Here's Why Raymond James Downgrades Ruth's Hospitality

Raymond James analyst Brian Vaccaro downgraded Ruth’s Hospitality Group RUTH from Strong Buy to Market Perform.
The analyst said the downgrade reflected a more cautious stance on the company’s margin outlook and to a lesser extent, slightly more conservative sales expectations after a modest deceleration in 3-year comparable sales trends in recent months.
The company’s Q3 EPS miss was driven by lower store margins and slightly higher G&A, while sales were in-line with expectations.
4Q COGS guidance was much higher than anticipated (34%, up ~200 bp vs. 3Q) as beef inflation has returned earlier than the analyst had previously expected.
Vaccaro said margins should ultimately recover to at least 2019 levels, though timing is now likely beyond 2023.
He also said Ruth’s sales remain well-above 2019 levels (high single-digit %) with room for further improvement, and the company is in a strong B/S position and is returning cash to shareholders.
The analyst cited his 4Q22 EPS estimate lowered by $0.12 to $0.39 on ~1% lower revenue, reflecting company-owned average weekly sales +9% vs 2019 and lower store margins.
The company has realized solid efficiency gains during COVID, but the benefit has more recently been offset by much higher beef costs and other inflationary pressures, Vaccaro said.
Price Action: RUTH shares are trading lower by 9.07% at $17.24 on the last check Monday.