In part one of my analysis of Ruth’s Hospitality Group (RUTH), I showed how the company should be able to sustain a free cash flow run-rate of $30-$35 million using conservative assumptions of no growth in same store sales and units nor any improvement in operating margins. In part two, I will show that significant increases in beef prices over the last few years have masked the substantial improvement in the operating expense ratio of the company.
The good news is that the company has been able to maintain its high level of customer satisfaction and service levels while producing operating leverage to higher same store sales with relatively flat employee counts. If the company is able to increase same store sales, I expect this trend to continue. However, there will be a point where the increase in customer traffic requires additional staff in order to maintain service levels and customer satisfaction. Monitoring the company’s guest satisfaction levels can alert investors as to when this may be necessary. Finally, I will also look at unit growth potential.