Ruth’s Chris Deals with 'Significant' Impact from Hurricanes
Ruth’s Hospitality Group, Inc. reported unaudited financial results for its third quarter ended September 24.
Highlights for the third quarter of 2017 were as follows:
- The company reported net income of $1.7 million, or $0.05 per diluted share in the third quarter of 2017, compared to net income of $3.6 million, or $0.11 per diluted share, in the third quarter of 2016.
- Income from continuing operations in the third quarter of 2017 was $1.8 million, or $0.06 per diluted share, compared to income from continuing operations of $3.5 million, or $0.11 per diluted share, in the third quarter of 2016.
- Net income in the third quarter of 2016 included a $335 thousand benefit related to the settlement of disputed rent charges from 2006 through 2015 for a leased company restaurant.
- Excluding the previously noted benefit and results from discontinued operations, non-GAAP diluted earnings per common share were $0.06 in the third quarter of 2017, compared to $0.10 in the third quarter of 2016. The company believes that non-GAAP diluted earnings per common share provides a useful alternative measure of financial performance. Investors are advised to see the attached Reconciliation of non-GAAP Financial Measure table for additional information.
- The company repurchased approximately 319 thousand shares of common stock under its current share repurchase program.
Michael P. O'Donnell, chairman and chief executive officer of Ruth's Hospitality Group, Inc., says, “Our third quarter results reflect the impact of Hurricanes Harvey, Irma and Maria along with a return of double digit beef inflation. With approximately 20% of our restaurants affected by these storms, the impact for us was significant. I am proud of the way our teams handled these external challenges and am pleased to report that traffic trends are positive so far in the fourth quarter and are driving sales, which are now running up in the low to mid-single digit range.”
O’Donnell adds, “Today’s announcement of the acquisition of our six Hawaiian franchise locations presents a significant opportunity for us. We’re delighted to welcome these outstanding restaurants and their wonderful teams into the Ruth’s Hospitality Group family and are committed to continuing their success. While the third quarter presented several significant transitory challenges, the health of our business remains strong. We continue to invest in profitable growth while simultaneously complementing our returns through returning capital to our shareholders. This opportunistic franchise acquisition, the December opening of our final Company-owned restaurant of the year, and our Board’s approval of a new $60 million stock repurchase plan all demonstrate our continued commitment to shareholder returns through effective capital deployment.”
Review of Third Quarter 2017 Operating Results
- Total revenues in the third quarter of 2017 were $85.2 million, an increase of 1.7% compared to $83.8 million in the third quarter of 2016.
- Company-owned comparable restaurant sales decreased 1.6%, which consisted of an average check decrease of 0.1% and a traffic decrease of 1.5%, as measured by entrees. During the third quarter of 2017, Hurricanes Harvey and Irma directly impacted 15 of our 70 restaurants and resulted in 64 lost operating days. The impact on company-owned comparable restaurant sales was approximately 150-200 basis points.
- Average unit weekly sales were $87.3 thousand in the third quarter of 2017, compared to $89.8 thousand in the third quarter of 2016.
- 70 company-owned Ruth’s Chris Steak House restaurants were open at the end of the third quarter of 2017, compared to 68 Ruth’s Chris Steak House restaurants at the end of the third quarter of 2016. Total operating weeks for the third quarter of 2017 increased to 910 from 877 in the third quarter of 2016.
- Franchise income in the third quarter of 2017 was $4.2 million, an increase of 7.4% compared to $3.9 million in the third quarter of 2016. The franchise community was also negatively impacted by Hurricanes Harvey, Irma and Maria. Although the impact on franchise royalties was immaterial to the quarter, our franchisee in Puerto Rico experienced significant storm damage to its restaurants.
- 81 franchisee-owned restaurants were open at the end of the third quarter of 2017 compared to 80 at the end of the third quarter of 2016.
- Operating income in the third quarter of 2017 was $3.0 million, compared to $5.6 million in the third quarter of 2016. As a percentage of total revenues, operating margin decreased 320 basis points year-over-year to 3.5%.
- Food and beverage costs, as a percentage of restaurant sales, increased 175 basis points to 31.9%, primarily due to a 10.9% increase in total beef costs.
- Restaurant operating expenses, as a percentage of restaurant sales, increased 210 basis points to 53.6%. The increase was primarily due to storm related inefficiencies and the resulting sales deleveraging, higher year over year healthcare costs driven by the timing of healthcare claims, as well as lapping the impact of the $335 thousand benefit in the third quarter of 2016 related to the settlement of disputed rent charges.
- General and administrative expenses, as a percentage of total revenues, decreased 40 basis points to 8.3% driven primarily by a decrease in performance-based compensation.
- Marketing and advertising costs, as a percentage of total revenues, increased 70 basis points, primarily due to a planned shift of marketing spend across the quarters.
- Pre-opening costs, as a percentage of total revenues, decreased 55 basis points to 0.1% driven by the timing of new restaurant openings.
The company will open its third new company-owned restaurant of the year in suburban Denver, CO during the fourth quarter of 2017. Additionally, the company expects to open a new restaurant in Jersey City, NJ in the second half of 2018.
During the third quarter of 2017, our franchisee opened a restaurant in Chengdu, China marking our second location in mainland China. Also during the quarter, our franchisee in Puerto Rico closed one of its two existing restaurants. Our franchise partner recently opened a restaurant in Kauai, HI on October 30th and another will relocate their restaurant in Mississauga, Canada later in the fourth quarter of 2017. Looking to 2018, a new franchised restaurant is expected to open in Fort Wayne, IN.
Share Repurchase and Debt
During the third quarter of 2017, the company repurchased approximately 319 thousand shares of common stock under its current share repurchase program, for approximately $6.1 million or an average price of $19.13 per share.
At the end of the third quarter of 2017, the company had $30 million in debt outstanding under its senior credit facility.
Quarterly Cash Dividend
Subsequent to the end of the third quarter of 2017, the Company’s Board of Directors approved the payment of a quarterly cash dividend to shareholders of $0.09 per share. This dividend will be paid on November 22, 2017 to shareholders of record as of the close of business on November 9, 2017, and represents a 29% increase from the quarterly cash dividend paid in November of 2016.
Subsequent to the end of the third quarter of 2017, the company’s Board of Directors approved a new share repurchase program under which it authorized the company to repurchase up to $60 million of its common shares outstanding. The new share repurchase program replaces the company’s previous $60 million share repurchase program announced in April 2016, which has now been retired. The company spent approximately $48.0 million to repurchase approximately 2.8 million shares of its common stock, at an average price of $17.05 per share under its previous share repurchase program. Share repurchases may be made from time to time in the open market, through negotiated transactions or otherwise (including, without limitation, the use of Rule 10b5-1 plans), depending on share price, market conditions and other factors. The company intends to continue to conduct any open market share repurchase activities in compliance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The share repurchase program does not obligate the Company to repurchase any dollar amount or number of its common shares.
On November 2, 2017, the company entered into an asset purchase agreement to acquire the six franchised Ruth’s Chris Steak House restaurants in Hawaii for approximately $35 million in cash. The purchase price for the six restaurants is subject to adjustments for certain deposits, credits, inventory and prepaid amounts. The company expects the transaction to close by no later than the first quarter of 2018.
Based on current information, Ruth's Hospitality Group, Inc. is updating its full year 2017 outlook based on a 53 week year ending December 31, 2017, as follows:
- Food and beverage costs of 29.0% to 31.0% of restaurant sales
- Restaurant operating expenses of 47.0% to 49.0% of restaurant sales
- Marketing and advertising costs of 2.9% to 3.1% of total revenue
- General and administrative expenses of $32.0 million to $34.0 million
- Effective tax rate of 31% to 34%
- Capital expenditures of $20 million to $23 million
- Fully diluted shares outstanding of 31.0 million to 31.2 million (exclusive of any future share repurchases under the Company's share repurchase program)