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One of the leading upscale dining operators, Ruth’s Hospitality Group Inc. (RUTH - Snapshot Report) reported fourth quarter 2011 adjusted earnings of 11 cents, surpassing the Zacks Consensus Estimate by a penny as well as the prior-year quarter earnings by a couple of cents. The better-than-expected results were driven by higher traffic and comps growth.

Total revenue enhanced 7.1% year over year to $99.6 million. Company-owned restaurant sales climbed 6.8% to $95.4 million, while franchise income jumped 13.4% to $3.6 million.

In full year 2011, the company reported earnings from continuing operation of 38 cents per share versus 36 cents per share in the prior year. Total revenue leaped 4.7% to $369.6 million.

Quarter Performance

During the quarter, comparable restaurant sales at Ruth’s Chris Steak House grew 7.7%, implying the seventh consecutive quarter of comparable sales growth, driven by a 6.1% rise in entrées and a 1.5% upside in average guest check. The company also witnessed the eighth consecutive quarter of traffic growth for Ruth’s Chris brand.

Moreover, comparable restaurant sales at Mitchell’s Fish Market turn around during the quarter. Comps crept up 0.4%, benefiting from a 1.4% rise in average guest check, partially offset by a 0.9% decline in entrées. Same-store sales at franchise-owned restaurant increased 8.0%, on the back of a 7.8% and 0.2% rise in both entrée and an average check, respectively.

During the quarter, restaurant operating expense as a percentage of restaurant sales, increased 10 basis points (bps) year over year to 50.9%, attributable to increased health insurance costs.  Food and beverage costs expanded 110 bps to 31.6% owing to unfavorable beef costs.

General and administrative expenses stood at $5.8 million as against $6.5 million in the year-ago quarter. Operating margin contracted 270 bps year over year to 3.7% in the reported quarter.

During the quarter, the company opened a franchised unit in Asheville, North Carolina.

Financial Position

At the end of 2011, the company had cash and cash equivalents of $5.0 million and shareholders’ equity of $80.4 million. Long-term debt outstanding at the end of 2011 was $51.0 million, up from $22.0 million in the year-ago quarter.

Outlook

Heathrow, Florida-based, Ruth’s provided its fiscal 2012 outlook. The company expects cost of goods to be 31.0%–32.0% of restaurant sales and marketing and advertising expense to be 3.0% to 3.5% of the total revenue. Capital expenditure for the same period is expected in the range of $10 million to $12 million and diluted share outstanding between 43.3 million and 44.0 million.

Our Take

The company’s continues to experience higher sales volume and also remain encouraged by Mitchell’s same-store sales that rebounded during the reported quarter.

However, we remain cautious on the stock based on cost inflation, lower consumer spending and intense competition from peers like Brinker International inc. (EAT - Analyst Report) and Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) with respect to price, service, location and concept in order to drive traffic.

The estimates have not budged in the last 30 days, implying that the analysts do no see any near-term catalysts. The Zacks Consensus Estimates for 2012 are pegged at 43 cents per share.

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