Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) Q4 2022 Earnings Call Transcript

Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Good morning, ladies and gentlemen. Welcome to today’s Ruth’s Hospitality Group Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company’s 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 Mike Hynes, Vice President of Finance and Accounting. Please go ahead.

Mike Hynes: Thank you, Latanya, and good morning, everyone. Joining me on the call today is Cheryl Henry, our President, Chief Executive Officer and Chairperson of the Board; and Kristy Chipman, our Chief Financial Officer and Chief Operating Officer. Before we begin, I’d first 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 also encourage you to refer to the Investor Relations section of our website at rhgi.com as well as the SEC’s website 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 non-GAAP financial measures, including adjusted earnings per share and adjusted EBITDA. You can find a reconciliation of these non-GAAP financial measures in our press release for today’s call. I would now like to turn the call over to the company’s Chief Executive Officer, Cheryl Henry.

Cheryl Henry: Thank you, Mike, and good morning, everyone. Our fourth quarter results marked the end to another solid year for our stakeholders at Ruth’s Group. The amazing efforts of our team delivered high single-digit top-line and double-digit adjusted EBITDA growth for the quarter, contributing to adjusted EBITDA of $83.8 million for the year. Driving these results were continued demand from our just because and special occasion guests and improvement and improvement in our private dining business. Combined with our team’s ability to manage costs and drive efficiencies, we were very pleased to deliver year-over-year adjusted earnings per share growth of over 13%.

, : During the year, we successfully opened four new company-operated restaurants; including one in the territory we acquired from a franchisee on Long Island, New York and relocated and redesigned our Winter Park, Florida restaurants. As a group, these five restaurants have continued to perform above our expectations. We are especially encouraged by the October relocation of our Winter Park Restaurant, which has outperformed its former location by over 35% in November and December combined. This is due to a new contemporary design that gives our guests different dining room experience options with increased energy from a new bar design and a larger outdoor dining space. Winter Park’s floor plans and interior and exterior design elements will serve as a model for future new restaurants and relocations as well as remodels as structures allow.

We are pleased to report that our data digital transformation project is now well underway, and we are happy to announce that we have once in Phase 1 with great success. Our investments in this area have been important to our total return strategy, as they have enabled us to elevate the guest experience and increased productivity across our entire operation. One of the most exciting accomplishments this year was the development of a proprietary demand forecasting platform, which seamlessly integrates with our labor management system to create more efficient schedule. We are pleased to report that, these efforts resulted in a 10% improvement in hours per entrée, translating to approximately 200 basis points of labor improvement over pre-pandemic levels for the year.

It is important to note that, we were able to achieve these results despite facing record high wage increases and adding managers back to most of our highest volume restaurants. In addition, we have implemented new proprietary processes that leverage our data platform, allowing us to improve capacity and cable management. This has been especially effective on our busiest days, including Friday, Saturdays and holidays, resulting in an increase in sales during these peak periods. Finally, we are excited to share that we have completed the rollout of our hospitality app to all restaurants. Although, it is still early days, we are seeing a positive impact on repeat visits. Overall, we are proud of the progress we have made in our Data Digital Transformation, and we are confident that these investments will continue to drive value for our guests and our shareholders in the years to come.

Mark Kupferman, our recently appointed Chief Commercial Officer, will spearhead these efforts and ensure that our investments in digital support the evolution of the Ruth’s Group brand. The final piece of our total return strategy in 2022 was smartly allocating excess capital. For the year, we repurchased 29.6 million worth of shares. We paid $18.3 million in dividend payments, and we reduced debt by the $40 million. In February, we also announced an increase of our dividend to $0.16, which will be paid in March and is the highest dividend we’ve ever paid. Along with investments in new restaurants, existing assets and our technology platform, we believe this balanced approach best positions our shareholders for value creation in the long run.

I’m pleased to say, our 2023 playbook reads much like 2022. Before I talk about this year’s portfolio development, let me quickly touch on the planned closure of our Manhattan location. As you may have heard, after 30 years of serving guests, we are closing our New York City restaurant in April. We’ve decided not to renew the lease due to a shift in the trade area and fully intend to open at least one new Manhattan location by the end of 2025. These plans allow us to relocate and redesign our New York City presence to better serve the market. In 2023, we expect to open five company restaurants, including one new opening in the Casino Resort in Michigan. In addition to these new openings, we expect one relocation in the second quarter and as many as 10 remodels and refreshes to our portfolio throughout the year.

In addition to this development, we are excited that one of our franchisees will open our first Ruth’s Chris Steak House restaurant in Iowa. This year, we will also embark on Phase 2 of our digital journeys. As part of this effort, we’ll be developing our new inventory platform, which we expect to drive at least 25 basis points of margin improvement over time. The platform is scheduled for testing throughout 2023. In addition, we are launching a new data-driven, digital paid media programs. Our third priority in 2023 will be the launch of the first phase of an elevated guest experience. Specifically, over the next 12 to 18 months, we will be rolling out RUTH re-imagined to the entire system. The program includes new hospitality training and standards, uniform, table presentation and smallwares.

We’ll also introduce a refreshed menu and new bar program. Our guests have shown that they want variety, not just in options, but also in price points. In the test of our prior bar menu, we experienced double-digit growth in average checks as guests, trade up to more premium offerings. To conclude, 2023 is an exciting year for us, balancing new unit growth, relocations and remodels, along with digital investments and new programs to accelerate both, top and bottom-line growth in our existing fleet and managing excess capital on behalf of our shareholders. While we acknowledge there is some uncertainty around the economy, our strong balance sheet and free cash flow allows us to plan and continue investing in the future. We look forward to keeping you up-to-date throughout the year, as we roll in these initiatives.

With that, I’ll turn the call over to Kristy, to cover the specifics of the quarter.

Kristy Chipman: Thank you, Cheryl. For the fourth quarter ended December 25th, 2022, we reported GAAP net income of $12.4 million or $0.38 per diluted share, compared to $13.8 million or $0.40 per diluted share last year. Non-GAAP diluted earnings per common share, was $0.38 compared to $0.34 in the prior year quarter. Adjusted EBITDA for the quarter was $24 million compared to $21.4 million in the same quarter last year. Please refer to our earnings release for reconciliations of non-GAAP measures. Our strong quarterly results were driven by total revenue growth of 9.2%, including company-operated restaurant sales growth of approximately 9.6%. Comp sales for the quarter increased 4.5% versus 2021 and increased 5.5% compared to 2019.

Average weekly sales during the quarter were $130,000 versus $123,000 in 2021 and 118,800 in 2019. Please note, going forward, we will no longer provide 2019 as a comparison period. Franchise income for the quarter was $5.8 million, up 6.1% versus the same period last year, driven by comparable franchisee sales growth of 2.3%. Food and beverage costs improved versus the prior year quarter by 93 basis points to 33.2%, as beef prices declined approximately 4%, partially offset by a 1% increase in the balance of our commodity basket. To give you a sense of the impact of beef prices on our overall financial performance, we estimate that a 10% change in beef costs would impact EBITDA by approximately $6 million to $7 million on an annual basis, all else remaining equal.

Labor expense for the quarter was versus 2021 increased 200 basis points, primarily due to hourly wage increases of approximately 9.5% and increased management labor due to higher wages as well as more managers per restaurant versus the same time last year. When compared to 2019, management labor expense was better by 105 basis points. Moving beyond restaurant expenses, combined marketing and G&A, as a percent of revenues was 9.7% compared to 11.6% in the fourth quarter of 2021, reflecting the timing of expenses related to bonus accruals and data digital initiatives. For the quarter, we repurchased approximately 905,000 shares for a total cost of 14.7 million and we paid 4.6 million in dividend payments. As of December 25, we had approximately $23 million in cash on our balance sheet, and our outstanding debt was $30 million.

In addition, subsequent to the end of the fourth quarter, we paid down $15 million of debt, leaving $15 million on the balance sheet as of today. 2022 delivered record revenue for the full year, and our start to January was strong with comp sales of about 17% as we lapped Omicron in January of 2022. Starting in February and carrying through July, the comparisons get more difficult as we lap against the country’s reopening post-Omicron and record high top sales from last year. In the last week of this quarter, we will be taking a price increase of approximately 3%. And as a reminder, we took 3.4% price during the same week last year. From a cost of goods sold perspective, we will not be guiding for the first quarter or full year, given the volatility in the feed market, which makes up about half of our basket.

However, I will say that in January, our cost of goods sold was 33.3%, driven by an increase in fees of 12% versus prior year, offset by the rest of the basket, which is down mid-single digits. With that, I’ll now turn the call back to Cheryl for a few closing comments.

Cheryl Henry: Thank you, Kristy. Our success over the past two years is a real testament to the great and determination of our team and franchise partners and their ability to adjust quickly to change. Through their efforts, we’ve achieved record revenue, open successful new restaurants, invested in new technologies to increase efficiencies, pay down debt and continue to return cash to shareholders and we accomplished this through a global pandemic, generationally high inflation and numerous macro challenges. Going forward, I believe the next couple of years can be as productive as the past. We believe we can open at least 10 new restaurants and relocate up to three more, utilizing our refreshed and enhanced brand standards.

We will also continue to embrace technology, as we’ve discussed today and allocate excess capital to shareholders as appropriate. The levers at our disposal have never been stronger, and I’m excited for what our team and franchisees will deliver. Thank you for joining us on the call this morning, and we look forward to taking your questions. Latanya, will you please open up the line.

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Q&A Session

Operator: Thank you. We will now conduct a question-and-answer session. Our first question comes from Brian Vaccaro with Raymond James. Please proceed.

Brian Vaccaro: Hi, thanks and good morning. I wanted to start out with the Winter Park redesign. I haven’t had a chance to see it yet, but Cheryl, many moons ago, we had — you had Ruth 2.0. And could you just provide a little more color on some of the key sort of guest-facing changes of the new Winter Park redesign and does it include both interior and exterior elements?

Cheryl Henry: Thanks, Brian. Yes. And yes, so Ruth 2.0 and that as you were coming and approaching in 2020, we had the plan put together for the redesign of restaurants, as well as some programming changes and then obviously COVID hit. So this is exciting for us. This restaurant was in plans. We were able to fulfill those plans and as you can see, to a great success, a lot of those changes, yes. So both exterior and interior, a lot of changes based on guest defect we had about the next generation and how they want to die. And so specifically, larger patios, better outdoor experience, elevations on the restaurant explaining who we are in the brand and what weight them inside, a lot of work done around that, also offering different dining room experiences.

So, we know we have a loyal and faithful special occasion guests, and we have an opportunity in the restaurant for those folks that want to come and celebrate those moments together in a more formalized comfortable setting. And then we also have what we are calling this specific restaurant, the atrium, which is a separate dining room of the bar, which allows for a bit of a more energized dining experience for these more frequent gas. And it’s working out well. So we’re excited to continue to monitor that, Brian, and see how we can then take the elements that work best for us and roll them into future restaurants as well as remodel.

Brian Vaccaro: All right. Great. That’s helpful. And Kristy, on the remodels, what’s the average investment that you expect here on up to 10 in 2023? And what sort of sales lift do you expect to achieve? And then what’s sort of the breakeven on a comp lift you need to achieve an ROI on that investment.

Kristy Chipman: Yes. So on the investment overall in the 10% that we’re talking about is a combination of both what we call major remodels, which will be between $1.5 million and $2 million as well as more minor remodels, which include carpet and shares, and we will be testing the new exterior on a few of those as well this year. that will be somewhere between $600 and $1 million depending on what we can do with that exterior and how much we need to be on just corporate and shares in the restaurants that make sure we provide a refresh experience for the guests. So that’s reflected in the capital guidance that we gave. We’re very encouraged by the information that we’re seeing out of Winter Park and we just completed in — late in the fourth quarter, a couple more remodels.

So, I’m not going to share any kind of ROI guidance at this point in time, but we would expect over time as we learn even more about the Winter Park restaurant. We’re going to put the right elements into the restaurants to make sure we deliver those 20% return on investment as we need to, given those investment levels.

Brian Vaccaro: All right. Great. And circling back, if I could, just one more on the fourth quarter comp performance. Could you just provide a little more color on what you saw across sales channels and maybe some perspective on how the private dining side of the business performed and kind of how that compared to pre-COVID levels, say, in fourth quarter ’19, just to frame that a bit for us?