Q3 2019 Earnings Call

This time all participants are in listen only mode. Following the formal remarks, we will conduct a question and answer session and instructions will be provided at the time for you to queue up for questions. As a reminder, today's conference is being recorded.

Now, let's turn the conference over to Mark Traylor, Vice President financial planning and analysis. Please go ahead Sir.

Thank you debit and good morning, everyone. Joining me on the call their Cheryl Henry President and Chief Executive Officer, and already Hakan Executive Vice President and Chief Financial Officer.

Before we begin I like to remind you that part of our discussion today will include forward looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

I refer you to the Investor Relations section of our website at <unk> Dot com as well as the Fccs website at ATSI Si Dot Gov for copies of today's earnings press release, and our recent filings with the FCC for a more detailed discussion of the risks that could impact our future operating and financial result, [laughter] during this call.

We will refer to adjusted earnings per share. This non-GAAP measure met with 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 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 our Chief Executive Officer, Cheryl Henry.

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

Probably the result, we delivered for the third quarter Interstate separately.

This included a tropical storm that affected our new Orleans area restaurant, and Hurricane Dorian, which impact in Florida and parts of southeast [noise].

Additionally, we managed to 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 at 22% increase and pro forma earnings per share the strength of our pets 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 [noise].

For more detail that Tennessee conclude we believe that these initiatives will help our efforts to drive sales increased traffic.

We look to enhance our successful happy hour at a bar program lots, introducing new guest experiences and evolve our main dining room offering also providing value to our GAAP.

These initiatives can only succeed if our foundation is strong.

Within our operations, we worked continuously within our restaurants on operational excellence showing our people are [laughter] on treating every guest without touch hospitality pages [laughter] third quarter concluded our efforts to bring every restaurant sales manager general manager and shop together for regional meetings.

These meetings focused on our sales expertise elevating the heart the arc hospitality and laying the groundwork for continuous innovation.

New restaurant openings are also an important color of our strategic effort.

In early October we opened a new restaurant in Columbus, Ohio, and we expect to open some hurdle in Somerville, Massachusetts later, that's not [noise].

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 restaurants scheduled within the territory of our recent franchise acquisition.

For 2020, we currently expect to open five restaurants. This includes Washington, D.C. short Hills, New Jersey, Western Massachusetts Long Island, New York in Long Beach, California.

Washington, D.C. was previously expected to open late in 2019, and well replace our current Washington, D.C. restaurant because lease expires in 2020.

Continue to actively work on additional development opportunity for about 2020 and beyond it will provide update on lease signings as they occur. In addition to investing in our core business. We also returned over $17 billion to shareholders during the quarter.

That's including dividend payments of 3.8 million and share repurchases at 13.5 million in regard to the latter this brings our annual share repurchase amount for 2019 to over 20 million and subsequent to the end of the quarter Our board of directors opera They knew.

60 million dollar 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.

Good day, and with that I'll turn it over to our nature you the details of our third quarter financial results [noise].

Thank you Sheryl for the third quarter ended September 29, 2019, we reported net income of $4.5 million or 16 cents per diluted share.

This compares to net income of $3.6 million or 12 cents per diluted share during the third quarter 2008.

Net income and this years third quarter included a 300000 dollar benefit related to the impact of discrete income tax items and $300000 in expenses associated with the acquisition of our former franchisee.

I didn't come in the third quarter of 2018 included an 80000 dollar benefit related to the impact of discrete income tax items and $400000 and deal related expenses associated with the acquisition of the six restaurants Cobra Hawaiian franchisee.

Excluding these adjustments as well as the results from discontinued operations, our non-GAAP diluted earnings per common share were 15 cents in the third quarter 2019, compared to 13 cents 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 per cent compared to last year, well average check increased 2.3%.

Sales trends improved by period during the quarter. Despite the unexpected weather challenges that Cheryl mentioned, which resulted in reduced sales during the 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 or approximately 30 to 40 basis points.

The improvement in our traffic in sales.

Has also continued into the fourth quarter and we are encouraged that our comp sales today 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 well comparable sales in our international franchise restaurants were down 0.6.

Our operating income for the third quarter was $1.9 million up 24% from $1.5 million in 2018.

Year over year increase was driven by the contribution from our restaurants operating under a management agreement [noise].

Now turning to our expenses food and beverage costs as a percentage of restaurant sales increased approximately 140 basis points year over year to 29.6%. The increase was largely driven by the 19% increase in total beef costs that Sheryl 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.

We 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 a percentage of total revenues was primarily driven by the plan shift in marketing tactics across the periods.

DNA 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 our acquisition deal costs [noise].

During the third quarter, we had capital expenditures.

$30 million, which included the acquisition of three franchise restaurants, plus the development rights to long Island, New York, The Philadelphia area in parts of New Jersey for $18.6 million.

Also during the quarter, we repurchased 664000 shares for approximately $13.5 million for an average price of $20.26.

This brings our year to date share repurchase totaled 941000 shares were $20.6 million with an average purchase price of 20 $1.90 cents per share.

At the end of the third quarter, the company had $83 million and debt outstanding under its senior credit facility, which is up $38 million from the second quarter of 2019 due to the franchise acquisitions share repurchases and increased capital expenditures based on new restaurant openings.

Subsequent to the end of the third quarter, our board of directors approved the 13 cents per share quarterly cash dividend, which represents an 18% increase over the dividend paid in November of 2018.

Now turning to our guidance I'd like to provide our revised outlook based on current information for the full year 2019, some of our key financial metrics.

Based on our current expectations for beef inflation in 2019 provided earlier in this call.

How 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 DNA expenses to be between $34.5 million and $35.5 million.

Most of the integration costs related to the acquired franchise restaurants in Philadelphia in long Island.

We continue to expect our annual effective tax rate to be between 17, and 19% excluding the impact of discrete income tax items.

We expect our annual Preopening cost to be between 2 million and $2.2 million based on the timing of new restaurant openings in the fourth quarter [noise].

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

The company's share repurchase program.

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

Thank you Arnie in closing I'd like to reiterate how pleased I am with our third quarter results.

There are a testament to the strength of our iconic brands as long as the resilience agility and dedication as our entire team. We're 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.

That I'd now like to turn the call back to seven for any questions you may have.

Thank you at this time, we conducted a question and answer session. If you like just a question. Please press star one on your telephone keypad a confirmation till indicate your line is in the question Q. You May proceed start to fuel let your move your questions in the queue for participants usually speaker equipment. It may be necessary to pick up your handset before person to start keys one moment. Please what we.

Pull for questions.

Our first question comes the line or will Slabaugh with Stephens. Please.

PC with your question.

Thank you.

If you could talk a little bit more about the initiatives that you referenced it sounds like they were more operational in nature anything else you'd be willing to say they would be helpful. And also I was curious if they involved anything with dominion as well.

Thanks, well so yes, we talked I think in previous calls about the investments we made last year and doing some work with our GAAP and understanding their needs around variety as well as value seeking and the initiatives I'm speaking to you that are in cats do they go beyond operation. So there are many you implications as some of them and all three of our.

Revenue centers from private dining to mean dining room to at the bar as well I mentioned that speak more about it. We're in we're in past. So at this point, that's probably what I can say, but look forward to staying on the results that those tests and sharing with you all.

Okay.

A quick question about the ship share repurchase authorization.

Good good signal, a nearly 10% of the morning cat being on the right. There just curious if you if you knew or had any plans about how aggressive you wanted to be what that authorization.

You know what I'll tell you. It's it's been a part of our total return strategy and its it discussion that we have continuously with the board I. It remains a lever that when we believe the opportunity to pull that we make a recommendation and and it's something that we do so more to come as we go through the quarters on that.

Okay. Thank you.

Our next question comes on line of Andy Barish with Jefferies. Please proceed with your question.

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 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 that'd be helpful.

Hi, Andy Thank you for given the opportunity to recognize the team and our development department because they often work tirelessly behind the scenes I will tell you. We've got a great team that's been in place now for just over two years.

Experts in what they do it really helps to build our pipeline in the work they do and you have to some extent I won't say the acquisitions helped I've got some flexibility and not until you saw the first site in long island come onboard I you know the competitive environment I don't know that that's relax that I think it's still competitive front 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.

And then Arnie on me on the expense side of the equation. The restaurant operating expenses was certainly a positive variance versus.

At least what we in the street, we're looking for anything more I mean, what is the labor line within their actually up and it was it was you know all incentive comp just any any color on that would be helpful and kind of where.

Where you're seeing a wage inflation these days.

Sure and the Oh, you know I think really hats off to the operating teams here.

They were really nimble.

Both at the end of the second quarter end of third quarter.

You know we saw some challenging sales in April and we saw what kind of beef inflation moving and we challenge.

The team to work on the labor inflation and margin pressure is still there they're working very hard against it there. So there's initiatives there on what can we do better around labor Theres nothing.

Monumental where 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 you know, we're still seeing kind of similar pressures there, but they just on a real nice job.

Okay. Thank you.

[laughter].

Our next question comes on line of Nicole Miller with Piper Jaffray. Please proceed with your question.

Thank you and good morning could you talk a little bit about the sequencing or the five stores next year how does.

How it might be appropriate to model Bose.

Sure Nicole.

We can go through the I. I think we talk a little bit about it on our call a and then in the press release, but the first one up will be in Washington DC.

And that will be in the first quarter.

Then in towards 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.

Okay.

And then when you look at the traffic being down I know in the past the Bibles assets kind of bond ops is sometimes that entree.

Hi can be a.

A little misleading Uh huh.

That's still the case are you getting traffic or having customize essentially or other ways. You know drinks hip hop to be an example that kind of on the cuts that figure.

It's a great question, yes, so we're still seeing that growth in the bar revenue center into your points that menu offers a variety of ways with intense for the gas to choose to eat it said that each person is not necessarily counted in our traffic count is very entre specific odd and so you can have people dining.

In that space and having very good check in sales I'm not in it it does not necessarily impact in a positive way. The Tropicana I'll also say you know as far as revenue centers, we sign that third quarter private dining kind of step back up to the plate and so we are encouraged by that as well, but to your tier direct question yes.

In other ways to die within the bar. This is not necessarily counter the direct traffic entre counts.

Okay, Great and then just a last question then you we've sat and I'm a lot of these kosmotras this earning season, but really for the better part of this year and last year too and we ask anybody about digital so how does what what we're doing the consumer doing digitally today apply to Ruth's Chris.

And when you say digitally referencing online ordering and delivery or a specific around loyalty program.

So the only thing I'd say, it's it's all about not be when you just a little bit different definition, but off premise tends to be it catches on delivery catering all of those things combined so I'm not sure. How you guys I think they said, but I sure no I want to get some ruth's, Chris well there [laughter]. So so how do you think about digital AD Tech.

Knowledge, you really it's 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 not it doesn't necessarily make sense everywhere, but it certainly could make sense at some market and it's about providing that opportunity for that gets to have raised anywhere they want that I'm. So we are.

Doing some tests around not I think beyond that as we think about kind of our digital data strategy. There are other opportunities, we're exploring and not ours did in some of our tests around is there are opportunities within the experience inside the restaurant nets out to reduce some of that traction.

Great. Thank you so much.

[noise] once again, if you like to ask questions. Please press star one on your telephone keypad. Once again, if you will notice question. Please press star one on your telephone keypad.

Our next question comes on line of Brian Vaccaro with Raymond James. Please proceed with your question.

Oh, Thank you and good morning, I just wanted to start with the third quarter comps and could you 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 is a broader segment a improvement or something else.

So Brian Thanks for the question so in the quarter I'd just mentioned this with Nicole I again, I think we saw private dining which hasn't really been its strong I'm earlier in the air really step back up until we were encouraged by that the bar has continued to be an opportunity as a as revenue center I'm that people are really enjoying so again.

We are doing some mark up some of the tests that were in place a I when can I would say attribute to some of the increases we've seen I'll turn it over to Arnie 'cause I think there's some interesting kind of when you look at the two year in three years stock around.

The traffic and sales as well.

Hey, Brian Good morning, you know I think Cheryl talk a lot about the goods and I think the team again, I would kind of throw a shout out to them as well I'm you know our sales managers, we talk to them about this summer we had some very specific initiatives for them. Some rewards that they could go work and you know.

They rally to the charge and hurt some rewards as well as we look back you know we had a pretty tough comp here in.

The third quarter over last year I think threenine.

Over the high threes in terms of a comp when we look at the black box data and look at versus our peers, you know a little bit of that was round tripping hurricanes back from 2017. So you know they are normal Unfortunately part of our business wouldn't Florida, having a large presents for us but oh.

On a two year basis on a three year basis, I think we're really encouraged.

With that the multiyear stack in terms of comp sales that you know.

After what was kind of really certainly a surprising in challenging April we've seen slow steady.

Improvement in kind of the pace of traffic the pace of sales and I think we'd like the trajectory that were on here for the fourth quarter.

Alright, Thats, great. Thank you and on average check in the quarter, how much was menu pricing up your on here do you take any incremental in its history and what are your expectations on pricing over the next few quarters.

So why we're we've always talked about being reluctant pricers and you know 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 storm come through Florida, and the cancels conferences and private dining events. Those are some of the better check a parts of our business in the fourth quarter were kind of running around the mid twos.

In terms of our menu price.

And as we look ahead to next year you know, we don't have what we have on the menu today and just let it run out we have about 1%.

Price on the menu right now, but you know 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.

[noise] right. That's a that's very helpful. And then let's not forget just wanted to hopefully we can touch on our earnings just curious to get your take on the market fundamentals.

Specifically, what's what you think is driving the outsized inflation on the prime side. Thank you.

<unk>.

Sure Brian .

On the V. fraud, 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 I think the only thing that surprised us was they're kind of the rate of inflation was higher and 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.

Number one on the supply side supply is still flat to up a little bit but for several years, we had seen and growth in supply driven around higher grading of cattle and the grading still is very high is high historically and it's holding up in the supply looks good but theres no growth in supply and so there's no.

Not that to help out what we are seeing is in your nai and Mark and I've talked about as we've talked about this but you know investor conferences, we are seeing more retail demand for prime beef that consumers are seeing and retail channels I think Sam's club at a big a promotion.

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 the Midwest and hopefully we'll have what kind of a cleaner winter and spring, we're hopeful that we get them better outlook.

Look for next year.

Very helpful. Thanks, very much.

We have reached the end of our question and answer session and I will like to turn the call back over to show Henry for any closing.

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

This concludes todays teleconference. You may now disconnect your lines at this time. Thank you for your participation I never wonderful day.

Yeah.

[noise].