Red Robin Gourmet Burgers Inc (RRGB) 2006 Q1 法說會逐字稿

Good afternoon, and welcome to the Red Robin updated first quarter 2006 financial results conference call.

Today's conference is being recorded.

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

It is now my pleasure to turn the floor over to your host, Ms. Katie Scherping, Chief Financial Officer.

Please go ahead.

Thanks, Kevin.

Before we get started, I 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, cost and administration expenses and other expectations.

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 10-K and 10-Q filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

I also want to inform my listeners that we will make some references to nonGAAP financial measures during our call, and you will find supplemental data in our press release on Schedules 1 and 2, which reconciles our nonGAAP measures to our GAAP results.

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

Thanks, Katie, and thanks to all of you for joining us today.

We also have Eric Houseman, our President and Chief Operating Officer with us.

Eric will provide a business overview, and Katie will provide the financial review and guidance.

First of all, let me talk briefly about the first quarter.

We reached the high end of our earnings guidance despite recognizing $0.08 per share of stock option expense.

Excluding the stock option expense of $0.08 a share, we earned $0.52 per share on a nonGAAP basis, $0.02 above the high end of our previous guidance of $0.50.

On a GAAP EPS basis, we earned $0.44, which was at the high end of our original guidance range of $0.41 to $0.45 per share.

Most importantly, we generated strong store sales of 4.8%, the majority of which was traffic related.

We are pleased with our first quarter performance and believe it is a reflection of the great job our team members are doing creating fantastic guest experiences.

We also executed on our restaurant growth plan.

From a development perspective, we opened nine new restaurants in the first quarter and supported the opening of three franchise restaurants, for a total of twelve restaurants in the quarter.

So far in the second quarter we have already opened three company opened restaurants and one franchise restaurant.

We also have fifteen company operated restaurants and five franchise locations under construction.

We are continuing with the diligence and working towards a definitive purchase agreement for the acquisition of the thirteen Red Robin franchise restaurants located in Washington State.

These are high performing, well managed restaurants and we do not expect any integration issues after closing.

Importantly, upon consummation of the acquisition, we expect several members of the restaurant leadership team will be joining our Company.

As we previously announced, the acquisition price is approximately 42 million, less any assumed indebtedness and purchase price adjustments.

And we will fund the purchase with our existing credit facility.

We still expect the acquisition to close early in the third quarter.

While Eric will discuss initiatives we have in place within our restaurants, I thought it would be appropriate to touch on how we are working to improve our return on invested capital for our new restaurants.

With construction costs continuing to rise, we are addressing ways to help manage these costs, while being careful so as not to impact the guest experiences or our brand.

We expect the impact of these modifications won't be material to any of the new restaurants slated for opening in 2006, but we will begin to see the benefit of these cost reductions starting in early 2007.

We will also continue to examine the possibility of developing a smaller prototype.

We look forward to sharing with you our progress on these efforts in future conversations.

And with that, I'd like to turn it over to Eric to give you a business update.

Thanks, Denny.

While Katie will cover financial results, I just wanted to touch on some key business drivers from Q1, as well as some exciting things that we are already working on this year.

First, same-store sales were 4.8% in the first quarter, 4.1% from guest counts and .7 from price and mix.

That compare to a strong 5.7% comp in last year's first quarter, which included 2.8% in guest counts and 2.9 in price and mix.

That's also a sequential improvement from the 2.7 comp achieved in the fourth quarter and marks our eighteenth straight quarter with positive guest counts.

Our comp store JVs for the first quarter of 2006 were $65,345 compared to $62,354 for the first quarter of 2005.

You will recall that a restaurant enters the comp stage five full quarters after it opens.

Our first quarter had 130 Company owned comparable restaurants out of 172 total Company owned restaurants in the comp based.

From a new restaurant opening or NRO perspective, our new restaurants are performing as expected.

They are all high quality sites which we think we can build successful operations for many years to come.

Remember our three year in a row model is for 3 million plus in revenue, 21% plus in restaurant level operating profit.

We balance initial performance against the long term prospects of the site.

Throughout 2006 we alone have the highest concentration of operating weeks from NROs in new markets compared to existing markets at roughly 60% of the total.

This does, though, reflect our strategy to continue to grow and expand our brand across the country.

In late March, we rolled out a new menu, which included our 1% price increase.

The new menu also includes some new menu items and has a new look and feel to it, which was based on feedback from our customer research that we conducted last year.

I think the most notable difference in the menu is the knife and fork [INAUDIBLE] category, as well as better positioning of different categories and specific menu items.

While the new menu has only been introduced for a short period of time in Q1, we are encouraged by our guest responses.

We will also feature three beverage menus over the course of the year to draw attention to our wide variety of limeades, lemonades, mocktails and cocktail, which in the past have proven to be a successful sales driver for us.

In fact, one of those new beverage menus has just rolled out this last week.

I also want to talk a little bit more about the plan -- what we plan to do on the marketing front this year, most of which will be at the local level for both our new and existing markets.

The overall marketing budget will stay within historical spending levels as a percentage of revenue, but we have changed the marketing department's structure by creating a field marketing team who are given the task to develop and execute local marketing plans for their designated regions.

Excuse me.

If you remember from our last call, we talked about our national team member initiatives, what we were calling MP3, mission possible.

That is also getting into high gear and will be carried out in phases throughout the summer and early fall.

We think it's already having a positive impact on the energy level within our restaurants.

We have put in place a number of [INAUDIBLE] and promotional programs at the team member level to help keep our teams, both hourly and salaried, excited about working at Red Robin, and this initiative gets them more engaged with our guests.

This inside-out brand marketing strategy has proven successful for us in the past and we think it's a great way to excite team members about our core values and our culture.

The great thing about this initiative is that it is being funded from our cooperative marketing dollars and partnerships with our franchise community.

In addition, with one of our four cornerstones being the gift of the time for our guests and the ability to always be respectful of their time and deliver under a 37 minute lunch and 42 minute guest experience at dinner, we have undertaken a very comprehensive throughput initiative.

This initiative is initially focused in our [INAUDIBLE] house operations; and while we are at the beginning stages, we are very pleased with the results in terms of operational execution that we are seeing right out of gate.

While we expect to see some operational efficiency benefit, the larger benefit we believe will be our continued success of taking better care of America's families in regard to speed of service and allowing them to always be in control of their dining experience.

We have always prided ourselves being on the cutting edge when it comes to throughput, and we look at our kitchens as the engines in our buildings.

On the people front, obviously being another one of the cornerstones, we have partnered with an outside vendor that specializes in team member selection and development.

With their help, we have identified key and leadership training for the general manager level that will not only help us better predict the initial success of the selection process, but will also be a key in driving our business to the next level.

As many of you know, last year we made the top 300 for great places to work, and it's our goal to continue to learn how to create a better and better work environment for our team members and to better develop our people.

As always, we are about creating outstanding Red Robin experiences for team members as well as our guests, because we know that when we do, we know our team members will stay with us and our guests will keep coming back.

Obviously, this helps create brand equity for our Company and shareholder value for our investors.

So with that business update, I will turn it back over to Katie.

Thanks, Eric.

Let me first speak to the implementation for 2006 of the statement of Financial Accounting Standard Number 123-R ,which I will refer to from here on as FAS 123-R.

We adopted the modified perfected transition method for recognizing stock compensation expense related to our options beginning this quarter, so there was so corresponding expense in the first quarter of last year.

The total free cash impact was $1.9 million or about $0.08 per share after tax.

This expense is about $0.03 higher than we originally estimated when we gave you our guidance in our first quarter call -- our first quarter guidance in our February call.

The primary reason for this difference relates to the refinement of some of the many estimates that are used in this complex calculation.

The stock compensation expense shows up in two places on the income statement.

The impact of restaurant operations was about $277,000 in our labor costs this quarter, which increased our labor as a percent of restaurant revenue by about 20 basis points.

The impact -- general and administrative one -- was about 1.6 million or about 100 basis points of total revenue.

We will be filing our first quarter 10-Q tomorrow which contains a more detailed discussion of the implementation of FAS 123-R.

Now, as for the first quarter 2006 total revenue, which consists of restaurant sales, franchise royalties and fees, grew 20.8% to 170.5 million from 141.2 million.

Restaurant sales grew 20.9% to 165.7 million from 137 million and consisted of 139.2 million sales from our 130 comp restaurants and 26.4 million in sales from our 42 noncomp restaurants.

As Eric [INAUDIBLE] mentioned, restaurant revenue from same store sales in the quarter increased 4.8% over last year.

The increase in same store sales was generated by a 4.1% increase in guest count and and a .7% increase in average guest to $10.48 from $10.41 last year.

Franchise royalties and fees increased 17.6% in the first quarter to 4.8 million from 4.1 million, as we added three franchise units for the system during the quarter and 16 since the end of the quarter last year.

The 97 comp restaurants of the U.S. franchise system reported a 3.9% increase in same store sales, while the 17 comp restaurants in the Canadian franchise system reported a 10.3% increase in same store sales.

Restaurant level operating profit margin fell 20 basis points to 21.1%, excluding the 20 basis points of stock compensation expense in the first quarter this year from 21.3% last year.

The [INAUDIBLE] profit margin from last year is attributed to increases in labor and operating costs, somewhat offset by more favorable cost of sales and leverage in our occupancy costs.

Specifically on the food and beverage front, we reduced cost by 70 basis points to 23% from 23.7% in the first quarter of last quarter.

We continue to [INAUDIBLE] from price leverage from the June 2005 price increase, along with favorable food cost offset by higher produce cost -- more specifically, tomatoes -- which were higher due to a poor growing season.

These resulted in a net 50 basis points of improvement on our food cost line.

Another 20 basis points of cost reduction is attributed primarily to the beverage rebates now received from our mid-year '05 switch to Coke products.

For the remainder of the year, we expect cost of sales to the quarter to stay relatively flat to our first quarter trends, with any improvements in commodity pricing being largely offset by higher freight and delivery costs.

The 100 basis increase labor costs this year, excluding the 20 basis points of stock comp expense, as percent of revenues -- restaurant revenues -- is attributed to higher salary and wage expense, higher bonus expense and increases in insurance benefit costs.

Newer restaurants, which are generally less efficient than their older counterparts, have also put pressure on our labor costs, as we expected that they would.

The 30 basis point increase in our other operating costs to 15.3% of restaurant revenues this quarter compared to a year ago was the result of an increase in supply cost, particularly -petroleum based products, as well as freight and utility costs.

We continue to expect the supply cost will normalize and that ultimately utility costs will moderate on a sequential as we exit the cold water months.

However, we still think we will see supplies and utility cost pressure on year-over-year basis.

Occupancy expense fell as a percentage of restaurant revenue to 6.1% compared to 6.5% a year ago.

On trend, we expect our occupancy expense to run between 6.1% and 6.3% for the balance of the year.

Depreciation and amortization increased by 10 basis points to 5.3% of total revenues from 5.2% a year ago, as a result of the certainly higher cost of the asset base being capitalized for restaurants constructed in the first quarter of 2005.

Excluding the impact of 100 basis points from the stock comp expense in the first quarter, our general and administrative expense rose 40 basis points as a percent of restaurant revenue to 8.3% compared to 7.9% in the first quarter of last year.

This increase can be primarily attributed to about $500,000 or 30 basis points of legal fees related to defending our class action litigation claims, as well as other professional fees.

Excluding those fees, our G&A expense year over year was relatively flat.

Over the balance of the year, we expect to reduce our G&A expense as a percentage of restaurant revenue by 10 to 30 basis points, excluding the stock compensation expense.

Our preopening expense in the first quarter of 2006 was 2.2 million compared to 1.8 million last year.

Our preopening costs typically represent costs incurred approximately six weeks prior to a restaurant opening, with the majority of the cost incurred in the final two weeks.

The current quarter preopening expense included 2.1 million of cost incurred for the 9 restaurants we opened in the first quarter and $100,000 of preopening costs incurred in the fourth quarter for restaurants we have or will open in the second quarter.

We currently and historically have expensed our noncash rent consistent with the requirements of the new [INAUDIBLE] [SFP 13-1].

We expect our preopening costs per restaurant to run higher in 2006 on a per restaurant basis, as we continue to open more restaurants in new markets, which require higher travel expenses for our team members to support the opening.

Net interest expense rose by $256,000 to 1.1 million from .8 million last year, as debt was 13.3 million higher than the prior year as we continued to borrow under our line of credit to fund our growth.

The effective tax rate for the quarter was 34.2%, as we expected.

Net income for the first quarter, including a tax effective 1.3 million in stock compensation expense, was 7.4 million or $0.44 per diluted share, which was towards the high end of our $0.41 to $0.45 guidance.

Excluding the impact of the stock compensation expense, net income for the first quarter would have been 8.6 million or $0.52 per diluted share compared to net income of 8 million or $0.48 per diluted share for 8.3% year over year EPS growth.

The primary reason for exceeding our earnings guidance came from savings in our first quarter G&A spending.

We expect that the first quarter G&A savings will be spent in the second quarter and our earnings guidance we'll be giving you reflects that assumption.

Now, I will update you on our outlook for 2006.

I want to remind you that our expected earnings results for the second quarter include the impact of stock compensation expense of approximately 1.4 to $1.5 million on a pretax basis, or $0.05 to $0.06 per share after tax; and for the full year of 2006 include the impact of stock compensation expense which is expected to be approximately 5.6 to $5.7 million on a pretax bases or approximately $0.22 per share after tax.

For the full year of 2006, which is a 53 week year, We expect total revenues in the range of 590 to 597 million and net income between $1.70 and $1.78 per diluted share.

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

The full year results are also expected to realize the benefit of 60 to 70 basis points from the 1% price increase we implemented late in Q1.

We expect our price increase will offset the higher labor and other costs we're experiencing to keep our restaurant level operating profit margins in the mid 21% range for 2006, excluding stock compensation expense.

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

Our Company opening schedule is expected to be fairly evenly distributed throughout the year.

We expect our franchisees will open between 15 and 17 new restaurants in 2006; and year-to-date, we've opened 12 restaurants and our franchisees have opened four.

For the second quarter 2006, which is a 12 week quarter, we expect total revenues to range between 134 and 135 million, and net income of $0.37 to $0.40 per diluted share.

These projected results are based on expected comparable restaurant sales increase of 2.5 to 3.5%.

We expect to open 7 to 8 new Company owned restaurants this quarter, of which three have already opened.

We expect our franchisees will open an additional 3 to 7 new restaurants in the second quarter, of which one has already opened. [INAUDIBLE, AUDIO CUTTING OUT] were 25.1 million, most of which was for new restaurants.

We are still on track with approximately 100 to 105 million in capital expenditures in 2006, excluding the announced acquisition of the 13 restaurants in Seattle.

With that, I will turn the call back over to Denny.

Thanks, Katie.

To sum things up, we are very pleased with the results of the first quarter.

However, we feel there are many well publicized threats on the horizon that our outside of our control and we have taken them into account in our forecast as best we could.

We continue to remain focused and confident on our long term growth model, which is 17 to 20% new unit growth, 2 to 3% comparable restaurant sales growth, continued growth of franchise royalties and fees, combined with continued G&A leverage, which generates 20% plus long term earnings growth.

And for 2006 and forward, that earnings growth target certainly includes stock option expenses -- excludes stock option expenses.

I'm sorry.

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

Operator?

[OPERATOR INSTRUCTIONS].

And we will take our first question from the site of John Glass with CIBC World Markets.

Please go ahead.

Thank you.

A couple, if I could.

First just a clarification.

Your guidance does not include the impact of this acquisition, is that correct?

That's correct.

And are you willing at this point to talk about what you think it might add to earnings?

Not at this time.

Okay.

And then, Katie on the second quarter, the G&A shift, can you just either repeat or tell us exactly how much it shifted from 1Q to 2Q and what the nature of that spending deferral was.

It's equivalent to about $0.03, and it's primarily marketing expense.

We got a little bit slower start in the first quarter on our marketing program that that we expect will gear up in the second quarter.

Okay.

And then just your sales guidance for the third quarter -- I'm sorry, second quarter.

Are you within that range right now, or any color on how May is trended?

We are comfortable with the guidance we are giving, John, based on where we are so far in the quarter.

Okay, and just lastly, Eric, you talked about that throughput initiative and you talked about your service times of 37 minutes and 42 at dinner.

Do you want to go below that or faster?

Or are you maybe not hitting the goals right now, or I guess, what are you trying to improve in this initiative?

Great question, John.

We do have guests that don't stay with us 37 or 42 minutes and can speed it up, and we do have guests that choose to stay longer.

We just want to make sure that our engine, the heart of the house, is able to do whatever our guests want.

So we want to make sure that as we grow new units and expand existing units that we are very focused on throughput and the gift of the time.

Thank you.

We'll go next to the site of Jeff Omohundro with Wachovia.

Please go ahead.

Yes.

I guess first, could you talk a little bit about what we are seeing in hourly and management labor turnover, and maybe elaborate a little bit further on the mission possible program?

Yes, well, mission possible is rolling out in the next 7 to 10 days.

Phase one -- there's actually three phases of it, with it concluding in October and -- September/October, with a real push with our team members to bring new guests, friends and family, into the restaurants.

We are pretty excited about that.

Huge buzz out there in the restaurants.

The team members are getting boarded; so it's a training initiative, as well as a brand building initiative within the four walls, so we think it does a lot of great things.

So we're excited.

Jeff, we'll have more to talk about and share on our next call.

Just gearing up now.

In terms of the turnover rate, you know, hourly, we are about 84%, which is about where we have been tracking; and I know well below the industry average.

And then turnover at the general manager level is about 12%, which it might be one tick up from where we were last year.

I think we were at 11% last year.

And what are you seeing in terms of any regional sales trends or shifts in day part mix, particularly lunch/dinner?

No shift whatsoever.

Any thoughts on impact from consumer spending as it relates to your concept, given the high gas environment?

No, we are on trend.

We haven't seen any impact.

Great.

Thanks.

Thank you.

And the next is the site of Destin Tompkins with Morgan Keegan.

Please go ahead.

Thanks.

Katie, was there any -- or any unusual lumpiness in the sales trends in Q1?

Was it stronger earlier in the quarter?

Or can you give us any color on how it trended through Q1?.

Okay, Destin, without giving you period over period.

Sure.

It was -- you know, we did see a little bit of variable early on when we had our February call.

We had seen what others in the industry have seen also, was a very strong January.

And then, you know, it kind of leveled off after that.

Right.

And I -- you mentioned that the newer units were performing in line with expectations.

Was the average weekly sales trend in the quarter essentially in line with kind of the same-store sales growth?

The average weekly sales from our noncomp unit were about 56,915 this quarter, and that compares to about 58,319 from last quarter.

You'll remember when we talked in February about the heavy weighting of those new market NROs.

We had about 56% of our operating -- or our NRO operating weeks in the third quarter this year from new market.

Okay.

That's influencing that reduction year-over-year.

Plus we had in the first quarter of '05 some same market NROs.

So, you know, we are pleased with our results.

We're right -- you know, exactly where we expected them to come in, and so I think our revenue projection and our actual revenue aligned nicely on that.

Okay, and then one last one.

Any estimate on what that extra week of sales is worth for the full year?

About 2%.

2%?

On an EPS basis?

Yes.

Okay.

We go next to the site with Conrad [Larney] with Keybanc Capital Markets.

Please go ahead.

Yes, hi.

Just talk a little bit more about average weekly sales real quick here.

Correct me if I am wrong, I think you guys did a reclass on the prior year -- a revenue reclass?

Is that true?

The team member meal reclass is reflected in these numbers.

Okay.

Both years.

Yes, both years are comparable.

Both years are comparable?

Mm-hmm.

Okay.

Got you.

Can you talk a little bit about the commodity environment going forward and really do you think there might be any benefit coming up here for you guys?

Yes, we -- from a commodity outlook, I think Katie mentioned it a little bit in her dialogue.

Any benefit that we see from a cost of goods standpoint will probably be the rolled away with utility and freight charges.

So for us, you know, we have poultry locked, we have fries locked, we have [INAUDIBLE], we have oil locked.

And there is talk out there there could be some leverage with the beef market.

But we are not building anything in our projections.

Okay.

We're pretty flat.

Okay.

All right.

Thank you.

We go next to the site of Joe Buckley with Bear Stearns.

Please go ahead.

Thank you.

Katie, can I take you back to that -- the AWS numbers you gave?

I didn't write fast enough.

I'm sorry.

Sure enough.

Average weekly sales -- and you are talking from the noncomp unit.?

Yes, yes I think --

Okay.

The current year quarter, 56,915.

Okay.

Q1 of '05, 58,319.

Okay.

And that differential you're saying is because you've got so many more NRO operating weeks in this year's first quarter?

We have got more operating weeks in total, but more of those are coming from new market units, which perform a little bit -- ramp a little bit slower.

And that's also combined by Q1 of '05, we have some huge [INAUDIBLE] NRO openings in Q1 of '05 that really shot that number up in Q1, '05.

Okay.

And could you elaborate a little bit further on the marketing shift first quarter to second quarter?

What type of marketing media is that expenditure going to go of marketing media is that expenditure going to go towards?

We have marketing gearing up in Denver, Seattle, Portland -- actually, we have -- it's in about 25 different markets around the country.

It's a combination of outdoor, billboard, radio, also some local initiatives that are going.

It's going to hit -- and actually, the marketing spend will probably impact about 80% of our total restaurants.

And we've got a timing difference that is about three to four weeks.

Okay.

And was that delivered, given the strength of the first quarter trend or it's just short of the way it played out?

You know, it's really the way it's played out, because you have to book that media four months in advance.

Okay.

A question on accounts, both what you reported and then the guidance.

You know, first quarter, obviously you had very, very strong; full year, you kept it at the 2.5 to 3.5% rate, which kind of implies that you'd slow.

Yet your second quarter, you are still at that 2.5 to3.5% rate and the comps get easier in the second half.

Is this just kind of a conservative approach or is there something that -- you know, something about the second half that you are communicating?

Joe, as Denny talked about, we see -- you know, there's a lot of well publicized threats out there.

You know, there's higher gas prices, consumer spending issues, things like that.

We just don't want to get too far out and over our season and confident based on, you know, the first quarter.

We want to be conservative in our view of the impact that those macro economic effects could have on us.

Okay.

Fair enough.

And just one last one.

Eric, did you say mission possible would be funded from the co-op marketing?

That's correct.

Each period, we contribute money into the cooperative marketing fund along with our franchise operations, and that's the funding that is being used to promote this program.

System wide.

Yes, system wide.

Is is a -- is it a marketing program or kind of a service oriented program?

It's a brand building initiative.

So it, you know, could be used for brand promotion eventually.

Okay.

Across the system.

Very good.

Thank you.

We go next to the site of Andy Barish with Banc of America Securities.

Please go ahead.

Hey, guys.

Looks like you had a couple cents of G&A spend on the legal stuff.

Katie, do you have that continuing at this rate into the Q2 until we see something happen with these class actions, or the FCC stuff?

We do have some built into the second quarter forecast.

Okay.

And when -- are you guys anticipating just waiting until closing of the Washington franchise acquisition before talking about any financials there?

Yes.

Yes, Andy.

Okay.

Thank you.

Thank you.

We go next to the site of Matt Difrisco with Thomas Weisel Partners.

Please go ahead.

Hello, this is Jake [Barley] in for Matt Difrisco.

I just was wondering if you could remind me of how you define new markets.

Is it new markets where you don't have any stores or is it going into a development that's not quite finished or --. if you could just define that for me.

And also, can you talk about how many new markets you expect in the second quarter of '06?

Is that still a 60% new mix?

Well, let me tell you how we define new markets; and you know, we can give you a little bit of color on where we opened in the first quarter in some new markets, and it's pretty much where we have no brand recognition because there's nothing for many miles around.

So like for example, Augusta, Maine was a new one for us.

Buffalo, New York.

Plymouth, Massachusetts.

Rockford, Illinois.

We do have some restaurants in Chicago, but Rockford is in the middle of the northern part of the state.

So those are all what we defined in the first quarter as our new market openings.

So that's kind of how we are looking at as, you know, where we don't have a lot of brand recognition and we do have some early on build of that brand recognition.

Then the second part of your question is how we -- I'm sorry, I forgot the second part of your question.

The second part is just the --

[INAUDIBLE].

It's still 60/40 this year, and pretty evenly spread out.

Each, you know, like the four that I illustrated in this first quarter out of the nine, you know, so we will be pretty even.

Okay.

Thank you.

We go next to the site os Barry Stouffer with BB&T Capital Markets.

Please go ahead.

Good afternoon.

I had a question about occupancy costs.

In dollars year over year they were up 13.8%, and unit count was up about 18%.

Can you explain what happened there?

Are you opening stores where you own them out right?

Yes.

Barry, last year in 2005, we actually had five land acquisitions for property.

And so we are realizing some leverage from having them own land.

Okay.

Can you review your current cost to open a new unit?

And then any estimate you can share with us on how you are hoping to save.

It is $255,000 in total.

To open and new preopening costs?

Is that --

No, I mean --

Oh, the building cost?

Yes.

Land, building, equipment.

Last year it was averaged 2.4 million and it's around -- you know, we're seeing some increase in that, so you know, closer to the 2.5 range.

But one of the things that Denny talked about as being -- you know, taking advantage of some alternatives and looking at some savings, but that won't happen until later in the year.

We've got a lot of restaurants under construction right now.

We've got 15 corporate owned units under construction, so that probably won't make as much of a difference this year.

What about the 5 land acquisition?

What would they have cost in total?

I don't have that.

We don't have that here.

That 2.4, that's average across the entire restaurant base?

Generally, yes.

Excluding land.

All right.

Thank you.

Thank you.

We go next to the site of Robert Lee with Fidelity Investments.

Please go ahead.

My question was already answered.

Thank you.

Thanks, Bob.

Thanks, Bob.

Thank you, we go next to the site of Rachel [INAUDIBLE] with Shelton.

Please go ahead.

Hi, guys.

Hey, Rachel.

Hi, Rachel.

How you doing?

Okay, can I just -- I want to make sure I understand your guidance exclusively.

It looks to me like you actually raised guidance by $0.02 on a preoption, and the pressure is coming from higher than expected option costs?

Well, we pushed up the bottom.

We originally had guided to $1.90 -- our original nonGAAP was $1.90 to $2.00.

Okay.

And then when you take that -- you take into account that we changed our option expense from $0.18 to $0.22 from the range of $1.70 to $1.78.

So we just take the bottom end of that guidance up to $1.92 on a nonGAAP basis.

Right, okay, and so the [INAUDIBLE] is just entirely related to options?

Yes.

Okay.

And then the other question was on that $500,000 of legal expense, how much had you initially contemplated in this quarter?

Was that roughly the amount that you had already embedded in your guidance, or was that --

Yes, so we had already included that in our guidance.

Okay, so --

It was just a year-over-year variation that we were explaining.

Okay.

I think that's all I got.

Thank you.

We go next to Peter Oakes with Piper Jaffrey.

Please go ahead.

Anything you care to update as far as the FCC investigation?

[INAUDIBLE], we have heard nothing else and have nothing to say at this point.

Okay.

But based on your guidance, is it correct to assume you expect some kind of resolution sooner rather than later, otherwise you would have probably had some more commentary about G&A in the second half?

No, not at all.

We --

So it's just second quarter and that's as far as you are willing to comment on that?

Okay.

And it's the class action suit that we were talking about as opposed to SEC.

That's taken its own course.

Got you.

Okay.

And then as far as the modifications, Denny, that you were referring to as far as store openings, and Katie alluded to 100,000 cost savings.

Is there any change in functionality of, you know, public space versus private?

Are you shifting that around besides ultimately changing the footprints on the [INAUDIBLE]?

If you could kind of go into that a little bit, that would be helpful.

Yes, I don't recall Katie saying 100,000.

But is she did, I will correct her.

In any event, the initial initiative was to look at the existing building and do a value engineering.

So there's no change in the basic footprint or the heart of the house is our kitchen, or all the way to the front of the house.

And those buildings are committed, as we said, throughout the rest of the year and starting into '07.

The next stage is looking at implementing those cost for any that we start in '07 and getting all the value engineering in, but that process continues every day, so there's no change there.

In terms of a footprint change, we are looking at -- we are looking at that initiative; but we don't have a whole lot to go into right now and it would be speculative; so we will have more on the next call to the extent that we are moving down that line.

Again, if we were to do a new prototype with the smaller footprint -- or materially smaller footprint -- we wouldn't see that until second half of '07 anyway.

So the real drive is on value engineering on existing building.

Okay, so that helps clarify the value [INAUDIBLE].

I'm sorry about the 100,000 -- actually, I think I got that out of context.

Katie was referring to the inflationary pressures.

Okay.

What Eric was mentioning as far as the -- I think he termed it comprehensive throughput initiative -- what exactly is changing there, if you could go into that in a little bit of detail?

Sure.

We are just getting in the back of the house looking at staffing levels, equipment, time and motion studies, additional -- we have about 15% of the restaurants that are utilizing what we're calling a K track system.

It's not a KDS system, it's actually -- but it does allow us to go in and better officiate the times between hot and cold side and is helping us in the back of the house, and it really is a focus to refocus on one of our cornerstones.

So we are seeing some great results like I said out of the gate; and again, and the benefit is so that we continue to be successful in providing our guests the gift of time.

Okay.

Good.

Sure.

We go next to the site of Mike Smith with Oppenheimer.

Please go ahead.

Of these units you're opening this year, how many are mall versus freestanding or end caps?

Zero mall.

The franchisees opened one.

Okay.

And in terms of the smaller prototype -- I know you just answered this question -- but are you approaching this study with the idea of being able to go into smaller markets or just to fill out existing markets?

Well, first of all, for our purposes, haven't defined what the smaller prototype will be.

But it -- so it's probably approach it from an A and a B. A would be smaller prototype if we can continue with the same productivity, same volume potential.

That's the goal.

Whether we can get there or not -- you know, we will have more to report either second quarter or third quarter.

And then B would be a purely small prototype for smaller markets that some of our our franchisees would probably use before we would ever use them.

We have plenty of runway for our own existing units.

And just to -- probably my fault I don't know this.

But is there any activity going on in the franchising arena, and where do you stand on your existing franchising agreements?

And how many stores do they represent that are not open?

Well, we have said that we are not looking for new franchise partners.

We have 27 or 26 franchise partners today across the United States.

We expect those franchise partners to open 15 to 17 units this year.

The development agreements stretch out over five, six, seven years.

Probably 100 to 140 restaurants, plus or minus.

Thank you.

Thank you.

We'll go next to the site of Andrew Morey with [INAUDIBLE] Partners.

Please go ahead.

Yes, hi can you hear me?

Just one or two quick follow ups.

You mentioned you had some other commodities, some of the proteins -- I guess it was chicken and some fish and stuff locked in.

I assume you meant that's for '06.

Or is there anything locked in in '07.

Poultry locked in place until middle of '07;

And then our fish is until fall -- later in the fall.

Okay.

And looking at those levels versus any kind of current market levels, you know are there -- is there any expectation that, you know, past April '07 you'll be comparable, better or worse.

Your crystal ball is as good as ours right now.

But we monitor that all the time and we will be all over it.

Okay.

Oh, and one other thing.

I forgot, I'm sorry.

Was it $0.06 or $0.08 was the impact after taxes on stock based comp?

The guidance for second quarter is $0.05 to $0.06.

Okay, sorry about that.

And lastly, I don't recall if you mentioned, did you mention average weekly sales or any difference kind of between the -- you know, the newer stores, whether they be in existing markets or the newer markets, you know, kind of going back over that issue?

We don't break out that information.

Yes, right.

About 56,915 is the average across the full noncomp base, which is about 42 units.

Okay.

And about 56% of those operating weeks were attributed to new markets.

Okay.

All right.

And one last follow up on the acquisition.

I know it was nonbinding letter, so obviously you have to hammer out, just, I guess, the physical legal stuff.

But is there anything else kind of on the due diligence side you need to do, or these are such old restaurants you know them well?

Can you give us more color?

Well, I take issue with old.

They are great restaurants.

No, they're not brand new.

Excuse me.

There you go.

We're going through the normal due diligence, which we would regardless.

Obviously, since there are franchise partners running Red Robins, which we have the highest regard for, we don't need to spend time a lot of time on the restaurants.

But that doesn't change the contractual issues in the leases and liquor licenses, which are two big issues that we just have to continue process going through, so -- which we are.

Okay, thank you.

Thank you.

Next we have a follow up from Joe Buckley with Bear Stearns.

Please go ahead.

Can I go back to an earlier question someone had on different regions.

There's been a lot of talk about California.

I'm kind of curious if you saw any divergence between California performance and your overall performance in sales.

Yes, Joe, we don't break out individual markets.

Okay.

Not even big states?

Historically, just to follow up, if there were major issues as in three, four years ago, the Company did break out some markets when there were some issues in particular markets.

So, I will leave that stand.

If there were major issues, we would break it out.

Very good, thank you.

Thanks.

There are no further questions.

At this time, I would like to turn the call back over to management for any additional or closing comments at this time.

We thank everybody for joining us today, and we look forward to seeing you soon.

I thank all those great Red Robin team members out there that are doing it every single day.

Thank you all.

Ladies and gentlemen, that does conclude today's conference call.

At this time, we'd like to thank you for your participation.

You may now disconnect, and have a great afternoon.