Ruth’s Hospitality Group (RUTH) is on our Hedgeye Restaurants LONG bench.
HEDGEYE OPINION
Traffic is the name of the game. In FY15 RUTH has experienced choppy traffic trends, in Q1 they were down -0.5%, Q2 up +0.7%, and now Q3 down -0.5%. Management eluded that traffic has turned to the positive LSD range in October; we’ll look to see if this positive trend continues through the end of the quarter. Beef prices are looking to moderate further over the next year, confirming our beef deflation call (CLICK HERE to view). YTD beef prices for RUTH are down 2%, and with heard size and slaughtering expected to increase, prices will continue to go down. Management is expecting beef deflation of 2-3% in 4Q15. RUTH played the beef market perfectly, deciding to buy at market, instead of contract, allowing them to capture significant savings. We like RUTH on the LONG side, but remain skeptical on the overarching macroeconomic trends that are affecting the restaurant industry right now.
3Q15 EARNINGS RESULTS
It was a decent quarter on the face, but with price up +3.0% and traffic down -0.5%, we need to see traffic growth in order to be fully convicted in the near term. Nonetheless, RUTH beat top line estimates, reporting revenue of $80.3mm versus $79.3mm. Company-owned same-store sales were +3.3% versus consensus estimates of +2.8%, breakdown of the comp was price +3.0%, mix up +0.8% and traffic down -0.5%. Strong comps coupled with lower than expected food costs resulted in a bottom line beat of $0.01, reporting EPS of $0.08 versus consensus estimates of $0.07.
Notably, management spoke to some weakness in oil and tourist regions but nothing substantial. They are still seeing robust strength in California and Florida, which are two of their bigger markets.
TRAFFIC VS. PRICE
As we stated we are keeping RUTH on the LONG bench. The relationship between Traffic and Price at RUTH is a concerning one. Below is a chart of Traffic versus Price, management needs to figure out a balance in which they can cover their increasing costs through price while driving traffic. Lower beef prices should alleviate some commodity basket pressure, giving them the ability to keep price increases to a minimum. Management stated price in Q4 is expected to be only 2%, which will help curb the divergence between these metrics.
RESTAURANT REVITALIZATION
RUTH is currently rolling out a new menu with innovative items designed to drive incremental traffic and average check. Early tests results were positive and the new menu has been rolled out to 52 locations as of the end of Q3, all corporate locations will carry the new menu by the end of 1Q16.
Management is also embarking on a restaurant redesign project, which will take place over the next 3-5 years, aimed at improving the guest experience. Changes will include an expanded bar area, revamped dining room and enhanced private dining spaces. They have remodeled two locations thus far and plan to remodel eight to ten next year.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
