Operator: Good morning, ladies and gentlemen, and welcome to today's Ruth's Hospitality Group Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Kristy Chipman, Chief Financial Officer and Chief Operating Officer. Please go ahead.

Kristy Chipman: Thank you, Sherry. And good morning, everyone. Joining me on the call today is Cheryl Henry, our President, Chief Executive Officer and Chairperson of the Board; and Michael Hynes, Vice President of Finance and Accounting. Before we begin, I'd like to remind you that part of our discussion today will include forward-looking statements. These statements are not guarantees of our future performance, and therefore, undue reliance should not be placed upon them.

We'd also encourage you to refer to the Investor Relations section of our website at rhgi.com as well as the SEC's website at sec.gov for copies of today's earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that impact our future operating and financial results. During this call, we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today's call.

I would now like to turn the call over to the company's Chief Executive Officer, Cheryl Henry.

Cheryl Henry: Thank you, Kristy, and good morning, everyone. Let me begin by expressing my gratitude to all our team members and franchise partners for their continued hard work and dedication during this past year. Our success is a direct result of their ability to adapt to a changing environment and deliver on our strategic initiatives. Our performance in 2021 has demonstrated that our iconic brand remains relevant across generations and our underlying business is strong.

To that end, we returned to positive sales in the second half of the year as well as new unit growth, strengthened our balance sheet and liquidity position, reinstated our share repurchase program and more recently, reinstated our dividend. Highlights for the fourth quarter included a 61% increase in comparable sales, driving restaurant sales to near $120 million with adjusted earnings of $0.34 per share. Notably, comparable sales were positive in October, strengthened further in November before softening in December due to the emergence of Omicron late in the quarter. Comps were also impacted by approximately 640 basis points due to the underperformance of our restaurants in Boston, Manhattan and Hawaii. Looking to the first quarter of 2022, January continued to feel the effects from the virus, but I'm pleased to report that we've seen a rebound in sales in February with comp sales of positive 4.3% through 8 weeks of the quarter.

With that, we believe our underlying business remains strong. And based on our accomplishments in 2021 and thus far in 2022, we're committed to investing in the long-term growth and health of our business. As we look to the remainder of '22 and beyond, our strategy is to return to a more consistent cadence of new restaurant development, with the goal of opening between 5 and 7 new restaurants each year. To that point, we are currently scheduled to open 5 new restaurants in 2022, the first of which opens in 2 weeks in Aventura, Florida. We also recently signed 2 new leases for 2023 and are continuing to fill the pipeline.

We will continue to invest in data and digital technologies and a team to support those initiatives. We began this transformation in 2021 and believe it's a key catalyst for maintaining our core customer base as well as introducing new guests to our brand. The nature of our high-touch hospitality requires us to be very deliberate in how we introduce technology to our business, as we want to ensure that it not only enhances guest experiences in an authentic way, but also reduces friction in the restaurants and increases our productivity. We continue to expand, both our commercial and operational tests that include in and out-of-restaurant personalization as well as capacity management using a proprietary platform to provide real-time, detailed insights into each individual restaurant. The early read on these tests is positive, and we rolled out our capacity management initiatives system-wide in late January.

We look forward to sharing more on the system-wide results on future calls. With our focus on investing for the future and more importantly, team members and franchise partners who are committed to operational excellence, we believe we are well positioned for continued success. I'll now turn the call over to Kristy to cover the specifics of the quarter.

Kristy Chipman: Thank you, Cheryl. Before I move into details of the quarter, I want to call out that I will make many references to 2019 versus 2020 for comparable purposes.

Please refer to our earnings release, supplemental disclosures and 10-K, which will be filed later today for additional information and comparisons to 2020. For the fourth quarter ended December 26, 2021, we reported GAAP net income of $13.8 million or $0.40 per diluted share compared to a net income of $1.4 million or $0.04 per diluted common share during the fourth quarter of 2020. Excluding adjustments, non-GAAP diluted earnings per common share was $0.34 compared to $0.03 in the fourth quarter of 2020. Total revenues for the quarter were $126.7 million compared to $77.4 million in 2020, while company-owned restaurant sales increased to $118.7 million compared to $72.2 million in the prior year. Comparable restaurant sales for the quarter versus 2020 increased 61.2% and increased positive 0.5% compared to 2019.

As compared to 2019 by month, comp sales were positive 2.8% in October, positive 6% in November and negative 5.3% in December. Despite the temporary setback, guests have shown us when they are ready to eat out again, we are a destination where they feel safe and appreciate the welcoming experience we provide in our restaurants, which resulted in our positive comp for the full quarter as well as a rebound to over 96% of 2019 comparable restaurant sales for the full year. Franchise income for the quarter was $5.5 million, up 50.2% versus the same quarter last year, while operating income was $2.6 million. Food and beverage costs for the quarter were 34.1%. These prices during the quarter increased approximately 39% compared to 2019.

Including beef, the market basket experienced inflation of 24% compared to quarter 4 of 2019, which also compared to quarter 3 inflation of 29%. As a reminder, we have lacked 10% of our total beef volume from mid-September to mid-March of 2022, and we recently entered into a new forward-pricing agreement for approximately 10% of our beef volume through mid-August of 2022. In January, we began to see decreases in the cost of beef. However, it will take a few weeks for this to be recognized in the P&L, as we work through our higher cost inventory. With that, we are anticipating cost of goods sold for the quarter to be in the range of 32.5% to 33.5%.

Next, let's touch on pricing. As you've heard me say before, we are surgical in pricing and are committed to ensuring that we price to provide value to our guests, while being cognizant of our responsibility to protect our restaurant operating income. As a reminder, we took our latest price increase of 1.3% in mid-November. Based on the current inflationary environment, we will be taking an additional price increase in March of approximately 3%. This higher pricing reflects the continued high inflationary environments, the introduction of a new tier in some restaurants and price increases on liquor, beer and wine, a category that we did not take significant price increases on during 2021.

Based on our analysis, we believe that price increase will be accepted by our guests as they understand the value they are getting when dining in our restaurants. Labor as a percentage of sales improved 321 basis points compared to 2019 during the quarter, as we continue to benefit from the efficiencies in front and back of house as well as management labor. In 2022, we remain committed to maintaining these hourly efficiencies, and we will continue to invest in adding back one manager into most of our restaurants to support the restaurant teams and protect the guest experience. To that end, we expect to have an average of 5 managers in these restaurants by about mid-year. As we add back these managers and manage through labor inflation, we reiterate our previous guidance of 200 basis points of improvement in labor versus 2019 levels because we are confident in our team members' ability to continue to deliver the efficiency we experienced last year.

For the quarter, combined marketing and G&A was $14.6 million or $11.6% of revenues. This quarter reflects an increase in performance-based compensation as well as spending associated with our investment in our data and digital transformation. In addition, we have started to add back certain positions in the home office to ensure we have the team members and expertise to take advantage of the growth opportunities we see in the future. In 2022, we will continue to invest in these areas and expect combined marketing and G&A to be in the range of 10% to 10.5% of total revenues for the full year. As Cheryl mentioned, we are committed to a healthy balance sheet that provides us with liquidity and flexibility, which is an important consideration as we entered into our amended credit agreement during the fourth quarter of 2021.

At the end of the quarter, we had $92.1 million in cash and outstanding debt was at $70 million. Since then, we repaid $20 million of our debt, leaving a debt balance of $50 million and our cash balance as of February 22, 2022, was $84.6 million. With that, let me turn the call back to Cheryl.

Cheryl Henry: Thanks, Kristy. As we enter 2022, we are optimistic about the health of our business, and we'll continue to focus on investing in our long-term success.

Through hiring and retaining the best team members, growing our footprint and utilizing data and digital technology to further improve on the roots experience, we believe we are positioning our company to deliver solid long-term financial performance, which will create value for our shareholders.

Operator: [Operator Instructions]. Our first question is from Nicole Miller with Piper Sandler.

Nicole Miller: I want to ask, first, about the managers being added back. And just what they'll do in terms of execution.

I know managers weren't necessarily on the floor during the swarm service, but I think about that was an unintended benefit for, I think, for the platform when you kind of went away from that. And just wondering where are you going to ask your managers to focus, as you bring them back in, in terms of consumer-facing elements.

Cheryl Henry: Thanks, Nicole, for the question. And so just to ensure we understand. As we think about the volume of the restaurants growing as they did throughout 2021, is how we determine when these managers go back into the restaurant.

I think where you'll see us focus is ensuring that the proper amount of training is taking place with our hourly employees, and that is a huge impact to the guest-facing experience. And so just overall, these are kind of utility managers. They are great at any position in the restaurant, they can work front of house, back of house, bar area, but really what we expect our managers to do is lead the excellent leaders in the store, and that's where you'll see them focused around the other team members and ensuring we're delivering the experience we've been known for, for almost 57 years now.

Nicole Miller: And then just a second and last question. In terms of the pricing, can you just talk about how sophisticated balancing the art and the science because it can't all be science, maybe not all art.

But are there any tools you're using in terms of pricing? Are you looking at peers? If so, what peer group are you looking at? Maybe a little bit more on that?

Cheryl Henry: Sure. So we also work with an external vendor that help us look at pricing across the board, help us look at competitors, menu item by menu item, region by region of the country to understand where the sensitivities exist and where they don't, which is why we came to a position where we are increasing a new tier across the board because we found that our peers were starting to compress a little bit too much this time. But it is across the board. When you look at who do we look at, it's certainly our major competitors that you would think of from Knapp-Track and Black Box as well as looking at, in some areas, some locals, just to get a flavor for how some local independent operators would be pricing similar type of products. We also make sure that we're comparing like-for-like products, reminding everybody, again, we are Prime-based steakhouse.

And so we want to make sure that we're comparing that as well when we're thinking about price.

Operator: Our next question is from Brian Vaccaro with Raymond James.

Brian Vaccaro: I wanted to ask about the quarter-to-date trends that you're seeing. And Kristy, could you help us convert that into average weekly sales? And perhaps you could give a little more perspective on sort of how much of a headwind Omicron was to January and maybe how much of an improvement that you've seen in more recent weeks?

Kristy Chipman: Yes. So that is a little bit volatile, right, when you start to think about, particularly as we head into February.

January, we still had Omicron. And then as you head into February, you have the differences in weeks related to the Valentine's Day holiday, it's a little bit difficult and early to be able to give you weekly sales on that.

Brian Vaccaro: Okay. But could you give us maybe where quarter-to-date average weekly sales, understanding that January looks very different from February?

Kristy Chipman: Yes, we're going to have to get back to you, Brian.

Brian Vaccaro: Okay.

All right. No problem. We can follow up offline. And then I guess one other thing on average weekly sales before moving on. Can you just remind us the historical seasonality you typically see? I believe February is an outsized month for you in Q1, given Valentine's Day.

But do you have that handy, perhaps, just to make sure we're all on the same page.

Kristy Chipman: Yes. So when you look at a non-Omicron, COVID-type seasonality. January is pretty normalized. But the fourth quarter is about 5% under the index of 100% for 97%.

February is about 110% on its own.

Brian Vaccaro: Okay. Great. That's helpful. On the menu pricing front, I heard you're looking at an additional 3%, I think, in March.

Can you just remind us what was effective pricing for the fourth quarter and sort of level set us on what your effective pricing will be moving through '22, assuming you take no additional price.

Kristy Chipman: Sure. So for the fourth quarter, we're at 5.9%. As we -- just a reminder, we took that incremental 1-ish, a little over 1% in November. And so we're going to be carrying about 6 -- this is all versus 2019.

We'll be carrying 6.4% into -- or we have carried 6.4% into the new year, we'll have the incremental 3% that we're taking in March. And then the roll-off, theoretically, won't happen because we're comparing to 2019. But as a reminder, we took 2.5% in May of '21. September, we took 1.6% and then in November, as I just mentioned, 1.3%.

Brian Vaccaro: Yes, yes.

That's great. And then I guess last one, and then I'll turn it over. But given your plans to accelerate unit growth, I was hoping you could just elaborate on your return expectations that you're underwriting? I know it varies by location, but could you walk through your unit economic targets and maybe drill down a little on the average cost to build you see for the class of '22 and '23?

Kristy Chipman: Yes. So you hit the nail on the head with the cost there, Brian, because we've talked a lot about the input cost as it relates to the P&L, but we've not talked much about input costs across builds. And we have seen some increases, as you'd expect on items across all of the build products as well, whether that be timber, steel, just general inflationary pressures in labor that affects the overall investment cost, which we have built into the capital expenditures that you're seeing us guide on in the release.

I would say that we're at the higher end of the ranges that we've historically provided for builds after you net some of the tenant allowances that we have. Our return expectations are still above 20%. That is feasible, and we're still able to do that, given the price that we're taking is still sufficient enough to be able to deliver on those levels of returns in most cases. And certainly, as you look across the portfolio of new restaurants, it's hard for us to predict what '23 will look like from an inflationary environment. But I also want to remind you that we are adjusting the size of our restaurants.

We are value engineering them as well to make sure that we bring the costs in line and meet the continued return expectations.

Cheryl Henry: The only thing I'll add that -- Kristy, that was great. I think we have a rigorous process for ensuring that our sites are successful, as we go forward, knowing the pressures that we're facing, Brian, very cautious and careful about how we are selecting their sites and understanding their performance. And we've seen that in our recent openings in Short Hills as well as Lake Grove that there -- as a market outperforming our expectations so therefore, offsetting some of that additional input cost.

Operator: [Operator Instructions].

Our next question is from Andy Barish with Jefferies.

Andrew Barish: Just a couple of questions on kind of demand out there. I guess, historically, the business has been impacted more by kind of stock market and headlines than anything. Are you seeing any choppiness or kind of outsized holiday days, like Valentine's Day, that's kind of keeping the sales in good shape. But otherwise, maybe there is some underlying challenges out there just with the stock market and obviously, the stuff going on in Russia and Ukraine.

Cheryl Henry: Yes, I'll answer, and I'll toss this to Kristy. We really haven't seen that volatility. I think if anything, and we experienced this, I guess, in June and July is probably as an industry, as things start to open up, so some of the headlines we are seeing in addition to those that you mentioned are the removal of some mandates in some of the markets that have taken us a lot longer to come back. And so there's a bit of a positive that we're starting to see, but not necessarily related to -- at this point related to other headlines.

Andrew Barish: And how should we kind of think of the December comp number.

Is that dine-in kind of core business was basically higher and the weakness in private events or group business kind of offset that? Just trying to tease out how that played out during December.

Cheryl Henry: Yes. Exactly what you said. That's where we saw -- there was an offset. The great news was the demand for just because smaller party, 2-tops, 4-tops celebratory around the holidays, but we did see, and somewhat impacted by Omicron as well when you think about group dining and private dining events and rooms and larger groups was soft during -- especially in the second half of December.

Kristy Chipman: And I'll just remind you there was a trading day shift in our year as well that had an impact on the quarter overall of about 1%.

Andrew Barish: Negative 1%, Kristy?

Kristy Chipman: Negative 1%. So we would have about 1% higher.

Operator: Our next question is from Todd Brooks with The Benchmark Company.

Todd Brooks: A couple of questions for you.

In the remarks, you talked about beef seeing some moderation here in the first quarter, taking a little while to work through inventory. Can you give us a sense of how much of a moderation you've seen so that we can start to maybe dimensionalize some normalization in Prime. And then you talked about the new hedged agreement for 10% through August. But can you talk about supply availability? If demand remains strong for Prime, are you at least locked from a supply standpoint, if you're not locked from a pricing standpoint?

Kristy Chipman: Thanks for the question. I will refer you to the range of guidance that we provided at this point as it relates to what's happening with beef.

We have 3 or 4 weeks of visibility into invoicing for beef. And there's a lot that is challenging right now in the supply market and continues to be challenging, and you referenced a couple of those, right? What is the supply and demand, particularly for Prime beef. I would love to see a few more weeks of consistency in pricing before I would want to provide specific per pound level and be able to forecast that forward for too far. It's just as we continue in this environment, it remains uncertain week-by-week, with a little bit more volatility than I'd like to see. So I'm going to leave that part of your question there.

And you -- I'm sorry, can you repeat your second half?

Todd Brooks: As far as the supply availability, hedged on price into August as far as availability of the product.

Kristy Chipman: Yes. So we had -- no, we have great partners who supply us with our beef. We don't foresee any issues with supply availability.

Todd Brooks: Okay.

Great. And then just one final question. I think when we talked about reluctant pricing when inflation started to rear its head in '21, you talked about a dynamic where maybe you were less hedged on Prime than some of the competitors were coming into '21 and that you hadn't seen a lot of competitive pricing actions. You talked about your outside resources that you use on pricing. I guess what are you seeing from peers as far as menu pricing now that they're probably rolling off locked positions? And what type of pricing/value umbrella does that give Ruth as we're moving through '22?

Kristy Chipman: Yes.

I'll make just a general comment because obviously, they're going to need to speak to their businesses. But I think you've heard in the most recent days some -- not direct competitors referenced that they are starting to move to market. We are -- we were pretty much on market for at least 90% of our beef, starting in May of last year. And so I find us a little bit less exposed this year as we start to lap the back half of the year, where we were already taking higher prices. And so depending on how these first 5 or 6 weeks hold, we could see flat to beneficial pricing year-over-year as it relates to base costs, where others are going to start to have greater impact than we would if they are unable to hedge in the way that they had in the past.

Operator: Our next question is from James Rutherford with Stephens.

James Rutherford: I want to apologize if I ask questions that's already been asked. I was bouncing between calls. But I want to start on the unit growth side. Cheryl, over the last few years, you've acquired a small number of franchise restaurants.

And with all the disruption in the industry, do you expect to have more opportunities to buy out different franchisees in the future?

Cheryl Henry: Yes. And the one that you're referencing, I think, the most and has been -- and we actually have opened 2 restaurants this half year, and this territory was the Marsha Brown, Long Island territory and purchased it with not only the existing units, but also to your point, to have opportunities to grow the brand further within that territory, and we've been able to successfully do that with the 2 new units. We look at it. We continuously say we look for the opportunity. We're talking to our franchisees, as we come out of the pandemic to understand where they are.

We've done a great deal of work around addressable market and understanding what markets going forward. Our franchise versus company and if there's an opportunity in that as we're talking with them, we'll take advantage of it, but no specific plan at this point.

James Rutherford: Okay. And then did you mention why you all chose to close the Bethesda, Maryland and the Hawaii location? And maybe more broadly, what comment are you making on kind of the recovery of some of those markets that have been a bit more troubled.

Cheryl Henry: Yes.

So Bethesda was actually end of lease, and so we decided to terminate in that marketplace. And then as far as the impact of -- I think the markets I mentioned during my remarks from Manhattan, Boston and Hawaii, which have been the markets we've been calling out through 2021, about a 640 basis point impact in Q4. So that, at one point, was around 700. We're starting to see, we mentioned some of the trends year-to-date for Q1. We're starting to see small signs of improvement as we make it through period 2.

James Rutherford: Okay. And then just one last one for me. In the absence of the normal level of business occasions, which has been consistent throughout last couple of years, you send a lot of success serving more personal celebratory occasions. Have you seen any cracks in that demand at all? Does it seem like so, but is there any indication that some of the growth you've had in that category was driven by stimulus and perhaps starting to wane? Or is it really just as strong as ever kind of coming back after the latest search?

Kristy Chipman: I'll start and then Cheryl can clean up after me. But no, I mean, we've been actually very pleased.

I think that, that is a testament to our teams, our capacity management initiatives are reopening to the right hours for individual restaurants to ensure that we're there, open early or late as the guest uses us. And so at this point in time, we have not seen a decline in those types of diners. I think last year, you would have heard us talk a little bit about how this will come and wave. We haven't seen the top end of this wave. We are anticipating business travelers coming back as offices start to reopen.

And then we'll see what happens as we start to lap some of the stimulus that was out there in the end of first and second quarter of last year.

Cheryl Henry: Yes, that's great, Kristy, nothing to add.

Operator: Our next question is a follow-up from Brian Vaccaro with Raymond James.

Brian Vaccaro: Just a quick one on food cost, and sorry if I missed it, but the first quarter '22 COGS guidance, Kristy, what level of inflation does that assume for your basket and for beef?

Kristy Chipman: Yes. It pretty much assumes that will stay for the rest of the basket at where we trended, which was about up 16% versus last year.

And beef will -- we are coming up and we're coming over the lot that we had from last year. So I'd have to get you the exact number on the beef side, Brian.

Brian Vaccaro: Okay. But the basket you're assuming is up 16% in the first quarter and the basket was up in fourth quarter. I think you said something in the low 20s...

Kristy Chipman: So the basket -- I'm sorry, the basket, excluding beef, will be up -- was up 16%, including the 24. I don't see any age to that in the -- outside of that, you're comping up against a loss from last year.

Brian Vaccaro: Okay. Okay. That's great.

And then last one for me. On the beef contract, I believe in the past, you've typically locked in tenderloin when you've been able to lock in a portion of your beef. Is that the case with this new contract? And I'm just curious what level of inflation you were able to lock in on this 10% through August.

Kristy Chipman: Yes. We don't share that information, Brian.

Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Cheryl Henry: Thank you, Sherry, and thank you all for joining us on the call this morning. We look forward to speaking again soon.

Operator: Thank you.

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.