A “choppy” start to the second quarter of fiscal 2019 led to less than desired results at Ruth’s Chris Steak House. A shift in the Easter holiday boosted comps, but overall, some weeks were good and some were bad, the company’s chief financial officer Arne Haak said during a conference call.
“It was a very unusual April,” Haak said. “If you hadn't had the Easter shift, April would've been down like 1.5–2 percent. That's a one-month blip that we haven't seen since the hurricanes of 2017.”
Historically, June also marks a challenging time for the brand. However, sales were better than expected this time around.
Even with the positive lift, Ruth’s Chris finished Q2—which ended on June 30—softer than expected. The blackout in Manhattan in July and closures in New Orleans, Metairie, and Lafayette from tropical storm Barry resulted in a flat month to end the quarter. Overall, same-store sales decreased by 0.5 percent, compared to a 1.3 percent increase this time last year.
- Q2 2019: -0.5 percent
- Q1 2019: 1.8 percent
- Q4 2018: -0.1 percent
- Q3 2018: 3.7 percent
- Q2 2018: 1.3 percent
Average unit weekly sales dipped 0.8 percent to $102,600 in Q2, compared to $103,400 last year.
Franchise locations fared better than company-owned restaurants with a 0.9 percent lift. Ruth’s Chris’ international franchises finished Q2 at 2.4 percent.
Additionally, the brand saw food and beverage costs, as a percentage of restaurant sales, decrease 20 basis points to 27.9 percent. Total beef costs spiked at the beginning of the quarter, which resulted in a 1 percent year-over-year increase, Haak said.
“As we shared on previous calls, in the third quarter last year, we experienced a 20 percent decline in beef prices to multi-year lows,” Haak said. “As a result, we were expecting higher inflation in the second half of this year with the third quarter likely having the highest quarterly inflation. So far this quarter, this is certainly proving to be true with beef costs up in excess of 10 percent to date.”
Ruth’s Chris entered into an agreement to set the pricing of about 70 percent of its tenderloin supply—or about 35 percent of its total beef supply—from August 2019 to the middle of February 2020. With the new contract price, Haak expects beef costs to average 3-4 percent for the full year.
“So you're certainly seeing beef prices return to kind of the normal to the mean,” Haak said. “But we're seeing more inflation here kind of in the third quarter than what we had thought. We're still thinking it's going to be 3-4 percent for the year. We think fourth quarter should be a little bit normal, but the third quarter will be choppy here.”
The market facing the most challenges this quarter was New York. Haak noted the Q2 comps would have been positive if it had been excluded. The company isolated underperforming stores in this market and is taking “a deep dive around what might be impacting that,” chief executive officer Cheryl Henry said during the call. There is still softness in Q3, but those locations are beginning to improve and move in the right direction.
“As you go farther out from Manhattan, the impact is—while it's still the New York area and it's still softer than what we're seeing in the rest of the country—it lessens as we go out further,” Haak added.
New restaurant development slightly offset the same-store sales decrease, allowing total company-owned restaurant sales to increase to $104 million compared to $103.5 million in 2018. The addition of the Reno, Nevada, location offset the loss of 29 operating days at the Tulsa, Oklahoma, restaurant as a result of flooding of the Arkansas River, Haak said.
The brand reported net income of $9.3 million or 31 cents per diluted share compared to net income of $9.6 million or 32 cents per diluted share during Q2 2018.
Last quarter Ruth’s Chris announced it had purchased development rights to “prized territory,” for about $19 million in cash. Along with three franchises run by longtime operator Marsha Brown—the former banker of founder Ruth Fertel—the high-end steakhouse acquired development rights to the Philadelphia area, including parts of New Jersey and Long Island, New York.
In addition to those areas of development, Ruth’s Chris announced the company-run restaurants in Columbus, Ohio; Washington, D.C.; and Somerville, Massachusetts, are all on track to open by the end of 2019. Looking to 2020, new leases have been signed in Short Hills, New Jersey and Worcester, Massachusetts. Executives expect those locations to open in the second half of 2020, along with the Oklahoma City restaurant, which was announced last quarter.
“We're pleased to welcome our new team members into the Ruth's Chris corporate family and believe that this territory will help us solidify our long-term development strategy of three to five new company-owned restaurants per year,” Henry said.
Ruth’s Chris’s 2.0 remodel program is on track to complete seven updated by the end of 2019. So far, three remodels have been completed. The company expects to finish one location during Q3, followed by three more by the end of 2019. The remodels are focused on expanding and diversifying the brand’s sales channels. Henry reiterated the company’s bar program is strong and the store refreshes will continue to support that part of the business.
Henry didn’t go into details about other improvements, but said the company expects to make more announcements around the à la carte business and private dining business at the end of Q3.