Ruth's Chris Steak House, Inc. Reports Second Quarter 2007 Financial Results

Ruth's Chris Steak House, Inc. (Nasdaq: RUTH) reported unaudited results for its second quarter ended July 1, 2007. Highlights for the 13-week second quarter 2007 compared to the 13-week second quarter 2006 were as follows:

• Total revenue increased 29.5% to $78.4 million from $60.5 million.

• Net income increased 11.8% to $5.4 million, or $0.23 per diluted share, from $4.9 million, or $0.21 in the prior year period.

• Same store sales on a fiscal basis decreased 0.4%, while on a comparable calendar basis (adjusting for the fiscal week shift), comparable restaurants sales increased 1.0%, marking the seventeenth consecutive quarter of comparable sales growth. Franchised-owned comparable restaurant sales increased 0.8%.

• Food and beverage costs, as a percentage of restaurant sales, were approximately 50 basis points higher quarter over quarter, primarily driven by higher lobster, produce and dairy costs, partially offset by sales mix initiatives, slightly favorable beef costs, and modest price increases.

• Restaurant operating expenses, as a percentage of restaurant sales, were approximately 260 basis points higher due to higher labor, management education and property insurance costs in core restaurants (208 basis points) as well as higher labor and operating expenses in newly opened restaurants (52 basis points).

• Marketing and advertising expenditures, as a percentage of total revenues, were approximately 70 basis points lower due to reduced utilization of television in select markets in the second quarter of fiscal 2007 versus the second quarter of fiscal 2006.

• General and administrative expenses, as a percentage of total revenues, were approximately 230 basis points lower due to leverage from strong revenue gains, reduced incentive compensation earned and certain open positions during the quarter.

• Depreciation and amortization expenses, as a percentage of total revenues, were approximately 10 basis points higher due to investments in newer restaurants.

• Preopening costs increased by $1.1 million from a year ago due to increased new restaurant development activity.

• Company-owned locations were opened in Anaheim, California and Biloxi, Mississippi.

• Operating income before Pre-opening expenses increased by 33.8%.

Craig S. Miller, Chairman of the Board, President and Chief Executive Officer, stated, 'The second quarter saw a continuation of slower guest traffic from our a la carte diners offset partially by gains from banquet and private dining. It appears the challenging consumer environment as well as planned changes in our marketing strategy have temporarily dampened traffic counts after 3 years of sustained increases. We were able to generate solid performance in absolute terms driven by strong revenue growth from newly opened restaurants, previously franchised restaurants we acquired in 2006, and the resulting leverage from fixed overhead costs. These results were slightly below our internal expectations as slower comparable restaurant sales growth was not sufficient to cover rising operating expenses. Additionally, as expected, margins from newly opened restaurants were slightly compressed.'

Miller continued, 'Despite the previously mentioned softness in ala carte dining traffic, our diverse customer base continues to provide us with industry leading average unit sales and operating margins. In addition, our newest stores continue to generate strong sales volumes, validating our strategy and brand value in the marketplace. In an effort to spur our sales in the back half of 2007, we are taking multiple steps. Specifically, we are utilizing more local marketing in select markets to complement our national radio and USA Today print ads, as well as testing a Friday lunch initiative designed to encourage professionals looking for a more upscale experience to finish off the week. Further, a new menu layout will be introduced shortly to allow us to more quickly introduce specials. This menu will include an approximate 1.5% price increase as we roll over a similar increase last year.'

Ruth's Chris Steak House is on track to open 9 new restaurants over the next 5 months including company units in West Palm Beach, FL, Santa Barbara, CA, Knoxville TN, and Tyson's Corner, VA as well as domestic franchised units in Columbia, SC, Mishawaka, IN, Madison, WI and international units in Tokyo and Calgary. The Company expects to end the year with 61 company operated restaurants, up 22% from December 31, 2006, including the 3 Pacific Northwest locations that we expect to acquire during the third quarter of 2007.

Review of Operating Results

Total revenues from continuing operations, which includes company-owned restaurant sales, franchise income, and other operating income, increased 29.5% to $78.4 million in the second quarter of 2007 compared to $60.5 million in the second quarter of 2006.

Company-owned restaurant sales from continuing operations grew 28.4% to $73.6 million in the second quarter of 2007 from $57.4 million in the same period last year, primarily as a result of a 28.9% increase in company restaurant operating weeks to 687 (including 12 additional restaurants in operation) and slightly offset by an average weekly sales decline of 0.4% to $107,197.

Company-owned same store sales on a fiscal basis decreased 0.4% from the second quarter of 2006. On a comparable calendar basis (adjusting for the fiscal week shift) comparable restaurant sales increased 1.0% marking the seventeenth consecutive quarter of comparable sales growth. Average check increased 4.1% driven by non-entree increases in bar and lounge traffic, menu selection shifts, and year over year menu pricing of approximately 3.0%. This was partially offset by an entree reduction of 3.1%. Company-owned comparable restaurant sales lapped last year's second quarter growth of 6.0%.

Franchise income decreased slightly to $2.9 million from $3.0 million in the second quarter of 2006 due to the acquisition of seven franchise locations last year by the Company, and was partially offset by an increase in comparable franchise-owned restaurant sales of 0.8% and an additional nine franchise-owned locations added to the system year over year.

Other operating income increased to $1.9 million from $0.1 million in the same period last year due primarily to $1.8 million of gift card breakage recognized during the quarter versus $48,000 in the prior year period. The Company recognizes gift card breakage for the remaining value of those cards that have not been redeemed following 18 months from the last date of card activity, and for which there is no third-party claim. This amount is expected to be approximately $2.0 to $2.2 million on an annual basis and will grow in relation to gift card sales growth. Due to the seasonally high volume of gift cards that are purchased during the fourth quarter of each fiscal year, the second quarter, which is 18 months following this period, will have the highest amount of gift card breakage recognition each fiscal year. This factor, in addition to our overall revenue growth, led to a 33.8% increase in Operating Income before pre-opening costs.

Net income was $5.4 million in the second quarter of 2007, or $0.23 per diluted share, compared to $4.9 million, or $0.21 per diluted share, in the second quarter of 2006.

Mr. Miller concluded, 'Despite cost pressures, we leveraged our overhead and operating expenses on a sequential basis, including investments we've made in our infrastructure over the last 18 months. In our view, this highlights the progress our team has made and our ability to ultimately get to at least 250 domestic and 50 to 100 international locations. Ultimately, we are confident that as traffic rebounds, in combination with significant operating week expansion, and G&A leverage, we will deliver on our long term earnings growth rate of between 17% and 20%."

Financial Guidance

For the full 52-week fiscal year 2007, the Company now estimates that same store sales will increase approximately 1.0% to 2.0%. This sales assumption implies slightly better second half performance due to a favorable calendar shift and the numerous sales initiatives underway. System-wide restaurant operating weeks will grow by greater than 20% resulting in year over year increases in pre-opening expenses and higher operating costs. The Company anticipates the opening of 8 company-owned and 8 franchised locations, of which 4 company-owned and 3 franchised locations, respectively, have opened through July 2007.

As previously communicated, the Company has contracted 50% of all beef needs for 2007 as well as has agreements in place on other key commodities with suppliers. The Company expects annual food and beverage costs as a percentage of restaurant sales to be between 31.8% and 32.2%, representing a 10-50 basis point reduction versus fiscal 2006. Annual marketing and advertising expenses, as a percentage of total revenue, are expected not to exceed 3.0%. The Company's effective tax rate for 2007 is expected to increase to approximately 32.3% versus 30.0% in 2006.

Based upon the assumed range of comparable restaurant sales growth between 1.0% and 2.0% , modest margin erosion from higher operating costs, the addition of 4 new restaurants in the second half of the year and the resulting pre-opening cost and lower margins, as well as the short term costs we expect to incur to complete the upcoming franchise acquisition, the Company now expects full year 2007 diluted earnings per share to be between $0.92 and $0.97, including the impact of Statement of Financial Accounting Standards No. 123R Share Based Compensation (SFAS No. 123R).





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