Red Robin Gourmet Burgers Inc (RRGB) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Red Robin fourth quarter 2005 financial results conference call. [OPERATOR INSTRUCTIONS] And as a reminder, today's call is being recorded.

It is now my pleasure to turn the floor over to your host, Miss Katie Scherping, the Chief Financial Officer of Red Robin.

Please go ahead.

Thanks, Vicky.

Before I get started, I do need to remind everyone that part of today's discussion will include forward-looking statements.

These statements will include but not be limited to references to our earnings guidance, margins, new restaurant openings, or NROs, trends, costs and administrative expenses and other expectations.

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

We refer all of you to our 10-K and 10-Q filings with the FCC for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

I would now like to turn the call over to Denny Mullen, Chairman and Chief Executive Officer.

Denny?

Thanks, Katie.

And thank you all for joining us today.

We have Eric Houseman, our President and Chief Operating Officer with us and he'll provide a business overview and Katie will provide the financial overview and guidance.

As you know from our announcement on January 10th, we missed our fourth quarter guidance.

While many of you were frustrated that we could not provide you with more precise information at that time, today we will strive to provide you with additional disclosure regarding our fourth quarter performance, and Katie will reconcile the difference between our original guidance and our actual result.

It is important that I point out that there will always be factors that are out of our control which can impact performance from quarter to quarter.

And from a sensitivity standpoint, $150,000 pretax expense equates to a penny a share.

While we fell short of our sales goal in the fourth quarter for both comp restaurants as well as new restaurants, we also underestimated the impact certain unusual expenses and deleveraging would have on our fourth quarter results.

Even though NRO sales were within targets established for NROs, our forecast was based more on our recent NRO history.

As it turned out, it was too optimistic.

In fact, the majority of our revenue shortfall across all restaurants was concentrated in the last period of the quarter, which made it even more difficult for us to react in time to influence the quarter's result.

We have spent considerable time analyzing these factors so that we can better predict their impact on our financial results and react more timely in the future.

The disclosure and the guidance we are offering today reflects those efforts.

In that regard, while we recognize guidance is important to many of you, we are going to offer a broader guidance range because we don't want to allow short-term earnings performance to influence our decision-making or our long-term growth strategy.

This is a marathon, not a sprint.

As we said earlier, when we updated the guidance, we will be taking a 1% price increase this quarter, at which we expect to realize about 50 to 70 basis points due to menu changes to offset higher recurring costs.

Despite the fourth quarter financial performance, 2005 represented a record year for Red Robin in revenues and earnings as well as restaurant openings, all of which are milestones the entire Red Robin team can be very proud of.

Lastly in December we achieved another important step to support our long term strategy in completing an amended and restated credit agreement which will provide us with the flexibility to fund the capital needs of our growing business and at substantially more favorable rates than our former facility.

With that, I'd like to turn the call over the Eric to do a business update.

Thanks, Denny.

Good morning, everyone.

While Katie will cover our financial result, I wanted to touch on some key business drivers for Q4, as well as some exciting new things that will be supporting the Red Robin brand as we head into 2006.

And before I begin, I'd like to thank the 25,000 team members that we have across the Red Robin system for their great, incredible 2005 results.

Well first, same-store sales were 2.7% in the fourth quarter. 1.8% from guest counts and and .9% from mix and price.

That compares to a strong 6.7% comp in last year's fourth quarter, which included 1% in guest counts and 5.7% in price and mix.

That's also a sequential improvement of 0.1% comp achieved in the third quarter of 2005.

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

Our fourth quarter had a 126 company owned restaurant in the comp base, out of 163 total company-owned restaurants.

When we look at our 2005 full-year same-store sales increase of 3.9%, we are very encouraged that more than half of our comp improvement came from guests voting with their feet.

Our guest count increase was 2% and 1.9% from was from price and mix.

We feel that Red Robin's strong and value relationship continues to drive traffic to our restaurants and we are encouraged by that increasing trend, as well as our price to value relationship as we head 2006.

We have shared our philosophy on price increases in the past, and I just want to summarize again, we'll only take a price increase to protect our restaurant margins and not to artificially inflate same-store sales.

That price to value relationship is very important to us, and we'll do whatever it takes within our power to protect it.

As I said, even more encouraging is that our traffic counts and overall comps have continued to improve sequentially in the first quarter, and we are very pleased with the guest count trends we're seeing so far.

From a developmental perspective, we opened 11 restaurants in the fourth quarter and supported the opening of nine new franchise restaurants as well.

This comes to a total of 20 new restaurant openings in the fourth quarter, by far a record number of a quarterly opens -- openings for Red Robin.

In addition, we opened up 13 restaurants in a four-week time period.

Again, a record store opening statistics for us and was one that I believe truly speaks to the strength, passion, and the dedication of our new restaurant opening division.

My many thanks to all those team members, team leaders, coordinators and the job [Robin Vaughn] and her team does each and every day, each and every opening.

In addition, we already opened 2 company owned restaurants as well as 2 franchise restaurants so far in Q1.

We also have 16 company-owned restaurants, 5 franchise locations that are currently under construction.

From a new restaurant opening or NRO perspective and from a forecasting perspective, I'd like to provide some context early on to the financial results Katie will discuss later on the call.

First, to maximize our growth strategy, which is 17% to 20% new unit growth, we look for the best possible real estate sites for our new restaurants.

Please keep in mind that most of these are 15-plus year deals, we look at each one of them individually, since we're investing in them for the long-term.

While we do try to balance the sites we open between new and and existing markets, and we try to spread them evenly throughout the quarter, our general rule is that the best sites win out.

That doesn't necessarily mean that those are the sites that are going to deliver the largest ROI right out of the game.

Our 3-year NRO model is for 3 million plus in revenue and 21% in restaurant level operating profits.

If a site comes up in a new market that is somewhere we want to be for the next 15 years, the center isn't going to open for another 6 months, guess what, we're going to do the deal.

It's better, we think it's better to be at main and main in a project of the year, even if it's a little early than to be on the backside of a mall or a depressed trade area that's moving away.

We experience this new restaurant, new market scenario in the fourth quarter in a few of our brand new markets.

As I said, since most of these are long-term investments, we try to evaluate each year's NRO class as just that, a class.

We look at them together as a whole on a global basis.

Remember that we don't anticipate that the AUVs of NROs, either in established or new markets, are going to perform at or above our comp restaurant AUVs in the first year.

We generally expect NROs to average approximately 10% less in volume than a comp restaurant over the first year of operation.

Sometimes units may start even a little slower in a new market where we lack brand awareness, or a market where we're in a retail development that's not fully completed yet.

We work individually with each NRO based on new versus established degrees of density and population, the life cycle within a specific project or market, and ROI models, we never expect these restaurants to perform like comp restaurants until years two and three of operation.

While we have some NROs in '04 and '05 that had higher than anticipated performance, we do not consistently expect that from all of our future openings.

So with that said, our 2005 NROs as a class generated average weekly volumes consistent and within our NRO model and, in fact, as a class, were the best in our history.

However, when you look at the NRO offering weeks on a quarterly basis, fourth quarter had the highest concentration of offering weeks from NROs in new markets compared to existing markets in our history.

It was actually at 58%.

This higher percentage of new market openings will remain high, probably around 60% of NRO operating weeks throughout 2006 as we continue to expand our brand.

So, what does that mean going forward?

Well, while we're pleased to see the Q4 NROs and non-comp restaurants in general performing more in line with our expectations so far in the first quarter, we would anticipate that average weekly volumes for NROs will increase slightly for the 2006 class as we head into new markets where we have less brand recognition.

We view these restaurants as having more upside potential as that new restaurant and that new market gets closer and closer to normalization.

The bottom line is that the new restaurants are long-term investments in our business.

Although we do our best to predict how an NRO will perform in the first few months of operations, our experience tells us to focus on the three-year model.

As an example, the Arizona, [Airland], Nevada markets all started a little soft as new markets, but after three years of development, are performing at or above the $3 million plus.

As Denny mentioned before, we will be taking a small price increase in April, and at that time we'll also be introducing some new menu items, as well as a new look and a new feel to our menu.

We recently conducted an extensive guest segmentation research project.

We continue to have an even better and better understanding of our guests and what they desire from a Red Robin experience.

We are very excited to continue to focus on our honest to goodness quality promise message.

The new menu will also feature a new burger category that we're calling the knife and fork section.

The [Sicillian], the burgers and greens, just get ready burger-lovers, it's going to be great.

With the new menu change, we're also able to do some menu engineering that we feel will better position and showcase different categories as well as specific menu items.

Additionally, we'll feature three beverage menus throughout the year showcasing our wide variety of limeades, lemonades, mocktail, cocktails, milk shakes, which in the past proven to be successful sales drivers for us.

Also in 2006 our marketing strategy will continue to focus on brand-building initiatives, and we are taking our local restaurant marketing activity to the next level in both our new and existing markets.

While we don't see the marketing spend deviating from our historical level as a percentage of revenue, we have launched a field marketing team this year, which includes regional managers, will develop and execute local marketing plans with their designated regions.

In addition, we will continue our inside-out brand marketing strategy by introducing a national team member incentive we are very, very excited about.

We feel that by enlisting and engaging our most valuable assets, our team members, that this initiative is going to have a positive impact both in our operations as well as helping us drive sales.

We are 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 in the tasty gourmet burgers we offer.

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

While our forecasting and financial performance didn't quite meet our expectations, we do believe that guest traffic in the fourth quarter and so far the increased guest traffic in 2006 continues to be a direct reflection of the outstanding experiences that the Red Robin team members across the country are creating for our guests, and we believe that's what keeps them coming back.

With that, I will 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 supplemental data in our press release on schedule 1 which reconciles our non-GAAP measures to our GAAP results.

In addition, we expect to file our 10K with the SEC within the next week, and we do not expect to report any material weaknesses or significant deficiencies in our financial controls for fiscal 2005.

As you can see in our press release, our actual results for the fourth quarter, $0.33, and year-to-date 2005 of $1.64 were slightly better than our updated guidance provided on January 10.

I'd like to start out today by reconciling for you the actual fourth quarter 2005 results to our original guidance provided in November, a difference of $0.08 per share from the high end of that guidance of $0.41 for the quarter and $1.72 for the year.

As Denny indicated, it is worth noting that, with 16.7 million shares outstanding, approximately 250,000 of pre-tax expense can reduce our earnings per share by a penny.

First, we experienced lower revenues in the fourth quarter compared to our original expectation.

We had forecast 3 to 4% same store sale increase in the fourth quarter from our comp stores and our actual same store sales were 2.7%.

In addition, we originally predicted higher sales volumes for our non-comp stores in the fourth quarter.

About half of our lower revenue was related to new units and the other half was related to comp units.

In total, revenue in Q4 of '05 was $116.5 million compared to $119.5 million, at the high end of our original guidance, a difference of $3 million.

We estimate about 40% of that reduction flows through to margins and to variable cost savings.

And together with lower revenue and deleverage on our fixed operating expenses contributed about $0.05 per share reduction relative to our original forecast.

Second, our restaurant operating expenses in the fourth quarter were higher than we originally projected.

This contributed $0.04 of the reduction in our actual results compared to our original forecast.

Let me break that $0.04 down if you.

Our labor expense in the fourth quarter included a $0.03 charge for worker's compensation insurance expense.

This charge was a result of a true-up adjustment recorded to our self-insured worker's compensation insurance liability as a result of a recently complete independent actuarial study we requested on our self-insurance reserve.

This independent actuarial study showed that we were under accrued for our worker's compensation insurance reserve and over accrued for our general liability self-insurance reserve.

The reversal of expense to our general liability insurance of a penny per share benefited our earnings by reducing occupancy expense in the quarter.

Together, the results of this true-up adjustment in our self-insurance reserves resulted in a net $0.02 reduction from our forecasted EPS.

We also saw higher expenses for supplies, service and maintenance and utilities than we originally expected.

These higher operating expenses accounted for about $0.02 of our EPS difference in total.

Supplies [ter] expense generally when purchased ran higher as a percent of revenue as a result of an increased volume of purchases for the quarter.

In addition, we continue to see overall higher costs of petroleum-based supplies and freight costs in this area.

We had some emergency repairs to several of our restaurants during the quarter that we did not anticipate in our original forecast.

Our utilities expense in the fourth quarter ran 20 basis points higher than our forecast, also contributing to higher operating expenses.

Finally, our effective tax rate for the year came in at 33.6%, which was lower than our forecasted rate of 34%.

The true-up in the fourth quarter to a lower tax rate contributed a penny to our actual EPS compared to our original forecast.

Now, let me summarize our $0.08 reduction in our actual fourth quarter results compared to our original guidance can be calculated as follows. $0.05 from lower than expected revenue and deleveraging of fixed costs. $0.03 from an increase in workers' compensation expense.

A penny in savings from a reduction in general liability insurance expense. $0.02 in higher supplies, repairs, and utilities expense.

And a penny in benefit or reductions in our effective tax rate.

Now I'll comment on our results for the fourth quarter 2005, compared to our results from the fourth quarter a year ago.

I will refer you to schedule one in our press release for the information I'll be referring to as I walk through this comparison.

Our revenue and total for the fourth quarter was $116.5 million, a 19.4% increase over a year ago.

Restaurant revenue increased $18.3 million, $97.4 million last year to $113 million this year.

This increase is made up of an increase in comp restaurant revenue of $2.3 million and non-comp restaurant revenue of $16 million.

As Eric previously mentioned, restaurant revenue from same-store sales in the quarter increased 2.7% over last year.

The increase in same-store sales was generated by a 1.8% increase in guest count and a 0.9% increase in average guest checks to $10.50 from $10.41 from the same quarter last year.

Franchise royalties and fees increased 20.1% in the fourth quarter to $3.4 million.

Restaurant level operating profit margin decreased from 21.8% in the fourth quarter last year to 20.6% this year.

Our fourth quarter margins were reduced as a result of the deleveraging of our fixed costs, as well as some of the items I described earlier.

The 120 basis point net decrease in a restaurant profit margin from last year primarily attributed to a 190 basis point increase in labor cost, a 140 basis point increase in operating cost, offset by a 150 basis point improvement in cost of sales and a 60 basis point reduction from the release of some of the general liability insurance reserve in our occupancy expense.

The 190 basis point increase in labor cost this year as a percentage of restaurant revenues is attributed to 65 basis points related to the workers' compensation insurance true-up adjustment I explained earlier and 125 basis points as a result of increases in both hourly wages and salary positions, as well as increased benefit costs for the last year.

We expect our labor costs to continue at this higher trend due to minimum wage increases and higher insurance costs, as well as due to the heavier weighting on our labor costs from our less efficient new restaurants.

The 140 basis point increase and other operating cost as a percent of new restaurant revenue this quarter of last quarter were nearly evenly spread between the increase in supplies, particularly petroleum-based products and freight costs, utility costs, repairs and maintenance costs, and an increase in advertising contributions due to the suspension of portion of advertising contributions to the fourth quarter a year ago.

We expect the supply costs will normalize and the utility costs will moderate as we exit the cold weather months and we see the impact of the recent declines in natural gas prices.

Our repairs and maintenance costs are expected to stabilize, assuming no need for emergency repairs like we had in the fourth quarter.

The improvement of 150 basis points in our cost of sales as a percent of our restaurant revenue this year is primarily a reflection of the 95 basis point improvement we've been seeing, commodity prices over last year, mainly from meat and tomatoes, slightly offset by higher freight costs incurred this year.

In addition, our vendor rebates, primarily from our 2005 switch in beverage vendors, provided a 55 basis point reduction in our cost of sales in the quarter compared to last year.

On trend, we expect cost of sales of the percent of restaurant revenue to improve slightly in 2006, as a result of our price increase, but any expected benefit from improvements in commodity prices will be offset by higher freight and delivery charges.

Occupancy expense as a percent of restaurant revenue was 6% compared to 6.6% a year ago. 35 basis points of this reduction in the fourth quarter relates to the release of a portion of the self-insured general liability insurance we spoke about earlier.

We expect our occupancy expense will return to a more normalized run rate in 2006 of 6.2% to 6.4%.

Depreciation and amortization increased as a percent of revenue to 5.8% of restaurant revenues from 5.2% a year ago, the result of our revenue deleveraging.

But total dollars were in line with the expected depreciation and amortization expense.

We expect our depreciation and amortization rates will return to historical run rate percentages in 2006.

Our general and administrative expense to percent restaurant revenue remains relatively unchanged at 7.9% compared to 8% from the fourth quarter last year.

For the full year of 2005, our G&A expense as a percent of restaurant revenue declined to 7.5% compared to 8.1 percent a year ago, but G&A expenses increased approximately 14% over the full year of 2004.

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 system to support our growth.

Our pre-opening expense in the fourth quarter of 2005, $2.1 million compared to $1.4 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 fourth quarter pre-opening expense included $1.6 million of costs incurred for the 11 restaurants we opened in the fourth quarter. 177,000 of pre-opening expense, pre-opening costs incurred in the fourth quarter for restaurants we have opened or will open in the first quarter of 2006 and $295,000 of noncash rent expense for units under construction in the fourth quarter.

Our average pre-opening expense per restaurant in 2005 was approximately $197,000, exclusive of noncash rent expense, which is slightly higher than our 2004 pre-opening expense average.

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

We currently and historically have expensed our noncash rent consistent with the requirements of the new accounting pronouncements [FSP13-1].

We expect our pre-opening costs per restaurant to increase in 2006, approximately 3% as we open more restaurants in new markets, which require higher travel expenses for our team members to support the opening.

Lastly, our effective tax rate for the year is 33.6 in 2005, compare to a 34% tax rate in 2004.

Now I'll share with you our view on 2006.

Our expected earnings results for the first quarter and full year of 2006 include the impact of the implementation of FAS123r stock option expensing of approximately $1.4 million and $4.8 million of pretax, or approximately $0.05 and approximately $0.18 per share after tax respectively.

Approximately 11% of the stock option is attributed to restaurant labor and our remaining 89% is attributed to general administrative labor.

For the full year of 2006, which is a 53-week year, we expect total revenues in the range of $590 to $598 million and net income of between $1.72 and $1.82 per diluted share, including option expenses.

These results on based on expected comparable restaurant sales increases of 2.5% to 3.5%.

The full year results are also expected to realize a benefit of 50 to 70 basis points on a 1% price increase which will be implemented late in Q1.

We expect our price increase will offset the higher labor and other costs we are experiencing to keep our restaurant level operating profit margin in the 21% range for 2006.

We plan to open 30 to 32 new company owned restaurants in 2006, with approximately 60% new market and 40% in existing market.

Our company opening schedule is expected to be fairly evenly distributed throughout the year, and we expect our franchisees will open between 15 and 17 new restaurants in 2006.

For the first quarter 2006, which is a 16 week quarter, we expect total revenues to range between $159 and $171 million, and net income $0.41 to $0.55 per diluted share including option expenses.

These projected results are based on expected comparable restaurant sales increases of 3% to 4%.

Our price increase will only be in effect for a short time in Q1, so we don't expect it to have a material benefit to this quarter's results.

We expect to open 8 to 9 new company owned restaurants in this quarter, of which 2 have already opened.

We expect our franchisees will open an additional 2 to 3 restaurants in fourth quarter, two of which have already opened.

As Eric mentioned, we have 16 company-owned and five franchise restaurants currently under construction.

So to wrap up, our capital expenditures for Q4 were $22.7 million, including $20 million for new restaurants and $2.7 for remodels, replacements and capital purchases. 2005 capital expenditures were 83.8 million.

We expect to spend approximately $100 to $105 million in capital expenditures in 2006.

On December 14, 2005, we announced we had executed an amendment to our revolving credit agreement which was set to mature in May of 2006.

This amendment provides us with access to the $200 million revolving line of credit with an option to increase the line of credit by an additional $40 million during the five-year term of the agreement.

Borrowing [from] this line of credit can be used for financing restaurant construction and related costs, working capital and general [inaudible] requirements, and to finance potential acquisitions of franchise restaurants.

The interest rates under the amended line of credit are substantially favorable to our previous agreement, and also provide for less restrictive financial covenant compliance.

You can find more information about our extended credit facility in our 8K that we filed on December 14th.

With that, I'll turn the call back over to Dennis.

Thanks, Katie.

Before we open the call up for questions, I just wanted to mention on February 2nd, we issued a press release and an 8K disclosing that the SEC had initiated a formal investigation relating to our previously announced internal investigation which was completed in August.

I would also like to reiterate a statement made in that disclosure, that there have been no determination made by the SEC as to whether the company has violated the law.

We have and will continue to cooperate with the SEC regarding this investigation.

To sum things up, we continue to remain focused and confident in our long-term growth model, which is 17 to 20% unit growth, 2 to 3% comparable restaurant sales growth.

Franchise royalty and [inaudible] growth combined with a continued G&A leverage which generates 20 plus percent earnings.

With that, I'd like to open the call up to questions.

Operator?

Yes, thank you. [OPERATOR INSTRUCTIONS]

And we'll take our first question from Andy Barish.

Please go ahead.

Hey, folks.

I guess you didn't really kind of specify the pressure that 20 unit openings during the quarter kind of maybe put on the system.

Is it inaccurate, I guess, to think that that was one of the issues in the fourth quarter, or was that something that you guys think you kind of handled pretty well and it was some of the other factors that you specified.

Andy, I think we handled the openings pretty well.

We were -- they were under construction for a long time, we knew they were coming, the teams had time to gear up for it.

So I think it's more of the other factors we specified.

Okay.

And you mentioned business in the last period, the month of December slowed down, I know out here in California, we had a ton of rain, do you think there was some weather factors kind of versus the prior year when you look at your big presence on the west coast?

We're kind of chuckling here, Andy, we're not in the weather business.

We don't allow that to be excuses when it's bad, and we probably don't want to take benefit when it's good.

But clearly the weather has had effects in the fourth quarter, it's had effects on everybody in January, since it's been very nice, or relatively nice.

So, I don't know if it really affected it that much.

Thanks.

Hey, Andy, Houseman, here.

Just let me piggy back on your original first question about the leverage with the new restaurants.

I think Katie referred to some of the labor costs, specifically management salaries, and most of that was in the new restaurants, obviously it was seasoning as well as having additional personnel to open up the new restaurant.

So we did see a little cost pressure there at the labor line.

Thanks, just one quick follow up to that, are you running heavy on management right now, just kind of getting [MIT]s into the system and that kind of stuff, or are you kind of balanced on that given the 30 openings for the year?

We're staffing up for the 8 to 9 that we plan to do first quarter.

So we're 1 or 2 heavy.

Okay, thanks.

But it's under control.

Understand.

We'll take the next question from John Glass of CIBC.

My question is on the new restaurant openings in '06.

How much below the 10% reduction versus the chain average do you expect the new markets to be in '06.

You made some allusion to that, but could you be more specific?

What we're looking at, John, is the new restaurants, as we said, are about 10% below our comp level.

So that's where we expected '06's to come in?

Is that all new restaurants are 10% below or is that new markets?

That's new markets.

Our existing seem to run closer than 95% of comp, so it's about a 5% reduction.

But again, some of that depends on the timing of the openings, things like that and where they are.

Gotcha.

Okay.

And then, as you look back at what happened in the fourth quarter, one of the issues seemed to be, how much information you had or it seemed at least to us to be an issue of how soon you knew that you were offtrack on the quarter.

Do you feel comfortable that you're getting the right kind of information in a timely fashion, or is there something maybe you're doing differently in '06 as you forecasted to monitor to make sure you're on plan, and when you get off maybe to take corrective actions or to come out and say something.

No, we didn't feel like we were missing any -- missing out on on anything and we haven't truly changed anything in '06.

As we said, the falloff on the revenues happened late in -- the last period of the fourth quarter.

So, the reaction time was pretty minimal.

Okay.

Thank you.

Thank you.

We'll now go to Jeff Omohundro with Wachovia.

Yeah.

I've got two questions.

I guess first, Katie, you mentioned the new revolver and what purposes you can use that for.

And in your commentary, you indicated that one purpose might be franchise acquisitions.

I wonder if you could elaborate a bit on that.

Do you have anything planned or are you contemplating anything there.

Well, we wouldn't discuss it -- John, this is Denny Mullen -- we wouldn't discuss it if we did have it planned, if we did have something in, while in process we would disclose it.

So, we just wanted the flexibility when we were negotiating the line that if there were franchisees that have been in the business for some time that needed or wanted an exit strategy, we had the flexibility to do that.

With cash as opposed to just using stock.

Well, I guess in terms of your -- that strategic growth plan that was laid out for us, is acquisitions, does that play any role in achieving earnings targets?

It does not.

Okay.

And then my second question.

There was a mention regarding a new team member incentive program.

That -- I wondered if you could expand a bit on that?

Yes.

Jeff, Houseman here.

That's actually is a new team member initiative that we're undertaking, which is a brand education as well as a training incentive that will get kicked off here in March.

So, very excited.

We feel that the more we can engage our team members, the more they're going to engage our guests, and that's just a win-win for everybody.

So, I wish I could go into more but it's pretty top secret MacGyver right now.

All right.

Thanks, thanks a lot.

We can tell you the program is called Mission Possible and more to come after that.

Thanks.

Okay, Jeff.

We'll take the next question from Matthew Difrisco with Thomas Weisel Partners.

Hi.

Katie, can you walk us through, I guess on those charges that you said, that sort of were part of the lowering of the initial -- from the initial guidance.

How many of those are going forward and how will we see those manifest, specifically the worker's compensation, the $0.03.

I'd presume that's going to be balanced now, you're going to accrue at a higher rate in the first three quarters.

And then also on the occupancy benefit.

Is that something that was a correction or is that a one-time fee you got paid out.

I couldn't follow you there.

Yes.

Let's start with the occupancy first.

As I said, it will go back to the 6.2 to 6.4 run rate.

So that was -- we'd see that as kind of a one-time true-up.

The workers comp, yes we have taken our independent actuarial study and their recommendations for 2006 expenses and those have been rolled into our forecast.

So, yes, those are going to be running higher in the future.

And probably beneficial in the fourth quarter, obviously?

Beneficial --

Fourth quarter of '06?

Year-over-year, yes.

Yes.

Because of the one-time catch up.

And the occupancy part is a true-up, so that should be normalized also, that penny, I guess, throughout the year of '06.

Correct, correct.

That was less, obviously.

Okay.

On the workers comp, just to clarify -- not to clarify, but just to say initiatives.

Clearly, since we've been self-insured for a short period of time, we've got a number of initiatives to try to make sure that we have better experience on workers comp, that should be -- the objective and goal is that would that would be reflected in our workers comp actuarial studies as we go forward.

But, that -- we didn't make anything into '06 projections other than what Katie said.

Okay.

And then, I know you guys don't give a monthly comp and there's a reason you don't want to give a monthly comp, but without disclosing exactly where the trends are today, just to give us some comfort from -- you were disappointed the last time you spoke about the fourth quarter comp, it did come in $3 million light, and now it sounds like there's less disappointment and now it's a realization that the new NROs are coming in at lighter volumes so we're going to be learning how to adjust to that.

Is that necessarily mean that the traffic's come back a little bit here, obviously from the weather like everybody else and the price increasing, you feel like there's no greater attention needed toward the revenue shortfall, or are there things behind the scenes going to -- that you've begun to correct some of the mistakes.

Let's see, that's a series of questions, there.

First of all, on the price increase, it isn't in effect yet and it won't be in effect until the last four weeks of the first quarter.

So, no benefit of that.

I think in Katie's remarks said that we are projecting 3 to 4% for the first quarter and we're very pleased with where sales have been in the first nine weeks of the 16-week first quarter.

Without specifically saying what they are.

Okay.

Thanks.

Yep.

[OPERATOR INSTRUCTIONS]

And we'll now to Ashley Woodruff with Bear, Stearns.

Okay, thank.

To touch again on the fourth quarter new market openings.

As you -- you said that the -- at the time, you said it was an execution issue, now it sounds like you think it was more of a forecasting issue.

Do you think that it is what it was entirely, is forecasting, or do you think there were some issues with execution?

I think, Ashley, I think looking at the way we opened, we had 9 in new markets and 2 in existing markets.

And when we were forecasting, we didn't take into account that the new market openings really run about 90% of our comp base and the existing run about 95% of our comp base.

We were kind of using our optimistic view of what had had happened previous three quarters of the year, which was pretty heavily weighted to the existing markets and ran closer to the 95%.

Plus we also had some markets in the fourth quarter that were in what we called greenfield areas, where we don't have a very developed shopping center, that we may be open, we're early, kind of on the front edge of that shopping center.

So that surprised us a little bit, too.

But we're getting better at taking a view on that.

So, Ashley, the follow up, though, on the execution comment, so if we did open in greenfields or NROs and the sales weren't there, we should have reacted faster.

So that's the execution, that's the basis for the execution comment.

And what do you mean by reacted faster, I mean, what would you -- is that from a cost side?

Yes, cost and labor.

Cost and labor, okay.

And then, how many of those stores in the fourth quarter were in greenfield?

Three.

Three, okay.

And then, as you have entered the first quarter with these group of openings from the fourth quarter, are they acting like your new stores historically did, I mean, from a ramp-up standpoint?

Yes, I think we've seen their behavior come back into line with our expectations of that 90, 95%.

Okay.

And then, I guess secondly, kind of touching on your -- the same-store sales comments.

I guess your long-term guidance is 2 to 3%.

And looking at -- you said you're kind of happy with the way things are going so far in the first quarter, should we assume then that at least right now you're running at least in line with that 3 to 4% range?

We're comfortable with that guidance, yes.

Okay, thanks.

Thanks, Ashley.

We'll go to [Dustin Thompkins] with Morgan Keegan.

Thanks, good afternoon.

My question is on Q1 guidance.

It sounds like some of the cost pressures in Q4 were somewhat Q4 specific.

As we look at Q1, the guidance, if you add back the options expenses, is still flat to slightly positive year-over-year.

Is there some lingering issues from Q4?

The way we're looking at it is the less efficiencies from those NROs, and since we've got such a higher population coming into the mix, that waiting is going to skew those costs a little bit on trend.

So I guess you said the workers' comp trending a little higher.

Any other lingering issues, just other than a few of the cost items and then the NROs that are still ramping?

Yes.

I think it's mostly, you can focus it on labor at those NROs.

We opened 11 new restaurants in the fourth quarter, we'll open 8 to 9 the first quarter, so we're expecting some -- just the weighting of that to pull down those costs.

Okay.

To pull down those margins, I guess.

And then, could you give us an update on your gift card sales this past holiday, what they were year-over-year?

We had 12% more in 2005, gift cards sales.

Okay.

Great.

Thanks.

Thank you.

And we'll now go to [James Cardemon] with FTN Midwest Securities.

Hi, guys.

Hey James.

Two questions for you.

First, help me figure out how you're getting to that 20% long-terms earnings growth number.

I mean, obviously there's a negative impact from the options expense.

It looks like if you add that back, you get, on apples to apples basis, somewhere between $1.90 and $2.00 for '06.

It also looks like you're getting the benefit of an extra week in the year.

So I mean, I guess I'm looking at $1.70 operating number for '05.

How do you get to that 20% growth number for '06.

And James, we always talk about that as being a long-term growth.

So, you're right, for the '06 full year, it's just shy of that.

Okay.

Year-over-year.

Okay.

And second question, just in terms of same-store sales for the year, it looks like you're guiding a 3 to 4% for the first quarter, but you're looking for that to slow throughout the remainder of the year.

It looks at the 2005 numbers, it looks like not only do you have easier comparisons, but you are going to be getting that benefit from pricing at the end of the first quarter, beginning of the second quarter.

Are you just being conservative on the back half of the year, is it that you think that maybe there was some positivity in the first quarter here so far that may not be replicated going forward.

Yes, and that's how we're looking at it is, Q1 first few weeks looked good but 6 weeks does not a quarter make.

So overall, for the rest of the year, we talk about our same-store sales growth coming from guest counts from 2 to 3%, and then we will be taking somewhat of a price increase in April, and we factored that in for our 2.5 to 3.5 same-store sales growth outlook for the full year.

Okay.

And just real quickly here, just to piggyback off of the previous question, any idea what gift card redemptions look like here, I guess in January and February, and do you think that had a material impact?

Obviously weather was nice, but did that really help you guys out with January numbers?

Well, James, Houseman here, right now we are analyzing the redemption on our gift cards.

So we should have more at least the next earnings call to talk about that.

And in terms of the gift card phenomenon, who -- it's tough to say.

Our crystal ball is probably as good as yours.

Right.

Great.

Thanks, guys.

And we'll go back to Andy Barish with Banc of America Securities.

Hey, are you guys working on a smaller prototype as you look at some of these new markets, maybe you don't need the same box that you've been opening.

I know you want to keep some of the unique aspects and some of the bells and whistles.

But is that something you guys are going to be doing a little bit of work on here in 2006?

Yes, the short answer is yes, we will be looking at smaller prototype.

We will always look at the value engineering of the existing building.

We have built a couple of buildings recently that are a little bit smaller, 3, 400 feet smaller than our old prototype, but we're still evaluating that one for additional cost savings and efficiencies and operational ability, and we haven't made a go decision on that one yet either.

But that's an area we are continuing to look at, Andy.

Thank you.

Thank you.

We'll now go to Jonathan Waite with KeyBanc Capital Markets.

Yes, I'm wondering if you could talk a little bit about the non-comp base units.

How are the units doing that are maybe entering into the later stages, maybe the 6-month to 18-month time period.

Are they going as planned?

Anything out of the ordinary there?

Yes.

I mean, I'd say they're on plan financially and I think Eric would agree operationally as well.

And then, in '06, maybe, let me know if I'm characterizing this right, but it sounds like first quarter we've got a drag from these NROs, and then we're taking a price increase and that's going to fix the margin problem for the remaining quarters?

Here's how we're looking at it, John, and I can walk you through kind of our thought process of how we get to that mid 21 comfort range of our margin.

If you look just at fourth quarter of that 20.6 margin that we had and consider the workers' comp adjustment of 60 basis points and the general liability insurance of about 30 basis points, that gives somewhere around that 20.9%.

And then looking at that price increase, 1%, figure 50 to 70 of that is going to be realized, okay.

And then 80% on a price increase flows through to margin.

So you're talking 40 to 60 points increase, so you're at 21.3 to 21.5 somewhere in there.

And that's how we're getting comfortable with that price increase being adequate.

Okay.

Thanks.

[OPERATOR INSTRUCTIONS]

We'll go to [Scott Waltman] with Piper Jaffray.

A couple of questions.

Concerning the labor pressure and the new unit openings that you've mentioned a few times.

Would you be willing to expand on where the particular pressure is coming from?

Yes, Scott.

Right now we're -- with the new unit opening we really saw the pressure, obviously at the workman's comp line, like Katie said, and it affects the admin line with the extra management supports to open up the new restaurants.

So are you paying up in markets for staffing, higher than the normal rates, or is it just some general inefficiencies or does it have something to do with the geography itself?

Well, it has a little bit to do with how openings just typically line up.

Obviously, if you want -- because you want to season some managers.

So if you have some NROs that are opening up in a market that's -- you're going to grow.

And then you're going to season managers there, so you may have at one NRO have a manager or two heavy gearing up for the next one that's going to happen 3 months down the road.

Okay, thanks.

And Dennis, you've indicated in the past that you initiated the startup of an internal audit function.

Would you update us on where that stands now.

Yes, we have and Katie can update you.

It's in place.

In place and their plan is underway.

What's the name of it?

We've hired [Protiviti] as our independent outsource firm to conduct that function for us.

And they report directly to the chairman of the audit committee.

So they are in place and the whole process is now functioning?

Yep, they're underway.

Yes.

Okay.

Thank you.

Thank you.

Next is Ashley Woodruff with Bear, Stearns.

A couple of follow ups.

On the margins, kind of quarter to quarter going forward, are you basically expecting then the first quarter margins to still be down year-over-year, but then as a percent of sales for the second through fourth quarter for them to be basically flat year-over-year, or do you still expect to see a little bit of pressure.

Well, because we don't really have much benefit from that price increase, we expect that first quarter to be a little depressed compared to their other quarters.

And once our price increase will kick in that will help, but back to our normalization that I talked about with John.

Okay.

So you said mid 21%.

Yes.

Once you get to the second quarter, not until then?

Right.

Okay.

And then, also, Eric, I think you talked about how you just completed a new guest segmentation study.

Can you kind of update us on that, what you've learned from it and what you plan to do with that.

Sure, Ashley.

Ashley, what we've learned, and I'm not sure, it's what -- a lot of the things we already knew.

But we validated that obviously Red Robin is -- our guest feel we have great gourmet burgers, best burgers, very generation portions, it's a great family place.

They appreciate the gift of time you can get in and out.

We have -- we also learned that we have the fewest deserters than any of our competition.

And strong loyalty.

We retain four guests for every one we lose.

Competitors run about 3 to 1.

We have the highest percentage of guest share from occasions with young kids, moms on the go, families, teens, weekday lunch, 70% of our families have kids between the ages of 8 and 12.

And our Red Robin -- our frequency mean is 2.6 visits in a 3-month time frame.

So, it's better than our competition.

So, we validate some things, we learn some things and as we move forward, we will learn more.

Okay, thanks.

And Matthew Difrisco with Thomas Weisel Partners also has a follow up question.

Hi, this is, I guess, for Katie or Denny.

Regarding your comfort with capital structure, I think right now you're running around, it looks like on the balance sheet here, a 22% debt to total cap with equity.

And with the expectations for your earnings in the CapEx, I guess the back of the envelope, it looks like you might be burning about $20 million in cash for '06.

Might push you to around 30% debt.

Would you -- do you feel comfortable if you were to take credit facility up and go above 30% debt, and what would be your ceiling for the debt ratio.

I don't think we've looked at it as a ceiling, quite honestly.

We're -- consider -- I think your math is correct, around that $20 million of additional takedown, annually.

That probably is pretty close.

So, we're not concerned about it, certainly.

And five years is a long run.

So, we've got plenty of opportunity over that five years.

Okay.

[OPERATOR INSTRUCTIONS] And we'll now go to [Andrew Morey] with [Tartan Partners].

Yes, hi.

When you mentioned about the price increase for first quarter offsetting some of those cost pressures, was there any reason you didn't want to take it earlier in the first quarter instead of only 3 or 4 weeks left?

And I had one other question.

Yes, Andrew.

Actually, the pricing in the first quarter is not going to offset, we don't expect it to offset too much of any cost pressure since it's going in the very latter half.

And we wanted -- we timed it with our new menu so that's the -- that's part of the reason why it took a little longer to implement.

Okay, got it.

And when you mentioned the new restaurants in kind of greenfield, new markets, starting out more at 90%, what's the ramp look like for those to get to look like new restaurants in existing markets?

Yes.

Andrew, it varies from unit to unit.

We do look at each and every one of these and attack them with individual marketing plans, but it really -- there's too many variables.

That's why we really like to look at these in terms of yearly classes.

Okay.

And last question, when you mentioned 60% of new stores for '06 will be in newer markets, are there any particular states in those new markets, any larger markets that you're not in that you're going into, anything you'd like highlight?

Yes.

Yes.

We have one going in in Massachusetts for all of our Boston friends, that'll be in Plymouth Massachusetts.

We've got a couple coming up in Tennessee, South Carolina, we've got a couple more in Georgia.

We had a new one open up in the fourth quarter in Georgia, but those are going to be expanding there.

And Augusta, Maine is a new one for us.

So we'll be looking at some upstate New York and some east coast properties this year.

Great.

Thanks a lot.

Thank you.

There are no further questions so I'd like to turn the call back to Dennis Mullen for any additional closing remarks.

Okay.

Thank you very much.

Thanks for joining us today.

Our management team will be presenting at several investor conferences over the next few weeks and we will be meeting with investors a lot of the next quarter.

We look forward to seeing you in the future and we report back to you on our first quarter call in May.

Thank you.