Q4 2022 Ruth's Hospitality Group Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to today's Ruth's Hospitality Group fourth quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
The company's formal remarks, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for your questions. As a reminder, today's conference call is being recorded I would now like to turn the conference over to Mike Hines, Vice President of Finance and accounting. Please go ahead.
Thank you Latanya and good morning, everyone. Joining me on the call today is Cheryl Henry our President and Chief Executive Officer, and chairperson of the board and Christy Chapman, Our Chief Financial Officer, and Chief operating Officer.
Before we begin I'd first like to remind you that part of our discussion today will include forward looking statements. These statements are not guarantees of our future performance and therefore undue reliance should not be placed upon them.
We would also encourage you to refer to the Investor Relations section of our website, our HDI dot com as well as the SEC's website for copies of today's earnings press release, and our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating and financial results.
During this call we will refer to non-GAAP financial measures, including adjusted earnings per share and adjusted EBITDA. You can find a reconciliation of these non-GAAP financial measures in our press release for today's call.
I would now like to turn the call over to the company's Chief Executive Officer, Cheryl Henry.
Thank you, Mike and good morning, everyone.
Our fourth quarter results Mark to be added to another solid year for our stakeholders at brings Craig the amazing efforts of our team delivered high single digit top line and double digit adjusted EBITDA growth for the quarter contributing to adjusted EBITDA of $83 8 million for the year.
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Driving these results were continued demand from our just because especially gauging occasion guests and improvement in our private dining business.
Combined with our team's ability to manage costs and drive efficiencies. We were very pleased to deliver year over year adjusted earnings per share growth of over 13%.
Quarterly results Aside 2022 was a year of many accomplishments for the Ruth's Chris T.
You recall, we started the year with the goal to deliver on our total return strategy for shareholders and that began with organic growth, including new restaurants, Remodels and digital technologies.
It also included smartly allocating capital on behalf of our shareholders and we believe we were able to accomplish both.
During the year, we successfully opened four new company operated restaurants, including one in the territory. We acquired from a franchisee on long Island, New York and relocated and redesign our Winter Park, Florida restaurants.
As a group. These five restaurants have continued to perform above our expectations were.
We are especially encouraged by the October relocation of our Winter Park restaurant, which has outperformed its former location by over 35% in November and December combined.
This is due to a new contemporary design that gives our GAAP different dining room experience options with increased energy from a new bar design and a larger outdoor dining space.
Winter Park floor plans and interior and exterior design elements will serve as a model for future, new restaurants, and relocations as well as remodels as structures allow.
We are pleased to report that our data digital transformation projects is now well underway and we are happy to announce that we have completed phase one with great success our.
Our investments in this area have been important to our total return strategy as they have enabled us to elevate the guest experience and increase productivity across our entire operation.
One of the most exciting accomplishments this year with the development of our proprietary demand forecasting platform, which seamlessly integrates with our labor management system to create more efficient schedule.
We are pleased to report that these efforts resulted in a 10% improvement in hours per entre translating to approximately 200 basis points of labor improvement over pre pandemic levels for the year.
It is important to note that we were able to achieve these results despite facing record high wage increases and adding managers back to most of our highest volume restaurants.
In addition, we have implemented new proprietary processes that leverage our data platform, allowing us to improve capacity and table management.
This has been especially effective on our busiest days, including Fridays Saturdays and holidays, resulting in an increase in sales during these peak period.
Finally, we're excited to share that we have completed the rollout of our hospitality app to all restaurants.
Although it is still early days, we are seeing a positive impact on repeat visits overall.
Overall, we are proud of the progress we have made in our data digital transformation and we are confident that these investments will continue to drive value for our guests and our shareholders in the years to come.
Mark Cup event, our recently appointed Chief Commercial Officer will spearhead these efforts and ensure that our investments in digital support the evolution of the Ruth's Chris brand.
The final piece of our total return strategy in 2022 with smartly allocating excess capital for the year, we repurchased $29 $6 million worth of shares we paid $18 3 million in dividend payments and we've reduced debt by $40 million.
In February we also announced an increase of our dividend to <unk> 16.
Which will be paid in March and has the highest dividend we've ever paid.
Along with investments in new restaurants existing assets and our technology platform. We believe this balanced approach best positions our shareholders for value creation in the long run.
I am pleased to say, our 2023 playbook reads much like 2022.
Before I talk about this year's portfolio development, let me quickly touch on the planned closure of our Manhattan location.
As you May have heard after 30 years of serving guests. We are closing our New York City restaurant in April we've decided not to renew the lease due to a shift in the trade area and fully intend to open at least one new Manhattan location by the end of 2025.
These plans allow us to relocate and redesign our New York City presence to better serve the market.
In 2023, we expect to open five company restaurants, including one new opening in a casino resort in Michigan.
In addition to these new openings, we expect one relocation in the second quarter and as many as 10, remodels and refreshes to our portfolio throughout the year.
In addition to this development we are excited that one of our franchisees will open our first Ruth's, Chris Steakhouse restaurant in Iowa.
This year, we will also embarked on phase II of our digital journey.
As part of this effort will be developing our new inventory platform, which we expect to drive at least 25 basis points of margin improvement over time.
The platform is scheduled for testing throughout 2023. In addition, we are launching a new data driven digital paid media program.
Our third priority in 2023 will be the launch of the first phase of an elevated guest experience <unk>.
Specifically over the next 12 to 18 months, we will be rolling out Rus re imagined to the entire system.
The program includes new hospitality training and standards uniform table presentation, and small wares will also introduce a refresh menu and new bar program.
Our guests have shown that they want variety not just an option, but also in price points.
And a test of our prior bar menu.
We experienced double digit growth in average check as guest trade up to more premium offerings.
To conclude 2023 is an exciting year for us that was a new unit growth relocations and Remodels, along with digital investments and new programs to accelerate both top and bottom line growth in our existing fleet and managing excess capital on behalf of our shareholders.
While we acknowledge there is some uncertainty around the economy, our strong balance sheet and free cash flow allows us to plan and continue investing in the future.
We look forward to keeping you up to date throughout the year as we roll into these initiatives with that I'll turn the call over to Christie to cover the specifics of the quarter.
Thank you Cheryl for the fourth quarter ended December 25, 2022, we reported GAAP net income of $12 4 million or <unk> 38 per diluted share compared to $13 8 million or <unk> 40 per diluted share last year.
non-GAAP diluted earnings per common share was <unk> 38, compared to 34 in the prior year quarter adjusted EBIT for the quarter was $24 million compared to $21 4 million in the same quarter last year. Please refer to our earnings release for reconciliations of non-GAAP measures.
Our strong quarterly results were driven by total revenue growth of nine 2%, including company operated restaurant sales growth of approximately nine 6%.
Comp sales for the quarter increased four 5% versus 2021 and increased five 5% compared to 2019.
<unk> weekly sales during the quarter were 130000 versus 123000 in 2021 and $118 8000 in 2019. Please.
Please note going forward, we will no longer provide 2019 at the comparison period.
Franchise income for the quarter was $5 8 million up six 1% versus the same period last year, driven by a comparable franchisee sales growth of two 3%.
Food and beverage costs improved versus the prior year quarter by 93 basis points to 33, 2% as beef prices declined approximately 4%, partially offset by a 1% increase in the balance of our commodity basket.
To give you a sense of the impact of beef prices on our overall financial performance, we estimate that a 10% change in beef cost would impact EBITDA by approximately $6 million to $7 million on an annual basis, all else remaining equal.
Labor expense for the quarter was 2020 versus 2021 increased 200 basis points, primarily due to hourly wage increases of approximately nine 5% and increased management labor due to higher wages as well as more managers per restaurant versus the same time last year.
When compared to 2019 management labor expense was better by 105 basis points.
Moving beyond restaurant expenses, combined marketing and G&A as a percent of revenues was nine 7% compared to 11, 6% in the fourth quarter of 2021, reflecting the timing of expenses related to bonus accruals and data digital initiatives.
For the quarter, we repurchased approximately 905000 shares for a total cost of $14 7 million and we paid $4 6 million in dividend payments.
As of December 25, we had approximately $23 million in cash on our balance sheet and our outstanding debt was $30 million.
In addition, subsequent to the end of the fourth quarter, we paid down $15 million of debt, leaving $15 million on the balance sheet as of today.
2022 delivered record revenue for the full year and our start to January was strong with comp sales of about 17% as we lapped omicron in January of 2022.
Starting in February and carrying through July the comparisons get more difficult as we lap against the countries reopening post omicron and record high top sales from last year.
And the last week of the quarter, we will be taking a price increase of approximately 3% and as a reminder, we took three 4% price during the same week last year.
From a cost of goods sold perspective, we will not be guiding for the first quarter or full year, given the volatility in the beef markets, which makes up about half of our basket. However, I will say that in January our cost of goods sold was 33, 3% driven by an increase in beef of 12% versus.
Prior year.
Offset by the rest of the basket, which was down mid single digits.
With that I'll now turn the call back to Cheryl for a few closing comments. Thank you Christy.
Our success over the past two years is a real testament to the grit and determination of our team and franchise partners and their ability to adjust quickly to change through their efforts. We've achieved record revenue opened successful new restaurants invested in new technologies to increase efficiencies and pay down debt.
And continued to return cash to shareholders and we accomplished this through a global pandemic generationally high inflation and numerous macro challenges.
Going forward I believe the next couple of years can be as productive as in the past. We believe we can open at least 10, new restaurants and relocate up to three more utilizing our refreshed and enhanced brand standards.
We'll also continue to embrace technology as we've discussed today and allocate excess capital to shareholders as appropriate.
The levers at our disposal have never been stronger and I am excited for what our team and franchisees will deliver.
Thank you for joining us on the call. This morning, and we look forward to taking your questions Latanya. We please open up the lines.
We will now conduct a question and answer session.
Like to ask a question. Please press star one on your telephone keypad.
As a confirmation tone will indicate your line is there any question in queue. You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys once again Thats star one at this time, one moment, while we pull for first question.
Our first question comes from Brian Vaccaro with Raymond James. Please proceed.
Hi, Thanks, and good morning.
I wanted to start out with the Winter Park redesign I haven't had a chance to see it yet, but I'm sure. Many many moons ago. We had you had ruth's two point and could you just provide a little more color on some of the key sort of guest facing changes of the new.
Winter Park redesign and does it include both interior and exterior elements.
Thanks, Brian , Yes, and yes. It was reached to point out that as we were coming and approaching 2020, we had a plan put together for the redesign of restaurants as well as some programming changes.
And then obviously COVID-19 hit so this is exciting for us this restaurant within plan.
We were able to fulfill those plans and as you can see to have great success at a lot of those changes, yes. So both exterior and interior of a lot of changes based on guest feedback we have about that the next generation and how they want to dine in so specifically larger patios.
Outdoor experience elevations on the restaurant, explaining who we are as a brand and what weight them inside a lot of work done around that also offering different dining room experiences. So we know we have a loyal and faithful special occasion guests and we have an opportunity in our restaurants for those folks.
But when a common celebrate those those moments together in a more formalized comfortable.
Setting and then we also have what we are calling this specific restaurant the atrium, which is a separate dining room off the bar, which allows for a bit of a more energized dining experience for those more frequent guests and.
And it's working out well. So we're excited to continue to monitor that Brian and see how we can then take the elements that work best for us to enroll them into future restaurants as well as remodels.
Alright, great that's helpful and Christine on the Remodels.
What's the average investment that you expect here on up to 10 in 2023.
And what sort of a sales lift do you expect to achieve in them or what's sort of the breakeven on a comp lift do you need to achieve an ROI on that investment.
So on the investment overall in that time that we're talking about is a combination of both what we'll call major remodels, which will be between $1 million, five and $2 million as well as.
More minor remodels, which include carpet and chairs and we will be testing the new exterior on a few of those as well this year that will be somewhere between 600, and a $1 million depending on what we can do with that exterior and <unk>.
How much we need beyond just carpet and chairs and these restaurants to make sure we provide.
Our refreshed experience for the guests.
So that's reflected in the capital guidance that we gave.
We're very encouraged by the information that we're seeing out of Winter Park and we just completed in late in the fourth quarter. A couple of more remodels. So I'm not going to share any kind of ROI guidance at this point in time, but we would expect over time as we learn even more about the winter Park restaurant.
To put the right elements into the restaurants to make sure we deliver those 20% return on an investment as we need to given those investment levels.
Alright, great and circling back if I could just one more on the fourth quarter comp performance could you just provide a little more color on what you saw across sales channels and maybe some perspective on how the private dining side of the business performed and kind of how that compared to pre COVID-19 levels.
In the fourth COVID-19, just to frame that a bit for us.
Sure so from a private dining perspective every month in the quarter got better. So just as a reminder, first quarter was down 52nd and third quarter were down about 25, each as we went into fourth quarter we were.
We're still on that down.
Mid twenties range and as we got to the December we were down 14%. So the total quarter was down 16% versus 2019, when we look at the other channel, which you might be referring to which is ruth's anywhere we were at about four and a half thousand per restaurant per week and so that was.
The overall on the channels.
Okay, and then just one quick clarification I think you mentioned comps up 17% that was for <unk> for the five weeks in January .
January specific just January specific okay, and would you be willing to just level set where average weekly sales are because these these comps year on year three year that gets a little disorienting.
Sure So 126000 for January .
Perfect Alright, I'll pass it along thank you.
The next question comes from Todd Brooks with Benchmark Company. Please proceed.
Hey, Thanks, good morning, everybody.
Following up on Brian's question around winter quality, if you look at the existing base. How many do you think would support a winter park.
We model going forward and.
Kevin.
What that kind of universe looks like does that change the balance of.
Maybe new unit growth.
<unk> Remodels as we look to 'twenty four 'twenty five.
Yes, that's a great question Todd.
So as we think about the existing portfolio, we probably have about 50% of the restaurants.
You wouldn't be required to do major structural changes to put some of the elements and again I think Christie described it well.
You don't have necessarily a big build the exact floor plan and existing restaurants to get some of the benefit of the new programming and new design elements and that's really what we're going to go forward with this year to understand how much of that is related to exterior work how much is related to having the opportunity to have a dining room off the bar and I'll give you an example.
We opened the Marina del Rey.
Six years ago, now and it.
It has an opportunity for having a dining room off the bar. So there are some existing restaurants.
That have an opportunity to kind of slide right into what winter Park.
Offering from a programming perspective.
So I do think coming forward as we put some of these exterior programs to work and we continue to study Winter Park, we will talk about what that means for our remodel program not prepared to give you that just yet.
Okay, great. Thanks.
Secondly, if we look at.
Christy This is just to make sure so pricing ran what level in Q4, and then I think youll roll off about 40 basis points net at the end of March from what you said earlier in the call, but then what's the outlook for further pricing in the remainder of the year.
Sure so pricing versus 21 in the quarter of quarter four was four 9%.
You are correct, we roll off.
So first quarter. This year, we lose at 40 basis points, you discussed and for the full year, we expect pricing based on this only this one pricing increase which again, we will look again and about midyear into September for another another opportunity to take price depending on the dynamics of the cost and inflation environment, but.
Based on what we know today and the price increase we are taking in March we you should expect about 4% full year pricing up for us.
Okay, Great and a final one for me and I'll jump back in the queue also.
You gave us some sensitivity around beef cost trends relative to EBITDA.
From a full year standpoint.
Prime which looks like it or beef, which looks like it was favorable.
In the fourth quarter.
It seems to have ticked up here.
In January with what you talked about from a Cogs standpoint.
Can you talk and as you possible to talk about our full year outlook.
It would be maybe the willingness of counterparties to to contract at least let you get some of your needs locked in going forward to take put some stability around our cost level versus being at.
At the whim of kind of how the market moves here yes.
Yes, I can I can tell you there's been a lot of discussion around beef always for us, but and even elevated amount of discussion. Most recently January did tick up a little bit I will tell you February has come down from those highs.
The reality of the situation with beef as is the herd sizes down and until we can bring that back up which will take some time, we are going to see some <unk>.
<unk> on beef to your point about can we lack we are always actively pursuing where we can lock portions of the basket and were taking smaller locks wherever we can in addition to larger blocks, where where we can but right now we don't have any significant locks.
On our beef right now.
Okay, perfect I'll jump back in thanks.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. The next question comes from Joshua Long with Stephens. Please proceed.
Hi, This is Daniel <unk> on for Joshua Thank you for taking my questions.
First.
Could you quantify the headwind from the Boston and Manhattan, Hawaii markets this past quarter.
Sure the impact was about 480 basis points.
Okay. All right. Thank you that's helpful and then.
On your proprietary demand platform, you talked about a 10% improvement in hours per entre.
Great.
Our bps of labor improvements do you think theres any more incremental labor cost benefits you think you could pull out from these initiatives.
As we go into 2023, I think good size around 105 bps of labor, if I heard that correctly.
Yes, so I would tell you that the actual efficiency metric with beyond the 200 bps, but obviously, we have average hourly rate increases and adding managers back and if you look back at the quarter, we started with significantly higher basis point improvement, but we have been adding managers back into the restaurants every quarter in order to protect against.
Experienced overall from a go forward basis, I think our opportunities are much more than that.
Cost of goods line and food and beverage line than they are in the labor line. We we.
Obviously are experiencing like everybody changes in staffing, which requires more training costs. I think we are committed to keeping the efficiency in our hours per entre.
Going forward the ones that we've captured already but I do not see more coming in the in that particular area for us in the short run.
Okay. Thank you that's helpful.
That's all.
The next question comes from Andy Barish with Jefferies. Please proceed.
Hey, good morning, everyone.
Good morning.
Just wondering.
On <unk>.
Some of the.
On the moving parts for 'twenty three I mean, it sounds like there is going to be a significant amount of.
Investment going on in experience in digital.
Paid media costs.
Just kind of how you're thinking about that.
As it rolls through.
The P&L.
And maybe maybe the extra week.
Kind of an offset just.
A couple of those factors if you could provide a little bit more color. Please.
Yes, so as we're thinking about I think your first question was on capital investment.
The $40 million to $50 million, we guided a little tighter obviously, but on an ongoing basis, especially given the remodels and the refreshes that we're doing which are important to us.
The paid media test is complete and so all of the costs associated with that are in the guide that you saw from a marketing perspective.
All of the costs associated with launching that paid media program based on the results of our test are in that number already.
Yeah.
Got it and then what about the kind of small wares menu uniforms stuff like that got it yes. So obviously.
Built into our overall I'm not going to give an exact dollar out per restaurant, but.
It's not overly significant and I would say that as we think about our other op as a percentage of sales versus where you would find some of the small wares will be relatively consistent on a percentage of restaurant sales perspective.
Okay and then.
Anything else kind of on.
The two I guess.
That we should be we should be looking for.
As the year goes on.
Yes, so I'll speak about turning to currency.
We've rolled out the idea of having our data transformation. There are several use cases that we're coming forward and so the big one we're focused on this year and I mentioned in my comments is around inventory and Cogs bankruptcy, followed up on that as we think thats an opportunity for us we look forward to testing that throughout the year.
The big one for us this year getting the hospitality App and now that it's fully rolls and understanding how that could impact kind of topline guest experience guests out et cetera is a big focus for us and then again the other the rollout on Vince we imagine that the environment for this year.
Yeah, and I'll, just add that Sheryl mentioned that at 25 basis points of improvement with the inventory I think many of US believe that that is a very modest assumption, but we do need to do a detailed test for this this is a very complicated change for our operators and we want to make sure.
We take some of the learnings from the rollout of both our new Pos and our labor management system and spend a little bit more time and test than we had originally planned to get this right and make sure that we capture the greatest amount of savings in food by having the inventory system in place.
Yeah.
Great appreciate the color. Thank you.
Okay.
The next question is a follow up from Brian Vaccaro with Raymond James. Please proceed.
Hi, Thanks, So I just wanted to circle back on margins and I guess on commodities.
I think you said that the non beef basket was up 1% in.
In the fourth quarter.
How do you expect inflation on the non beef basket to play out moving through 'twenty three I'm, just wondering how much visibility via contracts in place you have on that non beef basket.
So we expect it to be down about mid single digits for the year based upon those contracts that we have.
Some of our seafood, particularly seafood product, obviously theres still some exposure in areas like dairy.
We have to offset and it's based on the visibility we have we do have local restaurant purchases in some areas, including produce and so we'll have to see how all that shakes out but based on the direct visibility that we have down mid single digits is what we're planning for.
Okay, Great and then on labor if I could just ask Christie I think you said labor was up about 200 bps year on year.
But favorable versus pre COVID-19 by about 100 basis points.
Do you I think in previous calls you've expressed confidence that you could sustain sort of call. It 200 basis points of labor favorability.
Still think that's achievable.
And then I guess the other question is just on wage inflation. What are your expectations are you starting to see that moderate I think you set up 9% or 10% nine and a half in the fourth quarter. What are you expecting on wage inflation through 'twenty three thank you.
Yes. So so were 193 bps better versus 2019, and our 200 basis point guide was always versus 2019. So we're going to we're going to keep that efficiency, but clearly our ability to take price to offset wages is going to.
Flow through and impact our basis point change for this year on labor I think we're in a good place where we feel pretty satisfied that the pricing. We're taking can offset a lot of the wage inflation, we're going to see.
But we are still expecting mid to probably mid single digit levels of inflation in both hourly and management wages as we work through the year.
Okay. So that that helps clarify it so the total labor was down 190 bps. It was the management labor and you were saying that was that Audrey.
Perfect. Okay. Thanks, so much.
Thanks, Brian .
Next follow up question comes from Todd Brooks with benchmark. Please proceed.
Hey, Thanks, just a couple quick follow ups, if I can I know that we've been talking about Manhattan is one of the three laggard markets, but can you walk through the impact of closing that store managers, how should we think about what type of volume store was that what type of it should not be too.
Revenues for <unk>.
Back half of the year.
The volume the post Covid volume metric, we were giving it to you in percentages before I'd say, it's about an average volume restaurants. So.
Six to $6 5 million overall, obviously.
There is.
I'm not going to give the exact ROI number that that one did but you can do the math on what we do.
Thing from Us.
Restaurant operating income perspective there.
Okay, Great and then I wanted to follow up Chris.
We didn't touch much on the consumer and how they behaved across holiday how they build trucks.
Attach rates on apps desserts alcohol any changes <unk> for you there and.
As a follow on to that any color you can give us on gift card sales year over year, if that's if that's changed or accelerated.
<unk>.
So.
From a check perspective, we were still seeing some trade up.
Two more apps are higher cuts of beef et cetera.
It's moderated a bit from what we were seeing earlier in the year, but adding science et cetera. So that's still.
Still a positive to us from a check perspective overall from a gift card perspective.
Okay.
We were up low single digits.
From 21, Okay.
Great. Thanks.
Thank you at this time I would like to turn the call back over to management for closing comments.
Thank you everyone for joining the call. This morning and for your questions and we look forward to updating you again soon.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.