Ruth's Hospitality Misses by a Penny

Heathrow, Florida-based Ruth’s Hospitality Group Inc. (RUTH - Snapshot Report) reported second quarter 2011 adjusted earnings of 10 cents per share, missing the Zacks Consensus Estimate by a penny, but ahead of the prior-year quarter earnings of 8 cents per share. The year-over-year upside in earnings was driven by top-line growth.

Total revenue spiked 4.8% year over year to $92.6 million. Company-owned restaurant sales climbed 5.1% to $87.5 million, while franchise income jumped 3.4% to $2.9 million.

During the quarter, comparable restaurant sales at Ruth’s Chris Steak House grew 5.8%, driven by a 3.3% rise in entrées and a 2.4% upside in average guest check. However, comparable restaurant sales at Mitchell’s Fish Market slipped 1.4%, due to a 4.7% decline in entrées, partially offset by a 4.7% rise in average guest check. Same-store sales at franchise-owned restaurant increased 7.1%.

During the quarter, restaurant operating expense dropped 150 basis points (bps) year over year to 51.7% and depreciation and amortization slipped 50 bps to 3.9%. However, food and beverage costs expanded 120 bps to 30.5%, due to unfavorable beef costs.

Operating margin escalated 30 basis points to 9.4% in the reported quarter.

Financial Position

At the end of the second quarter, the company had cash and cash equivalents of $5.0 million and shareholders’ equity of $80.4 million. The company also strengthened its balance sheet through aggressive debt reduction. Long-term debt outstanding at the end of the quarter was $51.0 million.

Outlook

One of the leading upscale dining operators, Ruth’s reaffirmed its fiscal 2011 outlook. The company expects cost of goods sold to be 30.5%–31.5% of restaurant sales and tax rate in the range of 25% to 30%. Capital expenditure for the same period is expected in the range of $10 million to $12 million.

Our Take

The company’s sales volume increased during the quarter, implying higher customer visitation in upscale dining restaurants. Moreover, despite food cost inflation, restaurant margin enhanced during the quarter.

Hence, we believe Ruth’s will drive improved earnings going forward. We expect estimates to go up in the coming days, based on the second quarter results. The Zacks Consensus Estimates for 2011 and 2012 are pegged at 35 cents and 43 cents per share, respectively.

One of Ruth’s competitors, Morton’s Restaurant Group, Inc. (MRT) reported second quarter 2011 adjusted earnings of 5 cents, edging out the Zacks Consensus Estimate by a penny due to higher comps and margin expansion.

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Read the full analyst report on MRT