The National Restaurant Association's Restaurant Performance Index, a measure of the industry's health, has through December been above 100 for 10 consecutive months -- a clear sign of expansion. But not all restaurant companies are sharing equally in the improved business environment.
Restaurants can be classified in many different ways including fast casual, quick service, and upscale dining. Today we'll focus on the upscale segment with Ruth's Hospitality Group (NASDAQ:RUTH). We'll also look at another company that emphasizes beef dishes on its menu, Red Robin Gourmet Burgers (NASDAQ:RRGB), as well as one that has a diversified portfolio of restaurant concepts, Bloomin Brands (NASDAQ:BLMN).
Meat-ing customers' expectations better than competitors
Ruth's Hospitality Group has two distinct concepts: Ruth's Chris Steak House and Mitchell's Fish Market restaurants. The company uses both franchise and company-owned business models. The company has 161 restaurants, all but 22 of them Ruth's Chris locations.
In the third quarter ending Sept. 29, the company reported a 5% increase in total revenue compared to the same quarter last year. Company-owned Ruth's Chris locations achieved comparable-restaurant sales growth of 4.2%.
The combination of a change in menu mix and a small price increase of 1.7% decreased food and beverage costs as a percentage of revenue by 44 basis points. The company was able to keep restaurant operating costs flat compared to last year's third quarter, at 55.5% of revenue.
Ruth's reported a spectacular increase in operating income for the quarter, from $1.9 million to $4.8 million, or 159%, but a significant portion of the increase was due to one-time benefits from insurance settlements. With those removed, operating income was $2.7 million, still a 43% increase.
For the first three quarters of the year, revenue was up 5.7% and operating income, again with the non-recurring items removed, was up 29%.
Insights from the ICR XChange Conference
Ruth's was one of the presenters at January's ICR XChange Conference. Chief executive Michael O'Donnell discussed what remains constant in the company's strategy such as the sizzling USDA Prime steaks served on extremely hot plates. He also discussed changes undertaken to make the restaurants seem less formal and more inviting, such as adding a touch of whimsy to the décor.
He said the company has three important core customer segments: special occasion diners, the business/corporate set, and those highly prized "regulars."
To attract new customers who could become regulars, the company is utilizing special events such as inviting winemakers in to host wine tastings. The company also provides off-site catering for parties or dinners at customers' homes.
For a global company to have just 161 locations -- in 22 states and nine countries -- means that there is plenty of room for growth, or lots of "whitespace" on the world map as restaurant people like to say. Ruth's emphasizes disciplined growth, seeking quality locations with high earning potential rather than trying to expand as fast as possible. O'Donnell said that the company has 16 franchise commitments in the pipeline between 2014 and 2017.
Yes, burgers can be gourmet too
Red Robin Gourmet Burgers operates nearly 500 Red Robin restaurants, the majority of which, 345, are company-owned. The company offers a range of price points to attract both the customer willing to spend more for a unique burger and those who are value conscious.
In the third quarter, total revenue increased 8.1% compared to the same quarter last year. Comparable-restaurant revenue for company-owned restaurants grew a healthy 5.7%. Guest counts were up 1.1%, with the rest of the revenue increase attributable to a higher average guest check, up 4.6%.
Chief executive Steve Carley remarked about "the day-to-day battle for guest traffic" -- and indeed traffic had fallen 0.7% in the second quarter.
And the star performer is...steaks
Bloomin Brands operates nearly 1,500 restaurants, making it one of the largest casual-dining companies, with brands including Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, and Fleming's Prime Steakhouse and Wine Bar.
In the third quarter, blended domestic comparable-restaurant sales for its company-owned restaurants declined a fraction, 0.3%, compared to the same quarter last year. Total revenue increased just slightly, 1.5%, because of new restaurants that were not included in the comparable-store base. Traffic rose by just 0.2%.
Among its brands, Fleming's Prime Steakhouse and Wine Bar performed by far the best, with comparable-store sales up 4.2%. The other brands were either flat or down. It was, said CEO Elizabeth Smith: "...a challenging quarter for the industry."
What we learned
Ruth's Hospitality Group can be considered a cyclical company because serious economic downturns -- those that bring about a decline in consumer confidence and household wealth -- can result in a portion of the company's target customers choosing to dine at less expensive restaurants.
The only other possible negative I see is the increase in the cost of beef rising due to the declining number of cattle as a result of drought conditions in cattle-producing states such as Texas. Some estimates say that the number of cattle in the U.S. is at a 63-year low.
Ruth's is skilled at identifying geographic areas with sufficient numbers of its target customers to allow its restaurants to build same-store sales quarter after quarter -- 14 in a row to be exact. I like the mix of customers among loyal diners and those who choose the restaurant for a special occasion when they are willing to splurge.
For the third quarter, the increase in traffic at company-owned Ruth's Chris locations, 3.2%, was impressive given the yellow caution light that characterizes many consumers' spending -- and in comparison to the traffic at Red Robin and Bloomin Brands. The average check increased less than 1%, so Ruth's isn't relying on price increases to boost sales.
It's hard for a restaurant chain to achieve "sizzling" results in this uncertain economic environment, but Ruth's Hospitality Group is doing a better job than many other restaurant companies. It has carved out a special niche where the competition is less stiff than say the casual-dining segment. Ruth's Hospitality Group is a good selection for the long term.