ruth-10q_20180701.htm

Former name, former address and former fiscal year, if changed since last report

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial 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 Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of August 3, 2018 was 30,675,560, which includes 947,906 shares of unvested restricted stock.

	July 1,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	3,045	$	4,051
Accounts receivable, less allowance for doubtful accounts 2018 - $358; 2017 - $361		10,800		21,626
Inventory		8,105		8,688
Prepaid expenses and other		2,971		2,680
Total current assets		24,921		37,045
Property and equipment, net of accumulated depreciation 2018 - $152,481; 2017 - $144,373		114,748		112,212
Goodwill		36,522		36,522
Franchise rights, net of accumulated amortization 2018 - $1,338; 2017 - $396		45,880		46,822
Other intangibles, net of accumulated amortization 2018 - $1,288; 2017 - $1,181		4,968		3,904
Deferred income taxes		5,754		4,947
Other assets		603		644
Total assets	$	233,396	$	242,096
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	8,118	$	10,510
Accrued payroll		13,326		15,903
Accrued expenses		8,045		11,203
Deferred revenue		33,812		42,596
Other current liabilities		4,751		8,313
Total current liabilities		68,052		88,525
Long-term debt		50,000		50,000
Deferred rent		22,741		21,993
Unearned franchise fees		2,859		—
Other liabilities		1,955		2,074
Total liabilities		145,607		162,592
Commitments and contingencies (Note 11)		—		—

Common stock, par value $.01 per share; 100,000,000 shares authorized, 29,696,429 shares issued and outstanding at July 1, 2018, 29,645,790 shares issued and outstanding at December 31, 2017		297		296
Additional paid-in capital		71,194		77,017
Retained earnings		16,298		2,191
Treasury stock, at cost; 71,950 shares at July 1, 2018 and December 31, 2017		—		—
Total shareholders' equity		87,789		79,504
Total liabilities and shareholders' equity	$	233,396	$	242,096

	13 Weeks Ended						26 Weeks Ended
	July 1,			June 25,			July 1,			June 25,
	2018			2017			2018			2017

Revenues:
Restaurant sales	$	103,538		$	94,145		$	213,902		$	193,600
Franchise income		4,457			4,257			8,874			8,647
Other operating income		1,640			1,613			3,384			3,306

Total revenues		109,635			100,015			226,160			205,553

Costs and expenses:
Food and beverage costs		29,049			28,114			60,454			56,693
Restaurant operating expenses		50,022			45,005			101,702			90,452
Marketing and advertising		4,640			3,412			8,117			5,859
General and administrative costs		9,274			8,035			18,248			16,171
Depreciation and amortization expenses		4,673			3,731			9,134			7,236
Pre-opening costs		272			173			412			1,352

Total costs and expenses		97,930			88,470			198,067			177,763

Operating income		11,705			11,545			28,093			27,790

Other income (expense):
Interest expense, net		(403	)		(144	)		(783	)		(324	)
Other		22			14			34			39

Income from continuing operations before income tax expense		11,324			11,415			27,344			27,505
Income tax expense		1,763			3,611			4,147			8,616

Income from continuing operations		9,561			7,804			23,197			18,889
Income (loss) from discontinued operations, net of income taxes		12			7			22			(30	)

Net income	$	9,573		$	7,811		$	23,219		$	18,859

Basic earnings per common share:
Continuing operations	$	0.32		$	0.26		$	0.78		$	0.62
Discontinued operations		—			—			—			—
Basic earnings per share	$	0.32		$	0.26		$	0.78		$	0.62

Diluted earnings per common share:
Continuing operations	$	0.32		$	0.25		$	0.76		$	0.60
Discontinued operations		—			—			—			—
Diluted earnings per share	$	0.32		$	0.25		$	0.76		$	0.60

Shares used in computing earnings per common share:
Basic		29,713,825			30,548,258			29,701,847			30,561,741
Diluted		30,375,306			31,264,266			30,377,194			31,255,441

Cash dividends declared per common share	$	0.11		$	0.09		$	0.22		$	0.18

							Additional			Retained Earnings
	Common Stock						Paid-in			(Accumulated			Treasury Stock				Shareholders'
	Shares			Value			Capital			Deficit)			Shares		Value		Equity
Balance at December 31, 2017		29,646		$	296		$	77,017		$	2,191			72	$	—	$	79,504
Net income		—			—			—			23,219			—		—		23,219
Cash dividends		—			—			—			(6,787	)		—		—		(6,787	)
Repurchase of common stock		(225	)		(2	)		(5,941	)		—			—		—		(5,943	)
Shares issued under stock compensation plan net of shares withheld for tax effects		275			3			(3,752	)		—			—		—		(3,749	)
Stock-based compensation		—			—			3,870			—			—		—		3,870
Cumulative effect of a change in accounting principle (Note 2)		—			—			—			(2,324	)		—		—		(2,324	)
Balance at July 1, 2018		29,696		$	297		$	71,194		$	16,298			72	$	—	$	87,789

Balance at December 25, 2016		30,549		$	305		$	95,266		$	(16,562	)		72	$	—	$	79,009
Net income		—			—			—			18,859			—		—		18,859
Cash dividends		—			—			—			(5,724	)		—		—		(5,724	)
Repurchase of common stock		(400	)		(4	)		(8,428	)									(8,432	)
Shares issued under stock compensation plan net of shares withheld for tax effects		211			3			(527	)		—			—		—		(524	)
Stock-based compensation		—			—			3,369			—			—		—		3,369
Balance at June 25, 2017		30,360		$	304		$	89,680		$	(3,427	)		72	$	—	$	86,557

	26 Weeks Ended
	July 1,			June 25,
	2018			2017
Cash flows from operating activities:
Net income	$	23,219		$	18,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,134			7,236
Deferred income taxes		(61	)		916
Non-cash interest expense		41			76
Debt issuance costs written-off		—			16
Amortization of below market lease		39			—
Stock-based compensation expense		3,870			3,369
Changes in operating assets and liabilities:
Accounts receivable		10,826			12,004
Inventories		583			(158	)
Prepaid expenses and other		(291	)		(220	)
Other assets		—			356
Accounts payable and accrued expenses		(8,600	)		(4,531	)
Deferred revenue		(8,996	)		(9,198	)
Deferred rent		630			283
Other liabilities		(1,861	)		2,176
Net cash provided by operating activities		28,533			31,184
Cash flows from investing activities:
Acquisition of property and equipment		(11,889	)		(10,649	)
Acquisition of intangible assets		(1,171	)		—
Net cash used in investing activities		(13,060	)		(10,649	)
Cash flows from financing activities:
Principal borrowings on long-term debt		15,000			18,000
Principal repayments on long-term debt		(15,000	)		(22,000	)
Repurchase of common stock		(5,943	)		(8,432	)
Cash dividend payments		(6,787	)		(5,724	)
Tax payments from the vesting of restricted stock and option exercises		(3,759	)		(1,364	)
Proceeds from the exercise of stock options		10			838
Deferred financing costs		—			(413	)
Net cash used in financing activities		(16,479	)		(19,095	)
Net (decrease) increase in cash and cash equivalents		(1,006	)		1,440
Cash and cash equivalents at beginning of period		4,051			3,788
Cash and cash equivalents at end of period	$	3,045		$	5,228
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest	$	753		$	141
Income taxes	$	6,123		$	5,840
Noncash investing and financing activities:
Accrued acquisition of property and equipment	$	1,229		$	838

The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of July 1, 2018 and December 31, 2017 and for the thirteen and twenty-six week periods ended July 1, 2018 and June 25, 2017 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated financial statements include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of July 1, 2018, there were 154 Ruth’s Chris Steak House restaurants, including 77 Company-owned restaurants, two 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, Panama, Singapore and Taiwan. All Company-owned restaurants are located in the United States. A new franchisee-owned Ruth’s Chris Steak House restaurant was opened in Ft. Wayne, IN in May 2018.

The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the periods ended July 1, 2018 and June 25, 2017 are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the SEC’s rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended July 1, 2018 and June 25, 2017 each contained thirteen weeks and are referred to herein as the second quarter of fiscal year 2018 and the second quarter of fiscal year 2017, respectively. Fiscal year 2018 is a 52-week year. Fiscal year 2017 was a 53-week year.

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the periods to prepare these condensed consolidated financial statements in conformity with GAAP. Significant items subject to such estimates and assumptions include the carrying amounts of property and equipment, goodwill, franchise rights, and obligations related to gift cards, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and replaces most existing revenue recognition guidance in GAAP. The Company adopted this new revenue recognition standard on January 1, 2018. See Note 2 for further information about our transition to this new revenue recognition standard.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require the Company to adopt these provisions in the first quarter of fiscal year 2019. In July 2018, the FASB issued ASU 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating which transition method it will use. The Company’s restaurants operate under facility lease agreements that provide for material future lease payments. The restaurant facility leases comprise the

majority of the Company’s material lease agreements. The Company is currently evaluating the effect of the standard on its ongoing financial reporting, but expects that the adoption of ASU 2016-02 will have a material effect on its consolidated financial statements. The Company expects that the most significant changes relate to 1) the recognition of new right–of–use assets and lease liabilities on the consolidated balance sheet for restaurant facility operating leases; and 2) the derecognition of existing lease liabilities on the consolidated balance sheet related to scheduled rent increases.

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.

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 $764 thousand of advertising contributions from franchisees in the twenty-six weeks of 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 $470 thousand in the first twenty-six weeks of 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.

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the first twenty-six weeks of fiscal year 2018.

	July 1, 2018 As Reported		Adjustments			Balances without adoption of Topic 606
Assets
Current assets:
Cash and cash equivalents	$	3,045	$	—		$	3,045
Accounts receivable, less allowance for doubtful accounts 2018 - $358; 2017 - $361		10,800		—			10,800
Inventory		8,105		—			8,105
Prepaid expenses and other		2,971		—			2,971
Total current assets		24,921		—			24,921
Property and equipment, net of accumulated depreciation 2018 - $152,481; 2017 - $144,373		114,748		—			114,748
Goodwill		36,522		—			36,522
Franchise rights, net of accumulated amortization 2018 - $1,338; 2017 - $396		45,880		—			45,880
Other intangibles, net of accumulated amortization 2018 - $1,288; 2017 - $1,181		4,968		—			4,968
Deferred income taxes		5,754		(725	)		5,029
Other assets		603		—			603
Total assets	$	233,396	$	(725	)	$	232,671
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	8,118	$	—		$	8,118
Accrued payroll		13,326		—			13,326
Accrued expenses		8,045		—			8,045
Deferred revenue		33,812		(126	)		33,686
Other current liabilities		4,751		—			4,751
Total current liabilities		68,052		(126	)		67,926
Long-term debt		50,000		—			50,000
Deferred rent		22,741		—			22,741
Unearned franchise fees		2,859		(2,859	)		—
Other liabilities		1,955

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)

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

		Emerging growth company	☐


		Page
Part I — Financial Information		3

Item 1	Financial Statements:	3

	Condensed Consolidated Balance Sheets as of July 1, 2018 and December 31, 2017	3

	Condensed Consolidated Statements of Income for the Thirteen and Twenty-six Week Periods ended July 1, 2018 and June 25, 2017	4

	Condensed Consolidated Statements of Shareholders’ Equity for the Twenty-six Week Periods ended July 1, 2018 and June 25, 2017	5

	Condensed Consolidated Statements of Cash Flows for the Twenty-six Week Periods ended July 1, 2018 and June 25, 2017	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3	Quantitative and Qualitative Disclosures about Market Risk	24

Item 4	Controls and Procedures	25

Part II — Other Information		26

Item 1	Legal Proceedings	26

Item 1A	Risk Factors	26

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3	Defaults Upon Senior Securities	26

Item 4	Mine Safety Disclosures	26

Item 5	Other Information	26

Item 6	Exhibits	26

Signatures		28