RUTH
#Thank you, Christy, and good morning, everyone.
Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer, Arne <UNK>, Executive Vice President and Chief Financial Officer and Cheryl <UNK>, President and Chief Operating Officer.
Before we begin I'd 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 like to refer you today 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 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 adjusted earnings per share.
This non-GAAP measurement was calculated by excluding certain items as well as losses from discontinued operations.
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 chairman and CEO, Mike O'Donnell.
Thank you, Mike.
For the second quarter ended June 26, 2016 we reported net income of $6.9 million or $0.21 per diluted share, compared to net income of $7.5 million or $0.22 per diluted share in the second quarter of 2015.
Net income in the second quarter of 2016 was negatively impacted by a nonrecurring $465,000 charge related to the accrual for disputed rent charges from 2006 to 2015 for these company restaurants.
This was partially offset by $99,000 gain related to the sale of our Columbus Ohio restaurant.
Total company owned restaurant sales for the second quarter were $87.2 million, an increase of 1.7% from $85.8 million last year.
The growth was driven predominantly by the 1.5% increase in comparable restaurant sales which consisted of a 3.7% increase in average check, an offset by a 2.1% decrease in traffic.
As we shared with you earlier this year, our rate of total revenue growth slowed largely due to the timing of our new restaurant openings and the closure of our Columbus restaurant after 17 years in the market.
Average weekly sales for company-owned restaurants were $101.1 in the second quarter, an increase of 1.1%, compared to the $100,000 in the second quarter of last year.
Total operating weeks for company owned restaurants were 863 in the second quarter, up 0.6% year over year from 858 in the second quarter of 2015.
Franchise income in the second quarter of 2016 was $4 million, compared to $4.1 million in the second quarter of last year.
The decrease in franchise income was due primarily to development fees that related to the opening of new restaurants in 2015.
Total franchise comparable sales were down 0.3% year over year in the second quarter.
Comparable sales in our domestic franchise restaurants were up 2.4% during the quarter while comparable sales in our international franchise restaurants declined by 11.5%.
Similar to last quarter, a strong US dollar coupled with traffic weakness in Asia and Canadian oil markets continued to negatively affect our international comparable sales.
Excluding the impact of foreign currency translation, international comparable sales would have still decreased 8.8%.
Now turning to our costs, food and beverage costs as a percentage of restaurant sales, improved by 90 basis points year over year to 29.6%, driven by a 5% decline in year over year beef costs combined with a 3.7% increase in the average check.
On a year-to-date basis, our beef costs were down 4.7%.
Additionally, we have contracted roughly 50% our beef supply to the second half of the year at a savings of approximately 9% below year-ago levels.
As a result, we now expect between 3.5% to 5.5% beef cost deflation for the full year.
During the second quarter, our restaurant operating expenses as a percentage of restaurant sales increased a 180 basis points year over year to 48.8%.
This increase was primarily due to higher labor costs driven by a minimal wage increases and the timing of healthcare-related expenses in the quarter, as well as the nonrecurring $465,000 charge related to the accrual of disputed brand charges.
Our G&A expenses as a percentage of total revenues improved 60 basis points year over year to 7.6%.
During the quarter, the Company repurchased $1.2 million shares of common stock under its current share repurchase program or approximately $20 million or an average price of $16.78 per share.
At the end of the second quarter, we had roughly $30 million in debt outstanding under our senior credit facility largely as a result of our share repurchases.
Finally, as Mike noted subsequent to the end of the second quarter, the Board of Directors improved the payment of quarterly cash dividends of $0.07 to shareholders.
This dividend will be paid on August 25th 2016 to common shareholders of record as of the close of business on August 11th, 2016.
This represents a 17% year-over-year increase in our quarterly dividends.
Now I'd like to update our outlook for the full year of 2016 for some of our key cost metrics.
We now expect our cost of goods sold to be in the range of 29% to 31% of restaurant sales.
We expect our restaurant operating expenses to remain between 47% and 49% of restaurant sales.
We continue to expect marketing and advertising costs to be 2.9% to 3.1% of total revenues.
We now expect G&A expenses to be between $28.5 million and $38.5 million.
We continue to expect an effective tax rate of 32% to 34%.
We expect capital expenditures to remain between $28 million and $30 million.
Lastly, we now expect our fully diluted shares outstanding to be between 32.5 million and 33 million shares exclusive of any share repurchases under the Company's recently announced share repurchase program.
With that, Christy, I'd now like to turn the call over for any questions that we might have.
Thanks, <UNK>, for the question.
It is political season isn't it.
You know, as I think about the last nine years in working with this iconic brand and talented management team, I think the strategy Mark shared ---+ I'm sorry ---+ Mike shared during his talk is really right on, and so we'll continue with that, <UNK>.
I will say as we look to the success of initiative such as Ruth's 2.0 both on the menu as well as in some of the remodel, that is another path we'll continue down in the development of our people really looking to drive the cost store level sales that we committed to in our strategy.
In addition, Mike talked about our focus on new restaurant growth so for my team that's where we'll be head and look forward to working with everyone here for our continued future success.
Sure.
We continue to focus on ---+ as we have our very popular (inaudible) program.
So we continue to offer that as well as refreshing our classic which is our [prefee] menu we do that three times a year so it's always news in the quarter to talk about as we launch into our new menu.
We're also looking at a promotion that will roll out in the next week or so around fillet and [rosse] so that's exciting for us for the month of August and September.
And then working on some additional menu refresh items.
The success of Ruth's 2.0 is ---+ we're continuing that evolution so more to come on that.
Sure, Josh.
You know, I think we've talked a lot just about we are now in year two of deflation in terms of beef costs.
Last year, we saw deflation on our prime cuts in large part due to the increase in the percentage of the herd that graded prime so that caused an increase in supply of prime.
We've been very transparent about talking about that and watching that.
The increase in grading has helped.
But it is not growing anymore.
So our opportunities around contracting have probably been more around the [fillets] and that's where we're seeing the deflation right now, in that part of the meat basket.
The prime cuts are the pieces that are not contracted right now.
And those are probably not going to be as much deflation as what we'll see on the [fillets], which is contracted.
So I think that's kind of our outlook there in terms of beef but it's shifting now to an overall supply of cattle store versus an increase in the percentage of prime.
The rest of the basket is largely in control.
There's some puts and takes around some seafood, some specific seafood items that we use but there's no material headwinds.
It's still a tailwind for us here in terms of our commodity outlook for the rest of the year.
I think we have incorporated that into our guidance.
So the share count, obviously, is weighted what you see as of the end of the second quarter, but we incorporated it into our guidance because there are increases in share counts as well as part of equity compensation plans.
Sure, <UNK>.
You know, I think wage inflation is pretty much as we expected.
I think we shared with you earlier this year numbers about $1.4 million.
And if you are kind of tracking along that we expect that to continue through the rest of the year.
And that's probably a constant drumbeat we're going to have is the continued legislative.
And I think in the second quarter as well we had a little bit of pressure from healthcare claims, nothing unusual.
It's just last year was such a great year if you remember we had some really great claims quarters.
We're back now to more of a normal cadence in terms of that part of our business.
I think it's still the same kind of cadence, <UNK>.
I mean the oil market as we called out for our franchisees, Texas I think you're hearing from everybody is challenged.
You know some of the major metropolitan areas, the urban parts of ---+ that there are urban locations, those like New York and Chicago are down a little bit more than some of the suburban locations.
But other than that, I think it feels very consistent.
You know Florida has been good, California has been good.
Overall I think we're pleased with how we're holding up relatively I think on an absolute basis we want more.
