ruth-10q_20180930.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, if any, 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 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 October 26, 2018 was 30,809,350, which includes 1,078,571 shares of unvested restricted stock.

	September 30,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	4,877	$	4,051
Accounts receivable, less allowance for doubtful accounts 2018 - $371; 2017 - $361		11,332		21,626
Inventory		7,989		8,688
Prepaid expenses and other		2,393		2,680
Total current assets		26,591		37,045
Property and equipment, net of accumulated depreciation 2018 - $155,895; 2017 - $144,373		120,813		112,212
Goodwill		36,522		36,522
Franchise rights, net of accumulated amortization 2018 - $1,819; 2017 - $396		45,399		46,822
Other intangibles, net of accumulated amortization 2018 - $1,341; 2017 - $1,181		4,915		3,904
Deferred income taxes		4,949		4,947
Other assets		582		644
Total assets	$	239,771	$	242,096
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	6,537	$	10,510
Accrued payroll		14,130		15,903
Accrued expenses		7,779		11,203
Deferred revenue		36,794		42,596
Other current liabilities		3,541		8,313
Total current liabilities		68,781		88,525
Long-term debt		54,000		50,000
Deferred rent		23,004		21,993
Unearned franchise fees		2,803		—
Other liabilities		1,897		2,074
Total liabilities		150,485		162,592
Commitments and contingencies (Note 11)		—		—

Common stock, par value $.01 per share; 100,000,000 shares authorized, 29,730,779 shares issued and outstanding at September 30, 2018, 29,645,790 shares issued and outstanding at December 31, 2017		297		296
Additional paid-in capital		72,479		77,017
Retained earnings		16,510		2,191
Treasury stock, at cost; 71,950 shares at September 30, 2018 and December 31, 2017		—		—
Total shareholders' equity		89,286		79,504
Total liabilities and shareholders' equity	$	239,771	$	242,096

	13 Weeks Ended						39 Weeks Ended
	September 30,			September 24,			September 30,			September 24,
	2018			2017			2018			2017

Revenues:
Restaurant sales	$	93,488		$	79,442		$	307,390		$	273,042
Franchise income		4,030			4,218			12,905			12,865
Other operating income		1,497			1,507			4,880			4,813

Total revenues		99,015			85,167			325,175			290,720

Costs and expenses:
Food and beverage costs		26,440			25,319			86,894			82,012
Restaurant operating expenses		49,626			42,595			151,328			133,046
Marketing and advertising		3,813			3,197			11,930			9,056
General and administrative costs		8,809			7,096			27,056			23,267
Depreciation and amortization expenses		4,628			3,852			13,762			11,089
Pre-opening costs		845			121			1,258			1,473

Total costs and expenses		94,161			82,180			292,228			259,943

Operating income		4,854			2,987			32,947			30,777

Other income (expense):
Interest expense, net		(470	)		(197	)		(1,253	)		(521	)
Other		(65	)		(6	)		(31	)		33

Income from continuing operations before income tax expense		4,319			2,784			31,663			30,289
Income tax expense		727			1,017			4,873			9,632

Income from continuing operations		3,592			1,767			26,790			20,657
Income (loss) from discontinued operations, net of income taxes		9			(71	)		30			(101	)

Net income	$	3,601		$	1,696		$	26,820		$	20,556

Basic earnings (loss) per common share:
Continuing operations	$	0.12		$	0.06		$	0.90		$	0.68
Discontinued operations		—			—			—			(0.01	)
Basic earnings per share	$	0.12		$	0.06		$	0.90		$	0.67

Diluted earnings (loss) per common share:
Continuing operations	$	0.12		$	0.06		$	0.88		$	0.67
Discontinued operations		—			(0.01	)		—			(0.01	)
Diluted earnings per share	$	0.12		$	0.05		$	0.88		$	0.66

Shares used in computing earnings per common share:
Basic		29,720,472			30,348,180			29,708,055			30,490,554
Diluted		30,358,284			30,877,192			30,370,193			31,040,640

Cash dividends declared per common share	$	0.11		$	0.09		$	0.33		$	0.27

							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		—			—			—			26,820			—		—		26,820
Cash dividends		—			—			—			(10,176	)		—		—		(10,176	)
Repurchase of common stock		(225	)		(2	)		(5,941	)		—			—		—		(5,943	)
Shares issued under stock compensation plan net of shares withheld for tax effects		309			3			(4,317	)		—			—		—		(4,314	)
Stock-based compensation		—			—			5,720			—			—		—		5,720
Cumulative effect of a change in accounting principle (Note 2)		—			—			—			(2,324	)		—		—		(2,324	)
Balance at September 30, 2018		29,730		$	297		$	72,479		$	16,510			72	$	—	$	89,286

Balance at December 25, 2016		30,549		$	305		$	95,266		$	(16,562	)		72	$	—	$	79,009
Net income		—			—			—			20,556			—		—		20,556
Cash dividends		—			—			—			(8,568	)		—		—		(8,568	)
Repurchase of common stock		(719	)		(7	)		(14,536	)		—			—		—		(14,543	)
Shares issued under stock compensation plan net of shares withheld for tax effects		263			3			(1,167	)		—			—		—		(1,164	)
Stock-based compensation		—			—			5,080			—			—		—		5,080
Balance at September 24, 2017		30,093		$	301		$	84,643		$	(4,575	)		72	$	—	$	80,369

	39 Weeks Ended
	September 30,			September 24,
	2018			2017
Cash flows from operating activities:
Net income	$	26,820		$	20,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,762			11,089
Deferred income taxes		744			4,472
Non-cash interest expense		62			97
Loss on the disposal of property and equipment, net		21			—
Debt issuance costs written-off		—			16
Amortization of below market lease		59			—
Stock-based compensation expense		5,720			5,080
Changes in operating assets and liabilities:
Accounts receivable		10,295			11,002
Inventories		700			149
Prepaid expenses and other		287			217
Other assets		—			356
Accounts payable and accrued expenses		(9,797	)		(6,064	)
Deferred revenue		(6,070	)		(10,671	)
Deferred rent		834			493
Other liabilities		(2,895	)		(1,702	)
Net cash provided by operating activities		40,542			35,090
Cash flows from investing activities:
Acquisition of property and equipment		(22,113	)		(14,326	)
Acquisition of intangible assets		(1,171	)		—
Net cash used in investing activities		(23,284	)		(14,326	)
Cash flows from financing activities:
Principal borrowings on long-term debt		23,000			26,000
Principal repayments on long-term debt		(19,000	)		(21,000	)
Repurchase of common stock		(5,943	)		(14,543	)
Cash dividend payments		(10,176	)		(8,568	)
Tax payments from the vesting of restricted stock and option exercises		(4,342	)		(2,079	)
Proceeds from the exercise of stock options		29			913
Deferred financing costs		—			(413	)
Net cash used in financing activities		(16,432	)		(19,690	)
Net increase in cash and cash equivalents		826			1,074
Cash and cash equivalents at beginning of period		4,051			3,788
Cash and cash equivalents at end of period	$	4,877		$	4,862
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest	$	1,204		$	405
Income taxes	$	6,730		$	6,539
Noncash investing and financing activities:
Accrued acquisition of property and equipment	$	1,253		$	1,023

The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of September 30, 2018 and December 31, 2017 and for the thirteen and thirty-nine week periods ended September 30, 2018 and September 24, 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 September 30, 2018, there were 155 Ruth’s Chris Steak House restaurants, including 78 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 Company-owned Ruth’s Chris Steak House restaurant was opened in Jersey City, NJ in August 2018. Subsequent to the end of the quarter a franchisee-owned Ruth’s Chris Steak House restaurant was closed in Panama City, Panama.

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 September 30, 2018 and September 24, 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 September 30, 2018 and September 24, 2017 each contained thirteen weeks and are referred to herein as the third quarter of fiscal year 2018 and the third 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 is implementing a new lease software program as a part of its adoption of ASU 2016-02.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective for the Company in the first quarter of fiscal year 2021. We do not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

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 $1.1 million of advertising contributions from franchisees in the thirty-nine 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 $696 thousand in the first thirty-nine 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 thirty-nine weeks of fiscal year 2018.

	September 30, 2018 As Reported		Adjustments			Balances without adoption of Topic 606
Assets
Current assets:
Cash and cash equivalents	$	4,877	$	—		$	4,877
Accounts receivable, less allowance for doubtful accounts 2018 - $371; 2017 - $361		11,332		—			11,332
Inventory		7,989		—			7,989
Prepaid expenses and other		2,393		—			2,393
Total current assets		26,591		—			26,591
Property and equipment, net of accumulated depreciation 2018 - $155,895; 2017 - $144,373		120,813		—			120,813
Goodwill		36,522		—			36,522
Franchise rights, net of accumulated amortization 2018 - $1,819; 2017 - $396		45,399		—			45,399
Other intangibles, net of accumulated amortization 2018 - $1,341; 2017 - $1,181		4,915		—			4,915
Deferred income taxes		4,949		(718	)		4,231
Other assets		582		—			582
Total assets	$	239,771	$	(718	)	$	239,053
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	6,537	$	—		$	6,537
Accrued payroll		14,130		—			14,130
Accrued expenses		7,779		—			7,779
Deferred revenue		36,794		(126	)		36,668
Other current liabilities		3,541		—			3,541
Total current liabilities		68,781		(126	)		68,655
Long-term debt		54,000		—			54,000
Deferred rent		23,004		—			23,004
Unearned franchise fees		2,803

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)


		Page
Part I — Financial Information		3

Item 1	Financial Statements:	3

	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3

	Condensed Consolidated Statements of Income for the Thirteen and Thirty-nine Week Periods ended September 30, 2018 and September 24, 2017	4

	Condensed Consolidated Statements of Shareholders’ Equity for the Thirty-nine Week Periods ended September 30, 2018 and September 24, 2017	5

	Condensed Consolidated Statements of Cash Flows for the Thirty-nine Week Periods ended September 30, 2018 and September 24, 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	25

Item 4	Controls and Procedures	26

Part II — Other Information		27

Item 1	Legal Proceedings	27

Item 1A	Risk Factors	27

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3	Defaults Upon Senior Securities	27

Item 4	Mine Safety Disclosures	27

Item 5	Other Information	27

Item 6	Exhibits	27

Signatures		29

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐