使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day, and welcome to the Red Robin second quarter 2006 financial results conference call.
At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation.
It is now my pleasure to turn the floor over to one of your hosts, Ms. Katie Scherping, Chief Financial Officer of Red Robin.
Please go ahead.
Katie Scherping - CFO
Thanks, Kevin.
Before I get started I do need to remind everyone that part of today's discussions 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 in administrative expenses, and other expectations.
These statements are not guarantees of future performance and, therefore, investors should not place undue reliance 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 our listeners that we will make some references to non-GAAP financial measures during our call today, and you will find supplemental data in our press release on schedules 1 and 2, which reconciles our non-GAAP measures to our non-GAAP results.
Now, I'd like to turn the call over to Denny Mullen;
Chairman and Chief Executive Officer.
Denny.
Denny Mullen - Chairman and CEO
Thanks, Katie.
And thanks, all of you, for joining us today.
We also have Eric Houseman, our President and Chief Operating Officer with us.
He'll provide a business overview, and Katie will provide a financial overview and guidance.
Let's talk briefly about the second quarter, as well as the current environment.
On a GAAP EPS basis we earned $0.43 per share, which was $0.03 above the high end of our guidance of $0.37 to $0.40 per share.
And if we add-back $0.05 in stock option expense we actually earned $0.48 per share non-GAAP, which is 6.7% higher than the second quarter last year.
Our 3.3% positive comps were in line with our expectations and our non-comp restaurants continued to show improvement in the second quarter, contributing to our revenue of $135.9 million, which was above the top end of our $135 million revenue guidance range.
From a development cost perspective, we opened eight restaurants in the second quarter and supported the opening of three new franchise restaurants, for a total of 11 new Red Robins in the 12-week period.
So far in the third quarter we've already opened two company restaurants and two franchise restaurants.
We also have 16 company owned restaurants and 8 franchise locations currently under construction.
We recently closed on the acquisition of 11 of the 13 franchised restaurants in Washington.
The net proceeds paid at the initial closing were approximately 33.5 million, which were paid in cash drawn from our existing credit facility, plus the assumption of approximately 1.2 million in negative working capital.
The other two restaurants will close, assuming finalization of acceptable lease terms with the landlords of each of those properties.
Integration of all 13 locations into operations of the company are proceeding smoothly.
Equally important to acquiring these restaurants, we were fortunate to add several long-term team members from the franchised operations to our leadership team in the northwest region.
We spent some time on the last call discussing our focus on managing our construction costs.
We have implemented cost reductions in our Q4 2006 planned opening for an expected savings of approximately $60,000 to $70,000 per unit.
In our 2007 buildings we expect to be able to further reduce construction costs $80,000 to $90,000.
While construction costs continue to rise, we believe we have put in place a discipline to continually challenge the cost of our building and to improve the return on our investment without negatively affecting our guest experience or our brand.
Our design and construction teams are doing a fine job, and they remain very focused on our growth objectives as evidenced by our opening progress to date and our cost containment initiatives.
So, for the balance of the year, we will continue to focus on restaurant operations, new store development, integrating the newly acquired franchised restaurants, and, of course, serving high quality gourmet burgers and [menu] items that have made us the premiere destination for America's families.
With that, I'd like to turn the call over to Eric to give you a business update.
Eric Houseman - President and COO
Thanks, Denny.
Good afternoon, everyone.
While Katie will cover financial results in more detail, I just wanted to touch on some of the key business drivers from Q2, as well as some exciting things that have been happening and that we've been working on at Red Robin.
First, as Denny indicated, same-store sales were a positive 3.3% in the second quarter, up .9% in guest counts and up 2.4% in terms of price and mix.
That compares to a strong 4.8% comp in last year's second quarter, which included 2.2 in guest counts and 2.6 in price and mix.
While this is a sequential slowing from the 4.8 comp we achieved in the first quarter, it does mark our nineteenth straight quarter with positive comp store sales.
Our comp store AUVs for the second quarter of 2006 were $65,404 compared to $64,655 for the second quarter of '05.
You will recall, that a restaurant enters comparable base, five full quarters after it opens.
Our second quarter had 137 company owned comparable restaurants out of 180 total company owned restaurants.
The 17 restaurants that we have opened so far this year are performing well.
As we discussed in previous calls, [Q2 '06] will have a higher concentration of operating weeks from NROs in new market compared to existing markets, which does reflect our strategy of continuing to grow and expand our brand into new markets.
We are also very excited about executing that franchise acquisition.
Not only did we get 13 great restaurants, but we also acquired more developmental territory in a state that delivers our highest system AUVs.
But, most importantly, with this acquisition we've added six key senior regional team members, including a regional VP of operations, who will, in fact, be responsible for our entire northwest region operations, a regional team member, director, a director of franchise operations, a director of company operations, and two very capable regional operations directors.
Their combined experience with the Red Robin brand exceeds 100 years.
You'll remember from our last call, we introduced our new menu at the end of the first quarter.
I am happy to report that this new menu is beginning to have the positive affect that we had planned on, in particular, highlighting certain items that have improved our mix from a margin perspective.
If we combine the four [Knife & Fork Burgers] that were a new category on this menu update, they're selling at an impressive sixth place in our burger class.
The biggest seller, our Chili Chili Cheeseburger, has moved up four places from its old menu position.
The Knife and Fork Burgers deliver a strong margin contribution that we're quite pleased with.
We also, then, featured our second of our third beverage menus for the year, that we recently rolled out, which has kept our beverage offerings fresh and has proven to be a successful sales driver for us.
Our national team member initiative, what we're calling MP3, Mission Possible 3, is having a positive impact on the energy level within our restaurants.
We have launched the first two missions with our teams, which were designed to educate our team members and reinforce our cornerstones, particularly the gift of time.
And we just recently wrapped up the second mission, which created a lot of enthusiasm and excitement at our restaurants.
The final mission, designed around local restaurant marketing, to help generate sales by driving friends and families into the restaurants, is scheduled to launch in mid-September.
Our team members are having a lot of fun with MP3, and it's creating just some great buzz within the four walls of each of our restaurants.
This initiative was successful in getting our team members more engaged with our guests.
Lastly, we have undertaken an company wide [throughput] initiative this year, and we're very pleased with the results in terms of the operational execution that we're seeing so far in Q2.
While we've seen some operational benefits, the largest benefit, we believe, will be our continued success at taking better care of America's families in regards to speed of service, and allowing our guests to be in control of their dining experience.
No matter what direction the economy heads, we're all focused on what we can control, which is creating outstanding Red Robin experiences for our team members, as well as our guests.
Since our inception in 1969 we've experienced a few tough economic times, and we have endured through those by staying disciplined and focused on our four cornerstones: values, people, burgers, and the gift of time.
That philosophy will not change.
If we stay committed to our cornerstones we know that our team members will stay with us and our guests will keep coming back.
Obviously, this helps create both brand equity for our company and shareholder value for our investors.
So, with that, I'll turn the call back over to Katie.
Katie Scherping - CFO
Thanks, Eric.
Before I talk about our second quarter results, I'll reiterate some of the financial impact we expect from the franchise acquisition for the remainder of 2006.
First of all, we expect these restaurants to contribute revenue of between 25 and 26 million for the last 25 weeks of the year.
About 1 million in royalty revenues have been historically contributed from these 13 restaurants, which we've eliminated in our accretion calculation.
In accordance with the application of EITF 0-41, 'accounting for preexisting relationships between the parties to a business combination,' we expect to record a onetime non-cash charge of approximately $0.07 per diluted share in the third quarter related to the termination of franchise agreements for certain restaurants that operated at a royalty rate lower than current market royalty rates.
The accretion to our diluted EPS is expected to raise between $0.04 and $0.05 for the second half of 2006, excluding the onetime non-cash charge.
We have taken into account option grants given to the new team members and our stock compensation expense guidance we have provided for the full year of $0.22, $0.23 per diluted share.
Beginning in the third quarter the results of all 13 restaurants, including the two currently under management will be consolidated in our financial results.
These acquired restaurants will not be included in our comp store sales metric until the third quarter of 2007, so in the interim we will provide you with an acquisition AUV, beginning with the actual third quarter results.
Now, let's talk about our second quarter 2006 results.
Total revenue in the second quarter, which consists of restaurant sales and franchise royalties, grew 19.1% to $135.9 million, from $114.1 million.
Our total revenue of $135.9 million was higher than the high end of our guidance, primarily due to our positive comp store sales towards the top end of our 2.5 to 3.5% range, as well as the approved non-comp AUVs and higher franchise royalty revenue.
Restaurant sales grew 19.2% to $132.1 million from $110.8 million and consisted of 105.6 million in sales from our 137 comp restaurants and 26.5 million in sales from our 43 non-comp restaurants.
As Eric previously mentioned, restaurant revenues and same-store sales in the quarter increased 3.3% over last year, and the increase in same-store sales was generated by a .9% increase in GAAP count and a 2.4% increase in average GAAP check to $10.84 from $10.60 last year.
Franchise royalties and fees increased 16.9% in the second quarter to $3.8 million from $3.2 million as we added three franchised units to the system during the quarter and 16 since the end of the second quarter last year.
The 99 comp restaurants in the U.S. franchise system reported a 2.6% increase in same-store sales, while the 17 comp restaurants in the Canadian franchise system reported a 9% increase in same-store sales for the second quarter.
Restaurant level operating profit margin of 21.7% was the same as the prior year quarter, however, the second quarter of 2006 includes 20 basis points of stock compensation expense, which wasn't in the second quarter last year.
Taking the stock comp expense into account, the improvement of 20 basis points in margins was primarily due to favorable cost of sales and occupancy costs, which offset increases in labor and other operating costs.
Specifically, on the food and beverage front we reduced costs by 110 basis points to 22.5% from 23.6% in the second quarter last year.
Our decrease in raw material costs, along with reductions in costs from purchasing initiatives and new menu engineering, accounted for the majority of this improvement.
Labor costs were 70 basis points higher as a percentage of restaurant revenues this year compared to last.
This includes 20 basis points of stock comp expense, for which there is no comparable costs in 2005.
Our labor costs excluding stock compensation expense was 50 basis points higher than last year.
Overall, the increase in labor costs can be attributed to higher management wages, bonus expense, and increases in insurance benefits costs.
Just a reminder, stock compensation expense shows up in two places in our income statement.
In restaurant labor, which I just went through, and in G&A, which I will discuss momentarily.
The 50 basis point increase in our other operating costs to 15.3% of restaurant revenue this quarter, compared to 14.7% a year ago, was primarily the result of higher utility costs, mainly natural gas and garbage collection, as well as an increase in service and maintenance costs.
The utility cost pressure does not look to be turning around anytime soon, although we will begin to [lap] the higher rate from last year beginning in the third quarter so the YOY comparison will appear less dramatic.
Occupancy costs fell as a percentage of restaurant revenues to 5.9% compared to 6.1% a year ago.
Our increased leverage from revenue growth and a reduction in self-insurance liability claims have helped reduce our occupancy costs as a percentage of restaurant revenue.
Depreciation and amortization increased by 20 basis points to 5.4% of total revenues from 5.2% a year ago as a result of slightly higher costs of the asset base capitalized for restaurants opened since the second quarter of 2005.
General and administrative expense were 110 basis point higher than last year, at 8.4% versus 7.3% of total revenue.
The second quarter of 2006 includes 1.2 million of stock compensation expense, which contributed about 90 basis points to the expense.
Excluding stock compensation expense, the 20 basis point increase of G&A as a percentage of total revenue was primarily due to higher legal fees incurred related to defending our class action litigation claims, and we also spent more in the second quarter this year on marketing programs as a percentage of total revenue compared to last year.
Our pre-opening expense in the second quarter 2006 was 1.9 million compared to $922,000 last year.
Our pre-opening costs typically represent costs incurred approximately six weeks prior to our restaurant opening, with the majority of our costs incurred in the final two weeks.
We opened three restaurants in the second quarter last year, compared to eight this year.
Two of the three restaurants opened in 2005 were on purchased land, and one of the eight restaurants opened this year were on purchased land.
The second quarter 2006 pre-opening expense included 1.5 million of costs incurred for the eight restaurants we opened in the second quarter and 400,000 of pre-opening costs incurred in the second quarter for restaurants we have opened or will open in the third quarter.
The second quarter 2005 pre-opening expense included 600,000 of cost incurred for the three restaurants opened in the second quarter, and 300,000 of pre-opening costs incurred in the second quarter of 2005 for restaurants that were opened in the third quarter of 2005.
Net interest expense rose to $900,000 from $700,000 last year, as debt was 20 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 33.4%, to bring our YTD rate to 33.8%, which was 80 basis points lower than last year.
For the full year we expect our tax rate to be approximately 33.8% which is less than last year, primarily due to increased tax credits.
Net income for the second quarter, including a tax affected $900,000 of stock compensation expense was 7.2 million or $0.43 per diluted share, which was $0.03 above the high end of our $0.37 to $0.40 guidance.
Excluding the impact of stock compensation expense net income for the second quarter would have been 8.1 million or $0.48 per diluted share compared to net income of 7.4 million or $0.45 per diluted share last year, representing an adjusted 6.7% YOY EPS growth and a 9.2% net income growth.
Capital expenditures YTD were 56.4 million, most of which were premium restaurants, and we're still on-track to spend approximately 100 to 105 million in CapEx in 2006 excluding the acquisition of the 13 restaurants in Washington.
The balance outstanding under our line of credit facility is currently 88.6 million, with 111.4 million of the original 200 million still available, excluding the 40 million of additional credit that may be available in the future at our request.
Now, let's talk about our outlook for the third quarter and full year.
The guidance we are providing for revenue and EPS for the remainder of 2006 includes the consolidation of the 13 Washington restaurants into the results.
For the 12-week fiscal third quarter we expect total revenues between 147 and 149 million and net income of between $0.40 and $0.44 per diluted share, including the impact of stock compensation expense but excluding the onetime non-cash charge of approximately $0.07 per diluted share.
The impact of FAS 123R for the third quarter of 2006 is expected to be approximately $0.05 per diluted share.
On a GAAP basis including the onetime non-cash charge we expect diluted EPS to be between $0.33 and $0.37 in the third quarter.
Our third quarter guidance is based on certain assumptions, including a .5% to 1.5% increase in comp store sales, the anticipated opening of 7 to 8 new company owned and 2 new franchise restaurants during the quarter.
So far, 2 company owned and 2 new franchised restaurants have already opened, and we currently have 16 restaurants under construction, while our franchisees have 8 restaurants under construction.
For the 53-week fiscal 2006 we are updating our previous expectation.
We now expect revenues to be between $615 million and $618 million, and we still expect net income of between $1.74 and $1.83 per diluted share.
This includes the impact of stock compensation expense of between $0.22 and $0.23 per diluted share but excludes the onetime non-cash charge of approximately $0.07 per diluted share from the acquisition.
Our GAAP basis full year 2006 EPS are estimated to be between $1.67 and $1.76.
Due to the recent trending in our comp store sales and the economic pressures that are impacting the casual dining industry, generally, we are being cautious in our view of future revenue.
As a result, we are adjusting our full year expectations of comparable restaurant sales to 2.5 to 3%.
Included in the full year expectation for comparable restaurant sales is the assumption of a Q4 2006 price increase of approximately 1.2%.
We reiterate our commitment to maintaining our margins over the long-term in the 21 to 22% range and to gain G&A leverage over time.
We continue to expect to open 30 to 32 new company owned restaurants and 15 to 17 new franchise restaurants by the end of the year.
Through today 19 new company owned restaurants have opened and 16 are under construction, while 8 franchise restaurants have opened and 8 are under construction.
Finally, we plan to file our 10-Q tomorrow, so stay tuned for that.
With that, I'll turn the call back over to Denny.
Denny Mullen - Chairman and CEO
Thanks, Katie.
While we were proud of our accomplishments in the second quarter, we recognized the current environment presents some unique challenges.
We, like many other restaurant concepts, have seen a sequential slow-down in traffic since the beginning of the year, and we've incorporated our current trends into the guidance we've provided today.
Despite our cautiousness, we remain very enthusiastic about the long-term growth potential of Red Robin as the market opportunity remains very attractive.
Remember, we only have 180 company owned locations as of the end of the second quarter, which provides us significant room for future growth.
While our crystal ball is no clearer than yours when it comes to predicting consumer behavior, we are confident that we have a tried and true concept, one that resonates with our target guest base, and one that has endured in both good and challenging economic times since 1969.
And, with that, I'd like to open it up to your questions.
Operator.
Operator
[OPERATOR INSTRUCTIONS.]
And our first question will come from the site of Andrew Barish with Banc of America.
Please go ahead.
Andrew Barish - Analyst
Hey, guys.
Two things.
On the last thing you noted on the price increase, in the fourth quarter, is that an additional price increase on top of the 1% or so you took in April?
And then, secondly, can you just remind me on the – I thought there were some changes in advertising timing?
Can you just remind me how that is playing out 2Q versus 3Q?
Denny Mullen - Chairman and CEO
The price increase is an additional price increase of 1.2% in the October/November timeframe, in addition to the 1%.
Katie Scherping - CFO
I'll comment on the marketing timing.
For the full year we expect to spend about the same percentage of revenue that we've spent in the past, but it's loaded more towards the middle of the year, second quarter and third quarter, primarily.
And last year it was more heavily weighted toward the back half of the year.
Andrew Barish - Analyst
And any changes, just given the current environment, or just sticking with what you had planned as you entered the year?
Denny Mullen - Chairman and CEO
We're sticking with what we have planned.
We've got a lot of activity going on.
Andrew Barish - Analyst
Thank you.
Operator
We go next to the site of [John Glass] with CIBC.
Please go ahead.
John Glass - Analyst
Thanks.
Actually, I just wanted to clarify on the previous response to pricing, what was pure pricing in the second quarter versus the mix impact?
Katie Scherping - CFO
Hang on a second, and I'll give you that. [Mixed price?]
John Glass - Analyst
Correct.
And can you break-out the price on the mix?
Katie Scherping - CFO
We don't have that split out.
John Glass - Analyst
Okay.
And then when you talked about some improvements in new store productivity, could you give us what the non-comp company restaurant AUVs were in the quarter?
And can you maybe talk a little bit qualitatively about the openings in the second quarter?
Katie Scherping - CFO
The non-comp AUV in Q2 '06 was 58,330.
John Glass - Analyst
Okay.
And any color on the openings during the second quarter, how they trended versus say the first quarter or fourth quarter openings?
Eric Houseman - President and COO
Yes, John.
Houseman here.
We were real pleased with the second quarter openings.
Equally as pleased with our first quarter '06 openings.
And we've seen quite a dramatic improvement from the quarter four of '05 openings.
So we're real pleased.
Some solid openings across the country, not even in one or two economic areas, but in many states, in Kentucky we opened up [Groundsboro].
We opened up, you know, we've opened up Rockford this year.
We've opened up Greensboro.
We've opened up Fayetteville, North Carolina, Augusta, Maine, Redlands, California.
So we're real happy with first and second quarter openings.
John Glass - Analyst
Got you, okay.
And then just, finally, on the third quarter earnings deceleration versus the revenue growth, is that simply just a function of deleveraging on lower comps, or is there any, you know, cost issues that specifically stand out?
Denny Mullen - Chairman and CEO
No, cost issues, John.
John Glass - Analyst
Just deleveraging?
Denny Mullen - Chairman and CEO
Yes.
Katie Scherping - CFO
Right.
Denny Mullen - Chairman and CEO
Thank you.
Okay.
Thanks.
Operator
Our next question comes from the site of Jeff Omohundro with Wachovia.
Please go ahead.
Jeff Omohundro - Analyst
Well, I guess first maybe a follow-up to the last, or the question regarding the four new store openings.
To what do you attribute this dramatic improvement in the opening volumes to?
What's different?
Eric Houseman - President and COO
You know, Jeff, really there's nothing different from quarter to quarter.
We know that, that's why we've constantly reiterated that you have to look at these in terms of classes over a year time.
Anytime you take one snapshot, because if you, even in a single quarter, if you have great openings but they open up in maybe the last week, the last two weeks of the quarter, it can drastically skew just a single quarter's results.
So we're looking at these as a class, and we're real happy with how the '06s are coming out of the gate.
Jeff Omohundro - Analyst
Okay, and moving on, could you update us on where you are in the new product development pipeline?
And, in particular, you think about the second half and your comments regarding pricing, but will we see some mix efforts akin to what you've done with the Knife & Forkers?
Eric Houseman - President and COO
Well, I will say we have beefed up our food and beverage team. [Bob Morell] and his team have added an additional chef to the mix.
We actually went through a series of about five presentations over the last two weeks for new items, and we're really excited on some of the items that we have in the pipeline, that are going into test almost as we speak.
And they're a wide range, some different salads, some different entrees, to some unique new burgers.
We're real excited.
So we'll continue to become more and more students of menu engineering and get better and better, but we will always manage to the four P's and that's a commitment that Bob and his team have made.
So we're real excited with the pipeline and some of the new items.
Jeff Omohundro - Analyst
Okay.
And then, lastly, your traffic in the quarter was a bit better than really most of the casual diners.
There's some commentary in the press release about the demographics of the customer base, but I wonder if you'd give a little more color on that traffic?
Were there any regional sales trends that you saw emerging?
Or day parts or day of week trends within that?
Denny Mullen - Chairman and CEO
John, this is Denny.
Similar to the first quarter call, there were no regional trends.
The day part has changed insignificantly between lunch, dinner.
Obviously, we have the same menu, night, lunch and dinner, so we haven't seen any material changes or we would certainly discuss those, specifically.
Jeff Omohundro - Analyst
Thank you.
Denny Mullen - Chairman and CEO
To follow-up on Eric's point on the menu, in terms of the one we just rolled out, which has a number of great changes on it, and we'll do some tweaking in the October/November timeframe when we – and there will be mix changes with that price increase of 1.2%, with the eye on additional menu rollouts in '06 on a scheduled, I mean '07 on a scheduled basis with the addition of new products.
Jeff Omohundro - Analyst
When will we get more color on '07, by the way?
Denny Mullen - Chairman and CEO
January/February of '07, consistent with our prior practice.
Jeff Omohundro - Analyst
Okay.
Thank you very much.
Denny Mullen - Chairman and CEO
Thank you, sir.
Operator
Our next question comes from the site of Matt DiFrisco with Thomas Weisel partners.
Please go ahead.
Matt DiFrisco - Analyst
Hi.
I guess another, a third follow-on pricing question.
Denny Mullen - Chairman and CEO
Matt, we can hardly hear you.
Matt DiFrisco - Analyst
The third follow-on to the pricing question – can you hear me better?
Denny Mullen - Chairman and CEO
Yes.
Matt DiFrisco - Analyst
Okay.
October/November of 2006 you said you were going to have incremental 1.2% pricing, is that correct?
Katie Scherping - CFO
Correct.
Matt DiFrisco - Analyst
Is that then basically in synch with when you're lapping another price increase, and it falls off?
Katie Scherping - CFO
No, we don't lap one in June, from June of '05.
Matt DiFrisco - Analyst
Okay, so when we look at your comp guidance for this quarter then, you basically only have 1% pricing in there?
Katie Scherping - CFO
That's correct.
Matt DiFrisco - Analyst
Okay.
And then beyond, so October '06 to April of '07, you're going to be doing something roughly of 2.2 pricing?
Katie Scherping - CFO
Yes.
Denny Mullen - Chairman and CEO
In that range, sir.
Matt DiFrisco - Analyst
Okay.
Denny Mullen - Chairman and CEO
It's in the mix.
Matt DiFrisco - Analyst
Okay.
And then, Denny, you gave us some numbers on the '06 savings per unit and the '07 goals of 80 to 90K, can you give us the base that you're beginning with from, on the full cash investment?
Katie Scherping - CFO
It's about 2.4 million on the building, tax, land.
Matt DiFrisco - Analyst
And then you said 60 to 70 savings in '06 and an incremental 80 to 90 below that in '07?
Katie Scherping - CFO
About that, yes.
Matt DiFrisco - Analyst
Okay.
Katie Scherping - CFO
Yes.
Matt DiFrisco - Analyst
Can you talk a little bit about…
Denny Mullen - Chairman and CEO
Go ahead, I'm sorry.
Matt DiFrisco - Analyst
Can you talk a little bit about that in '07, what are the actual things that if one were to notice the difference in the box or where you're getting that savings?
Denny Mullen - Chairman and CEO
I doubt that you will notice, but one area may be if the bar would be straightened versus curved.
I mean I doubt too many people will notice that.
But most of the changes are out of the vision.
Matt DiFrisco - Analyst
Okay.
And then a last question, also.
Is there any change as far as what you're seeing on the direction of pre-opening costs?
I think some other concepts have either in this tighter labor environment have either brought on people a little earlier or level of training in order to ensure it, have taken on people a little earlier, and that's reflected in some higher pre-opening.
What do you expect over the next couple of quarters in the current economic environment and labor force we have, as direction of pre-opening?
Katie Scherping - CFO
Our pre-opening expense is expected to be flat for us.
One of the things you might see is the difference where we have purchased land and you don't have pre-opening rent expense in that number.
And so last year two of the three openings that we did in the quarter were on purchased land, one of the eight this quarter and second quarter of this year was purchased land, so you didn't have that expense flowing through the pre-opening line.
Matt DiFrisco - Analyst
Interesting.
Okay.
Thank you.
Operator
Our next question comes from the site of [Jason Witmer] with Cleveland Research Company.
Please go ahead.
Jason Witmer - Analyst
Hi, thanks.
I was wondering if you see any changes to family [traffic] or spending patterns over the last six months?
And I guess my real question is have you seen any similar marginal weakness of that lower end consumer?
I know your core consumer is certainly more in the higher end.
Have there been any slow-downs there?
Any type of shifts going on within that?
Denny Mullen - Chairman and CEO
Not that we've been able to discern, frankly.
You know, as I've said, we've had sequential slow-down in comp sales, but we're still very positive and haven't seen any granular evidence in any particular segment of the consumer.
Jason Witmer - Analyst
Did you do any analysis of size of the family?
You know, one kid, two kid, three kids sort of thing, and similar question, along that?
Eric Houseman - President and COO
Well, we do some market segmentation research, but I don't think we break-out size of family.
Jason Witmer - Analyst
And the only other question off of that, it certainly seems like there's a little bit of an up tick right now in the competitive couponing, discounting value sort of proposition.
Certainly, you like where your price point is, but do you feel like you're caught-up in that game at all and trying to chase our [traffic] in any sense versus similar peers at a price point?
Denny Mullen - Chairman and CEO
We are not pursuing that strategy, at all.
Eric Houseman - President and COO
Business as usual.
Jason Witmer - Analyst
Great.
Thank you.
Denny Mullen - Chairman and CEO
Thank you.
Operator
We go next to the site of [Joe Buckley] with Bear Stearns.
Please go ahead.
Joe Buckley - Analyst
Thank you.
A couple of questions.
Firstly, just a clarification question again, not on the pricing this time, but on the investment cost saving.
I know you said 60 to 70 in '06, and then is it 140 to 160 savings in '07?
Denny Mullen - Chairman and CEO
Yes.
Joe Buckley - Analyst
Okay, very good.
And then a question on the pricing, although a little bit different, talk about the decision to take price, you know, your food costs are running pretty favorably, and it's a tough environment?
What drives that decision to take price at this time?
Denny Mullen - Chairman and CEO
Well, Joe, we've always talked about, first of all, maintaining operating profit in the 21 to 22% range.
We've had exhaustive analysis here in terms of the threats that we're facing.
We have automatic increases in minimum wage in a number of states that are tied to cost of living, and we have a number of other states that have valid issues that will be going into effect with January increases, along with the high probability in our opinion of minimum wage increase in California, where we have a number of units.
So in that vein, given, and also given our price value relationship which we feel very strongly that we have and will maintain, we took a modest price increase to offset the minimum wage issues, primarily.
Joe Buckley - Analyst
Okay.
Give us an update on the MP3 program?
And is the September phase meant to be a traffic driving phase?
Eric Houseman - President and COO
Joe, it really is.
The first two phases are more about engaging the team members, and then in the third phase we ask them to go out and really recruit their friends and family, and their incentives and contests to bring them back.
And we, based on research that we've had and learned from some other concepts that have done this in the past, it's been successful for them, so we're not baking it into any of our forecasts but there is a sales driving component.
Joe Buckley - Analyst
Okay.
Have the first two phases been well received by the staff?
Eric Houseman - President and COO
Incredibly so.
Joe Buckley - Analyst
Okay, very good.
And then just a question on the sequential slowing of sales, could you give us a little more color on when it started and, I guess, Denny, you made it sound like your guidance is based on kind of the current run rate.
Would that be correct?
Katie Scherping - CFO
Yes, the guidance is based on the current trends we've been seeing recently, Joe.
Joe Buckley - Analyst
Okay.
And when do you start to see slowing?
Denny Mullen - Chairman and CEO
Oh, good question.
I mean we had – what was our second quarter, our first quarter, I mean?
Eric Houseman - President and COO
July was a little…
Katie Scherping - CFO
4.
Eric Houseman - President and COO
July was a little slower than June, but even in the month of July it wasn't like it descended every week.
It was a little bit of a rollercoaster, Joe.
We went up, down, you know, up, down type of deal.
Joe Buckley - Analyst
Okay, that's helpful.
Thank you.
Operator
[OPERATOR INSTRUCTIONS.]
We'll go next to the site of [Robert Barrington] with Morgan Keegan.
Please go ahead.
Robert Barrington - Analyst
Yes, hi.
Thank you.
Calling for Dustin Thompson.
A question on the, if we could stick with sales for a second, Denny – have you seen much in the way of geographic variation about that sales trend?
Has it been stronger or weaker in any given markets?
Have you seen much variance there?
Denny Mullen - Chairman and CEO
No, Robert, we really haven't.
And as we've said on previous calls, a couple of years ago when we did have some regional differences the company spoke to those differences, and we would again if there were any material changes between regions.
Robert Barrington - Analyst
Okay, all right.
Fair enough.
Denny Mullen - Chairman and CEO
I will remind that in that regional basis we have different [chart] of menus for different geographies around the country.
Robert Barrington - Analyst
Got you.
On the, Katie, on the cost of sales outlook, is it reasonable to expect that, you know, the kind of improvement we saw YOY in Q2 is likely to continue through the balance of the year?
Katie Scherping - CFO
We think we'll see some benefit YOY, certainly from commodities.
On a trend basis, though, we think any benefit we see may be offset by delivery charges and fuel surcharges as the oil prices continue to be volatile.
Robert Barrington - Analyst
Will much of those, did they have an impact in this current, this past quarter, Q2?
Katie Scherping - CFO
The fuel surcharges?
Robert Barrington - Analyst
Yes, exactly.
Katie Scherping - CFO
Yes, they did.
Robert Barrington - Analyst
Okay, all right.
Fair enough.
Very good.
Thank you.
Denny Mullen - Chairman and CEO
Thank you.
Operator
The next question comes from the site of [John Emeridge] with [Ironworks Capital].
Please go ahead.
John Emeridge - Analyst
Some unrelated questions, if I can ask them separately.
The cost savings on 60 to 70,000 and then 80 to 90, [I apologize if you already said this,] but what is that relative to?
Katie Scherping - CFO
It's from an original building base of about $2.4 million.
John Emeridge - Analyst
2.4 million?
Katie Scherping - CFO
Yes.
John Emeridge - Analyst
And that $2.4 million includes you own the building and the land?
Katie Scherping - CFO
That's no land.
John Emeridge - Analyst
No land, but the building?
Katie Scherping - CFO
The construction costs of the building, yes.
John Emeridge - Analyst
Building only.
Eric Houseman - President and COO
The [assessment.]
John Emeridge - Analyst
I'm sorry?
Eric Houseman - President and COO
Assessment, the furniture.
John Emeridge - Analyst
Right, right.
And how many sites do you own the land on?
Katie Scherping - CFO
We own about 31 to 32, something like that.
John Emeridge - Analyst
And, you own all of the buildings?
Katie Scherping - CFO
Yes.
John Emeridge - Analyst
Okay.
Let's see, the next question was what's the revenue in your guidance for the next quarter from the acquired franchise restaurants?
Katie Scherping - CFO
For the back half of the year, for the 13 weeks remaining at 25 to 26 million.
John Emeridge - Analyst
For both quarters?
Katie Scherping - CFO
That's for the full 25 weeks, yes, 25 weeks.
John Emeridge - Analyst
Right, remaining.
And can you clarify, in the press release it says it's accretive $0.04 to $0.05, I thought you said in your introductory comments that it was dilutive.
Can you just clarify what it's adding to the bottom line including the options expense?
Katie Scherping - CFO
It will be accretive, $0.04 to $0.05 for the back half of the year.
The $0.07 onetime non-cash charge will be taken in the third quarter.
John Emeridge - Analyst
Okay.
So do you – it's – the $0.04 to $0.05 accretion is before the charge but after the ongoing options expense that new employees will receive?
Katie Scherping - CFO
Correct.
John Emeridge - Analyst
Okay.
I guess the general feeling is the takeaway would be that if you hadn't done this acquisition, our EPS or profitability would still be kind of declining sequentially from the quarter just reported, is that fair?
Eric Houseman - President and COO
With the special charge, [that it] takes?
Denny Mullen - Chairman and CEO
Stock option expense.
John Emeridge - Analyst
No, no…
Denny Mullen - Chairman and CEO
Stock option expense is related to the entire company, not just…
John Emeridge - Analyst
No, I understand.
I think that's an expense, and so I'm including that in every period.
Denny Mullen - Chairman and CEO
Right.
Katie Scherping - CFO
Yes, we reported $0.43 for the second quarter.
John Emeridge - Analyst
Right.
Katie Scherping - CFO
And we're guiding $0.40 to $0.44.
John Emeridge - Analyst
Right, so if you took out a couple pennies you'd still be [finished.] And, lastly, what are the average unit volumes, what does a restaurant do?
And someone made, asked the question about dramatic improvements in the volumes of new restaurants, but I didn't hear that number, so I'd love to understand that difference?
Katie Scherping - CFO
Okay.
The non-comp AUV in the second quarter of 2006 is 58,330.
The prior quarter was 56,915 on the non-comp units outstanding at that time.
John Emeridge - Analyst
Okay.
I'm sorry, on an annual basis what is one year restaurants do in revenue.
Eric Houseman - President and COO
3.3.
Katie Scherping - CFO
3.3 is our average comp.
John Emeridge - Analyst
That's what I was looking for.
Thank you very much.
Operator
Ladies and gentlemen, this does conclude our q and a session for today's conference call.
At this time, I'd like to turn the conference back over to the company for any additional and, or closing remarks at this time.
Denny Mullen - Chairman and CEO
Well, just thank you very much, and we look forward to talking to you at the end of the third quarter.
Eric Houseman - President and COO
Thanks to all of those great Red Robin team members out there, that are working hard each and every day.
Operator
Ladies and gentlemen, this does conclude today's conference call.
At this time, you may disconnect.
And have a great afternoon.
7