Herd sizes and droughts have worked against the brand, the CFO said.
As supply chain issues and inflationary pressures impact food costs, Ruth’s Chris Steak House is having to react accordingly, especially for beef.
To mitigate the protein’s inflation, Ruth’s bumped prices on certain products by 3.4 percent in late March, a move CFO and COO Kristy Chipman said has not negatively impacted traffic.
Multiple events are causing issues. Drought, tight forage supplies, and macroeconomic factors are forcing producers to dive deeper into their cattle herds, according to the USDA. Data shows more than 69 percent of the country was experiencing some level of drought as of late March, impacting more than 61 percent of the U.S. cattle inventory. Last year, only 35 percent was affected. Even more concerning, 19 percent of the cattle inventory was located in the worst two tiers of drought, compared to 10 percent in 2021.
“Herd size and drought conditions are things working against us,” Chipman said during the chain’s Q1 earnings call. “Heading into the summer, we think that beef prices are increasing from where they’re at today. Seasonal demand, tight production, droughts, higher transportation costs are a situation we’re keeping a good eye on, while prime grading is slightly lower as well from a year ago. So I think overall, it continues to be very difficult.”
The steakhouse entered a new forward pricing agreement with suppliers, locking itself in for approximately 20 percent of total beef volumes through mid-August. Last year at this time, Ruth’s was locked in for 70 percent.
“It's just going to be based upon the volatility of the market, our competence, and the projections that we have from the suppliers,” said Chipman, describing how the brand approaches food contracts.
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Food and beverage costs in Q1 increased 445 basis points compared to 2021, driven largely by the rising cost of beef, which was up 37 percent. The total market basket increased 28 percent versus last year, reflective of continued pressure across nearly all food categories, including beverages.
Inflationary pressures aside, CEO Cheryl Henry feels good about the brand’s current state of affairs.
Same-store sales grew 41.5 percent in Q1 year-over-year and lifted 8.1 percent against 2019. The chain saw $124,700 in average weekly sales per restaurant, equal to $6.48 million in annualized AUV. The CEO attributed positive sales to the return of dine-in guests, continued success of off-premises business, and a revamped digital presence.
“Let me reiterate how please we are with a solid start to 2022,” Henry said.
Ruth’s is fueling momentum with a more than $50 million investment in new restaurants, relocations, remodels, and digital technologies. It also includes returning excess cash to shareholders through paying down debt, dividends, and share repurchases.
“We believe these actions will sustain the underlying growth and profitability of the business while creating significant value along the way,” Henry said.
Total revenues for the quarter increased 44.5 percent to $126.1 million compared to $87.3 million in 2021. Company-owned restaurants sales increased 45.4 percent to $118.7 million versus $81.6 million during the previous year.
Franchise income for Q1 was up 24.7 percent to $4.7 million, attributable to domestic franchise same-store sales growth of 23.8 percent and international franchise comp growth of 29.5 percent. Additional operating income was $2.7 million, lifting 45 percent from 2021.
With a positive start to 2022 underway, Ruth’s will look to expand its presence. The chain wants to establish a dependable pipeline of five to seven new restaurants annually. A location in Aventura, Florida, opened in March, and two more stores each are planned for the third and fourth quarters.
In addition to new openings, Ruth’s has two relocations under construction—one in Winter Park, Florida, and another in Woodland Hills, California. Henry said the relocations “reflect our new contemporary design that leverages outdoor dining spaces in larger bar areas.”
Even with increased material and construction costs and supply chain delays that have stalled construction projects industrywide, Henry believes the future pipeline is well-stocked. The brand is in the process of finalizing a lease for a unit in Albany, New York. Combined with previous lease agreements, she expects to have five units in the pipeline for 2023.
“We remain committed to returns consistent within our historical levels,” she said.
As of March 27, there were 151 Ruth’s Chris stores, including 74 company-owned restaurants, three restaurants operating under contractual agreements, and 74 franchises.