10-K 1 ruth-10k_20181230.htm 2018 10-K ruth-10k_20181230.htm

 

Legal

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

FOR THE FISCAL YEAR ENDED DECEMBER 30, 2018

or

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)

Registrant’s telephone number, including area code:  (407) 333-7440

 

Securities Registered Pursuant to Section 12(b) of the Act:

Common stock, par value $0.01 per share

The NASDAQ Stock Market LLC

 

(Title of Class)

 

(Name of exchange on which registered)

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   

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.

 

 

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 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 Act).    Yes      No    

As of July 1, 2018, the last day of the registrant’s most recently completed fiscal second quarter, the aggregate market value of the registrant’s outstanding common stock, par value $0.01 per share, held by non-affiliates was $832,984,833.

The number of shares outstanding of the registrant’s common stock as of February 22, 2019, was 30,340,720, which includes 1,095,738 shares of unvested restricted stock.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of Annual Report on Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the registrant’s Proxy Statement for the 2019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant’s fiscal year.

 

 

 


TABLE OF CONTENTS PAGE

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I

 

 

Item 1.

 

Business

 

1

Item 1A.

 

Risk Factors

 

6

Item 1B.

 

Unresolved Staff Comments

 

13

Item 2.

 

Properties

 

13

Item 3.

 

Legal Proceedings

 

16

Item 4.

 

Mine Safety Disclosures

 

16

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

17

Item 6.

 

Selected Financial Data

 

19

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

Item 8.

 

Financial Statements and Supplementary Data

 

33

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

34

Item 9A.

 

Controls and Procedures

 

34

Item 9B.

 

Other Information

 

36

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

37

Item 11.

 

Executive Compensation

 

37

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

37

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

37

Item 14.

 

Principal Accounting Fees and Services

 

37

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

38

Item 16.

 

Form 10-K Summary

 

38

 

 

 

 

 

Signatures

 

41

 


FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains “forward-looking statements” 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 “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “targeting,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe the Company’s objectives, plans or goals, including with respect to new restaurant openings, capital expenditures, strategy, financial outlook, our effective tax rate and the impact of healthcare inflation, recent accounting pronouncements and tax reform legislation, 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: reductions in the availability of, or increases in the cost of, USDA Prime grade beef, fish and other food items; changes in economic conditions and general trends; the loss of key management personnel; the effect of market volatility on the Company’s stock price; health concerns about beef or other food products; the effect of competition in the restaurant industry; changes in consumer preferences or discretionary spending; 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; harmful actions taken by the Company’s franchisees; a material 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; the impact of litigation; the restrictions imposed by the Company’s credit agreement; and changes in, or the discontinuation of, the Company’s quarterly cash dividend payments or share repurchase program. 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 this Annual Report on Form 10-K. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Annual Report on Form 10-K to reflect events or circumstances after the date hereof. You should not assume that material events subsequent to the date of this Annual Report on Form 10-K have not occurred.

 

Unless the context otherwise indicates, all references in this report to the “Company,” “Ruth’s,” “we,” “us”, “our” or similar words are to Ruth’s Hospitality Group, Inc. and its subsidiaries.

 


PART I

Item 1.

BUSINESS

Introduction

Ruth’s Hospitality Group, Inc. develops and operates fine dining restaurants under the trade name Ruth’s Chris Steak House. As of December 30, 2018, there were 156 Ruth’s Chris Steak House restaurants, including 78 Company-owned restaurants, three restaurants operating under contractual agreements and 75 franchisee-owned restaurants, including 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan.

On December 12, 2017, we completed the acquisition of substantially all of the assets of six franchisee-owned Ruth’s Chris Steak House restaurants located in Hawaii (the “Hawaiian Restaurants”) for a cash purchase price of $35.4 million.  The results of operations, financial position and cash flows of the Hawaiian Restaurants are included in our consolidated financial statements as of the date of the acquisition.  For additional information, see Note 4 of the consolidated financial statements.

The Company previously operated eighteen Mitchell’s Fish Markets and three Mitchell’s/Cameron’s Steakhouse restaurants (the Mitchell’s Restaurants), located primarily in the Midwest and Florida. On January 21, 2015, the Company sold the Mitchell’s Restaurants to a third party.  For financial reporting purposes, the Mitchell’s Restaurants are classified as discontinued operations for all periods presented.

The Company has a 52/53-week fiscal year ending the last Sunday in December. The 2018 fiscal year ended December 30, 2018, the 2017 fiscal year ended December 31, 2017, and the 2016 fiscal year ended December 25, 2016.  Fiscal year 2017 had 53 weeks, while fiscal years 2018 and 2016 had 52 weeks.

The following description of the Company’s business should be read in conjunction with the information in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K and the consolidated financial statements included in this Annual Report on Form 10-K.

Background

Ruth’s Hospitality Group, Inc. is a Delaware corporation formerly known as Ruth’s Chris Steak House, Inc.  The Company was founded in 1965 when Ruth Fertel mortgaged her home for $22 thousand to purchase “Chris Steak House,” a 60-seat restaurant located near the New Orleans Fair Grounds racetrack. After a fire destroyed the original restaurant, Ruth relocated her restaurant to a new 160-seat facility nearby. As the terms of the original purchase prevented the use of the “Chris Steak House” name at a new restaurant, Ruth added her name to that of the original restaurant—thus creating the “Ruth’s Chris Steak House” brand.

The Company’s expansion began in 1972, when Ruth opened a second restaurant in Metairie, a suburb of New Orleans. In 1976, the first franchisee-owned Ruth’s Chris Steak House opened in Baton Rouge, Louisiana. In 2005, the Company and certain selling shareholders completed an initial public offering of the Company’s common stock, which is currently listed on the Nasdaq Global Select Market under the ticker symbol “RUTH”.

Recent Developments

In 2018, the Company opened two new Ruth’s Chris Steak House restaurants in Jersey City, NJ and Paramus, NJ and one restaurant operating under a contractual agreement in Reno, NV.

In 2018, franchisees opened two new restaurants in Ft. Wayne, IN and Markham, Canada.

In 2018, the Company integrated the Hawaiian Restaurants into the organization.

The Company currently expects to open three additional Ruth’s Chris Steak House restaurants during 2019. The Company expects that franchisees will open two new Ruth’s Chris Steak House restaurants during 2019.

Ruth’s Chris Steak House

With 156 restaurants as of December 30, 2018, Ruth’s Chris Steak House is one of the largest upscale steakhouse companies in the world. The menu features a broad selection of high-quality USDA Prime and Choice grade steaks and other premium offerings served in Ruth’s Chris’ signature fashion—“sizzling”—complemented by other traditional menu items inspired by its New Orleans heritage. Ruth’s Chris complements its distinctive food offerings with an award-winning wine list.

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The Ruth’s Chris brand reflects its 53-year commitment to the core values instilled by its founder, Ruth Fertel, of caring for guests by delivering the highest quality food, beverages and genuine hospitality in a warm and inviting atmosphere.

Strengths

The Company believes that the key strengths of its business model are the following:

Premier Upscale Steakhouse Brand

The Ruth’s Chris Steak House brand is one of the strongest in the upscale steakhouse segment of the restaurant industry, with high levels of brand awareness. The Company has been recognized for its award-winning core wine list, for which a majority of its Company-owned restaurants received “Awards of Excellence” from Wine Spectator magazine.

Appealing Dining Experience

At Ruth’s Chris restaurants, the Company seeks to exceed guests’ expectations by offering high-quality food with warm, friendly service. The Company’s entire restaurant staff is dedicated to ensuring that guests enjoy a superior dining experience. The Company’s team-based approach to table service is designed to enhance the frequency of guest contact and speed of service without intruding on the guest experience.

Strategy

The Company’s strategy is to deliver a total return to shareholders by maintaining a healthy core business, growing with a disciplined investment approach and returning excess capital to shareholders.  The Company strives to maintain a healthy core business by growing sales through traffic, managing operating margins and leveraging its infrastructure.  The Company is committed to disciplined growth in markets with attractive sales attributes and solid financial returns.  The Company believes that its franchisee program is a point of competitive differentiation and looks to grow its franchisee-owned restaurant locations as well.  The Company may also consider acquiring franchisee-owned restaurants at terms that it believes are beneficial to both the Company and the franchisee.

Improve Sales/Profitability

The Company strives to improve sales and profitability by focusing on:

Ensuring consistency of food quality through more streamlined preparation and presentation;

Expanding its brand appeal through continued menu innovation and facility remodels;

Increasing brand awareness through enhanced media advertising at the national and local levels;

Enhancing and/or developing innovative marketing programs through its website (e.g., www.ruthschris.com), social media, digital media and email communication;  

Creating and/or growing revenue opportunities via Ruth’s Catering, Private Dining, the sale of Gift Cards and opening for lunch in selected markets; and

Opening new restaurants.

Expand Relationships with New and Existing Franchisees and Others

The Company intends to grow its franchising business by developing relationships with a limited number of new franchisees and by expanding the rights of existing franchisees to open new restaurants. The Company believes that building relationships with quality franchisees is a cost-effective way to grow and strengthen the Ruth’s Chris brand and generate additional revenues. The Company intends to continue to focus on providing operational guidance to its franchisees, including the sharing of “best practices” from Company-owned Ruth’s Chris restaurants.

In addition to the two franchisee-owned restaurants that were opened in fiscal year 2018, in fiscal year 2017 franchisees opened two new restaurants in Chengdu, China and Kauai, HI.  In fiscal year 2016, franchisees opened two new restaurants in Jakarta, Indonesia and Greenville, SC.  Franchisees are expected to open two new restaurants by the end of fiscal year 2019.

The Company and its franchise and licensing partners will have opened or relocated 19 new Ruth’s Chris Steak Houses worldwide during the three year period ended December 2018.

2


Menu

The Ruth’s Chris menu features a broad selection of high-quality USDA Prime grade steaks and other premium offerings served in Ruth’s Chris signature fashion—“sizzling” on a 500 degree plate and topped with butter and fresh parsley—complemented by other classic American steakhouse menu items. USDA Prime is the highest meat grade level, which refers to the superior quality and evenly distributed marbling that enhances the flavor of the steak. The Ruth’s Chris menu also includes premium quality lamb chops, fish, shrimp, crab, chicken and lobster.

The Ruth’s Chris restaurants offer ten to thirteen standard appetizer items, including New Orleans-style barbequed shrimp, mushrooms stuffed with crabmeat, spicy shrimp, chilled seafood tower and osso bucco ravioli, as well as six to eight different salads. They also offer a variety of potatoes and vegetables as side dishes. For dessert, crème brûlée, white chocolate bread pudding, chocolate duo, cheesecake, fresh seasonal berries with sweet cream and other selections are available.

The Company’s wine list features bottles typically ranging in price from $46 to over $1,000. Individual restaurants may supplement their 250-bottle core wine list with approximately 20 additional selections that reflect local market tastes. Most of the Company’s Ruth’s Chris restaurants also offer approximately 33 wines-by-the-glass, 13-16 handcrafted cocktails and numerous beers, premium liquors and alcoholic dessert drinks.

Dinner entrees are generally priced from $32 to $99.  Ruth’s Chris is predominately open dinner hours only with a limited number of restaurants open for lunch.  The lunch menu offers entrees generally ranging in price from $13 to $29.  The blended guest check average at Ruth’s Chris was approximately $85 during fiscal year 2018 with food sales representing 77% of the guest check and the remainder represented by beverage sales.  While the Ruth’s Chris core menu is similar at all of its restaurants, the Company seasonally introduces new items such as limited time and prix fixe offerings that allow it to give its guests additional choices while taking advantage of fresh sourcing and advantageous cost opportunities.

Restaurant Operations and Management

The Ruth’s Chris Chief Executive Officer and Vice President of Operations have primary responsibility for managing Company-owned restaurants and participate in analyzing restaurant-level performance and strategic planning. The Company has ten regional vice presidents who oversee restaurant operations at Company-owned restaurants, one vice president to whom the regional vice presidents report and one vice president who has oversight responsibility for franchisee-owned restaurants. In addition, restaurant education and training is overseen by a regional staff dedicated to the ongoing training and development of customer service employees and kitchen staff.

A typical Company-owned restaurant employs five managers, including a general manager, two front-of-the-house managers, an executive chef and a sous chef. The Company-owned restaurants also typically have approximately 60 hourly employees.

Purchasing

The Company’s ability to maintain consistent quality throughout its restaurants depends in part upon its ability to acquire food and other supplies from reliable sources in accordance with its specifications. Purchasing at the restaurant level is directed primarily by the executive chef, who is trained in the Company’s purchasing philosophy and specifications, and who works with regional and corporate managers to ensure consistent sourcing of fish, produce and other supplies.

During fiscal year 2018, the Company purchased substantially all the beef it used in Company-owned Ruth’s Chris restaurants from two vendors, Sysco Specialty Meat Group (a subsidiary of Sysco) and Stock Yards Packing (a subsidiary of US Foods).  Each vendor supplied about half of the Company’s beef requirements.  In addition, the Company has a distribution arrangement with a national food and restaurant supply distributor, Distribution Market Advantage, Inc. (DMA), which purchases products for the Company from various suppliers and through which all the Company-owned Ruth’s Chris Steak House restaurants receive a significant portion of their food supplies.

Quality Control

The Company strives to maintain quality and consistency in its Company-owned restaurants through careful training and supervision of personnel and standards established for food and beverage preparation, maintenance of facilities and conduct of personnel. The primary goal of the Company’s training and supervision programs is to ensure that its employees display the characteristics of its brand and values that distinguish it from its competitors. Restaurant managers in Company-owned restaurants must complete a training program that is typically seven to eight weeks long, during which they are instructed in multiple areas of restaurant management, including food quality and preparation, guest service, alcoholic beverage service, liquor regulation compliance and

3


employee relations. Restaurant managers also receive operations manuals relating to food and beverage preparation and restaurant operations. Restaurant managers are certified by the National Restaurant Association Educational Foundation for food safety.

In addition to our internal quality control measures, the Ruth’s Chris Steak House restaurants also employ an independent third-party food safety firm to ensure proper training, food safety and the achievement of the highest standards for cleanliness throughout the restaurant through routine quarterly unannounced inspections. The Company instructs chefs and assistants on safety, sanitation, housekeeping, repair and maintenance, product and service specifications, ordering and receiving food products and quality assurance.  At the Ruth’s Chris restaurants, the executive chef, together with the restaurant managers, oversees a line check system of quality control and must complete a quality assurance checklist verifying the flavor, presentation and proper temperature of the food and beverages.

Marketing and Promotions

The goals of the Company’s marketing efforts are to increase restaurant sales by attracting new guests, increasing the frequency of visits by current guests, enhancing the guest experience, driving innovation, improving brand recognition in new markets or markets where it intends to open a restaurant and to communicate the overall uniqueness, value and quality exemplified by our restaurants. The Company uses multiple media channels to accomplish these goals and complements its national advertising with targeted local media such as print, digital media, search engine marketing, radio and outdoor billboards.

Advertising

In fiscal year 2018, the Company spent $16.6 million, or 3.7% of its revenues, in total marketing and advertising expenditures, which included spending on national media, consisting primarily of paid search, online advertising, online initiatives, traditional public relations and consumer research. During fiscal year 2018, the Company continued to optimize its online marketing efforts, using a variety of tactics including paid search, digital advertising and paid social media advertising. The Company’s online strategy also included an emphasis on continued website improvement and targeted emails with special offers and announcements, as well as emails regarding seasonal specials, holiday offers and personalized birthday and anniversary invitations. In fiscal year 2018, Ruth’s Chris Steak House continued its participation in co-branded campaign with American Express Membership Rewards program. Many of the Company’s restaurants also schedule events to strengthen community ties and increase local market presence. The Company’s franchisees also conduct their own local media and advertising plans.

Gift Cards

The Company sells Ruth’s Chris gift cards at most of its Ruth’s Chris Steak House restaurants, including franchises, on its website and through its toll-free number. E-gift cards, which may be purchased on the Company’s e-commerce gift card website, are emailed directly to the recipient and are redeemable in the same manner as a plastic gift cards.  In the fourth quarter of fiscal year 2016, Ruth’s Chris entered into a distribution agreement where Ruth’s Chris gift cards are sold in third-party retail outlets.  Offering gift cards at third-party retailers and e-gift cards gives Ruth’s Chris the opportunity to maximize last-minute gift-giving and address its patrons’ requests for convenient, immediate purchases.   Ruth’s Chris patrons frequently purchase gift cards for holidays, including Christmas, Hanukkah, Valentine’s Day, Mothers’ Day and Fathers’ Day, and other special occasions.  In fiscal year 2018, Company and franchise sales of Ruth’s gift cards aggregated approximately $67.2 million system-wide, compared to $65.4 million in fiscal year 2017. Ruth’s Chris gift cards are redeemable at both Company and franchisee owned Ruth’s Chris restaurants.

Franchise Program and Relationship

Under the Company’s franchise program, the Company offers certain services and licensing rights to the franchisee to help maintain consistency in system-wide operations. The Company’s services include training of personnel, construction assistance, providing the new franchisee with standardized operating procedures and manuals, business and financial forms, consulting with the new franchisee on purchasing and supplies and performing supervisory quality control services. The Company conducts reviews of its franchisee-owned restaurants on an ongoing basis in order to ensure compliance with its standards.

As of December 30, 2018, the Company’s 75 franchisee-owned Ruth’s Chris restaurants are owned by 27 franchisees with the three largest franchisees owning 32 restaurants in total.

Under the Company’s current franchise program, each franchise arrangement consists of a development agreement, if multiple restaurants are to be developed, with a separate franchise agreement executed for each restaurant. The Company’s current form of development agreement grants exclusive rights to a franchisee to develop a minimum number of restaurants in a defined area, typically during a three-to-five-year period. Individual franchise agreements govern the operation of each restaurant opened and have a 20-year term with two renewal options each for additional ten-year terms if certain conditions are met. The Company’s current form

4


of franchise agreement requires franchisees to pay a 5% royalty on gross revenues plus up to a 1% advertising fee applied to national advertising expenditures.

Under the Company’s current form of development agreement, and unless agreed otherwise, the Company collects a $50 thousand development fee, which is credited toward the $150 thousand franchise fee, for each restaurant the franchisee has rights to develop. Under the Company’s current form of the franchise agreement, it collects up to $150 thousand of the full franchise fee at the time of executing the franchise agreement for each restaurant. If one restaurant is to be developed, a single unit franchise agreement is executed and the $150 thousand franchise fee is collected at signing.

Information Systems and Restaurant Reporting

All of the Company’s restaurants use computerized point-of-sale systems, which are designed to promote operating efficiency, provide corporate management timely access to financial and marketing data and reduce restaurant and corporate administrative time and expense. These systems record each order and print the food requests in the kitchen for the cooks to prepare. The data captured for use by operations and corporate management includes gross sales amounts, cash and credit card receipts and quantities of each menu item sold. Sales and receipts information is generally transmitted to the corporate office daily.

The Company’s corporate systems provide management with operating reports that show Company-owned restaurant performance comparisons with budget and prior year results. These systems allow the Company to monitor Company-owned restaurant sales, food and beverage costs, labor expense and other restaurant trends on a regular basis.

Service Marks

The Company has registered the main service marks “Ruth’s Chris” and its “Ruth’s Chris Steak House, U.S. Prime & Design” logo, as well as other service marks used by its restaurants, with the United States Patent and Trademark Office and in the foreign countries in which its restaurants operate. The Company has also registered in other foreign countries in anticipation of new store openings within those countries. The Company is not aware of any infringing uses that could materially affect its business. The Company believes that its service marks are valuable to the operation of its restaurants and are important to its marketing strategy.

Seasonality

The Company’s business is subject to seasonal fluctuations. Historically, the percentage of its annual revenues earned during the first and fourth fiscal quarters have been higher due, in large part, to increased restaurant sales during the year-end holiday season and the popularity of dining out in the fall and winter months.

Employees

As of December 30, 2018, the Company employed 5,408 persons, of whom 493 were salaried and 4,915 were hourly personnel, who were employed in the positions set forth in the table below. None of the Company’s employees are covered by a collective bargaining agreement.

 

Functional Area

 

Number of

Employees

 

Senior Officers / Corporate VPs / Operations VPs

 

 

26

 

General Managers

 

 

78

 

Managers

 

 

193

 

Regional Corporate Chefs / Executive Chefs

 

 

77

 

Sous Chefs

 

 

64

 

Non-Salaried Restaurant Staff

 

 

4,894

 

Corporate Salaried

 

 

55

 

Corporate Non-salaried

 

 

21

 

Total number of employees

 

 

5,408

 

 

Government Regulation

The Company is subject to extensive federal, state and local government regulation, including regulations relating to public health and safety, zoning and fire codes and the sale of alcoholic beverages and food. The Company maintains the necessary restaurant, alcoholic beverage and retail licenses, permits and approvals. Federal and state laws govern the Company’s relationship with its employees,

5


including laws relating to minimum wage requirements, overtime, tips, tip credits and working conditions. A significant number of the Company’s hourly employees are paid at rates related to the federal or state minimum wage. During 2018, governmental entities acted to increase minimum wage rates in several jurisdictions wherein Company-owned restaurants are located. Additionally, the federal government may act to increase the U.S. federal minimum wage rate.

The offer and sale of franchises are subject to regulation by the U.S. Federal Trade Commission (FTC) and many states. The FTC requires that the Company furnish to prospective franchisees a franchise disclosure document containing prescribed information. A number of states also regulate the sale of franchises and require state registration of franchise offerings and the delivery of a franchise disclosure document to prospective franchisees. The Company’s noncompliance could result in governmental enforcement actions seeking a civil or criminal penalty, rescission of a franchise, and loss of its ability to offer and sell franchises in a state, or a private lawsuit seeking rescission, damages and legal fees.

The Company is subject to laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. The Company is subject to laws and regulations requiring disclosure of calorie, fat, trans fat, salt and allergen content. Beginning in May 2018, the Patient Protection and Affordable Care Act of 2010 (ACA) has required restaurant companies, such as the Company, to disclose calorie information on their menus. The Food and Drug Administration has rules to implement this provision that require restaurants to post the number of calories for most items on menus or menu boards and to make available more detailed nutrition information upon request. A number of states, counties and cities have also enacted menu labeling laws requiring restaurant companies, such as the Company, to disclose certain nutrition information on their menus, or have enacted legislation restricting the use of certain types of ingredients in restaurants some of which are preempted by the federal law. Many of the current requirements are inconsistent or are interpreted differently from one jurisdiction to another. The long-term effect of such labeling requirements on consumer choices, if any, is unclear at this time.

The Company maintains an employee benefits program that provides self-insured and insured coverage to employees that meet the applicable requirements under the program. Employees can elect to enroll dependents that meet eligibility criteria. Coverage includes health, dental, vision, short- and long-term disability, life insurance and other voluntary ancillary benefits. Employees share in the cost of other coverage at varying levels. The Company has historically funded a majority of the cost of employee health benefits. The ACA requires that employers offer health care coverage that is qualified and affordable. Coverage must be offered to all “full-time” employees, as defined by the ACA. The Company routinely reviews its health benefit plans to assure conformity with the ACA. The hours of service eligibility criteria the Company requires for health benefits are lower than required under the ACA. Approximately 62% of eligible employees elect to participate in the Company’s health benefit plans.

Competition

The restaurant business is highly competitive and highly fragmented, and the number, size and strength of the Company’s competitors vary widely by region. The Company believes that restaurant competition is based on, among other things, quality of food products, customer service, reputation, restaurant location, atmosphere, name recognition and price. The Company’s restaurants compete with a number of upscale steakhouses and upscale casual seafood restaurants within their markets, both locally owned restaurants and restaurants within regional or national chains. The principal upscale steakhouses with which the Company competes are Fleming’s, The Capital Grille, Smith & Wollensky, The Palm, Del Frisco’s Double Eagle Steakhouse, Fogo de Chão, Morton’s The Steakhouse, Eddie V’s and other local fine dining restaurants. The Company’s competitors may be better established in certain of the Company’s existing markets and/or markets into which the Company intends to expand.

Available Information

The Company maintains a website at www.rhgi.com. The Company makes available free of charge, through the investor relations section of its website, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports electronically filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such information is available as soon as reasonably practicable after it files such reports with the SEC. Additionally, the Company’s Code of Ethics may be accessed within the Investor Relations section of its website. Information found on the Company’s website is not part of this Annual Report on Form 10-K or any other report filed with the SEC.

Item 1A.

RISK FACTORS

In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company and its business. Additional risks and uncertainties not presently known to us or that the Company currently deems immaterial may also impair its business operations. If any of these certain risks and uncertainties were to actually occur, the Company’s business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of the Company’s common stock could decline and its investors may lose all or part of their investment. These risks and uncertainties include the following:

6


We may not be able to compete successfully with other restaurants, which could reduce revenues.

The restaurant industry is intensely competitive with respect to price, service, location, food quality, atmosphere and overall dining experience. Our competitors include a large and diverse group of well-recognized upscale steakhouse and upscale casual restaurant chains, including steakhouse and seafood chains as well as restaurants owned by independent local operators. Some of our competitors have substantially greater financial, marketing and other resources, and may be better established in the markets where our restaurants are or may be located. If we cannot compete effectively in one or more of our markets, we may be unable to maintain recent levels of comparable restaurant sales growth and/or may be required to close existing restaurants.

Economic downturns or changes in consumer confidence may adversely impact consumer spending patterns.

Economic downturns could negatively impact consumer spending patterns. Any decrease in consumer spending patterns may result in a decline in our operating performance. Economic downturns may reduce guest traffic and require us to lower our prices, which reduces our revenues and operating income, which may adversely affect the market price for our common stock.  In addition, some of our restaurants are located in areas that we consider tourist or vacation destinations.  In those locations, we depend in large part on vacation travelers to frequent our Ruth’s Chris Steak House restaurants, and such destinations typically experience a reduction in visitors during economic downturns, thereby reducing the potential guests that could visit our restaurants.  A significant portion of our gross revenue comes from business guests and private dining which could also be negatively affected during an economic downturn or decrease in consumer confidence. This could have a material adverse impact on our results of operations and growth strategy.

Negative publicity surrounding our brand or the consumption of beef generally, or shifts in consumer tastes, could reduce sales in one or more of our restaurants and make our brand less valuable.

Our success depends, in large part, upon the reputation of our brand.  Negative publicity resulting from poor food quality, illness, injury or other health concerns, or operating problems including disappointing customer experiences related to one or more restaurants, could make our restaurants less appealing to consumers.  Further, the influence of social media could make it more difficult for us to respond to negative publicity in a timely or effective manner.  Consumers value readily available information and often act on such information without further investigation and without regard to its accuracy.  The harm may be immediate without affording us the opportunity for redress or correction.  In addition, any shifts in consumer preferences away from the kinds of food we offer, particularly beef, whether because of dietary or other health concerns or otherwise, would make our restaurants less appealing and adversely affect revenues.  Our restaurants are required to disclose calorie information on menus, which could have an adverse effect on our revenues and results of operations.

Food safety and food-borne illness concerns throughout the supply chain may have an adverse effect on our business.

Food safety is a top priority, and we dedicate substantial resources to ensuring that our customers enjoy safe, quality food products.  However, food safety risks are common throughout the restaurant industry and cannot be eliminated.  Food safety issues could be caused by food suppliers, distributors or franchisees and, as a result, be out of our control.  In addition, regardless of the source or cause, any report of food-borne illness such as E. coli, norovirus, hepatitis A, trichinosis, shigella, typhoid fever or salmonella, and other food safety issues including food tampering or contamination, at one of our restaurants could adversely affect the reputation of our brand and have a negative impact on our sales.  Even instances of food-borne illness, food tampering or other food contamination occurring solely at restaurants of our competitors could result in negative publicity about the food service industry generally and adversely impact our sales.  The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.

Increases in the prices of, or reductions in the availability of, any of our core food products could reduce our operating margins and revenues.

We purchase large quantities of beef, particularly USDA Prime grade beef, which is subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand and other factors. Our beef costs represented approximately 43% of our food and beverage costs during fiscal year 2018. We typically buy our beef on the “spot” market and from time to time we will enter into longer term pricing and supply agreements.  During fiscal year 2018, we entered into contracts with beef suppliers to establish set pricing on a portion of anticipated beef purchases. During the second quarter of 2018, we entered into negotiated set pricing for approximately 25% of our beef requirements from mid-August 2018 through mid-February 2019 at a price approximately 7.0% below prior year.  The market for USDA Prime grade beef is particularly volatile. If prices increase, or the supply of beef is reduced, our operating margins could be materially adversely affected.

In addition, under the Federal Meat Inspection Act and the Poultry Products Inspection Act, the production, processing or interstate distribution of meat and poultry products is prohibited absent federal inspection.  If there is a disruption to the meat inspection

7


process, we could experience a reduction in supply and a corresponding increase in meat prices, which could be significant, either of which could materially impact our operating margin and results of operations.

In the recent past, certain types of seafood have experienced fluctuations in availability. Seafood is also subject to fluctuations in price based on availability, which is often seasonal. If certain types of seafood are unavailable, or if our costs increase, our results of operations could be adversely affected.

If our vendors or distributors do not deliver food and beverages in a timely fashion we may experience supply shortages and/or increased food and beverage costs.

Our ability to maintain consistent quality throughout Company-owned restaurants depends in part upon our ability to purchase USDA Prime and Choice grade beef, seafood and other food products in accordance with our rigid specifications. During fiscal year 2018, the Company purchased substantially all of the beef used in Company-owned Ruth’s Chris restaurants from two vendors, Sysco Food Services and Stock Yards Packing (a subsidiary of US Foods).  Each vendor supplied about half of the Company’s beef requirements.

In addition, we currently have a long-term distribution arrangement with a national food and restaurant supply distributor, DMA, which purchases products for us from various suppliers, and through which all of our Company-owned Ruth’s Chris Steak House restaurants receive a significant portion of their food supplies. Consolidation in our supply chain due to mergers and acquisitions may change the relationships we have with our existing vendors and distributors and/or result in fewer alternative supply sources for purchasing our food supplies, which could result in an increase in prices.  If for any reason our vendors or distributors cease doing business with us, we could experience supply shortages in certain Company-owned restaurants and could be required to purchase supplies at higher prices until we are able to secure an alternative supply source. Any delay we experience in replacing vendors or distributors on acceptable terms could increase food costs or, in extreme cases, require us to temporarily remove items from the menu of one or more restaurants.

Labor shortages or increases in labor costs could slow our growth or harm our business.

Our success depends in part upon our ability to continue to attract, motivate and retain employees with the qualifications to succeed in our industry and the motivation to apply our core service philosophy, including regional operational managers, restaurant general managers and chefs. If we are unable to continue to recruit and retain sufficiently qualified individuals, our business and growth could be adversely affected. Competition for these employees could require us to pay higher wages, which could result in higher labor costs.

In addition, we have a substantial number of hourly employees who are paid wage rates at or based on the federal or state minimum wage and who rely on tips as a large portion of their income. Governmental entities have acted to increase minimum wage rates in several jurisdictions wherein Company-owned restaurants are located. The federal minimum wage may be increased and there likely will be additional minimum wage increases implemented in other states in which we operate or seek to operate.  Likewise, changes to existing tip credit laws (which dictate the amounts an employer is permitted to assume an employee receives in tips when calculating the employee’s hourly wage for minimum wage compliance purposes) continue to be proposed and implemented at both the federal and state government levels.  As federal and/or state minimum wage rates increase and allowable tip credits decrease, we may need to increase not only the wage rates of our minimum wage employees but also the wages paid to our employees who are paid above the minimum wage, which will increase our labor costs.  None of our employees are represented by a collective bargaining unit. Should some of our employees elect to be represented by a collective bargaining unit, our labor costs may increase due to higher wage rates and / or the implementation of work rules. We may be unable to increase our prices in order to pass these increased labor costs on to our guests, in which case our margins would be negatively affected.

A lack of availability of suitable locations for new restaurants, the inability to renew leases at existing restaurants on similar terms and conditions, or a decline in the quality of the locations of our current restaurants may adversely affect our sales and results of operations.

The success of our restaurants depends in large part on their locations. All, but one, of our Company-owned restaurant premises are leased.  If we do not renew leases when the lease terms expire, or if we are unable to renew leases on favorable terms and conditions, our operating results could be negatively impacted.  Possible declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could also result in reduced sales in those restaurants. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a new restaurant or relocation. The occurrence of one or more of these events could have a significant adverse effect on our sales and results of operations.

8


Regulations affecting the operation of our restaurants could increase operating costs and restrict growth.

Each of our restaurants must obtain licenses from regulatory authorities allowing us to sell liquor, beer and wine, and each restaurant must obtain a food service license from local health authorities. Each restaurant’s liquor license must be renewed annually and may be revoked at any time for cause, including violation by the Company or its employees of any laws and regulations relating to the minimum drinking age, advertising, wholesale purchasing and inventory control. One of our locations was cited for a violation in fiscal year 2018 and was penalized by a two week closure in fiscal year 2019.  In certain states, including states where we have a large number of restaurants or where we may open restaurants in the future, the number of liquor licenses available is limited and licenses are traded at market prices. If we are unable to maintain existing licenses, or if we choose to open a restaurant in those states, the cost of a new license could be significant. Obtaining and maintaining licenses is an important component of each of our restaurant’s operations, and the failure to obtain or maintain food and liquor licenses and other required licenses, permits and approvals would materially adversely impact existing restaurants or our growth strategy.

We are also subject to a variety of federal and state labor laws, pertaining to matters such as minimum wage and overtime pay requirements, unemployment tax rates, workers’ compensation rates and citizenship requirements. Government-mandated increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, or increased tax reporting and tax payment requirements for employees who receive gratuities or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could increase our labor costs and reduce our operating margins. In addition, the Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. Although our restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service to, or make reasonable accommodations for, disabled persons.

The cost of our employee health care benefit program may increase in the future.

We maintain an employee benefits program that provides self-insured and insured coverage to employees that meet the applicable requirements under the program. Employees can elect to enroll dependents that meet eligibility criteria. Coverage includes health, dental, vision, short- and long-term disability, life insurance and other voluntary ancillary benefits. Employees share in the cost of other coverage at varying levels. The Company has historically funded a majority of the cost of health benefits.

The Company routinely reviews its health benefit plans to assure conformity with government regulations.  Approximately 62% of eligible employees elect to participate in our health benefit plans.  The hours of service eligibility criteria for the Company’s health benefits plan are lower than those required by law.  In the future, proportionately more employees may elect to participate in our health benefit plans.  We are unable to reliably predict to what extent, if any, the percentage of eligible employees who elect health care coverage will increase in the future.  Because we fund a majority of the cost of health benefits, our financial accounting expense will increase to the extent that additional employees elect to participate in the Company’s health benefit plans.

Certain other restaurant companies may curtail the ability of their employees to participate in their health benefit plans by increasing the hours worked eligibility requirement to the minimum required under the ACA.  Such restaurant companies may gain a cost advantage compared to us by reducing the cost of their employee health benefit programs.

Also, medical inflation has historically tended to outpace general inflation.  We are unable to reliably predict the extent to which future medical inflation will outpace general inflation. Additionally, because our medical benefit program is self-insured, an unusual incidence of large claims may cause our costs to unexpectedly increase.

Our strategy to open franchisee-owned restaurants subjects us to extensive government regulation, compliance with which might increase our investment costs and restrict our growth.

We are subject to the rules and regulations of the FTC and various international and state laws regulating the offer and sale of franchises. The FTC requires that we furnish to prospective franchisees a franchise disclosure document containing prescribed information and can restrict our ability to sell franchises. A number of states also regulate the sale of franchises and require the obtaining of a permit and/or registration of the franchise disclosure document with state authorities and the delivery of the franchise disclosure document to prospective franchisees. Non-compliance with those laws could result in governmental enforcement actions seeking a civil or criminal penalty, rescission of a franchise, and loss of our ability to offer and sell franchises in a state, or a private lawsuit seeking rescission, damages and legal fees, which could have a material adverse effect on our business.

Our franchisees could take actions that harm our reputation and reduce our royalty and restaurant revenues.

We do not exercise control over the day-to-day operations of our franchisee-owned restaurants. While we strive to ensure that franchisee-owned restaurants maintain the same high operating standards that we demand of Company-owned restaurants, one or more of these restaurants may fail to maintain these standards or provide a customer experience consistent with our brand standards.

9


Any operational or financial shortcomings of the franchisee-owned restaurants are likely to be attributed to our system-wide operations and could adversely affect our reputation and damage our brand as well as have a direct negative impact on the royalty income we receive from those restaurants. Franchisee noncompliance with the operational standards and the terms and conditions of our franchise agreements may reduce the overall goodwill of our brand, whether through the failure to meet health and safety standards, engage in quality control or maintain product consistency, or through the participation in improper or objectionable business practices.  Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill of the Company’s brand, resulting in consumer confusion or dilution.  Any harm to our brand or goodwill, customer confusion or brand dilution could materially and adversely impact our business and results of operations.

The expansion into international markets by our franchisees also creates additional risks to our brands and reputation.

Our international operations are subject to all the same risks associated with our domestic operations, as well as a number of additional risks. These include, among other things, international economic and political conditions, foreign currency fluctuations and differing cultures and consumer preferences.  We are also subject to governmental regulation in such international markets, including antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Any new regulatory or trade initiatives could impact our operations in certain countries. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.  Most of our international locations are in Asia.  China and southeast Asia have recently experienced slower economic growth, which reduced our franchise royalty revenue in 2018.

We rely on information technology in our operations and a failure to maintain a continuous and secure network, free from material failure, interruption or security breach, could harm our ability to effectively operate our business, damage our reputation and negatively affect our operations and profits.

We rely on information systems across our operations, including for marketing programs, point-of-sale processing systems in our restaurants, online purchases of gift cards and various other processes and transactions. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, a material network breach in the security of these systems because of a cyber-attack, or any other failure to maintain a continuous and secure network could adversely affect our reputation, negatively affect our results of operations, subject us to litigation or action by regulatory authorities and result in substantial harm to us or an individual.  As privacy and information security laws and regulations change and cyber risks evolve, we may incur additional costs to ensure we remain in compliance and protect guest, employee and Company information.  We currently carry insurance coverage to protect ourselves against some of these risks.  However, our inability to continue to obtain such insurance coverage at reasonable costs also could have a material adverse effect on our financial condition and results of operations.

We accept electronic payment cards, including credit, debit and gift cards, from our guests for payment in our restaurants and on our websites. We also receive and maintain certain personal information about our customers and employees.  Most of our sensitive data, including information related to employees, guests, credit cards, gift cards and financial statements, is stored or processed by third-party vendors.  We, and some of our vendors, have experienced breaches but they have not had a material impact on operations or our financial position.  If we, or one of our vendors, experienced a material security breach, we could become subject to claims, lawsuits or other proceedings for purportedly fraudulent transactions arising out of the theft of credit or debit card information, theft of gift card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims.

We frequently defend against unauthorized attempts to breach our network, but we are not aware of a major security breach.  We employ both internal and external consultants to conduct auditing and testing for weaknesses in our systems, controls, firewalls and encryption and intend to maintain and upgrade our security technology and operational procedures to prevent such damage, breaches or other disruptive problems.  We continuously evaluate our network for known security breaches.  However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage computer systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or successfully implement adequate preventive security measures.  Any such incidents or proceedings could negatively affect our reputation and our results of operations, cause delays in guest service, require significant capital investments to remediate the problem, and could result in the imposition of penalties or cause us to incur significant unplanned losses and expenditures, including those necessary to remediate any damage to persons whose personal information may have been compromised. Furthermore, because of legislative and regulatory rules, we may be required to notify employees or the owners of the credit and debit card information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or other proceedings by regulatory authorities.

10


Our failure to enforce our service marks or other proprietary rights could adversely affect our competitive position or the value of our brands.

We own certain common law service mark rights and a number of federal and international service mark registrations, most importantly the Ruth’s Chris Steak House names and logos, copyrights relating to text and print uses, and other proprietary intellectual property rights. We believe that our service marks, copyrights and other proprietary rights are important to our success and competitive position. Protective actions we take with respect to these rights may fail to prevent unauthorized usage or imitation by others, which could harm our reputation, brand or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal expenses.

Litigation concerning food quality, health, employment practices and other issues could require us to incur additional liabilities and/or cause guests to avoid our restaurants.

Occasionally, our guests file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to our restaurants. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims, claims from franchisees, claims from landlords, claims from suppliers, claims alleging violations of federal and state law regarding workplace and employment matters, harassment and discrimination and similar matters. In addition, we could become subject to class action lawsuits related to these matters in the future. These actions and proceedings may involve allegations of illegal, unfair or inconsistent  employment practices, including wage and hour violations and employment discrimination; guest discrimination; food safety issues including poor food quality, food-borne illness, food tampering, food contamination, and adverse health effects from consumption of various food productions or high-calorie foods.  We, and other companies in the restaurant industry, have also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their guests. In addition, we are subject to “dram shop” statutes. These statutes generally permit a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The restaurant industry has also faced recent claims related to sexual harassment.  Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment significantly in excess of our insurance coverage for any claims or for matters not covered by insurance could materially adversely affect our financial condition and results of operations. Our inability to continue to obtain such insurance coverage at reasonable costs also could have a material adverse effect on our financial condition and results of operations.  Adverse publicity or a failure to respond effectively resulting from these claims may also negatively impact our reputation and revenues at one or more of our restaurants.

The terms of our senior credit agreement may restrict our ability to operate our business and to pursue our business strategies.

Our senior credit agreement contains, and any agreements governing future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us. Our senior credit agreement, which was entered into on February 2, 2017, limits our ability, among other things, to:  

pay dividends or purchase stock in excess of the limits permitted under the credit facility;

borrow money or issue guarantees;

make investments;

use assets as security in other transactions;

sell assets or merge with or into other companies;

enter into transactions with affiliates; and

create or permit restrictions on our subsidiaries’ ability to make payments to us.

Our ability to engage in these types of transactions is limited even if we believe that a specific transaction would contribute to our future growth or improve our operating results.  Our senior credit agreement also requires us to maintain compliance with certain financial ratios.  Our ability to comply with these ratios may be affected by events outside of our control. Any non-compliance would result in a default under our senior credit agreement and could result in our lenders declaring our senior debt immediately due and payable, which would have a material adverse effect on our financial position, consolidated results of operations and liquidity.

We pay interest under our senior credit agreement based on the London Interbank Offered Rate (“LIBOR”).  The U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021.  While our senior credit agreement includes a mechanism for an alternate rate to LIBOR, there is no guarantee that the discontinuance of LIBOR

11


will not result in financial market disruptions or significant increases in benchmark interest rates or borrowing costs, any of which may have an adverse affect on us.

We cannot assure our stockholders that we will continue to pay quarterly cash dividends on our common stock or repurchase shares of our common stock under our share repurchase program. Failure to continue to pay quarterly cash dividends to our stockholders or repurchase shares of our common stock under our share repurchase program could cause the market price for our common stock to decline.

During fiscal year 2018, we continued paying quarterly cash dividends to holders of our common stock and repurchased shares of our common stock under our share repurchase program. Our ability to pay future quarterly cash dividends or repurchase shares of our common stock will be subject to, among other things, our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our Board of Directors deems relevant. There can be no assurance that we will continue to pay a quarterly cash dividend or repurchase shares of our common stock in the future. Any reduction or discontinuance by us of the payment of quarterly cash dividends or the repurchase of shares of our common stock under our share repurchase program could cause the market price of our common stock to decline. Moreover, in the event our payment of quarterly cash dividends is reduced or discontinued, our failure or inability to resume paying quarterly cash dividends at historical levels could result in a lower market valuation of our common stock.

In the future we could incur unexpected expenses as a result of the sale of the Mitchell’s Restaurants.  

Effective January 21, 2015, we sold the Mitchell’s Restaurants and related assets to Landry’s.  Pursuant to the terms of the purchase agreement, upon closing of the sale of the Mitchell’s Restaurants, Landry’s assumed the lease obligations of the Mitchell’s Restaurants.  However, we have guaranteed Landry’s lease obligations aggregating $26.1 million under seven of the leases which extend until the leases terminate which may continue into 2040. The purchase agreement also includes customary seller representations and warranties. Separate from the purchase agreement, Landry’s has agreed to indemnify the Company in the event of a default under any of the leases.  There is a risk that adverse events may occur that require us to defend against or fulfill an indemnity claim, which could result in unexpected expense.  

We depend on external sources of capital, which may not be available in the future.

Historically, we have relied upon external sources of capital to fund our working capital and other requirements. Currently, we utilize our senior credit agreement to fund a portion of our working capital and other financing requirements. Any non-compliance with any restrictive or financial covenants in our senior credit agreement could result in a default and could result in our lenders declaring our senior debt immediately due and payable, which would have a material adverse effect on our financial position, consolidated results of operations and liquidity.

If we are required to seek other sources of capital, additional capital may or may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of things, including the market’s perception of our current and potential future earnings. Furthermore, additional equity offerings may result in substantial dilution of stockholders’ interests. If we are unable to access sufficient capital or enter into financing arrangements on favorable terms in the future, our financial condition and results of operations may be materially adversely affected.

Tax assessments or unclaimed property audits by governmental authorities could adversely impact our operating results.

We remit a variety of taxes and fees to various governmental authorities, including federal and state income taxes, excise taxes, property taxes, sales and use taxes, and payroll taxes. The taxes and fees remitted by us are subject to review and audit by the applicable governmental authorities, which could result in liability for additional assessments. In addition, we are subject to unclaimed or abandoned property (escheat) laws which require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time. We are subject to audit by individual U.S. states with regard to our escheatment practices. The legislation and regulations related to tax and unclaimed property matters tend to be complex and subject to varying interpretations by both government authorities and taxpayers. Although management believes that the positions are reasonable, various taxing authorities may challenge certain of the positions we have taken, which may also potentially result in additional liabilities for taxes, unclaimed property and interest in excess of accrued liabilities. Our positions are reviewed as events occur such as the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits, the measurement of additional estimated liability based on current calculations, the identification of new tax contingencies, or the rendering of relevant court decisions. An unfavorable resolution of assessments by a governmental authority could negatively impact our results of operations and cash flows in future periods. The Company has a pending voluntary disclosure agreement with the State of Delaware to resolve potential liability surrounding gift cards.

12


An impairment in the financial statement carrying value of our goodwill, other intangible assets or property could adversely affect our financial condition and consolidated results of operations.

Goodwill and owned franchise rights must be reviewed for potential impairment annually and when triggering events are detected.  We performed our annual impairment test of goodwill and franchise rights as of December 2, 2018 using a qualitative assessment.  Using the qualitative approach, we evaluated factors, including but not limited to, recent financial performance; forecasts for future cash flows; the Company’s stock price and market capitalization; recent impairment tests; legal factors; the business climate; and the competitive environment.  

We review property and equipment (which includes leasehold improvements) for impairment when events or circumstances indicate these assets might be impaired. We test impairment using historical cash flow and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. The analysis is performed quarterly at the restaurant level for indicators of impairment. In determining future cash flows, we make significant estimates with respect to future operating results of each restaurant over the expected remaining life of the primary asset in the restaurant.

We cannot accurately predict the amount and timing of any impairment of assets. Should the financial statement carrying value of goodwill, other intangible assets or property and equipment become impaired, there could be an adverse effect on our financial condition and consolidated results of operations.

Market volatility could adversely affect our stock price.

Many factors affect the trading price of our stock, including factors over which we have no control, such as reports on the economy or the price of commodities, as well as negative or positive announcements by competitors, regardless of whether the report relates directly to our business. In addition to investor expectations, trading activity in our stock can reflect the portfolio strategies and investment allocation changes of institutional holders. Any failure to meet market expectations, whether for sales growth rates, earnings per share or other metrics, could adversely affect our share price.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 2.

PROPERTIES

Company-owned restaurants are generally located in spaces leased by wholly-owned direct or indirect subsidiaries. Seventy-seven of the Company-owned Ruth’s Chris restaurants operate in leased space, of which the majority currently provide for an option to renew for terms ranging from approximately five years to twenty years. Historically, the Company has not had difficulty in renewing its leases in a timely manner. Restaurant leases provide for a specified annual rent, and some leases call for additional or contingent rent based on sales volumes over specified levels.

The corporate headquarters reside in leased space (21,211 square feet) in Winter Park, Florida, with a term set to expire on August 31, 2021.

The Company owns the real estate for one Ruth’s Chris operating restaurant in Ft. Lauderdale, FL (7,800 square feet).

The following table sets forth information about the Company’s existing Company-owned and franchisee-owned restaurants as of December 30, 2018. As of December 30, 2018, the Company operated 78 Ruth’s Chris restaurants. In addition, franchisees operated 75 restaurants and three restaurants operated under contractual agreements. Company-owned Ruth’s Chris restaurants range in size from approximately 4,000 to approximately 13,000 square feet with approximately 180 to 375 seats. The Company expects that future restaurants will range in size from 7,000 to 10,000 square feet with approximately 230 to 250 seats.

13


 

Company-Owned Ruth's Chris Restaurants

 

Franchisee-Owned Ruth's Chris Restaurants

Year Opened

 

Locations

 

Property Leased or Owned

 

Year Opened

 

Locations

1972

 

Metairie, LA

 

Leased

 

1976

 

Baton Rouge, LA

1977

 

Lafayette, LA

 

Leased

 

1985

 

Mobile, AL

1983

 

Washington, D.C.

 

Leased

 

1986

 

Atlanta, GA

1984

 

Beverly Hills, CA

 

Leased

 

1987

 

Pittsburgh, PA

1985

 

Ft. Lauderdale, FL

 

Owned

 

1987

 

Hartford, CT

1985

 

Austin, TX

 

Leased

 

1988

 

Philadelphia, PA

1986

 

Nashville, TN

 

Leased

 

1991

 

Richmond, VA

1987

 

San Francisco, CA

 

Leased

 

1993

 

Birmingham, AL

1987

 

N. Palm Beach, FL

 

Leased

 

1993

 

San Antonio, TX

1988

 

Seattle, WA

 

Leased

 

1993

 

Taipei, Taiwan

1989

 

Honolulu, HI

 

Leased

 

1993

 

Cancun, Mexico

1989

 

Memphis, TN

 

Leased

 

1994

 

Indianapolis, IN

1990

 

Weehawken, NJ

 

Leased

 

1995

 

Long Island, NY

1990

 

Scottsdale, AZ

 

Leased

 

1995

 

Toronto, Canada

1992

 

Palm Desert, CA

 

Leased

 

1996

 

Taichung, Taiwan

1992

 

Minneapolis, MN

 

Leased

 

1996

 

Indianapolis, IN

1992

 

Chicago, IL

 

Leased

 

1997

 

Kowloon, Hong Kong

1993

 

Arlington, VA

 

Leased

 

1997

 

Raleigh (Cary), NC

1993

 

Manhattan, NY

 

Leased

 

1998

 

Annapolis, MD

1994

 

San Diego, CA

 

Leased

 

1999

 

Atlanta, GA

1995

 

Westchester, NY

 

Leased

 

2000

 

Pikesville, MD

1996

 

Dallas, TX

 

Leased

 

2000

 

San Antonio, TX

1996

 

Troy, MI

 

Leased

 

2001

 

Kaohsiung, Taiwan

1996

 

Tampa, FL

 

Leased

 

2001

 

King of Prussia, PA

1996

 

Bethesda, MD

 

Leased

 

2001

 

Queensway, Hong Kong

1997

 

Irvine, CA

 

Leased

 

2001

 

Cabo San Lucas, Mexico

1997

 

Jacksonville, FL

 

Leased

 

2005

 

Virginia Beach, VA

1998

 

Louisville, KY

 

Leased

 

2005

 

Baltimore, MD

1998

 

Maui, HI

 

Leased

 

2005

 

Atlantic City, NJ

1998

 

Parsippany, NJ

 

Leased

 

2005

 

Charlotte, NC

1998

 

Northbrook, IL

 

Leased

 

2006

 

St. Louis, MO

1999

 

Coral Gables, FL

 

Leased

 

2006

 

Ocean City, MD

1999

 

Ponte Vedra, FL

 

Leased

 

2006

 

Destin, FL

1999

 

Winter Park, FL

 

Leased

 

2006

 

Huntsville, AL

2000

 

Sarasota, FL

 

Leased

 

2006

 

Edmonton, Canada

2000

 

Del Mar, CA

 

Leased

 

2007

 

Charlotte, NC

2000

 

Boca Raton, FL

 

Leased

 

2007

 

Columbia, SC

2000

 

Wailea, HI

 

Leased

 

2007

 

Mishawaka, IN

2001

 

Orlando, FL

 

Leased

 

2007

 

Tokyo, Japan

2001

 

Greensboro, NC

 

Leased

 

2007

 

Madison, WI

2002

 

Woodland Hills, CA

 

Leased

 

2007

 

Calgary, Canada

2002

 

Fairfax, VA

 

Leased

 

2007

 

Rogers, AR

2002

 

Bellevue, WA

 

Leased

 

2007

 

Park City, UT

2003

 

Walnut Creek, CA

 

Leased

 

2008

 

Aruba

2005

 

Roseville, CA

 

Leased

 

2008

 

Myrtle Beach, SC

2005

 

Boston, MA

 

Leased

 

2008

 

Wilmington, NC

14


 

Company-Owned Ruth's Chris Restaurants

 

Franchisee-Owned Ruth's Chris Restaurants

Year Opened

 

Locations

 

Property Leased or Owned

 

Year Opened

 

Locations

2005

 

Sacramento, CA

 

Leased

 

2008

 

Wilkes-Barre, PA

2006

 

Bonita Springs, FL

 

Leased

 

2008

 

Raleigh, NC

2006

 

Mauna Lani, HI

 

Leased

 

2008

 

Savannah, GA

2006

 

Pasadena, CA

 

Leased

 

2009

 

Greenville, SC

2007

 

Lake Mary, FL*

 

Leased

 

2009

 

St. Louis, MO

2007

 

Anaheim, CA*

 

Land Leased

 

2009

 

Durham, NC

2007

 

Biloxi, MS

 

Land Leased

 

2009

 

Kennesaw, GA

2007

 

Knoxville, TN

 

Leased

 

2010

 

Salt Lake City, UT

2007

 

Tyson's Corner, VA

 

Leased

 

2011

 

Grand Rapids, MI

2007

 

Waikiki, HI

 

Leased

 

2011

 

Asheville, NC

2007

 

West Palm Beach, FL

 

Leased

 

2012

 

Singapore

2008

 

Ft. Worth, TX

 

Leased

 

2012

 

Niagara Falls, Canada

2008

 

New Orleans, LA

 

Leased

 

2013

 

Las Vegas, NV

2008

 

Princeton, NJ*

 

Leased

 

2013

 

San Juan, Puerto Rico

2008

 

Fresno, CA

 

Land Leased

 

2013

 

Chattanooga, TN

2008

 

South Barrington, IL*

 

Leased

 

2013

 

Shanghai, China

2011

 

Portland, OR

 

Land Leased

 

2014

 

Alpharetta, GA

2012

 

Cincinnati, OH

 

Leased

 

2014

 

Boise, ID

2013

 

Houston, TX

 

Leased

 

2014

 

Taipei, Taiwan

2014

 

Denver, CO

 

Leased

 

2015

 

Ann Arbor, MI

2014

 

Gaithersburg, MD

 

Leased

 

2015

 

Charleston, SC

2014

 

Marina del Rey, CA

 

Leased

 

2015

 

San Antonio, TX

2015

 

St. Petersburg, FL

 

Leased

 

2016

 

Jakarta, Indonesia

2015

 

Dallas, TX

 

Leased

 

2016

 

Odenton, MD

2016

 

Albuquerque, NM

 

Leased

 

2016

 

Greenville, SC

2016

 

El Paso, TX

 

Leased

 

2017

 

Chengdu, China

2017

 

Waltham, MA

 

Leased

 

2017

 

Toronto, Canada

2017

 

Cleveland, OH

 

Leased

 

2018

 

Ft. Wayne, IN

2017

 

Kauai, HI

 

Leased

 

2018

 

Markham, Canada

2017

 

Denver, CO

 

Leased

 

 

 

 

2018

 

Jersey City, NJ

 

Leased

 

 

 

 

2018

 

Paramus, NJ

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ruth's Chris Restaurants Under Management Agreement

 

 

 

 

 

 

Year Opened

 

Locations

 

 

 

 

 

 

2012

 

Cherokee, NC

 

 

 

 

 

 

2017

 

Tulsa, OK

 

 

 

 

 

 

2018

 

Reno, NV

 

*

The Company owns the building and leases the land pursuant to a long-term ground lease.

15


Item 3.

LEGAL PROCEEDINGS

See Note 11 of the Notes to the Consolidated Financial Statements for a summary of legal proceedings.

Item 4.

MINE SAFETY DISCLOSURES

None.

 

16


PART II

Item 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is listed on the Nasdaq Global Select Market under the trading symbol “RUTH.” As of February 22, 2019, there were 105 holders of record of its common stock.

Common Stock Repurchase Program

On November 3, 2017, the Company announced that its Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $60 million of outstanding common stock from time to time in the open market, through negotiated transactions or otherwise (including, without limitation, the use of Rule 10b5-1 plans), depending on share price, market conditions and other factors. The new share repurchase program replaced the Company’s previous share repurchase program announced in April 2016, which has been terminated. The previous share repurchase program had permitted the repurchase of up to $60 million of outstanding common stock, of which approximately $12.0 million remained unused upon its termination. The Company conducts any open market share repurchase activities in compliance with the safe harbor provisions of Rule 10b-18 of the Exchange Act. The share repurchase program does not obligate the Company to repurchase any dollar amount or number of its shares.  The program has no termination date.  As of December 30, 2018, $32.1 million remained available for further purchases under the new program.  

Stock repurchase activity during the fiscal quarter ended December 30, 2018 was as follows:

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of a Publicly Announced Program

 

 

Maximum Dollar Value that  May Yet be Purchased under the Program – Amounts in thousands

 

October 1, 2018 to November 4, 2018

 

 

 

 

 

 

 

$

44,712

 

November 5, 2018 to December 2, 2018

 

 

420,000

 

 

$

27.66

 

 

 

420,000

 

 

$

33,094

 

December 3, 2018 to December 30, 2018

 

 

44,395

 

 

$

22.02

 

 

 

44,395

 

 

$

32,116

 

Totals for the fiscal quarter

 

 

464,395

 

 

$

27.12

 

 

 

464,395

 

 

$

32,116

 

 

Unregistered Recent Sales of Securities

None.

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Annual Report on Form 10-K for information regarding securities authorized for issuance under the Company’s equity compensation plans.

17


Performance Graph

The following table and graph show the cumulative total stockholder return on the Company’s Common Stock with the S&P 500 Stock Index, the S&P Small Cap 600 Index and the Dow Jones U.S. Restaurants & Bars Index, in each case assuming an initial investment of $100 on December 29, 2013 and full dividend reinvestment.

CUMULATIVE TOTAL RETURN

Assuming an investment of $100 and reinvestment of dividends

 

 

 

12/27/13

 

 

12/26/14

 

 

12/24/15

 

 

12/23/16

 

 

12/29/17

 

 

12/28/18

 

Ruth's Hospitality Group, Inc.

 

$

100

 

 

$

97

 

 

$

110

 

 

 

128

 

 

$

154

 

 

$

163

 

S&P 500

 

$

100

 

 

$

114

 

 

$

115

 

 

 

129

 

 

$

157

 

 

$

150

 

S&P Smallcap 600

 

$

100

 

 

$

106

 

 

$

104

 

 

 

131

 

 

$

149

 

 

$

136

 

Dow Jones US Restaurants & Bars

 

$

100

 

 

$

106

 

 

$

128

 

 

 

136

 

 

$

168

 

 

$

183

 

 

All amounts rounded to the nearest dollar.

**********

The stock performance graph should not be deemed filed or incorporated by reference into any other filing made by us under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate the stock performance graph by reference in another filing.

18


Item 6.

SELECTED FINANCIAL DATA

The following table sets forth the Company’s selected financial data for the year indicated and should be read in conjunction with the disclosures in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Certain amounts have been revised to reclassify certain operating revenues and expenses to income from discontinued operations.

 

 

 

Fiscal Year Ended

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

($  in thousands)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

427,433

 

 

$

390,434

 

 

$

363,147

 

 

$

351,875

 

 

$

325,437

 

Franchise income

 

 

17,919

 

 

 

17,545

 

 

 

17,301

 

 

 

16,661

 

 

 

15,763

 

Other operating income

 

 

6,982

 

 

 

6,844

 

 

 

5,499

 

 

 

4,897

 

 

 

4,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

452,334

 

 

 

414,823

 

 

 

385,947

 

 

 

373,433

 

 

 

346,097

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and beverage costs

 

 

120,112

 

 

 

116,361

 

 

 

107,075

 

 

 

108,101

 

 

 

103,259

 

Restaurant operating expenses

 

 

206,258

 

 

 

185,444

 

 

 

172,999

 

 

 

165,847

 

 

 

156,242

 

Marketing and advertising

 

 

16,639

 

 

 

12,724

 

 

 

11,406

 

 

 

10,925

 

 

 

10,076

 

General and administrative costs

 

 

37,253

 

 

 

32,700

 

 

 

31,488

 

 

 

30,242

 

 

 

24,311

 

Depreciation and amortization expenses

 

 

18,538

 

 

 

14,995

 

 

 

13,434

 

 

 

12,520

 

 

 

10,917

 

Pre-opening costs

 

 

1,875

 

 

 

2,013

 

 

 

1,986

 

 

 

1,032

 

 

 

1,630

 

Loss on impairments

 

 

 

 

 

3,904

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

400,675

 

 

 

368,141

 

 

 

338,388

 

 

 

328,667

 

 

 

306,435

 

Operating income

 

 

51,659

 

 

 

46,682

 

 

 

47,559

 

 

 

44,766

 

 

 

39,662

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,739

)

 

 

(821

)

 

 

(1,154

)

 

 

(790

)

 

 

(1,159

)

Other

 

 

(73

)

 

 

53

 

 

 

10

 

 

 

358

 

 

 

37

 

Income from continuing operations

   before income tax expense

 

 

49,847

 

 

 

45,914

 

 

 

46,415

 

 

 

44,334

 

 

 

38,540

 

Income tax expense

 

 

8,247

 

 

 

15,669

 

 

 

15,660

 

 

 

14,168

 

 

 

11,830

 

Income from continuing operations

 

 

41,600

 

 

 

30,245

 

 

 

30,755

 

 

 

30,166

 

 

 

26,710

 

Income (loss) from discontinued operations, net of income taxes

 

 

80

 

 

 

(108

)

 

 

(290

)

 

 

(162

)

 

 

(10,255

)

Net income

 

$

41,680

 

 

$

30,137

 

 

$

30,465

 

 

$

30,004

 

 

$

16,455

 

 

 

19


 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

($ in thousands, except per share data)

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.40

 

 

$

1.00

 

 

$

0.97

 

 

$

0.88

 

 

$

0.76

 

Discontinued operations

 

 

0.01

 

 

 

(0.01

)

 

 

(0.01

)

 

 

 

 

 

(0.29

)

Basic earnings (loss) per share

 

$

1.41

 

 

$

0.99

 

 

$

0.96

 

 

$

0.88

 

 

$

0.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.37

 

 

$

0.98

 

 

$

0.96

 

 

$

0.87

 

 

$

0.75

 

Discontinued operations

 

 

0.01

 

 

 

(0.01

)

 

 

(0.01

)

 

 

 

 

 

(0.29

)

Diluted earnings (loss) per share

 

$

1.38

 

 

$

0.97

 

 

$

0.95

 

 

$

0.87

 

 

$

0.46

 

Shares used in computing earnings (loss) per

   common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

29,659,461

 

 

 

30,346,999

 

 

 

31,670,189

 

 

 

34,018,582

 

 

 

34,955,760

 

Diluted

 

 

30,273,841

 

 

 

30,916,364

 

 

 

32,108,965

 

 

 

34,434,407

 

 

 

35,415,483

 

Dividends declared per common share

 

$

0.44

 

 

$

0.36

 

 

$

0.28

 

 

$

0.24

 

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at end of fiscal year):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,062

 

 

$

4,051

 

 

$

3,788

 

 

$

3,095

 

 

$

4,301

 

Total assets

 

 

254,613

 

 

 

242,096

 

 

 

207,472

 

 

 

198,597

 

 

 

218,567

 

Total long-term debt including current portion

 

 

41,000

 

 

 

50,000

 

 

 

25,000

 

 

 

 

 

 

13,000

 

Total shareholders' equity

 

 

90,132

 

 

 

79,504

 

 

 

79,009

 

 

 

97,902

 

 

 

96,311

 

 

20


Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes to the consolidated financial statements. We report our financial results on a 52/53-week fiscal year, which ends on the last Sunday in December. Fiscal year 2017 had 53 weeks while fiscal years 2018 and 2016 included 52 weeks of operations.

Overview

Ruth’s Hospitality Group, Inc. develops and operates fine dining restaurants under the trade name Ruth’s Chris Steak House. As of December 30, 2018, there were 156 Ruth’s Chris Steak House restaurants, including 78 Company-owned restaurants, three restaurants operating under contractual agreements and 75 franchisee-owned restaurants, including 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan.

On December 12, 2017, we completed the acquisition of substantially all the assets of the Hawaiian Restaurants for a cash purchase price of $35.4 million.  The results of operations, financial position and cash flows of the Hawaiian Restaurants are included in our consolidated financial statements as of the date of the acquisition.  For additional information, see Note 4 of the consolidated financial statements.

The Ruth’s Chris menu features a broad selection of high-quality USDA Prime and Choice grade 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 the 53-year 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.

Our Ruth’s Chris restaurants cater to special occasion diners and frequent customers, in addition to the business clientele traditionally served by upscale steakhouses, by providing a dining experience designed to appeal to a wide range of guests. We believe our focus on creating this broad appeal provides us with opportunities to expand into a wide range of markets, including many markets not traditionally served by upscale steakhouses. We offer USDA Prime and other high-quality steaks that are aged and prepared to exact company standards and cooked in 1,800-degree broilers. We also offer veal, lamb, poultry and seafood dishes and a broad selection of appetizers. We complement our distinctive food offerings with an award-winning wine list. During the fiscal year 2018, the average check was $85 per person at Company-owned Ruth’s Chris Restaurants.

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 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan. Two new Company-owned Ruth’s Chris Steak House restaurants opened during 2016, in Albuquerque, NM and El Paso, TX.  Franchisees opened two new restaurants during 2016, in Jakarta, Indonesia and Greenville, SC.  The franchisee-owned Ruth’s Chris Steak House restaurant in San Salvador, El Salvador closed in January 2016. Due to local market conditions and disappointing financial results, we closed our Ruth’s Chris Steak House restaurant in Columbus, OH in February 2016 after nearly seventeen years of operations.  In 2017, the Company opened three new Ruth’s Chris Steak House restaurants – one in Waltham, MA in January, one in Cleveland, OH in March and one in Denver, CO in December.  One new Ruth’s Chris Steak House restaurant operating under a contractual agreement opened in Tulsa, OK in January 2017.  Franchisees opened two new restaurants in 2017, in Chengdu, China and Kauai, HI.  The Kauai, HI restaurant was acquired by the Company in December 2017. During the Company’s fiscal year 2017, a franchisee-owned Ruth’s Chris Steak House restaurant in San Juan, Puerto Rico was closed.  In 2018, the Company opened two new Ruth’s Chris Steak House restaurants – one in Jersey City, NJ in August and one in Paramus, NJ in November.  Franchisees opened two new restaurants during 2018, in Ft. Wayne, IN and Markham, Ontario.  The franchisee-owned Ruth’s Chris Steak House restaurants in Ridgeland, MS and Dubai, United Arab Emirates were closed in March 2018 and April 2018, respectively.  Due to the expiration of our lease we closed one of our Ruth’s Chris Steak House restaurants in Washington D.C. in December 2018.   

The Company adopted FASB Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) with an initial date of application of January 1, 2018.  As a result, the Company has changed its accounting policy for revenue recognition.  The Company applied Topic 606 using the cumulative effect method to contracts that were not completed at January 1, 2018, which resulted in the recognition of the cumulative effect of initially adopting Topic 606 as an adjustment to the opening balance of shareholders’ equity at January 1, 2018.  Therefore, the comparative information has not been adjusted and continues to be reported under the Company’s revenue recognition policy in effect prior to the adoption of Topic 606.  The Company adopted Topic 606 using the practical expedient in paragraph 606-10-65-1(f)(4), under which the Company aggregated all contract modifications that occurred before January 1, 2018 to identify the satisfied and unsatisfied performance obligations, to determine the transaction price, and to allocate the transaction price to the satisfied and unsatisfied performance obligations.  The details of the significant changes as a result of adopting Topic 606 are provided below.

21


Franchise Income.  Prior to the adoption of Topic 606, the Company recognized franchise development and opening fees when a franchisee-owned restaurant opened.  Under Topic 606, the Company now recognizes franchise development and opening specific fees over the life of the applicable franchise agreements.  The Company increased its deferred revenue liability by $3.1 million, increased its deferred tax assets by $746 thousand and decreased the opening balance of shareholders’ equity by $2.3 million for previously recognized franchise development and opening fees that will now be recognized over the life of the applicable franchise agreements.  The adoption of Topic 606 also impacts the classification of advertising contributions from franchisees.  Prior to the adoption of Topic 606, the Company recorded advertising contributions from franchisees as a liability against which specific marketing and advertising costs were charged, which reduced the Company’s marketing expense on the consolidated statements of income.  Under Topic 606, advertising contributions from franchisees are classified as franchise income on the consolidated statements of income in fiscal year 2018.  The Company recognized $1.5 million of advertising contributions from franchisees for the fiscal year 2018.  Because of the offsetting adjustments, the reclassification of advertising contributions from franchisees will have no impact to the Company’s net income for fiscal year 2018.

Gift Cards.  Under Topic 606, the Company now classifies certain discounts recognized on the sale of gift cards, historically recognized as marketing expense, as a reduction to restaurant sales on the consolidated statements of income.  The reclassification of discounts recognized on the sale of gift cards from marketing expense to restaurant sales on the consolidated statements of income totaled $1.1 million in fiscal year 2018.  Because of the offsetting adjustments, the reclassification of discounts recognized on the sale of gift cards will have no impact to the Company’s net income for fiscal year 2018.

See Note 3 of the Notes to Consolidated Financial Statements for a summary of the impact of the adoptions of Topic 606.

Recap of Fiscal Year 2018 and Fiscal Year 2017 Operating Results

Operating income for fiscal year 2018 increased from fiscal year 2017 by $5.0 million to $51.7 million. Operating income for fiscal year 2018 was favorably impacted by a $37.0 million increase in restaurant sales, which was offset by increased food and beverage costs, restaurant operating expenses, marketing and advertising, general and administrative costs and depreciation and amortization expenses.  The Company had a $3.9 million loss on impairment during fiscal year 2017 that did not reoccur in fiscal year 2018.  Higher restaurant sales were attributable to an increase in new Company-owned restaurant sales partially offset by sales at comparable Company-owned restaurants.  After-tax income from continuing operations during fiscal year 2018 increased from fiscal year 2017 by $11.4 million to $41.6 million. Income tax expense decreased $7.4 million primarily due to the passage of the 2017 Tax Act which reduced the statutory rate from 35% to 21%.  Fiscal year 2018 net income increased from fiscal year 2017 by $11.5 million to $41.7 million.

Operating income for fiscal year 2017 decreased from fiscal year 2016 by $877 thousand to $46.7 million. Operating income for fiscal year 2017 was favorably impacted by a $27.3 million increase in restaurant sales, which was offset by increased food and beverage costs, restaurant operating expenses, marketing and advertising, general and administrative costs, depreciation and amortization expenses and pre-opening costs.  The Company also had a $3.9 million loss on impairment during fiscal year 2017.  Higher restaurant sales were attributable both to an increase in comparable Company-owned restaurant sales and new restaurants.  After-tax income from continuing operations during fiscal year 2017 decreased from fiscal year 2016 by $510 thousand to $30.2 million. Fiscal year 2017 net income decreased from fiscal year 2016 by $328 thousand to $30.1 million.

Key Financial Terms and Metrics

We evaluate our business using a variety of key financial measures:

Restaurant Sales. Restaurant sales consist of food and beverage sales by Company-owned restaurants. Restaurant sales are primarily influenced by total operating weeks in the relevant period and comparable restaurant sales growth. Total operating weeks is the total number of Company-owned restaurants multiplied by the number of weeks each is in operation during the relevant period. Total operating weeks are impacted by restaurant openings and closings, as well as changes in the number of weeks included in the relevant period. Comparable restaurant sales growth reflects the change in year-over-year or quarter-over-quarter, as applicable, sales for the comparable restaurant base. We define the comparable restaurant base to be those Company-owned restaurants in operation for not less than eighteen months prior to the beginning of the fiscal year including the period being measured. Comparable restaurant sales growth is primarily influenced by customer traffic, which is measured by the number of entrées sold, and the average guest check. Customer traffic is influenced by the popularity of our menu items, our guest mix, our ability to deliver a high-quality dining experience and overall economic conditions. Average guest check, a measure of total restaurant sales divided by the number of entrées, is driven by menu mix and pricing.

Franchise Income. Franchise income includes (1) franchise and development fees charged to franchisees, (2) sales-based royalty income and (3) sales-based advertising fees. Franchise royalties consist of 5.0% of adjusted gross sales from each franchisee-owned restaurant. In addition, our more recent franchise agreements require an advertising fee of up to 1.0% of gross sales to be paid by the

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franchisee. Under our prior franchise agreements, the Company would pay 1.0% out of the 5.0% royalty toward national advertising. We evaluate the performance of our franchisees by measuring franchisee-owned restaurant operating weeks, which is impacted by franchisee-owned restaurant openings and closings, and comparable franchisee-owned restaurant sales growth, which together with operating weeks, drives royalty income.

Other Operating Income. Other operating income consists primarily of breakage income associated with gift cards, and includes fees earned from management agreements, banquet-related guarantee and services revenue and other incidental guest fees.

Food and Beverage Costs. Food and beverage costs include all restaurant-level food and beverage costs of Company-owned restaurants. We measure food and beverage costs by tracking cost of sales as a percentage of restaurant sales and cost per entrée. Food and beverage costs are generally influenced by the cost of food and beverage items, distribution costs and menu mix.

Restaurant Operating Expenses. We measure restaurant operating expenses for Company-owned restaurants as a percentage of restaurant sales. Restaurant operating expenses include the following:

Labor costs, consisting of restaurant management salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits. We measure our labor cost efficiency by tracking hourly and total labor costs as a percentage of restaurant sales;

Operating costs, consisting of maintenance, utilities, bank and credit card charges, and any other restaurant-level expenses; and

Occupancy costs, consisting of both fixed and variable portions of rent, common area maintenance charges, insurance premiums and real property taxes.

Marketing and Advertising. Marketing and advertising includes all media, production and related costs for both local restaurant advertising and national marketing. We measure the efficiency of our marketing and advertising expenditures by tracking these costs as a percentage of total revenues. We have historically spent approximately 2.5% to 4.0% of total revenues on marketing and advertising and expect to maintain this level in the near term.

General and Administrative. General and administrative costs include costs relating to all corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future Company and franchisee growth. General and administrative costs are comprised of management, supervisory and staff salaries and employee benefits, travel, performance-based compensation, stock compensation, information systems, training, corporate rent, professional and consulting fees, technology and market research. We measure our general and administrative expense efficiency by tracking these costs as a percentage of total revenues.

Depreciation and Amortization. Depreciation and amortization includes depreciation of fixed assets and certain definite life intangible assets. We depreciate capitalized leasehold improvements over the shorter of the total expected lease term or their estimated useful life.

Pre-Opening Costs. Pre-opening costs consist of costs incurred prior to opening a Company-owned restaurant, which are comprised principally of manager salaries and relocation costs, employee payroll and related training costs for new employees, including practice and rehearsal of service activities as well as lease costs incurred prior to opening.

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Results of Operations

The table below sets forth certain operating data expressed as a percentage of restaurant sales and total revenues for the periods indicated. Our historical results are not necessarily indicative of the operating results that may be expected in the future. Certain prior year amounts have been reclassified to conform to the current year presentation of discontinued operations.

 

 

 

Fiscal Year

 

 

 

2018

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

 

94.5

%

 

 

94.1

%

 

 

94.1

%

Franchise income

 

 

4.0

%

 

 

4.2

%

 

 

4.5

%

Other operating income

 

 

1.5

%

 

 

1.7

%

 

 

1.4

%

Total revenues

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses: