Ruth’s Hospitality Group, Inc. (NASDAQ: RUTH) Q2 2022 earnings call dated Aug. 05, 2022
Corporate Participants:
Michael Hynes — Vice President of Finance and Accounting
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Analysts:
Nicole Miller — Piper Sandler Companies — Analyst
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Andy Barish — Jefferies Group LLC — Analyst
Todd Brooks — The Benchmark Company, LLC — Analyst
Presentation:
Operator
Good morning, and welcome to the Ruth’s Hospitality Group, Inc., Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I will now turn the call over to your host, Mr. Mike Hynes, Vice President of Finance and Accounting. Please go ahead, sir.
Michael Hynes — Vice President of Finance and Accounting
Thank you, Ryan, and good morning, everyone. Joining me on the call today is Cheryl Henry, our President, Chief Executive Officer, and Chairperson of the Board; and Kristy Chipman, our Chief Financial Officer and Chief Operating Officer.
Before we begin, I’d first like to remind you that part of our discussion today will include forward-looking statements. These statements are not guarantees of our future performance, and therefore, undue reliance should not be placed upon them. We would also encourage you to refer to the Investor Relations section of our website at rhgi.com for copies of today’s earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating and financial results.
During this call, we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today’s call.
I would now like to turn the call over to the company’s Chief Executive Officer, Cheryl Henry.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Thank you, Mike, and good morning, everyone. Our commitment to serving the highest quality food with genuine hospitality has always been the core of who we are and I could not be prouder of our team members as they embody this commitment every day.
Kristy and I experienced this firsthand at our Long Beach, California, and Worcester, Massachusetts, openings this past weekend as we watched our highly experienced, best-in-class opening teams work with our new team members to ensure they understood every tactical element of what’s required for a flawless execution. That dedication is ingrained in our culture and is what drives our success.
Turning to our second quarter results. We delivered exceptional performance as we continue to enjoy strong demand from our just-because and special occasion guests and improved private dining sales. This resulted in a strong topline momentum demonstrated by double-digit comparable sales growth over both 2021 and 2019.
For the period, we were also able to effectively manage costs resulting in strong year-over-year adjusted earnings per share growth of 20% and 41% versus the same quarter in 2019. Beyond these numbers, we continue to make progress growing our business organically, including investments in new restaurants, relocations, remodels, and digital technologies.
Let’s begin with an update on our development plan. For 2022, we kick off the year with the opening of our Aventura, Florida restaurant, and as I mentioned, we opened two new restaurants earlier this week in Long Beach, California, and Worcester, Massachusetts. Additionally, we will open our fourth restaurant of the year in just a couple of weeks in Melville, New York. This development adds to the restaurants in our territory on Long Island, which as you recall, we repurchased from one of our franchisees in 2019.
Lastly, we are working to open a fifth site by the end of 2022. However, due to construction delays, it may push a month or two into early 2023. In terms of 2023, we’ve already signed three leases with two additional agreements in their final negotiation stages.
Moving on to our investments in digital technologies. We completed the installation of our booking and capacity data platform during the quarter. By capturing and analyzing more data, we’re already improving demand forecast and table management and that has positioned our restaurants to increase traffic on weekends and holidays.
With this new platform, we experienced comp sales growth of between 25% and 30% versus 2019 on all three of our major holidays during the quarter, Easter, Mother’s Day, and Father’s Day. We also made progress with our new point-of-sale systems and are nearing completion of our labor management system rollout. These technologies will serve as a foundation for continued efficiency and put our teams in a better position to deliver on our already world-class hospitality.
Another key investment we are making is in the hiring, training, and development of our team. Most recently, we completed GM and Chef Meetings across the country to ensure focus on back-to-basics operation, staffing and training, and new restaurant technology. The goal is to provide our team members with the tools they need to ensure a superior guest experience in a competitive and dynamic market.
Investing in new restaurants and other growth initiatives are part of our balanced capital allocation plan. That also includes returning excess capital to our shareholders through debt reduction, dividends, and share repurchases. If you recall, we resumed the dividend in January of this year at $0.12 per share and increased it to $0.14 in Q2. We will be paying a Q3 dividend of $0.14 per share in September. In addition, we paid down $10 million in debt and repurchased $9.5 million worth of shares during the quarter, and I’m pleased to announce that our Board has approved a new $60 million share repurchase authorization, which further demonstrates our commitment to long-term shareholder returns.
In all, we believe our actions to date have positioned us to achieve sustainable growth through our investments and create significant long-term value.
I’ll now turn the call over to Kristy to cover the specifics of the quarter.
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Thank you, Cheryl. For the second quarter ended June 26, 2022, we reported GAAP net income of $10.3 million or $0.31 per diluted share compared to $12.4 million or $0.36 per diluted share last year. Adjusted earnings per common share was $0.44, compared to $0.36 in the prior year quarter. Please refer to our earnings release for a reconciliation of GAAP to adjusted EPS.
Our strong quarterly results were driven by total revenue growth and company-operated restaurant sales growth of approximately 16% each. Comp sales for the quarter increased 12.6% versus 2021 and increased 18.6% compared to 2019. With the lack of normal seasonal trends in 2021 as the company — country reopen, we continue to believe 2019 remains a relevant comparison for sales trends at this point.
As compared to 2019 by month, comparable restaurant sales grew 24.4% in April, 20.1% in May, and 10.3% in June. While June comps softened compared to the prior two months, similar to the overall industry slowdown, we are pleased with the double-digit comp growth. July results will be similar to June with comp growth expected to be positive in the low double-digits.
Franchise income for the quarter was $5.1 million, up 13.3% versus the same period last year, driven by comparable franchisee sales growth of 12.3%. Other operating income was $2.8 million, up 24.5% versus last year. Overall, restaurant margin as a percent of sales declined approximately 65 basis points versus 2021, primarily due to higher labor and other operating expenses, offset by lower food and beverage costs. While slightly lower than 2021, this quarter’s restaurant margin is one of the highest quarterly margins we have won in our history.
Food and beverage costs decreased 56 basis points for the quarter to 29.8%, as these prices eased versus last year and we saw the benefit of the price increase we took towards the end of March. Overall, food and beverage inflation for the quarter was about 8% versus 2021, primarily due to beef deflation of approximately 6% and inflation in the rest of the basket of about 23%. As we move to the back half of the year, we expect beef deflation similar to this quarter and mid-single-digit inflation on the rest of the basket, resulting in relatively flat year-over-year food and beverage costs versus 2021.
Labor expense for the quarter versus 2021 increased 84 basis points, primarily due to hourly wage increases of approximately 8% and increased management labor. Based on our results to date, we remain confident with our ability to maintain approximately 200 basis points of labor savings compared to 2019. That said, if conditions warrant additional staffing or increased training expenditures, we will make the necessary investments to protect the guest experience.
Moving beyond restaurant expenses, combined marketing and G&A as a percent of revenues was 10.9%, compared to 10.8% in the second quarter of 2021, reflecting the timing of expenses related to the implementation of our new data platform and the addition of certain key resources into the business. That said, we expect marketing and G&A to be in the range of 10.5% to 10.8% of total revenues for the full year. As of June 26th, we had $45 million in cash, and our outstanding debt was $40 million. During the second quarter, we repaid $10 million in debt for a total repayment of $30 million since the beginning of 2022. And as of August 1st, our cash balance was approximately $47 million.
I’ll now turn the call back to Cheryl for a few closing comments.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Thank you, Kristy. In closing, the solid performance in the first half of 2022 is a testament to the hard work and dedication of our team. They are comprised of veteran operators and franchise partners with decades of experience, and I believe they are the best in the business at understanding how great food and genuine hospitality directly link to business success. They have also managed through numerous cycles over the last two decades, and as demonstrated by the pandemic, can pivot and adjust accordingly.
Thank you for joining us on the call this morning. We continue to invest in the future and believe Ruth’s Chris is ideally positioned to capture the many opportunities ahead. We look forward to taking your questions. Ryan, can you please open the line for those questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question is from the line of Nicole Miller from Piper Sandler. Please go ahead.
Nicole Miller — Piper Sandler Companies — Analyst
Thank you so much, and good morning. First, Cheryl, I want to ask about your comment, not about comps in total, but if I understood this comment correctly, you talked about the three holidays in the quarter and comping up significantly on those days. Is that a point you’re making about still having excess capacity and the ability to drive volumes even higher? I just want to dig a little bit more into that.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Yeah. Thanks, Nicole. Great question, because I think historically, as you know, those holidays have been some of our highest from a volume standpoint. And when you think about that number versus 2019, certainly, there is more capacity and guess the demand was there. And so that is a testament to the teams using the new tools we’ve given them. And I think going forward, as we think about it, and this was the first real big holiday season that we’ve had those tools in place, we will continue to balance the guest experience with using that additional capacity. And so we’re excited about it. We are careful and balanced about it. We want to make sure the experience is what the guests want, but certainly, we saw from this that there is some capacity even in those really strong historic holidays.
Nicole Miller — Piper Sandler Companies — Analyst
And just to define capacity, I mean, you can get this from turning a table faster, but also from opening up more dayparts, brunch specifically, right? Do they come from both areas or just specifically from efficiencies and turning a table?
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
It really was the latter, Nicole, and so we did not expand operating hours significantly. This was really about being thoughtful in managing the flow of the guests in the restaurants and allowing the teams to staff accordingly, understand where the demand is, and spreading that out throughout the day.
Nicole Miller — Piper Sandler Companies — Analyst
Awesome. And then just the last question on 2023 development. Obviously, a good head start. Can you talk a little bit high level about the geographies, so existing markets, new markets filling in acquired markets has certainly been a goal. And then since you’re getting such an early jump, would it be the normal cadence for development still always back-end loaded, or would potentially a couple of stores open a little bit earlier next year? Thank you.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Yeah. And so — we’ve announced the three, and so you mentioned one of the markets, Florida. Obviously, Florida is a great market for us, and we are looking for infill opportunities there. And also, in some of our existing markets, just looking for those infill. And one of the things we talked about was looking for second-gen space, especially in this inflationary time, where construction costs we know have escalated. And so, finding existing restaurant space that we can remodel and work with, that was — that’s the third opportunity we’ve talked about in the New York market.
Nicole Miller — Piper Sandler Companies — Analyst
Thank you.
Operator
Thank you. Our next question is from the line of Brian Vaccaro from Raymond James. Please go ahead.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Hi. Thanks, and good morning. I was hoping to circle back on sales, and obviously, very strong trends there, but could you elaborate on what you saw moving through June? I’m curious if that’s primarily a traffic or check dynamic and maybe you could touch on any changes you’re seeing among different consumer cohorts, changes in behavior, order patterns, etc.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
So I think what we actually saw, I’ll go back to March in — sorry, April and May, really strong, right, coming out of what I think was the Omicron wave and people taking advantage of another opportunity to get back out. And so while June softened, we were still double digits of growth. So we were glad to see that. We look on a regular basis to understand, are people trying to manage check, are we seeing softening because people are feeling the effect of inflation, and we have not seen that yet. So that is right now a good sign for us. We did see, during the quarter, and I mentioned it in my comments, private dining come back a little stronger. And so we mentioned on the Q1 call that, that was an area of focus for us, and we’ll certainly be focusing on that as we look at the back half of the year and especially the holiday season as well.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Okay. Great. And, Kristy, I think you mentioned July comps running up low-single-digits year-on-year. Could you just level set that versus ’19, or maybe give us a sense of where average weekly sales were in July?
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
So I think it’s low double digits. First of all, similar to June, not low single digits for July. Yeah, versus 2019, just to be clear. And then as far as — what are you looking for? Are you looking for 2019, or what we think it’s going to be?
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Sorry. Just — or just average weekly sales in July.
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Yeah, about — somewhere between $102,000 and $103,000.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Okay, okay. Thanks. And I just wanted to circle back on the COGS front just to make sure I understood the message there. Did you say that you expect your second half COGS ratio to be similar to the level that you saw in the second quarter around 30%?
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
No. No, I said if fees continue to be deflated relative to last year, similar to what we saw this quarter, we are starting to lap over some higher commodity inflation in the back half of last year. So we expect our overall inflation to be relatively flat year-over-year versus ’21, for the last six months of 2021.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Okay, okay. So year-on-year inflation on the basket expected to be relatively flat. Okay. Thank you for clarifying that. And then I guess just…
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
I’m sorry, Brian, including beef payments.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Including beef?
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Yes.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
Right, right. Okay.
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Yeah.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
That’s great. Thank you for clarifying that. And then I guess within the other operating cost line, some very strong leverage there compared back to 2019. Can you just unpack that a little bit further and maybe tie in or elaborate on how some of the efficiency initiatives that you have executed and still are — seem to be on the way with some of the initiatives you talked about on the call? Can you just talk about how that’s showing up in that line, whether it be labor efficiency or within the other opex ex-labor? Thank you.
Michael Hynes — Vice President of Finance and Accounting
Hey, Brian. This is Mike. So, on the labor, we’re continuing to see efficiency versus 2019 on the labor front, consistent with what we’ve talked about in prior quarters. On the rest of the restaurant operating expense line, we’re really seeing consistent costs versus 2019. Some inflation there, but really, we’re benefiting from the higher check, which is giving us some more leverage beyond the inflation we’re seeing for those costs.
Brian Vaccaro — Raymond James Financial, Inc. — Analyst
All right. Thank you. I’ll pass it on.
Operator
Thank you. Our next question is from the line of Andy Barish from Jefferies. Please go ahead.
Andy Barish — Jefferies Group LLC — Analyst
Hey. Good morning. Just wondering if you could share the kind of the impact of some of the bigger cities that you’ve called out in the past that have lagged in the quarter, and how far back are you on sort of that private event or corporate business, if you will?
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Yeah. So I’ll take the first part, and then if Cheryl want to take part in there, she can jump in there as well. So we’re about 560 basis points still depressed due to Boston, Hawaii, Manhattan for the quarter. So getting a little bit better versus our prior trends, they’re making up a little bit of ground, but they still create a pressure on our overall comp base.
From — also, private dining, overall private dining improved significantly in Q2, primarily April and May, softened a little bit again in June, but it’s probably back about — I’ll say, about 75% of what it was in 2019 during the quarter, which compares to about 50% in Q1. So we still have some room there and we’re doing everything we can right now to make sure we capture it for the holiday season.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
And I’ll just add a little color, Andy. We watch it by market, and we do have some markets that are close to fully back to 2019, some that are over, and then you have some that are significantly lagging kind of pulling the rest down. And so, we are fortunate to be able to target those markets with resources, especially going into the back half to try to use that as an opportunity for growth.
Andy Barish — Jefferies Group LLC — Analyst
And are — the resumption of wine dinners, has that been part of that, and is that in that revenue bucket as you look at that?
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Yes, it is. So the wine dinners were counted as part of the private dining revenue center. And the demand for those has been strong. We’ve got a couple more coming in the back half. We’re working now on our calendar for 2023. So we’re glad to have those. The guests are thrilled that they’re back. We get a lot of comments on that, and we’ll keep building that program.
Andy Barish — Jefferies Group LLC — Analyst
Got you. And then, I was interested in the kind of remodel comments on some of the new unit growth. How many of the five or so do you think for next year are remodels?
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
So we’re going to open five new restaurants next year. We are still looking at what our overall reinvestment plan is for existing locations. I would imagine that we’ll have one to two, maybe upwards of three full remodels next year, and then we’ll continue to do refreshes to the existing restaurant base as well. Andy, you might have been talking about what I mentioned second-generation space. Is that what you were referencing?
Andy Barish — Jefferies Group LLC — Analyst
Yeah. I’m sorry, I asked that. Not…
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Okay.
Andy Barish — Jefferies Group LLC — Analyst
Yeah.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
So two of the ones we’ve talked about having three are actually second-gen space.
Andy Barish — Jefferies Group LLC — Analyst
And I know each of those is kind of an individual case and most of the time, they are — they do have some advantages, but obviously, sometimes, there are some surprises. Is there any sense on how much that could help on the investment cost side of things?
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
So I mean relative to — Lake Grove is one of those sites for us that we recently opened, and the capital cost for that was almost half. It was about half of what a new restaurant would be. And so, there’s significant benefit from an investment perspective, as long as when you get in and you start tearing up the wall is you don’t find anything unforeseen, which we try to do a good job when we’re looking at these locations. So I think from an overall return perspective, these are very good sites for us because they are lower investment and they tend to hit average unit volumes, maybe slightly under what our average is, but not significantly.
Andy Barish — Jefferies Group LLC — Analyst
Okay. Helpful. Thank you
Operator
Thank you. [Operator Instructions] Our next question is from the line of Todd Brooks from The Benchmark Company. Please go ahead.
Todd Brooks — The Benchmark Company, LLC — Analyst
Hey. Good morning, everybody, and congrats on the quarter. And I certainly want to second Cheryl’s comments about Worcester. It’s a great addition to the city here and we had a great experience our first-time visiting, so welcome to Worcester certainly.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Thank you.
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Thank you.
Todd Brooks — The Benchmark Company, LLC — Analyst
A few follow-up questions, not much left here. But on the table management side, as you look at the benefits that you got across the three holidays in Q2, how are you translating that to additional capacity you think you can squeeze out of that kind of post-Thanksgiving through the end of the year holiday season?
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Yeah. So it’s a couple of things. One, we’re doing it every weekend on a weekly basis. And so, it really is about the attention and detail of the teams in the restaurants on every single week basis to make sure we’re doing the same — having the same philosophy around our weekends. And certainly, we know as we go into the traditionally and historically busy holiday times, it’s an opportunity.
I think what we learned from the first round is that we want to make sure we are balancing the opportunity to completely maximize versus optimize and that’s really the balance of using every single moment and seat against what is the experience the guests want. So it is absolutely part of our planning for the back half of the year, but we’ll do it on a very balanced basis.
Todd Brooks — The Benchmark Company, LLC — Analyst
Okay. Great. Second question. You talked about Hawaii and the Boston, New York bucket, but I was just wondering in the second quarter, you saw a lifting of some of the pretesting requirements to come into the U.S. In the more tourist-focused markets, are you seeing a lift from travel-related customers at all since the listing of that requirement?
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
So Hawaii, it’s a little bit sporadic at this point. So I don’t know that I can attribute it exactly to what you’re describing. Across the board, I think we would say that the July — or June was what it was from a strong start to a slowdown in the back half of the year — back half of the month, sorry about that. So, yeah, I mean I don’t know that we can attribute anything to particularly travel alone.
Todd Brooks — The Benchmark Company, LLC — Analyst
Okay. Great.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Hawaii is still not back, and I think that’s an opportunity for us as the markets really start to open up more and people start to travel, but that’s kind of still to come for us.
Todd Brooks — The Benchmark Company, LLC — Analyst
Okay. Great. And the final one, if I can. You talked about the beef costs in the quarter, and you gave some forward thinking on the basket. Are you seeing any more willingness on the part of your supplier partners to lock in kind of supply at a price? Are you able to I think some of your existing hedges run off in the August time frame if I remember correctly? What’s the hedged outlook for prime beef in the back half? Thank you.
Kristy Chipman — Chief Financial Officer, Chief Operating Officer
Great question. So we were able to extend that lock that we had through August into the November time frame. And so we are locked on about 20% of our overall beef. Prime grading is down, so beyond that, I don’t necessarily expect that our suppliers are going to be looking to offer many more locks beyond what we’ve already taken. But again, I think we expect that we are starting to come over record-level beef prices from last year. And so I think we’re pretty confident that we’re going to see flat to deflationary beef prices for the last six months of the year.
Todd Brooks — The Benchmark Company, LLC — Analyst
Okay. Great. Thanks, Kristy.
Operator
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now, I would like to turn the call back to Cheryl Henry for closing remarks.
Cheryl Henry — President, Chief Executive Officer, and Chairwoman
Thank you, Ryan, and thank you, all, for joining us on the call this morning. We look forward to speaking with you again soon.
Operator
[Operator Closing Remarks]