Raising the Stakes
Craig Miller has grown units, volumes and profits at Ruth’s Chris Steak House.

By David Farkas

Although Ruth’s Chris Steak House doesn’t do lunch, the staff at the Winter Park, Fla., restaurant whipped up heaping steak salads for Craig S. Miller and a guest on a recent afternoon. Sure, Miller’s status as president and chief executive accounted for the royal treatment. But there are also plenty of people outside the organization who’d argue Miller deserves at least as much care and feeding.

That’s because the 91-unit chain is growing again. And while its stock price tumbled this fall from $23 to $17 in the wake of Hurricanes Katrina and Wilma, which closed six units (four have since re-opened), analysts remain bullish on the long-term prospects of the company, now headquartered near Orlando, Fla.

“Katrina dealt a blow, but company recovers quickly,” Boston-based CIBC’s John Glass wrote in a Sept. 19 equity note. He rates the stock a “sector outperformer.” Jeff Omohundro, based in the Charlotte, N.C., office of Wachovia Securities, was impressed with “the decisive and professional manner” Miller’s team responded to Hurricane Katrina. Both firms, by the way, underwrote the company’s August IPO.

Ruth’s Chris has posted double-digit same-store sales in company stores for seven consecutive quarters—a record unmatched by other luxury steakhouse chains. Preliminary third-quarter results showed a 10.6 percent same-store-sales increase despite 71 days lost to hurricane-related closures. Revenues from company-store sales and franchise royalties rose an estimated 5 percent, to $147.6 million, for the first nine months of the year.

Ruth on Radio
Miller, who signed on in March 2004, says the chain’s strong brand image, selectively marketed, is chiefly responsible for the recent surge in guest counts and check-average increases. Radio and TV talk-show personality Sean Hannity, for example, is a spokesman for Ruth’s Chris because his mostly male listeners match the chain’s customer profile. Ads also appear on popular Internet sites such as theatermania.com and golf.com. The company’s redesigned Web site has enhanced both the gift-card program and online reservation system.

The push toward technology comes from Vice President of Marketing Tony Lavely, a former Domino’s Pizza executive who also worked for a sporting-goods dot-com. Since joining the company in August ’04, he has replaced the chain’s longtime New York-based agency, Pedone & Partners, with six agencies that separately handle everything from public relations to the Internet. Lavely describes 2004 as “a benchmark year.” Ruth’s Chris spent an estimated $6.8 million on marketing and advertising this year. Lavely expects that figure to increase by 20 percent next year.

The chain is also finally expanding after a restaurant-less 2004. This year, Miller opened company stores in Boston and Roseville, Calif., a Sacramento suburb. A third unit is scheduled to open in December in downtown Sacramento. Franchisees opened four units, including a second Ruth’s Chris in Baltimore. Miller expects to open six to eight company units in ’06 in New England, Florida and California. Franchisees are likely to open four. In all the company expects to grow 10 percent in the next three to five years.

Miller is confident the units will do well as long as the company and franchisees find “A” sites in densely populated urban areas and affluent, high-traffic suburbs. Recent openings, he claims, are averaging $5 million or better, considerably higher than the $4.7 million AUV posted last year.

The new volumes still rank below competitors Smith & Wollensky ($9.7 million) and The Capital Grille ($7.2 million). That’s no big deal when you consider Ruth’s Chris 34.8 percent cash-on-cash return swamps all comers except Fleming’s Prime Steakhouse & Wine Bar (37.1 percent). “This is a solidly profitable business,” declares Minneapolis-based RBS Capital Markets analyst David Geraty, who rates the stock “outperform.”

“Profit” is a word that Miller steps carefully around. The knock against his predecessor, former President and CEO Bill Hyde, is that Hyde fretted about the company’s bottom line at the expense of growing sales and opening new units. “[Prior management] was more focused on maintaining the profitability of the business than on growth and franchising,” Miller charges.

Debt Load
“I don’t think that’s a fair characterization,” complains Hyde, who now works as a private investor in Dallas. “We were never focused on profitability.”

The company, however, was saddled with significant debt after a recapitalization bought out late founder Ruth Fertel and brought in new owners Madison Dearborn. Hyde, Ruth’s Chris’ second largest shareholder, does admit that the $130 million owed to lenders, combined with the economic slowdown after 9/11, restrained company growth.

Miller nonetheless has found ways to boost margins. He replaced common carriers with a customized distribution system, for instance. “Distribution is saving us a half-point to a point in overall cost of sales, depending on the restaurant,” Miller explains. “The buying power that goes along with distribution savings means we are able to negotiate national contracts on a lot of products.” Meat accounts for 51 percent of Ruth’s Chris’ total cost of goods; wine follows at 15 percent.

Still, Miller insists the real leverage on the bottom line comes from raising sales volumes. “In approximately 18 months, we have added $1 million per restaurant in sales. We’ve taken the system from $4.2 million to $5.2 million,” he boasts. “The leverage that comes out of that increase in sales is very significant to the bottom line.”

CIBC’s Glass, in fact, estimates a 1 percent change in same-store sales will add or subtract 2 cents of earnings per share. Analysts who follow Ruth’s Chris and report their findings to First Call predict the company will earn 73 cents per share in ’05 and 86 cents in ’06 based on strong same-store sales. Shares of RUTH are currently trading at 21 times earnings, somewhat below the 23.7 times analysts expected for ’05, due likely to hurricane-related issues.

The company expects to open the damaged Metairie, La., restaurant this month while leaving shuttered the original Ruth’s Chris on Broad Street in New Orleans and the Biloxi, Miss., restaurant (which never opened). The devastated New Orleans restaurant is likely to be razed, though no official is willing to say so. The brand new Biloxi unit, in the Hard Rock Hotel, however, will open next year.

Hurts So Bad
The reaction to management’s quick decision to move company headquarters to Heathrow, Fla., after Hurricane Katrina has not been entirely positive. “I have not heard a single person defend the move,” says Times-Picayune restaurant critic Brett Anderson. “The city wasn’t done flooding yet and they were gone.” A columnist for the same newspaper, Lolis Eric Elie, recently quoted Fertel’s son, Randy, as saying, “I don’t think leaving would have crossed her mind.”

Miller is sensitive to criticism that he abandoned the founder’s hometown without much thought to her legacy. Fertel, a single mom, remortgaged her house to buy Chris Steakhouse, a New Orleans institution, in 1964. A savvy businesswoman, she got a jump on competition by franchising, a risky move that worked despite the complexity of a fine-dining restaurant. Ironically, one of her earliest franchisees was Paul Fleming, who founded Fleming’s Prime Steak House. He later sold the rival chain to Outback.

“You’d like to be able to take more time,” Miller allows, adding the decision to relocate headquarters was sobering. “I learned that in a crisis, the absence of someone with an answer can be the most hurtful and harmful thing. Everyone is looking at you.”

Including, apparently, the Street. “Uncertainty in a market is unsettling for investors,” Miller says. The market may still be worried given the beating the stock has taken since the September storms. Miller, however, remains hopeful. “The clouds will dissipate and the sun will come out. Nothing about our story, nothing about our fundamentals, has changed,” he says.

Let Them Eat Steak
Part of that story concerns Ruth’s Chris’ customers, who Miller believes will still be willing to fork out an average $63 a meal despite rising energy prices. He’s counting on baby boomers, with their increasing disposable income and desire for luxury goods, to help him maintain market share. “Demographically, we’re aligned with what consumers are looking for,” he says.

So positioned, Ruth’s Chris, the largest player in the luxury steak subset, may currently have the upper hand in the $12.5 billion steak category. “People think, all of a sudden, there’s a lot of competition among the high-end steakhouses. If you add them up, I think the number is less than 400,” he says.

Considerably less, in fact. Technomic reports nine national chains with per-person check averages greater than $50 operated just 273 units at the end of 2004. Experts do not expect that number to climb much higher by the end of ’05 as many companies prefer wringing sales from existing restaurants to adding new ones. Only Fleming’s and Capital Grille saw double-digit annual growth in ’04, on a much smaller unit base than Ruth’s Chris.

“What the IPO allowed us to do is significantly capitalize the company to fulfill our growth objectives,” Miller says. The proceeds from the offering relieved debt pressure, which had hampered company store expansion. Miller figures Ruth’s Chris still owes about $38 million, a relatively minor sum in the scheme of things. An $80 million line of revolving credit and free cash flow (the company will generate $35 million in EBITDA in ’05) will be more than enough to fund new restaurants and projects like bar renovation and the yet-to-launch “Friends of Ruth” VIP program.

Miller envisions the program, largely administered online, catering to local movers and shakers. The details, particularly as they concern privacy issues, have yet to be worked out. But Miller thinks offering a higher level of service to these folks, whether or not they currently use the restaurants, will entice them to the restaurant more often. “I would love to be in a position where a Friend of Ruth drives up outside and our valet is able to recognize him,” he muses.

Here’s another thought: How about serving him lunch?