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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

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FORM 10-Q

 

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(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 27, 2015

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                      

 

Commission File Number 000-51485

 

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Ruth’s Hospitality Group, Inc.

(Exact name of registrant as specified in its charter)

 

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Delaware	72-1060618
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1030 W. Canton Avenue, Suite 100, Winter Park, FL	32789
(Address of principal executive offices)	(Zip code)

 

(407) 333-7440

Registrant’s telephone number, including area code

 

None

Former name, former address and former fiscal year, if changed since last report

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

The number of shares outstanding of the registrant’s common stock as of October 26, 2015 was 35,007,990, which includes 1,140,082 shares of unvested restricted stock.

 

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TABLE OF CONTENTS

 

		Page
Part I — Financial Information		3
Item 1	Financial Statements:	3
	Condensed Consolidated Balance Sheets as of September 27, 2015 and December 28, 2014	3
	Condensed Consolidated Statements of Operations for the Thirteen and Thirty-nine Week Periods ended September 27, 2015 and September 28, 2014	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Thirty-nine Week Periods ended September 27, 2015 and September 28, 2014	5
	Condensed Consolidated Statements of Cash Flows for the Thirty-nine Week Periods ended September 27, 2015 and September 28, 2014	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4	Controls and Procedures	24
Part II — Other Information		24
Item 1	Legal Proceedings	24
Item 1A	Risk Factors	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3	Defaults Upon Senior Securities	25
Item 4	Mine Safety Disclosures	25
Item 5	Other Information	25
Item 6	Exhibits	25
Signatures		26

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited

(Amounts in thousands, except share and per share data)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations—Unaudited

(Amounts in thousands, except share and per share data)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity—Unaudited

for the Thirty-nine Weeks ended September 27, 2015 and September 28, 2014

(Amounts in thousands)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Amounts in thousands)

 

 

See accompanying notes to condensed consolidated financial statements. 

 

 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

 

 

 

 

 

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” that reflect, when made, the Company’s expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “targeting,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe the Company’s objectives, plans or goals also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company’s forward-looking statements. Some of the factors that could cause actual results to differ include: reductions in the availability of, or increases in the cost of, USDA Prime grade beef, fish and other food items; changes in economic conditions and general trends; the loss of key management personnel; the effect of market volatility on the Company’s stock price; health concerns about beef or other food products; the effect of competition in the restaurant industry; changes in consumer preferences or discretionary spending; labor shortages or increases in labor costs; the impact of federal, state or local government regulations relating to Company employees, the sale or preparation of food, the sale of alcoholic beverages and the opening of new restaurants; harmful actions taken by the Company’s franchisees; a material failure, interruption or security breach of the Company’s information technology network; repeal or reduction of the federal FICA tip credit; unexpected expenses incurred as a result of the sale of the Mitchell’s Restaurants; the Company’s ability to protect its name and logo and other proprietary information; an impairment in the financial statement carrying value of our goodwill, other intangible assets or property; the impact of litigation; the restrictions imposed by the Company’s Amended and Restated Credit Agreement; and changes in, or the discontinuation of, the Company’s quarterly cash dividend payments or share repurchase program. For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2014, which is available on the SEC’s website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof. You should not assume that material events subsequent to the date of this Quarterly Report on Form 10-Q have not occurred.

 

Unless the context otherwise indicates, all references in this report to the “Company,” “Ruth’s,” “we,” “us”, “our” or similar words are to Ruth’s Hospitality Group, Inc. and its subsidiaries. Ruth’s Hospitality Group, Inc. is a Delaware corporation formerly known as Ruth’s Chris Steak House, Inc., and was founded in 1965.

 

Overview

 

Ruth’s Hospitality Group, Inc. is a leading 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 September 27, 2015, there were 146 Ruth’s Chris Steak House restaurants, including 66 Company-owned restaurants, one restaurant operating under a management agreement and 79 franchisee-owned restaurants.

 

 

As of December 28, 2014, we also operated eighteen Mitchell’s Fish Markets and three Mitchell’s/Cameron’s Steakhouse restaurants (collectively, the Mitchell’s Restaurants), located primarily in the Midwest and Florida. On January 21, 2015, we sold the Mitchell’s Restaurants to a third party for $10 million. The assets sold consisted primarily of leasehold interests, leasehold improvements, restaurant equipment and furnishings, inventory, and related intangible assets, including brand names and trademarks associated with the 21 Mitchell’s Restaurants. For financial reporting purposes, the Mitchell’s Restaurants are classified as a discontinued operation for all periods presented and, as of December 28, 2014, the assets were classified as held for sale.

 

During 2015, we are celebrating the 50^th anniversary of the founding of Ruth’s Chris Steak House. The Ruth’s Chris menu features a broad selection of high-quality USDA Prime- and Choice-grade steaks and other premium offerings served in Ruth’s Chris’ signature fashion—“sizzling” and topped with butter—complemented by other traditional menu items inspired by our New Orleans heritage. The Ruth’s Chris restaurants reflect the 50 year commitment to the core values instilled by our founder, Ruth Fertel, of caring for our guests by delivering the highest quality food, beverages and service in a warm and inviting atmosphere.

 

All Company-owned Ruth’s Chris Steak House restaurants are located in the United States. The franchisee-owned Ruth’s Chris Steak House restaurants include 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, El Salvador, Japan, Mexico, Panama, Singapore, Taiwan and the United Arab Emirates. In February 2015, we opened a new Company-owned Ruth’s Chris Steak House restaurant in St. Petersburg, FL, and a new Company-owned restaurant is expected to open in Dallas, TX in our fourth quarter of fiscal year 2015. New franchisee-owned Ruth’s Chris Steak House restaurants opened in Ann Arbor, MI and Charleston, SC in May 2015. We opened three new Company-owned Ruth’s Chris Steak House restaurants in 2014 – one in Denver, CO in January, one in Gaithersburg, MD in October, and one in Marina del Rey, CA in November. In February 2014, we acquired the franchisee-owned restaurant located in Austin, TX. Three new franchisee-owned restaurants opened in 2014 – one in Boise, ID in February, one in Panama City, Panama in September and one in Taipei, Taiwan in December. Due to an expiring lease term, we closed the Ruth’s Chris Steak House in Kansas City, MO in March 2014 after seventeen years of operation. Due to local market conditions and disappointing financial results, we negotiated an early termination of the facility lease for the Providence, RI Ruth’s Chris Steak House restaurant, which closed in September 2014.

 

Our business is subject to seasonal fluctuations. Historically, our first and fourth quarters have tended to be the strongest revenue quarters due largely to the year-end holiday season and the popularity of dining out during the fall and winter months. Consequently, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular period may decrease.

 

Our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 provides additional information about our business, operations and financial condition.

 

 

 Results of Operations

 

The table below sets forth certain operating data expressed as a percentage of total revenues for the periods indicated, except as otherwise noted. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

 

 

		13 Weeks Ended								39 Weeks Ended
		September 27,				September 28,				September 27,				September 28,
		2015				2014				2015				2014
Revenues:
Restaurant sales			93.7	%			93.9	%			94.2	%			94.0	%
Franchise income			4.9	%			4.8	%			4.5	%			4.6	%
Other operating income			1.3	%			1.3	%			1.3	%			1.4	%
Total revenues			100.0	%			100.0	%			100.0	%			100.0	%
Costs and expenses:
Food and beverage costs (percentage of restaurant sales)			31.5	%			32.0	%			30.8	%			31.7	%
Restaurant operating expenses (percentage of restaurant sales)			52.3	%			53.7	%			47.9	%			49.0	%
Marketing and advertising			2.9	%			2.7	%			2.4	%			2.3	%
General and administrative costs			9.3	%			7.3	%			7.9	%			7.0	%
Depreciation and amortization expenses			4.0	%			3.6	%			3.5	%			3.2	%
Pre-opening costs			0.1	%			0.5	%			0.2	%			0.4	%
Total costs and expenses			94.8	%			94.6	%			88.2	%			88.8	%
Operating income			5.2	%			5.4	%			11.8	%			11.2	%
Other income (expense):
Interest expense, net			(0.2	%)			(0.4	%)			(0.2	%)			(0.4	%)
Other			0.0	%			0.0	%			0.0	%			0.0	%
Income from continuing operations before income tax expense			5.0	%			5.0	%			11.6	%			10.9	%
Income tax expense			1.7	%			2.0	%			3.8	%			3.7	%
Income from continuing operations			3.3	%			3.0	%			7.8	%			7.2	%
Loss from discontinued operations, net of income taxes			(0.1	%)			(12.9	%)			(0.2	%)			(3.8	%)
Net income (loss)			3.2	%			(9.9	%)			7.6	%			3.4	%

 

Third Quarter Ended September 27, 2015 (13 Weeks) Compared to Third Quarter Ended September 28, 2014 (13 Weeks)

 

Overview. Operating income increased by $193 thousand, or 4.9%, to $4.2 million for the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014. Operating income for the third quarter of fiscal year 2015 was favorably impacted by a $6.0 million increase in restaurant sales, offset by a $1.5 million increase in food and beverage costs, a $2.1 million increase in restaurant operating expenses and a $2.1 million increase in general and administrative costs. Income from continuing operations increased from the third quarter of fiscal year 2014 by $440 thousand to $2.6 million. Net income for the third quarter of fiscal year 2015 increased from the third quarter of fiscal year 2014 by $9.9 million to $2.6 million. The loss for the third quarter of fiscal year 2014 includes the $9.3 million after-tax impact of the impairment loss on Mitchell’s Restaurants. The results of operations and impairment charges for the Mitchell’s Restaurants have been classified as discontinued operations in the consolidated statements of operations.

 

Segment Profits. Segment profitability information is presented in Note 7 to the financial statements. Not all operating expenses are allocated to operating segments. The Ruth’s Chris Steak House Company-owned restaurants, which are all located in the United States, are managed as an operating segment. The Ruth’s Chris concept operates within the full-service dining industry, providing similar products to similar customers. The franchise operations are reported as a separate operating segment. No costs are allocated to the franchise operations segment. Segment profits for the third quarter of fiscal year 2015 for the Company-owned steakhouse restaurant segment increased by $2.5 million to $12.8 million from the third quarter of fiscal year 2014. The increase was driven by a $6.1 million increase in revenues, which exceeded the increase in segment operating expenses. Franchise income in the third quarter of fiscal year 2015 increased by $448 thousand to $4.0 million from the third quarter of fiscal year 2014.

 

 

Restaurant Sales. Restaurant sales increased by $6.0 million, or 8.6%, to $75.2 million in the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014. The increase was attributable to a $2.2 million increase in Company-owned comparable sales and $3.8 million in restaurant sales at new restaurants. Excluding discontinued operations, total operating weeks during the third quarter of fiscal year 2015 increased to 858 from 819 in the third quarter of fiscal year 2014. Company-owned comparable restaurant sales increased 3.3%, driven by an average check increase of 3.8% partially offset by an entrée decrease of 0.5%.

 

Franchise Income. Franchise income in the third quarter of fiscal year 2015 increased $448 thousand, or 12.7%, compared to the third quarter of fiscal year 2014. The majority of the increase during the third quarter of fiscal year 2015 was due to new franchise restaurants that opened since September 2014. During the third quarter of fiscal year 2015 there was also a $186 thousand recovery of franchise royalties from prior periods.

 

Other Operating Income. Other operating income in the third quarter of fiscal year 2015 was relatively unchanged compared to the third quarter of fiscal year 2014. Other operating income includes gift card breakage revenue, our share of income from a managed restaurant and miscellaneous restaurant income.

 

Food and Beverage Costs. Food and beverage costs increased $1.5 million, or 7.0%, to $23.7 million in the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014. As a percentage of restaurant sales, food and beverage costs decreased to 31.5% in the third quarter of fiscal year 2015 from 32.0% in the third quarter of fiscal year 2014. The decrease in food and beverage costs as a percentage of restaurant sales was primarily due to a 3.8% increase in the average check partially offset by a 3.1% increase in beef costs.

 

Restaurant Operating Expenses. Restaurant operating expenses increased $2.1 million, or 5.6%, to $39.3 million in the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014. Restaurant operating expenses, as a percentage of restaurant sales, decreased to 52.3% in the third quarter of fiscal year 2015 from 53.7% in the third quarter of fiscal year 2014. The decrease in restaurant operating expenses as a percentage of restaurant sales was primarily attributable to lower healthcare claims.

 

Marketing and Advertising. Marketing and advertising expenses increased $322 thousand to $2.3 million in the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014. The increase in marketing and advertising expenses in the third quarter of fiscal year 2015 was primarily attributable to a planned increase in advertising spending.

 

General and Administrative Costs. General and administrative costs increased $2.1 million to $7.4 million in the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014. The increase in general and administrative costs was primarily attributable to performance-based compensation and an increase in stock based compensation.

 

Depreciation and Amortization Expenses. Depreciation and amortization expense increased $548 thousand to $3.2 million in the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014 primarily due to depreciation on new restaurant assets placed in service within the last twelve months.

 

Pre-opening costs. Pre-opening costs were $112 thousand in the third quarter of fiscal year 2015 primarily due to the planned opening of the Dallas, TX Ruth’s Chris Steak House Restaurant in the fourth quarter of fiscal year 2015. Pre-opening costs were $395 thousand in the third quarter of fiscal year 2014 primarily due to two new Ruth’s Chris Steak House restaurants that opened in the fourth quarter of fiscal year 2014.

 

Interest Expense. Interest expense decreased $109 thousand to $188 thousand in the third quarter of fiscal year 2015 from the third quarter of fiscal year 2014. The decrease in expense was primarily due to a lower average debt balance in the third quarter of fiscal year 2015.

 

Income Tax Expense. During the third quarter of fiscal year 2015, we recognized income tax expense of $1.3 million. During the third quarter of fiscal year 2014, we recognized income tax expense of $1.5 million. The effective tax rate, including the impact of discrete items, decreased to 33.7% for the third quarter of fiscal year 2015 compared to 40.1% for the third quarter of fiscal year 2014. The effective tax rate decreased primarily due to unfavorable discrete items recognized in the third quarter of fiscal year 2014. Fiscal year 2015 discrete items and other unexpected changes impacting annual tax financial accounting tax expense may cause the effective tax rate for fiscal year 2015 to differ from the effective tax rate for the third quarter.

 

Income from Continuing Operations. Income from continuing operations of $2.6 million in the third quarter of fiscal year 2015 increased by $440 thousand compared to the third quarter of fiscal year 2014 due to the factors noted above.

 

Loss from Discontinued Operations, net of income taxes. Loss from discontinued operation, net of income taxes, for the third quarter of fiscal year 2015 was $73 thousand compared to $9.5 million during the third quarter of fiscal year 2014. The $9.5 million loss recognized in the third quarter of fiscal year 2014 was primarily due to a $9.3 million net of tax loss on impairment recognized on the Mitchell’s Restaurants.

 

 

Net Income (Loss). Net income was $2.6 million in the third quarter of fiscal year 2015 and increased by $9.9 million compared to a loss of $7.3 million in the third quarter of fiscal year 2014. The increase was largely attributable to the factors noted above.

 

Thirty-nine Weeks Ended September 27, 2015 Compared to Thirty-nine Weeks Ended September 28, 2014

 

Overview. Operating income increased $4.0 million, or 14.5%, to $31.8 million for the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014. Operating income for the first thirty-nine weeks of fiscal year 2015 was favorably impacted by a $20.7 million increase in restaurant sales, offset by a $4.3 million increase in food and beverage costs, a $7.5 million increase in restaurant operating expenses and a $3.9 million increase in general and administrative costs. Income from continuing operations increased from the first thirty-nine weeks of fiscal year 2014 by $3.2 million to $21.1 million. Net income for the first thirty-nine weeks of fiscal year 2015 increased from the first thirty-nine weeks of fiscal year 2014 by $12.0 million to $20.5 million. The loss for the first thirty-nine weeks of fiscal year 2014 includes the $9.3 million after-tax impact of the impairment loss on Mitchell’s Restaurants. The results of operations and impairment charges for the Mitchell’s Restaurants have been classified as discontinued operations in the consolidated statements of operations.

 

Segment Profits. Segment profits for the first thirty-nine weeks of fiscal year 2015 for the Company-owned steakhouse restaurant segment increased by $8.6 million to $55.6 million from the first thirty-nine weeks of fiscal year 2014. The increase was driven by a $20.4 million increase in revenues, which exceeded the increase in segment operating expenses. Franchise income increased $743 thousand in the first thirty-nine weeks of fiscal year 2015 to $12.1 million from the first thirty-nine weeks of fiscal year 2014.

 

Restaurant Sales. Restaurant sales increased by $20.7 million, or 8.9%, to $253.1 million in the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014. The increase was attributable to a $7.7 million increase in Company-owned comparable restaurant sales and $13.0 million in restaurant sales at new restaurants. Excluding discontinued operations, total operating weeks for all brands during the first thirty-nine weeks of fiscal year 2015 increased to 2,568 from 2,447 in the first thirty-nine weeks of fiscal year 2014. Company-owned comparable restaurant sales increased 3.4%, driven by an average check increase of 3.5% partially offset by an entrée decrease of 0.1%.

 

Franchise Income. Franchise income in the first thirty-nine weeks of fiscal year 2015 increased $743 thousand compared to the first thirty-nine weeks of fiscal year 2014. The increase was primarily due to new franchise restaurants that opened since September 2014. During the first thirty-nine weeks of fiscal year 2015 there was also a $186 thousand recovery of franchise royalties from prior periods.

 

Other Operating Income. Other operating income in the first thirty-nine weeks of fiscal year 2015 was relatively unchanged compared to the first thirty-nine weeks of fiscal year 2014. Other operating income includes gift card breakage revenue, our share of income from a managed restaurant and miscellaneous restaurant income.

 

Food and Beverage Costs. Food and beverage costs increased $4.3 million, or 5.9%, to $78.0 million in the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014. As a percentage of restaurant sales, food and beverage costs decreased to 30.8% in the first thirty-nine weeks of fiscal year 2015 from 31.7% in the first thirty-nine weeks of fiscal year 2014. The decrease in food and beverage costs as a percentage of restaurant sales was primarily due to a 3.5% increase in average check without a corresponding increase in costs.

 

Restaurant Operating Expenses. Restaurant operating expenses increased $7.5 million, or 6.6%, to $121.3 million in the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014. Restaurant operating expenses, as a percentage of restaurant sales, decreased to 47.9% in the first thirty-nine weeks of fiscal year 2015 from 49.0% in the first thirty-nine weeks of fiscal year 2014. The decrease in restaurant operating expenses as a percentage of restaurant sales was primarily attributable to lower healthcare claims.

 

Marketing and Advertising. Marketing and advertising expenses increased $694 thousand to $6.4 million in the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014. The increase in marketing and advertising expenses in the first thirty-nine weeks of fiscal 2015 was primarily attributable to a planned increase in advertising spending. Marketing and advertising expenses as a percentage of revenue in the first thirty-nine weeks of fiscal year 2015 were relatively unchanged compared to the first thirty-nine weeks of fiscal year 2014.

 

General and Administrative Costs. General and administrative costs increased $3.9 million to $21.3 million in the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014. The increase in general and administrative costs was primarily attributable to performance-based compensation and an increase in executive compensation.

 

 

Depreciation and Amortization Expenses. Depreciation and amortization expense increased $1.4 million to $9.3 million in the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014 primarily due to depreciation on new restaurant assets placed in service within the last twelve months.

 

Pre-opening costs. Pre-opening costs were $627 thousand in the first thirty-nine weeks of fiscal year 2015 primarily due to the opening of the St. Petersburg, FL Ruth’s Chris Steak House Restaurant and the planned opening of the Dallas, TX Ruth’s Chris Steak House Restaurant in the fourth quarter of fiscal year 2015. Pre-opening costs were $924 thousand in the first thirty-nine weeks fiscal year 2014 primarily due to the opening of three new Ruth’s Chris Steak House restaurants in fiscal year 2014.

 

Interest Expense. Interest expense decreased $293 thousand to $588 thousand in the first thirty-nine weeks of fiscal year 2015 from the first thirty-nine weeks of fiscal year 2014. The decrease in expense was primarily due to a lower average debt balance during the first thirty-nine weeks of fiscal year 2015.

 

Income Tax Expense. During the first thirty-nine weeks of fiscal year 2015, we recognized income tax expense of $10.1 million. During the first thirty-nine weeks of fiscal year 2014, we recognized income tax expense of $9.0 million. The effective tax rate, including the impact of discrete items, decreased to 32.5% for the first thirty-nine weeks fiscal year 2015 compared to 33.6% for the first thirty-nine weeks of fiscal year 2014. The effective tax rate decreased primarily due to a decrease in the recognition of unfavorable discrete income tax items during the first thirty-nine weeks of fiscal year 2014. Fiscal year 2015 discrete items and other unexpected changes impacting annual tax financial accounting tax expense may cause the effective tax rate for fiscal year 2015 to differ from the effective tax rate for the first thirty-nine weeks of fiscal year 2015.

 

Income from Continuing Operations. Income from continuing operations of $21.1 million in the first thirty-nine weeks of fiscal year 2015 increased by $3.2 million compared to the first thirty-nine weeks of fiscal year 2014 due to the factors noted above.

 

Loss from Discontinued Operations, net of income taxes. Loss from discontinued operation, net of income taxes, for the first thirty-nine weeks of fiscal year 2015 was $582 thousand compared with a loss of $9.4 million during the first thirty-nine weeks of fiscal year 2014. The loss in the first thirty-nine weeks of fiscal year 2015 was primarily attributable to the Mitchell’s Restaurants. The loss for the first thirty-nine weeks of fiscal year 2014 includes the $9.3 million after-tax impact of the impairment loss on Mitchell’s Restaurants.

 

Net Income. Net income was $20.5 million in the first thirty-nine weeks of fiscal year 2015 and increased by $12.0 million compared to $8.5 million in the first thirty-nine weeks of fiscal year 2014. The increase was largely attributable to the factors noted above.

 

Liquidity and Capital Resources

 

Overview

 

Our principal sources of cash during the first thirty-nine weeks of fiscal year 2015 were net cash provided by operating activities, proceeds from the sale of the Mitchell’s Restaurants and related assets and borrowings under our $100 million senior credit facility. Our principal uses of cash during the first thirty-nine weeks of fiscal year 2015 were for capital expenditures, principal repayments under our $100 million senior credit facility, common stock repurchases and dividend payments.

 

Cash flows from discontinued operations are combined with the cash flows from continuing operations within each of the categories on our condensed consolidated statement of cash flows. Except for the receipt of $10 million cash for the sale of the Mitchell’s Restaurants and related assets during the first thirty-nine weeks of fiscal year 2015, we do not anticipate that the sale of the Mitchell’s Restaurants or any of our closed restaurants reported in discontinued operations will have a material impact on the Company’s cash flow during fiscal year 2015.

 

During November 2014, a new share repurchase program was approved by our Board of Directors under which the Company is authorized to repurchase up to $50 million of outstanding common stock from time to time. The new share repurchase program replaced the previous share repurchase program announced in May 2013, which has been terminated. During the first thirty-nine weeks of fiscal year 2015, 752,438 shares were repurchased under the repurchase program at an aggregate cost of $11.7 million or an average cost of $15.52 per share. All repurchased shares were retired and cancelled. As of September 27, 2015, $33.2 million remained available for future purchases under the new program.

 

 

During the second quarter of fiscal year 2013, we commenced paying quarterly cash dividends to holders of common and restricted stock. We paid a quarterly cash dividend of $0.06 per share, or $2.1 million in the aggregate, during the first, second and third quarters of fiscal year 2015. On October 30, 2015, we announced that our Board of Directors declared a quarterly cash dividend of $0.06 per share, or approximately $2.1 million in the aggregate, to be paid on December 3, 2015 to common and restricted stockholders of record as of the close of business on November 19, 2015. Future dividends will be subject to the approval of our Board of Directors. 

 

We have decreased borrowing under our senior credit facility by $8.0 million since the end of fiscal year 2014. As of September 27, 2015, we had $5.0 million of outstanding indebtedness under our senior credit facility with approximately $90.8 million of borrowings available, net of outstanding letters of credit of approximately $4.2 million. As of September 27, 2015, the weighted average interest rate on our outstanding indebtedness was 2.3%. In addition, the fees on our unused senior credit facility and outstanding letters of credit were 0.2% and 2.1%, respectively.

 

We amended our senior credit agreement in May 2013 to reset the limit applicable to junior stock payments, which include both cash dividend payments and repurchases of common and preferred stock. As a result of the amendment, we are permitted to make up to $100 million in junior stock payments subsequent to December 30, 2012 through the end of the agreement; $44.8 million of such payments had been made as of September 27, 2015. As of September 27, 2015, we were in compliance with all the covenants under our senior credit facility.

 

We believe that our cash flow from operations coupled with our borrowing capacity under our senior credit facility should provide us with adequate liquidity for the next 12 months. We anticipate capital expenditures for fiscal year 2015 will total approximately $19.0 million to $21.0 million.

 

Sources and Uses of Cash

 

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):

 

		39 Weeks Ended
		September 27,				September 28,
		2015				2014
Net cash provided by (used in):
Operating activities		$	29,505			$	13,112
Investing activities			(4,594	)			(14,435	)
Financing activities			(26,420	)			(5,777	)
Net decrease in cash and cash equivalents		$	(1,509	)		$	(7,100	)

 

 

Operating Activities. Operating cash inflows pertain primarily to restaurant sales and franchise income. Operating cash outflows pertain primarily to expenditures for food and beverages, restaurant operating expenses, marketing and advertising and general and administrative costs. Operating activities provided cash flow during the first thirty-nine weeks of both fiscal years 2015 and 2014 primarily because operating revenues exceeded cash-based expenses.

 

Investing Activities. Cash used in investing activities aggregated $4.6 million in the first thirty-nine weeks of fiscal year 2015 compared with $14.4 million cash used in the first thirty-nine weeks of fiscal year 2014 primarily due to receipt of $10 million from the sale of the Mitchell’s Restaurants and related assets. Investing cash outflows during the first thirty-nine weeks of both fiscal years 2015 and 2014 pertained primarily to capital expenditure projects. Cash used in investing projects during the first thirty-nine weeks of fiscal year 2015 pertained to $8.6 million for restaurant remodel projects and $5.7 million for new restaurants. Cash used in investing activities during the first thirty-nine weeks of fiscal year 2014 pertained to $5.0 million for restaurant remodel projects, $5.8 million for leasehold improvements at a new Ruth’s Chris Steak House restaurant and $2.8 million for the acquisition of the Austin, TX Ruth’s Chris Steak House Restaurant from an owner franchisee.

 

Financing Activities. Financing activities used cash during the first thirty-nine weeks of both fiscal years 2015 and 2014. During the first thirty-nine weeks of fiscal year 2015, we: reduced the debt outstanding under our senior credit facility by $8.0 million; used $11.7 million to repurchase common stock; paid $1.4 million in employee taxes in connection with the vesting of restricted stock and the exercise of stock options; and paid dividends of $6.3 million. We paid $1.4 million in taxes in connection with the vesting of restricted stock and the exercise of stock options because some recipients elected to satisfy their individual minimum tax withholding obligations by having us withhold a number of vested shares of restricted stock and/or a number of shares otherwise issuable pursuant to stock options. During the first thirty-nine weeks of fiscal year 2014, we: increased the debt outstanding under our senior credit facility by $11.0 million to fund operations and capital expenditures; used $10.3 million to repurchase common stock; paid $2.9 million in taxes related to stock based compensation; and paid dividends of $5.4 million.

 

 

Off-Balance Sheet Arrangements

 

As of September 27, 2015, we did not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 includes a summary of the critical accounting policies and estimates that we believe are the most important to aid in the understanding our financial results. There have been no material changes to these critical accounting policies and estimates that impacted our reported amounts of assets, liabilities, revenues or expenses during the first thirty-nine weeks of fiscal year 2015.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

The Company is exposed to market risk from fluctuations in interest rates. For fixed rate debt, interest rate changes affect the fair market value of such debt but do not impact earnings or cash flows. Conversely, for variable rate debt, including borrowings under the Company’s senior credit facility, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. At September 27, 2015, the Company had $5.0 million invariable rate debt outstanding. The Company currently does not use financial instruments to hedge its risk to market fluctuations in interest rates. Ceteris paribus, a hypothetical immediate one percentage point change in interest rates would be expected to have an impact on pre-tax earnings and cash flows for fiscal year 2015 of less than $100 thousand.

 

Foreign Currency Risk

 

The Company believes that fluctuations in foreign exchange rates do not present a material risk to its operations due to the relatively small amount of franchise income it receives from outside the U.S. During the first thirty-nine weeks of fiscal years 2015 and 2014, franchise income attributable to international locations was approximately $2.3 million in each year.

 

Commodity Price Risk

 

The Company is exposed to market price fluctuations in beef and other food product prices, which in the past have been volatile and have impacted the Company’s food and beverage costs. As the Company typically sets its menu prices in advance of its beef and other food product purchases, the Company cannot quickly react to changing costs of beef and other food items. To the extent that the Company is unable to pass the increased costs on to its guests through price increases, the Company’s results of operations would be adversely affected. As of September 27, 2015, the Company had not negotiated set pricing for any of its beef requirements for the remainder of fiscal year 2015. The market for USDA Prime grade beef is particularly volatile. If prices increase, or the supply of beef is reduced, operating margin could be materially adversely affected. Ceteris paribus, a hypothetical 10% fluctuation in beef prices would have an approximate impact on pre-tax earnings ranging from $1.0 million to $1.5 million for the remainder of fiscal year 2015.

 

From time to time, the Company enters into purchase price agreements for other lower-volume food products, including seafood. In the past, certain types of seafood have experienced fluctuations in availability. Seafood is also subject to fluctuations in price based on availability, which is often seasonal. If certain types of seafood are unavailable, or if the Company’s costs increase, the Company’s results of operations could be adversely affected.

 

Effects of Healthcare Inflation

 

The Company is exposed to market price fluctuations related to the cost of providing healthcare to its employees. Claim trends are predicted to outpace inflation throughout the upcoming year. Pharmacy costs are also rising in excess of general and medical cost inflation. If prices increase, or the Company experiences significantly more claims, operating margin could be materially adversely affected. Ceretis paribus, a hypothetical 10% fluctuation in healthcare costs would have an approximate impact on pre-tax earnings of approximately $250 thousand for the remainder of 2015.

 

Effects of Inflation

 

The Company believes that general inflation, excluding increases in food and employee health plan costs, has not had a material impact on its results of operations in recent years. Additionally, increases in statutory minimum wage rates may increase our operating costs. During 2014 and 2015, governmental entities acted to increase minimum wage rates in several states where Company-owned restaurants are located. The increased minimum wage rates are expected to increase employee compensation and related taxes by approximately $800 thousand in fiscal year 2015 compared to fiscal year 2014. Also, the U.S. government may consider legislation to increase the federal minimum wage rate, which, if enacted, would further increase employee compensation and related taxes.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 27, 2015. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 27, 2015 to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.

 

Changes in internal control over financial reporting

 

During the first thirty-nine weeks of fiscal year 2015, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that in the Company’s judgment has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. While litigation is subject to uncertainties and the outcome of litigated matters is not predictable with assurance, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition or results of operations.

 

The Company sells a considerable number of gift cards, which are issued and administered by a third party gift card issuer and service provider, consistent with common retail industry practice. The third party gift card issuer is paid a net fee for its services by the Company. The third party gift card issuer and service provider, as well as a number of other restaurant companies, retailers and gift card issuers, were named as defendants in an action filed under seal in June 2013 by William French on behalf of the State of Delaware in the Superior Court of Delaware in and for New Castle County alleging violations of Delaware law. The filing was unsealed in March 2014. The complaint alleges that approximately $30 million with respect to unused gift cards should be escheated by the Company to the State of Delaware and seeks interest and penalties, attorneys’ fees and costs, and an injunction against alleged future violations of Delaware’s unclaimed property laws. The Company has not yet been served with the complaint. The Company believes that it is in compliance with Delaware’s unclaimed property laws and intends to defend its position vigorously if served. To protect its interests, the Company has joined in a notice to remove the case to federal district court, which was filed in May 2014, and a motion to dismiss filed by all defendants in June 2014. In December 2014, the case was remanded back to Superior Court of Delaware. After the remand, the motion to dismiss was refiled in Delaware Superior Court and is currently pending.

 

ITEM  1A.

RISK FACTORS

 

There have been no material changes in the risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2014. The impact of circumstances and events described in such risk factors could result in significant adverse effects on our financial position, results of operations and cash flows.

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Stock repurchase activity during the fiscal quarter ended September 27, 2015 was as follows:

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of a Publicly Announced Program				Maximum Dollar Value that May Yet be Purchased under the Program (1) – Dollars in thousands
June 29, 2015 to August 2, 2015			272,809			$	15.99				272,809			$	35,253
August 3, 2015 to August 30, 2015			71,600			$	15.98				71,600			$	34,109
August 31, 2015 to September 27, 2015			57,280			$	15.98				57,280			$	33,194
Totals for the fiscal quarter			401,689			$	15.99				401,689			$	33,194

 

On November 17, 2014, the Company announced that its Board of Directors had approved a new share repurchase program under which the Company is authorized to repurchase up to $50 million of outstanding common stock from time to time in the open market, through negotiated transactions or otherwise (including, without limitation, the use of Rule 10b5-1 plans), depending on share price, market conditions and other factors. The new share repurchase program replaced the Company’s previous share repurchase program announced in May 2013, which was terminated. The previous share repurchase program had permitted the repurchase of up to $30 million of outstanding common stock, of which approximately $19 million remained unused upon its termination. The new share repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and has no termination date. The Company intends to conduct any open market share repurchase activities in compliance with the safe harbor provisions of Rule 10b-18 of the Exchange Act. During the fiscal quarter ended September 27, 2015, 401,689 shares were repurchased via open market transactions at an aggregate cash cost of $6.4 million. During the fiscal quarter ended September 28, 2014, 325,220 shares were repurchased via open market transactions at an aggregate cash cost of $3.5 million. The repurchased shares were cancelled. As of September 27, 2015, $33.2 million remained available for further purchases under the new program.

 

ITEM  3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM  4.

MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.

OTHER INFORMATION

 

None.

 

ITEM  6.

EXHIBITS

 

3.1   Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report filed on June 3, 2015).

 

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS

XBRL Instance Document.

 

101.SCH

XBRL Taxonomy Extension Schema Document.

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

101.DEF

XBRL Taxonomy Definition Linkbase Document.

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

 

---

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	RUTH’S HOSPITALITY GROUP, INC.
	By:	/s/ MICHAEL P. O’DONNELL
		Michael P. O’Donnell
		Chairman of the Board, President and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ ARNE G. HAAK
		Arne G. Haak
		Executive Vice President and Chief Financial Officer of Ruth’s Hospitality Group, Inc. (Principal Financial Officer)
Date: October 30, 2015

 

 

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