Ruth's Hospitality Group, Inc.

Good morning, ladies and gentlemen. Welcome to today's Ruth Hospitality Group Third Quarter 2021 Earnings Conference Call. At this time, our participants are in electronic mode. Following the company's formal remarks, we will conduct a question and answer session. Instructions will be provided at that time for your queue up for the questions. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Christy Chipman, Chief Financial Officer. Please go ahead.

Thank you, LaTonna, and good morning, everyone. Joining me on the call today is Cheryl Henry, our president, chief executive officer, and chairperson of the board. Before we begin, I'd like to remind you that part of our discussion today, we will include forward-looking statements. These statements are not guarantees of our future performance, and therefore, undue reliance should not be placed upon them. We would also encourage you to refer to the investor relations section of our website at rhgi.com, as well as the SEC's website at sec.gov for copies of today's earnings press release and our recent filings of the SEC for a more detailed discussion of the risks that could impact our future operating and financial results. During this call, we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today's call. I would now like to turn the call over to our Chief Executive Officer Cheryl Henry. Thank you, Christy, and good morning, everyone. Our third quarter results demonstrated our team's continued operational excellence in a challenging and dynamic environment. Our performance also reminded us of how sought after the Ruth's Crisp brand experience is and how our guests trust our commitment to safety, quality, and the genuine hospitality that our team members and franchise partners have delivered for more than 56 years. During the quarter, we generated solid revenue growth, including a comparable sales increase of approximately 8% relative to 2019. The improvement over 2019 was especially notable, given a negative 700 basis point impact from our Boston, Hawaii, and Manhattan markets, which, as we have discussed, have not fully recovered from the effects of the pandemic. Excluding these markets, comps were up about 15% over 2019. In terms of margins, we were also able to deliver improvement over 2019, driven not only by strong sales, but also by our operations team and the efficiency initiatives they've worked on for the last 18 months. As far as the fourth quarter to date, I'm pleased to say our comparable sales remain approximately 11% above 2019, excluding the six restaurants in the three markets I just discussed. Embedded in that comp number is softer performance in private dining, which has not returned as quickly as our main dining room. Having said that, we have recently seen an uptick in inquiries for holiday season events and are working to convert those to booked events. We also expect to see some rebound in Hawaii in the fourth quarter and more so early next year as the state welcomes tourists again beginning in November. As far as the state of the business generally, despite near-term external pressures and uncertainties, we are committed to investing in the long-term health of the business. An important part of that is ensuring that when our guests return to our restaurants, they are welcomed with world-class hospitality and safety. This requires not only hiring exceptional team members, but investing the time and resources to train them. Beyond investments in hiring and training, a second bucket of investment is growing our restaurant base. In late September, we successfully opened in Shore Hills, New Jersey. We're pleased that sales performance to date has been better than our system average, demonstrating the enthusiasm guests have for Ruth Chris when we enter new markets. To build on this momentum, we will open an additional company-owned restaurant in Lake Grove, New York, before the end of the year, and are on track to open five new restaurants in 2022, including one management agreement. We also have a solid pipeline for 2023 and currently anticipate signing additional leases by the end of this year. The third bucket of investment is enhancing our ability to use advancements in data and digital technologies. As you've heard me say before, this effort is focused on three areas for us. Enhancing the guest experience, reducing friction in the restaurant, and driving operational efficiencies. To realize the full-scale benefits of this initiative, we have been working to replace old and introduce new technologies into our restaurants. For example, in the third quarter, we made progress implementing our POS and labor management systems with a full rollout expected in the first quarter of 2022. In addition to the foundational technology, we've been mining our data and testing several ways to automate restaurant insights to deliver on these priorities. For example, we are testing a proprietary approach to use guest data to enhance the guest experience. The intent is to better understand why our guest visit routes and make sure each visit is further personalized by our staff. Another example that targets both the top line and bottom line is a pilot linked to maximizing our capacity in the restaurant while managing labor hours. Early results are positive, and we expect a system-wide rollout to begin by the end of November. While these technology initiatives may take time to roll out and refine, we're confident that when we reach full scale, they will help us drive sales and operating efficiency through a more productive menu better labor management, and demand forecasting. Now, it's important to note that all of these investments are possible because of our financial position, which has allowed us to make investments in organic growth while returning capital to shareholders. During the third quarter, we repurchased 192,000 shares of our common stock, and we're thrilled to be able to resume buyback as part of our total return strategy. We also entered into a new credit agreement, which not only increased the size of our facility, but also provided us with more favorable terms, including additional flexibility with regards to capital expenditures, share repurchases, and potential dividends. In closing, we are encouraged by our continued sales momentum and strategic progress. I reiterate, at the core of this success is our team members and franchise partners, who have remained resilient and committed to excellence. They have provided an amazing and consistent guest experience, which is the core of what Ruth Chris must do every day. I will now turn the call back to Christy Chipman to cover the specifics of the quarter. Thank you, Cheryl. For the third quarter ended September 26, 2021, we reported gas net income of $6.9 million or 20 cents per diluted compared to a net loss of $5.3 million or a $0.15 loss per diluted common share during the third quarter of 2020. Excluding adjustments, non-GAAP diluted earnings per common share was $0.20 compared to a loss per common share of $0.04 in the third quarter of 2020. Please refer to our earnings release and related disclosures for a reconciliation of the GAAP to non-GAAP net income. Total revenues for the quarter were $104.2 million compared to $63.4 million in 2020. Company-owned restaurant sales were $97.5 million compared to $58.6 million in the prior year. Comparable restaurant sales for the quarter versus 2020 increased 66.8%, and compared to 2019, they increased 7.6%. By month, comp sales were positive 16.3% in July, 1.9% in August, and 3.3% in September. Comp sales dropped to positive single digits in the last two months of the quarter as the Delta variant moves through our largest market. We are pleased that despite the variant, guests felt safe dining in our restaurants, and we averaged weekly sales of nearly 103,000 versus 93,000 in 2019. Franchise income for the quarter was $4.7 million, up 35.1% versus the same quarter last year, while other operating income was $1.9 million. Overall, restaurant margins during the quarter 2021 were better by 80 basis points compared to third quarter 2019, despite rising inflation, particularly in food. Food and beverage costs for the quarter were 34.2%, Beef prices during the quarter increased approximately 65% compared to last year, and were up 47% compared to 2019. Our market basket experienced inflation of approximately 29% compared to Q3 2019, with most of this increase being in proteins, particularly beef, crab, and lobster. While this inflation is historically high, we remain committed to serving our guests fresh, prime-aged beef. Given the volatility within the supply chain and our inability to precisely predict cost of goods sold, we will not be providing further guidance for the fourth quarter or next year at this time. I'd now like to take a minute to address how we are thinking strategically about pricing as we move forward to offset the inflation we're experiencing. We have historically taken price in the 1% to 3% range, and this year's pricing to date has been over 4%. from the price taken in May and the one we recently did in September. While we are carrying more price this year, it remains below the inflation levels we are experiencing in the restaurant. With beef prices remaining at high levels, we reviewed pricing again recently and will be taking another price increase of 1.3% in mid-November. As I mentioned in our last call, we are thoughtful and surgical with these price increases to ensure we balance profitability with the value we've been known for in the fine dining category, and we will continue to approach pricing with this lens. Our efficiency initiatives continued to benefit us during the quarter, with labor as a percentage of sales improving 414 basis points compared to the pre-COVID third quarter of 2019. We began adding an additional manager back into our higher volume restaurants this quarter and expect to continue to add back on average one manager to most of our restaurants in 2022. Given our year-to-date results, we expect that we will end the year with our labor as a percentage of sales approximately 300 basis points better compared with full year 2019. G&A increased 100,000 compared to the third quarter of 2020 to 7.7 million. This increase was primarily due to an increase in performance-based comp-related expenses. Full-year G&A is expected to be between 32 million and 33 million. At the end of the quarter, we had 83.8 million in cash, and our outstanding debt remained at 70 million. Our cash balance as of October 27th was 84.6 million. With that, let me turn the call back to Cheryl. Thank you, Christy. In closing, we feel very good about our sales momentum. We've taken price to the degree that we can, but make no mistake, we will not jeopardize our long-term brand position for short-term quarterly gain. Preserving our brand positioning is critical for long-term success. We also feel very good about our pipeline of new restaurants and the strategic progress we're making in the areas of technology and training. You simply can't deliver solid long-term financial performance without unit growth, greater efficiency, and attention to detail within our four walls. This all translates into confidence that we can continue to create value for our shareholders as the virus abates and the economy recovers, and obviously longer term. We look forward to the remainder of 2021 and continuing to execute against our plans in 2022. With that, I will turn the call over to questions.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star 2 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. One moment while we poll for our first question. Our first question comes from Nicole Miller with Piper Sandler. Please proceed.