Dine Brands Global Inc (DIN) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Applebee's International second quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS] I would like to introduce your host, Miss Carol DiRaimo.

Good morning, and thank you all for joining us. This call is being broadcast simultaneously over the internet this morning. A couple of calendar items to note, comparable sales for our August fiscal period, which ends on the 21st will be released after market close on Tuesday, August 23rd. Third quarter 2005 earnings are scheduled to be released on Wednesday, October 26th, after the market closes. And our quarterly conference call will be on Thursday morning, October 27th at 10:00 AM central time. September and October comparable sales results will be included in the third quarter earnings release.

Many of the statements we are about to make with respect to our business outlook, including comparable sales increases, costs, earnings per share growth, and new restaurant development are forward-looking and based on current expectations. There are several risks and uncertainties that could cause actual results to differ materially from those described including, but not limited to the ability of the Company and our franchisees to open and operate additional restaurants profitably, the ability of our franchisees to obtain financing, the continued growth of our franchisees and our ability to attract and retain qualified franchisees, the impact of intense competition in the casual dining segment of the restaurant industry, the impact of economic factors on consumer spending, and our ability to control operating costs, which are impacted by market changes, minimum wage and other employment laws through costs and inflation. You should review our form 8-K filed with the SEC on February 9th, 2005, for important information about factors that could cause actual results or events to be materially different.

With me today are Lloyd Hill, our Chief Executive Officer, Dave Goebel, our Chief Operations Officer, Steve Lumpkin, our Chief Financial Officer, and John Cywinsky, our Chief Marketing Officer. With that, I'll turn it over to Lloyd.

Thanks, Carol, and good morning. I'd like to share a couple thoughts with you from 10,000 feet, as we start the call this morning. First thought, while July takes us clearly in the right direction, we're disappointed, this management team, disappointed with sales trends over the last months, particularly in Company markets. I hope to make it clear that these results -- I think this team will make it clear to you in this call, these results are not acceptable to us. And you should know this management team is not sitting on its hands waiting for comparisons to get easier in the back half of the year.

Secondly we recognize that many of our competitors have looked at our outstanding results over the past several years, and have been rapidly copying a lot of the things that we do; our menu, our promotions, even our advertising style. And we recognize that's resulted in a boring of the category. As a result of that, I ask you not to expect us to be as specific in this call, and probably in future calls, as we have been in the past with reb -- regards to our tactics and -- and our initiatives for building our sales.

And then lastly, regardless of the direction of our economy or the competitive landscape, you -- you can trust this management team is in an ac -- in action and that this management team has its arms around the issues that we can control. So, thank you for that and I'll turn it over to Dave Goebel.

Thanks, Lloyd, and good morning, again, everyone. In my remarks this morning, I'm going to provide a brief update on current initiatives and operations. I;m also going to give you some additional insight into the recent sales softness and update the news on the development front.

Inside the four walls, we remain generally pleased with the progress we're making. But I'll reiterate, we remain relentless around the continuous improvement and execution. Let me give you a quick snapshot, in that regard. Carside to Go continues to grow and improve. In Q2 this year, Company restaurants average $4,920 in weekly sales. and that accounted for a 10.4% mix. And now, that's up from nine three a year ago and represents a 10.6% increase in overall volume. The wireless handheld device now 550 Company and franchise restaurant, as that roll-out continues. Carside CSI or that customer satisfaction index is at the highest level since we began the program in 2003, and that's primarily been driven by improvement in the -- in the data points around Quick Greet and Quick Payment Process.

The impact of fine-tuning our KDS or our kitchen display system and other convenience initiatives has resulted in record table-turn times, now down to 45 minutes, and that's a 15% improvement from our pre-KDS rollout days. And you'll recall that four of the six drivers of our customer loyalty were convenience measures, and these improvements have driven our dining room CSI scores to the highest level since the measurement was put in place. We also remain very pleased with our Weight Watchers partnership, as well as the ongoing strength and the differentiation that this gives Applebee's, and as well as the halo effect we get from these incremental guests. Two new items were added in the spring, with more to come this fall. Our guest order incidence is in the 7% to 10% range, with the mix around 5% to 8% and, of course, that depends on the market. There's evidence that this brand differentiation may drive traffic a little more broadly than just the seasonality peaks, as we first thought.

We condin -- continuing to see improvement on internal metrics around quality as it relates to kitchen and dining room operations, as well as restaurant cleanliness. And keeping significant focus on these initiatives and our operating standards, as one strategy to work our way through current traffic softness that we're experiencing. An important headline here is inside the four walls, nothing is broken.

Let's move on to sales. Let's focus on the most recent trends. As you read in our release, July comp sales were up one-sixth of the system, with franchise restaurants increasing 2.3% and Company restaurants decreasing 0.3%. Although July comps and traffic improved slightly from June, the two-year July comps are below both the Q1 and Q2 two-year numbers, which is -- as Lloyd said, is a little bit disappointing. And the same is traffic or guest counts, that showed some improvement in July from June, but they're still below the Q1 and Q2 level. Regarding spending, we're seeing some loss in check from desserts that we believe is driven by reduced incidence, and and there's clear evidence that consumers are opting for lower priced appetizers and entrees, as they manage their total spend. Now regarding day part, week part, the most significant negative traffic impact, both in recent months and year-to-date is coming first from early-week lunch, followed secondly by week-end lunch, arguably two of the most discretionary day parts. Our most recent trends at dinner show weekend traffic holding up better than weekday, and that's a change from what we experienced in Q1. But we believe that's tributable to lar -- largely to lapping-over Weight Watchers roll-out of last year.

Let's take a snapshot regionally to sales. For Q2 and July, for that matter, strongest comp performance in Company restaurants is coming from California, Nevada, New Mexico and Texas. Weakness continues in the midwest, particularly around St. Louis, Minnesota, Michigan, Kansas City, with recent signs of softness in New England, as well, not dissimilar to some recent news from some of our peers. An interesting note is significant improvement from Q2 to July, for the Company portfolio, occurred in Kansas City, indicating some strength for the first time this year in that market. On the franchise side our strongest performance remains in Florida and in the west, with comp sales in the high single-digits. We just recently returned from a two-day strategic off-site with our franchise business council, the elected body, where we shared current sales and analysis trends, we aligned on future strategy, and some spent time on the more near-term need for additional focus on enhancing our value proposition, as Lloyd indicated in the press release. I'll reiterate, we've got a very solid alignment and partnership with our franchisees. It continues to be a great relationship.

On the development front, we remain committed to 2005 as a year of significant investment. There's continued evidence in market that it's important that we remain aggressive around taking market share for the long-term health of our earnings. We could call that a little short-term pain for some long-term gain. In the first half of '05, we opened 15 more Company restaurants than we did the same period last year, and that's more than double. And for the last half of this year, we'll open more than 20 Company restaurants. Our franchisees have opened 29 in the first half of the year and finish with 85 openings, approximately 10% increase over last year. As you know, we've restaged the entire Memphis, Tennessee market, and we're very pleased with the seven restaurants that have opened year-to-date, with average weekly sales of over $50,000. That's a significant improvement from where they were. And by the way, these restaurants are not in our comp base. We're also building a very, very big pipeline for '06.

In closing, we continue to see trends on our customer and operations score card move in the right direction, but we realize in this environment that bar continues to be raised. We remain committed to our market pon-- penetration strategy, because we believe it's an important underpinning of our long-term growth model, and we've increased focus around the importance of, I'll call it more overt relevant value propositions in this environment.

So with that, John, I'll turn it over to you.

Great. Thanks, Dave. Good morning, everyone. I'd like to focus my comments this morning on some -- some of the key insights we had with respect to our recent under performance. I'll also touch on how these insights might affect our future plans.

From a promotional standpoint, we're currently in the midst of our new irresistibles campaign. This program started in restaurant on June 20th, with television support beginning June 27th. Those promotion's proven very popular with our guests. It has not stemmed the traffic erosion that we experienced from about mid-May. Now, as you know, we're rolling over category leading sales and traffic performance from a year ago in the January through July time frame. However regardless of the difficult comparisons, we recognized that the landscape has changed. This led us to initiate the most comprehensive business assessment that we've undertaken in the past four years, and the insight from this assessment, which is literally hot off the presses, provides a pretty clear road map as to some of our near-term opportunities.

As many of you have noted, we are engaged in a market share battle featuring aggressive new restaurant development. While this is not new news, it does suggest a challenging near-term environment for same-store traffic growth, particularly in the rapidly developing grill and bar segment. This challenge is even more acute in several of our Company-owned geographies. We also believe, as Dave referenced, we've underestimated the positive impact that the Weight Watchers introduction had on our business last year from mid-May through mid-August. It is quite possible this alliance is under-leveraged and represents a broader opportunity than originally anticipated.

It's also clear to us from the assessment that the economic environment remains challenging for households with income under $50,000. Gas prices effect this group most directly, given their level of discretionary income, and we believe this is impact is both psychological and behavioral. Based upon certain assumptions, the average consumer spent $97 per month on gas back in 2003. In 2004, they spent $117 per month, and that same consumer is currently spending $144 per month as we speak here in '05. This represents an increase of $47 per month or about $560 per year from '03 to '05. While this certainly is not an excuse, it is the reality in which we operate. Even more important from our perspective, is the fact that Applebee's has a disproportionate share of this under 50,000 demographic.

The segment is largely comprised of light and medium users who, frankly, tend to be less brand loyal than the Applebee's heavy user. And it is this segment and tough economic times that is most susceptible to brand or category switching. For obvious reasons, these folks are value-seekers, and it is here where we may be seeing some migration from Applebee's and, in a very broad sense, from CDR to QSR, particularly at the lunch-day part, where the two categories are most likely to intersect. Higher-income households may choose to economize, you've heard us use that term before, in tough economic times by ordering fewer appetizers, drinks and desserts, but they typically don't come bac -- cut back on their visit frequency. Lower-income households, on the other hand, change their visitation behavior when they feel pinched. Needless to say, this under-50,000 household is an important segment for us. It certainly leads us to ask if we're as relevant and compelling as we can be, with this demographic across all-day parts.

In summary while our business fundamentals are solid, the competitive and economic environment has become more challenging. We remain confident in our targeted marketing and differentiation strategies, and we're very pleased with the results of our '06 up-front media purchase, which has just concluded. As we look forward, we will be relentless in our pursuit of menu innovation and explicit everyday value at Applebee's. In fact, we're currently in market with several test initiatives, designed to specifically address our value positioning. We simply will not be satisfied until we once again achieve our targeted long-term rate of sustained growth. And with that, I'll turn it to Steve.

Great, John, thank you. Good morning, everyone and thanks, as always, for your interest in what we're doing here at Applebee's. ake a quick look at the numbers and then I'll get to the end of the talk, we'll talk a little bit about change in guidance. So here in the quarter, Company sales were up 10.1% to nearly 273 million; that was on a capacity increase of over 12%. That capacity increase was due to the opening of 47 Company restaurants during the last 12 months. That's a pretty nice organic growth rate of 11%, and that's certainly an acceleration in the pace of Company development and that's consistent with what we talked about the last couple quarters. And we expect that to continue.

In addition, the Memphis and Ozark acquisitions contribute about 1% capacity to this growth, and these increases were offset by a 2% decline in average weekly sales during the quarter. Franchise royalties and fees up 5.8% to 32 .5 million, driven by an increase in franchise average unit volumes of 2.8% on 87 openings in the last 12 months. This is normalized capacity growth of about 7%, excluding the impact of our franchise acquisitions. Other income came in at 1.4 million. You've seen a significant decline here in this line, and it's really related to our insurance captive and how we're thinking about the -- this particular product we offer. We've got fewer franchisees participating and I think, as I've mentioned, perhaps for management is taking a look at our need to be in the insurance business, given the current stability of the markets, post 9/11, and our franchisees ability to access coverage.

The difference between other franchise income versus expense of about 195,000 is related to revenue from IT products we also provide to franchisees. Now, total revenues were 306.6 million, that's up nearly 9% for the quarter, and system-wide sales during the quarter increased 8%, driven by average uni -- average weekly sales growth of 1.5 and new unit growth of over 8% with 134 new restaurant openings in the last 12 months. Net income was 27.5 million versus 28.1 last year. Diluted EPS was $034 versus $0.33 last year. And, of course certainly, I'll remind everyone last year's quarter included $0.02 riblets charge.

Now let's take a -- at some highlights on the P&L. Overall restaurant margin, before pre-opening, came in 14.3. That's down 180 basis points from the prior year. While we look at food costs, food costs came in at 26.6. That's down 30 basis points from last year's quarter. We did have higher commodity cost, but they were offset by menu price increases we've taken. And that 1% menu price increase we took in November and the point and a half we took in May and, also, last year's results were negatively impacted by a 20 basis point charge for riblets.

Labor came in at an even 33%, that's up 40 basis points in total. Hourly labor was up about 25 bpps, due to a 1.6% increase in hourly wage rates. This was offset somewhat substantially by lower management labor, as bonuses were lower than prior year by 60 basis points. Management wage rates up about 2.4% in the quarter, and that pressured margin by another 15 bpps. Now, higher group insurance accounted for most of the additional 40 basis points pressure, and then the remaining pressure little bit of pressure here in labor was due to lower volumes, deleveraging on some of our fixed management costs.

Now DNO -- DNO was the line that, kind of, weighed heavily on our overall restaurant margin here. DNO costs were up 160 basis points to 26% and that was, and I'll take you through some of the details in a second, but largely that was due on timing of advertising as we mentioned last quarter, energy costs, rent depreciation. So here's how you kind of dissect it. 40 basis points in the ad shift, as mentioned before. 30 basis points in increased depreciation, as for remodels, the effect of our Carside build-out, and higher investment on new stores. 25 basis points in utilities, and I think many in this environment are talking about what's happening with energy costs. We're not immune to that. And finally, 20 basis points in supplies behind our bowls campaign and packaging. The balance of that is basically -- the balance of that 160 basis points is basically related to deleverage on our lower average unit volumes.

Now, into G&A. G&A came in a 9.1%, that was up 20 basis points. And if you peal it back, that increase was due to the timing of our annual GM conference, which was held in the second quarter this year versus Q1 of last year. And that was a million dollar shift in G&A into this quarter. We're also seeing some pressure from management training expense here, as we mentioned other quarters, as we build a very substantial pipeline in new openings. Our expectation is this management training expense pressure continues throughout the year. Pre-opening increased from 20 basis points on the P&L last quarter to 50 this quarter, due to 14 openings in Q2 this year versus four last year. So we're up ten openings -- per-openings expanded appropriately. Tax rate came in at 34.6 versus 34.9, really in line with guidance.

Let's look at a couple quick things on the balance sheet. We did see inventories go lower here by 8.8 million, as we decreased our exposure to back ribs, riblets and shrimp. Debt was up 51 million from the end of the year, as we funded our franchise acquisition and our pretty healthy stock repurchase here in the quarter. We continue at capacity on the balance sheet. Debt to cap came in at 14.7. That's the highest it's been in a while, but certainly you can see we're not adverse to putting a little leverage on this balance sheet. Shares outstanding at the end of the quarter came in at 79.4 million and, as I mentioned, share repurchase during the quarter we bought back nearly $50 million worth of stock at an average price of $25.67. And at the end of the quarter, we had almost $82 million remaining under our authorization.

Now let me hit the changes in guidance here. I won't take you through all the guidance, but certainly what changed. We're very thoughtful environment about restaurant margin. Clearly, our view on restaurant margin before pre-opening is -- for the full year it's going to be below where it was last year. And we need to get some further visibility on Company same-store sales and it's g -- margin here is going to be dependent on what happens on same-store sales performance for the balance of the year. CapEx, we did add an additional $10 million into our guidance here. CapEx does, of course, exclude franchise acquisition. We now expect CapEx to be 150 to 160 million, and that does have the costs of re-opening the Memphis market, as they talked about. And this $10 million increase is really due to additional allocation for a 2006 pipeline of opening new stores. In addition, we did complete the acquisition of 12 franchise stores in the Ozarks for 39.5 in cash. You kind of put it all together, we expect now full year EPS to be in the range of $1.44 to $1.47, with Q3 expected to be in the range of $0,37 to $0.39, given what we talked about today. Molina, let's open it up for questions.

[OPERATOR INSTRUCTIONS] Our first question from Joe Buckley from Bear Stearns.

Thank you. Two sort of major big picture things that I'd like to ask you to fill out a little bit further. One, you know, truly on the value side, you mentioned you're testing some things. You know, Lloyd obviously included in his quote in the earnings release, and you mentioned discussing it with the franchise business council. Can you elaborate a little bit what you're thinking in that regard? Are you thinking about price -- menu price roll-backs or the addition to the menu of some more value-oriented products, or just kind of the direction you may go? And, also, if you think you would do this kind of chain wide, or if you would do it in, perhaps, the mid-west markets that are relatively soft?

The other thing big picture thing I'd like to talk about is the -- is the unit expansion front. John, I think you made a comment about the business turning into a market share battle, including aggressive restaurant development, and I guess I'm curious what you're seeing on that front? If you think things have changed significantly over the last year or two and then, maybe, put that in the context of what we're seeing in the fast food business. You know, if you saw the QSR sales flatten out, do you think the environment look as challenging as you just described?

Hey, Joe. Good morning. It's Dave. Let me start. I think -- let's go to the value piece first. I'll begin to answer that until Lloyd reaches over and kicks me under the table and tells me to hush.

I'm kicking you now.

Let me start by telling you what it's not. I think that'd be a good way to frame this. When we talk about more overt value, what it will not be is picking up and FSI around the country on Sunday and seeing a $4 coupon or a buy-one-get-one. Okay. I'll tell you, as much as it pains us to wake up and see that going on in the market place, some of it in CDR, and I -- I've been the carrier of all those clippings every Monday morning into Lloyd and Steve, John and Carol. And I'm not surprised that sometimes at 5:00 on a Sunday afternoon, somebody's in line at one of those competitors with their $4 off, and they may have come to us. But , I'll tell you what, we're not going to play that game, that's a slippery slope.

So I'll begin by saying what ove -- overt value means is not couponing and discounting. You can go from there and say well, what's left. You know, we ha -- I think John used the word explicit value earlier. We have, you know, been low-cost leader here on the menu. There's been a lot of implicit value in our menu and I think it, perhaps, is a time for us to be a little more explicit with how we come forward with value. So, I'm going to let you read between the lines on that and look to the rest of the team and see if they want to add to that comment on value.

Joe, the only th -- this is John. The only thing I would add is there are any number of ways to package and present our brand messaging in a more overt fashion. And I think Dave captured it, and in the interest of not sharing tactical details, I think we'll just leave it at that.

Joe, you did mention about rolling back pricing, that is not -- that's not a consideration for us. I mean, we -- this isn't a question for us of are we priced appropriately. Because, I think as every -- as we've talked to a lot of people, we de-link what's happening in our cost structure from pricing decisions we take, We just think in this environment the consumer is all about value. And, so, we're -- we think we've got some very explicit things that we can do on the value front. But it does not represent rolling bra -- back prices.

And, Joe. John again here. On the market share battle, we see that. That's a fact of life here in CDR, frankly the restaurant industry. We see it in -- certainly in grill and bar in terms of aggressive development. And when economic challenges are present, it makes per unit topline growth a little more challenging, and that's all we intended with that statement.

Okay. Thank you.

Our next question comes from Peter Oakes of Piper Jaffray.

Hi. John, I'd be curious to get your impressions far as the advertising message, and is it resonating as strongly as you'd like to, given the copycat efforts out there and is that going to influence your thought process, kind of going forward? And the other question, if I may, is when you talk about the weekday lunch giving you some difficulties, are you able to parse out Carside? Is that continuing to have success at lunch or -- I don't know if you're breaking it out that way. I'd be curious to hear what you're finding with that. Thanks.

Hey, Pete or Steve, I'll take the lunch question. I think, you know, we continue to see our Carside business strong into the cross-day part. So, I think it's more four-wall lunch early week and weekend.

Peter, this is John. The question on advertising and particularly the question on blurring. We have seen a number of competitors become more aggressive and have seen some herd mentality on messaging. We do a lot of work with consumers, and that's the one group we obviously care most about. Engaging the relevance of our messaging, the effectiveness of the advertising and it's ability to break through clutter.

I think it's safe to say that there probably is more like-clutter in the market place today, and so it becomes more difficult. From our perspective it's three components. t's the content of the message, what is the proposition, that's number one, probably most important. Number two is how you package it from an advertising standpoint. It has to be relevant. It must be targeted, must break through all that clutter. And three is where do you reach that guest from a media standpoint. All are related. All are, I would say, equally important. And we continue to, on a program-by-program basis, look at making our messaging most effective. We don't spend a lot of time thinking about competition, but we spend a lot of time with our consumer, Peter. So, we're very thoughtful there and we think the landscape's changed a bit.

Okay, thanks.

You bet.

Our next question comes from John Glass of CIBC.

Thanks, good morning. Just want to go back to the comments on the value of focus. The last couple of years, you spent a lot of time redoing the menu, upgrading products. Do you, perhaps, think that's now working against you? In other works, has the perception of Applebee's value proposition lessened with that effort? And, when you talk about change in the menu, are you talking about removing some of those items and replacing them with others, or adding new things that would enhance value?

John, this is John. No, I don't think the evolution over three years from a menu standpoint is working against us. I think it -- it's more important than ever that we evolve appropriately, that we provide choice across categories, appetizer, entree, dessert and across price points. And today's earlier point, that we are clear in packaging and presenting those options for all of our guests, whether they happen to be a $100,000- plus household or $25,000 household. And, so, we have a lot of focus in that arena and that is a top priority for us, as it always has been.

And then just on the up-front purchase. Is there anything you're willing to talk about in your ad spending in '06, and if not that, maybe so favorability of the ad rates or some of the economics you're getting on that front?

John, the -- you know, the marketplace this year is very different than it -- than it has been in past years. Different in the sense that there typically is a significant dial-up in demand. There are no significant new categories coming into the market. The medium market place continues to be fragmented. Whereas, in past years, network and cable operators have been able to command five to ten, in some cases double-digit, significant double-digit premiums, what we're seeing is a flattish market place which is great news for those who plan early and purchase in the up-front market.

As an example with network, ABC, probably, and CBS would be the two networks that are securing the most favorable rates, and can command premium prices. NBC is in trouble. Some of the other cable operators are getting flattish cost per thousand increases, and it's a buyer's market and we should very much benefit from that. So, we'll have more color for you, as we move into the '06 time frame. But it's a good news story from our perspective.

Okay. Thank you.

Our next question comes from John Ivankoe of JP Morgan.

Hi, thanks. Also a question on the menu, if I may. I mean, it does sounds like we're talking a lot about, you know, communicating and its explicit value menu -- message, and obviously there are a number of different ways to do that. And it sounds further that that value message is going to be targeted to a consumer which is relatively fickle, meaning the lower -- you know, the under $50,000 household consumer. My question is, as you talk about value, does it make sense or you actively considering a high-low strategy, when you continue to evolve on the upper end of the menu, maybe trying to broaden-out the, you know, the Applebee's consumer, maybe reduce some of your dependence on the under $50,000 household consumer? Or should you just stay focused where you are now? Thanks.

Hey, John. Steve. I don't -- we don't want to put too fine of a pencil on tactually what we're going to do. You know, the -- what you've mentioned, those are certainly things that are under consideration. You know, we're -- we've been known as a place where you get everyday value. And, you know, when we introduced Weight Watchers this year, Weight Watchers did expand our reach and there's empirical evidence that, with the Weight Watchers ticket, there is an increase in how much the Weight Watchers guests are spending at Applebee's.

So, we're -- you know, I think we're -- we love our position. We've got the broadest appeal from a consumer demographic standpoint of anybody and that's empirical. And because we're in great menu, we've also got reach; We think there's opportunities, as there always are, for us to go after certain segments and appeal more broadly to segments. That's been our strategy all along. whether it's Carside To Go, to appeal to the person who needs food on the run. Whether it's weight watchers, to appeal it healthy eater. And, so, whether it's other focus we've had in foods. So, I wouldn't want to -- I wouldn't want to niche it as specifically as you did. It's going to be much broader than that.

And John, the -- this is John. When we talk value, we don't want to suggest we're talking price. We're talking the entire experience. We are certainly looking at menu and price and service and news and the entire experience that we provide, not just for the guest with a lower household income, but for the entire spectrum of our guest portfolio. And we'll leave that as the summary.

Alright. Thanks.

Our next question comes from Dustin Tompkins of Morgan Keegan.

Good morning. John, you mentioned in your comments when you talked about Weight Watchers that you felt it was maybe under-leveraged, you know, you were seeing less seasonality there. Is there anything you can add at how you can, maybe, better utilize that program?

Dustin, there -- one thing is clear to us. Weight Watchers is an outstanding partnership that drives some incremental business. There is a component of that that;s very difficult to quantify, but it's real, and Dave referenced the halo benefit. There is a contemporary new relevant message in being associated with Weight Watchers that extends well beyond just those who order from the menu when they come in. It clearly appears to be a factor in decision-making as to where to go eat. I may be a component of a party who decides to eat at Applebee's. Weight Watchers may factor into that. I may not choose to order from the Weight Watchers menu. We know that party sizes tend to be larger, and we have such great information and we are -- we have yet to optimize the relationship, which is really the great news. There are all sorts of insights coming our way, and so look for more news from us on the Weight Watchers front.

Dustin, this is Dave. As I said earlier, you know, we certainly got some clear evidence early on, as we went to the public with Weight Watchers at rollout time last May. But, as you know, subsequent to that we've been in a number of markets with continued message about Weight Watchers. And, it's just been very encouraging to see that -- that spike we saw last May and spring was not significantly less and off-peak. That's really to the comment earlier that, you know, we traditionally thought January and swimsuit season were the peaks, but it's clear that the guest is responding to this Weight Watcher message, above and beyond what we consider to be peak periods.

Dustin, this is John. To close this one, we've aggressively marketed this initiative in the spring-summer of last year, in January, February, March of this year, and the learnings we have from those two experiences, as well as some other test experiences, suggest a seasonal approach is potentially under-leveraging this great asset we have.

Great. One more if I may. As you talk about being more aggressive about taking market share and being aggressive around development in a big pipeline in '06, as we look at '06, you know is there anything you can give us directionally compared to '05 development?

Yes, Dustin. Steve. I think the theme we've had all along is that -- is that the Company is in the midst of a evolu -- evolving our franchise system. During that evolution, we're moving, the Company's moving into a greater number of markets. We haven't really touched from a pipeline perspective on the Los Angeles market in any kind of significant way. So, our theme here is continued full development of the Company market the Company owns, and I think you could expect that the Company will be in rapid pursuit of that. What you've got to think about, though, in '06, you know, we're not going to repeat a Memphis market in '06. In Memphis, we opened seven stores very quickly. So that's the only consideration that I would give you, as you think about '06. Strong pipeline, we're ar -- we already have several sites approved for '07. So, I think we feel very confident about continuing to have a strong unit development on the Company side in '06.

Great, thanks.

Yes.

Our next question comes from Hil Davis of Sun Trust.

Hi. A couple of questions. One is, is there an opportunity at lunch to create a lunch menu insert that might have, maybe, a higher value attribute to it, whether it's smaller portions or just -- you take a little bit hit on the food cost, but you grab traffic to offset other cost? And, then, could you do it regionally? And along those lines, is there a time where, maybe, we'll see a national advertising message and very regionalized, local message as well?

And then, finally, when you do do the consumer research and. given that it's becoming a more competitive space with more units going up, what do consumers tell you that are the most important drivers for their decision making? And then, I guess, how cost -- how fickle are those, how quickly do they change and how cost and time intensive are those, that if you had to build initiatives around them, especially on a relatively faster or even a longer term way? Thanks.

That's a -- hey, good morning, Hil. That's a mouthful there. We're try -- we're writing feverishly as you're talking. This is Dave. I'm going to go first.

Sorry.

No. That's quite alright. You're good, we like it that way. I'm going to talk about lunch, first of all. To your issue around are there these kind of specific opportunities around lunch that I think you said, you know, relate to some packaging, some perhaps pricing, if you will. The bottom line is we're -- we're very much tuned in to the fact that at lunch, the keys are speed and the keys are value. Particularly as you listened to my comments earlier about where we've seen some traffic declines early-week lunch. So, you're on the right path. And I think that the issue is with our thinking that that combination of speed and value and able to, you know, get people in and out of there, and feel great about what they just left -- what they left and paid for, and to get in and out of there quickly, is certainly going to be a consideration that we're going to have around lunch. We are excited about some opportunity there.

And, Hil, on your last question, because there were several in there. Occasions, you asked about drivers in decision making. We have great insight there, specifically around segmentation of our guests. And we know and I'll -- I'll frame this very generally and won't get into detail, and we've talked about this before. There are primary occasions, and we'll categorize those in no particular order, as the signature food occasion. I crave a great meal at Applebee's. The driver is food. The social occasion. The driver isn't food, the driver isn't price, the driver is the need to interact and socialize in a comfortable environment. A third occasion would be value. The driver there very much is -- price is a significant driver of that occasion. Convenience is an occasion, where the driver again isn't necessarily price or food. It's I'm on the go, I don't have 45 minutes to sit down. I need a quick meal, but a quality meal. The family occasion, where the driver is I want to please my children or my family and that's a whole different dynamic. And an emerging occasion is I want healthy choice. I certainly want the choice available to me at any restaurant where I dine. And, so, there are dynamics within those, demographics within those. Each of you participate in each one of those, unless you don't have a family. And so, that's the insight we have and we do develop our marketing plans and our messaging around those occasions.

So I guess when you look at that, you would try to put forth all those messages at once and some way or other, whether it's pop material in the store, national advertising, local advertising, and try to pull on all those strings is that -- and how difficult is that?

It's complex. As an example, Carol's reminding me. we also look at heavy, medium and light users. And, again, if y -- the drivers across those segments are different. A -- you would see price value show up significantly among light and medium users, as an example. Heavy users have a higher level of income. They love what we do at Applebee's, that's the essence of a heavy-user description. And so, other factors may play in there such as food. And -- and I think that's as far as we'll go with it, Hil, but we have significant medium muscle that allows us to multiple message to very specific targets with relevant -- with relevant messages. We do that fairly well,l and we just fielded the most recent segmentation study and, so, from that we have new insights.

Great. Thank you all very much.

You're welcome.

Our next question comes from Sue Parram of Avondale Partners.

Good morning. Could you break down the percentage of -- between heavy, medium and light users.

Sue, I'm -- this is John. I'm going to decline on that one. Suffice to say we know not only the percentage of our guests, but the percentage of the revenue they account for, and from a competitive standpoint, I would prefer not to reveal any more than that.

Hey, Sue. This is Steve. From the overall category is the heavy user, which is probably represents 20% to 30% of the people, though they control about 60% of the actual visits --

Okay.

of the category. So, clearly meeting the needs of the heavy user is really, really important. We spend a lot of time understanding behaviorally what's happening with the heavy users of the category, as well as heavy users at Applebee's. And a heavy user of the category is going to come in -- is going to visit 12 to 14 times the casual dining in a month. So, they'er -- they're out a couple times a week, using the category. So, meeting the needs of the heavy user is really important.

Okay. You also mentioned in your comments about some softening up in New England. Is there anything particular that's happening up there that you're seeing?

I think the -- it's -- we had weakness -- we had weakness early in New England just because of weather, and New England rolled over that. But, you know, we're seeing not only in our numbers some, I'm going it call some near-term weakness we've seen. We're also seeing it in the -- in the published industry data that this -- this is the second worst market in the country right now, according to NatTracks. So it's a -- it's not only us, it think it's other people there. I cannot say, Sue, that we're totally underneath it. Some things going on in Boston. but it is -- it's worth mentioning right now in context.

Is it from a competitive standpoint, you think?

No, I don't think it's competitive. I think it's more economic. Because if -- competitive would be you're kind of getting singled out in users or operators but this. according to Malcolm's data, the region is the sec -- like I said, the second worse in the country, so there's something happening in the region, for all the players.

And one last question. On Carside, you mentioned that it was strong. Is it still strong in terms of the number of consumers that are visiting you, as well as an average check? Have you seen any change in mix there?

Still our fastest growing day-part. No change in mux. Our -- people are responding, you know, well to our advertising message here. We've had a pretty good balance message throughout year on Carside. We do see perhaps a little bit of, perhaps, managing a check there, but not really worth talking about.

Yes, Sue, this is Dave. The good -- the growth, to the front part of your question, we're seeing growth, not just in that mix number, not just in that total volume number, but growth as well in the attendance, if you will, at Carside from the guest, so it remains very strong.

Thank you very much.

Our next question comes from David Palmer of UBS.

Hi, guys. I was -- I was under the impression when you were starting this year out that you were targeting women with the carside and Weight Watchers initiatives, and in your media strategy, too. And that these initiatives were supposed to, perhaps, help or could potentially help week-day lunch and week-day takeout dinner, which are low capacity utilization day-parts. Yet, you said these day-parts were certainly not really driving the growth for -- within this mix. And, of course, you know there's economic factors, but are you really not getting new Applebee's users to the degree you were hoping, namely the higher-income folks and women?

David, this is John. The female segment is critically important to us. And, frankly, historically we haven't spend a lot of time there, in terms of targeting. First three to four months of the year, first four months in particular, a lot of focus there, certainly with Weight Watchers and Carside. That's in -- that's a segment for us that's a primary decision maker. With those two initiatives, in particular, it allows us to broaden the message in terms of ,not only gender but a higher income, a higher level of education, and there are some age and family dynamics there, as well. So, to sum up, it's a critically important segment. We do have targeting initiatives there, you know. Specifically with respect to the lunch day-part, no, we have not done that. We don't market exclusively to the female guests to the expense of others. We have other messages, as well. Does that suffice?

Yes. I guess -- I guess the whole thing about incrementality is if you had gotten a new type of user and got Applebee's to be thought of in a new way, obviously the takeout is one way, it's easy to imagine. But, obviously Weight Watchers can be redefined in people's minds, and it doesn't seem that has taken on the life that it could have, given the weight you were allocating to it on a -- in a directed media strategy.

David, Steve. I think what you're -- the strategy here of targeting individual segments, like the healthy eater or like the food on the run, is absolutely working. However, when you look at the Company's footprint in these markets, you've got a big footprint. Nearly 49% of the Company's estate is in these midwest markets. So, when you've got these midwest markets down, it's pulling down, you know, those -- those -- those parts of your week and parts of your day. So, I think it's a little early to reach, perhaps, the conclusion that you're vectoring towards here. You know, we're not there, I think we need to see, certainly, the year progress.

And, David, to close up on that point -- John again, here. Long-term, which is really the essence of changing consumer behavior. we look at awareness, we look at generating trial, and and we look at repeat visitation But, ultimately, the name of the game for us is loyalty and preference, and that takes time, especially when we are targeting new audiences that may in the be familiar with us or may not be familiar with our initiatives. And so that's a great question to hold, maybe for another time next year.

Operator, let's take two more questions, please.

Our next question comes from Rachael Rothman of Merrill Lynch.

Hey, guys. Just two quick ones, if I could, and if you don't have time, one is fine. I just wanted to touch on your share repurchase. I know you've done a great job so far year-to-date. Could you just comment on your appetite for possibly levering up in the back half of the year to buyback more shares?

You know, Rachel, we've got about 82 million left on the authorization. Management and board are very supportive with what we're doing here. We've got a 10D51 (ph), you know, plan in place. If we continue, if you look at where we've been buying, I think that kind of establishes how management thinks about the, you know, value here. And we've got -- we've been more front-end loaded from a capital deployment this year with all the restaurants. We've got plenty of dry powder, as we need it. So I think, our posture is unchanged, is how we think about stock buyback.

Perfect. And you have time for one more quick one?

Sure.

Okay. If you could just comment, looking at your guidance at the end of the first quarter, your appears that your most recent guidance isn't changed for same-store sales at all, yet margins are expected to be lower for the full year. Can you just talk specifically about what's changed and where you're seeing the pressure in your expense items?

I think what you're seeing there is our guidance always is around system-wide sales and that's really unchanged. Of course, the biggest level on Company margins, which is our guidance, is what's happening with Company comps. So I think, you know, we're just -- we're just, as we said really in a release, it's balance a year certainly going to be lower. The extent to which they're lower is going to be driven by full-year comps on the Company side.

Okay. Thank you so much.

Let's go with one more question, Lynn.

Our final question comes from Joe Buckley of Bear Stearns.

I'm going to stuff two in here, too. One very quick one. You mentioned Kansas City being better in July. I'm curious if you did anything in Kansas City? Is that maybe where you're testing some of these value initiatives or take any actions to make it improve?

I'm going to -- John and I will tackle this together, Joe. Did we do anything? Yes, we did some things. We've a lot of focus in Kansas City, because of the way we've seen Kansas CIty trend this year, and those things are everything from being extremely dialed-in to what's going inside the four walls,insuring all our internal metrics are right, as well as, you know, this is our backyard, so not afraid of experiment a little bit. I don't know that I'd be any more specific than that.

Joe, you had another one?

Yes, the markets all performing well? You mentioned Florida, California, how d -- how does that business break down versus some of your weaker areas? Is Carside a bigger part of the business there? Is the lunch-date part there? You know, strong or weak? Just kind of dissect that a little bit, if you could.

Joe, I think, you know, you go some regional issue there. Certainly Florida is a beneficiary of rolling over some disaster stuff in the prior year. Our -- I think the California market and the Texas market are just being driven by -- certainly in California, California's on a four-year run here. Just higher brand awareness around Applebee's, and reaching more effectively a customer base. Texas we've had dedicated focus on operations in Texas and I think we've been doing some things in our -- in the Texas estate from a menu and operation standpoint that is -- that's driving our results. Don't see appreciable differences that we can read right now in the Carside business in those markets. So, that's kind of a -- kind of a general answer we're get -- we're giving there, Joe.

Thank you.

Well, we thank you for your continued interest and for joining us this morning. We look forward to talking to you at the end of Q3 Thank you, everybody. [multiple speakers]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference, and you may now disconnect.