Red Robin Gourmet Burgers Inc (RRGB) 2005 Q3 法說會逐字稿

Good morning, and welcome to the Red Robin third quarter 2005 earnings conference call.

At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Dennis Mullen, Chairman and CEO of Red Robin.

Please go ahead, Sir.

Thank you.

Good afternoon.

Before we get started, I want to remind everyone that today's discussion will include forward-looking statements.

These statements are not guarantees of future performance and therefore, undue reliance should not be placed on them.

Red Robin refers all of you to the filings with the SEC for a more detailed discussion of the risks that could impact Red Robin's future operating results and financial condition.

With that, thank you very much for joining today.

With me is Eric Houseman, President and COO, who will give you a business update, and Katie Scherping, our CFO who will provide a financial overview and guidance.

Before I turn the call over to Eric however, I wanted to just say I've really enjoyed the opportunity to meet with and speak to many of you about Red Robin.

Also, since assuming the CEO role in August, I've spent a lot of time with various team members of Red Robin and I'm pleased to report they have never been more enthusiastic about our future.

Red Robin's goals remain the same.

We want to grow our Red Robin culture with our business, we want to attract new team members, we want to take care of those new team members, our guests and our shareholders and we want to execute our growth model.

And importantly, we are here today to tell you that what we've said regarding our financial performance and our new restaurant development program in our guidance update this past September is on track, all of which would not be possible without the outstanding contributions of all of our Red Robin team members and I want to personally think them for our continued success.

And with that, I'd like to turn the call over to Eric.

Thanks, Denny.

Good afternoon, everybody.

While Katie will cover our financials, I just want to touch on a few of the items that our 25,000 team members across the system can be so very proud of.

Our same store sales at our company owned restaurants grew by over 2.1%.

This was against a very challenging 8.8% of the previous year and this increase was pretty evenly split between average guest counts and average check.

Average check, or average guest counts rose .9% while our average check rose 1.2%.

You will recall that the restaurant enters a comparable base five full quarters after it opens.

In our third quarter, we had 122 company-owned comparable restaurants out of 152 total company-owned restaurants.

As Denny said, our development plan remains on track.

This quarter we opened 4 restaurants in Oklahoma, Illinois, California and Pennsylvania and we brought our 2005 opening total to 15 through the end of Q3.

We also reopened our Salem location at the end of August which, as everyone probably remembers, was closed due to a fire.

In addition, we've already opened an additional 8 restaurants so far in Q4 and we remain on track to open a total of 11 in Q4 which will give us a total of 26 company-owned restaurants for 2005 which was right in line with our previous guidance.

Our franchise partners opened 1 new restaurant during the third quarter, bringing their total to 10 at the end of the third quarter and they have opened 5 new units so far through the third quarter of this year.

We expect our franchise partners to open an additional 2 to 4 units in the fourth quarter for a total of somewhere between 17 and 19 new franchise units in 2005.

This is actually 2 units above our prior guidance of 15 to 17.

From a products standpoint, we just finished featuring our fall Chili Chili promotion which included the Chili Chili Cheeseburger, the Chili Chili soup, and the Chili Chili Cheese fries.

Say that 10 times fast.

The Chili Chili promotion items slightly impacted our average check due to the lower price menu items and soups.

However, we saw better margin contribution due to the lower than average cost per unit.

We're also very pleased to continue to be recognized as our guests as a choice destination for fun, wholesome, family friendly atmosphere with attentive service.

And they appreciate the tremendous value that our tasty gourmet burgers offer.

With our low average guest check and high income demographic, we are confident that we will remain well positioned to take better care of our core audience, America's families including women, teens and tweens.

We are very pleased with this price to value relationship and industry low guest check average, and we are constantly looking at ways on how to better protect and enhance this relationship because we feel it adds to some reversionary insulation and allows for our strong frequency of loyal guests to continue, especially during time of macro economic pressure.

As you can see from today’s release, we remain on plan for fiscal 2005.

That performance would not be possible without the incredible efforts of the entire Red Robin team.

I want to thank them all for helping create incredible guest experience that keep wowing our guests and keep them coming back time in and time out.

So with that, I'll turn the call over to Katie.

Thanks, Eric.

Before I get started, I want to inform our listeners that we will make some references to non-GAAP financial measures during our call.

You'll find the supplemental data to our press release on Schedule 1 which reconciles our non-GAAP measures to our GAAP results.

I would also like to remind you that our revenue comparisons for the third quarter and year to date of 2004 have been adjusted by $1.3 million and $4.3 million respectively to reclassify the cost of team members meals as we previously disclosed in our second quarter 2005 report.

This reclassification had no impact on earnings.

In addition, we will be filing our third quarter 10Q tomorrow.

Now let me comment on our results for the third quarter 2005 compared to our results from a year ago.

Our revenue in total for the third quarter was $114.2 million, a 16.2% increase over a year ago and within our guidance range of $113 to $115 million.

Restaurant revenue increased $15.6 million from $95.4 million last year to $111 million this year.

This increase is made up of an increase in comp restaurant revenue of $1.9 million and non comp restaurant revenue of $13.7 million.

As Eric mentioned, restaurant revenue from same store sales increased 2.1% above last year.

The increase in same store sales was generated by a .9% increase in guest counts and a 1.2% increase in average guest check to $10.60 from $10.48 last year.

Keep in mind our third quarter 2005 same store sales was negatively impacted about 67 basis points from the closure of our Salem, Oregon store due to the fire in early July.

That store reopened on August 29th.

Franchise royalties and fees increased 12.3% in the third quarter to $3.2 million.

Restaurant level operating profits decreased from 23% in third quarter last year to 21.8% this year and is slightly above our second quarter '05 profit margin of 21.7%.

Our 2005 margins are in line with our long term restaurant level operating target of 21 to 22%.

The decrease in restaurant profit margin from last year is primarily attributed to a 70 basis point increase in labor costs, a 100 basis point increase in operating costs, offset by a 60 basis point improvement in cost of sales.

The higher labor costs this year as a percent of restaurant revenue is the result of increases in both hourly wages and salary positions.

The 100 basis point increase in our operating costs in the percent of restaurant revenue this quarter over last year were primarily the results of a 20 basis point increase in supplies, particularly petroleum based products and freight costs, 40 basis points in higher utility costs, and a 10 basis point increase in repair and maintenance costs.

The improvement of 60 basis points in our cost of sales as a percent of restaurant revenue this year is primarily a reflection of the improvement we have seen in commodity prices recently.

In addition, our quarterly beverage rebates, from our recent switch from Pepsi to Coke provided a 15 basis point reduction in our cost of sales in the quarter.

On trend, we expect cost of sales to remain relatively flat.

However, we may experience some higher produce costs in the near term as a result of the impact of Hurricane Wilma on the Florida crops.

Depreciation and amortization remained at 5.4% of restaurant revenues, consistent with the same period a year ago.

Our general and administrative expense as a percent of restaurant revenue improved 40 basis points over the third quarter last year, but actual expense increased $813,000 this year.

We expect to reduce our G&A expense as a percent of restaurant revenue by 10 to 30 basis points annually over time excluding stock compensation expense, but we will continue to invest in our infrastructure and systems to support our growth.

Looking forward to the fourth quarter it's worth noting the G&A expense in the fourth quarter of 2004 included approximately $500,000 for the cost of implementing SOX 404.

Although we don't expect to incur significant cost this year for SOX compliance, we do expect higher legal costs in the fourth quarter which will impact our Q4 guidance.

Our pre-opening expense in the third quarter 2005 was approximately $1.4 million compared to $1.2 million last year.

Our pre-opening costs typically represent costs incurred approximately 6 weeks prior to our restaurant openings with the majority of the costs incurred in the final two weeks.

The current quarter pre-opening expense included $822,000 of costs incurred for the 4 restaurants we opened in the third quarter, $289,000 of pre-opening costs incurred in the third quarter for restaurants we have opened or will open in the fourth quarter of this year, and $253,000 of non cash rent expense for units under construction in the third quarter.

Our average pre-opening expense per restaurant in 2005 year to date is approximately $194,000 exclusive of non cash rent expense which is slightly higher than our average 2004 pre-opening expense average.

In addition, our non cash rent expense during the restaurant construction period averages $50,000 and begins approximately 130 to 150 days prior to opening.

We currently and have historically expensed our non cash rent consistent with the new accounting pronouncement, FSP13-1.

The significant and unusual items we incurred in the third quarter and year to date 2005 related to our management changes, were discussed in our last quarterly call, and have been outlined in our prior releases and guidance updates.

The 1.5 million of net charges represent the combination of the pretax charge of 2.8 million stock compensation expense, net of the 1.25 million pretax gain recorded as the result of the reimbursement of certain expenses.

Together, these unusual items resulted in a net charge of $0.06 per share after tax which is reflected in our quarter and year to date earnings per share.

The public consensus EPS for the third quarter of $0.41 on First Call represents the third quarter earnings per share excluding the $0.06 net charge.

Our reported EPS of $0.39 per share for the quarter was $0.04 above the GAAP adjusted consensus EPS of $0.35 and above our $0.33 to $0.35 EPS guidance for the third quarter.

Let me highlight the items that created the $0.04 per share improvement above the top end of our third quarter EPS guidance.

Pre-opening expense was approximately $0.02 per share less in the third quarter than we estimated.

However, most of that is expected to be pushed into the fourth quarter.

In the third quarter, we recorded a gain from an insurance settlement we received from the Salem store fire which resulted in about a penny per share after tax.

And finally, our effective tax rate in the quarter was decreased to 33.2% as a result of lower taxable net income which resulted in a penny per share reduction in tax expense.

For the fourth quarter 2005, which is a 12 week quarter, we expect total revenues to range between $118 and $119.5 million and net income of $0.40 to $0.41 per diluted share.

These projected results are based on an expected comparable restaurant sales increase of 3 to 4% It is important to note that we are still up against a very difficult 6.7% comp from last year.

We will open 11 new company-owned restaurants this quarter of which 8 have already opened, and we expect our franchisees will open an additional 7 to 9 new restaurants of which 5 have already opened.

I would like to point out that our full year revenue guidance provided prior to the second quarter of this year included approximately $7 million from team member meals.

For the full year 2005, we now expect revenues of $487.5 million to $489 million and comparable restaurant sales growth of approximately 4%.

Based on those assumptions, our 2005 earnings guidance is now $1.71 to $1.73 per diluted share up from our previous guidance of $1.69 to $1.72.

I also want to point out that our full year guidance is a penny wider than the sum of the quarters due to rounding.

It’s worth noting that the current EPS consensus for the full year of 2005 is published on First Call as $1.75 which excludes the $0.06 per share charge of significant and unusual items.

Therefore, our GAAP EPS guidance for full year of 2005 of $1.71 to $1.73 should be compared to the GAAP adjusted consensus of $1.69.

Just to be clear, on our third quarter performance, our fourth quarter and full year guidance, the pre-opening costs that benefited EPS in the third quarter will primarily show up in the fourth quarter but will have little effect on EPS for the full year.

The third quarter benefit of a penny from the Salem fire insurance settlement and the penny from the reduced tax rate are expected to benefit our full year EPS.

We expect higher legal expenses in the fourth quarter which will impact earnings per share about a penny for the fourth quarter and full year and we’ve narrowed our sales expectations for the fourth quarter and full year based on our results to date.

To wrap up, capital expenditures for Q3 were $22.1 million, including $19.1 million for new restaurants and $3 million for remodels, replacements, and equipment purchases.

Year to date capital expenditures are $61.8 million and we currently have approximately $47 million available under our $85 million revolving credit agreement to fund our future capital needs.

And with that, I will turn the call back over to Dennis.

Thanks.

Eric, thanks and Katie, thanks.

Catch your breath, I'm sure there will be a few questions.

To sum things up, as you all know, while there have certainly been a number of moving parts between Q3 and Q4, overall we remain on plan for the year and are confident with our long term growth model which is 17 to 20% new unit growth, 2 to 3% comparable restaurant sales growth, 16 to 18% franchise royalty and fee growth, combined with continued G&A leverage as Katie mentioned All this generates 20% plus earnings growth excluding stock option expenses.

And with that, I'd like to open it up to your questions.

Thank you.

[OPERATOR INSTRUCTIONS].

We'll have our first question from Andy Barish, Banc of America Securities.

Thanks.

On that G&A number in the third quarter, I guess I was a little surprised how good it looked given some of the management changes and everything that were going on.

Is that kind of a new focus or did the insurance proceeds go into the G&A line to make that look a little bit better?

Yeah, we had about a penny a share equivalent that's in G&A for the insurance settlement.

Okay, that’s helpful.

And Eric, can you just quickly remind us what you have in terms of menu price increases kind of coming into the fourth quarter here and when or the next kind of lapping would take place when you'd have to consider pricing?

Absolutely, Andy.

And to answer your question, consider pricing, I'll take that one first.

We’ve said that our goal is to maintain those 21 to 22% restaurant operating profits and we will take a price increase to protect our margins.

We will not take a price increase to artificially inflate same store sales.

So with that said, we are, we did take a 1.2% price increase in June of '05, so we have 1.2% of pricing carrying us through the first 6 periods of ’06.

And currently right now, while we are monitoring our commodity costs, utilities, that kind of thing, we are not planning on taking any price increase, but are watching it.

And on the promotional side, you said you finished up Chili Chili.

Are you now into gift cards, is that kind of the primary promotion in store?

Yep, gift cards and it's reinforced with some cinema going on right now as well as a little radio.

Thank you.

We'll have our next question from Matthew Difrisco, Thomas Wiesel Partners.

Hi.

I have a couple of questions.

Just some of the bookkeeping ones though first.

Can you give us the net charge of the after tax of the $0.06?

That is after tax.

No, no, I meant the dollar value of it on top.

You gave - - I'm just trying to figure out the tax rate, normalized tax rate how - - I think you got to like $0.44 adding back in the $0.06, not $0.45, correct?

The pretax charge?

No, you gave us the pretax charge.

I'm just wondering what is the absolute dollar amount after tax.

Not per share but absolute dollar amount.

We've got about 33% rate on the 1.5 net, so - -

Okay, I'll back out of that.

Okay, and then for modeling purposes, can you give us the base year for the sales in the fourth quarter of '04 without the discount for your company-owned restaurants for wait staff?

Fourth quarter adjusted without team member meals.

Without team member meals in the fourth quarter you mean?

Yeah.

The '04 guidance, or Q4 guidance is - - let me go back to my guidance here.

[Inaudible] is the basis of the actual number?

Yeah.

Revenue was $118 to $119.5 million.

No, for Q4.

2004, '04.

Oh, '04, I’m sorry, '04.

Total revenues 119, restaurant revenues 116.

116.

Okay.

And then just on your COGS guidance, it was unclear when you said flat.

Do you mean flat year over year or flat with the range that you just saw in the third quarter?

We had pretty flat cost of goods.

Flat year over year or flat - -

No quarter to quarter.

Quarter - - so you expect like a 22.8 number for the fourth quarter as well?

Yeah, that's pretty close.

Okay.

Perfect.

And any guidance on what we should expect for the number of franchise development in '06?

Or should we take the cue that you're looking like you’re opening up more in the fourth quarter as a good sign for the beginning of '06 as well on number of franchises open?

Yeah, our target growth is between 15 and 17 annual for franchisees in the near term.

So that would cover '06 as well.

Okay.

Excellent.

Thank you.

And we'll have our next question from Barry Stouffer, BB&T Capital Markets.

Good afternoon.

Just two questions.

Can you tell us what your hourly wage rate inflation was in the quarter?

Barry, we actually don't have that, we'll get back to you.

Okay.

Second question I have was what percent of sales your utility costs run and what part of that is electrical versus natural gas?

Okay.

In Q3 of '05, 2.9% represented utilities and about 75% of that is electric and natural gas, 50 electric and 25% is natural gas.

Okay, thank you.

And just a reminder to everyone, to ask a question please press star one at this time.

We'll have our next question from Ashley Woodruff, Bear Stearns.

Hi, thanks.

Could you - - you mentioned that you did see a decline in mix shift in the third quarter.

Do you expect to see that again in the fourth quarter or since you're done promoting chili, do you expect to actually see an increase in the mix shift as well as the price factor that you have on top of that?

And then your 3 to 4% same store sales guidance for the fourth quarter, can we assume that's where you're running right now?

Ashley, I’ll let Eric answer the first one and you know we’re not going to answer the second one.

And the first one would be yes, we expect to see an increase.

Okay.

And going, looking at your comparisons in the fourth quarter of last year, did same store sales - - were they about the same month to month throughout the fourth quarter of last year or did they I guess slow sequentially?

Ashley, we don't give moth to month.

We are up against 6.7% same store sales for the quarter though.

Okay.

And then secondly, looking at investment costs for your new company stores going into 2006, it seems like construction costs are likely to be up industry wide.

Do you expect your investment costs to also go up for new stores in '06 or do you think you can offset some of those increased construction costs by tweaking the store design or any other changes you're making?

Well, Ashley, I think as we've said before but we'll say it now, our '06 development plan is all the restaurants are pretty much, many of them are under construction, all or most of them are under contract.

We will constantly review those prices.

We can't control all third party events, but we will look for alternative building materials, etc.

And we've done this before at Red Robin under other adverse conditions, hurricanes, and oil shortages, etc., and so quite frankly, we'll monitor that, but we're looking into ‘07 now for new restaurant development.

Okay, so it’s likely that your costs will be up next year per store?

I'm not saying it's likely.

We'll monitor it.

It probably would be more of a function of where we're building.

Okay.

Thank you.

We'll have our next question from Dan Geiman, McAdams, Wright, Ragan.

Good afternoon.

Can you comment a little bit more on your traffic trends within the quarter?

And also, did you see a fluctuation or variation due to the hurricanes, gas prices, etc.?

And also, any significant regional variances you saw during the quarter?

Three questions.

On the last part, unless there's a material difference as there was a couple years ago with some markets, Dan, we don't go into regional differences, so you can assume that there wasn't any material difference.

The second part, in terms of energy, we frankly have not seen any trends due to the energy noise or press.

And your first question was what?

Just general traffic trends within the quarter?

Oh within the quarter?

Same answer as we gave Ashley, we don't talk about trends within the quarter, we only talk about the quarter itself.

Okay.

All right, thanks.

And just a reminder, it is star one to ask a question.

We'll have our next question from Conrad Lyons, Key McDonald.

Yeah, hi.

Just a couple questions.

First one is kind of just a curious thing.

The timing of the 8K.

It looks like it was filed about 5 minutes before the close today.

I just wanted to see if that's going to be an ongoing thing or not.

Second question though, are the issues surrounding Mike Snyder behind us completely?

Are there anything else that you can see coming up in the forefront?

Conrad, you ask 2 questions.

The first one on the 8K, it was not supposed to be filed.

Not our intent to file and we are aggressively looking into it, I'll leave it at that.

On the issues of Mike Snyder, I can’t comment on the investigations, the internal investigations and/or the derivative suits.

Okay.

Hey, one last thing.

Tax rate going into the fourth quarter.

Is that going to be about 34.6?

That will probably come done for the full year.

Okay, thank you.

We'll have our next question from Hil Davis, SunTrust.

Hi, good afternoon.

Got a question - - is there a - - the franchisee sales slowed a little bit more significantly.

Is there anything going on there, are they getting stretched in terms of unit openings or is it a regional concern or is jut they've had great growth and so it's more difficult comparison?

Anything in particular there on that trend?

Hil, let me understand your question.

The franchisee sales - - you mean sales of area development agreements to new partners you mean?

Same store sales growth.

Oh, same store.

No, it's not that much out of line with what we're seeing store to store.

Okay, great.

Thank you all.

And again, it is star one to ask a question.

Again that's star one.

And we have a follow up from Matthew Difrisco, Thomas Weisel Partners.

Hi.

I don't mean to harp or be thick, but I guess it sounds like I think when you, when I look at my notes, when you answered my question regarding the retail number for last year without the team member meals, you said 116.

I’m sorry, I was looking at the 2005 number.

Q4 of '04 there's a restaurant revenue of 95 and total revenue was 97.

Okay, I just think it’s important because modeling it makes it look like then even if you beat earnings, sometimes you're soft on the revenue because we're all using this higher base.

But appreciate that.

And then also can you just give us how much right now are you spending around on marketing dollars?

And has there been a change or philosophy change at all in that as far as how much goes toward local and how much goes outside or is it still pretty di minimis?

Our marketing expense is projected to be flat Q3 to Q4, pretty similar.

We've got some promotions and Eric can expand on the cinema stuff, but that's about all we've got keyed up in Q4 which is the same as we did last year in Q4.

Basically no change, Matt.

Okay, and then just when you're also looking at the pre-opening costs.

Is there anything going on in that that is causing that to go up a little bit more?

Is it because you're in newer markets or is it just generally small creep in inflationary pressures across the board?

Our new markets are slightly more than our existing markets where you've got a core group of restaurants to pull help from.

But generally that 194K is - -

Team members.

Team members, sorry, to pull help from.

Team member wise.

So that does add a little bit, but it's not significant.

And then I guess on the pre-opening costs, you had a couple of moving variables that will be a nice equation to try to figure out the fourth quarter.

But just to avoid the volatility in our estimates for some number that should be relatively fixed, can you give us what you have in there internally so we just avoid that volatility in our earnings numbers?

For the fourth quarter?

For the fourth quarter.

Well, we’re going to push about two pennies in against where we were in Q3.

So take Q3 actual and add roughly 2 cents per share.

That gives you about half a million to $800,000, somewhere in there.

Additional?

Additional expense.

So what's the total?

2.1.

2.1, exactly.

Perfect, 2.1.

Okay, thank you.

We'll have our next question from Michael Smith, Oppenheimer & Company.

Good afternoon.

Next year I guess you'll expense stock options?

That's correct.

Beginning with the first quarter of 2006, we'll report stock option expense in our P&L.

And about how much would that be in terms of the earnings this year? 10, 12%?

No, what we're running is, we're estimating between 8 and 10% EPS impact.

Great, thanks,

And we'll have our final question from Ashley Woodruff, Bear Stearns.

Hi, thanks.

It's just a clarification of an answer you gave to another question.

You said, I guess I was a little confused.

Did you say there's still an internal investigation going on of Mike Snyder?

Or were you just referring to some external investigations and the shareholder lawsuits?

No, I was just referring to the original investigation, Ashley, nothing new.

Okay, nothing new.

And then on the additional one cent in legal expenses in the fourth quarter.

Is that different than you would have expected initially?

Is there anything else new there?

Or does that again relate to the same issues?

It’s difficult to estimate, so on a quarter over quarter basis, we're just adding some expense in there.

Further clarification though, Ashley, is that when we estimated before, we didn’t have the derivative and the class action lawsuits, so that's just the legal expense to fend them off.

Okay, thank you.

And again to ask a question, it's star one.

We'll have our next question from Peter Oakes, Piper Jaffray.

Hi.

I understand you don't want to talk too much about - - Hi, Dennis, too much about the composition unless there's something unusual there.

But I was just curious if you care to take a stab - - is there anything of material nature as far as performance weekday, weekend, lunch versus dinner, given that the comps had slowed, although obviously you feel a little bit better about the fourth quarter?

Nothing material, Peter.

Okay, good.

Thanks a lot.

We'll have our next question from Dean Haskell, JMP Securities.

Good afternoon, everyone.

Congratulations on a great third quarter.

Christina, I know I may be a little slow here and you reported 39 after the $0.06 charge and everybody was looking for 33 to 35.

Would you explain again the differentials between what you actually recorded and what you thought the consensuses were?

Sure.

The GAAP consensus that was reported on First Call was $0.41 and that included, or didn’t included the $0.06.

So when you take a GAAP consensus down to $0.35, then you reconcile that to our 39 reported, that basically gets you the two cents up for pre-opening, a penny up for Salem insurance settlement, and a penny for the tax rate decrease.

And the pre-opening was the lower pre-opening than expected?

The shift - - lower in Q3 than we expected but it's shifting to Q4.

Okay, that's fine.

Thank you.

And that does conclude our question and answer session.

I'll turn the conference back over to Mr. Mullen for any additional or closing remarks.

I just want to thank you all very much.

We appreciate your time, patience, etc.

Eric is trying to give me something to read but I can't see it.

What does that say?

We just want to thank all of our great team members out there on a great quarter and we wouldn't have been able to do it without their passion and compassion for the burger business.

So appreciate their support.

Come see us when you can.

Thank you.

And that does conclude the Red Robin third quarter 2005 earnings conference call.

You may disconnect at this time.

We do appreciate your participation.