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One of the leading upscale dining operators, Ruth’s Hospitality Group Inc.’s (RUTH - Snapshot Report) second-quarter 2013 earnings of 20 cents per share beat both the Zacks Consensus Estimate and comparable year-ago quarter’s earnings of 17 cents by 17.6%. Earnings in the quarter received a boost from the company’s higher top line and margin expansion.

Quarterly revenues increased 4.8% year over year to $101.8 million and surpassed the Zacks Consensus Estimate of $101 million by nearly 0.8%. Higher restaurant sales and increased franchise income drove the top-line during the quarter.

Behind the Headlines Numbers

Company-owned restaurant sales climbed 4.3% year over year to $95.1 million, led by a 4.3% rise in average weekly sales, increased traffic growth and higher comps gain at Ruth’s Chris Steak House restaurants.

During the quarter, comps at Ruth’s Chris Steak House grew 4.6%, driven by a 2.1% rise in entrées and a 2.5% increase in average guest check. However, comps in the quarter were slightly affected by the time shift of Easter to the first quarter. Moreover, comps at Mitchell’s Fish Market were down 1.4%, due to a 2.8% decline in traffic, offset by a 1.5% rise in average guest check.

During the quarter, franchise income jumped 12.5% to $3.6 million, gaining from 3.6% and 3.2% rise in domestic and international comps, respectively, at franchised restaurants and higher unit expansion.

The company’s operating margin expanded 150 basis points (bps) to 10.7% in the reported quarter, driven by top-line growth, lower food cost and better menu pricing.

During the quarter, restaurant operating expenses as a percentage of restaurant sales was 50.3%, down 74 bps year over year, attributable to minimized occupancy costs. Food and beverage costs as a percentage of restaurant sales also declined 180 bps to 30.4% benefiting from the reduction in the beef costs and 2% improvement in menu pricing.

Store Update

At the end of the quarter, Ruth’s Hospitality operates nearly 150 company-owned and franchised restaurants worldwide.

Outlook

Heathrow, Fla.-based, Ruth’s Hospitality has revised its full year 2013 outlook. The company now expects its cost of goods sold, as a percentage of restaurant sales within 31.5%–32.5%, down from the previous estimate of 32.5%–33.5%. Restaurant operating expenses, as percentage of restaurant sales, will continue to be within 50.0%–51.0%.

Our Take

With the help of its sales-building initiatives, continued margin expansion and growing franchise businesses, Ruth’s Hospitality has succeeded in posting solid earnings and revenue growth in the past three quarters. The Zacks Rank #2 (Buy) company is also focusing more on expanding its Ruth’s Chris Steak brand, as it continues to perform well. Moreover, moderating beef cost positively impacted the margin, going ahead.

Some other players in the restaurant industry which is expected to perform well, going ahead, include Burger King Worldwide, Inc. (BKW - Analyst Report), Buffalo Wild Wings Inc. (BWLD - Analyst Report) and Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).

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