ITEM 1. FINANCIAL STATEMENTS
RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements—Unaudited
(1) The Company and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of June 27, 2021 and December 27, 2020 and for the thirteen and twenty-six week periods ended June 27, 2021 and June 28, 2020 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated financial statements include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of June 27, 2021, there were 148 Ruth’s Chris Steak House restaurants, including 73 Company-owned restaurants, three restaurants operating under contractual agreements and 72 franchisee-owned restaurants, including 21 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan. All Company-owned restaurants are located in the United States. The Ruth’s Chris Steak House located in Bellevue, WA permanently closed in April 2021.
The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the periods ended June 27, 2021 and June 28, 2020 are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the SEC’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2020.
The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended June 27, 2021 and June 28, 2020 each contained thirteen weeks and are referred to herein as the second quarter of fiscal year 2021 and the second quarter of fiscal year 2020, respectively. Fiscal years 2021 and 2020 are both 52-week years.
COVID-19 Impact
In March 2020 the World Health Organization declared the novel coronavirus 2019 (COVID-19) a pandemic and the United States declared it a National Public Health Emergency, which has resulted in a significant reduction in revenue at the Company’s restaurants due to mandatory restaurant closures, capacity limitations, social distancing guidelines or other restrictions mandated by governments across the world, including federal, state and local governments in the United States. As a result of these developments, the Company has experienced a significant negative impact on its revenues, results of operations and cash flows compared to periods prior to the onset of the pandemic. During the second quarter of fiscal year 2021 most of the Company’s restaurants were operating with open dining rooms. As of June 27, 2021, 75 of the 76 Company-owned and -managed restaurants were open and one was closed. This is an unprecedented event in the Company’s history, and it is uncertain how the conditions surrounding COVID-19 will continue to change. The extent to which COVID-19 will continue to impact the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the unknown duration and severity of the COVID-19 pandemic, which may be impacted by variants of the COVID-19 virus and the adoption rate of the COVID-19 vaccines in the jurisdictions in which the Company operates, the actions taken to contain the impact of COVID-19, and further actions that may be taken to limit the resulting economic impact.
7
Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the periods presented to prepare these condensed consolidated financial statements in conformity with GAAP. Significant items subject to such estimates and assumptions include the carrying amounts of property and equipment, goodwill, franchise rights, operating lease right of use assets and obligations related to gift cards, income taxes, operating lease liabilities, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update modifies Topic 740 to simplify the accounting for income taxes. The Company adopted this new standard on December 28, 2020. The adoption of ASU 2019-12 did not have a significant impact on the Company’s financial reporting.
(2) Fair Value Measurements
The carrying amounts of cash and cash equivalents, receivables, prepaid expenses, accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair values due to their short duration. Borrowings classified as long-term debt as of June 27, 2021 and December 27, 2020 have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying value, plus unpaid interest and deferred financing costs of $681 thousand at June 27, 2021, represents a reasonable estimate of FV (Level 2).
The Company’s non-financial assets measured at fair value on a non-recurring basis as of June 27, 2021 were as follows (in thousands):
|
|
Fair Value as of June 27, 2021
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Total Losses on Impairment
|
|
Long-lived assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
306
|
|
The Company’s non-financial assets measured at fair value on a non-recurring basis as of December 27, 2020 were as follows (in thousands):
|
|
Fair Value as of December 27, 2020
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Total Losses on Impairment
|
|
Long-lived assets
|
|
$
|
1,708
|
|
|
$
|
1,708
|
|
|
$
|
—
|
|
|
$
|
12,736
|
|
Territory rights
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,101
|
|
(3) Leases
The Company leases restaurant facilities and equipment. The Company determines whether an arrangement is or contains a lease at contract inception. The Company’s leases are all classified as operating leases, which are included as operating lease right of use assets (“ROU assets”) and operating lease liabilities in the Company’s condensed consolidated balance sheet. Operating lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. ROU assets are measured based on the operating lease liabilities adjusted for lease incentives, initial indirect costs and impairments of operating lease assets. Minimum lease payments include only the fixed lease components of the agreements, as well as any variable rate payments that depend on an index, which are measured initially using the index at the lease commencement dates. To determine the present value of future minimum lease payments, the Company estimates incremental borrowing rates based on the information available at the lease commencement dates, or amendment date for contract modifications. The Company estimates its incremental borrowing rates by determining the synthetic credit rating of the Company using quantitative and qualitative analysis and then adjusting the synthetic credit rating to a collateralized credit rating. A spread curve is then developed using the U.S. corporate bond yield curve of the same credit rating and the U.S. Treasury curve to determine the rate for different terms. The expected lease terms include options to extend when it is reasonably certain the Company will exercise the options up to a total term of 20 years. Total lease cost is expensed on a straight-line basis over the life of a lease. Additionally, incentives received
8
from landlords used to fund leasehold improvements reduce the ROU assets related to those leases and are amortized as reductions to lease expense over the lives of the leases. Variable lease payments that do not depend on a rate or index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.
On April 10, 2020, the FASB issued a staff Q&A (the “Staff Q&A”) to provide guidance on its remarks at the April 8, 2020 Board meeting about accounting for rent concessions resulting from the COVID-19 pandemic. The Staff Q&A affirmed the discussion at the April 8, 2020 meeting by allowing entities to forgo performing the lease-by-lease legal analysis to determine whether contractual provisions in an existing lease agreement provide enforceable rights and obligations related to lease concessions as long as the concessions are related to COVID-19 and the changes to the lease do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. In addition, the Staff Q&A affirmed that entities may make an election to account for eligible concessions, regardless of their form, either by (1) applying the modification framework for these concessions in accordance with Topic 842 or (2) accounting for the concessions as if they were made under the enforceable rights included in the original agreement.
Due to the impacts of the COVID-19 pandemic, the Company initiated negotiations with its landlords to modify its restaurant lease agreements. During the second quarter of 2021, the Company amended 9 leases. Where applicable, the Company has elected to account for eligible lease concessions as if they were made under the enforceable rights included in the original agreement pursuant to the Staff Q&A.
As of June 27, 2021, all of the Company-owned Ruth’s Chris Steak House restaurants operated in leased premises, with the exception of the restaurant in Ft. Lauderdale, FL, which is an owned property, and the restaurants in Anaheim, CA, Lake Mary, FL, Princeton, NJ and South Barrington, IL, which operate on leased land. The leases generally provide for minimum annual rental payments with scheduled minimum rent payment increases during the terms of the leases. Certain leases also provide for rent deferral during the initial term, lease incentives in the form of tenant allowances to fund leasehold improvements, and/or contingent rent provisions based on the sales at the underlying restaurants. Most of the Company’s restaurant leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of June 27, 2021, the weighted average remaining lease term and discount rate for operating leases is 12.9 years and 5.2%, respectively.
The components of lease expense are as follows (in thousands):
|
|
|
|
13 Weeks Ended
|
|
|
13 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
Classification
|
|
June 27, 2021
|
|
|
June 28, 2020
|
|
|
June 27, 2021
|
|
|
June 28, 2020
|
|
Operating lease cost
|
|
Restaurant operating expenses and general and administrative costs
|
|
$
|
6,433
|
|
|
$
|
7,331
|
|
|
$
|
12,942
|
|
|
$
|
14,482
|
|
Variable lease cost
|
|
Restaurant operating expenses and general and administrative costs
|
|
|
4,315
|
|
|
|
2,044
|
|
|
|
7,260
|
|
|
|
4,670
|
|
Total lease cost
|
|
|
|
$
|
10,748
|
|
|
$
|
9,375
|
|
|
$
|
20,202
|
|
|
$
|
19,152
|
|
As of July 27, 2021, maturities of lease liabilities are summarized as follows (in thousands):
|
Operating Leases
|
|
2021, excluding first twenty-six weeks ended June 27, 2021
|
$
|
14,652
|
|
2022
|
|
26,013
|
|
2023
|
|
23,951
|
|
2024
|
|
23,476
|
|
2025
|
|
22,043
|
|
Thereafter
|
|
189,787
|
|
Total future minimum rental commitments
|
|
299,922
|
|
Imputed interest
|
|
(90,088
|
)
|
|
$
|
209,834
|
|
Supplemental cash flow information related to operating leases was as follows (in thousands):
|
|
26 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
June 27, 2021
|
|
|
June 28, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
13,052
|
|
|
$
|
13,393
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
1,096
|
|
|
$
|
15,131
|
|
Reduction of right-of-use assets and lease obligations from lease modifications and terminations
|
|
$
|
8,572
|
|
|
$
|
1,822
|
|
9
Additionally, as of June 27, 2021, the Company has executed four leases for new Ruth’s Chris Steak House Restaurant locations with undiscounted fixed payments over the initial term of $21.7 million. These leases will commence when the landlords make the properties available to the Company. These leases are expected to commence during the next 15 months. These leases are expected to have an economic lease term of 20 years. The Company will assess the reasonably certain lease term at the lease commencement date.
(4) Revenue
In the following tables, the Company’s revenue is disaggregated by major component for each category on the consolidated statements of operations (in thousands).
13 Weeks Ended June 27, 2021:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
104,165
|
|
|
$
|
—
|
|
|
$
|
104,165
|
|
Franchise income
|
|
|
4,106
|
|
|
|
422
|
|
|
|
4,528
|
|
Other operating income
|
|
|
2,217
|
|
|
|
—
|
|
|
|
2,217
|
|
Total revenue
|
|
$
|
110,488
|
|
|
$
|
422
|
|
|
$
|
110,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended June 28, 2020:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
26,978
|
|
|
$
|
—
|
|
|
$
|
26,978
|
|
Franchise income
|
|
|
695
|
|
|
|
261
|
|
|
|
956
|
|
Other operating income
|
|
|
483
|
|
|
|
—
|
|
|
|
483
|
|
Total revenue
|
|
$
|
28,156
|
|
|
$
|
261
|
|
|
$
|
28,417
|
|
26 Weeks Ended June 27, 2021:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
185,801
|
|
|
$
|
—
|
|
|
$
|
185,801
|
|
Franchise income
|
|
|
7,434
|
|
|
|
886
|
|
|
|
8,320
|
|
Other operating income
|
|
|
4,072
|
|
|
|
—
|
|
|
|
4,072
|
|
Total revenue
|
|
$
|
197,307
|
|
|
$
|
886
|
|
|
$
|
198,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended June 28, 2020:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
130,018
|
|
|
$
|
—
|
|
|
$
|
130,018
|
|
Franchise income
|
|
|
3,752
|
|
|
|
830
|
|
|
|
4,582
|
|
Other operating income
|
|
|
2,353
|
|
|
|
—
|
|
|
|
2,353
|
|
Total revenue
|
|
$
|
136,123
|
|
|
$
|
830
|
|
|
$
|
136,953
|
|
The following table provides information about receivables and deferred revenue liabilities from contracts with customers (in thousands).
|
|
June 27,
|
|
|
December 27,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts receivable, less allowance for doubtful accounts 2021 - $131; 2020 - $322
|
|
$
|
10,813
|
|
|
$
|
16,578
|
|
Deferred revenue
|
|
$
|
53,727
|
|
|
$
|
59,030
|
|
Unearned franchise fees
|
|
$
|
2,070
|
|
|
$
|
2,186
|
|
10
Significant changes in the deferred revenue balance and the unearned franchise fees balance during the first twenty-six weeks of fiscal year 2021 are presented in the following table (in thousands).
|
|
Deferred
|
|
|
Unearned
|
|
|
|
Revenue
|
|
|
Franchise Fees
|
|
Balance at December 27, 2020
|
|
$
|
59,030
|
|
|
$
|
2,186
|
|
Decreases in the beginning balance from gift card redemptions
|
|
|
(18,380
|
)
|
|
|
—
|
|
Increases due to proceeds received, excluding amounts recognized during the period
|
|
|
13,065
|
|
|
|
—
|
|
Decreases due to recognition of franchise development and opening fees
|
|
|
—
|
|
|
|
(116
|
)
|
Increases due to proceeds received for franchise development and opening fees
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
12
|
|
|
|
—
|
|
Balance at June 27, 2021
|
|
$
|
53,727
|
|
|
$
|
2,070
|
|
Significant changes in the deferred revenue balance and the unearned franchise fees balance during the first twenty-six weeks of fiscal year 2020 are presented in the following table (in thousands).
|
|
Deferred
|
|
|
Unearned
|
|
|
|
Revenue
|
|
|
Franchise Fees
|
|
Balance at December 29, 2019
|
|
$
|
52,856
|
|
|
$
|
2,489
|
|
Decreases in the beginning balance from gift card redemptions
|
|
|
(17,319
|
)
|
|
|
—
|
|
Increases due to proceeds received, excluding amounts recognized during the period
|
|
|
12,748
|
|
|
|
—
|
|
Decreases due to recognition of franchise development and opening fees
|
|
|
—
|
|
|
|
(118
|
)
|
Increases due to proceeds received for franchise development and opening fees
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(59
|
)
|
|
|
—
|
|
Balance at June 28, 2020
|
|
$
|
48,226
|
|
|
$
|
2,371
|
|
(5) Long-term Debt
Long-term debt consists of the following (in thousands):
|
|
June 27,
|
|
|
December 27,
|
|
|
|
2021
|
|
|
2020
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
70,000
|
|
|
$
|
115,000
|
|
Less current maturities
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
70,000
|
|
|
$
|
115,000
|
|
As of June 27, 2021, the Company had $70.0 million of outstanding indebtedness under its senior credit facility with approximately $35.3 million of borrowings available, net of outstanding letters of credit of approximately $4.7 million. As of June 27, 2021, the weighted average interest rate on the Company’s outstanding debt was 3.5% and the weighted average interest rate on its outstanding letters of credit was 2.6%. In addition, the fee on the Company’s unused senior credit facility was 0.4%.
On February 2, 2017, the Company entered into a senior credit facility pursuant to a credit agreement with Wells Fargo Bank, National Association as administrative agent, and certain other lenders (as amended, as of the end of the fiscal year 2020, the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility of $120.0 million with a $5.0 million subfacility of letters of credit and a $5.0 million subfacility for swingline loans. The Credit Agreement has a maturity date of February 2, 2023.
On January 28, 2021 the Company entered into a Sixth Amendment to Credit Agreement (the “Sixth Amendment” and the “Credit Agreement as amended by the Sixth Amendment”), which makes certain amendments to the Credit Agreement. The Sixth Amendment provides for a $10.0 million commitment reduction from the $120.0 million available under the Credit Agreement, so that the Credit Agreement as amended by the Sixth Amendment provides for a $110.0 revolving credit facility. The commitment reduction was effective as of March 29, 2021, the first day of the Company’s second quarter of fiscal year 2021. The Credit Agreement as amended by the Sixth Amendment has a $5.0 million subfacility of letters of credit and a $5.0 million subfacility for swingline loans. The Sixth Amendment limited non-maintenance capital expenditures by the Company and its subsidiaries to no more than $5.0 million during fiscal year 2021.
On May 4, 2021, the Company entered into a Seventh Amendment to Credit Agreement (the “Seventh Amendment” and the Credit Agreement as amended by the Seventh Amendment, the “Amended Credit Agreement”), which amends its existing $110.0 million Credit Agreement as amended by the Sixth Amendment. The Seventh Amendment increases the permitted non-maintenance capital expenditures from $5.0 million to $20.0 million in fiscal year 2021 and adjusted the interest rate pricing and maximum Consolidated Leverage Ratio as described below.
11
The Amended Credit Agreement contains customary representations and affirmative and negative covenants (including limitations on indebtedness and liens) as well as financial covenants, as described below, requiring a minimum fixed coverage charge ratio as defined in the Amended Credit Agreement (“Fixed Charge Coverage Ratio”) limiting the Company’s actual leverage ratio as defined in the Amended Credit Agreement (“Consolidated Leverage Ratio”) and requiring the Company to hold a certain specified amount of cash. The Amended Credit Agreement also contains events of default customary for credit facilities of this type (with customary grace periods, as applicable), including nonpayment of principal or interest when due; material incorrectness of representations and warranties when made; breach of covenants; bankruptcy and insolvency; unsatisfied ERISA obligations; unstayed material judgment beyond specified periods; default under other material indebtedness; and certain changes of control of the Company. If any event of default occurs and is not cured within the applicable grace period or waived, the outstanding loans may be accelerated by lenders holding a majority of the commitments and the lenders’ commitments may be terminated. The obligations under the Amended Credit Agreement are guaranteed by certain of the Company’s subsidiaries and are secured by a lien on substantially all of the Company’s personal property assets other than any equity interest in current and future subsidiaries of the Company.
From May 4, 2021 until the Calculation Date for the fiscal quarter ending June 27, 2021, interest rates on loans under the Amended Credit Agreement are 2.50% and 1.50% above the LIBOR Rate and Base Rate, respectively, and the fee for the daily unused availability under the revolving credit facility is 0.40%. Thereafter, interest rate margins and the fee for the unused commitment will be calculated based on the Consolidated Leverage Ratio in accordance with the Credit Agreement. The term “Calculation Date” means the date five (5) business days after the day on which the Company provides a compliance certificate required for its most recently ended fiscal quarter. Thereafter, and in accordance with the Amended Credit Agreement, interest rate margins and the fee for the unused commitment will be calculated based on the Consolidated Leverage Ratio, and at the Company’s option, revolving loans may bear interest at either:
|
(i)
|
LIBOR, plus an applicable margin, or
|
|
(ii)
|
the highest of (a) the rate publicly announced by Wells Fargo as its prime rate, (b) the average published federal funds rate in effect on such day plus 0.50% and (c) one month LIBOR plus 1.00%, plus an applicable margin (the rate described in this clause (ii) prior to adding the applicable margin, the “Base Rate”).
|
The applicable margin is based on the Company’s Consolidated Leverage Ratio, ranging (a) from 1.50% to 2.50% above the applicable LIBOR rate or (b) 0.50% to 1.50% above the applicable Base Rate.
Among the covenant obligations with which the Company must comply, the Amended Credit Agreement requires the Company to comply with the following:
|
•
|
Minimum aggregate cash holding requirements through June 2021 in an amount equal to the following amount for each month set forth below:
|
|
|
January 2021
|
$50,000,000
|
February 2021
|
$50,000,000
|
March 2021
|
$50,000,000
|
April 2021
|
$40,000,000
|
May 2021
|
$40,000,000
|
June 2021
|
$40,000,000
|
|
•
|
Commencing with the fiscal quarter ending June 27, 2021, a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00 on an annualized basis, which will exclude the impact of fiscal year 2020, through the end of fiscal year 2021, and on an actual basis thereafter.
|
|
•
|
Commencing with the second fiscal quarter ending June 27, 2021, a Consolidated Leverage Ratio not to exceed the following thresholds for the periods indicated:
|
|
|
Period
|
Maximum Ratio
|
The last day of the second Fiscal Quarter of the 2021 Fiscal Year
|
4.00 to 1.00
|
The last day of the third Fiscal Quarter of the 2021 Fiscal Year
|
3.50 to 1.00
|
The last day of the fourth Fiscal Quarter of the 2021 Fiscal Year and thereafter
|
3.00 to 1.00
|
12
For purposes of calculating required compliance with the maximum ratio, the Consolidated Leverage Ratio will be calculated on an annualized basis, which will exclude the impact of fiscal year 2020, through the end of fiscal year 2021, and on an actual basis thereafter.
The Fixed Charge Coverage Ratio and Consolidated Leverage Ratio requirements remain in effect through maturity of the loan on February 2, 2023, but the minimum cash holding requirement ended in June 2021.
Beginning in fiscal year 2022, the Amended Credit Agreement provides that the Company and its subsidiaries may make capital expenditures in any fiscal year in an amount equal to 75% of consolidated EBITDA for the immediately preceding fiscal year when the Consolidated Leverage Ratio is equal to or greater than 1.50 to 1.0, but less than 2.50 to 1.0. When the Consolidated Leverage Ratio is less than 1.50 to 1.0, the Company and its subsidiaries may make capital expenditures in an unlimited amount. For purposes of determining to what extent capital expenditures may be made, the Consolidated Leverage Ratio will be calculated on an actual basis rather than on an annualized basis.
The Company currently is prohibited from paying any dividends or repurchasing any shares of its common stock if the Company cannot demonstrate that its Consolidated Leverage Ratio is less than 2.00 to 1.00 (both before and after giving effect to the proposed repurchase or dividend).
The Amended Credit Agreement permits non-maintenance capital expenditures up to $20.0 million in fiscal year 2021. The Company and its subsidiaries may fund such non-maintenance capital expenditures during fiscal year 2021 with (i) 75% of consolidated EBITDA earned during a fiscal quarter in excess of $7.5 million (“Capital Expenditure Basket Amount”) and/or (ii) net cash proceeds from the sale-leaseback of a real property located in Florida. If the Company and its subsidiaries do not use the entire Capital Expenditure Basket Amount in any fiscal quarter, such unutilized amount may be carried forward to increase the aggregate amount of consolidated capital expenditures permitted to be made until the Company can demonstrate that the Consolidated Leverage Ratio is less than 2.50 to 1.00 for the period of four fiscal quarters most recently ended. Beginning in fiscal year 2022, requirements for non-maintenance capital expenditures revert back to the terms in the Credit Agreement when the Consolidated Leverage Ratio is less than 2.50 to 1.00, and non-maintenance capital expenditures will not be permitted if the Consolidated Leverage Ratio is greater than 2.50 to 1.00.
(6) Shareholders’ Equity
In October 2019, the Company’s Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $60 million of outstanding common stock from time to time. As of June 27, 2021, $41.6 million remained available for future purchases under the share new repurchase program.
The Company’s Board of Directors declared the following dividends during the periods presented (amounts in thousands, except per share amounts):
Declaration Date
|
|
Dividend per Share
|
|
|
Record Date
|
|
Total Amount
|
|
|
Payment Date
|
Fiscal Year 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
February 21, 2020
|
|
$
|
0.15
|
|
|
March 6, 2020
|
|
$
|
4,428
|
|
|
March 20, 2020
|
As a result of the impacts to our business arising from the COVID-19 pandemic, the Company has suspended its share repurchase program and dividend payments. Amendments to the Company’s Credit Agreement currently prohibit the payment of dividends and share repurchases until our Consolidated Leverage Ratio (as defined in the Credit Agreement) is less than 2.00:1.00 times Bank Adjusted EBITDA. Outstanding unvested restricted stock is not included in common stock outstanding amounts. Restricted stock awards outstanding as of June 27, 2021 totaled 466,654 shares. Restricted stock units outstanding as of June 27, 2021 totaled 78,294 shares. Performance stock awards (in the form of market stock units) outstanding as of June 27, 2021 totaled 31,108 shares.
(7) Segment Information
The Company has two reportable segments – the Company-owned steakhouse segment and the franchise operations segment. The Company does not rely on any major customers as a source of revenue. The Company-owned Ruth’s Chris Steak House restaurants, all of which are located in North America, operate within the full-service dining industry, providing similar products to similar customers. Revenues are derived principally from food and beverage sales. As of June 27, 2021, (i) the Company-owned steakhouse restaurant segment included 73 Ruth’s Chris Steak House restaurants and three Ruth’s Chris Steak House restaurants operating under contractual agreements and (ii) the franchise operations segment included 72 franchisee-owned Ruth’s Chris Steak House restaurants. Segment profits for the Company-owned steakhouse restaurant segments equal segment revenues less segment expenses. Segment revenues for the Company-owned steakhouse restaurants include restaurant sales, management agreement income and other restaurant income. Gift card breakage revenue is not allocated to operating segments. Not all operating expenses are allocated to operating segments. Segment expenses for the Company-owned steakhouse segment include food and beverage costs and restaurant operating
13
expenses. No other operating costs are allocated to the Company-owned steakhouse segment for the purpose of determining segment profits because such costs are not directly related to the operation of individual restaurants. The accounting policies applicable to each segment are consistent with the policies used to prepare the consolidated financial statements. The profit of the franchise operations segment equals franchise income, which consists of franchise royalty fees and franchise opening fees. No costs are allocated to the franchise operations segment.
Segment information related to the Company’s two reportable business segments follows (in thousands):
|
|
13 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
June 27,
|
|
|
June 28,
|
|
|
June 27,
|
|
|
June 28,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
105,474
|
|
|
$
|
26,522
|
|
|
$
|
188,167
|
|
|
$
|
131,432
|
|
Franchise operations
|
|
|
4,528
|
|
|
|
956
|
|
|
|
8,320
|
|
|
|
4,582
|
|
Unallocated other revenue and revenue discounts
|
|
|
908
|
|
|
|
939
|
|
|
|
1,706
|
|
|
|
939
|
|
Total revenues
|
|
$
|
110,910
|
|
|
$
|
28,417
|
|
|
$
|
198,193
|
|
|
$
|
136,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
28,467
|
|
|
$
|
(7,781
|
)
|
|
$
|
50,656
|
|
|
$
|
10,948
|
|
Franchise operations
|
|
|
4,528
|
|
|
|
956
|
|
|
|
8,320
|
|
|
|
4,582
|
|
Total segment profit (loss)
|
|
|
32,995
|
|
|
|
(6,825
|
)
|
|
|
58,976
|
|
|
|
15,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating income
|
|
|
908
|
|
|
|
939
|
|
|
|
1,706
|
|
|
|
939
|
|
Marketing and advertising expenses
|
|
|
(3,232
|
)
|
|
|
(1,487
|
)
|
|
|
(5,225
|
)
|
|
|
(4,925
|
)
|
General and administrative costs
|
|
|
(8,774
|
)
|
|
|
(7,066
|
)
|
|
|
(15,970
|
)
|
|
|
(15,095
|
)
|
Depreciation and amortization expenses
|
|
|
(5,084
|
)
|
|
|
(5,522
|
)
|
|
|
(10,147
|
)
|
|
|
(11,345
|
)
|
Pre-opening costs
|
|
|
(159
|
)
|
|
|
(304
|
)
|
|
|
(604
|
)
|
|
|
(781
|
)
|
Gain on lease modifications
|
|
|
—
|
|
|
|
488
|
|
|
|
—
|
|
|
|
488
|
|
Loss on impairment
|
|
|
(394
|
)
|
|
|
(4,283
|
)
|
|
|
(394
|
)
|
|
|
(12,980
|
)
|
Interest expense, net
|
|
|
(1,128
|
)
|
|
|
(1,291
|
)
|
|
|
(2,431
|
)
|
|
|
(1,919
|
)
|
Other income
|
|
|
36
|
|
|
|
3
|
|
|
|
80
|
|
|
|
36
|
|
Income (loss) before income tax expense
|
|
$
|
15,168
|
|
|
$
|
(25,348
|
)
|
|
$
|
25,991
|
|
|
$
|
(30,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
2,054
|
|
|
$
|
4,185
|
|
|
$
|
2,413
|
|
|
$
|
7,952
|
|
Corporate assets
|
|
|
91
|
|
|
|
89
|
|
|
|
91
|
|
|
|
250
|
|
Total capital expenditures
|
|
$
|
2,145
|
|
|
$
|
4,274
|
|
|
$
|
2,504
|
|
|
$
|
8,202
|
|
|
|
June 27,
|
|
|
December 27,
|
|
|
|
2021
|
|
|
2020
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
396,022
|
|
|
$
|
420,245
|
|
Franchise operations
|
|
|
1,504
|
|
|
|
1,705
|
|
Corporate assets - unallocated
|
|
|
98,538
|
|
|
|
112,108
|
|
Deferred income taxes - unallocated
|
|
|
7,320
|
|
|
|
8,616
|
|
Total assets
|
|
$
|
503,383
|
|
|
$
|
542,674
|
|
(8) Stock-Based Employee Compensation
On May 15, 2018, the Company’s stockholders approved a new 2018 Omnibus Incentive Plan (2018 Plan) which replaced the Amended and Restated 2005 Equity Incentive Plan (2005 Plan), which expired on May 30, 2018. The 2018 Plan authorizes 2.5 million shares reserved for future grants. Awards that were previously awarded under the 2005 Plan that are forfeited or cancelled in the future will be made available for grant or issuance under the 2018 Plan. The 1,649,394 shares that were authorized but unissued under the 2005 Plan as of May 15, 2018 were cancelled. As of June 27, 2021, there were no shares of common stock issuable upon exercise of currently outstanding options, and 46,968 currently outstanding unvested restricted stock awards under the 2005 Plan. As of June 27, 2021, there were 529,088 currently outstanding unvested restricted stock awards, restricted stock units, and performance stock awards under the 2018 Plan. As of June 27, 2021, the 2018 Plan has 2,217,005 shares available for future grants. During the
14
first twenty-six weeks of fiscal year 2021, the Company issued 102,699 restricted stock awards and units to directors, officers and other employees of the Company. Of the 102,699 restricted stock awards and units issued during the first twenty-six weeks of fiscal year 2021, 31,496 shares will vest in fiscal year 2022, 31,496 shares will vest in fiscal year 2023, 33,167 shares will vest in fiscal year 2024 and 6,540 shares will vest in fiscal year 2026. Additionally, 2,470 shares of restricted stock granted during fiscal year 2019 and 7,802 shares of restricted stock granted during fiscal year 2020 were also fully vested in the first fiscal quarter of 2021 in accordance with the termination of an employment agreement. Total stock compensation expense recognized during the first twenty-six weeks of fiscal years 2021 and 2020 was $2.7 million and $4.0 million, respectively.
(9) Income Taxes
Income tax expense differs from amounts computed by applying the federal statutory income tax rate to income from continuing operations before income taxes as follows:
|
|
26 Weeks Ended
|
|
|
|
June 27,
|
|
|
June 28,
|
|
|
|
2021
|
|
|
2020
|
|
Income tax expense (benefit) at statutory rates
|
|
|
21.0
|
%
|
|
|
(21.0
|
%)
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
4.5
|
%
|
|
|
(3.5
|
%)
|
Federal employment tax credits
|
|
|
(9.7
|
%)
|
|
|
(5.2
|
%)
|
Non-deductible executive compensation
|
|
|
2.0
|
%
|
|
|
1.7
|
%
|
Stock-based compensation
|
|
|
(0.6
|
%)
|
|
|
1.4
|
%
|
Other
|
|
|
(0.1
|
%)
|
|
|
(2.1
|
%)
|
Effective tax rate
|
|
|
17.1
|
%
|
|
|
(28.7
|
%)
|
The effective tax rate of 17.1% for the twenty-six weeks ended June 27, 2021 represents income tax expense of $4.5 million, while the effective tax rate of 28.7% for the twenty-six weeks ended June 28, 2020 represents an income tax benefit of $8.6 million.
The federal employment-related tax credits are comprised mainly of federal FICA tip credits which the Company utilizes to reduce its periodic federal income tax expense. A restaurant company employer may claim a credit against its federal income taxes for FICA taxes paid on certain wages (the FICA tip credit). The credit against income tax liability is for the full amount of eligible FICA taxes. Employers cannot deduct from taxable income the amount of FICA taxes taken into account in determining the credit.
Reflected in the Other line in the effective tax rate schedule above for the quarter ended June 28, 2020 is a tax benefit of $2.9 million related to the carryback of federal NOLs under the CARES Act, and a tax expense of $2.2 million related to changes in valuation allowances against deferred tax assets for certain state NOL carryforwards.
(10) Earnings Per Share
The following table sets forth the computation of earnings per share (amounts in thousands, except share and per share amounts):
|
|
13 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
June 27,
|
|
|
June 28,
|
|
|
June 27,
|
|
|
June 28,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
12,411
|
|
|
$
|
(17,598
|
)
|
|
$
|
21,536
|
|
|
$
|
(21,416
|
)
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding - basic
|
|
|
34,398,251
|
|
|
|
29,951,332
|
|
|
|
34,340,492
|
|
|
|
29,119,296
|
|
Weighted average number of common shares
outstanding - diluted
|
|
|
34,652,869
|
|
|
|
29,951,332
|
|
|
|
34,620,626
|
|
|
|
29,119,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.36
|
|
|
$
|
(0.59
|
)
|
|
$
|
0.63
|
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
0.36
|
|
|
$
|
(0.59
|
)
|
|
$
|
0.62
|
|
|
$
|
(0.74
|
)
|
There were no anti-dilutive shares during the second quarter of fiscal year 2021. Diluted earnings per share for the second quarter of fiscal year 2020 excludes restricted shares of 832,781 which were outstanding during the period but were anti-dilutive and had no exercise price. Diluted earnings per share for the first twenty-six weeks of fiscal year 2021 and 2020 excludes restricted shares of 347 and 429,196, respectively, which were outstanding during the period but were anti-dilutive and had no exercise price.
15
(11) Commitments and Contingencies
The Company is subject to various claims, possible legal actions and other matters arising in the normal course of business. Management does not expect disposition of these other matters to have a material adverse effect on the financial position, results of operations or liquidity of the Company. The Company expenses legal fees as incurred.
The legislation and regulations related to tax and unclaimed property matters are complex and subject to varying interpretations by both government authorities and taxpayers. The Company remits a variety of taxes and fees to various governmental authorities, including excise taxes, property taxes, sales and use taxes, and payroll taxes. The taxes and fees remitted by the Company are subject to review and audit by the applicable governmental authorities which could assert claims for additional assessments. Although management believes that the tax positions are reasonable and consequently there are no accrued liabilities for claims which may be asserted, various taxing authorities may challenge certain of the positions taken by the Company which may result in additional liability for taxes and interest. These tax positions are reviewed periodically based on the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits, the identification of new tax contingencies, or the rendering of relevant court decisions. An unfavorable resolution of assessments by a governmental authority could negatively impact the Company’s results of operations and cash flows in future periods.
The Company is subject to unclaimed or abandoned property (escheat) laws which require the Company to turn over to certain state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. The Company is subject to audit by individual U.S. states with regard to its escheatment practices.
On February 26, 2018, a former restaurant hourly employee filed a class action lawsuit in the Superior Court of the State of California for the County of Riverside, alleging that the Company violated the California Labor Code and California Business and Professions Code, by failing to pay minimum wages, pay overtime wages, permit required meal and rest breaks, and provide accurate wage statements, among other claims. On September 2, 2020, the class action lawsuit was amended to include two additional proposed class representatives. This lawsuit seeks unspecified penalties under the California’s Private Attorney’s General Act in addition to other monetary payments (Quiroz Guerrero, et al. v. Ruth’s Hospitality Group, Inc., et al.; Case No RIC1804127). The parties are currently engaged in discovery and the court has set a briefing schedule on class certification for mid-2022. Although the ultimate outcome of this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, we have vigorously defended this matter and intend to continue doing so.
The Company currently buys a majority of its beef from two suppliers. Although there are a limited number of beef suppliers, management believes that other suppliers could provide similar product on comparable terms. A change in suppliers, however, could cause supply shortages and a possible loss of sales, which would affect operating results adversely.