Is Ruth's Hospitality Group Leaving Big Money On The Table?

Ruth's Hospitality Group, Inc. (RUTH) a leading restaurant company focused on the upscale dining segment. The Company owns the Ruth's Chris Steak House, Mitchell's Fish Market, Mitchell's Steakhouse and Cameron's Steakhouse concepts. It has over 150 restaurants including its franchises, many of which are located outside of the United States. Included in the company-owned restaurants are exactly 8 restaurants which happen to be located in the BP (BP) Economic & Property Damages Settlement Agreement gulf region geographic zones making each of them potentially eligible for a claim payment.

The average settlement for business locations as of September 27 is nearly $250,000 per location. All 10 of Ruth's locations in the zones are Ruth's Chris Steak Houses. According to the terms of the settlement, restaurants are classified part of the "tourist industry" and are entitled to an additional 125% recovery of their dip in variable profit margins in 2010 (called a risk transfer premium). As of RUTH's latest 10Q and latest 10K, there was no mention in the legal proceedings section or anywhere else of RUTH yet filing a claim. It's possible that RUTH is still preparing the documents or filed the claim without telling shareholders, but since the expected amounts are substantial I have my doubts. If RUTH doesn't file its claim it could be leaving a substantial amount of money on the table at the expense of shareholders. I believe RUTH should file a claim to the benefit of shareholders for all the reasons and more I wrote in my article 4 Reasons Why Businesses Should And Will File More Claims Against BP.

I obviously don't have access to the individual financial records of each location. However, armed with the 10Q filings and knowing the terms of the settlement, we could very conservatively reach an estimated total claim for RUTH for its 10 locations by calculating averages across the chain even though the gulf region locations were likely hit much harder than the rest of the chain since the! entire gulf region overall was hit harder than the rest of the country after the 2010 oil spill. Consider this from one of the 2010 conference calls in October of that year when the question came up about the oil spill:

I do think that it did have an impact on us throughout the summer and then particularly in the Florida market

In an effort to remain ultra conservative, I will merely calculate the dip in variable profit for the average restaurant across the chain as a bare minimum benchmark (knowing full well that the gulf region restaurants actually suffered more, allowing for a larger claim. First I will focus on my Q3 2010 estimate.

Quarter	Q3 2010	Q3 2009	Q3 2008	Q3 2007
Gross Profit in millions	10718	10634	13997	11960
No. of restaurants	87	86	87	57
Average per rest.	114.02	125.11	160.89	209.82

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According to the terms of the settlement, variable profit can be an average from 2007 to 2009 to generate the benchmark period then subtract the 2010 variable profit to arrive at a variable profit loss. To get an average per restaurant gross profit from the filings, simply take the gross profit from company-owned restaurants and divide it by the number of company-owned restaurants at the time. Based on this, the average restaurant in the 2007-2009 period went from $165,272 in gross profit to $114,020, a decline of $77,775 on average.

Next I turn to the two months after the spill in Q2 2010. This is a bit more complicated to estimate due it to being 2/3rds of a q! uarter in! Q2 2010 after the spill so I will take 2/3rds of the full quarter dip to get a very conservative May and June 2010.

Quarter	Q2 2010	Q2 2009	Q2 2008	Q2 2007
Gross Profit in millions	14487	14720	19605	16103
# of restaurants	87	86	85	54
average per rest.	172.46	173.06	230.65	298.20

For Q2, the average restaurant in the 2007-2009 period was $236,967 compared to $114,020 in the 2010 period, a decline of $122,947. A pro-rated 2/3rds of a quarter comes to a decline of $81,965.

Now add the $81,965 for Q2 to the $77,775 for Q3 and the average gross profit decline per location is $159,740. Multiply that number by 8 locations and get $1,277,920 as the economic loss estimate (conservatively, it's probably higher since again this is based on chain-wide average declines). Now add the risk-transfer premium of 125%, and my estimated conservative total RUTH is leaving on the table is $2,875,320 if it doesn't file a BP claim. I didn't even bother to look into Q4 2010 to see if there was a dip.

$2,875,320 is a decent sum of money for a company that last reported just $5.53 million in cash on its balance sheet. Investors should monitor the legal proceedings section of RUTH's filings to learn if RUTH has filed a claim since doing so could have a material impact on RUTH's cash balance. It could also make for a good conference call question as well

Source: Is Ruth's Hospitality Group Leaving Big Money On The Table?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)