Dine Brands Global Inc (DIN) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Applebee's International second-quarter 2006 earnings release conference call.

At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be provided at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

Introducing your host -- Vice President-Investor Relations, Miss Carol DiRaimo. Ma'am, you may begin.

Thanks, Jim, and good morning, everyone, and thank all of you for joining Applebee's second-quarter 2006 conference call. I'll note that this call is being broadcast simultaneously over the Internet.

A couple of calendar items to note -- comparable sales for our August fiscal period will be released the week of August 21, and third-quarter 2006 earnings are scheduled to be released on Wednesday, October 25 after the market closes, and our quarterly conference call will be on Thursday, October 26 at 10 AM Central time. Both September and October 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; and our ability to control restaurant operating costs, which are impacted by market changes, minimum wage and other employment laws, food costs, and inflation. You should review our Form 10-K for the fiscal year ended December 25, 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 President and COO; and Steve Lumpkin, our Chief Financial Officer. With that, I'm going to turn it over to Dave.

Thank you, Carol, and good morning, everybody.

In my remarks this morning, I'm going to add some additional color on the current sales trends. I'm going to talk about our food and marketing strategies. Now, I realize, for a lot of you, this is your third call of the morning, so we're going to be relatively brief so you can get to Q&A and address the questions and the issues you probably have on your minds.

With the current macroeconomic environment continuing to pressure our lower-income guests, our company traffic trends, as you see, have been really admired in the down 4 to 6% range for essentially the last year. Beginning in May, we experienced even more broad geographic weakness throughout the system with the most challenging markets continuing to be New England -- this is on the Company side -- to be New England and parts of Virginia and Michigan. This broad weakness was evidenced throughout the system by quarterly franchise comps turning negative for the first time since 1998. As we signaled to you several times previously, we were looking for comp sales traction from our food and advertising initiatives beginning in Q2, but we did not see improvement in our overall sales and traffic results.

By day part, our bright spot continues to be late-night; that's our 9-to-close time period -- as we see really good guest response and traction for our beverage initiative. As you know, Q2 overall comps were down 2%, the bar was up 2%, and improvements were seen in several markets after the roll-out of that new bar menu.

In terms of the impact on our portfolio, just to note that late-night is comparable to car side in percent of sales at around 10%. The roll-out of our new bar initiative was completed throughout the system in late June.

Lunch and dinner traffic are both down in the dining room and at car side with dinner being weaker than lunch in the quarter and accounting for about 85% of the sales decline. Weekends have also been softer than early week, and both of these trends are different than what we've seen over the past year, with softening at the dinner period and the weekend day part.

There's no question that our lower to middle income guest is getting pinched and they are either reducing visit frequency or temporarily stepping back out of casual dining. As a number of other casual diners have noted, we have a leaky bucket at the bottom and it's evidenced by a bigger decline in the number of guest checks under $10 versus an interesting increase in the number of guest checks that are well above our average in the $14-plus range.

Another note is that, in the July numbers we reported, we showed a small deceleration in traffic -- just small, but it was compounded by less of a benefit from check, as we were on air with a salad message that carried a lower price point than last year's promotion.

Now, as we noted on our last call, on our own proprietary metrics -- that's where we are following 10,000 consumers that were part of our segmentation from last spring, and we're doing this through our tracking panel -- it tells us that 5% of the casual dining guests have simply left the casual dining space. We're still digging deep on that data but it suggests that, of those who left, it could be 80, 90% of those look like they've gone to QSR.

Now with that said, let's move to some news on the positive front. We continue to be very excited about the progress and the news that is coming out of our culinary center. Our pipeline of new items continues to be very strong. By the end of the year, we will have introduced more than 20 new or improved items that are designed to appeal to both the consumer that is still frequenting casual dining as well as the customer that is seeking value.

Our fall campaign -- I'm going to call it "New News Food", which kicks off in late September, honestly has me personally more excited than anything I've seen yet. I believe it's even more strongly going to communicate the message to the consumers that this is no longer your father's Applebee's.

We are encouraged by the substantial improvement we've seen in our in-store food measures, but our challenge has been getting these people in the door to try the new food. So what have we been doing about that? Many of you saw what we dropped at FSI in late June in most Company markets and that also included about 20% of our franchise market. Now importantly, this is not a generic dollar-off coupon. It was designed as a trial incentive to get guests to specifically try any one of our new five sandwiches for only $5. We saw both comps and traffic improve dramatically to a positive territory for about a week to ten days following this insert with very little negative impact to margin. So, the strategy worked. Given these results, it's likely that you may see us use this strategy again to drive trial.

You know, I want to emphasize, we are not fans of blanket couponing, which we see a proliferation of in the Sunday newspaper by a lot of casual diners. However, we are fans of incenting our guests on a limited basis to try some of the great new food here at Applebee's.

As to our advertising, we are committed to sharpening our message to align with our food strategy. After assuming leadership of the marketing team in May and reviewing the results of the research following the first three campaigns, I made the decision that are advertising message going forward would not include the two guys. While they were certainly memorable, they were also very polarizing and interestingly enough did not drive one of the most important metrics we watch through our research, which is visit intent. In addition, the ads didn't refocus enough on the new food that we've been introducing.

Now, for our fifth promotion of the year, Southwest Fiesta, it starts next week and it will run through September 17. While this creative is a little bit more aligned with our strategy and will definitely focus more on food, I want to point out it's not exactly where we want to be yet, and that's given the timing of the change in our creative direction. So let me be clear. This is not our new ad campaign. The promotion is going to feature one of our most popular new items that has gotten great traction in restaurants, the quesadilla burger, along with a three-course combo priced at $9.99 in most Company markets. Carol will send out a couple of commercials to you later today.

Lastly, on the marketing front, we are continuing our nationwide search for a new Chief Marketing Officer, and it's a position that, as you can imagine, is attracting a lot of interest. The search is really in the early phases and I'm not going to speculate at this point as to when that will be finished or when we will be introducing a new Chief Marketing officer to you.

In closing, internally, we're focused on what we can control. We are committed to retaining our best managers and associates to execute the strategies that are taking care of the guests that are still frequenting our restaurant. You know, the good news is our turnover remains very low but we continue to be mindful that good people always have options.

By the way, on a lighter note, for those of you who've recently renewed your subscription to Seventeen magazine, you've probably seen the September issue that named Applebee's as the best Company for teens to work for. So, some good news there.

Seriously, while I know our recent trends have been less than stellar, we are committed to our food, our menu and our value strategies and we are anxious to evolve this advertising message. Very importantly, we continue to work closely with our franchise partners on the franchise business council, our marketing and kitchen councils, and they are a powerful and a very constant reminder that we are all in this for the long haul.

So with that news, I will turn it over to you, Steve.

Okay, Dave, thanks. Good morning, everybody.

I think there's a lot of news certainly in this space this morning, so I'm going to be pretty crisp here in my comments on what's happening in the quarter, and then we will open it up for Q&A.

First of all, to Company sales, the company sales in the quarter were up 8.6% to 296 million. That's a capacity increase of over 12%. We opened up 44 Company restaurants in the last 12 months. You parse that, that's an organic growth rate of about 9%. In addition, of the three acquisitions we've made, Memphis, Ozark and the Houston markets contributed about 3% to that capacity growth. This was offset by a 3.3% decline in average weekly sales, as well as a comp decline of about 2% in the quarter. Now, this gap between Company (indiscernible) and comps has narrowed slightly from what we've seen in the last three quarters at least.

Franchise royalties and fees were up 5.6% to a little over 34 million, and that is a capacity increase of about 7.5%, as 108 franchise restaurants have opened in the last 12 months. This increase was partially offset in domestic -- in the domestic franchise average unit volume decrease of 1.8% during the quarter. It's important to note that we saw basically no gap in comp versus [AOS] on the franchise side again this quarter.

Other franchise income came in at 0.5 million. This is off last year's pace because we exited the insurance business as we talked about on a couple of calls. Total revenues came in at 331 million; that's up 8% during the quarter. System-wide sales increased 5.7%, and that's a net capacity growth of about 8% with 152 new restaurants opened in the last year. This capacity growth was partially offset by a decline in domestic (indiscernible) of about 2.2%.

Net income came in at 20.4 versus 27.5 last quarter -- last year. Excluding impairment and other restaurant closure costs and stock-based comp, net income was 25.9 million.

Diluted EPS reported $0.27 versus $0.34 last year. Now, when you take out impairment, restaurant closure costs of about $0.03 and then incremental stock-based comp of about $0.04, diluted EPS rounded 34 and that's the same as last year.

Now, a couple of quick highlights on the P&L -- margin came in at 12.5%; restaurant margin came in at 12.5%. That's down 180 basis points. As we look at the pieces, food costs came in at 26.5; that's down about 10 BIPs. We benefited there from a menu price increase of 2.5, and then offset by essentially higher costs associated with the rollout of our beverage initiative, which includes our late-night value strategy and the traction we've been getting from that, as Dave talked about.

Labor came in at 33.9. That's up 80 basis points in total. Most of that is at the hourly level, 60 basis points in hourly as wage rates are up 2.5%. Management labor was up the balance, 20 basis points, and that's a 3.4% increase in wages. We expect, at this line, labor -- we expect this pressure to continue through the balance of the year, as we continue to put more food, more training and more focus on execution within the four walls. Of course, you saw a little bit of deleveraging there from lower sales volumes.

Now, D&O overall came in at 27.2. That's up 110 basis points with the big movers there being depreciation and 60, and higher utilities at 50. Advertising was up about 10 points during the quarter.

Now, as we said in the press release, we changed our accounting convention for small (indiscernible) during the quarter to essentially amortize the initial costs for new restaurant small orders over a two-year period instead of one year. We think that's proper accounting, as these assets do have a useful life greater than a year. The net impact of this change was a 30 basis points favorable to the D&O line, with small [layers] favorable by 55, and then taking the depreciation on those small [layers] was unfavorable but 25. So netting the 55 favorable against the 25, you get a 30 net impact. That's $0.007 for the quarter, $0.02 full year.

Now G&A, G&A came in at 9.8%. That was up 60 BIPs from the prior year, all based on the stock-based compensation -- that number. You take stock-based comp out, G&A was down 70 BIPs and basically was flat in terms of dollars on a year-over-year basis. Now, when you look at it, this was due to a reduction in bonus expense, corporate bonus expense, and a favorable swing in our nonqualified plan (indiscernible) Rabbi trust as the market here in the second quarter corrected significantly and that gave us some relief here at this line.

Now, this was offset -- the Rabbi, the reduction of the Rabbi was offset as it swung in divestment income as we talked about before, changes in this nonqualified plan (indiscernible) the Rabbi trust have basically no impact; they just move really between income and G&A. We also had a sequential decline in dollars from Q1 to Q2 as a result of our timing of our manager, our general manager convention.

Now, moving onto impairment, impairment and other restaurant charges -- closure costs reflect the write-down of property and equipment on two restaurants. That was an after-tax hit that rounded to $0.03. Interest expense was up 70 basis points. We had both borrowings up and rate was up because of our stock repurchase, the Houston acquisition, our dividend and some CapEx. We've got 37 million remaining on our current revolver. Tax rate in line at 34.8.

Now, a couple of quick things on the balance sheet -- debt was sequentially up from year end about 13 million, as we dipped into our revolver to fund the Houston acquisition, CapEx and our dividend. Debt-to-cap is right 30% at quarter end and of course we are comfortable with some additional leverage be on this. Shares outstanding were 74.4. Now, as a share repurchase in the quarter, we bought back 469,000 shares at the price of 23.38. That's for about $11 million. Year-to-date, we repurchased 687,000 shares for a cost of 16 million. At the end of the quarter, we had 113 million left on the authorization.

Now, I will repeat what I said in Q1. Don't expect us to kind of do the same thing this year as we did last year on stock buyback. But I would say now that the current stockprice is far below our own intrinsic value calculations and we want to continue to reinforce our commitment to enhancing shareholder value through increases in our dividend, as well as the use of stock buyback. I think everybody recalls the Board did increase our annual dividend to $0.20 last year, yielding above 1% now based on where the stock is.

So as to our guidance for the rest of the year, I won't hit every change in guidance, just a couple of highlights. You will see we've reduced our opening -- company opening expectations from approximately 40 to 35 restaurants this year. We are going to be pushing some projects into 2007. As we have been saying here recently, we expect fiscal '07 openings are going to be less than this year. We will probably give you some additional insight in the third quarter as that number gets more refined. Quite frankly, right now, we've got a decent handle on that number but we want to be a little more precise when we talk to you about it in October.

Now, based also on uncertainty in the macro and our recent trends, I think we are now expecting same-store sales to be flat to down 4. I think we all understand that's a big range, but I think it's indicative of the lack of visibility we've got in this environment and waiting to see how some of our initiatives get traction.

Restaurant margins will depend in part on what happens at comp but we expect them to be lower than last year. We did update our full-year EPS guidance to $1.12 to $1.22. That excludes impairment charges and reflects, as I said earlier, a $0.02 favorable impact from the change in small wares.

So that was pretty quick for both Dave and I. Operator, let's open it up for Q&A.

(OPERATOR INSTRUCTIONS). John Glass, CIBC World Markets.

Two questions, one is just on the couponing. So you talked about its possible recurring use. At what frequency do you see using couponing? I guess when you've used it in the past, what is the competitive response typically? Do you end up escalating the competitive environment by doing this? I guess lastly, just do you expect the whole system to go along with it is time, given your success last time, or it may just be the partial system as well next time?

Good morning, John. This is Dave. First of all, relative to frequency of that, as I said earlier, since we categorize this primarily as a trial incentive on new food, the frequency will probably be directly related to those moments where we put new food in the marketplace and simply can't get enough media coverage on all the new products, and we want to come underneath that with some visibility through an FSI. So I really can't speak to frequency. As I said, you're likely to see it again and as you see new food come forward in a promotion where there may be three or four items, two of which are on air, it's not out of the question we would want to tag the other two.

Relative to what we've seen in the marketplace when we go there, you know, I really wouldn't suggest that we see competitive set dial it up or change their frequency when we go. Part of that is masked in the fact that every Sunday morning I pick up the newspaper, it's a constant barrage of dollar-off couponing. So it seems like there's such a steady stream that I haven't really seen any evidence that, when we are out there, we're followed by a bunch of our near-end competitors, because they are in the marketplace with some dollar-off stuff.

John, it's Steve. Good morning. As to the question on will the whole system follow or not, I think this is going to be very situational. This is new ground for us. We are not big fans of just straight discounts, as we've said before. Don't expect that we're going to do a lot of this, but we are happy with the results we got, especially the trial on our new food and our franchise partners on a case-by-case basis will look to do this, but don't expect any systemwide mandated from the franchisor use of trial incentives. That just doesn't work and our system is going to be much more targeted.

Got you. Then, just a question on the sales trends -- historically, softness started in the weekday and at lunch. Now it you're saying it has really softened us on the weekends and dinner. When did that switch occur?

Really, John, we started to see that switch occur in April.

Okay, got it. It continues on or that's where the primary source of weakness is, even through the July results?

Correct.

John, if you look at our traffic, our traffic for the last three months has been essentially between 5.5 and 6. We are kind of bouncing along. I'm the going to call it that we are bouncing along on the bottom here, but there is some dynamic movement between late-night, lunch and weekend. I think underneath those numbers is a lot of satisfaction with this new food we're putting out, and I think the tale of the tape is going to be as we've said. And we've said, we're not going to hold or we are not going to judge ourselves here in the middle of July, because we've got a lot more food that's coming, especially, as Dave said, in our September campaign, which probably the management team is most excited about. We want to see the visibility that gets to the consumer and see if it helps us move our traffic off this bouncing along down 5.5 to down 6. It is yet to seen whether that will happen or not, so this food is really designed to go after the dinner business and the 50% of our dinner business occurring on the weekends; we're going to get after that.

John, I also think there's a potential relationship to be drawn here when we talked about the bottom of the bucket leaking far more significantly than what we see coming into the top of the bucket on check, and let's related that for a moment to weekday/weekend. Typically, the demographic profile, particularly from an income standpoint of our weekday guest at dinner, will tend to be a little bit stronger, whereas the special occasion weekend visitor would be a lower demographic. I think those tie together fairly nicely to tell us a story here about what's really going on.

Thank you, very helpful.

Joe Buckley, Bear Stearns.

I have a couple of questions as well. First, a very big-picture question for Lloyd or for Dave. Could you just update us on the plans for the CEO transition?

Joe, good morning. It's Lloyd. Joe, I believe that, in quarter one, I said that I anticipate recommending to the Board sometime this summer that Dave Goebel succeed me as I move to the Non-Executive Chair role or something to that effect. Well, I think our secession plan is exactly on track and that is still my anticipation, and we've still got a little bit of summer left.

Okay, very good. I'm not anxious to get rid of you, Lloyd, just curious.

I just want to note that I do appreciate your differentiating between a retiring career and a retiring personality in your notes.

(LAUGHTER) I thought you would like that! Then a question for Dave on your comment about your tracking study. I think you indicated that 80 to 90% of that 5% that is dropping out of casual dining you believe are trading down to QSR. I'm curious what your read is on people trading out to supermarkets, out of that consumer group you are tracking.

Yes, as you know, Joe, through that tracking study, we get very specific answers to "Where did you go?" So that is where we are landing on this 80 to 90% as we parse all that information now. Again, we're reading that on a three to four-month basis, so we're constantly digging into current information.

Our early data suggests it's not grocery store. I say 80, 90% in QSR. There's also some evidence -- movement into fast-casual, but very, very few of those responses when that question is put to the guest in terms of, "So where did you go?" Very little is to the grocery store. I think some of that is the grocery store, for the most part, still has an implication -- although there are certainly daily counters where you can take food home. Most of it has an implication that I'm going to pick it up and cook at home. I think the consumer is saying, I'm not going to change my habits here. I'm not going to go from not cooking to cooking. I think they have to come down-market a little bit.

Great, thank you.

Steven Kron, Goldman Sachs.

Good morning. A couple of interrelated questions -- I guess first, if we take a step back and just try to get some perspective, and I recognize there's not a lot of recent examples. But if we look back at past difficult cycles and we learn from them, what was it that ultimately got either you or the category out of it? Was it really just waiting for the economy to turn? Is it that we need meaningful supply growth deceleration in the category or better innovation? Is that enough to do it -- to get perhaps Applebee's out of this negative traffic scenario?

I guess related to that and piggybacking off of Joe's question, of those 80 or 90% of the 5% that left the category, it's probably pretty evident that they left because of price constraints. But what does your research maybe say about what will get them back, given that perhaps they're trading down to restaurants that are now offering some better product than they may have remembered them?

Steven, good morning. It's Steve. A couple of quick things and I will have -- Dave can jump in on what does it take to get them back.

I think, you know, you've got to go back to probably 1991 to see numbers this bad in the marketplace. Especially casual dining is a lot different. I think this management team and our franchisees -- we've got -- this is a -- our set of initiatives here are a research, consumer-focused set of plans that we have offering better products to people that are still frequenting casual dining and then offering value. Whether you call it a high/low, whether you call it a food strategy with value for guests, whatever you call it, we think that's absolutely right for the times and we are systematically implementing that. It's going to take time. We think that is the way home for us. I'm not saying that's the way home for everybody, but we are being very disciplined about how we approach it and we've got a lot more (indiscernible) news headed this year.

I think the consumer's pocketbook, though, has got to get some relief at some point. I think it's a pocketbook issue for that 5% that has traded out here. Until we see some relief in the pocketbook, either more meaningful growth in real wages or some help from a combination of energy, interest costs and other things, then the consumer may not be coming back to casual dining as we (indiscernible) in the short run.

So I'm going to let Dave talk about things we're going to do to get it back.

Yes, I think really, Steven, threaded throughout Steve's comments are a lot of the answers to the second part of the question, in terms of what to do to get them back in the high-level strategy.

I think we want to be very mindful of -- I think what lies here today and potentially in front of us in a little bit -- I'm going to call it, I think there's a potential no man's land if you get into a knee-jerk reaction here. This consumer that is particularly wounded with the discretionary dollars in their pocket and have gravitated back to QSR, I think that no man's land is if we go out there willy-nilly and start screaming either price point or dollar off with the rest of the world's screaming at the same time, it could not be -- it's a situation that could be detrimental to margin, and it's a situation that, quite frankly, I think there's a lot of danger in playing there. So we're going to stay fairly committed to this high/low strategy. The high and the low are both going to be accompanied by good-quality stuff. So that's, I think, between Steve's comments and mine, that's how I would suggest we intend to fix things.

Steve, this is Lloyd. I would just note that if the environment does sustain itself, you could see some shakeout here in casual dining. I think it's the organizations with the might and the clout and the staying power like Applebee's that would stand then to benefit in that environment.

Okay, thanks very much.

Robert Derrington, Morgan Keegan.

Yes a question I guess best for Dave -- Dave, when you look at the business and you look at how difficult it has been for the consumer and you look at your box, you're talking about slowing up new unit development next year. Do you see redeploying that capital possibly to either accelerate or to do something around the store itself to bring some visual reason to the remodel program or something that will bring consumers in?

Thanks, Bob. There's no question, first of all, to the issue of slowing down. We have talked in previous calls about a finer filter we have on our site review process as we look at returns. That will remain the same and the likely byproduct of that, as Steve suggested, is we will probably see a little bit of development slowdown in Company and franchise side. That's prudent and the right thing to do.

We are taking a very, very serious look in this marketplace as we see some fundamental shift in the consumer movement to casual dining and fast casual and the kind of trends that you see for instance with -- I'm going to call it "the gathering place" kind of thing that comes from Starbucks, and very mindful of our design and our architecture.

We are going way back up here upstream, Bob, to be sure we spend time revisiting, from a brand-positioning standpoint, what are our leverage points? What is it that differentiates us? Then driving a stake through the heart of that as it relates to facility, architecture, menu strategy, messaging to the consumer.

So, shorter answer to your question -- yes, you can probably expect you will see some deployment of capital to spend a lot of time looking at these existing 1800 restaurants to be sure we stay relevant.

Can you give us any kind of sense on how the stores that you have put under your current remodel program, your freshening up the appearance -- how has that affected the business within those restaurants?

Bob, it's Steve. I think, with regard to our current remodel, I think we look at the level of investment that we're making in our stores as more of a way to protect sales. Call it a defensive move. We have not philosophically looked at remodels up to this point as a way to necessary drive sales. Now, there have been certain markets where you would come in with a total front-of-the-house look and (indiscernible) control. You can see some movement. But I'm not going to say on this call that you see that broadly.

Now, today's point -- we don't talk much publicly about it but this period, this period of what's happening to the consumer has caused our management team to look at every piece of our business. The asset -- let's broadly call it the asset, what the consumer sees, the building, the design is something that has been going under an intense review. So we expect we will be able to talk more about that later on this year, but we've been doing a lot of work in that space and I think you could all expect that we will not just kind of go quietly here because we've got to have a box and what the consumer sees must be very relevant.

Bob, I think you really put your finger on the pulse here to Steve's -- to just summarized Steve's comments, I think the remodel program, to this point, I would describe as one that has been defensive. We've made (indiscernible) in a marketplace that is becoming saturated, and I think what you're asking and I will tell you what you can look to see going forward is a remodel program that's a little more offensive.

John Ivankoe, JPMorgan.

A lot of us have understood kind of the midweek lunch and midweek dinner weakness, but it sounds like -- I know that you kind of said two different words but I'm just going to assume that weekend dinner is also weak?

Yes, John, I think it's really a function of lapping the weakness over the last couple of years on the lunch now. So it's still negative on early week lunch, but now the negative has really kind of shifted more towards the weekend dinner.

Okay. I didn't know if that was two separate words or if that was meant to stay together. So, okay, weekend dinner is weak. So my question is -- I mean, you know, the QSR numbers, from what I can see of them, and especially pizza don't really support a trade-down to QSR at least over like a weekend dinner type of occasion. So my question is what do you think this symbolizes and have you seen this before and does the data support that in 1991?

Secondly, to follow up to kind of what other people were asking, how much of that traffic decline -- if it's fair to put you on the spot -- do you think is due to supply growth, if any?

John, it Steve. First of all, due to supply growth, I think it's hard to discreetly look at that. Each marketplace has factors there. There's no question some of our markets where we've had a lot of competitive intrusion, that everybody is impacting everybody else's numbers. You know, we have been saying for awhile that '07 will represent, for most chain players, a reduction in expectation. We are seeing more of that as every quarter get reported out. Now, that takes time, however, to work through the system. That's not going to be a magic bullet but I think most public companies are becoming rational allocators of capital in a very, very tough consumer environment. You've got to be or you are destroying capital.

So I can speak to what happened from a 1991 data perspective. Our data warehouse has got a lot of data and it doesn't go back that far, but I think, to your comment on QSR and the weekend, I think what you're seeing is our traffic has been very stable for the last three months from down 5 to down 6. You've got some churn in there. Carol mentioned lapping weakness at lunch; that's part of it. So I think there's no question, though, that the 5% of the people that can't afford casual dining, the weekend was their one time when they went out and treated themselves; there's no question about that. The Friday/Saturday night occasion has, in many cases, gone away. It will be interesting to see if other people, when they report, talk about that or not. We can't discreetly isolate whether we are a lone ranger on that or not, John. We don't think we are.

John, as you know, the weekend dinner softness you talk about -- don't really see evidence of moving down into pizza or necessarily a full impact in QSR. A lot of that, again, has to do with frequency. I think the other thing that has happened is the consumer is moving around a lot. I think they are moving around and maybe seeking deals is a big part of this as well.

Our own data, John, suggests that there is a tremendous amount of movement between names, especially in the last quarter.

Okay. I understand. Great, thanks.

Jeffrey Omohundro, Wachovia Securities.

I wanted to elaborate a little bit more, touch a little bit more on the marketing strategy around the couponing. It just seems to me that that's kind of going after the bottom-of-the-bucket customers. I'm just curious. Given your new product news, given the Company's formidable strength in national media, why not target the top-of-the-bucket and perhaps even with a bit more of a premium strategy to drive frequency among those customers who are still going to casual dining?

Jeff, good morning. It's Dave. Let me talk about that in terms of the perception you have here about that trial incentive targeting bottom-of-the-bucket. First of all, let's put an overall umbrella on this again in terms of our high/low strategy, okay? The FSI that we did mid-June targeted -- first of all targeted five new, very flavorful sandwiches that are part of the strategy to say there's something different going on at Applebee's around flavor and around huge taste. (background noise). So we really don't see that as targeting bottom-of-the-bucket. In fact, that user, a reasonable percent of that $5 redemption was coming into our lunch meal period, and that is a user who is still out the in the marketplace with discretionary dollars for a lunch meal experiencing better food. The incentive was they try these new sandwiches and in fact, we are seeing that we've set a good hook there. We're targeting the high-end and we're going to do that even more so with the upcoming fall campaign, as you will see.

I hope that helps, Jeff, answer that question.

Yes, thank you.

Jeff, are there?

Yes, thank you.

David Palmer, UBS.

Could you perhaps talk a little bit about your beverage sales? Anheuser-Busch, for instance, cited weakness in its sales at major casual dining chains in the quarter. Meanwhile, you are making some efforts to really drive beverage sales and trade up. Perhaps that's kind of the first question.

All right, let's stop there, David. I will take a shot at that one first. First of all, as you might suspect, given our mix of beverage sales, particularly now in the alcoholic beverage arena, we are a fairly heavy mix of beer sales, so despite what you might see in macrotrends from many of our significant vendor partners, overall in QSR, it's certainly accurate to expect that, to the extent we are a stand-out a little bit there with bar sales up 2%, that correspondingly, our vendors are seeing some bright spots with us as well around bar sales.

Part of what's happening here in the late-night piece is also exposing our guests to a line of new products and drinks that have really drawn some attention, both during the afternoon period as well as the late-night period, where we are offering, in some cases, the half-priced appetizers to go with it.

This is kind building on John Ivankoe's question but you mentioned that the lunch business has been trending a little bit closer to your overall trends and this is after a couple of rough years, I guess, on your lunch. Just given the fact that fast food is perhaps getting a good portion of this trade-down, it just seems like it would be a disproportionate impact to lunch. Is that -- why is that tapering off as an impact, I'm wondering?

John, -- or David -- lunch is still negative, let's just be clear there. It's just the magnitude of dinner which is obviously a much bigger part of our business. It is slightly weaker than the lunch day part, and that is not the trend we've seen over the past year. So the absolute magnitude of our dinner business, which -- dinner-only, that day part is over 50% of our business; that's what is really driving the traffic. So I don't want to imply that lunch is positive by any means; it's just less negative than dinner.

Is there anything that you would do specifically at lunch to perhaps -- since that would be perhaps the greatest overlap with this trade-down effect?

David, it's Steve. I think the five sandwiches for $5, as a Dave Goebel mentioned, is something we've done proactively. That's a kind of in-your-face lunch value. We've also -- we are testing a couple of different versions of lunch value around the country and vectoring in on really one that will make sense from the consumer and will not -- let's put it this way -- will be friendly to margin. I think that's a sweet spot in any kind of lunch deal. So, we think the lunch business is pretty important but right now, our high/low -- our high/low will play both at lunch and at dinner. We're really focused on going after the high-end customer with great dinner entrees that give them a reason to come to Applebee's.

One last on -- in recent years, you've rolled out car-side and Weight Watchers, and you've also improved your new menu news, and I'm going back a bit. Do you think, in retrospect, there has been any hit to your in-restaurant execution with all of that? If so, is that -- are you addressing that internally, perhaps thinking about getting the right direction with the in-restaurant experience and certain key measures? Are you improving?

Lastly, can you really make people convinced that there is a difference inside the restaurant without at least doing a little bit of a brush-up on the box itself, kind of like you've seen with Olive Garden and Red Lobster and some of these other chains? Thanks.

David, this is Dave. First of all, to the first part, which is I hear you talking about a broad umbrella here under execution and the possibilities that, in hindsight, did we do something with roll-outs that may have impacted execution. A couple of thoughts -- first of all, as you've heard us say before, we are extremely disciplined in our roll-out of any new initiative, whether it's car side or Weight Watchers. On previous calls you've also heard us talk about minor pick-ups, sometimes on hourly, where we've rolled new programs that involve training. We're not reluctant to invest in that to be sure that it's done right.

Probably most significantly, as we once these million data point we get a year from our CSI, they would clearly suggest that what we did not see for the in-restaurant Applebee's dining customer was any tick down in what was going on in terms of our execution inside the store level.

Now, I think you're onto a good point, though, because there is no question as we look forward here to what I said earlier -- 20 new and improved items this year. We are being very thoughtful about how we take that into the market. Steve talked a moment ago about some early reads and early successes on lunch. When it's absolutely right and we're ready to roll it, it's going to go through one more filter to ensure that, with the new food coming, particularly the stuff that is answering the question for this 85% dinner decline, we will be really thoughtful about how we layer that in, because the last thing in the world we want is to see our execution go the other way, particularly in this environment.

David, on your second question on -- should we be doing something where people will notice a difference in the asset or the box, I think we addressed that previously with our comments on what we are doing on remodel and the total asset. So we've got a pretty significant initiative that's going on there. It's just a little premature to talk about it. Thanks.

Mike Smith, Oppenheimer.

I've got just a couple of quick questions to expand on this -- your coupons. Did that have an expiration date on it, number one?

Number two, did it happen long enough ago that you were able to determine the success of it in terms of returning visits or the things that they drank?

Mike, yes, it did have an expiration, which was July 31. I will say we absolutely saw our numbers move, particularly in the week that we dropped it, because we get the industry data on a weekly basis. We absolutely saw our numbers move significantly positive, and that's against the backdrop of a -5 to 6% traffic. Our traffic numbers move positive (indiscernible) to that week to ten day period. But in terms of the kind of lasting impact of that, you know, it really rolled off after, I would say, probably a two-week period.

Mike, we continue to watch that. I think you to probably read, in the release, Lloyd's comments that a little frustration over the fact that some of the traction we're getting here is being masked in this environment. We are going to continue to watch guest order incidents on the items that were in that trial incentive as well as the new food. Early signs look good, but evidence of how well it works I think will, in a large part, be read much further downstream than where we are today.

Great, thanks.

Andy Barish, Banc of America Securities.

Two quick ones -- on kind of size of market, have you've parsed the data over the last year? Are you seeing any differing trends I guess kind of digging into maybe like small towns, where there's less competition? You know, are you seeing better comp trends or is it just the overall market conditions are so rough?

Then secondly, on new unit productivity, any material changes that you or your franchisees are kind of seeing out there, or the unit slowdown you were talking about is kind of that marginal site that you are just kind of pushing off or taking off the blackboard right now?

Yes, Andy, it's Steve. Good morning. Hey, on new units, I think it's more the projects that maybe would have been a little more edgy, from a return standpoint, that are getting looked at. There are still a lot of great deals to be done out there, as evidenced by us pushing up our franchise expectations for this year. So I think there are still good opportunities in the marketplace. I think franchisees and company operators are being much more focused on returns in this environment. There's no indication that the real estate market is cooling off, so --

Now, as to your first question, absolutely small towns we are experiencing better same-store sales performance, and that has been kind of the small-town phenomenon -- better sales, better returns, more stable workforce, more loyal customers. You know, we've had an initiative, as everybody knows in this call, for the last four years, to go into these small markets. There's still great small market opportunity out there that we are aggressively pursuing.

Anything else -- (multiple speakers)?

Anything else?

(indiscernible), Merrill Lynch. (OPERATOR INSTRUCTIONS).

It's Rachel Rothman, sorry. Just two quick questions, if I could, on your capital allocation. You guys had been really aggressive last year in your buybacks at a much higher price. Can you talk about, given where your stockprice is today, how you are think about that going forward? And why we are not seeing you be more aggressive at this time?

Yes, I think our stock is very attractively priced at this level. You know, Rachel, we suspended guidance in May, and I think, just from good corporate governance and practices, we didn't think it was really appropriate for us to be actively in the marketplace until we had kind of, A, put our news out and B, put new guidance out. So we've got plenty of dry powder to go after the stock.

So do you feel it would be appropriate to be more aggressive in the back half of the year, or sort of your previous comments about don't expect last year's levels to reaccelerate?

Well, you know, after spending nearly $200 million last year, it would be hard for us to spend that level in the back half.

Correct -- (multiple speakers) -- quarterly pace.

Yes, I would say -- I will stick to what I just said. The stock is attractively priced. We've got plenty of authorization, plenty of Board authorization, and I think you can expect the Company will think favorably about a stock buyback initiative.

Then if I could, on your unit growth, one point of clarification -- I may have misunderstood. But I thought you said that, in '07, you may expect to see a slower pace both of Company and franchise. Is that correct?

No, no, we just talked about company slowing down.

Okay, I thought earlier (inaudible) franchise as well. Can you talk about how aggressive on the scaleback you could be? It looks like the returns that you have been generating on the units over the last couple of years on the Company-operated front really haven't kept pace. How aggressively do you think you would be able to scaleback and where would you reallocate that capital if you did?

Yes, we're not going to put too fine of a pencil on it right now, as I said in my remarks. I think we want to -- actually when we talk about next year, opening expectations, we want to do that with really a very full visibility of what we're going to do. We've got these invisibility now, but there's still a lot of projects coming in, so I just wouldn't want to comment on that.

I think, certainly looking at our existing installed asset base, what we could do there, we are absolutely looking at how we could redeploy some capital there to drive average unit volume behind a better menu and improved execution. So, that's how we are thinking about it.

Great, thanks so much.

Aimee Marcel, Jefferies.

Operator, this will be the last call -- last question we're going to take, okay?

I understand.

Thanks. I was just actually following up on Rachel's question. We noticed that you were slowing your new unit openings. Do you have any plans to close underperforming units this year or next year?

Well, I will answer that as delicately as I can and from the standpoint of every quarter, we go through a pretty rigorous impairment test, and if we need to impair assets, we do. So, you know, I wouldn't say that we've got -- the only plans we have is to continue to look at our portfolio every quarter, look at the cash flows and go through our normal impairment testing.

Okay. On another topic, where there any price increases during the quarter, and are you expecting any for the remainder of the year?

Aimee, this is Carol. We don't give our forward guidance on pricing and as Steve said in his comments, we had 2.5% of pricing in our menu all quarter. We did take a price increase at the beginning of our May period, which was 1.5., lapping last year's 1.5 points.

Okay, and last question -- curbside to go, what are you -- how are you seeing that trend?

It's still tracking right around our 10% range.

Okay, thanks.

You bet. Thank you!

Great. With that, I appreciate everyone's participation on the call today. If you have any additional questions, I will be here for the rest of the day. I noticed there are several other calls this afternoon, so have a terrific weekend. Thanks.

Thank you. Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.