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Ruth's Hospitality Group Inc (NASDAQ:RUTH)
Q3 2019 Earnings Call
Nov 1, 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 Third 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 queue up for 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 Gavin 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 could 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, Director

Good morning, everyone. And thank you all for joining us on the call today.

I am proud of the results we delivered for the third quarter in the face of several external headwinds. This included a tropical storm that affected our New Orleans area restaurants and Hurricane Dorian, which impacted Florida and parts of the South East. Additionally, we managed through record high beef prices, which drove a 19% increase in year-over-year total beef costs. Despite these challenges, we were able to deliver positive same store sales growth and 22% increase in pro forma earnings per share. The strength of our business continues to evolve around our commitment to innovation and operational excellence, which is the foundation of our brand and long-term success.

With regards to innovation, we made progress testing new initiatives during the quarter, which we are excited about, and we'll share more details as soon as these tests conclude. We believe that these initiatives will help our efforts to drive sales and increased traffic as we look to enhance our successful Happy Hour and bar programs, launch enticing new guest experiences and evolve our main dining room offerings, while also providing value to our guests. These initiatives can only succeed if our foundation is strong within our operations. We work continuously within our restaurants and operational excellence, ensuring our people are focused on treating every guest with a touch of hospitality they deserve. The third quarter concluded our efforts to bring every restaurant sales manager, general manager and chef together for regional meetings. These meetings focused on our sales expertise, elevating the art of hospitality and laying the ground work for continuous innovation.

New restaurant openings are also an important pillar of our strategic efforts. In early October, we opened a new restaurant in Columbus, Ohio and we expect to open in Somerville, Massachusetts later this month. We have also recently signed leases for two new company restaurants. One in Long Beach California and one in Suffolk County on Long Island, New York, the first restaurant scheduled within the territory of our recent franchise acquisition. For 2020, we currently expect to open five restaurants. This includes Washington DC, Short Hills, New Jersey, Worcester, Massachusetts, Long Island New York and Long Beach, California. Washington DC was previously expected to open late in 2019 and will replace our current Washington DC restaurant whose lease expires in 2020. We continue to actively work on additional development opportunities for both 2020 and beyond, and we'll provide updates on lease signings as they occur.

In addition to investing in our core business, we also returned over $17 million to shareholders during the quarter. This included dividend payments of $3.8 million and share repurchases of $13.5 million. In regards to the latter, this brings our annual share repurchase amount for 2019 to over $20 million. And subsequent to end of the quarter, our Board of Directors authorized a new $60 million share repurchase program, reflecting the strength and stability of our business.

Beyond 2019, we are focused on opportunities to grow and evolve this iconic brand. These opportunities continue to be generated by our incredible team and their dedication to operational excellence and innovation. I'd like to thank them along with our franchise partners for their remarkable work that they do each day.

And with that, I'll turn it over to Arne to review the details of our third quarter financial results.

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

Thank you, Cheryl. For the third quarter ended September 29, 2019, we reported net income of $4.5 million or $0.16 per diluted share. This compares to net income of $3.6 million or $0.12 per diluted share during the third quarter of 2018. Net income in this year's third quarter included $300,000 benefit related to the impact of discrete income tax items and $300,000 in expenses associated with the acquisition of our former franchisee. Net income in the third quarter of 2018 included an $80,000 benefit related to the impact of discrete income tax items and $400,000 in deal related expenses associated with the acquisition of the six restaurants of our Hawaiian franchisee. Excluding these adjustments, as well as the results from discontinued operations, our non-GAAP diluted earnings per common share were $0.15 in the third quarter of 2019 compared to $0.13 in the third quarter of 2018.

Total company owned restaurant sales for the third quarter were $97.2 million compared to $93.5 million in 2018. The increase year-over-year was driven by new restaurants, including the recent franchise acquisition and the 0.6% increase in comparable restaurant sales. Traffic during the quarter as measured by entrees decreased 1.7% compared to last year, while average check increased 2.3%. Our sales trends improved by period during the quarter, despite the unexpected weather challenges that Cheryl mentioned, which resulted in reduced sales during storm preparation, as well as the loss of 11 operating days during the quarter. We estimate that these events negatively impacted our comparable restaurant sales and traffic by approximately 30 basis points to 40 basis points. The improvement in our traffic and sales trends has also continued into the fourth quarter and we are encouraged that our comp sales to date are running up low single-digits.

Franchise income in the third quarter was $3.9 million compared to $4 million in 2018. Comparable sales in our domestic franchise restaurants increased 0.5% during the quarter, while comparable sales in our international franchise restaurants were down 0.6%. Other operating income for the third quarter was $1.9 million, up 24% from $1.5 million in 2018. The year-over-year increase was driven by the contribution from our restaurants operating under a management agreement.

Now turning to our expenses. Food and beverage costs, as a percentage of restaurants sales, increased approximately 140 basis points year-over-year to 29.6%. The increase was largely driven by the 19% increase in total beef cost that Cheryl noted earlier. Looking to the fourth quarter for beef, we now expect the rate of inflation to be between 10% to 15%, primarily driven by increased retail demand for prime cuts.

Restaurant operating expenses, as a percentage of restaurant sales, decreased approximately 40 basis points year-over-year to 52.7%, primarily due to lower incentive based compensation. Marketing and advertising costs, as a percentage of total revenues, decreased approximately 80 basis points to 3.1%. The decrease, as percentage of total revenues, was primarily driven by the planned shift in marketing tactics across the periods. G&A expenses, as a percentage of total revenues, were down approximately 80 basis points year-over-year to 8.1%. The decrease was primarily driven by lower performance based compensation, cost management initiatives and lower acquisition deal cost.

During the third quarter, we had capital expenditures of $30 million, which included the acquisition of three franchise restaurants plus the development rights to Long Island, New York, the Philadelphia area and parts of New Jersey for $18.6 million.

Also, during the quarter, we repurchased 664,000 shares for approximately $13.5 million for an average price of $20.26. This brings our year-to-date share repurchase total to 941,000 shares or $20.6 million with an average purchase price of $21.90 per share. At the end of the third quarter, the company had $83 million in debt outstanding under its senior credit facility, which is up $38 million from the second quarter of 2019, due to the franchise acquisition, share repurchases and increased capital expenditures based on new restaurant openings.

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

Now turning to our guidance. I would like to provide our revised outlook based on current information for the full year 2019 with some of our key financial metrics. Based on our current expectations for beef inflation in 2019 provided earlier in this call, we now expect our cost of goods sold to be in the range of 28.5% to 29% of restaurant sales. We now expect annual restaurant operating expenses to be between 48.5% and 49% of restaurant sales. We now expect marketing and advertising costs to be between 3.3% and 3.5%. We now expect G&A expenses to be between $34.5 million and $35.5 million, inclusive of integration costs related to the acquired franchise restaurants in Philadelphia and Long Island. We continue to expect our annual effective tax rate to be between 17% and 19%, excluding the impact of discreet income tax items. We expect our annual pre-opening costs to be between $2 million and $2.2 million based on the timing of new restaurant openings in the fourth quarter.

We expect capital expenditures to remain between $54 million and $56 million. We now expect depreciation expense to be between $21 million and $22 million. We expect our fully diluted shares outstanding now to be between 29.4 million and 29.6 million shares, exclusive of any share repurchases program under the company's share repurchase program.

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

Cheryl Henry -- President and Chief Executive Officer, Director

Thank you, Arne. In closing, I'd like to reiterate how pleased I am with our third quarter results. They're a testament to the strength of our iconic brands, as well as the resilience, agility and dedication of our entire team. We are excited about the opportunities to grow and evolve our business and believe our commitment to innovation and operational excellence will continue to create shareholder value in the long run.

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

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Will Slabaugh with Stephens Inc. Please start with your question.

Will Slabaugh -- Stephens Inc -- Analyst

Yeah, thank you. Wondering if you could talk a little bit more about the initiatives that you referenced. It sounds like they were more operational in nature. Is there anything else you'd be willing to say that would be helpful? And also I was curious if they involved anything with the menu as well?

Cheryl Henry -- President and Chief Executive Officer, Director

Thanks Will. So, yes we talked I think in previous calls, about the investments we made last year and doing some work with our guests and understanding the needs around variety as well as value seeking. And the initiatives that I'm speaking to that are in test do -- they go beyond operations. So there are menu implications with some of them in all three of our revenue centers from private dining, to main dining room, to the bar as well. I mentioned I'd speak more about it, we're in test. So at this point, that's probably what I can say, but look forward to seeing the results of those tests and sharing it with you all.

Will Slabaugh -- Stephens Inc -- Analyst

Okay. And then a quick question about the share purchase authorization. That was a good signal of nearly 10% of the market cap being authorized there. Just curious if you knew or had any plans about how aggressive you wanted to be with that authorization?

Cheryl Henry -- President and Chief Executive Officer, Director

Will, I'll tell you, it's been a part of our total return strategy and its a discussion that we've continuously with the Board. It remains a lever that when we believe the opportunity is to pull it, we make a recommendation and it's something that we do. So more to come as we go through the quarters on that.

Will Slabaugh -- Stephens Inc -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Andy Barish with Jefferies. Please stay with your question.

Andy Barish -- Jefferies -- Analyst

Hey, guys. I mean it seems like the real estate lease process is picking up a little bit. Can you address that? Is there anything -- obviously, you've got the new territory, but anything internal or maybe external in terms of seeing fewer competitors out there for sites that'd be helpful?

Cheryl Henry -- President and Chief Executive Officer, Director

Hi, Andy. Thank you for giving the opportunity to recognize the team in our development department, because they all have worked tirelessly behind the scenes. I will tell you, we've got the great team that's been in place now for just over two years. Experts in what they do and really help to build on the pipeline in the work that they are doing. And yes, to some extent, I would say the acquisitions helped us, have some flexibility in that and so you saw the first site in Long Island come on board. The competitive environment, I don't know that's relaxed at all. I think it's still competitive for good sites out there, but I think we have a great team that's working hard to make sure we get access to those sites.

Andy Barish -- Jefferies -- Analyst

And then Arne, on the expense side of the equation, the restaurant operating expenses was certainly a positive variance versus at least what we and the Street were looking for. Anything more, I mean, was the labor line within their actually up and it was all incentive comp? Just any color on that would be helpful and kind of where -- where you're seeing wage inflation these days?

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

Sure Andy. I think really hats off to the operating teams here. They are really nimble, both at the end of the second quarter and the third quarter. We saw some challenging sales in April and we saw kind of beef inflation moving and we challenged the team to work on this. Labor inflation and margin pressure is still there. They are working very hard against it. There is initiatives there on what can we do better around labor. There is nothing monumental or new, it's just good old fashioned hard work around managing your business. And even in light of the hurricanes and things like that, I think they did a really good job of managing against that. We're still seeing kind of similar pressures there, but they just done a real nice job.

Andy Barish -- Jefferies -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Nicole Miller with Piper Jaffray. Please stay with your question.

Nicole Miller -- Piper Jaffray -- Analyst

Thank you. And good morning. Could you talk a little bit about the sequencing of the five stores next year, how those -- how it might be appropriate to model those?

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

Sure Nicole. We can go through that. I think we talked a little bit about it on our call and in the press release. But the first one up will be Washington DC and that will be in the first quarter. Then toward the end of the second quarter will be the Short Hills mall area in New Jersey, and then the rest of the mall in the back half of the year.

Nicole Miller -- Piper Jaffray -- Analyst

Okay. And then when you look at the traffic being down, I know in the past the bar business has kind of gone up. So sometimes that entree count can be a little misleading. Is that still the case? Are you getting traffic or having customers essentially order other ways, drinks and pops [Phonetic] being example, that kind of undercuts out for year?

Cheryl Henry -- President and Chief Executive Officer, Director

It's a great question, and yes. So we're still seeing that growth in the bar revenue center. And to your point, that menu offers a variety of ways with intents for the guests to chose to eat. And so each person is not necessarily counted in our traffic count, it's very entree specific. And so you can have people dining in that space and having very good check and sales on that and it does not necessarily impact in a positive way the traffic count. I will also say, as far as revenue centers we saw in the third quarter, private dining kind of stepped back up to the plate. And so we are encouraged by that as well, but to your direct question yes, there is other ways to dine within the bar that does not necessarily count as a direct traffic for entree counts.

Nicole Miller -- Piper Jaffray -- Analyst

Okay, great. And then just a last question. And we saw on a lot of these calls, not just this earnings season, but really for the better part of this year and last year too, and we ask everybody about digital. So how does -- what we're doing -- the consumer doing digitally today apply to Ruth's crest?

Cheryl Henry -- President and Chief Executive Officer, Director

When you say digital, you are referencing online ordering and delivery or specific around loyalty programs?

Nicole Miller -- Piper Jaffray -- Analyst

Everything. I would say, it is that and everyone uses a little bit different definition that off-premise tends to be digital, delivery, catering. all of those things combined. I'm not sure how you guys slice and dice it, but I sure know I want to get some Ruth's crest delivered.

Cheryl Henry -- President and Chief Executive Officer, Director

So how we think about digital technology really is about reducing friction for the guest. And so we do have a test in some markets around delivery. I think the way we think about it, Nicole, is it's going to -- it doesn't necessarily make sense everywhere, but it certainly could make expenses in some markets. And it's about providing that opportunity for the guest to have roots anywhere they want it. So we are doing some tests around that. I think beyond that, as we think about kind of our digital data strategy, there are other opportunities we're exploring and that are included in some of our tests around is there opportunities within the experience inside the restaurant itself to reduce some of that friction.

Nicole Miller -- Piper Jaffray -- Analyst

Great, thank you so much.

Operator

[Operator Instructions] Our next question comes from the line of Brian Vaccaro with Raymond James. Please stay with your question.

Brian Vaccaro -- Raymond James -- Analyst

Thank you and good morning. Just wanted to start with the third quarter comps. And could provide a little more color on what you saw across revenue centers during the period? And also, obviously encouraging to hear October improving a bit. Curious what you'd attribute that to? Is it broader segment improvement or something else?

Cheryl Henry -- President and Chief Executive Officer, Director

Brian thanks for the question. So in the quarter, I just mentioned this with Nicole, again I think we saw private dining, which hasn't really been as strong earlier in the year really step backup. And so we were encouraged by that. The bar has continued to be an opportunity as a revenue center and that people are really enjoying. So again, we're doing some work. Some of the tests that were in place, I would say attribute to some of the increases we've seen. I'll turn it over the Arne, because I think there's some interesting connects when you look at the two year and three year stack around the traffic and sales as well.

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

You know, I think Cheryl talked a lot about and I think the team, again, I would kind of throw a shout out to them as well. Our sales managers, we talk to them about this summer we had some very specific initiatives for them, some rewards that they could go earn. And they rally to the charge and earn some rewards as well.

As we look back, we had a pretty tough comp here in the third quarter of last year, I think 3.9 [Phonetic] over in the high 3s in terms of the comp when we look at the Black Box data and look at versus our peers. A little bit of that was round tripping hurricanes back from 2017. So they are normal, unfortunately part of our business with Florida having a large presence for us. But on a two year basis, on a three year basis, I think we're really encouraged with the multiyear stack in terms of comps sales. After what was kind of really certainly a surprising and challenging April, we've seen slow steady improvement in kind of the pace of traffic, the pace of sales. And I think we like the trajectory that we're on here for the fourth quarter.

Brian Vaccaro -- Raymond James -- Analyst

Alright that's great. Thank you. And on the average check in the quarter, how much was menu pricing up year-on-year? Did you take any incremental in Q3? And what are your expectations on pricing over the next two quarters?

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

So Brian we've always talked about being reluctant pricers and -- so our target is normally on an annual basis 1% to 3%. We were kind of in the -- around 2.8% here in the third quarter. We saw a little bit of mix change there which is more around revenue center mix when a storms comes through Florida and it cancels conferences and private dining events those are some of the better check parts of our business. In the fourth quarter, we're kind of running around the mid twos in terms of our menu price.

And as we look ahead to next year, we don't have -- what we have on the menu today just weather run out, we have about 1% in price on the menu right now, but we really are trying to move this business and sales by driving traffic, that's our first priority. We're not looking to get a lot more aggressive on price unless we have to.

Brian Vaccaro -- Raymond James -- Analyst

Alright, that's very helpful. And then last topic I just wanted to hopefully we could touch on, Arne, just to as to take on the beef market fundamentals and maybe specifically what you think is driving the outside inflation on the prime side? Thank you.

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

On the beef front, I think we knew even if you go back to January of this year, we knew that we were going to have inflation in the back half of the year. And I think the only thing that surprised us was the kind of rate of inflation was higher than what we were expecting. So we still think the third quarter obviously is the worst part of it. It's being driven by really two things, number one on the supply side, supply is still flat to up a little bit, but for several years we had seen a growth in supply, driven around higher grading of cattle. And the grading still is very high, it's high historically and it's holding up and supply looks good. But there is no growth in supply and so there is not that to help out. What we are seeing is and you and I, and Mark, and I talked about this, we talked about this at investor conferences, we are seeing more retail demand for prime beef. The consumers are seeing in retail channels, I think Sam's Club had a big promotion earlier this year rolling it out system wide. So if you couple kind of flattish supply with increased demand, I think that's what we're looking at. We should be kind of round tripping some weather issues too in mid west and hopefully, we'll have kind of a cleaner winter and spring, we're hopeful that we get a better outlook for next year.

Brian Vaccaro -- Raymond James -- Analyst

Very helpful, thanks very much.

Operator

We have reached the end of our question-and-answer session. And I would like to turn the call back over to Cheryl Henry for any closing remarks.

Cheryl Henry -- President and Chief Executive Officer, Director

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

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Mark Taylor -- Vice President of Financial Planning and Analysis

Cheryl Henry -- President and Chief Executive Officer, Director

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

Will Slabaugh -- Stephens Inc -- Analyst

Andy Barish -- Jefferies -- Analyst

Nicole Miller -- Piper Jaffray -- Analyst

Brian Vaccaro -- Raymond James -- Analyst

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