Zacks_Analysts' Blog : Ruth's Misses, Breaks Even - Analyst Blog

Heathrow, Florida-based Ruth’s Hospitality Group Inc. (RUTH) reported break-even third quarter 2011 earnings, which missed the Zacks Consensus Estimate by a penny, but were ahead of the prior-year quarter loss of 1 cent per share. The marginal year-over-year upside in earnings was driven by higher traffic and comps growth.

Total revenue spiked 2.0% year over year to $80.2 million. Company-owned restaurant sales climbed 1.9% to $77.1 million, while franchise income jumped 10.7% to $2.9 million.

During the quarter, comparable restaurant sales at Ruth’s Chris Steak House grew 2.6%, implying the sixth consecutive quarter of comparable sales growth, driven by a 1.2% rise in entrées and a 1.4% upside in average guest check. The company also witnessed the seventh consecutive quarter of traffic growth for Ruth’s Chris brand.

However, comparable restaurant sales at Mitchell’s Fish Market slipped 0.7%, due to a 2.4% decline in entrées, partially offset by a 1.8% rise in average guest check. Same-store sales at franchise-owned restaurant increased 6.1%, on the back of solid growth in the international market.

During the quarter, restaurant operating expense increased 40 basis points (bps) year over year to 56.3% attributable to increased health insurance costs.  Food and beverage costs expanded 120 bps to 31.1%, due to unfavorable beef costs. However, all other operating costs dropped 7% due to lower marketing expense. Operating margin remained flat year over year at 2.1% in the reported quarter.

Financial Position

At the end of the third quarter, the company had cash and cash equivalents of $2.5 million and shareholders’ equity of $97.1 million. The company also strengthened its balance sheet through aggressive debt reduction. Long-term debt outstanding at the end of the quarter was $39.4 million, down from $67.0 million in the year-ago quarter.

Outlook

One of the leading upscale dining operators, Ruth’s updated its fiscal 2011 outlook. The company continues to expect cost of goods at 30.5%–31.5% of restaurant sales and marketing and advertising expense in the range of 3.0% to 3.5% of total revenue. Capital expenditure for the same period is expected in the range of $8 million to $10 million, down from the previous expectation of $10 million to $12 million.

Our Take

The company’s sales volume increased during the quarter, implying higher footfalls in upscale dining restaurants. However, increasing food costs and stiff competition from peers like Brinker International inc. (EAT) and Red Robin Gourmet Burgers Inc. (RRGB) will drag profits.

We expect estimates to go down in the coming days, based on lower-than-expected third quarter results. The Zacks Consensus Estimates for 2011 and 2012 are pegged at 35 cents and 43 cents per share, respectively.