Q4 2020 Ruth's Hospitality Group Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by and welcome to today's Ruth's Hospitality group fourth quarter of 2020 earnings Conference call. At this time all participants are in a listen only mode. Following of almost the company's 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 call is being recorded.
I'd now like to turn the conference over to Kristy Chip at Chief Financial Officer. Please go ahead.
Thank you Shirley and good morning, everyone. Joining me on the call today is share Cheryl Henry our President and Chief Executive Officer of.
Before we begin at 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 <unk> Gi Dot com as well as the SEC website at SEC Gov 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 risk.
During this call we will refer to adjusted earnings per share non.
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.
Christie and good morning, everyone. Thank you for joining us on our call today, we hope that everyone is staying safe and healthy.
2020 was truly a challenging year for our Ruth's, Chris team and our franchisees, we manage through two significant shutdowns during the year at first in late March and the other most recently during our fourth quarter.
Despite these challenges our amazing team both in the field and in the home office and our franchise partners continuously displayed resilience and agility in the face of uncertainty, resulting in strong fourth quarter results.
While we still remain cautious with ease restrictions and the possibility of of vaccinated population on the horizon at Fiat.
We are approaching the other side and at the worst at the impact on our business is behind US with that said I'd like to touch briefly on a few observations of our business as of late.
First our business is currently being driven largely by special occasion end just because of diners.
We believe this is due to the trust we have built in Nebraska over 55 years, our guests' trust of most of their dining experiences and with their health and safety at least made that our number one priority from the beginning of <unk>.
Second our buckets of business from partners that are more of Lord before and Thats. Okay. As we are meeting the customer where they want to day whether.
Whether thats in our new outside of dining rooms are in our restaurant safely social distance.
Finally in the past we've talked about demand mainly in the context of seasonality and day of week.
Today demand is also more about regional nuances and consumer mindset and we have adjusted the guest experience accordingly.
For example, our restaurants with open but restrict dining revenue posted a comparable restaurant sales decline of 16, 3% through the first nine months of 2021.
However of Florida, which we look at the same 50% capacity experienced at 11 declining.
In California, with patio open and off premise of basketball performed at almost 60% of prior year sales during the month of February from weather allowed and the consumer is ready.
I have followed.
Well of Chrissy, we'll talk we'll walk you through fourth quarter financials in a moment.
Wanted to share a bit more on our most recent operating staff and talk about growth.
As we look at the restaurant portfolio today 75 company managed restaurants are open and two restaurants remain temporarily closed.
We have 63 restaurants with restricted capacity.
Alright as operating into go service only.
These open restaurant have contributed to sequentially improving comparable sales in January down 38, 9% and February down 25, 6% when compared to December of 2020.
As I mentioned company owned comparable sales for restaurants with open dining rooms decreased 16, 3% compared to 2020.
This is our best sustained performance and open dining rooms since reopening after the shutdown in late March.
With the evolving recovery and our solid liquidity position I am happy to announce that we expect to open a new Ruth's Chris Steakhouse in short Hills, New Jersey early in the third quarter of this year and we will begin construction of a new restaurant restaurant in Aventura, Florida from mid 2022.
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As we look ahead, we are maintaining a dual focus.
Sharon we are prepared should the external environment change again.
At the same time, making sure we are looking toward and planning for the future.
This includes keeping our teams ready and agile.
Focusing on the guest experience leveraging the efficiencies and learnings from 2020, and maintaining a strong balance sheet with ample liquidity.
I'll now turn it over to Christie to cover the specifics of the quarter. Thank.
Thank you Cheryl.
The fourth quarter ended December 27, 2020, we reported GAAP net income of $1 4 million of <unk> <unk> per diluted share compared to $14 5 million of our 50 cents per diluted share for the fourth quarter of 2019.
Net income included a $2 5 million dollar employee retention payroll tax credit, which reduced operating expenses.
It also included roughly 300000 in severance and accelerated stock expense and approximately 300000 impairment loss related to restaurant.
And at $1 1 million in income tax expense related to the impact of discrete income tax items. Excluding these adjustments non-GAAP diluted earnings per share was three <unk> compared to 52 in the fourth quarter of 2019.
Total revenues for the quarter of $77 4 million compared to $135 million in 2019.
Company owned restaurant sales were $72 2 million compared to 127.
$1 million in the prior period.
Well there are comparable sales improved sequentially from April to October renamed Covid related restrictions negatively impacted sales trends at the fourth quarter progressed comparable restaurant sales decreases by months included negative $26. One in October of.
Negative 35, two in November and a decrease of 53 point.
In December at least.
Two of fourth quarter comp sales of negative 39, 7%.
Restaurants at open dining rooms have average unit weekly sales during the quarter of 92000 compared to $118 8000 from the fourth quarter of 2019.
This decrease was largely due to the tightening COVID-19 restriction.
Traffic during the quarter as measured entrees decreased 34, 7% and check decreased by seven 6% primarily related to the off premise check when compared to in restaurant dining.
Franchise income for the quarter was down 26, 7% versus the same quarter last year.
Other operating income was $1 6 million down from $2 9 million end 2019, due to the impact from Covid as well as a decrease in gift card breakage income and lower.
Lower income derived from our restaurant operating under management agreements.
67 of the company's franchise owned locations and as of the end of fourth quarter <unk>.
60 offered limited earnings.
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Two offered outdoor seating only in five of our to go and delivery surface all day.
Turning to expenses food and beverage cost for the quarter as a percentage of restaurants that were down 34 basis points to 29, 5%.
Primarily related to 2% beef deflation compared to the fourth quarter of 2019.
Restaurant operating expenses as a percentage of restaurant sales decreased 19 basis points to 46%.
This was primarily due to the $2 $5 of employee retention payroll day by day.
That I noted earlier offset by higher fixed operating costs, such as group insurance and rent that resulted from the sales day.
And operating expenses that resulted from to go and Reorders.
Marketing and advertising costs decreased 65, 1% to $1 6 million end the quarter.
As we reopened our dining rooms, we continue to be focused on regaining our sales leverage, particularly on labor force.
For restaurants that were opened during the quarter, we had fewer labor force compared to last year to efficiencies built into our labor model.
However, this was offset by sales leverage and restaurants that were restricted to a to go only operating at all.
We expect to see the benefit from our labor model as restaurants reopen end sales improve across the portfolio.
G&A expenses increased 2 million end to 10 6 million compared to the fourth quarter of 2019, largely due to the timing of recording the bonus accrual for all home office team members.
As Sheryl mentioned, maintaining our strong financial.
At the end of fourth quarter, we had $95 4 million in cash and net debt of $19 6 million down from a net debt position of over $58 million at the end of 2019.
In the fourth quarter of the company paid down an additional $20 million on our revolving line of credit and secured an extension to our credit facility through February 2023.
Our net debt has improved by approximately $15 million since the end of 2020.
Subsequent to the fourth quarter, we entered into a six of amendment on our senior credit facility, which we detailed in an 8-K filing on January 29, 2021. This amendment provides for a $10 million commitment reduction in April 2021. It also provides us relief from certain financial covenants.
For the first fiscal quarter of 2021, while limiting capital expenditures for the fiscal year.
Before I turn the call back to Cheryl I, just wanted to reiterate our confidence in our business as conditions normalize over the coming quarters.
That said I am sure we will experience some choppiness and volatility month to month and for that reason, we won't be providing any additional guidance at this time share. Thank you Christine as I mentioned earlier 2021 has started off stronger than the final months of 2020 as such we are focused on understanding our.
GAAP anticipating demand and being ready operationally.
As of today, we believe further recovery starts with the vaccinated population as they return with Ms celebratory occasions and milestones.
And then group social dining events, followed by increased local business demand and over time business travelers. This transition may take months, but as I mentioned, we are ready and meeting our guests on their timeline and with the type of experience. They desire COVID-19 has taught us much about flexibility.
And innovation, which includes new operating procedures at the restaurant level as well as a more flexible labor model better capacity utilization and the adoption of technology not only by us as an organization, but by our guests.
With an iconic 55 year old brand and the best team members and franchise partners in the business behind these efforts. We are proud of where we are today and optimistic about the future with that we will open up the lines.
A question and answer session.
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Participants using speaker equipment, it may be necessary to pick up your hands at before questions Derek.
One moment, please while we poll for questions.
Our first question is from James Rutherford from.
From Stephens Inc. Please proceed with your other question.
Thanks, and good morning, really appreciate all of the detail it's nice to see the progress you are making.
I wanted to start with that quarter to date result, the negative 16 comparable sales result for restaurants open to dine in at.
Really quite impressive do you think that the the headwinds on business occasions that you talked about share all the kind of take time to get back will will that how does that inhibit your ability to get to pre COVID-19 at <unk>.
Let's say this year for restaurants doing dine in or is it possible that maybe towards the back end of this year at vaccinations pick up.
Do you think we potentially could get at that sort of a level.
Additional off premise may be helping a little bit as well.
Yes. Thanks for the question I think you know I think there is in everyone's been talking about at Theres, certainly a pent up demand.
Seen we read some of the things you read and we've been conducting a bit of our own research around how does the gas selling whether it's the business gas store a special occasion diners I believe that there are folks that are still.
Not yet coming in that as we go further through this recovery and people sales safe and are choosing to come back to dine at they'll come back and dine with us the piece around the business I think there's a couple of elements of the business guests that we see at our restaurants and so I'll just mention of the when.
When we survey folks that are in the restaurant, we still see of business guests into the restaurants, it's not as significant as it has been pre COVID-19, having said that there is a couple of different elements to that end. So our restaurant has been in their local market many of them for 15 plus years.
In those local markets have a local business clients, how they're not traveling to get there they do business in their communities.
These are the folks that we still see and we believe kind of as you think about the demand coming in waves will be back as they.
As you mentioned the vaccination program reaches out to more communities I think the second wave of that is the business traveler and again we.
We think that will be later on in the recovery, but we still believe that theres going to be of demand across our buckets of business. If you will that can help to your point offset some of the still negative trends.
That's great and then flipping to the restaurant level margin side of the P&L was impressed by the cost controls during the fourth quarter, especially given a lot of disruption in terms of operating status, but as we think about the future can you remind how much benefits of restaurant margin you expect from closing those nine lower profit unit.
And on top of that what sort of benefit do you expect.
Yeah.
Gross COVID-19 sort of normal unit volume kind of restaurant level margin at that at kind of at that at that point in time. Thank you very much at all.
Great question, So I have to first acknowledge the effort as you mentioned in Q4 at the amazing job that the operators in our restaurants.
All of the flow through the organization has done in managing the P&L and working with the new systems, we've put in place in the new.
Tools, we've given them to manage through that so they've just done an amazing amazing job thats been.
Call two quarters of trend, but they've been able to hold onto that after the closing of its about 100 basis points for the nine restaurants that closed end I'll turn it over to Christie I think your question was more details as well around labor as we go forward and the maintaining of the efficiencies of the margin.
Great. Thanks Charles.
We're not prepared to really give overall guidance on what that efficiency can look like I can tell you that the labor model has efficiencies built into it at as you can expect it gets a little bit difficult to Peel apart right now simply because of the operating status of.
Of certain restaurants and particularly.
In December and part of November where California closed again, which was one of our higher wage states. So we saw somewhat of a benefit because of that being closed. So we'll be teasing that apart over that couple of months, but we do expect some savings in labor to stay with us for the.
The remainder of the year as we implement that new labor model.
Alright, thanks very much.
And our next question is from Nicole Miller with Piper Sandler. Please proceed with your question.
Thank you and good morning, and thanks for the update just two questions. The first is around development. So proud of the pandemic. There was some great acquisitions I'm thinking specifically on the east coast, where at open up an opportunity for corporate store development and so we understand the store for this year of next year.
Could you talk a little bit just high level of longer term.
How long until that's like of a more robust pipeline of did the pandemic create a pause there of GAAP, maybe there's even of stores that have L. O I's are leases attached. So we can understand how that might accelerate thank you.
Sure. So yes, we announced two of the at least seven leases going into the pandemic and we talked about two of them today, we are in the territory.
Specific to <unk>.
The Marsha Brown acquisition in July of 19 was really about opening up some of the market in the long Island, Pennsylvania, and New Jersey area and so we do have two leases currently in that market. We are in the process of working with those landlords. Obviously the initial timeline of development and construction has been pushed but they are still in play is.
As part of our pipeline and our desire.
To add those additional units.
We're working through the details of the landlords on those as well and as we think about the others.
One location that we will not be moving forward with and the others again are still part of our development pipeline that we're looking at through the next couple of years.
Okay, Great and then.
The second last question is around the team and when I think about your team, it's more of a business and industry professionals than than anything.
So how many of you know app.
Individuals' at where their PTC are being you know called back now that things are reopening at improving where you do have to hire how is that going and then how are you deploying to individual at the same or differently based on the pattern of sales that you're seeing today.
Yeah. So we've obviously had some choppiness around stores opening and then closing again. So the number has shifted out of California. As you know is now open.
<unk> dining, but not inside dining so the teams are a bit smaller in those market.
At the home office were at about 75% of pre COVID-19 levels and expect to.
Stay there generally through this year.
As we look at the different types of business, we're doing or the different functions.
Sitting in January of 2021 of the things we've talked about was announcing some digital work around brief anywhere which was really the launch of our to go and delivery channel.
That's been accelerated clearly by Covid and so when you think about how we deploy resources against a new business line that might be some of the changes that are happening at the restaurant level.
But that's been a worthwhile endeavor to resource against that new channel, especially during COVID-19.
Generally speaking our restaurants that are now open we are pulling back people as quickly as possible. We do have two restaurant sales at are temporarily closed.
Those folks are made on furlough.
Yeah.
Thank you.
Thank you Nicole.
Our next question is from Brian Vaccaro with Raymond James. Please proceed with your question.
Thanks, and good morning.
Certainly encouraging to see the improving quarter to date trends and appreciate the quarter to date comps disclosures. You gave I was curious, though could you help level set where company owned average weekly sales volumes were in February and sorry, if I missed it but what what we're AWS in the fourth quarter as well.
So oh I'll take the second one first and so through the nine weeks. We were on average about 80000 average unit volume, but as we started to get into February we are seeing numbers more in the mid nineties from an average unit weekly volume perspective.
As far as fourth quarter was about 92000, which is detailed in the release yet.
Ah Okay. So so the sorry, the third of the nine week you said in February you're seeing.
Mid Ninety's that is that for dine in all of the dine in units only because I know you said those were down what 16 per.
I just want make sure.
Got the same number that was the average of all restaurants, regardless of status.
Okay. So mid Ninety's in February company average weekly sales right as you progressed throughout the quarter at starting to move towards that mid 90 level, yes, I mean throughout the day, so I'm sorry for all of them up.
Okay.
Was that an exit rate or is at the average sort of bugs.
Yeah. It was about post Valentine's of the last two weeks of the month, we're closer to that mid nineties.
Mark got at growing great.
Okay perfect. Thank you.
I appreciate the update on the operating status of a company units could you do the same for the franchise system. If you have it handy.
As of the and we're gonna have to grab that for you because I don't think I have that handy for the end.
So Brian me, if he would cost so for Q4 just to get.
We mentioned it but you know one of the things that they they had 60 units open operating dining rooms at the end of Q4 versus our 48. So they didn't actually have as many closures, which is I'm thrilled for them that was that.
That was great through the fourth quarter.
And that's at the nine week.
What do you have to I don't have it from here. So I forget what we will get that for you.
We can we can follow up on that for sure.
Just thinking about the outlook a little bit I know, we're not talking about guidance and at the dynamic environment, but can you ballpark four at what your expectations are in terms of Cogs inflation for the year end.
And also maybe help us ballpark G&A.
All of it was lumpy through 'twenty, one through 'twenty quarter to quarter for obvious reasons, but should we expect something call. It in the low thirties.
On G&A of any help on that line would be great.
Yeah, so starting with G&A overall, it's really difficult from to your point to look at it from a percentage of sales perspective, just given the uncertainty with what's going on but I think if you look at it on a go forward basis, we would expect that expected not to exceed 2020.
Probably the best information, we can give you at this point in time.
Okay.
As far as the rest of the cost of goods sold and impact on the overall business, we talked already a little bit about labor and that's probably the the the one area. We're still looking to land on what efficiencies will be there for the full year, but I can tell you from a cost of goods and food perspective.
We're looking at somewhere between one to one and a half on the overall inflation.
Yeah.
Perfect Alright, Thanks, I'll pass it along thanks.
Brian.
And again as a quick reminder, as kind of a question you May press star one on your telephone keypad.
Our next question is from Todd Brooks with CL King <unk> Associates. Please proceed with your question.
Hey, good morning to you both of a few questions here if I may one this is <unk>.
Just running through of holiday period end and doing it in a capacity constrained fashion I know you were looking at the restaurants differently, how do we flex.
Certain private dining areas to accommodate more customers I guess share I'll just looking back.
At at the holiday period, what have you learned about the boxes and what you may be able to take forward that will allow you to get more productivity out of the units in these peak periods November December typically.
Yeah. So at capacity has been a bigger utilization of capacity has been a big opportunity for us and you know I mentioned at this recently prior to Covid, we had actually done work around how we're utilizing our footprint of layout in the in each of the boxes and you know one of the big areas of opportunity was actually table.
So at 50% of our guest demand is for two tops and we have all four tops you've built in inefficiencies around your utilization and so we have done work throughout 2019 to reset the seating plans in the boxes in the restaurants and so I think that was the start of our learning around how we wanted to use space going forward as COVID-19.
Hit and we had the additional six foot separation and 50% of 25% capacity at 50% capacity.
Flexing the space in our private dining rooms, which again was something we had started designing our restaurant force so that the private dining rooms didn't feel as isolated in the building, but yet health as part of the Ala Carte means space.
With something that we were we were able to implement and I believe will serve us well going forward. So if you are utilizing space for a very specified occasion at being able to open that up and use it to get more turns for at all card experience can be more efficient for us and the restaurant. So those are some of the general learnings.
It is you know.
Some of this is also based on consumer demand and mindset or coming out of Covid is the guests still feel comfortable or the desire to eat earlier in the day or later in the day and they've now built flexibility into their schedules of our work has allowed them to be more flexible and so you know.
We will continue to look at it and understand how we need to continue to adjust to that demand, but there are definitely some learnings there so great question.
Very helpful. Thank you and then a second follow up I know.
There was a plan at least in fourth quarter that some of the premium items, we're going to come back to the menu for the holidays knowing that.
Restaurants were likely to be capacity constrained to try to drive higher average ticket I guess a did that happen.
And B if it did happen now going into a post holiday period did those.
More unique higher ticket items stick on the menu of if we'd gone back to a more streamlined menu here going into the first parts of fiscal 'twenty one.
Yeah, so that was in relation to our bonus program.
Q4, and we actually did see a recovery in dining room check.
Throughout the quarter end into the holiday season, they remain on the menu.
It's something that we found is as you mentioned, we streamline we cut back at least.
Where's the potential demand from a consumer here and given the results that we saw in Q4 I believe that is an important part of our menu and our operating for our guests. So we do plan to move forward with them.
Okay, Great and then finally.
Now we're through the holiday end.
Kind of looking at the at the industry and your competitive set is what what are you. What's your sense on behalf of survivor bias in fine dining is going to play out force.
For Ruth's as far as.
<unk> market share at that to be had out there and how do you. How do you go and capture competitive set of closed and thoughts fitting budget in fiscal Q1 to really go after what that incremental share maybe that you could capture.
Yes.
Let me I think let me speak to the the of quantifying what the opportunity is around potentially closed I think that has not played out yet I think there is.
You know being where we're at.
Based in Florida.
Traveled up and down the coast to kind of see the different things that are happening in different regional areas and understanding what that looks like and what I can say is you know.
Being here, we've seen restaurants that have been closed for six months because of capacity.
Restraints or just the inability that of now reopened and so while I appreciate that there's a strong desire to quantify exactly what that opportunity is I don't think we're there yet I think theres more aid coming.
To help some of the independents and the smaller chains and so I think that's still yet to be determined having said that we are always pre COVID-19 for 55 years looking to gain market share.
And it's why we've over time expanded our offerings change, Brian launched Ruth's anywhere pre COVID-19.
To make sure that we are staying relevant to the guest and building our market share. So we will continue to focus on that I think if there is one thing to say about area of opportunity. We've learned a lot of vote efficiencies in marketing spend.
And opportunities that we have in our data.
Database now and I think we have an opportunity to leverage that going forward.
And you will see some of that coming out as we think about marketing spend and just to directly answer that we cut back marketing spend pre COVID-19. Our trend has been around three three to three 5%.
And we're at two six and so we'll look at it we continue to look at it will end.
Understanding where the consumer is going from pent up demand and utilize it as needed but right now we're hanging out in that range.
Very helpful. Thank you.
Yeah.
And our next question is from James Rutherford with Stephens, Inc. Please proceed with your question.
Hey, just wanted to hop back with one more question could what's the average capacity in your restaurant that are open for dining today.
And most importantly, how do you plan to handle capacity as states like Texas, and Florida had given the operators that led us to decide and clearly you probably don't want to flip to 100% immediately but is there of thought towards incrementally walking at capacity slowly guys. Your guests become more comfortable and at vaccination rates pick up just how do you want to handle that.
That's the question, we haven't really so I'll say that when Florida.
Ability for capacity, we stayed at 50%.
We believe its driving driving trust and frequency and that gas space. So that has worked well for us I think as again things continue to evolve and more people become vaccinated and more people feel safe with going out and we'll keep looking at it.
Do you think it's more states start to loosen up that capacity restriction will make incremental changes along the way, but we haven't set that yet again. This in this case because of health and safety of our kind of let the GAAP lead to some extent and then obviously looking at the business and understanding what we need to do going forward.
But right now given the true incremental sales available when you add two or three tables.
It's a balance and so we're still conducting that balance and so there'll be more to come online.
Yes, certainly at the delicate thing to handle so much of a great day.
And we have reached the end of the question and answer session I'll now turn the call over to Cheryl Henry for closing remarks.
Thank you all so much for joining us. This morning, I look forward to speaking with you all again soon.
This concludes todays conference that you may disconnect your lines at this time.
Thank you for your participation.
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Yes.
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