Ruth’s Hospitality buybacks, sales trends boost outlook

The recent share buybacks by Ruth’s Hospitality Group Inc., which purchased preferred stock held by affiliates of Bruckmann, Rosser, Sherrill & Co. Management LP, elicited a strong response from analysts and investors, helping push Ruth’s share price an aggregate 15.9 percent by close of trading last week, through March 13.

The buyback announcement March 9 came on top of what has been a relatively positive flow of news since the start of the year about the fiscal 2011 performance and year-to-date same-store sales trends and balance-sheet developments at Ruth’s.

Based in Heathrow, Fla., the company is the operator and franchisor of the Ruth’s Chris Steak House, Mitchell’s Fish Market, Mitchell’s Steakhouse and Cameron’s Steakhouse chains. With the high-end positioning of its primary brand, Ruth’s Chris, the company was hard hit by the recession.

Earlier this month, Ruth’s management said the company had used $60.2 million of its $100 million credit facility to exercise its option to buyback 25,000 shares of 10-percent convertible preferred stock sold to Bruckmann, Rosser, Sherrill affiliates in February 2010. Under the terms of that agreement, the repurchased preferred stock held by Bruckmann, Rosser, Sherrill affiliates could have been converted into about 8.6 million shares of common stock, or about 20 percent of such shares, company documents indicated.

The BRS affiliates had paid $25 million, or $1,000 per unit, so the price paid by Ruth’s last week of roughly $2,408 per share of preferred stock represented a 140.1-percent return on investment for the outside investors in the private investment in public equity, or PIPE, transaction.

“This transaction reflects the significant progress our entire team has made since BRS’ investment in early 2010, which is further supported by the growth in sales and profitability that has allowed us to repay over $50 million in debt over the last seven quarters,” Michael O’Donnell, Ruth’s Hospitality chairman, president and chief executive, said in a March 9 statement.

“Moreover, we believe that this transaction positions the company for improved earnings during the foreseeable future and enhances our ability to generate cash, while still giving us the balance sheet flexibility to continue to invest in our business,” O’Donnell said.

Ruth’s officials said that as a result of the repurchase, the company’s diluted common stock share count has decreased by about 8.6 million shares, and the 10-percent dividend on the preferred stock, which amounted to $2.5 million last year, was eliminated.

They added that the company will record a $36 million hit to net income in the first quarter of 2012, which reflects the excess of the buy-back price over the carrying value of the preferred shares redeemed.

Excluding that charge, the company said it expects the transaction to be accretive to earnings.

Investment banking and research firm Jefferies & Co. said in a March 9 report that because of the share buyback and other factors it was raising its fiscal 2012 earnings per share forecast for Ruth’s from 37 cents to 43 cents and raising its share price target from $7 to $8.

Jefferies had acted as financial advisor to Ruth’s in connection with the PIPE transaction and a separate rights offering at about the same time as the PIPE deal and acted as dealer-manager for the rights offering.

Analysts for D.A. Davidson & Co. on March 9 also raised their targeted price per share for Ruth’s from $8.50 to $9, as well.

By the close of trading March 9, Ruth’s shares had risen 6.9 percent to $6.71 a share, compared with the prior day’s closing price, which followed an aggregate increase of 3.8 percent during the two prior days.

Ruth’s share-price growth continued when the market resumed trading on March 12 and through the next day, with daily increases of 2.7 percent and 2.6 percent, respectively, to $7.07 a share, at the market’s close on March 13. March 14 saw investors push back a bit, as Ruth’s share price decreased 1.7 percent, to $6.95, at the close of trading, compared with the 52-week low-high range of $3.97 to $7.10.

The company’s stock price fortunes began to change for the better in a significant way on Jan. 12, when its share price rose 9.6 percent, to $5.95, following a presentation at the annual ICR X Change conference.

Ruth’s improved stock performance was not harmed by a Feb. 10 report on fourth quarter and full-year 2011 results that contributed to a 2.7-percent bump in share price, to $6.16, at the close of trading that day.

Ruth’s Hospitality Group said it had lower net income for the fourth quarter ended Dec. 25, compared with the prior year, as significantly higher same-store sales were offset by impairment and other charges and greater expenses.

It said fourth quarter net income of $2.6 million, or 4 cents a share, fell 43.5 percent from earnings of $4.6 million, or 9 cents a share, in the same quarter a year earlier.

Fourth-quarter expenses were adversely impacted by $3.0 million non-cash charge for the impairment of the Mitchell’s Fish Market trade name and by a $400,000 non-cash loss on the disposal of property and equipment stemming from restaurant renovations, the company said. The fourth quarter of 2010 had seen $800,000 non-cash impairment charges tied to property and equipment, the company noted.

Fourth-quarter revenue of $99.6 million represented a 7.1-percent increase from the same 2010 quarter. The revenue gain was largely driven by growth in same-stores sales at company restaurants of 7.7 percent for Ruth’s Chris, and 0.4 percent at Mitchell’s Fish Market.

At Ruth’s Chris, those higher same-store sales trends were linked to a 6.1-percent increase in the number of entrees sold, which Ruth’s Hospitality reports instead of guest traffic counts, and a 1.5-percent uptick in average check. The improvement to Mitchell’s Fish Market stemmed from a 1.4-percent bump in average ticket, which was partially offset by a 0.9-percent fall off in entrée sales, the company said.

CEO O’Donnell said fourth-quarter trends continued into the New Year at Ruth’s Chris, which, in January, had same-store sales growth in the “mid-single digits.”

“While we still have two months to go, we’re pleased with this strength, particularly on top of last year’s 5.2 percent comp growth in the first quarter,” he said.

For the year, Ruth’s Hospitality said its net income rose 22.5 percent to $19.6 million, or 39 cents per share, as revenue increased 4.7 percent, to $369.6 million.

During the Feb. 10 conference call with investors and analysts, O’Donnell said the company’s momentum was tied to a strategy of emphasizing traffic-boosting initiatives over price increases. He indicated that some recent traffic gains were tied to the company’s strategy of offering fixed-price menus along with a la carte ordering, which, at a high-end concept like Ruth’s Chris, offers “price certainty” to diners on a budget.

Also a factor, he said, has been the appeal-broadening move of adding other proteins, such as beef and poultry, to the Mitchell’s Fish Market menu.

Ruth’s Hospitality Group operates or franchises more than 150 restaurants worldwide.

Contact Alan Liddle at [email protected] [3].
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