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Florida-based Ruth’s Hospitality Group Inc. (RUTH - Snapshot Report) recently reported third quarter 2012 earnings of 2 cents, a penny ahead of the Zacks Consensus Estimate. The current quarter earnings also outperformed the prior-year quarter’s break-even earnings. The better-than-expected earnings were driven by higher traffic resulting in higher revenue.

Total revenue climbed 5.7% year over year to $84.8 million, beating the Zacks Consensus Estimate of $84.0 million. Company-owned restaurant sales ascended 5.5% to $81.4 million, while franchise income jumped 11.2% to $3.3 million in the quarter.

Quarter Performance

During the quarter, comparable restaurant sales at Ruth’s Chris Steak House grew 5.9%, implying the 10th consecutive quarter of comparable sales growth, driven by a 3.6% rise in traffic and a 2.2% upside in average guest check. The company also witnessed the 11th consecutive quarter of traffic growth in Ruth’s Chris brand.

Moreover, comparable restaurant sales at Mitchell’s Fish Market leaped 4.6%, driven by a 5.2% hike in traffic, partially offset by a 0.6% drop in average guest check. Same-store sales at franchise-owned restaurants increased 3.1%, on the back of a 2.9% upside in the domestic market and a 3.9% hike in the international market.

During the quarter, restaurant operating expenses as a percentage of restaurant sales plunged 80 basis points (bps) year over year to 55.5%, benefiting from higher sales leverage and cost control efforts.  Food and beverage costs spiked 70 bps to 31.8%, owing to unfavorable beef costs.

Marketing and advertising costs increased 38% to $2.2 million, attributed to a shift in advertising expense from the second quarter to the third and fourth quarters of 2012. General and advertising costs stretched 3% to $6.0 million. However, operating income enhanced 10.0% year over year to $1.8 million in the reported quarter.

Liquidity

At the end of the quarter, the company had cash and cash equivalents of $3.9 million and shareholders’ equity of $78.0 million. Long-term debt outstanding at the end of September 23, 2012 was $69.0 million, up from $22.0 million at the end of December 25, 2011.

Outlook

Ruth’s reiterated its fiscal 2012 outlook again. 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.

Store Update

In October 2012, the company opened a new Ruth's Chris Steak House in Cincinnati, Ohio and in August, franchisees unveiled Ruth’s Chris Steak House in Singapore and El Salvador. Additionally, management expects to open one franchise-owned restaurant in late 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

We are impressed by Ruth’s third-quarter results, its ability to drive traffic in an uncertain economic environment and the second consecutive sales improvement at Mitchell’s Fish Market. The company also remains focused on expanding the Ruth’s Chris brand, as the brand continues to perform well.

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 #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.

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