Red Robin Gourmet Burgers Inc (RRGB) 2005 Q2 法說會逐字稿

Good afternoon, and welcome to the Red Robin second quarter 2005 earnings conference call. This call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will are open for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Michael Snyder, please go ahead.

Thank you. Hello, everyone. Well, by now you've seen the news announcement regarding management changes at Red Robin. As I have retired as the Company's CEO and President, I will not participate in today's conference call, but I wanted to make sure I was here to kick off the call --

If you have to look people up --

Pardon the interruption, please continue.

I think I'll start over. By now, you've seen the news announcement regarding management changes at Red Robin. As I have retired as the Company's CEO and President, I will not participate in today's conference call. But I wanted to -- I wanted to make sure that I was here to kick off the call and introduce the team. Let me be very clear on this. You are in good hands. This is a strong Company with a tremendous future in front, and I urge all of you to support Dennis Mullen and Eric Houseman and the rest of our outstanding team as you have supported all of us in the past years. In my contemplated role as consultant to Red Robin, I look forward to supporting the board, the brand and the new executive team. With that said, I'd like to turn the call over to Dennis and Eric. And thanks again. Dennis?

Mike, thank you very much. And thank everyone for calling in this afternoon. I'd like to speak to the management change for just a minute and then get right into the very good news about Red Robin's continued strong performance. As we reported in a companion news release that was issued shortly after the earnings release today, Red Robin has announced the various management changes. I have the privilege of serving as the Company's Chairman and Chief Executive Officer. I have served on the Red Robin's board of directors since 2002, and most recently as Chairman of the Audit Committee. I do look forward to getting to know all of you as soon as possible. Eric Houseman, who you all know, has been elevated to the President and Chief Operating Officer. Eric has been at Red Robin since 1988 and has served -- very successfully served as Vice President of Operations for the last five years. Todd Brighton has been named Senior Vice President and Chief Development Officer.

Todd has been with Red Robin since 2001 and has served as the Company's Vice President of Development and has done a tremendous job with our accelerated restaurant development program. Also on the call today, we have Bob Merullo and Mike Woods, long-time key employees at the Company. Bob is Senior Vice President of Operations and Mike is Senior Vice President of Franchise Development. Additionally on the call, we have two new members of the management team: Katie Scherping, who is our CFO, who you will hear from later in the call; and Emily Rusnak, our Vice President of Human Resources. Combined, the restaurant executive management team has more than 60 years of experience with this Company. I am honored to be a part of this tremendous group of restaurant professionals. As we reported in the release, Mike Snyder has retired from post -- his post as President and CEO.

He will continue to provide the value of his experience and insight to the Company and the board of directors on a consulting basis. Finally, I need to strongly reiterate at this time that we can not elaborate beyond the details provided in the Company's statement and filings regarding the internal investigation leading to these management changes, nor will we speculate on any matters related to this. We trust you will understand our need to keep focused on the financial performance and operational aspects of this Company. Please be assured that we will keep the lines of communication open as facts and situations become known. With that, I'd like to turn this over to Eric for the good news.

Thanks, Dennis. Well, before we get started, I do need to remind everyone that part of our discussion this afternoon will include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed on them. We refer all of you to our filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition. Well, with that said, the second quarter for Red Robin was strong by any measure. Our revenue increased 23.4%, while same stores -- same-store sales at company-owned restaurants increased 4.8%. This 4.8% increase was driven by a 2.6% increase in our average guest check and a 2.2% increase in our guest counts.

Our company-owned restaurants had comp weekly sales averaging $64,655. This compared to $61,670 during the same period of last year. Our noncomp restaurants posted average weekly sales of $61,828 in the second quarter. This versus 57,745 in the same period of 2004. In terms of -- in terms of our bottom line, we reported net income of $7.4 million and diluted earnings per share of $0.45. This was better than our previous guidance and our expectations -- and our expectations. This was reflected through our margin leverage on nearly every line in our income statement. I'm going to let Katie delve into the details; but obviously, overall it demonstrates how our restaurants' team members, in addition to our great corporate team, can work in tandem to achieve significant earnings growth for our shareholders.

This last quarter, we -- we also opened up three new restaurants. That brings our total year-to-date to 11, and we are on track to open a total of 26 company-owned restaurants this year, which is in line with our previous expectations. Our franchise partners, they opened four new restaurants during the second quarter, bringing their total to nine this year, and are projected to open between 15 and 17 year-to-date. As of the end of the second quarter, there are a total of 274 Red Robins in operation across the country; 148 company-owned, and 126 franchised. This last quarter, we also celebrated the return of Warm Nights and Backyard Grilling in the second quarter by introducing a new selection of limited-time barbecue-inspired food items. The Whiskey River Barbecue Chicken Wrap, the Whiskey River Barbecue Chicken Salad, as well as some specialty beverages such as the Peachy Tea, Puckerberry and Huckleberry Lemonades.

To round out our latest promotion, we highlighted our popular Whiskey River Barbecue Burger. These items were very well-received by our guests and contributed to our same-store sales growth. We believe we have a unique concept and a wide selection of menu offerings that appeal to all of our guests, and we're always looking for fresh and new ideas and innovative flavors to enhance our menu; however, these promotions have certainly proved appealing to our guests. You know, July 19, it marked our third year as a publicly-held company, and we were pleased to celebrate that occasion by ringing the Opening Bell of the NASDAQ on the corner of Times Square that morning. In addition, recently, we were celebrated being named Chain of the Year by Restaurant Hospitality Magazine, which will be announced in the upcoming August edition.

Also, last month, Red Robin was recognized at the Restaurant and Institution Magazine's Choice and Chains Award in Las Vegas as one of the top three burger chains, an award chosen by our consumers. We're very proud of these accolades, and the best recognition comes from our guests that's used to dining at Red Robin day in and day out. So, in closing, our second quarter results demonstrated the continued validation of our concept as the choice destination for fun, wholesome, family-friendly atmosphere with attentive service, tremendous value and the best, darn gourmet burgers anywhere, as well as our ability to successfully execute our operations plan. So, with that, I will turn the call over to Katie.

Thanks, Eric. Before I get started, I want to inform our listeners we will make some references to non-GAAP financial measures during this call. You will find supplemental data in our earnings release that reconciles our non-GAAP measures to GAAP. In addition, our revenue results for 2005 and comparable 2004 periods reflect the change in the way we report costs related to complementary employee meals. This change resulted in a decrease in restaurant revenues and a corresponding decrease in restaurant labor and general and administrative costs, with no effect on net income. The change in our team member meals out of revenue and into the appropriate expense offset described in -- is described in detail in our earnings press release. Second quarter restaurant sales were $110.8 million, compared to $89.6 million in the same period last year.

This was a $21.2 million increase or 23.7%, and was driven by 4.8% growth in same-store sales, or an incremental $4.1 million from comparable restaurants, $8.9 million of sales from our 2004 restaurants and $8.2 million from the 11 restaurants that were opened in the first half of this year. Our same-store sales reflect 2.2% growth in guest counts and a 2.6% growth increase in menu mix. Our average check increased to $10.52 this year from $10.35 last year. As Eric mentioned, average weekly sales for company-owned restaurants in the comp base were $64,655 in the second quarter, a 4.8% increase over last year's $61,670 results. Average weekly sales for company-owned restaurants, not in the comp base, were $61,828 in the second quarter versus $57,745 for the same period in 2004.

Franchise royalties and fees increased 14.2% or $400,000, to $3.2 million in the second quarter compared to a year ago. These increases were primarily attributable to royalties generated from franchise restaurants opened in 2004 and 2005. Overall, our comp franchise restaurants reported a 3.8% increase in U.S. restaurant sales during the second quarter. Comp restaurant sales for Canadian franchises increased 6.7%. Our U.S. comp franchise restaurants averaged $59,348 in the second quarter versus $57,158 a year ago, and $44,651 versus $41,829 a year ago in Canada. Canadian results are in Canadian dollars. Turning to restaurant operating costs, cost of sales as a percentage of restaurant sales for the second quarter was 23.6%, a 20 basis point improvement over the second quarter of 2004, due primarily to menu mix changes and purchasing initiatives.

Before we continue, I wanted to spend a few moments discussing some of the key issues affecting cost of goods. First, we're pleased that the Canadian border has re-opened, but expect hamburger costs to remain volatile in the near-term. We expect that it will be several months before the effect of Canadian beef re-entering our markets has a meaningful reduction on prices, although we are optimistic that some relief may be on the horizon. Weather and supply has brought our produce category back into the 2.8% range of food sales. The majority of our produce items were impacted by higher costs in the first half of 2005, and we expect some relief in had the second half of the year. We've renegotiated our poultry contract for the period from June 2005 through April 2007.

Overall, the pricing on our new contract is lower than our old contract, so, we expect to see some savings for the rest of 2005, approximately 5 to 8 basis points. As we indicated last quarter, freight costs are impacting our commodity and supply cost, due to the increasing price of fuel as well as driver shortages. We are still experiencing significant cost increases related to these factors. Labor expense as a percentage of restaurant sales for the second quarter remained flat with prior year at 33.9%. Operating expenses as a percentage of restaurant sales were 14.7%, a 10-basis point increase over the second quarter of last year, which can primarily be attributed to increasing costs in supply and freight. Occupancy expense as a percentage of restaurant sales was 6.1%, 20 basis points better than the prior year period, also driven by sales leverage, since most of our occupancy costs are fixed in nature.

Restaurant-level operating profit grew 25.4% year-over-year; and as a percentage of restaurant sales was 21.7%, a 30-basis point increase over the second quarter last year, attributable to the improvements in our restaurant-level operations as I just described. Depreciation and amortization expense as a percentage of our total revenue remained flat at 5.2% in both periods. General and administrative expenses fell by 40 basis points to 7.3%. Marketing expenses decreased as a result of the lower costs of new store opening marketing expenses. Preopening costs fell by $135,000 to $1.1 million from $1.1 million last year, which on a percentage basis were 30 basis points lower, representing .9% of total revenue. We opened three company-owned restaurants during second quarter 2005 compared to three in the prior year period.

Overall, excluding noncash rental costs, preopening costs for the restaurants we opened during the second quarter of 2005 averaged $192,145 per restaurant, compared to an average of $187,042 per restaurant in the second quarter of 2004. Income from operations grew 34% year-over-year to $12.1 million from $9 million, and improved 90 basis points to 10.6% of total revenue from 9.7 in the second quarter of 2004, due to the improvements I've just described. Other expenses were $722,000 in the second quarter of 2005 compared to $298,000 in the same period last year. This year, we have higher interest expenses of about $157,000 due to higher outstanding debt in addition to an increase in the interest rates. 2004 expense was offset by a $257,000 gain on the sale of property.

We expensed $3.9 million in income taxes in the second quarter, or 34.6% of income before taxes, compared to $3 million, or 34.8% of income before taxes in the same period last year. We expect our tax rate to be approximately 34.6% for the remainder of this year. Net income for the quarter was $7.4 million compared to $5.7 million last year, s 30.7% increase. Diluted earnings per share in the second quarter were $0.45 compared to $0.35 last year, a 27.8% increase. Capital expenditures for the quarter were $17.5 million, including $14.9 million for new restaurants and $2.6 million for remodels, replacements and equipment. At this point, I will turn the call back over to Dennis.

Very good, Katie. Thank you very much. At this point, I'd like to review third quarter and full-year 2005 guidance. Based on the -- excuse me, based on the current outlook for the third quarter and full year 2005, we are offering the following update: Please keep in mind the revenue guidance for the period is net of team member meals, which we described earlier. For the full year, we are on track to open 26 new company-owned restaurants, and our franchise partners should add 15 to 17 new units. We expect four restaurants to open in the third quarter. We have opened two since the end of the second quarter; our development schedule calls for four restaurants -- or for the fourth quarter, includes 11 new restaurants, all of which are currently under construction.

For the third quarter 2005, which is a 12-week quarter, we expect total revenues to range between 113 and $115 million, and net income of $0.28 to $0.30 per diluted share. These projected results are based on an expected comparable restaurant sales increase of 2 to 3%. At the end of the second quarter, our restaurant in Salem, Oregon sustained a fire that will close the location for about 60 days. This closure is expected to reduce same-store sales by approximately .7%, and impact our earnings per share by approximately $0.01. Finally, our projected results for the third quarter will also be impacted by an $0.11 per share charge related to previously accelerated vesting of stock options, as further described in the press release. For the full year of 2005, we expect revenues of $487 million to $491 million, and comparable restaurant sales growth of 4 to 5%.

Based on those assumptions, our 2005 earnings guidance is now $1.64 to $1.67 per diluted share. This does not include the impact of new accounting rules for stock options, which we intend to implement in the first quarter of the new year as per the new SEC guidelines. Our tax rate for 2005 is expected to remain at 34.6%. Capital expenditures for the year are expected to range in the 90 to $94 million. Excuse me. Even though we have not changed our full-year guidance to reflect the benefit from exceeding our second quarter expectations, let me comment on the sales environment, since the guidance for the balance of 2005 is more conservative. Our long-term growth model is built on a 2 to 3% comparable sales growth, which we believe is sustainable.

While we have been able to achieve outstanding momentum over the last few years, I want to remind everybody, compounding on strong sales only gets more difficult, as we have particularly difficult comparisons in the second half of 2005. Before we open this up to questions, I want to quickly speak to the events surrounding the management change. As we announced today, the management and governance changes follow an internal investigation conducted by a special committee of the board of directors. We have notified the Securities and Exchange Commission of this internal investigation. We do not know what the SEC may or may not -- what action the SEC may or may not take in response to our notification. Because these matters are pending, we are not in a position to speculate or discuss or elaborate beyond the details provided in the Company's press release and public filings.

We are committed to communicating to the market and to our stakeholders as developments warrant, and as it becomes more appropriate to do so. I sincerely appreciate your understanding, and ask that you keep your questions today to the financial and operational matters at hand. I want to reiterate strongly that Red Robin is in very good shape financially and operationally. Today's management changes underscore a commitment by the board of directors to act in the best interest of our shareholders and our brand. With that, I'd like to open it up to your questions, and respond from the key members. Thank you very much.

[OPERATORINSTRUCTIONS]. We will take our first question from Andy Barish at Banc of America Securities.

Hey, guys, can you hear me?

Yes, sir.

Just wondering if -- just on the third quarter guidance, the sales results, is that indicative of starting out the -- the quarter in July in that range? Or is that just kind of using your long-term guidance, given the tough comparison? And what -- even putting the charge back in there, the -- the operating results are still well below where we were and I think some of the other analysts were. Is there, you know, some other cost issues that you expect will be hitting in the third quarter?

I'll let Eric take that, please.

Hey, good afternoon, Andy.

Hi, Eric.

You know, I think we always err on the conservative side and, you know, like -- like Dennis alluded to before, our long-term model is that 2 to 3% range. We are comping over some extremely difficult comps in the third quarter of this year versus 2004. We are pleased how the outlook of the quarter and the guidance that we're giving. And I think that that, coupled with, you know, the -- the different commodity costs out there, while we are seeing some light at the end of the tunnel with -- with produce and -- and beef, hamburger costs, there are some other threats out there, in terms of oil and utilities.

Do you have any further questions?

No, that -- that helps clarify it. Thank you.

We'll go next to a question from Jeff Omohundro of Wachovia Securities.

If you could -- good afternoon, everybody.

Hey, Jeff.

I wonder if you could maybe address your management philosophy. How's this change going to impact the strategy of running the business, particularly looking back on the track record of -- of performance that's been put up over the past few years?

Jeff, Denny Mullen. Good afternoon. We don't have any change in plans of management philosophy and strategy at all.

And when you look at the team members, I mean where are you in the process of communicating this with them?

Well, obviously, we had to get it out to the public first, and there's communications going out to team members, franchisees, as we speak. We have calls set up as soon as we get off this one.

Okay. Then, looking at the -- the pricing outlook for H2, could you comment on any shifts in mix that you saw following the 1.5% price increase from June? Any more color on -- on your thoughts about the price value in general?

Yes, well obviously, Jeff, you know, our average check did go up -- and I don't have it right front of me -- but about $0.25 over the same time previous year. You know, we did this -- last quarter, we did introduce the barbecue promotion, which actually had some lower menu items, entree items on it, and we actually had probably some trading down in that category from burgers. So, while that -- that possibly affected maybe some top line sales, those -- those lower-priced items were much better margin contributors. So, we're pleasantly surprised -- pleased on what it's -- what it's doing to our cost of goods line. So, from a price value standpoint, even at the -- you know, that 10.65 range, we're still on the left-hand side of -- of that price value chart, and that's where we like to hang out and that's where we will be. And currently, we don't foresee taking another menu increase this year.

Very good, thank you.

Thank you.

We go next to Matt Difrisco of Thomas Weisel Partners.

I guess I'm still not understanding the slowdown here on the operating side. You did basically 40% EPS growth here, 59% in the first quarter. Now you're going to adding back in it the $0.11 -- $0.41 is below what you made a year ago, even though you're doing your 2 to 3 comp outlook. And then you've got about a 19% pickup in 4Q. I'm just trying -- is there some preopening going on here? I mean, the last guidance we had on preopening was 0.9 around for 3Q, and 4Q of 2.4. Are you going to incur more preopening in 3Q than that?

Yes.

Can you give us the preopening guidance you're getting to get to your $0.41 operating number?

We don't want to, at this point, go into those specifics, but let us look into that and get back to you on that, Matt.

Okay. And then a little bit of -- you want us to stay focused on the financial statements. Is that, then, to infer that this investigation is limited and not going to take into account financial restatements or the risk of financial restatements? Has that been crossed already or investigated?

We don't expect there to be any financial statements -- financial statement restatements as a result of this investigation.

Okay. Thanks for making that clear.

Thank you, sir.

We go next to Jonathan Waite of Key McDonald.

Okay, good afternoon. A couple of questions. Let me just beat this dead horse here with this guidance in the third quarter. What -- what are we looking for on margins? I mean, because you gave some bullish comments for commodity outlook for the remainder of the year. Where do you see margins moving, then? And what are the pressures that we're talking about that get you there?

[INAUDIBLE].

Jonathan, really I think probably the -- the conservative EPS guidance is really -- really floats around that -- that 2 to 3% in comp store sales increases. Originally, I think --

I don't think anybody was expecting much more than that, no? I mean you had a pretty difficult comparison anyway, but even with a 2 to 3 comp, you've got down earnings?

Well, we're -- currently right now we're going up -- we will be going up in the third quarter against very -- one of our strongest heavy guest counts of 2004.

So, it's just lapping off the pricing and --

Exactly.

Okay. And with your guidance, that implies earnings in it the fourth quarter of about 43 to 45? Is that about right?

That's correct.

Okay. Mike still has a pretty big chunk of your stock outstanding. Any comment on what happens to that?

No.

And in -- in the press release, is -- you talked about Jim leaving. Is his resignation have anything to do with the special committee investigation?

Well -- this is Denny Mullen. The board discussed the findings and the result in management changes with Jim, and he decided to resign. And we can't go into it any further.

Okay. Thank you.

Thank you.

Thanks, Jonathan.

We take our next question from Barry Stouffer of BB&T Capital Markets.

Good afternoon. Was there any extra legal expense in the second quarter from the investigation? And are you expecting extra expenses in the third quarter?

Barry, there were no accruals in the second quarter and we have the expenses in the third quarter.

Is that --

[INAUDIBLE], if you will.

Okay. Is that part of what's the issue with here with down guidance? Because --

No, it's insignificant.

Any severance costs?

No.

Okay. I'm -- I'm -- I guess I'm going to weigh in like everybody else. With a 2 to 3% comp, I'm still not clear on where the margin pressure would be coming from that would cause a down quarter in the third, excluding that $0.11.

Well, we will be seeing, Barry, some increases and -- or we expect to see some increases in G&A. You know, right now in our development pipeline, we think somewhere between -- we'll open between somewhere between 26 and 30 new restaurants over the three quarters and 4, 1 and 2. And there is some money earmarked for -- for some marketing that -- that will -- that will drive some G&A costs, as well.

And if there's margin pressures in the third quarter, why would we -- or why should we think that -- or why do you think that there's going to be a rebound in the fourth quarter, so with that many openings you actually are, in effect, raising your fourth quarter guidance?

In the fourth quarter, actually, we're comping then over strictly just a price increase and very low guest traffic increases -- over 2004. Conversely, the exact opposite that we're experiencing in the third quarter of this year.

And Barry, as we said in the fourth quarter, we expect sales growth 4 to 5%.

Okay. Thank you.

Thank you.

Next we have Dean Haskell of JMP Securities.

Yes, good afternoon, everyone.

Hey, Dean.

You know, following Barry's questions, if you look at the G&A run rate in the first quarter, you're running about 570 -- $570,000 a week. You look at the G&A run rate in the second quarter, you're running almost $700,000 a week. To what do you attribute that huge increase, just in the last 12 weeks?

You're asking the increase in G&A?

On a weekly basis, yes; it accelerated dramatically.

16 weeks in the first quarter --

Yes, we have 16 weeks in the first quarter.

12 weeks in the second.

I divided by 16.

Okay.

So you get $570,000 per week spent on G&A in the first quarter, and $691,000 spent in the second quarter with 12 weeks. That's a dramatic increase in G&A per week.

Right.

And -- and really, Dean, if I can handle that one, the way that our -- our -- our growth is aligning for this year, with -- with some of the -- the projects moving towards the latter half and 2006 really looking to be front-loaded, some of that's just natural in gearing up for that growth, both in the field as well as here at the home office.

Okay. And also following Barry's excellent questions, the guidance for the second -- or excuse me, the third quarter -- does imply a significant increase in guidance on the fourth quarter, in a quarter where you're going to open a significant number of new units with a very high related preopening cost.

Our guidance is on comp sales. So the NROs wouldn't be in there, but there will be opening costs already in the plan.

And third quarter, we'll be seeing those preopening costs that are going to be opened in the fourth quarter.

So, you're going be -- some of the preopening costs of the fourth quarter will be in the third quarter and that's why you're being extra conservative at about -- if I add back the $0.11, I get, you know, 30 -- $0.39 to $0.41 for the second quarter -- excuse me, the third quarter, versus $0.46 last year, and that means a dramatic increase in the fourth quarter in EPS.

To get to the addback -- to get to the full year of $1.75 to $1.78 --

$1.78.

With the add back, yes.

Okay. And -- okay, well now I'm in Missouri, it's a "Show Me" state kind of -- Okay, thanks.

Yes, sir.

We take our next question from Peter Oakes of Piper Jaffray.

Hi, yes, I have a few here. Dennis, this news, obviously for you folks and everybody on the call, is rather sudden. Can you share with us your intentions with your new role? Do you view this as permanent? Or more as a caretaker role?

I -- I don't -- I don't know what you define by permanent, Peter, but I'm 62 years old and healthy, hopefully. But we have been talking at the board level for some time about succession planning and looking at Mike's desires in the future, and these promotions that we've made today are indicative of that succession planning. How long my role is here will -- will be determined on how strong the management comes along as we develop these restaurants. I'm in no hurry. The board is in no hurry. But we've got a lot of strong people at this Company.

I guess I was just inferring, is there a search underway for another CEO? And I think you answered it.

There is no search under way, I will answer it specifically.

Okay. Do you -- just to familiarize everybody on the call, do you have any other current employment engagements?

No, I'm involved with the Janus Fund Boards as independent Chairman, but that's not an employment.

Okay. I was just hoping for a little clarification in the press release regarding the $0.11 charge, and it states that during September 2002, the Company's board approved accelerated vesting of 400,000 options that were originally granted in May 2000. Why is that charge going to be recognized in the third quarter of 2005?

Peter, I will let Katie go into that, please.

It was deemed to be a modification of the plan, which created a charge upon receipt of benefit. As long as those two individuals were employees, they could not receive benefit upon termination, was what triggered the charge.

Okay. So these had not vested while they were still employees?

That's correct.

Okay. Have these options actually been exercised?

Yes, they have.

Okay.

Way back.

Yes, back in 2002.

Way back. So, it's just a contingent chart setting there.

And it's disclosed there in the 10-K in the footnote on stock options, so you can look at more detail there.

Okay. As far as -- Dennis, you mentioned up front about communications with the SEC. Is there kind of a framework of a timetable you can share with us that you're thinking about for that?

Peter, we -- we've had the initial communications with the SEC. We have no timeframe or response at this point.

Okay. And then --

We will keep -- you know, keep you advised as best we can.

Okay. And then maybe just one more on -- on kind of the third quarter, a clarification. The guidance for 2 to 3% comp, and you compared that to the 4.8 that was posted for second quarter, you're already one month into the third quarter. Could you share with us how third quarter's actually started, though?

Eric?

Well, I think as I said before, we're confident that -- that we will hit that -- that guidance.

Okay, so that -- that implies the first month is actually showed some slowdown as -- as you expected, relative to second quarter? I just want to make sure that's the message you're signalling here.

I think relative to second quarter, that's -- that's appropriate.

That's correct, Peter.

Okay. Thank you very much.

Thank you.

We move now to Mike Smith of Oppenheimer.

Well, just a real quick question. I -- it seems like moving up that vesting seems to be a reward. Is that a reward for misbehavior, or are you going to try and recoup any of the funds that you think were misappropriated?

Mike, there are two parts to that question. The last part we won't speak to. The first part in terms of the vesting, I'll have Katie go through that slowly again, because frankly, it was difficult for me to understand. But the 2002 transaction has nothing to do with severance or reward or anything of that nature. So, Katie, one more time, slowly, on that, please. And this is a one-time deal. Third quarter -- done.

Correct. And the only reason that it triggered an expense is because the terminations. This acceleration of vesting was done in 2002. And those options were, in fact, exercised in 2002. The benefit to those employees would have been obtained in 2002.

The charge, as I understand it, is -- as more of a layman is at 2002 when the vesting was changed, the stock -- the options were vested at "X" price -- $5.80 or something like that, when the market price was $12. So that spread was a contingent compensation charge that carried on until April of 2007, and in 2007 it just went away. We wouldn't have a charge at that point at all, unless any of the individuals that were involved in that acceleration, if you will, and repricing, left the Company. And two of those individuals left the Company this week. Therefore, we had to take the charge.

Thank you.

Thank you.

Thanks, Mike.

We go now to Hil Davis of SunTrust.

Hi, good afternoon.

How are you, Hil?

I was just -- I guess I want to touch on margins again because kind of from what I understand, is usually when you are able to achieve 2 to 3% same-store sales growth, you can maintain more -- restaurant level margins, maybe a little bit of decline, which I think maybe some of us had modeled. But such a significant decline on 2 to 3% same-store sales would kind of suggest that it's either all or nothing, because if you get 4%, you actually have margin expansion, but at 3%, you have margin contraction; and I just -- I'm a little confused about why there's such that high extremes in -- in the same-store sales in the margins, to how they react to that?

Hey, Hil, Houseman here. Let me answer that one, and I'll answer for the group, because I don't we did a good job before explaining that, so we'll try one more time. Really, with the -- the third quarter guidance and -- and the earnings guidance, really, what's driving that is the G&A from marketing, as well as -- as some additional G&A that we have planned to support the 2006 growth in the first and second quarters; and then predominantly what's driving that is the 11 restaurants that we will -- that are under construction today that will open in -- in the fourth quarter. We need to accrue for those expenses in the third quarter of this year. So those -- those things coupled together with our conservative, yet we think attainable same-store sales increases of 2 to 3%, is where we're getting at and arriving at our guidance.

So mostly it's kind of the below the line of preopening in the G&A side?

It really is. You know, I think Katie admitted to -- or alluded to it at a -- you know, each new restaurant, that preopening is about $195,000. So you do that by -- by 11 restaurants, or a portion of there, and -- and it's a substantial hit for one quarter. But what we like about that is where we feel like we're really setting ourselves up for a pretty strong 2006.

I guess in terms of the marketing dollars, you -- you've successfully pushed back marketing in 1Q and 2Q this year because of the success of the -- of the stores, and it sounds like you didn't have to market as heavy around new store openings. Why are you expecting kind of an acceleration of the marketing dollars in Q3 versus maybe the first two quarters of the year?

Well, I think that is -- and I think we alluded to this on one or two previous conference calls -- but two things: One, you know, we like having that little buffer in our quiver, in case we need to pull it out; and two, you know, we do have a fall promotion with new products that are coming down the line in the -- in the fall in Q3. So, it's really a couple of things.

So, like historically, I guess, if -- if sales are trending above planned and you don't feel like you need to market, you won't; and you will put those dollars back into the quiver. But if you feel like you do need to market, you will actually use them. Is that -- is that?

Yes. That's been our strategy going forward, and I don't see -- I don't see it changing. So I will -- will just quickly add that, you know, we -- we have reallocated those marketing funds for new restaurants, and we are quite pleased with the results that we are -- that we're opening our new restaurants from a revenue standpoint. So that -- that marketing money, then, is really more earmarked for our comp base.

Okay. And I a final question, it sounds like based on the preopening dollars being loaded in the Q3, you probably expect to have the majority of those stores opened early in Q4, and that's maybe where we're getting some of the upside to the earnings, as well?

Yes.

Okay. Great, thank you.

And just to that third quarter earnings call, do remember that we will -- we have Salem, which is a $4 million restaurant for us, which will be closed for most of the majority of the entire -- entire quarter, which is making up a penny right there.

Right. So, it's about $0.12 of one-time expenses or, you know, $0.11 of one-time and then a penny due to the closure?

You got it.

Great, thank you all very much.

You bet.

Thank you.

We go next to Ashley Woodruff of Bear Stearns.

Hi, thank you. Just to go back to -- first on the preopening, you said the majority of those fourth quarter openings, you will recognize that preopening in the third quarter. How much -- is it like 75% of that preopening will be in the third quarter? Can you give us a --

I'd probably say, Ashley, it's probably about 50%. Not all of it -- the -- we do have a couple of those 11 that are slated to open after Thanksgiving. So the majority of those preopening expenses will -- will be incurred into the fourth quarter. But I'd probably say about -- probably about five or six restaurants preopening expenses we will recognize in Q3.

Okay. And then on restaurant level margins in the third quarter, you had a very strong sales year -- sales quarter in the third quarter of last year -- and I think you had maybe record restaurant level margins. Do you expect margins this third quarter to be more similar to where they've been running this year? Or do you think they can be more similar to what they were a year ago?

Well, I think -- we anticipate, like we said, we -- there are threats out there, in terms of freight and oil. We are seeing some benefits in terms of some of our cost of goods. But I think -- I think we're comfortable that we will see -- we will see restaurant operating profit increase.

Okay. And then on -- just a question on the special committee, has that been completed or is the committee still ongoing?

The committee for all intent and purposes is completed; it's still in existence until the investigation -- until the SEC has done whatever they're going to do.

Okay. But there's -- is there anything particular -- anything else that the committee wants to investigate? Or was this --

Ashley, as I said, that's -- we're not going to talk about it any further.

Okay. Thank you.

Thank you.

We'll take our next question from Matt Difrisco of Thomas Weisel Partners.

Hi. Regarding the new management, is there any sort of vesting you've received in your new position to align yourself with shareholders, or can you talk about the position you have reported as holdings right now?

For Dennis Mullen, your mean?

Yes.

Well, I've been a director since 2002. So, I've received options through those periods and have been a shareholder since 2002. The holdings are in the proxy that was just put out. In terms of going forward, we're still negotiating -- this happened so quickly that I stepped into it, you know, to take over the position and get after it. We'll worry about those details later.

Okay. And does the investigation restrict anything such as share repurchase activity in the open market?

No.

Okay. Thank you very much.

Thank you.

We go now to Charles Rupinski of Forstmann Leff Investment Management.

Yes, I had a quick question. Could we get a bit more detail on the nature of the consulting arrangement going forward, particularly in the second half, that had been mentioned about, you know, these management changes?

I'm sorry, with Snyder you mean?

Yes.

Well, it's -- Mike is the -- Mike is going to assist us in -- in the brand work, as he always has, and in looking at marketing programs and advising it and giving us his input on that. He will not be involved in the day-to-day business as -- as he has in the past, but he will be available to consult with me, consult with house, consult with the board on -- you know, on an as-needed basis. Obviously, he said he needs to take some time with his family and kick back a bit. But Red Robin is his life, and he's a huge shareholder; and for those reasons, we fully expect him to remain engaged with us.

Did that answer your question?

Yes.

That's the best I can answer it right now, sir.

We will take our next question from Dan Geiman of McAdams Wright Ragen.

Thanks. How does today's announcement impact your expansion plans, and how might it impact your relationship with your franchisees? Also, is there anything you can say with respect to how your FY '06 openings are shaping up at this point, both company-owned and franchised?

Well, Eric and I both think that it does not affect our expansion plans at all. The relationship with the franchisees, we don't expect any change whatsoever. We will be on a call with franchisees shortly. But again, I'd remind you that Mike Woods and Bob Murello have been with the Company for a long time. Mike is in charge of the franchisees and the franchisee development, and communicating. And there will be -- we expect that to be seamless, frankly.

Okay, anything you can say with respect to fiscal '06 openings at this point?

Yes, Dan -- Houseman here. I'll -- I'll answer that one. We expect probably somewhere -- in the franchise community, somewhere -- open somewhere between 15 and 17 new units in '06.

Company-owned?

Somewhere, I believe -- I'm not sure if we've given that guidance yet, so I'm going to hold off for -- on this call.

Okay. Thank you.

I will tell you that our pipeline is -- is quite full, and Todd Brighton and his team are working on, actually, 2007 deals. So it's -- it's pretty loaded. It will all depend on how fast we're going to grow. And as Dennis said, it's business as usual. So, one of Snyder's deals was. we got to grow this thing with grace and dignity, and that's what we will continue to do.

Great, thanks.

[OPERATORINSTRUCTIONS]. We will take our next question from Steve Mortimer with Wellington Management.

Hi, guys.

Hi, Steve.

Hi. Could you confirm that Mike is going to be expected to payback and he's agreed to all the expenses the board deems appropriate?

Yes.

Okay. And with the 2 to 3 comp, you do expect -- I think you said the restaurant-level operating margins should be at least flat with last year's 22.7%?

Yes.

Okay. And then lastly, why have you changed -- or could you break out what the franchise development costs were for the quarter? That used to be a line item that was done separately.

For the second quarter, is that what you're asking?

Yes, and why you decided to roll it up into other things, it looks like?

Yes, it's $637,000 for the second quarter.

Okay. And then -- can you give any idea in terms of order of magnitude what you're going to be spending on the incremental marketing in the quarter?

You know, I will take that one, Steve. Currently right now, I don't think -- I don't think we know for sure. So we wouldn't -- we'd be a little hesitant to give that guidance. It all really depends on -- on how well -- how well the -- our same-store sales continue.

Right, so the 2 to 3 might be without the marketing, and with marketing you'd hope you could maybe get them better after that?

Eric didn't say that, Steve. [LAUGHTER]. But, the marketing, as the Company has done in the past, is post-marketing that if -- if it responds well, then we make the determination on an ongoing basis whether to keep the pedal down or let up on it. And that will run the 2 or 3% as we go forward.

Okay.

Without getting into specific, you know, numbers at this point.

Thanks.

Thank you.

We'll take our next question from Steven Gold with Turner Investment Partners.

Could you please let us know what the date of that fire at the Portland, Oregon restaurant was?

I believe that, Steven, was July 3 -- Saturday -- yes, Saturday, July 3.

Okay, and in the month of -- if we take a look at July same-store sales, if you back out the Portland, Oregon restaurant, is July tracking with this 2 to 3% that you're now anticipating for the third quarter, or is July tracking higher than that?

We're right on track.

Okay. In terms of the margin assumptions for the third quarter, you -- you all appear to be focusing mostly on the G&A and the preopening costs. Is one to assume that the other components of -- on the expense side, that there -- that you do not anticipate any pressure on margins, again, from labor and the operating occupancy?

For the third quarter?

Right.

That's a correct assumption.

Okay. And earlier, I thought I heard one of the questioners was mentioning the G&A, that they thought that it had significantly increased between the -- the first and the second quarter. It looks like on a weekly basis, the number is 697 year-to-date and 691 for the second quarter. So, it doesn't appear as if, you know, on a weekly basis that there really was much of a change in G&A in the first half of the year. Is that correct?

Steven, that's what our spreadsheet is showing us, too.

Okay, so again -- so the pressure --

We're doing the dividing and math here while you've been talking.

Well, I just -- no, and again, it's sort of -- it just sounded like it was misleading information, so I just wanted to correct the record, that's all.

Appreciate it, and thanks for helping us.

So, again -- so the pressure in the third quarter is only coming from the preopening expenses because the -- because of the, you know, the increased expansion of the restaurants opening in the fourth quarter.

Correct.

But no other place in which you all seem to be concerned?

Other than what we talked about in G&A, yes.

Right. Okay, thank you.

Thank you.

And we'll take our next question from Ken [INAUDIBLE] with Waddell and Reid.

Yes, just a couple of questions for you. I was just wondering if you could just talk a little bit about the timing of all, you know, these changes? I mean, it seems like, at least to my knowledge, some of these management people were still accessible, you know, even up until yesterday. And so I was just wondering, did this all come to a head today? Or -- and, you know, kind of what's -- what's been the duration of all of this?

Ken, by accessible, you mean Mike and/or Jim?

Jim was, to my knowledge, accessible yesterday.

The management changes happened within the last two days. So --

So, all the kind of preparation for the call and all of that just kind of came together real, I guess, pretty quickly?

As you can imagine, yes.

Yes, it's been a very busy 48 hours.

Okay. Now -- now the whole idea, you know, in terms of the, you know, consulting arrangement, is that more driven by need than it is by desire? Well, I mean, the fact is, is you know, I'm -- I'm just wondering, you know, kind of the scope of the whole investigation. I mean, the reason -- you know, I'm just trying to understand, you know, this is a big change that's happening quickly, and so it seems like you need -- you need some -- need some help.

Well, this management team has been in place for a long time. Mike as been the head, of course, but we don't expect any hitches. In terms of your question between need and desire, you know, the desire on our part was to keep Mike engaged in terms of the brand and the things that he's definitely been a major contributor to over the years. There was no need -- quotient factor, if you will -- on his part or our part. It was a desire by us and a desire by Mike, irrespective of the investigation.

Okay. Thanks.

Thank you.

We'll take our last question from Adrian [Ambrosi] of Deutsche Banc.

Hi, I just -- most of my questions have been asked. Just a follow-up on the last question. What is the duration of this consultancy? And I guess, what message does it send about, you know, sort of committing things that are not acceptable at the board level, but then, you know, remaining part of the team on some level, I guess to the extent you can comment on that?

Good question. The extent of the arrangement -- if the question -- well, maybe what you're driving at or others are driving at is the extent of the consulting arrangement on a financial basis; therefore, that would also drive the extent of -- of his involvement on a time basis. It is totally inconsequential in terms of a financial basis --

No, I was thinking more from an ethical standpoint. I mean, clearly, someone doesn't get treated this way unless they've done something wrong and inappropriate, and -- but he's apparently keeping a position because he's good at branding? I don't get it.

No, I think -- I think more will come on that as we go forward, and hopefully it will better answer your question, Adrian. I wouldn't go out and just make assumptions at this time on that basis.

Okay. Great. Thank you for the clarification.

Thank you very much.

Thank you.

And again, that is today's final question. I would like to turn the conference back over to Dennis Mullen for any additional or closing remarks.

I'm sorry that we have had a bit of a scramble here. It's been a very busy 48 hours -- or 36 hours, as the case may be -- events that were not expected by any of us, and certainly not expected by you all. I look forward to further dialogue as we go forward here. This is a great Company, and we're going to keep it on track. So thank you very much for the call.

And once again, this will conclude the Red Robin second quarter 2005 earnings conference call. We do appreciate your participation. You may disconnect at this time.