Ruth's Hospitality Group, Inc. Price & Performance (RUTH)

Thank you, Latanya, and good morning, everyone. Joining me on the call today is Sheryl Henry, our President, Chief Executive Officer and Chairperson of the Board and Christy Chipman, our Chief Financial Officer and Chief Operating Officer. Before we begin, I'd first 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 also encourage you to refer to the Investor Relations section of our website at rhgi.com as well as the SEC's website 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 non GAAP financial measures, including adjusted earnings per share and adjusted EBITDA. You can find a reconciliation of these non GAAP financial measures in our press release for today's call. I would now like to turn the call over to the and double digit adjusted EBITDA growth for the quarter, contributing to adjusted EBITDA of $83,800,000 for the year. Driving these results were continued demand from our Just Because and Special occasion guests and improvement in our private dining business.

Combined with our team's ability to manage costs and drive efficiencies, we were very pleased to deliver year over year Adjusted earnings per share growth of over 13%. Quarterly results aside, 2022 was a year of many accomplishments for the Ruth's Chris team. If you recall, we started the year with a goal to deliver on our total return strategy for shareholders, And that began with organic growth, including new restaurants, remodels and digital technologies. It also included smartly allocating capital on behalf of our shareholders, and we believe we were able to accomplish both. During the year, we successfully opened 4 new company operated restaurants, including 1 in the territory We acquired from a franchisee on Long Island, New York and relocated and redesigned our Winter Park, Florida restaurant. As a group, these 5 restaurants have continued to perform above our expectations. We are especially encouraged by the October of our Winter Park restaurant, which has outperformed its former location by over 35% in November December combined. This is due to a new contemporary design that gives our guests different dining room experience options With increased energy from a new bar design and a larger outdoor dining space, Winter Park's floor plans and interior and Interior Design Elements will serve as a model for future new restaurants and relocations as well as remodels as structures allow.

We are pleased to report that our data digital transformation project is now well underway, and we are happy to announce that we have As they have enabled us to elevate the guest experience and increase productivity across our entire operation. One of the most exciting accomplishments this year was the development of a proprietary demand forecasting platform, which seamlessly integrates with our labor management system to create more efficient schedules. We are pleased to report that these efforts resulted and a 10% improvement in hours per entree, translating to approximately 200 basis points of labor improvement over pre pandemic levels for the year. It is important to note that we were able to achieve these results despite facing record high wage increases and adding managers back to most of our highest volume restaurants. In addition, we have implemented new proprietary processes that leverage our data platform, allowing us to improve capacity and table management. This has been especially effective on our busiest days, including Fridays, Saturdays and holidays, resulting in an increase in sales during these peak periods. Finally, we are excited to share that we have completed the rollout of our hospitality app to all restaurants. Although it is still early days, we are seeing a positive impact on repeat visits.

Overall, we are proud of the progress we have made in our Data Digital Transformation and we are confident that these investments will continue to drive value for our guests and our shareholders in the years to come. Mark Kupferman, our recently appointed Chief Commercial Officer, will spearhead these efforts and ensure In 2022, we're smartly allocating excess capital. For the year, we repurchased $29,600,000 worth of shares. We paid $18,300,000 in dividend payments and we reduced debt by $40,000,000 In February, we also announced an Along with investments in new restaurants, existing assets and our technology platform, we believe this balanced approach that positions our shareholders for value creation in the long run. I'm pleased to say our 2023 playbook Reads much like 2022. Before I talk about this year's portfolio development, let me quickly touch on the planned closure of our Manhattan location. As you may have heard, after 30 years of serving guests, We are closing our New York City restaurant in April. We've decided not to renew the lease due to a shift in the trade area and fully intend to open at least one new Manhattan location by the end of 2025. These plans allow us to relocate and redesign our New York City presence to better serve the market.

In 2023, we expect to open 5 company restaurants, including one new opening in a casino resort in Michigan. In addition to these new openings, we expect one relocation in the 2nd quarter and as many as 10 remodels and refreshes to our portfolio throughout the year. In addition to this development, we are excited that one of our franchisees will open our 1st Ruth's Chris Steakhouse restaurant in Iowa. This year, we will also embark on Phase 2 of our digital journey. As part of this effort, we'll be developing our new inventory platform, which we expect to drive at least 25 basis points of margin improvement over time. The platform is scheduled for testing throughout 2023. In addition, we are launching a new data driven digital paid media program. Our 3rd priority in 2023 will be the launch of the first phase of an elevated guest experience. Specifically, over the next 12 to 18 months, we will be rolling out Ruth's reimagined to the entire system. The program includes new hospitality training and standards, uniforms, table presentation and smallwares. We'll also introduce a refreshed menu and new bar program. Our guests have shown that they want variety, not just in options, but also in price points.

In a test of our prior bar menu, We experienced double digit growth in average checks as guests trade up to more premium offerings. To conclude, 2023 is an exciting year for us, balancing new unit growth, relocations and remodels, along with digital investments and new programs to accelerate both top and bottom line growth in our existing fleet and managing excess capital on behalf of our shareholders. While we acknowledge there is some uncertainty around the economy, Our strong balance sheet and free cash flow allows us to plan and continue investing in the future. We look forward to keeping you up to date throughout the year as we roll in these initiatives. With that, I'll turn the call over to Christi to cover the specifics of the quarter. Thank you, Cheryl. For the Q4 ended December 25, 2022, we reported GAAP net income of $12,400,000 or $0.38 per diluted share compared to $13,800,000 or $0.40 per diluted share last year. Non GAAP diluted earnings per common share was $0.38 compared to $0.34 in the prior year quarter. Adjusted EBITDA for the quarter was $24,000,000 compared to $21,400,000 in the same quarter last year. Please refer to our earnings release for reconciliations of non GAAP measures.

Our strong quarterly results were driven by total revenue growth of 9 point 2% including company operated restaurant sales growth of approximately 9.6%. Comp sales for the quarter increased 4.5 percent versus 2021 and increased 5.5% compared to 2019. Average weekly sales during the quarter We're $130,000 versus $123,000 in 2021 $118,800 in 20 19. Please note going forward we will no longer provide 2019 as a comparison period. Franchise income for the quarter was $5,800,000 up 6.1% versus the same period last year, driven by comparable franchisee sales growth of 2.3%. Food and beverage costs improved versus the prior year quarter by 93 basis points to 33.2% as beef prices declined approximately 4%, partially offset by a 1% increase in the balance of our commodity basket. To give you a sense of the impact of beef prices on our overall financial performance, we estimate that a 10% change in beef cost would impact EBITDA by approximately $6,000,000 to $7,000,000 on an annual basis, all else remaining equal. Labor expense for the quarter was versus 2021 increased 200 basis points, primarily due to hourly wage increases of approximately 9.5% and increased management labor due to higher wages as well as more managers for restaurants versus the same time last year.

When compared to 2019, management labor expense was better by 105 basis points. Moving beyond restaurant expenses, combined marketing and G and A as a percent of revenues was 9.7% compared to 11.6% in the Q4 of 2021, reflecting the timing of expenses related to bonus accruals and Data Digital Initiatives. For the quarter, we repurchased approximately 905,000 shares for a total cost of $14,700,000 and we paid $4,600,000 in dividend payments. As of December 25, we had approximately $23,000,000 in cash on our balance sheet and our outstanding debt was $30,000,000 In addition, subsequent to the end of the 4th quarter, We paid down $15,000,000 of debt, leaving $15,000,000 on the balance sheet as of today. 2022 delivered record revenue for the full year, and our start to January was strong with comp sales of about 17% as we lapped Omicron in January of 2022. Starting in February and carrying through July, the comparisons get more difficult as we lap against the reopening post Omicron and record high comp sales from last year. In the last week of the quarter, we will be taking a price increase of approximately 3%. And as a reminder, we took 3.4% price during the same week last year.

From a cost of goods sold perspective, we will not be Guiding for the Q1 or full year given the volatility in the beef markets, which makes up about half of our basket. However, I will say that in January, Our cost of goods sold was 33.3 percent driven by an increase in beef of 12% versus prior year, offset by the rest of the basket, which is down mid single digits. With that, I'll now turn the call back to Cheryl for a few closing comments. Thank you, Christy. Our success over the past 2 years is a real testament to the grit and determination of our team and franchise partners and their ability to adjust quickly to change. Through their efforts, we've achieved record revenue, opened successful new restaurants, invested in new technologies to increase efficiencies, paid down debt and continued to return cash to shareholders. And we accomplished this through a global pandemic, generationally high inflation and numerous macro challenges. Going forward, I believe the next couple of years can be as productive as the past. We believe we can open at least 10 new restaurants and relocate up to 3 more utilizing our refreshed and enhanced brand standards.

We will also continue to embrace technology as we've discussed today and allocate excess capital to shareholders as appropriate. The levers at our disposal have never been stronger Latanya, will you please open up the line?

Thank you. We will now conduct a question and answer session. Our first question comes from Brian Vaccaro with Raymond James. Please proceed.

Hi, thanks and good morning. I wanted to start out with the Winter Park redesign. I haven't had a chance to see it yet, but Cheryl, many moons ago, we had You had Ruth 2.0. And could you just provide a little more color on some of the key sort of guest facing changes of the new Winter Park redesign. And does it include both interior and exterior elements?

Thanks, Brian. Yes. And yes, so it was Rouge 2 And then as we were coming and approaching 2020, we had a plan put together for the redesign of restaurants as well as some And then obviously, COVID hit. So this is exciting for us. This restaurant was in plans. We were able to fulfill those Plans and as you can see to a great success. And a lot of those changes, yes, so both exterior and interior, a lot of Changes based on guest feedback we had about the next generation, and how they want to dine. And Specifically, larger patios, better outdoor experience, elevations on the restaurant explaining who we are as a brand And what weighs them inside, a lot of work done around that. Also offering different dining room experiences. So we know we have loyal and faithful special occasion guest, and we have an opportunity in the restaurants for those folks that want to come and celebrate Those moments together in a more formalized comfortable setting. And then we also have what we are calling in this specific restaurant, the atrium, which is Separate dining room off the bar, which allows for a bit of a more energized dining experience for those more frequent guests.

And it's working out well. So we're excited to continue to monitor that, Brian, and see how we can then take the elements that work best for us and roll them into future restaurants as well as remodels. All right. Great. As well as remodels.

All right, great. That's helpful. And Christy, on the remodels, what's the average investment Expect to achieve in them or what's sort of the breakeven on a comp lift you need to achieve an ROI on that investment?

So on the investment overall in the 10 that we're talking about is a combination of both what we'll call major remodels, which will be between $1,500,000 $2,000,000 As well as more minor remodels, which include carpet and chairs, and we will be testing the new exterior on a few of those as well this year. That will Somewhere between $600,000,000 depending on what we can do with that exterior and how much we need beyond just carpet And shares in these restaurants to make sure we provide a refreshed experience for the guests. So that's reflected in that capital guidance that we gave. We are very encouraged by the information that we're seeing out of Winter Park. And we just completed in late in the 4th A couple more remodels. So I'm not going to share any kind of ROI guidance at this point in time, but we would expect Over time as we learn even more about the Winter Park restaurant, we're going to put the right elements into the restaurant to make sure we deliver So 20% return on investment as we need to given those investment levels.

All right, great. And circling back, if I could, just one more on the 4th quarter comp performance. Could you just provide a little more color on what you saw across sales Channels and maybe some perspective on how the private dining side of the business performed and kind of how that compared to Pre COVID level, say, in Q4 2019, just to frame that a bit for us.

Sure. So from a private dining perspective, Every month in the quarter got better. So just as a reminder, Q1 was down 50, 2nd and third quarter were down about 25 each. As we went into 4th quarter, we're still in that down mid-20s range and as we got to the December, we were down 14%. So the total quarter was down 16% versus 2019. When we look at the other channel, which you might be referring to, which is Roost Anywhere, we were at about 4,500 per restaurant per week. And so that was the overall on the channels.

Okay. And then just one quick clarification, I think you mentioned Comps up 17%. That was for the 5 weeks in January? Correct. Just January specific?

Just January specific.

Okay. And would you be willing to just level set where average weekly sales are because these comps Year on year, 3 year, that gets a little disorienting at times.

Sure. So $126,000 for January.

Perfect. All right. I'll pass it along. Thank you.

The next question comes from Todd Brooks with Benchmark Company. Please proceed.

Hey, thanks. Good morning, everybody. Following up on Brian's question Around Winter Park, if you look at the existing base, how many do you think would support a Winter Park type of Remodel going forward and given what that kind of universe looks like, does that change the balance of Maybe new unit growth versus remodels as we look to 2024 and 2025?

Yes. That's a great question, So as we think about the existing portfolio, we probably have about 50% of the restaurants where you wouldn't Be required to do major structural changes to put some of the elements. And again, I think Christy described it well. You don't have to necessarily build the exact Floor plan and existing restaurants to get some of the benefit of the new programming and new design elements and that's really what we're going to go Forward with this year, I understand. So how much of that is related to exterior work? How much is related to having We have a dining room off the bar. And I'll give you an example. We opened Marina del Rey 6 years ago now and it has an opportunity for having a dining room off So there are some existing restaurants that have an opportunity to kind of slide right into what Winter Park It's offering from a programming perspective. So I do think coming forward as we Some of these exterior programs to work and we continue to study Winter Park and we'll talk about what that means for our remodel program. Not prepared to give you that just Okay, great.

Thanks, Sheryl. Secondly, if we look at, Christy, this is just to make sure. So Pricing ran what level in Q4? And then I think you'll roll off about 40 basis points net at the end of March from what you said earlier in the call. But then What's the outlook for further pricing in the remainder of the year?

Sure. So pricing versus 21 in the quarter of Quarter 4 was 4.9%. You're correct, we roll off so Q1 this year, we lose that 40 basis points you discussed. And for the full year, we expect pricing based on this only this one pricing increase, which again, we'll look again in about midyear into September for Another opportunity to take price depending on the dynamics of the cost and inflation environment, but based on what we know today and the price increase we're taking in March, You should expect about 4% full year pricing out for us.

Okay, great. And a final one for me and I'll jump back in the queue also. You gave us some sensitivity around beef cost trends relative to EBITDA from a full year standpoint and Prime, which looks like it or beef, which looks like it was favorable in the 4th quarter, seems to have ticked up here In January with what you talked about from a COGS standpoint, you talk and is it possible to talk about a full year outlook Or beef yet or maybe the willingness of counterparties to contract and at least let you get some of your needs locked in going Forward to take to put some stability around a cost level versus being at the whim of kind of how the market moves here.

Yes, I can tell you there's been a lot of discussion around beef always for us, but and even elevated amount of discussion most recently. January did pick up a little bit. I will tell you February has come down from those highs. The reality of the situation with beef As the herd size is down and until we can bring that back up, which will take some time, we are going to see some challenges on beef. To your point about Can we lock? We are always actively pursuing where we can lock portions of the basket and we're taking smaller Locks wherever we can in addition to larger blocks where we can. But right now, we don't have any significant locks On our beef right now.

Okay, perfect. I'll jump back in. Thanks.

The next question comes from Josh Long with Stephens. Please proceed.

Hi. This is Daniel Breen on for Joshua. Thank you for taking my questions. First, Could you quantify the headwinds from the Boston, Manhattan and Hawaii markets this past quarter?

Sure. The impact was about 480 basis points.

Okay. Okay. Thank you. That's helpful. And then On your proprietary demand platform, you talked about a 10% improvement in hours per entree, translating into that 200 bps of labor improvement. Do you think there's any more incremental labor COGS benefits you think you could pull out from these initiatives and as we go into 2023? I think you had cited around 105 bps of labor, if I heard that correctly?

Yes. So I would tell you that the actual The CNC metric was beyond the 200 bps, but obviously, we had average hourly rate increases and adding managers back. And if you look back at the quarter, we started With significantly higher basis point improvement, but we have been adding managers back into the restaurants every quarter in order to protect the guest experience overall. From a go forward basis, I think our opportunities are much more in the cost of goods And then they are in the labor line. We obviously are experiencing, like everybody, changes in staffing, which requires More training costs, I think. We are committed to keeping the efficiency in our hours per entree Going forward, the ones that we captured already, but I do not see more coming in that particular area for us in the short run.

Okay. Thank you. That's helpful. That's all.

The next question comes from Andy Barish with Jefferies. Please proceed.

Hey, good morning, everyone.

Good morning.

Just wondering on some of the moving parts for 2023. I mean, it sounds like There is going to be a significant amount of investment going on in experience, in digital, Paid media tests, just kind of how you're thinking about that as it rolls through The P and L and maybe the extra week is kind of an offset, Just a couple of those factors, if you could provide a little bit more color, please.

Yes. So as we're thinking about Your first question was on capital investment. The $40,000,000 to $50,000,000 we guided a little tighter obviously, but on On an ongoing basis, especially given the remodels and the refreshes that we're doing, which are important to us. The paid media test It's complete. And so all of the costs associated with that are in the guide that you saw from a marketing perspective. All of the costs associated with launching that paid media program based on the results of our test are in that number already.

Got it. And then what about the kind of smallwares, menus, uniforms, stuff like that?

Got it. Yes. So obviously, built into our overall, I'm not going to give an exact dollar amount per restaurant, But it's not overly significant. And I would say that as you think about our other op as a percentage of sales, which is where you would find Some of the small wares will be relatively consistent on a percentage of restaurant sales perspective.

Okay. And then anything else kind of on Phase 2, I guess, Cheryl, that we should be looking for as the year goes on?

Yes. So I'll speak and I'll turn it to Christy. So we've rolled out the idea of having our data transformation. There are several use So a big one we're focused on this year and I mentioned it in my comments is around inventory and COGS. And I think Christy followed up on that. We think that's an opportunity for us. We look forward to testing that throughout the year. That's a big We look forward to testing that throughout the year. That's a big one for us this year. Getting the hospitality app And now that it's fully rolled and understanding how that could impact kind of top line guest experience, guest status, etcetera, is a big focus for us. And then again, the other the roll in on Food Street Imagine and the new bar menu for this year. Yes. And I'll just add that Cheryl mentioned that at 25 basis points of improvement with the inventory, I think many of us believe that that's a very modest Assumption, but we do need to do a detailed test for this. This is a very complicated Change for our operators and we want to make sure we take some of the learnings from the rollout of both our new POS and our labor management system and A little bit more time in test than we had originally planned to get this right and make sure that we capture the greatest amount of Savings in food by having this inventory system in place.

Great. Appreciate the color. Thank you.

The next question is a follow-up from Brian Vaccaro with Raymond James. Please proceed.

Hi, thanks. I just wanted to circle back on margins and I guess on commodities. Christy, I think you said that the non beef basket was up 1% In the Q4, I guess, how do you expect inflation on the non beef basket to play out moving through 'twenty three? I'm just wondering how much visibility The contracts in place you have on that non beef basket?

Yes. So we expect it to be down about mid single digits for the year based upon those That we have, some of our seafood, particularly seafood products. Obviously, there's still some exposure in areas like dairy that we have to offset. And it's based on the visibility we have. We do have local restaurant This is in some areas including produce and so we'll have to see how all that shakes out. But based on the direct visibility that we have down mid single digits is what we're planning for.

Okay, great. And then on labor, if I could just ask, Christy, I think you said labor was up about 200 bps year on year, But favorable versus pre COVID by about 100 basis points. Do you I think in Previous calls, you've expressed confidence that you could sustain, call it, 200 basis points of labor Favorability, do you still think that's achievable? And then I guess the other question is just on Wage inflation, what are your expectations? Are you starting to see that moderate? I think you set up 9% or 10%, 9.5% in the 4th quarter. What are you expecting on wage inflation through 2023? Thank you.

Yes. So we're 193 bps better versus 2019 and our 200 basis point guide It was always versus 2019. So we're going to keep that efficiency, but clearly Our ability to take price to offset wages is going to flow through and impact Our basis point change for this year on labor. I think we're in a good place where we feel pretty satisfied that the pricing we're taking can offset inflation in both hourly and management wages as we work through the year.

Okay. So that helps that clarify it. So the Total labor was down 190 bps. It was the management labor you were saying that was down 100. Perfect. Okay. Thanks so much.

Thanks, Brian. The next follow-up question comes from Todd Brooks with Benchmark. Please proceed.

Hey, thanks. Just a couple of quick follow ups, if I can. I know that we've been talking about Manhattan as one of the 3 laggard markets. Can you walk through the impact of closing that store in May? Just how should we think about it? What type of volume store was that? What type of hit should that be to Revenues for back half of the year.

The volume the post COVID volume, we were giving it to you in percentages before. I'd say it's about an average volume restaurant, so 6 The $6,500,000 overall, obviously, there's I'm not going to give the exact ROI number that one did, but You can do the math on what we would be losing from a restaurant operating income perspective there.

Okay, great. And then I wanted to follow-up just We didn't touch much on the consumer and how they behaved across holiday, how they built checks, attach rates on apps, desserts, Alcohol, any changes in behavior there? And as a follow on to that, any Color you can give us on gift card sales year over year if that's changed or accelerated at all? Thank you.

So from a check perspective, we were still seeing some trade up Into more apps, higher cost of beef, etcetera, I think that has moderated a bit from what we were seeing earlier in the year, but Adding size, etcetera, so that's still a positive to us from a check perspective overall. From a gift card perspective, we were up low single digits From 'twenty one.

Okay, great. Thanks.

Thank you. At this time, I would like to turn the call back over to management for closing comments.

Thank you everyone for joining the call this morning and for your questions and we look forward to updating you again soon.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.