RUTH - Ruth's Hospitality Group Inc. (RUTH) Q3 2022 Earnings Call Transcript
Ruth's Hospitality Group, Inc. (RUTH)
Q3 2022 Earnings Conference Call
November 04, 2022 08:30 AM ET
Company Participants
Mike Hynes - Vice President-Finance & Accounting
Cheryl Henry - President, Chief Executive Officer & Chairperson
Kristy Chipman - Chief Financial Officer & Chief Operating Officer
Conference Call Participants
Joshua Long - Stephens
Brian Vaccaro - Raymond James
Todd Brooks - The Benchmark Company
Presentation
Operator
Good morning, ladies and gentlemen. Welcome to today's the Ruth's Hospitality Group, Third 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, David, 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 like to first 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 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. 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 the company's Chief Executive Officer, Cheryl Henry.
Cheryl Henry
Thank you, Mike, and good morning, everyone. Our commitment to serving the highest quality food with genuine hospitality has always been the core of who we are and I could not be more proud of our team members, as they embody this commitment every day. We continue to utilize Ruth's exceptional brand equity and strong capital position to make necessary investments that strengthen our operations and guest experience, while strategically building the team, our restaurant base and our digital infrastructure for continued growth over the long term.
Turning now to the third quarter, we delivered solid results in part from the continued demand from our just because and special occasion guests. We realized strong top line momentum, demonstrated by our more than 11% comparable sales growth over 2019. We also successfully managed ongoing inflationary pressures, resulting in strong adjusted earnings per share of $0.16 and adjusted EBITDA of $12.3 million.
Outside of last year, this is the best third quarter performance the company has had and landed in line with our internal expectations. Beyond these numbers, we continue to make progress, growing our business organically, including investments in new restaurants, relocations, remodels and digital technologies.
Let's begin with an update on our development plan. During the third quarter, we opened three new restaurants, including Long Beach, California, Worcester, Massachusetts and Melville, New York on Long Island. In addition, last week, we opened our relocated Winter Park, Florida location, upgrading our hometown restaurant to modern brand standards. This is part of our ongoing remodel and relocation efforts, which also includes remodels in our restaurants in Nashville, Biloxi and Garden City, New York to be completed by the end of this year.
Looking ahead, we remain confident in our ability to develop at least five new units annually. As we prepare for 2023, we have signed four agreements and are actively working to confirm a fifth opening for the fourth quarter. We recently signed a new lease in Jupiter, Florida for late 2023 or early 2024, and are in final stages of lease negotiations for another 2024 location.
Moving on to our investments in digital technologies. Phase 1 investments included our booking, capacity and guest experience platforms, point-of-sale and labor management software. These investments have already generated efficiency in the business and give us increased confidence that further digital investment will benefit our shareholders. To that point, we are beginning Phase 2 with a new inventory platform, enhanced reservation website and a new data-driven and targeted paid media program.
To lead these digital efforts, we're in the process of hiring a Chief Commercial Officer, who will continue to develop and drive our digital transformation, producing actionable insights to enhance our ability to deliver on our exceptional steakhouse experience. Our new CCO will also lead our new approach to marketing that leverages our deeper knowledge of the guests, as well as insights so that we are even more targeted with our marketing efforts to maximize sales and profitability.
Investing in new restaurants and other growth initiatives has always been part of our balanced and disciplined approach to capital allocation. The second part of that approach, which has also been very consistent over the years, is returning excess capital to shareholders through debt reduction, dividends and share repurchases.
To that point, we returned over $20 million excess capital to shareholders during the quarter. We paid down $10 million of debt, paid $9 million in dividends at $0.14 per share and repurchased 5.4 million of shares. In all, we believe these actions have and will continue to position us for sustainable growth and long-term value creation.
I'll now turn the call over to Kristy to cover the specifics of the quarter.
Kristy Chipman
Thank you, Cheryl. For the third quarter ended September 25, 2022, we reported GAAP net income of $5.5 million or $0.16 per diluted share compared to $6.9 million or $0.20 per diluted share last year. Non-GAAP diluted earnings per common share was $0.16, compared to $0.20 in the prior year quarter. Please refer to our earnings release for a reconciliation of GAAP to non-GAAP EPS.
Total revenue grew by 8.2% versus 2021, including total company-operated restaurant sales growth of approximately 8.5%. Comp sales for the quarter increased 2.9% versus 2021 and increased 11.2% compared to 2019.
The Comparable sales in October were up approximately 6% and 8% versus 2021 and 2019, respectively. We continue to consider 2019 to be a relevant sales trend comparison at this point due to the lack of normal seasonality in 2021.
Franchise income for the quarter was $4.9 million, up 3.5% versus the same period last year, driven by comparable franchisee sales growth of plus 4.1%, with domestic sales of positive 2.1% and international sales post 15.7%. Other operating income was $2 million, up 7% versus last year.
Food and beverage costs decreased 257 basis points for the quarter to 31.7%, and as these prices declined 14% versus 2021, offset in part by a 6% increase in the balance of our commodity basket. These costs per pound continued to increase in Q4 compared to Q3, leading us to expect food and beverage costs as a percentage of sales for Q4 2022 to be in line with last year.
Labor expense for the quarter versus 2021 increased 240 basis points, primarily due to hourly and management wage increases in the high single digits and an increase in the number of managers per restaurant, as we continue to add assist manager to most of our restaurants.
We reiterate our full year 2022 expectations that restaurant operating expenses, including labor, will improve by approximately 200 basis points when compared to 2019. Moving beyond restaurant expenses, combined marketing and G&A as a percentage of revenue was 11.3% compared to 9.7% in the third quarter of 2021, reflecting the timing of investments in business transformation and the addition of certain key resources back to the business.
As a reminder, the third quarter is typically our highest spend as a percentage of revenue as sales in the third quarter are typically the lowest. We expect marketing and G&A when combined to be between $54 million and $56 million for the full year. As of September 25, we had $20.8 million in cash, and our outstanding debt was $30 million. We will continue to ensure a strong balance sheet that supports our ability to grow the business organically and return cash to shareholders. As part of this, we will be paying a dividend of $0.14 on December 2 to shareholders of record as of November 18.
I'll now turn the call back to Cheryl for a few closing comments.
Cheryl Henry
Thank you, Kristy. In closing, our solid performance is a direct result of the hard work and dedication of our team members. We have veteran operators and franchise partners, who have always shown resilience in the face of adversity, most recently with their recovery efforts during Hurricane Ian.
As we look forward to the remainder of the fourth quarter and on to 2023, we will continue to monitor the economy and adjust accordingly. Let me remind you, we are a 58-year old iconic brand that is operated through many economic cycles, and we have confidence in our strategic plan, our strong capital position and our incredible team. And we believe that positions us well to grow opportunities that create value for all stakeholders over time.
Thank you for joining us on the call this morning, and we look forward to taking your questions. David, would you please open the line for questions.
Question-and-Answer Session
Operator
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Joshua Long with Stephens.
Joshua Long
Great. Thank you for taking the question and for the update today. I wanted to see if we might start first up, just talking about some of the trends through the quarter. I know that, you mentioned your results came in line with your expectations, and we also had the opportunity to have an update from you for the first part of the 3Q period a month or two ago. So just curious, how the rest of the quarter shaped out and any sort of directionality as you talked about some of that acceleration into 4Q?
Cheryl Henry
Thanks Josh. Yes. So we had given an update, I think, at the beginning of September, before we went to The Benchmark conference regarding our sales for July and August. So, September came in at about 7.5% versus 2021. And so, we were pleased with that from an overall comp perspective.
As we expected, food and other items came in online, and we've been the beneficiary of some earlier pricing that supported the inflationary pressures that we saw. So as we mentioned, well, I think there was a little bit of a disconnect or difference between what you all came up with from a restaurant operating expenses perspective, we were in line with what we expected here, anchoring on 2019 kind of, has the right space line for that particular set of expenses.
Joshua Long
Got it. That's helpful. When we think about the 2.9% comp on the company outside for the quarter, could you talk about pricing mix, any sort of changes or trends there that you're seeing from the guests, how they're engaging with the brand at the store level? And maybe touch on any sort of updated pricing thoughts given where your commodity basket is right now?
Cheryl Henry
Yes, Josh. I'll let Christi touch on pricing, and then I'll jump in around where we're -- how we're thinking about the guest and the consumer at this point.
Kristy Chipman
Sorry. Sure, I’ll. So for pricing for the quarter, we were carrying about 5.9% versus 2021 and about 10% versus 2019. And what we can talk about October, we took a price increase of approximately 1% in October and about mid-October as well. So we'll be carrying that forward into the first part of next year.
Cheryl Henry
And just a follow-up on the guest. We haven't seen at this point, Josh, any managing check more so than at the first half of the year. All -- we've talked about private dining in the past that is not recovered to 2019 levels at this point. However, that special occasion, and just because guests has made up for that, we're still seeing some strength and resilience in that segment of our guest base.
Joshua Long
Got it. That's helpful. Kristy one clarification. Were those two price increases here in October, or was that a net -- or an incremental 1% to get you to kind of running at that 6.9% for the fourth quarter?
Kristy Chipman
Sorry. So let me just clarify. We were at 5.9% in Q3. In October -- mid-October, we took a 1% price increase that will carry into next year, obviously. For Q4, our pricing is expected to be about 4% when compared to 2021.
Joshua Long
That's helpful. Thank you. I'll pass along and requeue.
Operator
Our next question is from Nicole Miller with Piper Sandler.
Unidentified Analyst
Hi, guys. This is Abbie on for Nicole. Thanks for taking my question. I was just hoping you guys could provide some detail on holiday bookings heading into the fourth quarter. Anything you're seeing elevated demand? Just any commentary there.
Cheryl Henry
Yes. Thanks, Abby. It's a little early to predict and again, obviously, December being the strongest month for us for those holiday events. We've seen some shift throughout the year and the booking patterns of people, so how early they're booking events. So, I wouldn't want to give specifics.
I think generally, as expected some of those peak times and peak days are booking up fast, so that's good to see. I think it's a good indicator. We've put resources for the quarter against that segment of our business and have some new folks in that are really driving some of the special menus around the holidays to help us fill some of those off times that we've been successful in doing in the past.
Unidentified Analyst
Got it. Okay. Thank you. That's helpful. And then this is more just a technical modeling question. D&A, I notice tends to step up in the fourth quarter historically. Is this a safe assumption? I know you guys provided a super helpful commentary surrounding your margins, but just anything you can provide there
Mike Hynes
H, Abby, this is Mike. In the past, we've seen some noise in the fourth quarter with G&A because of incentive compensation that gets trued up at the end of the year, when it's based on that full year performance. And so I wouldn't necessarily consider that the normal seasonality for 2022.
Unidentified Analyst
Got it. And just to confirm, I said D&A, not G&A
Mike Hynes
I'm sorry. So yes, the depreciation increase that you saw in the third quarter will continue to increase in the fourth quarter. We had three restaurants in the third quarter. In addition, we placed in service a lot of our technology investments in the third quarter, and they got a partial quarter of depreciation there. And so you'll see fourth quarter depreciation higher than Q3.
Unidentified Analyst
Great. Thank you. I will hop back in queue. I appreciate it.
Operator
Our next question is from Brian Vaccaro with Raymond James.
Brian Vaccaro
Hi, good morning and thanks for taking my question. I just wanted to start on sales, and I appreciate the quarter-to-date comp update. Could you just level set where October average weekly sales were so on the same page?
Kristy Chipman
Sure, Brian. Let me just find to locate.\
Mike Hynes
It came in at 112, Brian.
Kristy Chipman
Here you go, 112
Brian Vaccaro
112. Okay. Great. Thank you. And I guess, Cheryl, you touched on it a minute ago. But as you dig into your traffic trends and your check trends and I guess I'm also thinking about your comps versus 2019, I think you set up 8%, that's a little lower than the third quarter. So I guess, as you dig into that, I'm curious what you think is embedded or reflected in that, whether there are any changes in customer frequency or behavior? And are you seeing reduced frequency amongst lower middle income consumer that maybe had traded up and they were boosted by stimulus or what have you, or maybe on the other side, maybe the higher income consumer might be dialing back a bit with 401(k) down and just kind of broader recession concerns starting away. Just any perspective on what you're seeing beneath the hood a little bit on the sales front.
Cheryl Henry
Sure. So as we dig into it, Brian, and we've talked about this in various quarters, it's really the impact still of those down markets not recovering as quickly versus their sales and traffic in 2019. So as we kind of pull that apart, that's probably one of the biggest impacts that we have on sales and traffic as well as, again, the private guiding kind of recovering slower versus 2019, so not so much -- again, not seeing the management of the check at this point, not seeing that a la carte diner pull back and still seeing some benefit from [indiscernible], which is our to-go program, but it's really around that -- those specific markets for us that are having the biggest impact.
Brian Vaccaro
Okay. Thank you for that. And I guess on the margins, I just wanted to clarify, Kristy, did you say fourth quarter COGS ratio will be similar to the fourth quarter of 2019. And could you maybe unpack kind of what that reflects in terms of beef inflation or any other perspective on your commodity assumptions within that?
Kristy Chipman
Yeah. Sure. Good clarification, Brian. So Q4 of 2022 will be similar to Q4 of 2021, so we are seeing beef prices, continue to go up as we have come into October, reflecting, I think, pretty normal seasonal demand in the fourth quarter.
And so based on what we're seeing there with a similar level of inflation across the rest of the basket, maybe coming down a little bit, we think we're going to be relatively flat to Q4 of 2021 in the overall cost of sales Brian.
Brian Vaccaro
Okay. And if my notes are right, I think you were lapping or you had a contract through mid-October. Have you been able to enter into any new contracts, that are worth highlighting?
Kristy Chipman
None, that are large enough to work highlights, are worth highlighting right now, we have a very small one going for a few weeks here to take us through November, but nothing meaningful of note. And those are reflected in my commentary on being able to hit Q4 of 2021 similar cost of sales.
Brian Vaccaro
Okay. Great. And then, last one for me. Just on the other operating costs in the quarter. As we've heard a lot about and seeing from other companies, a lot of inflation on utilities, repair and maintenance and some other categories.
Could you just parse through, kind of, where was labor in the third quarter? And where were some of these other categories that might have pressured that line?
Kristy Chipman
Yeah. The labor was definitely continues to be in line with our expectation of being 200 basis points better than 2014 -- 2019, sorry, and it's coming in line there. When you look at the other restaurant operating expenses, particularly, we have seen inflation and utilities and M&R and written and certain line items.
Our pricing has been able to offset a lot of that. I think we're -- we have to enter on 2019 as the right base and have the 200 basis point savings on overall restaurant operating expenses from that base versus 2021.
When you think about 2021, sales ramped up really quickly in the third quarter. We had the best July last year at almost 17%. And he was wrapping delta, et cetera, which meant we didn't fully return to normal operating expense mode.
We had maybe less value. Credit card charges were a little bit less last year, just across the board. And so that's why we continue to enter in 2019, as a more reasonable baseline for restaurant operating expenses, including labor.
Brian Vaccaro
Okay. Thank you. I’ll pass it on.
Operator
[Operator Instructions] Our next question is from Todd Brooks with The Benchmark Company.
Todd Brooks
Hey. Good morning everybody. A couple of quick questions for you, just finishing up maybe on beef costs. I know, Kristy, you said there's a small hedge through November. As you're looking out to 2023, just with what has gone on with the overall hard this year.
Is it too soon to have an outlook for prime costs for 2023 relative to 2022? And is there any increased willingness at all with co-parties to come into the other side of contracts that may let you hedge at least a chunk of your needs for 2023?
Kristy Chipman
So first, we're not specifically guiding on 2023 because, to your point, it is a little bit early, but let me just give you a little bit of texture on what we're seeing on the supply side, which is there continues to be a tight production supply, fewer catalog fees. Costs are going up, high feed costs, transportation costs, while labor at the packers is easing a little bit.
Prime grading continues to be down and so as we come into the year, I think that that's a little bit of a wild card for us as it relates to what we'll be able to secure from a pricing perspective. I would say that as we always say, we are active in the market to try to figure out where we can contract forward if it's possible. It has become increasingly difficult to do that. And so we have been a little bit more strategic in the past few months at looking at different ways that we can contract but nothing to share to-date anything for 2023.
Todd Brooks
Okay, great. That's helpful. Thanks. Secondly, I just wanted to know if you guys dig into the September and October strength. Do you have any sense -- is there a delta lap benefit? So, as we've gotten further into October, early November, have we seen same-store sales maybe normalize from just getting back to kind of out of the window where Delta was impacting things last year?
Kristy Chipman
Yes. I'll start, and then I'll turn it to Cheryl, she has some additional comments. I think -- I definitely think we're out of the Delta variant, we kind of came out of that in the August timeframe. That was a pretty short time period for us of impact.
I think as you come into October and particularly in mid-November, the interesting piece is that's when we started to hear about Omicron, but I would argue that mid-December into all of January is when Omicron really started to take hold and people would have changed some behaviors, are not going out again in that later part of December and all of January timeframe.
Cheryl Henry
Yes, Kristy, not much to add. Just as you mentioned, mid-December, that's really when last year as we talk about kind of a big driver of that period, the private dining began to fall off as groups decided they weren't going to make the visit to the restaurant in larger groups during that time of the year last year.
Todd Brooks
Okay, great. And can you remind us -- and it's all a blur sadly now. It's been so long. But if you look back to Omicron, how does it impact staffing levels as far as exclusions, call-outs? Did you have lost operating hours that you'll be lapping, or did you have to go to restricted menus at all in any of the locations just to deal with where staffing levels were during kind of that Omicron reality?
Cheryl Henry
Yes. And thinking back again, you're right, some of it gets a little lost, but I do recall because we talked about it frequently. And we didn’t have -- we did have call-outs, but they were not to the point where we had to close shifts or change operating hours on a significant basis, so we shouldn't be experiencing it is that in the shift this year.
Todd Brooks
Okay, great. And then a final one. I know this will be the first big holiday season that we're going into armed with the table management tool that you guys rolled out this year. Just how should we be thinking about that for what it might unlock at peak periods just because some of these holiday periods are so peaky to begin with, I don't know if the benefit from the technology actually wanes, or if you do feel like there's capacity that can be extracted that you could satisfy? Thanks.
Cheryl Henry
Yeah. Great question, Todd. And so really, the impact we've seen and with intent as we put this program in is exactly that, so to hit those weekends, the Friday, Saturdays and then holidays. So we do expect the teams now have months under their belt and understanding the balance between the guest experience as well as driving those opportunities around capacity. And so we expect them to be focus on this through the next couple of months as we see those -- the majority of the holidays as well as those busy Friday and Saturday nights.
Todd Brooks
Okay. Great. Thanks.
Operator
Our next question is a follow-up from Joshua Long with Stephens.
Joshua Long
Great. Thanks for taking the follow-up. I think we touched on it earlier and if you quantified it, I missed it, but can you talk about some of the challenged markets in terms of Boston, Hawaii in the theater district in New York, how are those trending versus the last update that you offered?
Kristy Chipman
Sure, Josh. So Boston, Manhattan and Hawaii are continuing to challenge us to the tune of about 580 basis points for the quarter particularly, Hawaii and one site in Hawaii was a fairly significant impact on YTC [ph]. We do expect that Japanese stores that were pretty dependent on particularly in that restaurant to start to come back as Japan opened back up during the quarter. The Manhattan, Boston are a little bit different. They're much more tied to the return of work. Our Manhattan restaurant continues to be challenged, albeit it had some green shoots, but it continues to be challenged over the long haul pharma sales projective as does Boston in a couple of restaurants there that we include.
Joshua Long
Got it. That's helpful. Thank you for that. Going back to some of the investments for Phase 2 on your digital front or your digital initiatives. Can you talk about the timing around those? And is that something that is largely in place now? Just trying to put together kind of a view of when and where that might hit the G&A line or other cost line items and just put into perspective when some of the benefits might be able to start being realized?
Kristy Chipman
Sure. We're in the early stage of configuration of that inventory management system and so you'll -- that's mainly capital right now, you'll see the software expenses start to hit early next year in the first quarterish, but outside of that, the rest of it is capital configuration. And then it's going to take us a good part of next year to get it fully rolled out. As you can imagine, implementing system that's large particularly covering both food and then liquor beer, wine, which has different order guide and requirements across every state and sometimes local is a fairly significant lift in order to get that system configured and ready and tested.
So we don't expect a significant benefit from the placement of that inventory system until probably fourth quarter next year and then definitely into 2024, where we will start to assign some savings in that inventory category. As it relates to the other work, we -- I think Cheryl mentioned the reservation of websites. That won't go into process until Q1. And then the paid media program, we are testing right now. And so you're going to see that, and that was reflected in the marketing and G&A dollars that we gave you already. So we have built in that incrementality for that specific use case, we'll call it, and the benefits and the learnings from that will be implemented starting in Q2 of next year.
Q – Joshua Long
That's very helpful. Then one more follow-up. Cheryl, I know you mentioned it's a little early for the private dining bookings to come through, but just curious on what -- if you have a view that you'd share in terms of how you're looking for this holiday season to shape up. It seems like is going to be one of the first ones here in a while where hopefully, there's no sort of major disruption or volatility there.
But just curious on how you're shaping it up, knowing that you're -- just because social dynamic has remained strong. Is that an opportunity or maybe it might not fall technically in the definition of private dining as we think about it, but just curious on how you're shaping that or how your perspective is shaping up for the 4Q period?
A – Cheryl Henry
Yes. So -- as you said, we haven't seen kind of the managing of the check or reduction in the sales in our a la carte space. So as we go into the quarter, the way we think about it, again, and someone asked this question is how are we managing our books? Are we there for the demand at the peak times when we're getting it. So really, it's the operators focusing on what they do and what they do well, delivering that best Steak House experience and making sure that we are open our books -- or open, we're managing it the right way to pick up any incremental demand that we can get.
Kristy Chipman
And I'll just add and I think if you recall during COVID, we had to get pretty worried about how we use our dining room. So there is an opportunity for us to continue to grow main dining room sales by using private in space if it is not -- if we're not able to fill it with an event, it's going to depend on what day of the week and what we need in terms of servicing the guests from a capacity perspective.
Q – Joshua Long
Makes sense. Thank you.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to the management team for closing remarks.
End of Q&A
Cheryl Henry
Thank you, David, and thank you all for joining us on the call today. We look forward to speaking with you again soon. Have a great day.
Operator
This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.
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Ruth's Hospitality Group, Inc. (RUTH) Q3 2022 Earnings Call Transcript