Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements", as
defined in the Private Securities Litigation Reform Act of 1995 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 "anticipate," "assume," "believe," "continue," "could,"
"estimate," "expect," "forecast," "future," "intend," "likely result," "may,"
"might," "plan," "potential," "predict," "project," "seek", "should,"
"target," "will be," "will continue," "will likely result," "would" and other
similar words and phrases. Similarly, statements herein that describe the
Company's objectives, plans or goals, including with respect to restaurant
closures and re-openings, new restaurant openings and acquisitions or closures,
capital expenditures, strategy, financial outlook, liquidity outlook, our
effective tax rate, and the impact of inflation and recent accounting
pronouncements, 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: the negative impact the COVID-19 pandemic has had and may
continue to have on our business, financial condition, results of operations and
cash flows; reductions in the availability of, or increases in the cost of, USDA
Prime grade beef, fish and other food items; changes in economic conditions,
including inflation, increasing interest rates, higher unemployment, slowing
growth or recession, reductions in consumer discretionary income, and general
trends; the loss of key management personnel; the effect of market volatility on
the Company's stock price; the instability in the banking system as a result of
several recent bank failure; health concerns about beef or other food products;
the effect of competition in the restaurant industry; changes in consumer
preferences or discretionary spending or our ability to pass along rising costs
through selling prices; labor shortages or increases in labor costs; the impact
of federal, state or local government regulations relating to income taxes,
unclaimed property, Company employees, the sale or preparation of food, the sale
of alcoholic beverages and the opening of new restaurants; political conditions,
civil unrest or other developments and risks in the markets where the Company's
restaurants are located; harmful actions taken by the Company's franchisees; the
inability to successfully integrate franchisee acquisitions into the Company's
business operations; economic, regulatory and other limitations on the Company's
ability to pursue new restaurant openings and other organic growth
opportunities; a failure, interruption or security breach of the Company's
information technology network; the Company's indemnification obligations in
connection with its 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; gains or losses on lease modifications; the impact of litigation;
uncertainty regarding the transition away from LIBOR and the replacement of
LIBOR with an alternative reference rate; the restrictions imposed by the
Company's credit agreement; changes in, or the suspension or discontinuation of,
the Company's quarterly cash dividend payments or share repurchase program; and
the inability to secure additional financing on terms acceptable to the Company.
Other factors that could cause actual results to differ are those with respect
to the Merger (as defined herein), including: the proposed commencement of a
tender offer by Darden (as defined herein) or one of its subsidiaries to
purchase all of the shares of common stock of the Company and the subsequent
merger, including the occurrence of any event, change or other circumstance that
could give rise to our right or the right of Darden's or both of us to terminate
the Merger Agreement (as defined herein), including circumstances requiring us
to pay Darden a termination fee pursuant to the Merger Agreement; the risk that
the potential transaction may not be completed in a timely manner or at all; the
risk that the potential transaction may not close in the anticipated timeframe
or at all due to one or more of the closing conditions to the acquisition not
being satisfied or, to the extent permitted by the Merger Agreement
or applicable law, waived, including due to the failure to obtain applicable
regulatory approvals or the approval of our shareholders in a timely manner or
otherwise; uncertainty surrounding the number of shares of the Company's common
stock that will be tendered in the Offer (as defined herein); the possibility
that competing offers or acquisition proposals for the Company will be made; the
possibility that any or all of the various conditions to the consummation of the
Offer and the Merger (as defined herein) may not be satisfied or waived,
including that a governmental entity may prohibit, delay or refuse to grant
approval for the consummation of the potential transactions; the occurrence of
any event, change or other circumstance that could give rise to the termination
of the Offer or the Merger; the effects of disruption from the transactions of
the Company's business; the risk of legal proceedings that may be instituted
related to the Merger Agreement, which may result in significant costs of
defense, indemnification and liability; the risk that the proposed acquisition
disrupts our current plans and operations; the risk that there may be unexpected
costs, charges or expenses resulting from the proposed transactions, including
the Offer and the Merger; risks related to disruption of management's time and
attention from ongoing business operations due to the proposed transactions,
including the Offer and the Merger; the risk that any announcements related to
the proposed transactions, including the Offer and the Merger, could have
adverse effects on our ability to retain and hire key personnel and to maintain
relationships with business partners (including franchisees), suppliers and
customers and on our operating results and business generally; and the risk that
certain restrictions during the pendency of the proposed tender offer and
acquisition may impact our ability to pursue certain business opportunities or
strategic transactions. 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 Part II Item 1A of this
Form 10-Q and the Company's Annual Report on Form 10-K for the fiscal year ended
December 25, 2022, 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.
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Overview
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 26, 2023, there were 154 Ruth's Chris Steak House restaurants, including
77 Company-owned restaurants, three restaurants operating under contractual
agreements and 74 franchisee-owned restaurants. Subsequent to the end of the
quarter ended March 26, 2023, a Company-owned Ruth's Chris Steak House
restaurant was opened in Reston, VA and a Company-owned Ruth's Chris Steakhouse
was closed in Manhattan, NY.
The Ruth's Chris menu features a broad selection of USDA Prime and other
high-quality 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 over 57 years of 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
23 international franchisee-owned restaurants in Aruba, Canada, China, Hong
Kong, Indonesia, Japan, Mexico, Philippines, Singapore and Taiwan.
The novel coronavirus 2019 (COVID-19) pandemic resulted in a significant
reduction in revenue at the Company's restaurants due to mandatory restaurant
closures, capacity limitations, social distancing guidelines or other
restrictions mandated by governments across the world, including federal, state
and local governments in the United States. As a result of these developments,
the Company experienced a significant negative impact on its revenues, results
of operations and cash flows. As of and for thirteen-week periods ended March
26, 2023 and March 27, 2022, all of the Company-owned and managed Ruth's Chris
Steak House restaurant dining rooms were open and its revenues, results of
operations and cash flows were comparable to periods prior to the pandemic.
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 period may decrease.
Our Annual Report on Form 10-K for the fiscal year ended December 25, 2022
provides additional information about our business, operations and financial
condition.
Merger Agreement
On May 2, 2023, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Darden Restaurants, Inc., a Florida corporation ("Darden"), and
Ruby Acquisition Corp., a Delaware corporation and an indirect wholly owned
subsidiary of Darden ("Merger Sub").
Pursuant to the Merger Agreement, and upon the terms and subject to the
conditions thereof, Merger Sub has agreed to commence a tender offer (the
"Offer"), to purchase all of the shares of common stock, par value $0.01 per
share (the "Company Common Stock"), of the Company issued and outstanding (each
a "Share" and, collectively, the "Shares") at a price of $21.50 per Share (the
"Per Share Price"), in cash, without interest thereon (but subject to applicable
withholding). Pursuant to the Merger Agreement, following the consummation of
the Offer, subject to the terms and conditions of the Merger Agreement and in
accordance with Section 251(h) of the General Corporation Law of the State of
Delaware (the "DGCL"), Merger Sub will be merged with and into the Company (the
"Merger"), with the Company surviving the Merger as a wholly owned subsidiary of
Darden in accordance with the DGCL. If the Merger is completed, the Company's
Common Stock will be delisted from the Nasdaq Global Select Market and
deregistered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
The obligation of Merger Sub to consummate the Offer is subject to the
satisfaction or waiver of customary conditions, including, among others, (i) the
tender of Shares representing at least a majority of the outstanding Company
Common Stock, (ii) any waiting period applicable to the Offer under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, having expired
or otherwise been terminated, (iii) the absence of any law or order by any
governmental authority of competent jurisdiction prohibiting, restricting,
enjoining or otherwise making illegal the consummation of the Offer or the
Merger, (iv) the Merger Agreement not having been terminated in accordance with
its terms and (v) other customary conditions set forth in Annex I to the Merger
Agreement.
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The Merger Agreement also includes customary termination provisions for both the
Company and Darden, and provides that, in connection with the termination of the
Merger Agreement under specified circumstances, including termination by the
Company to accept and enter into an agreement with respect to a Superior
Proposal (as defined in the Merger Agreement), the Company will pay Darden a
termination fee of $23.9 million.
In connection with the Merger, the Company expects to incur significant
expenses. An estimate of those expenses cannot be made at this time. The
proposed Merger is expected to close by the end of June 2023, subject to
satisfaction of customary closing conditions. For more information about the
Merger, see Note 12 in the notes to the condensed consolidated financial
statements included in Item 1. "Financial Statements" and our Current Report on
Form 8-K filed with the SEC on May 3, 2023 (SEC Accession No.
0001193125-23-133284).
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
March 26, March 27,
2023 2022
Revenues:
Restaurant sales 94.2 % 94.1 %
Franchise income 3.9 % 3.8 %
Other operating income 1.9 % 2.1 %
Total revenues 100.0 % 100.0 %
Costs and expenses:
Food and beverage costs (percentage of restaurant sales) 32.9 % 32.5 %
Restaurant operating expenses (percentage of restaurant
sales)
46.7 % 46.0 %
Marketing and advertising 3.3 % 3.9 %
General and administrative costs 6.9 % 7.3 %
Depreciation and amortization expenses 4.8 % 3.8 %
Pre-opening costs 0.4 % 0.7 %
Gain on lease modifications (0.6 %) -
Total costs and expenses 89.8 % 89.7 %
Operating income 10.2 % 10.3 %
Other income (expense):
Interest expense, net (0.2 %) (0.2 %)
Other 0.0 % 0.0 %
Income before income taxes 10.0 % 10.1 %
Income tax expense 1.8 % 1.8 %
Net income 8.2 % 8.3 %
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First Quarter Ended March 26, 2023 (13 Weeks) Compared to First Quarter Ended
March 27, 2022 (13 Weeks)
Overview. Operating income increased by $1.0 million to $14.0 million for
the first quarter of fiscal year 2023 from the operating income reported for the
first quarter of fiscal year 2022. Operating income for the first quarter of
fiscal year 2023 was favorably impacted by a $10.2 million increase in
restaurant sales offset by a $3.8 million increase in food and beverage costs a
$5.6 million increase in restaurant operating expenses and a $1.7 million
increase in depreciation and amortization expense. Net income increased from the
first quarter of fiscal year 2022 by $929 thousand to $11.3 million.
Restaurant Sales. Restaurant sales increased by $10.2 million, or 8.6%, to
$128.9 million in the first quarter of fiscal year 2023 from the first quarter
of fiscal year 2022 driven by a $4.2 million increase or 3.8% increase
in Company-owned comparable restaurant sales with the balance from
non-comparable sales, primarily sales from six new restaurants. The increase in
Company-owned comparable restaurant sales in fiscal year 2023 primarily from an
increase of 5.6% in average check partially offset by a 1.8% decrease in
traffic.
Franchise Income. Franchise income in the first quarter of fiscal year 2023
increased by $539 thousand, or 11.4%, to $5.3 million compared to the first
quarter of fiscal year 2022. The increase in franchise income compared to the
first quarter of fiscal year 2022 was due to an increase in franchisee-owned
restaurant sales.
Other Operating Income. Other operating income increased by $14 thousand to $2.7
million in the first quarter of fiscal year 2023 compared to the first quarter
of fiscal year 2022. The increase was primarily due to an increase in breakage
income.
Food and Beverage Costs. Food and beverage costs increased by $3.8 million, or
9.9%, to $42.4 million in the first quarter of fiscal year 2023 compared to the
first quarter of fiscal year 2022 primarily due to increased restaurant sales.
As a percentage of restaurant sales, food and beverage costs increased to 32.9%
in the first quarter of fiscal year 2023 from 32.5% in the first quarter of
fiscal year 2022, primarily driven by a 12.8% increase in beef costs.
Restaurant Operating Expenses. Restaurant operating expenses increased by
$5.6 million, or 10.2%, to $60.2 million in the first quarter of fiscal year
2023 from the first quarter of fiscal year 2022. Restaurant operating expenses,
as a percentage of restaurant sales, were 46.7% in the first quarter of fiscal
year 2023 compared to 46.0% in the first quarter of fiscal year 2022 primarily
driven by higher labor costs from adding staff to our restaurants.
Marketing and Advertising. Marketing and advertising expenses decreased by $405
thousand, or 8.2%, to $4.5 million in the first quarter of fiscal year 2023 from
the first quarter of fiscal year 2022. The decrease in marketing and advertising
expenses in the first quarter of fiscal year 2023 was primarily attributable to
a $498 thousand increase in media and online advertising offset by $628 thousand
decrease in digital and data transformation expenses.
General and Administrative Costs. General and administrative costs increased by
$266 thousand, or 2.9%, to $9.5 million in the first quarter of fiscal year 2023
from the first quarter of fiscal year 2022. The increase in general and
administrative costs was primarily due to a $515 thousand increase in
compensation related costs offset by a decrease of $360 thousand in bonus
expenses.
Depreciation and Amortization Expenses. Depreciation and amortization expense
increased by $1.7 million to $6.5 million in the first quarter of fiscal year
2023 from the first quarter of fiscal year 2022 primarily due to the opening of
four new Ruth's Chris Steak House restaurants in fiscal year 2022 and placement
of data and digital assets into service during fiscal year 2022.
Pre-opening Costs. Pre-opening costs were $522 thousand in the first quarter of
fiscal year 2023. These expenses are primarily due to the Ruth's Chris Steak
House restaurant in Reston, VA which opened in April 2023 and recognition of
rent expense at unopened Ruth's Chris Steak House restaurants where the Company
has taken possession of the property. Pre-opening costs were $881 thousand in
the first quarter of fiscal year 2022 primarily due to the planned opening of
the Ruth's Chris Steak House restaurant in Aventura, FL and recognition of rent
expense at unopened Ruth's Chris Steak House restaurants where the Company had
taken possession of the properties.
Gain on lease modifications. Gain on leases modifications were $869 thousand in
the first quarter of fiscal year 2023. The gains on lease modifications during
fiscal year 2023 were attributable to a reduction in lease payments related to
closed restaurants.
Interest Expense, net. Interest expense decreased by $72 thousand to $252
thousand in the first quarter of fiscal year 2023 compared to $324 thousand in
the first quarter of fiscal year 2022. The decrease is primarily due to a lower
average debt balance in the first quarter of fiscal year 2023, partially offset
by a higher interest rate.
Other Income and Expense. During the first quarter of fiscal year 2023, we
recognized other income of $6 thousand. During the first quarter of fiscal year
2022, we recognized other expense of $28 thousand.
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Income Tax Expense. During the first quarter of fiscal year 2023, we recognized
income tax expense of $2.4 million compared to $2.3 million during the first
quarter of fiscal year 2022. The effective tax rate, including the impact of
discrete items, decreased to 17.7% for the first quarter of fiscal year 2023
compared to 18.4% for the first quarter of fiscal year 2022. Fiscal year 2023
discrete items and other unexpected changes impacting the annual tax expense may
cause the effective tax rate for fiscal year 2023 to differ from the effective
tax rate for the first quarter of fiscal year 2023.
Net Income. Net income was $11.3 million in the first quarter of fiscal year
2023, which reflected an increase of $929 thousand compared to $10.4 million in
the first quarter of fiscal year 2022. The increase was attributable to the
factors noted above.
Liquidity and Capital Resources
Overview
Our principal sources of cash during the first quarter of fiscal year 2023 was
net cash provided by operating activities. During the first thirteen weeks of
fiscal year 2023 our principal uses of cash flow were debt repayments, capital
expenditures and dividend payments.
In July 2022, the Company's Board of Directors approved a new share repurchase
program authorizing the Company to repurchase up to $60 million of outstanding
common stock from time to time. No shares were repurchased during the first
quarter of fiscal year 2023 and the first quarter of fiscal year 2022. As of
March 26, 2023, $40.0 million remained available for future purchases under the
share repurchase program.
During the first quarter of fiscal year 2023, we paid a cash dividend of $0.16
per share or $5.4 million in the aggregate. We believe that our current cash
position, coupled with our anticipated cash flow from operations, should provide
us with adequate liquidity for the next twelve months and, when combined with
our access to additional capital, should provide us with adequate liquidity for
the foreseeable future. As of March 26, 2023, we were in compliance with all
covenants pertaining to the Credit Agreement.
Senior Credit Facility
As of March 26, 2023, we had $15.0 million of outstanding indebtedness under our
senior credit facility and approximately $5.0 million of outstanding letters of
credit, pursuant to a credit agreement entered into with Wells Fargo Bank,
National Association as administrative agent, and certain other lenders (as
amended, the "Credit Agreement"). As of March 26, 2023, the weighted average
interest rate on our outstanding debt was 6.1% and the weighted average interest
rate on our outstanding letters of credit was 1.6%. In addition, the fee on the
unused portion of our senior credit facility was 0.2%.
The Credit Agreement provides for a revolving credit facility of $140.0 million
with a $10.0 million sub-facility of letters of credit and a $5.0 million
sub-facility for swingline loans. Subject to the satisfaction of certain
conditions and lender consent, the revolving credit facility may be increased up
to a maximum of $200.0 million. The Credit Agreement has a maturity date of
October 18, 2026. For more information about our long-term debt, see Note 5 in
the notes to the condensed consolidated financial statements included in Item 1.
"Financial Statements".
We have assessed the impact of the impending cessation of LIBOR and have
identified and evaluated financial instruments and other contracts that refer to
LIBOR. Our underlying exposure to LIBOR includes our Credit Agreement. We expect
to be able to transition our LIBOR-based Credit Agreement to an alternative
reference rate on or before the cessation of LIBOR and we do not believe that
the cessation of LIBOR, or its replacement with an alternative reference rate or
rates, will have a material impact on us.
Subsequent to the end of first quarter 2023, the Company received proceeds
of $5.0 million from a draw on the revolving credit facility.
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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):
13 Weeks Ended
March 26, March 27,
2023 2022
Net cash provided by (used in):
Operating activities $ 22,470 $ 9,533
Investing activities (8,261 ) (10,050 )
Financing activities (21,211 ) (24,830 )
Net decrease in cash and cash equivalents $ (7,002 ) $ (25,347 )
Operating Activities. Operating activities provided cash of $22.5 million during
the first thirteen weeks of fiscal year 2023 and $9.5 million during the first
thirteen weeks of fiscal year 2022. Operating cash outflows pertain primarily to
expenditures for food and beverages, restaurant operating expenses, marketing
and advertising, general and administrative costs, and income taxes. Operating
activities provided cash flows primarily because operating revenues have
exceeded cash-based expenses.
Investing Activities. Cash used in investing activities totaled $8.3 million in
the first thirteen weeks of fiscal year 2023 compared with $10.1 million used in
the first thirteen weeks of fiscal year 2022. Cash used in investing projects
during the first thirteen weeks of fiscal year 2023 primarily pertained to $4.8
million for new restaurants, $802 thousand for technology investments and
upgrades and $2.7 million for restaurant remodel and capital replacement
projects. Cash used in investing activities during the first thirteen weeks of
fiscal year 2022 primarily pertained to $6.1 million for new restaurants, $2.5
million for technology investments and upgrades and $1.5 million for restaurant
remodel and capital replacement projects.
Financing Activities. Financing activities used cash during the first thirteen
weeks of fiscal year 2023 and the first thirteen weeks of fiscal year 2022.
During the first thirteen weeks of fiscal year 2023, we repaid debt in the
amount of $15.0 million, paid $5.4 million in dividends and paid $861
thousand in employee withholding taxes in connection with the vesting of
restricted stock. We paid the $861 thousand in taxes in connection with the
vesting of restricted stock for recipients who elected to satisfy their
individual tax withholding obligations by having us withhold a number of vested
shares of restricted stock. During the first thirteen weeks of fiscal year 2022,
we reduced debt by $20.0 million, paid $4.1 million in dividends and paid $721
thousand in employee withholding taxes in connection with the vesting of
restricted stock.
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 25, 2022 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 thirteen weeks of fiscal year 2023.
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