Ruth’s Hospitality Group, Inc. Reports Fourth Quarter and Full Year 2017 Financial Results

Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) today reported unaudited financial results for its 14-week fourth quarter and 53-week full year ended December 31, 2017, and announced a quarterly cash dividend of $0.11 per share to be paid in the first quarter of 2018.

Highlights for the 14-week fourth quarter of 2017 compared to the 13-week fourth quarter of 2016 were as follows:

• The Company reported net income of $9.6 million, or $0.31 per diluted share, in the fourth quarter of 2017, compared to net income of $9.2 million, or $0.30 per diluted share, in the fourth quarter of 2016.
  • Income from continuing operations in the fourth quarter of 2017 was $9.6 million, or $0.31 per diluted share, compared to income from continuing operations of $9.4 million, or $0.31 per diluted share, in the fourth quarter of 2016.
  • The Company’s fourth quarter of 2017 consisted of 14 weeks compared to 13 weeks in the fourth quarter of 2016. The Company estimates that the extra week increased earnings in the fourth quarter of 2017 by approximately $0.06 per share.
  • Net income in the fourth quarter of 2017 included a $3.9 million non-cash charge related to the impairment of assets at one restaurant location and $0.6 million in deal-related expenses associated with the acquisition of our Hawaiian franchisee.
  • The Tax Cuts and Jobs Act, also known as H.R. 1, was signed into law on December 22, 2017. This act will significantly lower the Company’s tax rate and reduced the value of the Company’s deferred tax assets by $1.1 million. Additionally during the fourth quarter, the Company recorded income tax expense of $0.1 million related to other discrete state income tax items. Combined, these discrete income tax items reduced net income by $1.2 million, or $0.04 per diluted share.
  • Excluding these adjustments, as well as the results from discontinued operations, non-GAAP diluted earnings per common share were $0.44 in the fourth quarter of 2017, compared to $0.31 in the fourth quarter of 2016. The Company believes that non-GAAP diluted earnings per common share provides a useful alternative measure of financial performance. Investors are advised to see the attached Reconciliation of non-GAAP Financial Measure table for additional information.

• During the fourth quarter the Company repurchased 450 thousand shares of common stock under its current share repurchase program.
• One Company-owned Ruth’s Chris Steak House restaurant opened in suburban Denver, CO in the fourth quarter of 2017.

Michael P. O'Donnell, Chairman and Chief Executive Officer of Ruth's Hospitality Group, Inc., noted, “I am pleased to report a return to positive traffic during the fourth quarter, and am proud that 2017 marked our 8th consecutive year of positive comparable restaurant sales. These results would not be possible without our incredibly dedicated team members and franchise partners.”

O’Donnell added, “During the quarter we also welcomed our six Hawaii restaurants to our corporate family and we are encouraged as we move forward together in 2018.”

Review of Fourth Quarter 2017 Operating Results

Total revenues in the 14-week fourth quarter of 2017 were $124.1 million, an increase of 15.3% compared to $107.6 million in the 13-week fourth quarter of 2016.

Company-owned Sales

• Company-owned comparable restaurant sales increased 1.5% on a comparable 14-week basis, which consisted of a traffic increase of 0.8%, as measured by entrees, and an average check increase of 0.7%.
• Average unit weekly sales were $117.4 thousand in the fourth quarter of 2017, compared to $114.5 thousand in the fourth quarter of 2016.
• 77 Company-owned Ruth’s Chris Steak House restaurants were open at the end of the fourth quarter of 2017, compared to 68 Ruth’s Chris Steak House restaurants at the end of the fourth quarter of 2016. Total operating weeks for the fourth quarter of 2017 increased to 1,000 from 884 in the fourth quarter of 2016.

Franchise Income

• Franchise income in the fourth quarter of 2017 was $4.7 million, a decrease of 3.3% compared to $4.8 million in the fourth quarter of 2016. The decrease in franchise income was driven primarily by the acquisition of the Hawaii restaurant locations, partially offset by a 0.7% increase in comparable franchise restaurant sales.
• 76 franchisee-owned restaurants were open at the end of the fourth quarter of 2017 compared to 80 at the end of the fourth quarter of 2016.

Operating Expenses

• Food and beverage costs, as a percentage of restaurant sales, increased 55 basis points to 29.3%, primarily driven by a 4% increase in total beef costs.
• Restaurant operating expenses, as a percentage of restaurant sales, decreased 80 basis points to 44.6%. The decrease was primarily driven by leverage related to the 14th week and performance-based compensation.
• General and administrative expenses, as a percentage of total revenues, decreased 115 basis points to 7.6% driven primarily by leverage of fixed costs related to the 14th week and a reduction in performance-based compensation, partially offset by $0.6 million of deal-related expenses for the Hawaii acquisition.
• Marketing and advertising costs, as a percentage of total revenues, decreased 100 basis points, primarily due to a planned shift of marketing spend across the quarters.
• Pre-opening costs, as a percentage of total revenues, increased 14 basis points to 0.4% driven by the timing of new restaurant openings.

Franchisee Acquisition

On December 12, 2017, the Company completed the previously announced acquisition of six franchised Ruth’s Chris Steak House restaurants in Hawaii for approximately $35 million in cash. The acquisition was funded with debt through the Company’s senior credit facility.

Highlights for the 53-week Full Fiscal Year 2017 were as follows:

• The Company reported net income of $30.1 million, or $0.97 per diluted share for the full fiscal year 2017, compared to net income of $30.5 million, or $0.95 per diluted share for the full fiscal year 2016.
  • Income from continuing operations in 2017 was $30.2 million, or $0.98 per diluted share, compared to income from continuing operations of $30.8 million, or $0.96 per diluted share, in fiscal 2016.
  • The Company’s fiscal 2017 consisted of 53 weeks compared to 52 weeks in fiscal 2016. The Company estimates that the extra week increased earnings in fiscal 2017 by approximately $0.06 per share.
  • Net income in 2017 included a $3.9 million non-cash charge related to the impairment of assets at one restaurant location and $0.6 million in deal-related expenses associated with the acquisition of our Hawaiian franchisee.
  • The Tax Cuts and Jobs Act, also known as H.R. 1, was signed into law on December 22, 2017. This act will significantly lower the Company’s tax rate and reduced the value of the Company’s deferred tax assets by $1.1 million. Additionally, the Company recorded income tax expense of $0.1 million related to other discrete state income tax items. Combined, these discrete income tax items reduced net income by $1.2 million, or $0.04 per diluted share.
  • Net income in 2016 included a $0.2 million income tax charge related to certain discrete income tax items as well as an adjustment of $0.3 million related to restaurant closing costs and accrual of prior year’s rent dispute costs.
  • Excluding these adjustments, as well as the results from discontinued operations, non-GAAP diluted earnings per common share were $1.10 in fiscal 2017, compared to $0.97 in fiscal 2016. The Company believes that non-GAAP diluted earnings per common share provides a useful alternative measure of financial performance. Investors are advised to see the attached Reconciliation of non-GAAP Financial Measure table for additional information.

• During the year, the Company repurchased 1.2 million shares of common stock under its current and previous share repurchase programs.

Review of Fiscal Year 2017 Operating Results

Total revenues in fiscal 2017 increased 7.5% to $414.8 million compared to $385.9 million in the prior year.

Company-owned Sales

• For fiscal 2017, Company-owned comparable restaurant sales increased 1.0% on a comparable 53-week basis, which consisted of an average check increase of 1.0%, and flat traffic.
• Average unit weekly sales were $105.1 thousand for fiscal 2017, an increase of 1.0% compared to $104.1 thousand in fiscal 2016.
• Total operating weeks for fiscal 2017 increased to 3,715 from 3,489 in fiscal 2016. Total operating weeks exclude discontinued operations.

Franchise Income

• Franchise income in fiscal 2017 was up 1.4% to $17.5 million compared to $17.3 million in fiscal 2016. The increase in franchise income was due to new franchise restaurant openings in fiscal 2017 and a 1.3% increase in comparable franchise restaurant sales.

Operating Expenses

• Food and beverage costs, as a percentage of restaurant sales, increased 32 basis points to 29.8%, primarily due to an increase in total beef costs of 4.2%.
• Restaurant operating expenses, as a percentage of restaurant sales, decreased 14 basis points to 47.5% primarily driven by performance-based compensation.
• Marketing and advertising costs, as a percentage of total revenues, increased 11 basis points to 3.1%.
• General and administrative expenses, as a percentage of total revenues, decreased 28 basis points to 7.9% driven primarily by leverage related to the 53rd week.
• Pre-opening costs in fiscal 2017 were flat year-over-year at $2.0 million.

Development Update

During the fourth quarter of 2017, the Company opened its fourth new Company-managed restaurant of the year in suburban Denver, CO. In 2018 the Company expects to open a new restaurant in Jersey City, NJ in the third quarter.

Also during the fourth quarter of 2017, our franchisee in Hawaii opened a restaurant on Kauai prior to the closing of the sale to the Company. Additionally, a franchise partner relocated its restaurant in Mississauga, Canada during the fourth quarter of 2017. Looking to 2018, new franchised restaurants are expected to open in Fort Wayne, IN in the second quarter, and in Markham, Ontario in the fourth quarter.

Share Repurchase and Debt

During the fourth quarter of 2017, the Company repurchased approximately 450 thousand shares of common stock under its current share repurchase program, for approximately $9.3 million or an average price of $20.77 per share.

For the full year, the Company repurchased approximately 1.2 million shares of common stock under its current share repurchase program, for approximately $23.9 million or an average price of $20.43 per share. At the end of 2017, the Company had approximately $50.7 million remaining under its current authorization. Since the beginning of 2014, the Company has repurchased an aggregate of 6.7 million shares for approximately $108.1 million under the current and prior share repurchase programs.

At the end of fiscal 2017, the Company had $50.0 million in debt outstanding, and availability of $35.8 million under its senior credit facility.

Quarterly Cash Dividend

Subsequent to the end of 2017, the Company’s Board of Directors approved the payment of a quarterly cash dividend to shareholders of $0.11 per share. The dividend will be paid on March 22, 2018 to shareholders of record as of the close of business on March 8, 2018, and represents a 22% increase from the quarterly cash dividend paid in March of 2017.

Accounting Policy and Standard Changes

In 2018, the Company will be adopting ASU number 2014-09, which is generally referred to as the new revenue recognition standard. The new standard will now require that advertising contributions received from franchised restaurants be recognized as franchise income. In 2017, these contributions were credited against marketing expenses. The impact of this standard change will increase franchise income in 2018 by approximately $1.5 million, and increase marketing and advertising expense by a similar amount. Beginning in 2018, the Company will recognize initial franchise fees ratably over the franchise agreement term compared to the previous practice of recognizing the fees upon completion of all material obligations, which generally occurred upon the opening of the restaurant. The overall impact of the change to the recognition of initial franchise fees is expected to be immaterial to the Company’s net results. The Company is also evaluating whether certain discounts recognized on the sale of gift cards, historically recognized as a marketing expense, may potentially be reclassified as a reduction of revenue on the income statement.

The Company will also move administrative support costs that have been historically allocated to general and administrative expenses into the marketing line. The net impact of this reclassification is neutral, but will increase marketing and advertising expenses and decrease general and administrative expenses by a similar amount.

Also in 2018, the Company is making a change to its policy on comparable restaurants. The current approach is that a new restaurant is placed into the comp base in the first quarter after the restaurant is open for 15 months and this is measured quarterly. The Company will be shifting to an 18 month period and will now measure annually. This means that a restaurant will enter the comp group in the first quarter of the year if it has been open for 18 months.

Financial Outlook

Based on current information, Ruth's Hospitality Group, Inc. is providing its full year 2018 outlook based on a 52 week year ending December 30, 2018, as follows:

• The 53rd week of 2017 made a particularly strong contribution to the Company’s earnings as it contained both Christmas Day and New Year’s Eve. Subsequently, the quarter to date fiscal comparison began the year approximately $3 million lower than 2017 and will lower fiscal comparable sales in the first quarter by approximately 300 basis points.
• The Easter holiday will shift back into the first quarter in 2018, from the second quarter in 2017. The Company believes that first quarter comparable sales last year decreased by approximately 70 basis points due to the shift of Easter.
• The Hawaiian restaurants produced sales of nearly $35 million in 2017, and also generated $1.7 million in royalty revenues. Additionally, this acquisition will add an incremental $3 million in annual depreciation driven by the purchase accounting for the assets and franchise territory rights.
• Food and beverage costs of 29.0% to 31.0% of restaurant sales with total beef inflation of 3-5%
• Restaurant operating expenses of 47.0% to 49.0% of restaurant sales
• Marketing and advertising costs of 3.8% to 4.0% of total revenue
• General and administrative expenses of $32 million to $34 million
• Effective tax rate of 19% to 21%
• Capital expenditures of $29 million to $31 million
• Fully diluted shares outstanding of 30.5 million to 31.0 million (exclusive of any future share repurchases under the Company's share repurchase program)

The foregoing statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to our recent filings with the Securities and Exchange Commission for more detailed discussions of the risks that could impact our financial outlook and our future operating results and financial condition.

About Ruth’s Hospitality Group, Inc.

Ruth's Hospitality Group, Inc., headquartered in Winter Park, Florida, is the largest fine dining steakhouse company in the U.S. as measured by the total number of Company-owned and franchisee-owned restaurants, with over 150 Ruth’s Chris Steak House locations worldwide specializing in USDA Prime grade steaks served in Ruth’s Chris’ signature fashion – “sizzling.”