Piper Jaffray -- Analyst

Great. Thank you.

Operator

It appears there are no further questions at this time. I would now like to turn the conference back over to the management team for any additional or closing remarks.

Cheryl Henry -- President and Chief Executive Officer

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

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 27 minutes

Call participants:

Mark Taylor -- Vice President of Financial Planning and Analysis

Cheryl Henry -- President and Chief Executive Officer

Arne G. Haak -- Chief Financial Officer

Will Slabaugh -- Stephens Inc -- Analyst

Andy Barish -- Jefferies -- Analyst

Brian Vaccaro -- Raymond James & Associates, Inc -- Analyst

Joshua Long -- Piper Jaffray -- Analyst

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