RRGB Red Robin Gourmet Burgers Inc

One of the leading upscale dining operators, Ruth’s Hospitality Group Inc. (RUTH) reported first quarter 2012 adjusted earnings of 15 cents, in line with the Zacks Consensus Estimate, but ahead of the prior-year quarter earnings by 2 cents. The reported earnings exclude stock repurchase charges, related debt expenses and restructuring charges. The year-over-year growth in earnings was driven by higher traffic resulting in higher revenue.

On a GAAP basis, the company recorded a loss of 89 cents per share versus earnings of 14 cents per share in the year-ago quarter, due to the heavy charge of 35.8 million related to the redemption of preferred shares.

Total revenue enhanced 3.4% year over year to $101.0 million. Company-owned restaurant sales climbed 3.3% to $97.3 million, while franchise income jumped 13.1% to $3.5 million in the quarter.

Quarter Performance

During the quarter, comparable restaurant sales at Ruth’s Chris Steak House grew 3.7%, implying the eighth consecutive quarter of comparable sales growth, driven by a 2.2% rise in entrées and a 1.5% upside in average guest check. The company also witnessed the ninth consecutive quarter of traffic growth in the Ruth’s Chris brand.

Moreover, comparable restaurant sales at Mitchell’s Fish Market were flat year over year, due to a 0.1% rise in entrées, partially offset by a 0.1% decline in average guest check. Same-store sales at franchise-owned restaurant increased 7.6%, on the back of a 4.7% and 2.9% rise in both entrée and an average check, respectively. In the international market, comparable franchise-owned restaurant sales climbed 9.8%.

During the quarter, restaurant operating expense as a percentage of restaurant sales, decreased 40 basis points (bps) year over year to 48.8%, benefiting from higher sales leverage, partially offset by health insurance costs.  Food and beverage costs expanded 130 bps to 32.0%, owing to unfavorable beef costs.

General and administrative expenses stood at $6.9 million as against $5.9 million in the year-ago quarter, attributed to higher legal fees and personnel costs. Operating Income contracted 4.6% year over year to $10.0 million in the reported quarter.

Financial Position

At the end of the quarter, the company had cash and cash equivalents of $3.1 million and shareholders’ equity of $69.8 million. Long-term debt outstanding at the end of March 25, 2012 was $77.0 million, up from $22.0 million at the end of December 25, 2011.

Outlook

Heathrow, Florida-based, Ruth’s revised its fiscal 2012 outlook. The company expects cost of goods to be 31.5% to 32.5% of restaurant sales, up from previous expectation of 31.0%–32.0% 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 35.0 million and 36.0 million, down from the earlier projection of 43.3 million to 44.0 million.

In April 2012, the company opened a second franchise-owned restaurant in Dubai. The company remains focused on unit growth. The company plans to open a new Ruth's Chris Steak House in Cherokee, North Carolina later in May and expects to open a company-owned Ruth’s Chris Steak House in Cincinnati, Ohio in November this year. Additionally, management anticipates to open two to four franchise-owned restaurants in 2012.

Our Take

The company’s remains encouraged by the growth momentum of Ruth’s Chris brand and improved capital structure. The company also remains focused on unit growth and expansion through franchising.

However, on the flip side, rising beef cost, lower consumer spending and intense competition from peers like Brinker International inc. (EAT) and Red Robin Gourmet Burgers Inc. (RRGB) remain concerns. Given the company reported loss on a GAAP basis during the quarter, we expect the analysts to reduce their estimates for fiscal 2012 and 2013. The Zacks Consensus Estimates for 2012 and 2013 are pegged at 46 and 56 cents per share respectively.

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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