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RUTH > SEC Filings for RUTH > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for RUTHS HOSPITALITY GROUP, INC.


6-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" that reflect, when made, the Company's expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words "believe," "anticipate," "expect," "estimate," "intend," "project," "will be," "will continue," "will likely result," or other similar words and phrases. Similarly, statements herein that describe the Company's objectives, plans or goals also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company's forward-looking statements. Some of the factors that could cause actual results to differ include: changes in economic conditions and general trends; the loss of key management personnel; the effect of market volatility on the Company's stock price; health concerns about beef or other food products; the effect of competition in the restaurant industry; changes in consumer preferences or discretionary spending; reductions in the availability of, or increases in the cost of, USDA Prime grade beef, fish and other food items; labor shortages or increases in labor costs; the impact of federal, state or local government regulations relating to Company employees, the sale or preparation of food, the sale of alcoholic beverages and the opening of new restaurants; harmful actions taken by the Company's franchisees; the Company's ability to protect its name and logo and other proprietary information; the impact of litigation; and the restrictions imposed by the Company's Amended and Restated Credit Agreement. For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2012, which is available on the SEC's website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

Unless the context otherwise indicates, all references in this report to the "Company," "Ruth's," "we," "us", or "our" or similar words are to Ruth's Hospitality Group, Inc. and its subsidiaries. Ruth's Hospitality Group, Inc. is a Delaware corporation formerly known as Ruth's Chris Steak House, Inc., and was founded in 1965.

Overview

Ruth's Hospitality Group, Inc. is a leading restaurant company focused on the upscale dining segment. The Company owns the Ruth's Chris Steak House, Mitchell's Fish Market, Columbus Fish Market, Mitchell's Steakhouse and Cameron's Steakhouse concepts.

As of September 29, 2013, there were 138 Ruth's Chris Steak House restaurants, of which 63 were Company-owned, 74 were franchisee-owned, and one location was operating under a management agreement. All Company-owned restaurants are located in the United States. The franchisee-owned restaurants include seventeen international franchisee-owned restaurants in Aruba, Canada, China (Hong Kong), El Salvador, Japan, Mexico, Singapore, Taiwan, and the United Arab Emirates. Three new Ruth's Chris Steak House locations opened during the thirty-nine weeks ended September 29, 2013, including a second franchise restaurant located in San Juan in April 2013, a franchise restaurant located in Chattanooga, TN in July 2013 and a franchise restaurant opened in early 2013 in Las Vegas, NV under a licensing agreement with Harrah's Casino under which we receive a fee as a percentage of sales. Due to an expiring lease term, we closed our Ruth's Chris Steak House Company-owned restaurant in Phoenix, AZ, on March 31, 2013. Our Ruth's Chris Steak House in Houston, TX was relocated in July 2013. A franchise restaurant located in Dubai was closed in July 2013. We are targeting to open four new Company-owned restaurants in 2014 - one each in Denver, CO, Dallas, TX, Gaithersburg, MD and Los Angeles, CA. We expect that a franchisee will open one new restaurant during the remainder of 2013.

The Company operates 19 Mitchell's Fish Markets and three Cameron's Steakhouse restaurants, located primarily in the Mid-west and Florida.

In January 2013, we signed an agreement with the Ko Group for the development of four new franchised Ruth's Chris Steak House restaurants to be opened in People's Republic of China over the next three years. The new restaurants are planned for Shanghai and Beijing and will be the first Ruth's Chris Steak House restaurants in People's Republic of China. The Ko Group has had success as an existing franchisee with seven restaurants in Hong Kong, Japan, Taiwan, and Singapore.

Our business is subject to seasonal fluctuations. Historically, our first and fourth quarters have tended to be the strongest revenue quarters due, in part, to the year-end holiday season. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular period may decrease.


Our Annual Report on Form 10-K for the fiscal year ended December 30, 2012 provides additional information about our business, operations and financial condition.

Results of Operations

The table below sets forth certain operating data expressed as a percentage of total revenues for the periods indicated, except as otherwise noted. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

                                                     13 Weeks Ended                          39 Weeks Ended
                                            September 29,       September 23,       September 29,       September 23,
                                                2013                2012                2013                2012
Revenues:
Restaurant sales                                     95.3%               95.9%               94.8%               95.4%
Franchise income                                      3.9%                3.9%                3.6%                3.5%
Other operating income                                0.8%                0.2%                1.6%                1.1%
Total revenues                                      100.0%              100.0%              100.0%              100.0%

Costs and expenses:
Food and beverage costs (percentage of
restaurant sales)                                    31.4%               31.8%               31.0%               32.0%
Restaurant operating expenses
(percentage of restaurant sales)                     55.5%               55.4%               51.0%               51.6%
Marketing and advertising                             2.3%                2.6%                2.6%                2.3%
General and administrative costs                      8.2%                7.1%                7.3%                6.8%
Depreciation and amortization expenses                3.5%                4.2%                3.3%                3.9%
Pre-opening costs                                     0.4%                0.2%                0.2%                0.1%
Gain on settlements                                  (2.4% )              0.0%               (0.7% )              0.0%
Total costs and expenses                             94.6%               97.8%               90.3%               92.7%
Operating income                                      5.4%                2.2%                9.7%                7.3%


Other income (expense):
Interest expense, net                                (0.5% )             (0.8% )             (0.5% )             (0.6% )
Debt issuance costs written-off                       0.0%                0.0%                0.0%               (0.3% )
Other                                                (0.1% )              0.0%               (0.0% )              0.0%

Income from continuing operations before
income tax expense                                    4.9%                1.4%                9.2%                6.4%

Income tax expense                                    1.5%                0.4%                2.6%                1.9%

Income from continuing operations                     3.3%                1.0%                6.6%                4.5%

Income (loss) from discontinued
operations, net of income taxes                      (0.1% )             (0.1% )             (0.4% )             (0.0% )

Net income                                            3.3%                1.0%                6.2%                4.5%

Preferred stock dividends                             0.0%                0.0%                0.0%                0.2%
Accretion of preferred stock redemption
value                                                 0.0%                0.0%                0.0%                0.0%
Excess of redemption value over carrying
value of preferred shares redeemed                    0.0%                0.0%                0.0%               12.7%

Net income (loss) applicable to
preferred and common shareholders                     3.3%                1.0%                6.2%               (8.4% )

Third Quarter Ended September 29, 2013 (13 Weeks) Compared to Third Quarter Ended September 23, 2012 (13 Weeks)

Overview. Operating income for the third quarter of fiscal year 2013 increased from the third quarter of fiscal year 2012 level by $2.9 million to $4.8 million. Operating income for the third quarter of fiscal year 2013 was favorably impacted by a $3.5 million increase in restaurant sales which was somewhat offset by increased restaurant operating expenses. Higher restaurant sales were attributable both to an increase in the number of customers as measured by an increase in entrées and an increase in average check. Operating income for the third quarter of fiscal year 2013 was also favorably impacted by an aggregate gain of $2.2 million, net of fees incurred, from the settlement of two casualty loss claims which previously arose. Net income for the third quarter of fiscal year 2013 increased by $2.1 million to $2.9 million as compared to the third quarter of fiscal year 2012.


Segment profitability information is presented in Note 6 to the financial statements. Not all operating expenses are allocated to operating segments. The Ruth's Chris Steak House, Mitchell's Fish Market and Cameron's Steakhouse restaurant concepts in North America are managed as operating segments. The concepts operate within the full-service dining industry, providing similar products to similar customers. For financial reporting purposes, the Ruth's Chris Steak House and Cameron's Steakhouse restaurants are both included in the Company-owned steakhouse restaurant segment. The Company-owned fish market restaurant segment consists entirely of Mitchell's Fish Market restaurants. The franchise operations are also considered to be a separate operating segment. Third quarter segment profits for the Company-owned steakhouse restaurant segment increased by $1.1 million to $10.5 million from the third quarter of fiscal year 2012. The increase was driven by increased revenues. Third quarter segment profits for the Company-owned fish market restaurant segment decreased by $146 thousand to $1.1 million from the third quarter of fiscal year 2012 due to a decrease in revenues. The $0.2 million increase in franchise operations segment profitability is attributable to four new locations and an increase in comparable franchise restaurant sales.

Restaurant Sales. Restaurant sales increased $3.5 million, or 4.3%, to $84.4 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. The increase was attributable to a $2.2 million increase in Company-owned comparable sales for all brands and $1.3 million in restaurant sales from an increase in operating weeks. Excluding discontinued operations, total operating weeks for all brands during the third quarter of fiscal year 2013 increased to 1,102 from 1,092 in the third quarter of fiscal year 2012. Company-owned comparable restaurant sales for Ruth's Chris Steak House increased 4.2%, which consisted of an entrée increase of 3.2% and an average check increase of 0.9%. Company-owned comparable restaurant sales at Mitchell's Fish Market decreased 1.4%, which consisted of an entrée decrease of 4.8% and an average check increase of 3.5%.

Franchise Income. Franchise income increased $0.2 million, or 7.4%, to $3.5 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. The increase was driven primarily by four new locations which opened since September 2012. An increase in comparable franchisee-owned restaurant sales of 1.4% (which included a 1.8% increase in domestic comparable franchisee-owned restaurant sales partially offset by a 0.6% decrease in international comparable franchisee-owned restaurant sales) was offset by the closing of one location in July 2013.

Other Operating Income. Other operating income increased $0.5 million to $0.7 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. The increase was attributable to a $0.1 million increase in our management fee and our share of income at the Cherokee location and a $0.3 million increase in gift card breakage income in the third quarter of fiscal year 2013.

Food and Beverage Costs. Food and beverage costs increased $0.8 million, or 2.8%, to $26.5 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. As a percentage of restaurant sales, food and beverage costs decreased to 31.4% in the third quarter of fiscal year 2013 from 31.8% in the third quarter of fiscal year 2012. This decrease in food and beverage costs as a percentage of restaurant sales was primarily due to a 1.7% increase in menu pricing.

Restaurant Operating Expenses. Restaurant operating expenses increased $1.9 million, or 4.3%, to $46.8 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. Restaurant operating expenses, as a percentage of restaurant sales, increased to 55.5% in the third quarter of fiscal year 2013 from 55.4% in the third quarter of fiscal year 2012 primarily due to higher group insurance costs.

Marketing and Advertising. Marketing and advertising expenses decreased $0.2 million to $2.0 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. The decrease in marketing and advertising expenses in the third quarter of fiscal 2013 was attributable to a decrease in national advertising spending.

General and Administrative. General and administrative expenses increased $1.3 million to $7.3 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012 primarily due to a $1.4 million increase in performance-based compensation.

Depreciation and Amortization Expenses. Depreciation and amortization expense decreased $0.5 million to $3.1 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012 due to certain property and equipment becoming fully depreciated.

Pre-opening costs. Pre-opening costs increased $0.2 million to $0.3 million in the first thirty-nine weeks of fiscal year 2013 primarily due to the relocation of our Houston location in July 2013.

Gain on Settlements. During the third quarter of fiscal year 2013, the Company settled two casualty loss claims which previously arose and recognized an aggregate gain of $2.2 million, net of fees incurred. The majority of the gain pertained to compensation awarded by the claims administrator pursuant to the settlement agreement reached in litigation related to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico.


Interest Expense. Interest expense decreased $0.3 million to $0.4 million in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. The decrease in expense was primarily due to a lower average debt balance in the third quarter of fiscal year 2013.

Income Tax Expense. During the third quarter of fiscal year 2013, we recognized income tax expense of $1.4 million. During the third quarter of fiscal 2012 we recognized income tax expense of $0.3 million. The effective tax rate increased to 31.8% in the third quarter of fiscal year 2013 compared to 26.7% in the third quarter of fiscal year 2012.

Income from Continuing Operations. Income from continuing operations of $2.9 million in the third quarter of fiscal year 2013 increased by $2.1 million compared to the third quarter of fiscal year 2012 due to the factors noted above.

Net Income (Loss) Applicable to Preferred and Common Shareholders. Net income applicable to preferred and common shareholders was $2.9 million in the third quarter of fiscal year 2013 compared to $0.8 million in the third quarter of fiscal year 2012.

Thirty-nine weeks ended September 29, 2013 compared to thirty-nine weeks ended September 23, 2012

Overview. Operating income for the first thirty-nine weeks of fiscal year 2013 increased from the first thirty-nine weeks of fiscal year 2012 by $8.2 million to $28.7 million. Operating income for the first thirty-nine weeks of fiscal year 2013 was favorably impacted by a $13.6 million increase in restaurant sales which was somewhat offset by increased food and restaurant operating expenses. Higher restaurant sales were attributable both to an increase in the number of customers as measured by an increase in entrées and an increase in average check. Operating income for the first thirty-nine weeks of fiscal year 2013 was also favorably impacted by an aggregate gain of $2.2 million, net of fees incurred, from the settlement of two casualty loss claims which previously arose. Income from continuing operations increased from the first thirty-nine weeks of fiscal year 2012 by $6.8 million to $19.6 million. Net income for the first thirty-nine weeks of fiscal year 2013 was adversely impacted by loss from discontinued operations. The first thirty-nine weeks of fiscal year 2013 $1.2 million loss from discontinued operations, net of income taxes, includes a $1.2 million loss attributable to property we lease near the United Nations in Manhattan. We recognized the loss as a consequence of a remeasurement of our lease exit costs due to the subtenant abandoning the property. Net income for the first thirty-nine weeks of fiscal year 2013 increased from first thirty-nine weeks of fiscal year 2012 by $5.6 million to $18.3 million.

Segment profitability information is presented in Note 6 to the financial statements. Company-owned steakhouse restaurant segment profits for the first thirty-nine weeks of fiscal year 2013 increased by $6.6 million to $47.1 million from the first thirty-nine of fiscal year 2012. The increase was driven by increased revenues. Company-owned fish market restaurant segment profits for the first thirty-nine weeks of fiscal year 2013 decreased by $131 thousand to $5.1 million from the first thirty-nine of fiscal year 2012 due to a decrease in revenues. The $0.9 million increase in franchise operations segment profitability is attributable to four new locations and an increase in comparable franchise restaurant sales.

Preferred stock requirements are deducted from net income to arrive at net income (loss) applicable to preferred and common shareholders. During the first thirty-nine weeks of fiscal year 2012, we reported a $23.6 million loss applicable to shareholders due to the repurchase of all of the Company's Preferred Stock. We recorded a reduction of net income applicable to shareholders of $35.8 million in the first thirty-nine weeks of fiscal year 2012 to reflect the excess of the redemption value over the carrying value of the preferred shares redeemed.

Restaurant Sales. Restaurant sales increased $13.6 million, or 5.1%, to $282.3 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012. The increase was attributable to a $10.3 million increase in Company-owned comparable sales for all brands and $3.3 million in restaurant sales from an increase in operating weeks. Excluding discontinued operations, total operating weeks for all brands in the first thirty-nine weeks of fiscal year 2013 increased to 3,312 from 3,276 in the first thirty-nine weeks of fiscal year 2012. Company-owned comparable restaurant sales for Ruth's Chris Steak House increased 5.3%, which consisted of a traffic increase of 2.8% and an average check increase of 2.4%. Company-owned comparable restaurant sales at Mitchell's Fish Market decreased 0.4%, which consisted of a traffic decrease of 1.6% and an average check increase of 1.2%.

Franchise Income. Franchise income increased $0.9 million, or 8.6%, to $10.8 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012. The increase was driven by a $0.6 million increase from four new locations which opened since September 2012 and a $0.2 million increase from an increase in comparable franchisee-owned restaurant sales of 2.0% (which included a 2.3% increase in domestic comparable franchisee-owned restaurant sales and a 0.6% increase in international comparable franchisee-owned restaurant sales).

Other Operating Income. Other operating income increased $1.6 million to $4.6 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012. The increase was in large part attributable to a $0.9 million increase in gift card breakage income in the first thirty-nine weeks of fiscal year 2013. Our management fee and our share of income from the Cherokee location was $0.5 million in the first thirty-nine weeks of fiscal year 2013 and $0 in the first thirty-nine weeks of fiscal year 2012.


Food and Beverage Costs. Food and beverage costs increased $1.4 million, or 1.7%, to $87.4 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012. As a percentage of restaurant sales, food and beverage costs decreased to 31.0% in the first thirty-nine weeks of fiscal year 2013 from 32.0% in the first thirty-nine weeks of fiscal year 2012. This decrease in food and beverage costs as a percentage of restaurant sales was primarily due to a 2.4% increase in menu pricing and 0.4% lower beef costs.

Restaurant Operating Expenses. Restaurant operating expenses increased $5.4 million, or 3.9%, to $144.0 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012. Restaurant operating expenses, as a percentage of restaurant sales, decreased to 51.0% in the first thirty-nine weeks of fiscal year 2013 from 51.6% in the first thirty-nine weeks of fiscal year 2012 due to leveraging higher comparable restaurant sales.

Marketing and Advertising. Marketing and advertising expenses increased $1.3 million to $7.6 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012. The increase in marketing and advertising expenses in the first thirty-nine weeks of fiscal year 2013 was attributable to planned television advertising spending.

General and Administrative. General and administrative expenses increased $2.8 million to $21.8 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012 primarily due to a $2.4 million increase in performance-based compensation and a $0.2 million increase in stock-based compensation.

Depreciation and Amortization Expenses. Depreciation and amortization expense decreased $1.1 million to $9.8 million in the first thirty-nine weeks of fiscal year 2013 primarily due to certain property and equipment becoming fully depreciated.

Pre-opening costs. Pre-opening costs increased $0.2 million to $0.5 million in the first thirty-nine weeks of fiscal year 2013 primarily due to the relocation of our Houston location in July 2013.

Gain on Settlements. During the first thirty-nine weeks of fiscal year 2013, the Company settled two casualty loss claims which previously arose and recognized an aggregate gain of $2.2 million, net of fees incurred. The majority of the gain pertained to compensation awarded by the claims administrator pursuant to the settlement agreement reached in litigation related to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico.

Interest Expense. Interest expense decreased $0.4 million to $1.3 million in the first thirty-nine weeks of fiscal year 2013 from the first thirty-nine weeks of fiscal year 2012. The decrease in expense was primarily due to a lower average debt balance in the first thirty-nine weeks of fiscal year 2013.

Income Tax Expense. During the first thirty-nine weeks of fiscal year 2013, we recognized income tax expense of $7.8 million. During the first thirty-nine weeks of fiscal 2012 we recognized income tax expense of $5.3 million. The effective tax rate decreased to 28.5% in the first thirty-nine weeks of fiscal year 2013 compared to 29.2% in the first thirty-nine weeks of fiscal year 2012. During the first thirty-nine weeks of fiscal year 2013, the Company recognized a state income tax benefit for employment related tax credits aggregating $1.0 million generated during the years 2006 through 2012. These prior year state tax credits resulted in a discrete $600 thousand reduction (net of federal and state tax consequences) in income tax expense and lowered the effective income tax rate by 2.2% in the first thirty-nine weeks of fiscal year 2013.

Income from Continuing Operations. Income from continuing operations of $19.6 million in the first thirty-nine weeks of fiscal year 2013 increased by $6.8 million compared to the first thirty-nine weeks of fiscal year 2012 due to the factors noted above.

Income (Loss) from Discontinued Operations, net of income taxes. Income (loss) from discontinued operations, net of income taxes for the first thirty-nine weeks of fiscal year 2013 was a loss of $1.2 million. The loss includes a $1.2 million loss, net of income tax benefit, attributable to property we lease near the United Nations in Manhattan. We recognized the loss as a consequence of the remeasurement of our lease exit costs due to the subtenant abandoning the property subleased from us.

Net Income (Loss) Applicable to Preferred and Common Shareholders. Net income applicable to preferred and common shareholders was $18.3 million in the first thirty-nine weeks of fiscal year 2013 compared to $23.6 million net loss in the first thirty-nine weeks of fiscal year 2012. Net income applicable to preferred and common shareholders in the first thirty-nine weeks of fiscal year 2012 included charges for preferred stock dividends of $0.5 million and accretion of preferred stock redemption value of $0.1 million. We also recorded a reduction of net income applicable to shareholders of $35.8 million in the first fiscal thirty-nine weeks of 2012 to reflect the excess of the redemption value over the carrying value of the preferred shares redeemed.


Liquidity and Capital Resources

Overview

Our principal sources of cash during the first thirty-nine weeks of fiscal year 2013 were net cash provided by operating activities and borrowings under our $100 million senior credit facility. Our principal uses of cash during the first thirty-nine weeks of fiscal year 2013 were for capital expenditures, principal repayments on our senior credit facility and dividends.

On March 8, 2012, we repurchased all of our issued and outstanding shares of Preferred Stock for $60.2 million in cash. The purchase price, which included all accrued and unpaid dividends owed on the preferred stock, was funded using borrowings under our $100 million senior credit facility. We believe the . . .

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