Ruths Hospitality Group, Inc. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 27, 2021

OR

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)

(407) 333-7440

Registrant’s telephone number, including area code

None

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

Securities registered pursuant to Section 12(b) of the Act:

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 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.

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 July 28, 2021 was 34,812,179, which includes 606,743 shares of unvested restricted stock.

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited

(Amounts in thousands, except share and per share data)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations—Unaudited

(Amounts in thousands, except share and per share data)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity—Unaudited  

(Amounts in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

(1) The Company and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of June 27, 2021 and December 27, 2020 and for the thirteen and twenty-six week periods ended June 27, 2021 and June 28, 2020 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 June 27, 2021, there were 148 Ruth’s Chris Steak House restaurants, including 73 Company-owned restaurants, three restaurants operating under contractual agreements and 72 franchisee-owned restaurants, including 21 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan. All Company-owned restaurants are located in the United States.  The Ruth’s Chris Steak House located in Bellevue, WA permanently closed in April 2021.

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 June 27, 2021 and June 28, 2020 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 unaudited condensed consolidated 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 27, 2020.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended June 27, 2021 and June 28, 2020 each contained thirteen weeks and are referred to herein as the second quarter of fiscal year 2021 and the second quarter of fiscal year 2020, respectively. Fiscal years 2021 and 2020 are both 52-week years.

COVID-19 Impact

In March 2020 the World Health Organization declared the novel coronavirus 2019 (COVID-19) a pandemic and the United States declared it a National Public Health Emergency, which has resulted in a significant reduction in revenue at the Company’s restaurants due to mandatory restaurant closures, capacity limitations, social distancing guidelines or other restrictions mandated by governments across the world, including federal, state and local governments in the United States.  As a result of these developments, the Company has experienced a significant negative impact on its revenues, results of operations and cash flows compared to periods prior to the onset of the pandemic. During the second quarter of fiscal year 2021 most of the Company’s restaurants were operating with open dining rooms. As of June 27, 2021, 75 of the 76 Company-owned and -managed restaurants were open and one was closed. This is an unprecedented event in the Company’s history, and it is uncertain how the conditions surrounding COVID-19 will continue to change.  The extent to which COVID-19 will continue to impact the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the unknown duration and severity of the COVID-19 pandemic, which may be impacted by variants of the COVID-19 virus and the adoption rate of the COVID-19 vaccines in the jurisdictions in which the Company operates, the actions taken to contain the impact of COVID-19, and further actions that may be taken to limit the resulting economic impact.

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Estimates

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 presented 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, operating lease right of use assets and obligations related to gift cards, income taxes, operating lease liabilities, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740).  This update modifies Topic 740 to simplify the accounting for income taxes.  The Company adopted this new standard on December 28, 2020.  The adoption of ASU 2019-12 did not have a significant impact on the Company’s financial reporting.

(2) Fair Value Measurements

The carrying amounts of cash and cash equivalents, receivables, prepaid expenses, accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair values due to their short duration. Borrowings classified as long-term debt as of June 27, 2021 and December 27, 2020 have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying value, plus unpaid interest and deferred financing costs of $681 thousand at June 27, 2021, represents a reasonable estimate of FV (Level 2).

The Company’s non-financial assets measured at fair value on a non-recurring basis as of June 27, 2021 were as follows (in thousands):

The Company’s non-financial assets measured at fair value on a non-recurring basis as of December 27, 2020 were as follows (in thousands):

(3) Leases

The Company leases restaurant facilities and equipment.  The Company determines whether an arrangement is or contains a lease at contract inception.  The Company’s leases are all classified as operating leases, which are included as operating lease right of use assets (“ROU assets”) and operating lease liabilities in the Company’s condensed consolidated balance sheet.  Operating lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date.  ROU assets are measured based on the operating lease liabilities adjusted for lease incentives, initial indirect costs and impairments of operating lease assets.  Minimum lease payments include only the fixed lease components of the agreements, as well as any variable rate payments that depend on an index, which are measured initially using the index at the lease commencement dates.  To determine the present value of future minimum lease payments, the Company estimates incremental borrowing rates based on the information available at the lease commencement dates, or amendment date for contract modifications.  The Company estimates its incremental borrowing rates by determining the synthetic credit rating of the Company using quantitative and qualitative analysis and then adjusting the synthetic credit rating to a collateralized credit rating.  A spread curve is then developed using the U.S. corporate bond yield curve of the same credit rating and the U.S. Treasury curve to determine the rate for different terms.  The expected lease terms include options to extend when it is reasonably certain the Company will exercise the options up to a total term of 20 years.  Total lease cost is expensed on a straight-line basis over the life of a lease.  Additionally, incentives received

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from landlords used to fund leasehold improvements reduce the ROU assets related to those leases and are amortized as reductions to lease expense over the lives of the leases.  Variable lease payments that do not depend on a rate or index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.

On April 10, 2020, the FASB issued a staff Q&A (the “Staff Q&A”) to provide guidance on its remarks at the April 8, 2020 Board meeting about accounting for rent concessions resulting from the COVID-19 pandemic.  The Staff Q&A affirmed the discussion at the April 8, 2020 meeting by allowing entities to forgo performing the lease-by-lease legal analysis to determine whether contractual provisions in an existing lease agreement provide enforceable rights and obligations related to lease concessions as long as the concessions are related to COVID-19 and the changes to the lease do not result in a substantial increase in the rights of the lessor or the obligations of the lessee.  In addition, the Staff Q&A affirmed that entities may make an election to account for eligible concessions, regardless of their form, either by (1) applying the modification framework for these concessions in accordance with Topic 842 or (2) accounting for the concessions as if they were made under the enforceable rights included in the original agreement.  

Due to the impacts of the COVID-19 pandemic, the Company initiated negotiations with its landlords to modify its restaurant lease agreements.  During the second quarter of 2021, the Company amended 9 leases.  Where applicable, the Company has elected to account for eligible lease concessions as if they were made under the enforceable rights included in the original agreement pursuant to the Staff Q&A.

As of June 27, 2021, all of the Company-owned Ruth’s Chris Steak House restaurants operated in leased premises, with the exception of the restaurant in Ft. Lauderdale, FL, which is an owned property, and the restaurants in Anaheim, CA, Lake Mary, FL, Princeton, NJ and South Barrington, IL, which operate on leased land.  The leases generally provide for minimum annual rental payments with scheduled minimum rent payment increases during the terms of the leases.  Certain leases also provide for rent deferral during the initial term, lease incentives in the form of tenant allowances to fund leasehold improvements, and/or contingent rent provisions based on the sales at the underlying restaurants.  Most of the Company’s restaurant leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more.  The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.  As of June 27, 2021, the weighted average remaining lease term and discount rate for operating leases is 12.9 years and 5.2%, respectively.

The components of lease expense are as follows (in thousands):

As of July 27, 2021, maturities of lease liabilities are summarized as follows (in thousands):

Supplemental cash flow information related to operating leases was as follows (in thousands):

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Additionally, as of June 27, 2021, the Company has executed four leases for new Ruth’s Chris Steak House Restaurant locations with undiscounted fixed payments over the initial term of $21.7 million.  These leases will commence when the landlords make the properties available to the Company.  These leases are expected to commence during the next 15 months.  These leases are expected to have an economic lease term of 20 years.  The Company will assess the reasonably certain lease term at the lease commencement date.

(4) Revenue

In the following tables, the Company’s revenue is disaggregated by major component for each category on the consolidated statements of operations (in thousands).

The following table provides information about receivables and deferred revenue liabilities from contracts with customers (in thousands).

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Significant changes in the deferred revenue balance and the unearned franchise fees balance during the first twenty-six weeks of fiscal year 2021 are presented in the following table (in thousands).

Significant changes in the deferred revenue balance and the unearned franchise fees balance during the first twenty-six weeks of fiscal year 2020 are presented in the following table (in thousands).

(5) Long-term Debt

Long-term debt consists of the following (in thousands):

As of June 27, 2021, the Company had $70.0 million of outstanding indebtedness under its senior credit facility with approximately $35.3 million of borrowings available, net of outstanding letters of credit of approximately $4.7 million. As of June 27, 2021, the weighted average interest rate on the Company’s outstanding debt was 3.5% and the weighted average interest rate on its outstanding letters of credit was 2.6%.  In addition, the fee on the Company’s unused senior credit facility was 0.4%.

On February 2, 2017, the Company entered into a senior credit facility pursuant to a credit agreement with Wells Fargo Bank, National Association as administrative agent, and certain other lenders (as amended, as of the end of the fiscal year 2020, the “Credit Agreement”).  The Credit Agreement provides for a revolving credit facility of $120.0 million with a $5.0 million subfacility of letters of credit and a $5.0 million subfacility for swingline loans. The Credit Agreement has a maturity date of February 2, 2023.

On January 28, 2021 the Company entered into a Sixth Amendment to Credit Agreement (the “Sixth Amendment” and the “Credit Agreement as amended by the Sixth Amendment”), which makes certain amendments to the Credit Agreement.  The Sixth Amendment provides for a $10.0 million commitment reduction from the $120.0 million available under the Credit Agreement, so that the Credit Agreement as amended by the Sixth Amendment provides for a $110.0 revolving credit facility.  The commitment reduction was effective as of March 29, 2021, the first day of the Company’s second quarter of fiscal year 2021.  The Credit Agreement as amended by the Sixth Amendment has a $5.0 million subfacility of letters of credit and a $5.0 million subfacility for swingline loans.  The Sixth Amendment limited non-maintenance capital expenditures by the Company and its subsidiaries to no more than $5.0 million during fiscal year 2021.

On May 4, 2021, the Company entered into a Seventh Amendment to Credit Agreement (the “Seventh Amendment” and the Credit Agreement as amended by the Seventh Amendment, the “Amended Credit Agreement”), which amends its existing $110.0 million Credit Agreement as amended by the Sixth Amendment.  The Seventh Amendment increases the permitted non-maintenance capital expenditures from $5.0 million to $20.0 million in fiscal year 2021 and adjusted the interest rate pricing and maximum Consolidated Leverage Ratio as described below.

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The Amended Credit Agreement contains customary representations and affirmative and negative covenants (including limitations on indebtedness and liens) as well as financial covenants, as described below, requiring a minimum fixed coverage charge ratio as defined in the Amended Credit Agreement (“Fixed Charge Coverage Ratio”) limiting the Company’s actual leverage ratio as defined in the Amended Credit Agreement (“Consolidated Leverage Ratio”) and requiring the Company to hold a certain specified amount of cash.  The Amended Credit Agreement also contains events of default customary for credit facilities of this type (with customary grace periods, as applicable), including nonpayment of principal or interest when due; material incorrectness of representations and warranties when made; breach of covenants; bankruptcy and insolvency; unsatisfied ERISA obligations; unstayed material judgment beyond specified periods; default under other material indebtedness; and certain changes of control of the Company. If any event of default occurs and is not cured within the applicable grace period or waived, the outstanding loans may be accelerated by lenders holding a majority of the commitments and the lenders’ commitments may be terminated. The obligations under the Amended Credit Agreement are guaranteed by certain of the Company’s subsidiaries and are secured by a lien on substantially all of the Company’s personal property assets other than any equity interest in current and future subsidiaries of the Company.

From May 4, 2021 until the Calculation Date for the fiscal quarter ending June 27, 2021, interest rates on loans under the Amended Credit Agreement are 2.50% and 1.50% above the LIBOR Rate and Base Rate, respectively, and the fee for the daily unused availability under the revolving credit facility is 0.40%.  Thereafter, interest rate margins and the fee for the unused commitment will be calculated based on the Consolidated Leverage Ratio in accordance with the Credit Agreement. The term “Calculation Date” means the date five (5) business days after the day on which the Company provides a compliance certificate required for its most recently ended fiscal quarter.  Thereafter, and in accordance with the Amended Credit Agreement, interest rate margins and the fee for the unused commitment will be calculated based on the Consolidated Leverage Ratio, and at the Company’s option, revolving loans may bear interest at either:

The applicable margin is based on the Company’s Consolidated Leverage Ratio, ranging (a) from 1.50% to 2.50% above the applicable LIBOR rate or (b) 0.50% to 1.50% above the applicable Base Rate.  

Among the covenant obligations with which the Company must comply, the Amended Credit Agreement requires the Company to comply with the following:

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For purposes of calculating required compliance with the maximum ratio, the Consolidated Leverage Ratio will be calculated on an annualized basis, which will exclude the impact of fiscal year 2020, through the end of fiscal year 2021, and on an actual basis thereafter.  

The Fixed Charge Coverage Ratio and Consolidated Leverage Ratio requirements remain in effect through maturity of the loan on February 2, 2023, but the minimum cash holding requirement ended in June 2021.

Beginning in fiscal year 2022, the Amended Credit Agreement provides that the Company and its subsidiaries may make capital expenditures in any fiscal year in an amount equal to 75% of consolidated EBITDA for the immediately preceding fiscal year when the Consolidated Leverage Ratio is equal to or greater than 1.50 to 1.0, but less than 2.50 to 1.0.  When the Consolidated Leverage Ratio is less than 1.50 to 1.0, the Company and its subsidiaries may make capital expenditures in an unlimited amount.  For purposes of determining to what extent capital expenditures may be made, the Consolidated Leverage Ratio will be calculated on an actual basis rather than on an annualized basis.

The Company currently is prohibited from paying any dividends or repurchasing any shares of its common stock if the Company cannot demonstrate that its Consolidated Leverage Ratio is less than 2.00 to 1.00 (both before and after giving effect to the proposed repurchase or dividend).

The Amended Credit Agreement permits non-maintenance capital expenditures up to $20.0 million in fiscal year 2021.  The Company and its subsidiaries may fund such non-maintenance capital expenditures during fiscal year 2021 with (i) 75% of consolidated EBITDA earned during a fiscal quarter in excess of $7.5 million (“Capital Expenditure Basket Amount”) and/or (ii) net cash proceeds from the sale-leaseback of a real property located in Florida.  If the Company and its subsidiaries do not use the entire Capital Expenditure Basket Amount in any fiscal quarter, such unutilized amount may be carried forward to increase the aggregate amount of consolidated capital expenditures permitted to be made until the Company can demonstrate that the Consolidated Leverage Ratio is less than 2.50 to 1.00 for the period of four fiscal quarters most recently ended.  Beginning in fiscal year 2022, requirements for non-maintenance capital expenditures revert back to the terms in the Credit Agreement when the Consolidated Leverage Ratio is  less than 2.50 to 1.00, and non-maintenance capital expenditures will  not be permitted if the Consolidated Leverage Ratio is  greater than 2.50 to 1.00.  

(6) Shareholders’ Equity

In October 2019, the Company’s Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $60 million of outstanding common stock from time to time.  As of June 27, 2021, $41.6 million remained available for future purchases under the share new repurchase program.

The Company’s Board of Directors declared the following dividends during the periods presented (amounts in thousands, except per share amounts):

As a result of the impacts to our business arising from the COVID-19 pandemic, the Company has suspended its share repurchase program and dividend payments. Amendments to the Company’s Credit Agreement currently prohibit the payment of dividends and share repurchases until our Consolidated Leverage Ratio (as defined in the Credit Agreement) is less than 2.00:1.00 times Bank Adjusted EBITDA. Outstanding unvested restricted stock is not included in common stock outstanding amounts. Restricted stock awards outstanding as of June 27, 2021 totaled 466,654 shares. Restricted stock units outstanding as of June 27, 2021 totaled 78,294 shares. Performance stock awards (in the form of market stock units) outstanding as of June 27, 2021 totaled 31,108 shares.

(7) Segment Information

The Company has two reportable segments – the Company-owned steakhouse segment and the franchise operations segment. The Company does not rely on any major customers as a source of revenue. The Company-owned Ruth’s Chris Steak House restaurants, all of which are located in North America, operate within the full-service dining industry, providing similar products to similar customers. Revenues are derived principally from food and beverage sales. As of June 27, 2021, (i) the Company-owned steakhouse restaurant segment included 73 Ruth’s Chris Steak House restaurants and three Ruth’s Chris Steak House restaurants operating under contractual agreements and (ii) the franchise operations segment included 72 franchisee-owned Ruth’s Chris Steak House restaurants. Segment profits for the Company-owned steakhouse restaurant segments equal segment revenues less segment expenses. Segment revenues for the Company-owned steakhouse restaurants include restaurant sales, management agreement income and other restaurant income. Gift card breakage revenue is not allocated to operating segments. Not all operating expenses are allocated to operating segments. Segment expenses for the Company-owned steakhouse segment include food and beverage costs and restaurant operating

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expenses.  No other operating costs are allocated to the Company-owned steakhouse segment for the purpose of determining segment profits because such costs are not directly related to the operation of individual restaurants. The accounting policies applicable to each segment are consistent with the policies used to prepare the consolidated financial statements. The profit of the franchise operations segment equals franchise income, which consists of franchise royalty fees and franchise opening fees. No costs are allocated to the franchise operations segment.

Segment information related to the Company’s two reportable business segments follows (in thousands):