Ruth's Tops, Outlook Maintained

Ruth’s Hospitality Group Inc. (RUTH - Snapshot Report) reported second quarter 2012 earnings of 17 cents, in line with the prior-year quarter adjusted earnings. However, the results surpassed the Zacks Consensus Estimate of 13 cents. The better-than-expected earnings were driven by higher traffic resulting in higher revenue.

Total revenue enhanced 6.2% year over year to $97.7 million beating the Zacks Consensus Estimate of $95.0 million. Company-owned restaurant sales climbed 5.6% to $91.8 million, while franchise income jumped 12.6% to $3.2 million in the quarter.

Quarter Performance

During the quarter, comparable restaurant sales at Ruth’s Chris Steak House grew 6.0%, implying the ninth consecutive quarter of comparable sales growth, driven by a 3.8% rise in entrées and a 2.1% upside in average guest check. The company also witnessed the 10th consecutive quarter of traffic growth in Ruth’s Chris brand.

Moreover, comparable restaurant sales at Mitchell’s Fish Market jumped 2.3% year over year, due to a 3.2% rise in entrées, partially offset by a 0.9% decline in average guest check. Same-store sales at franchise-owned restaurants increased 4.4%, on the back of a 0.2% and 4.2% rise in both entrée and an average check, respectively. In the domestic market, comparable franchise-owned restaurant sales climbed 6.1%.

During the quarter, restaurant operating expenses as a percentage of restaurant sales plunged 60 basis points (bps) year over year to 51.1%, benefiting from higher sales leverage, partially offset by health insurance costs. Food and beverage costs expanded 170 bps to 32.2%, owing to unfavorable beef costs.

General and administrative expenses stood at $0.9 million as against $6.2 million in the year-ago quarter, attributed to higher personnel costs. Operating Income contracted 7.2% year over year to $8.9 million in the reported quarter.

Liquidity

At the end of the quarter, the company had cash and cash equivalents of $4.5 million and shareholders’ equity of $76.7 million. Long-term debt outstanding at the end of June 24, 2012 was $71.0 million, up from $22.0 million at the end of December 25, 2011.

Outlook

Heathrow, Florida-based, Ruth’s reiterated its fiscal 2012 outlook. The company expects cost of goods to be 31.5% to 32.5% of restaurant sales. Further, it expects marketing and advertising expense to be 3.0% to 3.5% of the total revenue. Capital expenditure for the same period is expected to be in the range of $10 million to $12 million.

In May 2012, the company opened a new Ruth's Chris Steak House in Cherokee, North Carolina and expects to open a company-owned Ruth’s Chris Steak House in Cincinnati, Ohio in November this year. Additionally, management expects to open three franchise-owned restaurants in 2012.

The company remains focused on unit growth. In 2013, it expects to open a new company-owned restaurant in Denver, CO and four to five franchised restaurants.

Our Take

Given the better-than-expected second quarter results, continuous growth momentum at Ruth’s Chris brand, sales improvement at Mitchell’s Fish Market and reiteration of the outlook despite a challenging environment, we expect the Zacks Consensus Estimates to increase for fiscal 2012 and 2013.

However, on the flip side, rising beef costs, lower consumer spending and intense competition from peers like Brinker International inc. (EAT - Analyst Report) and Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) remain concerns.

Ruth’s Hospitality, currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term “Neutral” recommendation on the stock.