Edgar Filing: Ruths Hospitality Group, Inc.

ruth-10q_20190331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

☐	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

Ruth’s Hospitality Group, Inc.

(Exact name of registrant as specified in its charter)

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

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, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☒	Accelerated Filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	RUTH	Nasdaq

The number of shares outstanding of the registrant’s common stock as of April 30, 2019 was 30,479,801, which includes 1,097,867 shares of unvested restricted stock.

TABLE OF CONTENTS


		Page
Part I — Financial Information		3

Item 1	Financial Statements:	3

	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 30, 2018	3

	Condensed Consolidated Statements of Income for the Thirteen Week Periods ended March 31, 2019 and April 1, 2018	4

	Condensed Consolidated Statements of Shareholders’ Equity for the Thirteen Week Periods ended March 31, 2019 and April 1, 2018	5

	Condensed Consolidated Statements of Cash Flows for the Thirteen Week Periods ended March 31, 2019 and April 1, 2018	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	21

Item 4	Controls and Procedures	22

Part II — Other Information		23

Item 1	Legal Proceedings	23

Item 1A	Risk Factors	23

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3	Defaults Upon Senior Securities	23

Item 4	Mine Safety Disclosures	23

Item 5	Other Information	23

Item 6	Exhibits	23

Signatures		25

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)

	March 31,		December 30,
	2019		2018
Assets
Current assets:
Cash and cash equivalents	$	3,116	$	5,062
Accounts receivable, less allowance for doubtful accounts 2019 - $111; 2018 - $322		12,211		19,476
Inventory		8,476		9,296
Prepaid expenses and other		3,068		2,528
Total current assets		26,871		36,362
Property and equipment, net of accumulated depreciation 2019 - $164,607; 2018 - $160,153		125,637		125,991
Right of use assets, net of accumulated amortization: operating leases 2019 - $3,905; 2018 - $0		166,189		—
Goodwill		36,522		36,522
Franchise rights, net of accumulated amortization 2019 - $2,779; 2018 - $2,299		44,438		44,919
Other intangibles, net of accumulated amortization 2019 - $1,343; 2018 - $1,395		4,070		4,862
Deferred income taxes		5,671		5,353
Other assets		625		604
Total assets	$	410,023	$	254,613
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	9,129		10,273
Accrued payroll		12,590		19,475
Accrued expenses		6,493		10,535
Deferred revenue		42,506		48,370
Current operating lease liabilities		14,421		—
Other current liabilities		5,921		6,619
Total current liabilities		91,060		95,272
Long-term debt		39,000		41,000
Operating lease liabilities		178,412		—
Deferred rent		—		23,692
Unearned franchise fees		2,855		2,680
Other liabilities		47		1,837
Total liabilities		311,374		164,481
Commitments and contingencies (Note 11)		—		—

Shareholder's equity:
Common stock, par value $.01 per share; 100,000,000 shares authorized, 29,376,062 shares issued and outstanding at March 31, 2019, 29,268,776 shares issued and outstanding at December 30, 2018		294		293
Additional paid-in capital		61,652		61,819
Retained earnings		36,703		28,020
Treasury stock, at cost; 71,950 shares at March 31, 2019 and December 30, 2018		—		—
Total shareholders' equity		98,649		90,132
Total liabilities and shareholders' equity	$	410,023	$	254,613

See accompanying notes to condensed consolidated financial statements.

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income—Unaudited

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

	13 Weeks Ended
	March 31,			April 1,
	2019			2018

Revenues:
Restaurant sales	$	112,986		$	110,364
Franchise income		4,558			4,417
Other operating income		2,197			1,745
Total revenues		119,741			116,526

Costs and expenses:
Food and beverage costs		31,848			31,405
Restaurant operating expenses		53,603			51,679
Marketing and advertising		3,629			3,477
General and administrative costs		8,751			8,976
Depreciation and amortization expenses		4,969			4,461
Pre-opening costs		98			140
Total costs and expenses		102,898			100,138

Operating income		16,843			16,388

Other income (expense):
Interest expense, net		(405	)		(380	)
Other		2			12

Income from continuing operations before income tax expense		16,440			16,020
Income tax expense		2,529			2,384
Income from continuing operations		13,911			13,636
Income from discontinued operations, net of income taxes		—			10
Net income	$	13,911		$	13,646

Basic earnings per common share:
Continuing operations	$	0.48		$	0.46
Discontinued operations		—			—
Basic earnings per share	$	0.48		$	0.46

Diluted earnings per common share:
Continuing operations	$	0.47		$	0.45
Discontinued operations		—			—
Diluted earnings per share	$	0.47		$	0.45

Shares used in computing earnings per common share:
Basic		29,275,501			29,689,870
Diluted		29,903,511			30,384,180

Cash dividends declared per common share	$	0.13		$	0.11

See accompanying notes to condensed consolidated financial statements.

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity—Unaudited

(Amounts in thousands)

						Additional			Retained Earnings
	Common Stock					Paid-in			(Accumulated			Treasury Stock				Shareholders'
	Shares			Value		Capital			Deficit)			Shares		Value		Equity
Balance at December 30, 2018		29,269		$	293	$	61,819		$	28,020			72	$	—	$	90,132
Net income		—			—		—			13,911			—		—		13,911
Cash dividends		—			—		—			(3,967	)		—		—		(3,967	)
Repurchase of common stock		(26	)		—		(568	)		—			—		—		(568	)
Shares issued under stock compensation plan net of shares withheld for tax effects		133			1		(1,632	)		—			—		—		(1,631	)
Stock-based compensation		—			—		2,033			—			—		—		2,033
Cumulative effect of a change in accounting principle (Note 2)		—			—		—			(1,261	)		—		—		(1,261	)
Balance at March 31, 2019		29,376		$	294	$	61,652		$	36,703			72	$	—	$	98,649

Balance at December 31, 2017		29,646		$	296	$	77,017		$	2,191			72	$	—	$	79,504
Net income		—			—		—			13,646			—		—		13,646
Cash dividends		—			—		—			(3,390	)		—		—		(3,390	)
Shares issued under stock compensation plan net of shares withheld for tax effects		146			2		(1,689	)		—			—		—		(1,687	)
Stock-based compensation		—			—		1,841			—			—		—		1,841
Cumulative effect of a change in accounting principle		—			—		—			(2,324	)		—		—		(2,324	)
Balance at April 1, 2018		29,792		$	298	$	77,169		$	10,122			72	$	—	$	87,589

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)

	13 Weeks Ended
	March 31,			April 1,
	2019			2018
Cash flows from operating activities:
Net income	$	13,911		$	13,646
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,969			4,461
Deferred income taxes		95			(150	)
Non-cash interest expense		21			21
Amortization of below market lease		—			20
Stock-based compensation expense		2,033			1,841
Changes in operating assets and liabilities:
Accounts receivable		8,077			8,500
Inventories		820			320
Prepaid expenses and other		(540	)		204
Other assets		(42	)		—
Accounts payable and accrued expenses		(13,511	)		(8,771	)
Deferred revenue		(5,864	)		(6,055	)
Deferred rent		—			355
Lease liabilities		(171	)		—
Other liabilities		2,281			1,307
Net cash provided by operating activities		12,079			15,699
Cash flows from investing activities:
Acquisition of property and equipment		(5,860	)		(5,505	)
Net cash used in investing activities		(5,860	)		(5,505	)
Cash flows from financing activities:
Principal borrowings on long-term debt		7,000			2,000
Principal repayments on long-term debt		(9,000	)		(9,000	)
Repurchase of common stock		(568	)		—
Cash dividend payments		(3,967	)		(3,390	)
Tax payments from the vesting of restricted stock and option exercises		(1,630	)		(1,696	)
Proceeds from the exercise of stock options		—			9
Net cash used in financing activities		(8,165	)		(12,077	)
Net decrease in cash and cash equivalents		(1,946	)		(1,883	)
Cash and cash equivalents at beginning of period		5,062			4,051
Cash and cash equivalents at end of period	$	3,116		$	2,168
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest	$	427		$	375
Income taxes	$	31		$	971
Noncash investing and financing activities:
Accrued acquisition of property and equipment	$	667		$	1,278

See accompanying notes to condensed consolidated 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 March 31, 2019 and December 30, 2018 and for the thirteen week periods ended March 31, 2019 and April 1, 2018 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 March 31, 2019, there were 157 Ruth’s Chris Steak House restaurants, including 78 Company-owned restaurants, three restaurants operating under contractual agreements and 76 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. A new franchisee-owned Ruth’s Chris Steak House restaurant was opened in Chongqing, China in February 2019.

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 March 31, 2019 and April 1, 2018 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 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 30, 2018.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended March 31, 2019 and April 1, 2018 each contained thirteen weeks and are referred to herein as the first quarter of fiscal year 2019 and the first quarter of fiscal year 2018, respectively. Fiscal years 2019 and 2018 are both 52-week years.

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 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, and obligations related to gift cards, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.

Recent Adopted Accounting Standard

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company adopted this new lease standard on December 31, 2018. See Note 2 for further information about our transition to this new lease standard.

(2) Leases

Effective December 31, 2018, the Company adopted Topic 842 using the modified retrospective method for all leases in effect at the date of adoption. This new lease standard requires a lessee to recognize on the balance sheet a liability for future lease obligations and a corresponding right-of-use (ROU) asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company chose the effective date as its initial date of adoption. Consequently, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carry forward prior conclusions regarding lease identification, lease classification and initial indirect costs for existing leases. The Company did not elect the hindsight practical expedient.

In addition to the recognition of a liability for future lease obligations and a corresponding ROU asset, upon adoption, the Company:

Derecognized existing deferred rent and tenant allowance balances totaling $25.4 million.

Derecognized existing assets related to below market leases of $758 thousand.

Derecognized existing deferred gains on previous sale-leaseback transactions of $1.8 million. The deferred gain associated with this change in accounting was recognized through opening retained earnings as of December 31, 2018.

Recognized a retained earnings adjustment of $3.5 million related to the write-off of the ROU asset from a previously impaired Ruth’s Chris Steak House restaurant.

Recognized $413 thousand of additional deferred income taxes from the previously mentioned adoption related equity adjustments.

The Company did not experience material changes to either the consolidated statements of income or the consolidated statements of cash flows due to the adoption of Topic 842. The following table summarizes the impacts of adopting Topic 842 on the Company’s condensed consolidated balance sheet as of December 31, 2018 (in thousands):

	December 30,		Adjustments Due
	2018		to the Adoption			December 31,
	As Reported		of ASC 842			2018
Assets
Current assets:
Cash and cash equivalents	$	5,062	$	—		$	5,062
Accounts receivable, less allowance for doubtful accounts		19,476		812			20,288
Inventory		9,296		—			9,296
Prepaid expenses and other		2,528		(2,108	)		420
Total current assets		36,362		(1,296	)		35,066
Property and equipment, net of accumulated depreciation		125,991		—			125,991
Right of use assets, net of accumulated amortization: operating leases		—		166,040			166,040
Goodwill		36,522		—			36,522
Franchise rights, net of accumulated amortization		44,919		—			44,919
Other intangibles, net of accumulated amortization		4,862		(758	)		4,104
Deferred income taxes		5,353		413			5,766
Other assets		604		—			604
Total assets	$	254,613	$	164,399		$	419,012
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	10,273	$	—		$	10,273
Accrued payroll		19,475		—			19,475
Accrued expenses		10,535		—			10,535
Deferred revenue		48,370		—			48,370
Current operating lease liabilities		—		14,599			14,599
Other current liabilities		6,619		(1,698	)		4,921
Total current liabilities		95,272		12,901			108,173
Long-term debt		41,000		—			41,000
Operating lease liabilities		—		178,256			178,256
Deferred rent		23,692		(23,692	)		—
Unearned franchise fees		2,680		—			2,680
Other liabilities		1,837		(1,805	)		32
Total liabilities		164,481		165,660			330,141
Commitments and contingencies (Note 11)		—		—			—

Shareholder's equity:
Common stock, par value $.01 per share; 100,000,000 shares authorized, 29,268,776 shares issued and outstanding at December 30, 2018		293		—			293
Additional paid-in capital		61,819		—			61,819
Retained earnings		28,020		(1,261	)		26,759
Treasury stock, at cost; 71,950 shares at December 30, 2018		—		—			—
Total shareholders' equity		90,132		(1,261	)		88,871
Total liabilities and shareholders' equity	$	254,613	$	164,399		$	419,012

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 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 secured borrowing rates based on the information available at the lease commencement dates, or the transition date at adoption. 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. For financial reporting purposes, minimum rent payments are expensed on a straight-line basis over the lives of the leases. Additionally, incentives received from landlords used to fund leasehold improvements reduce the ROU assets related to those leases and are amortized as reductions to rent 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.

At March 31, 2019, 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 payments 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. The weighted average term and discount rate for operating leases is 12.5 years and 5.1%, respectively.

The components of lease expense are as follows (in thousands):

		13 Weeks Ended
	Classification	March 31, 2019
Operating lease cost	Restaurant operating expenses and General and adminstrative costs	$	6,380
Variable lease cost	Restaurant operating expenses and General and adminstrative costs		2,757
Total lease cost		$	9,137

As of March 31, 2019, maturities of lease liabilities are summarized as follows (in thousands):

	Operating Leases
2019, excluding the quarter ended March 31, 2019	$	19,655
2020		24,886
2021		23,259
2022		22,112
2023		19,183
Thereafter		159,124
Total future minimum rental commitments	$	268,219

As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2018, and under the previous lease accounting prior to the adoption of ASC 842, future minimum annual rental commitments for operating leases as of December 30, 2018 were as follows (in thousands):

	Operating Leases
2019	$	25,767
2020		24,177
2021		22,520
2022		21,388
2023		18,858
Thereafter		154,661
Total future minimum rental commitments	$	267,371

Supplemental cash flow information related to leases for the first quarter of 2019 was as follows (in thousands):

	13 Weeks Ended
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	6,524
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	4,055

(3) Revenue

In the following tables, the Company’s revenue is disaggregated by major component for each category on the consolidated statements of income (in thousands).

13 Weeks Ended March 31, 2019:

Domestic

International

Total Revenue

Restaurant sales

112,986