Red Robin Gourmet Burgers Inc (RRGB) 2006 Q4 法說會逐字稿

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

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

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

Thanks, Mark.

Before we get started, I need to remind everyone that part of today's discussion, particularly, but not limited to our outlook for fiscal 2007, 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, investors should not place undue reliance on them.

We refer all of you to our 10-K and our 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 today during our call.

You will find supplemental data in our press release on Schedules 1 and 2, which reconciles our non-GAAP measures to our GAAP results.

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

Denny.

Excuse me.

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 an update regarding various business initiatives, while Katie will provide a financial review of the fourth quarter, and we'll also discuss our new guidance strategy for 2007 which will enable us to take a longer term view of the business.

But, first, let's talk briefly about 2006.

We had a number of key accomplishments, including the passing of the $1 billion systemwide sales figure and passing $600 million company restaurant sales figure, as well as a successful acquisition and integration of the 13 restaurants from our Washington franchisee during 2006.

We finished the year with 347,000--347 systemwide locations in North America, and we and our franchise partners have opened more new Red Robin Restaurants in 2006 than in any other year in our history.

All of this would not have been possible without the incredible contributions from all of our Red Robin team members.

Moving on to the fourth quarter, as you can see from today's press release, we had a better quarter than we originally expected.

On a GAAP EPS basis we earned $0.53 a share in the fourth quarter, which was above our guidance range of $0.32 to $0.37 a share.

Our operating performance was better than we originally expected, which resulted in a higher than forecasted revenues and margins.

The 53rd week had a better than expected contribution to our financial performance, and we also benefited from the receipt of a well-publicized credit card class action litigation settlement, as well as some tax rate adjustments, which Katie will explain in more detail in just a few minutes.

Same store sales increased 0.2% for the fourth quarter and 2.4% for the full fiscal year.

Our comps were in line with our expectations but continued to reflect a more challenging environment.

So far in the quarter--in the first quarter, we continue to feel the pressure on our guest counts and considering the difficult comp comparisons to Q1 '06 and the extreme weather conditions experienced across the country we expect the first quarter of '07 to be difficult.

From a development perspective, we opened 7 restaurants in the fourth quarter and supported the opening of 8 new franchise restaurants, for a total of 15 new Red Robins in the 13-week period.

For the full year we opened 32 new restaurants and supported the opening of 16 new franchise restaurants, along with the acquisition of the 13 restaurants in Washington.

As you can see from today's press release, our non-comparable restaurant sales volumes continued to perform at a level that we are not satisfied with.

As I have indicated on previous calls, we believe a lack of brand awareness in new markets is having an impact on our new restaurants' performance, particularly those opening in new markets.

We are taking a number of steps to address these, to address this, including, one, in launching a new media advertising campaign to help brand awareness.

Two, reducing the new unit growth to approximately 24 to 27 company-owned restaurants this year, and making incremental investments in pre-opening costs in an effort to improve our new restaurant volumes from units we will open in 2007, which Eric will cover in a few minutes.

The national advertising campaign will be funded by both company-owned and franchised restaurants contributing 1% of their sales to a national advertising fund.

We have produced several commercials and are planning national media buys on cable networks for the first commercial which is expected to run in mid April.

We expect to spend approximately $11 to $11.5 million on the national advertising fund in 2007.

Our national advertising efforts are focused exclusively on branding and raising consumer awareness around the Red Robin concepts, which we expect to drive guest traffic throughout the system.

Our current plan is to run advertising periodically through 2007, again, beginning in April.

While this is Red Robin's first launch on to national cable television, the initial copy testing of our spots was well received, and we are optimistic it will increase our brand awareness and help drive restaurant sales volumes.

From a new restaurant construction standpoint, we expect to be able to reduce construction costs by $150,000 per building for our 2007 units from the average cost of our 2006 units of around $2.4 million, keeping in mind that we may offset some of those cost savings with inflation in 2007, though.

We are finalizing plans for our new 5,600 s.f. building that would reduce construction costs by another, about another $150,000, yet produce similar sales volume capacity as our current prototype.

The first restaurant to be built with this design will be in Georgia, which will--is expected to open later in the first quarter.

Our 2000 plans call for 24 to 27 new Company restaurants, but only about 3 will be the new design, of this 5,600 s.f. design.

As we announced on January 31st, we have signed a nonbinding letter of intent to acquire our very successful California franchisee, Top Robin Ventures.

There's really nothing new to report on this opportunity outside of the details in the January press release.

We continue to expect that the acquisition will close by the end of the second quarter, and if completed to be accretive to earnings.

We are not including the Red Robin acquisition in our financial guidance until it actually closes.

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

Thanks, Denny.

In the fourth quarter of 2006 our comp store sales were up 0.2%, this is made up of the 3.2 increase from price and mix, offset by a 3% decline in guest counts.

For comparison purposes, we posted a 2.7 comp gain in the fourth quarter of 2005, which included 0.9 increase from price and mix and 1.8 increase in guest counts.

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

Our fourth quarter had 148 company-owned comparable restaurants out of the 208 total company-owned restaurants.

The 13 acquired franchised restaurants in Washington are not currently included in the comped base, but will be included beginning the third quarter of 2007.

The average unit volume from these 13 restaurants in the fourth quarter was an impressive $82,167.

Average weekly sales for the comparable base was $61,421 during the fourth quarter, compared to $60,966 last year.

Average weekly sales for non-comparable restaurants was $53,557 during the fourth quarter this year, compared to $56,573 non-comparable restaurants in the fourth quarter this year--last year, I'm sorry.

Approximately 63% of our operating weeks from the non-comparable restaurants in the fourth quarter this year were from units in new markets, compared to 58% a year ago.

The performance of our non-comparable restaurants' average unit volume represented about 87.2% of our average comp store sales volumes in the fourth quarter, which is the same as it was in the third quarter of 2006.

The new market non-comp AUVs as a percentage of comp AUVs actually improved in the fourth quarter to 84% of the average comp restaurant AUV.

As we have discussed in previous calls, we will continue to have a higher concentration of non-comp operating weeks from new markets compared to existing markets.

This reflects our long-term strategy and commitment of continuing to grow the Red Robin brand into new markets.

Also, remember, that restaurants generally mature at year three and beyond, so we will also have a higher concentration of less than mature markets in the comp base.

In addition, over 40% of our company-owned portfolio of restaurants at the end of 2006, excluding the 13 acquired restaurants, are less than three years old.

We continue to develop a number of programs built around normalizing new restaurant performance, or as we call it "NRO normalcy."

First, we are working to maintain as much of the honeymoon sales volume as possible and making sure each and every guest gets a great Red Robin experience.

Second, since new restaurants are not as efficient as existing restaurants, we are very, very focused on training to and measuring the proficiencies of each and every team member in each hourly position.

We expect that with increased proficiencies come increased productivity use which translates into comp-like or normalized margins.

The reduction in 2007's new unit growth will allow us time to focus in on the NRO normalcy initiatives to drive performance from the non-comp restaurants that have already opened and those that will open in 2007.

We will also be spending more on our average pre-opening costs per restaurant in 2007.

We expect the average cost per restaurant to run about $275,000 including the cash rent expense, this compared to the 200--or the 2006 average of about $251,000.

The NRO initiatives, including redefining and strengthening our hourly team training during new restaurant openings will continue.

We have also increased the number of trainers that we plan to send to each opening to ensure that our new team members are getting the confidence they need to perform well and to ensure we are providing a great Red Robin experience from our first opening day, forward.

In addition to enhancing our hourly team member training, we are also adding some additional modules to our manager training curriculum to better prepare new managers for the challenging environment that NRO creates so they can confidently execute our processes, our systems, and our cornerstones.

We've also developed a unique leadership selection process that we've recently implemented, which began in the fourth quarter of 2006 to improve our selection and retention of great people that thrive and prosper in the Red Robin culture.

We aspire to be 12 months ahead of our identification and succession planning for the leadership teams who will be assigned to new restaurants, especially those in new markets.

On the training front, in our comp restaurants we are putting together the final touches on our late first quarter, early second quarter training curriculum, which will focus upon the execution of our hourly cultural and technical musts.

For many of you that have followed the Red Robin story, you will remember that ongoing training, which represents our core value of continually seeking knowledge, is something we do quite regularly at Red Robin.

This focus will be very similar to the throughput focus we had last year, and will internally reinforce with our team members the cornerstones that our guests' busy lifestyles require.

Briefly, I'll spend a few minutes talking about what we are gearing up for in our April spring menu run.

We are very excited about some of the new items that we'll be introducing and some of the old favorites that we'll be reintroducing.

In the entrée and salad categories we'll be adding an adult version of a [Chicken Mac and Cheese], as well as a fabulous apple walnut smoked chicken salad to the permanent menu.

Both of these items tested very well in our promotions and have been well received by our guests.

In addition, we'll also be adding the [chicken brochette burger] and the [honkey tonk pulled pork burger] to our [Knife & Forker] category, as well as enhance all of our Knife& Forker's with our own signature garlic parmesan steak fries.

Also coming this spring is a blackened chicken burger.

Some of the burger favorites that are making a comeback in the burger category are the popular [A-1 peppercorn burger] and our famous [pot roast burger] which is back as a traditional burger.

We also have some great new burgers that are entering our testing pipeline and look to be promising, and which will keep Red Robin in the forefront of being America's gourmet burger maker.

Speaking of gourmet burgers, last fall we launched a national public relations program called "The Next Gourmet Burger Kids Contest."

The contest entries exceeded our expectation.

We received over 16,000 gourmet burger entries from kids all across the nation.

Last month at our Annual Leadership Conference in Miami we brought the top four regional Kids Burger finalists to the stage for a burger wrap-off prior to our annual [Smiling Burger Championship.]

All of the finalists were truly amazing, and I'm pleased to report that [Adrianna], a--our nine-year-old guest from North Carolina, stole the show with her gourmet spicy Asian burger.

Her burger will be featured on our upcoming spring promo.

In addition, her recipe will be featured along with the top 50 burger recipes in a cookbook, which will be available this summer and sold in all Red Robin restaurants, with the proceeds from the sale of the cookbooks benefiting the National Center for Exploited and Missing Children.

We expect our national advertising initiative that will create--will create more brand awareness in markets where Red Robin is not as known, and we expect it to drive improvements in guest counts throughout our system, as well as improve our team member recruiting efforts in those new markets.

Our team members are very enthusiastic about this initiative, and we have talked about it at the Leadership Conference.

Building name recognition for Red Robin, particularly in markets where we do not have a long operating history, takes time.

We realize that building a loyal guest base in these new markets will not come about overnight, and we are focused on the execution within our four walls to deliver a great Red Robin guest experience.

We remain passionately focused on creating outstanding Red Robin experiences for our team members, as well as our guests.

Our history has shown that when we stay disciplined and focused on our four cornerstones, our values, our people, our burgers, and our guests get the time, our team members will stay with us and our guests will keep coming back.

This is the surest way to create both brand equity for our Company and shareholder value for our investors, and would not be possible without the incredible hard work and dedication of all our Red Robin team members, CDTs, and managers.

And, now, I'll turn the call over to Katie, so she can review our financial results in further detail.

Thanks, Eric.

Now, let's talk about the results for the fourth quarter 2006, which I should remind you includes the results of the 13 acquired restaurants in Washington State, beginning with the third quarter 2006.

Please note, also, that the fourth quarter of 2006 was a 13-week period, while the fourth quarter of 2005 was a 12-week period.

The impact of this additional week on our earnings represented about $0.11 of diluted EPS.

In addition, the leverage of that additional week had an impact on our year-over-year comparisons.

As I go through our results, the comparisons I make will be on a fiscal year to fiscal year basis, as reported in our financial results.

Where material, I will point out the impact the additional week had on our results.

Total revenues for the fourth quarter of 2006, which consists of restaurant sales and franchise royalties grew 40.6% to $163.8 million from $115.5 million last year.

The 53rd week contributed about $14 million to total revenue, so excluding the extra week our total sales would have increased 28.2% over 2005.

Restaurant sales grew 41.8% to $160.4 million from $113.1 million, and consisted of $116.1 million in sales from our 148 comp restaurants, $13.8 million from the 13 acquired restaurants in Washington, and $30.5 million in sales from our 47 non-comp restaurants.

Since Eric already covered comparable restaurant sales metrics, I won't discuss those specifically, but please note that the acquired Washington restaurants will not be included in our comp store sales metrics until the third quarter of 2007.

In addition, we measured our comps in the fourth quarter and year-over-year on a comparable 13-week, 53-week basis, including the first week of 2006 into our 2005 comp performance to calculate our same store sales year-over-year.

Franchise royalties and fees fell 0.9% in the fourth quarter to $3.4 million, as they now exclude the royalty contributions from the 13 Washington restaurants from which we recognized $412,000 in royalty revenue in the fourth quarter last year.

The 95 comp restaurants in the U.S. franchise system reported a 1.5% increase in same store sales, while the 18 comp restaurants in the Canadian franchise system reported a 5.1% increase in same store sales for the fourth quarter.

Our restaurant level operating profit margin of 21.5% was nearly 90 basis points higher than our 20.6% results for the prior year's fourth quarter.

The variance is attributed to a 20 basis point decrease in cost of sales, a 90 basis point decrease in labor cost, a 20 basis point decrease in operating expense, offset by a 30 basis point increase in occupancy costs.

Our costs of sales decreased by 20 basis points to 22.4% this year, from 22.6% of restaurant revenue last year.

The improvement here was due to several factors, including the new menu engineering, our price increases taken in 2006, which helped with the margin leverage, as well as minimal food and beverage cost increases this year.

Our new poultry contract, which locks our price until the end of 2007 also accounted for some favorability in margin.

The recent extreme weather in the produce growing states has put pressure on our produce costs in the first quarter of 2007, however, we expect nominal increases in our food costs through the remainder of the year.

Our labor costs decreased by 90 basis points to 33.7%, from 34.6% of restaurant revenues this year compared to last.

In addition to some reductions in our hourly and administrative labor, we have experienced reductions in our self-insured benefits cost in 2006, which improved comparisons this year.

While we are hopeful this improved trend will continue into 2007, the impact of minimum wage increases in several states where we operate will reduce our margins by about 80 to 85 basis points in 2007.

We have not assumed any 2007 impact from a federal minimum wage increase in our 2007 model.

The additional 13th operating week had a positive impact on margins and, historically, the last two weeks of the fiscal fourth quarter are among our highest generating sales weeks for the year.

We estimate that the margin leverage from the 53rd week provided about 10 basis points of restaurant operating profit margin benefit for the year and 50 basis points for the fourth quarter.

Our labor costs in 2006 also include 10 basis points of stock comp expense, for which there was no comparable costs in 2005.

As a reminder, stock compensation expense shows up in two places in our income statement.

Here in restaurant labor and in G&A, which I will discuss in a moment.

The 20 basis point decrease in our other operating costs to 16.0% of restaurant revenue this quarter, compared to 16.2% a year ago was primarily the result of sales leverage, as well as reduced utility costs compared to last year, as natural gas prices have declined.

For 2007 the incremental cost of our national advertising fund contribution will be about a half a percent of revenue and will increase other operating costs in 2007 beginning in March.

The remaining half a percent will be a reallocation of our historical marketing spending.

Occupancy expense increased 30 basis points to 6.3% of restaurant revenues this quarter, compared to 6.0 a year ago.

Fewer properties purchased in 2006, combined with the higher average rent expense from the acquired Washington restaurants added to the Company's portfolio in the second half of 2006, which accounted for the increase.

Depreciation and amortization decreased by 30 basis points to 5.5% of total revenues from 5.8% a year ago, primarily from the leverage on the acquired units, combined with about 10 basis points of leverage due to the 13th week on the fixed costs.

General and administrative expenses were 20 basis points higher than last year, at 8.1% versus 7.9% of total revenues.

The fourth quarter of 2006 includes $1 million of stock compensation expense, which contributed about 50 basis points to the expense.

Excluding stock compensation expenses incurred in the fourth quarter of 2006, the 40 basis point decrease in the general and administrative expenses as a percentage of total revenue was due, in part, to the receipt of $340,000 related to a class action litigation settlement with Visa and MasterCard, as well as leverage from increased sales.

In accordance with the application of EITF 04-1, accounting for preexisting relationships between the parties to a business combination, we recorded the charge of approximately $0.01 per diluted share after tax related to the termination of a franchise agreement with the Puyallup Restaurant that operated at a royalty rate lower than the current market royalty rates.

This $301,000 pretax charge is included in our statement of operations in the fourth quarter of 2006 as reacquired franchise cost.

As you may recall, we incurred $0.06 per diluted share attributed to the other acquired restaurants in the third quarter, for a total of $0.07 per diluted share for the full year.

Our pre-opening expense in the fourth quarter 2006 was $1.8 million, compared to $2.1 million last year.

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

We opened 11 restaurants in the fourth quarter last year, compared to 7 this year.

The fourth quarter 2006 pre-opening expense included $1.3 million of costs incurred for the 7 restaurants we opened in the fourth quarter, and $521,000 of pre-opening costs incurred in the fourth quarter for restaurants we have opened or will open in the first quarter of this year.

Net interest expense rose to $1.9 million, from $.8 million last year.

Our interest expense increase reflects increased borrowings to fund our growth and to fund the Washington acquisition, offset by more favorable borrowing terms from the amended credit agreement we executed in December of 2005.

Our effective tax rate for the quarter was 24.2%, compared to 31.2% in the fourth quarter last year.

This reduction in our effective tax rate contributed $0.05 to our EPS, our diluted EPS, compared to our forecasted rate of 33%.

Our full year effective tax rate for 2006 is 30.6%.

This more favorable tax rate is primarily due to increased tax credits, as well as lower effective state income tax rates.

We expect the 2007 effective tax rate to be approximately 32%.

Net income for the fourth quarter, including the tax affect of $913,000 in stock compensation expense and $228,000 related to the reacquired franchise cost for the franchise acquisition, was $8.8 million or $0.53 per diluted share.

Excluding the impact of stock compensation, the reacquired franchise costs, and the impact of approximately $1.9 million of net income contributed by the 53rd week in 2006, net income for the fourth quarter 2006 would have been approximately $8.1 million or $0.49 per diluted share, compared to net income of $5.5 million or $0.33 per diluted share last year.

Schedule 2 in the press release lays out this non-GAAP reconciliation for you.

Now, allow me to reconcile our fourth quarter results relative to our earlier guidance.

On the high end we estimated diluted EPS results of about $0.37.

Our actual operating results through the first 12 weeks of the quarter ran about $0.07 above these expectations, yielding $0.44 in EPS.

The 13th week of the quarter came in above our expectations by about $0.03 in EPS, getting us to $0.47 in earnings.

The credit card litigation settlement, which we didn't forecast, added another $0.01 to our EPS.

And, finally, the reduction in our effective tax rate from the 33% we forecasted generated another $0.05 in EPS in the quarter.

Taking all these items together they added $0.16 to our original EPS guidance of $0.37, and resulted in a total of $0.53 in EPS on a GAAP basis.

Excluding the acquisition of the 13 franchised restaurants in Washington State, our capital expenditures were $96 million for the year, most of which was for new restaurants.

We expect our capital expenditures to be between $85 and $95 million in 2007.

The balance outstanding under our line of credit facility at the end of the year was $99 million, with about $96 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.

Beginning with 2007 we will no longer provide quarterly revenue, quarterly comparable restaurant sales, and quarterly EPS guidance.

We will, however, provide guidance for these metrics on an annual basis, which we may update throughout the year as circumstances and visibility changes.

We will continue to provide quarterly unit development expectations for both Company owned units, as well as franchise units.

We are changing our guidance policy due to the numerous challenges associated with trying to forecast our business on a quarterly basis, including a limited visibility related to the performance of our new restaurants and the timing of their opening, the timing of the costs and potential sales benefit from our new national advertising effort, the impact that extreme weather patterns can have on our sales and commodities, as well as the various challenges that exist in the [cattle] dining industry today.

Also, keep in mind, the $250,000 of pre-taxed earnings moves our EPS by about a penny.

Having said that, I've shared with you today some of the trends we expect to see throughout the year, and we will continue to update you on our progress in a quarterly earnings announcement, where we will provide updates to our annual expectations as we deem appropriate.

I know we have spoken to many analysts and investors who have followed us for years and who share this long-term view of our business, and we appreciate your suggestions in helping us interact with the investment community, and believe that focusing on our business for the long term while giving you quarterly updates on our progress, is in the best interest of both the Company and its shareholders.

For the 52-week fiscal 2007, we are looking for total revenue of between $715 and $735 million.

Comparable restaurant sales of 2% to 3.5%.

And net income of between $1.75 and $1.85 per diluted share on a GAAP basis.

Our assumptions provide for an improvement in comparable restaurant sales results concentrated in the last three quarters of 2007, as comparisons get easier throughout the year and expected guest counts benefit from the advertising campaign.

Our full year EPS guidance includes the impact of stock compensation expense, which we are estimating to be between $0.28 and $0.30 per diluted share.

In addition, we have included the cost of our national advertising campaign in our annual forecast, which will impact our margins an incremental 50 basis points beginning in March to fund our portion of the 1% contribution to the national advertising fund.

For 2007 we are planning to take a price increase early in the fourth--early in the second quarter of about 0.9% that will help offset some of the cost threats to our margins.

We reiterate our commitment to maintaining our margins over the long term at 20 to 22% and to gain G&A leverage over time.

In terms of unit development, we look to open 24 to 27 new Company owned restaurants and about 15 to 17 new franchise restaurants by the end of the year.

It's worth noting that despite the slowdown in new restaurant growth we will have about a 19% increase in operating weeks as a result of the 13 Washington restaurants that were acquired in 2006.

And because of our heavy front-end loading of our 2007 unit openings in the first half of 2007 we only expect to lose 3 to 4% of total operating weeks from these 24 to 27 units compared to the--compared with the operating weeks contributed by the 32 units opened more evenly throughout 2006.

We will open 17 to 19 new units in the first half of 2007, with 5 already open, and 15 currently under construction.

Additionally, we expect that the operating weeks from new units opened in new markets will, again, represent about 60% of our non-comparable operating weeks in 2007.

We expect our franchise partners will open 15 to 17 new restaurants in 2007, with 7 to 9 of those in the first quarter, 2 have already opened and they currently have 10 under construction.

Now, with that, I'll turn the call back over to Denny.

Thanks, Katie.

So as we look at 2007 we recognize the year will present its share of challenges for Red Robin and the restaurant industry as a whole.

Minimum wage changes will have a material impact on our labor costs.

Weather has already caused some commodities costs to spike, like produce in the first quarter.

We are taking productive steps to heighten brand awareness and drive guest counts throughout our system, and we believe that with the launch of the national advertising campaign, we will bring that brand awareness to a national level for our concepts.

We are very excited about the opportunities it will bring to our team members, our guests, and our shareholders.

With that said, our objectives for the balance of 2007 are pretty straightforward.

We will continue to focus on restaurant operations, maximizing the performance of all restaurants, particularly newer units, in an effort to improve our overall returns.

And we will continue to prudently invest shareholder capital based on where we believe we can get the best returns.

We think the Washington State acquisition and the Top Robin Ventures opportunity are great examples of employing capital to maximize the returns for our shareholders.

And, of course, we are going to stay focused on serving high quality gourmet burgers and cravable menu items that have made us the premiere destination for America's families.

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

Thank you.

[OPERATOR INSTRUCTIONS.]

And our first question is from Nicole Miller, Piper Jaffray.

Good afternoon.

Hey, Nicole.

Hi, Nicole.

I just want to clarify a couple of things, so I'm sorry to ask for you to repeat this, but can you talk about the labor impact you suggested from I believe it was minimum wage increases?

Did you say labor could be up as much as 50 to 85, or 80 to 85 basis points, was that right?

That is correct.

Okay, on an annual basis, and really starting in the first part of the year?

That's right.

We're [looking] for January 1 increases.

Okay.

And then some slightly offset--you'd see more increase in the first quarter and then slightly offset by the 0.9% price you'd take early in the second quarter?

That's right.

Okay.

And then just to clarify, the advertising spend is going to be in other expenses?

Correct, other operating expense, right.

Other operating expenses, and that's going to start being 0.5% of sales in basically the first of April, is that correct?

First of March.

First of March?

Yes.

And that's the correct percent of sales, 0.5%?

0.5% of sales, right.

And did you give a basis point impact on that, I thought you did at one point?

No, it just starts in March and it's a half of a percent.

Okay, okay.

In the guidance there was no additional--it wasn't 50 basis points impact, it was a half a percent?

Right, it's a half a percent beginning in March.

Okay.

And can you break-out the CapEx projections for us, the $85 to $95 million, what is new stores, what is maintenance, and are you still remodeling stores?

We use about 12, around 12% for a remodel.

And, okay, so then a percent or 2 in maintenance probably?

Yes, remodel and maintenance are kind of all included, and then we have some infrastructure CapEx, maybe a couple million in the year, and then the remainder would be new restaurants.

Okay, great.

And then just one last, bigger picture question, can you sort of talk to us about how many stores in '05 and '06 were considered to open in new markets, and I guess, I don't want to necessarily say underperforming stores but stores that caused some of these problems you were having previously?

It seems from the fourth quarter, I mean I know the extra week benefited but are--did stores that were--had opened before at a lower percentage of sales and previously anticipated, have they picked up somewhat?

Well, our sales as a percentage of comp in our new market ran about 84% this quarter, and that compares to just over 80 last quarter.

Okay.

And then just one last question in development, in '07 are all the stores considered to open either in existing or developing market, meaning kind of backfilling where you've been and not really what we might call new market?

Well, let me tell you what the definition of new market is, and I'll help you think through that.

We look at the proximity to another restaurant, and usually a 30-mile radius, we also look at the number in that market that might already be in comp.

So if it's a fairly new market for us, in other words, five quarters [left] was the first store or second store that was in that market, and then we also look at the--the third criteria is the--yes, is this the third store in the market, generally.

So you kind of look at the age of the stores in the market and is this a third or more store.

So having said that, in '07 the two new markets that we opened first in, which were deals that were signed, sealed and/or under construction, and one of them is already opened, one market is Alabama where we just opened in Montgomery, and the second one will be in Fort Myers, Florida, which will be our first Florida restaurant.

Okay.

And I'm just going to ask one final question before I hop off, and it may be too early to tell, but can you speak to then--I know there's just one restaurant in one new market, but did you see sort of the same opening at 80% capacity or did those stores open differently?

Well, Nicole, again, just to clarify, they don't open at 80% capacity, they open at a honeymoon volume which is well north of comp in almost all cases, and then settle down, not these particular, but all restaurants for the most part, and have a decline from the honeymoon, and then we measure it after a period of time, compared to comp, and that's when the, you know, the 80% of comp or 84% of comp in new--in NROs and new markets come into play.

But it's not that they opened opening week, down, or anything of that nature, that's generally never the case unless the shopping center for some reason is--we have to open, but the Target and the Costco and everybody else isn't open.

Okay, great.

So they open strong, they honeymoon, and it looks like the stores fell off to 80%, and now they're gaining back to 84 in the most current quarter?

Yes, and that's a total of all non-comp units.

Thank you very much.

Thanks, Nicole.

Our next question is from Matthew DiFrisco from Thomas Weisel and Partners.

Hi.

This is [Jay Bartlett] in for Matt.

Katie, just a question on the revenue, I'm just trying to kind of disaggregate how much of the up side came from the 13th week versus performance of stores outside of the comp base being a little bit better than you expected.

So in the up side, can you tell us just how much more came in from that 13th week than you expected?

Well, there was about $14.4 million of revenue in that 13th week, and we said we added about $0.03 above our expectation for EPS, from an EPS standpoint, so we got a little bit of additional leverage, a little higher revenue than what we had originally expected to be in that 13th week.

Okay, so, okay.

Overall, but and so how--in terms of your previous expectations how much better did these stores [inaudible] the comp base do?

How much did they contribute to the up side?

I think our non-comparable base, we estimated would still be around that 80 to 81% going into the fourth quarter, and actually performed at 84%.

Okay.

And in terms of the insurance adjustment, I believe it was the self-insured, the benefit in the labor line, could you tell us how much that helped and whether, you know, we should be projecting kind of a similar level going forward or whether that is kind of more onetime in nature?

I don't know that I would call it an adjustment in the fourth quarter, I think we saw a continuing downward trend in our expense.

And I think we do anticipate continuing to see that benefit going into '07, as well as our insured base grows and we spread that risk.

Okay, so that wasn't any sort of catch-up [inaudible]?

No, huh-uh, no, it was just a downward trend we've been seeing.

Okay.

And then in terms of where do you look for in terms of the percentage [inaudible] sales of non-comp stores versus comp stores?

What percentage are you comfortable with and that would kind of cause you to sort of relaunch [inaudible] unit growth?

Well, I don't think we're prepared to say what volume we're comfortable with.

We're in the midst of the NRO project, and we're in the midst of a national marketing fund roll-out, you know, we're not--I mean we've tapered off on the new unit development, but 24 to 27 is nowhere near stopping.

Right.

And we're confident in the roll-outs.

Okay.

And then, lastly, just in terms of kind of expanding your [inaudible] market, just wondering if you're in any talks to--negotiating the--I know you have a problem with the use of your name in Northern California, are you trying to address that kind of limiting factor in that market, at all?

Well, let me speak to the Northern California [suit], so let's isolate that down.

The limiting in the name is carried over from an acquisition the Company made way back, five or ten years ago, I guess.

But in any event it relates to San Francisco County or the City of San Francisco, which we wouldn't expect we'd build any Red Robins in anyway at this point and Marin County, which if we did go in would be a little bit expensive.

So there may be a few opportunities in those markets if we were able to negotiate our way out of a--out of this trade name infringement, but it's not a high priority for us.

Great.

Thank you.

Thank you.

Our next question is from Ashley Woodruff from Friedman, Billings, Ramsey.

Hi, thanks.

Could you talk a bit about what your expectations are for marketing in 2007?

I guess what are you building into your forecast in terms of revenues, both on non-comp stores and for same store sales based on the new marketing fund?

Well, the way we looked at it, Ashley, was our half a percent additional contribution for the year, we expect that to breakeven, so that--that's as aggressive as we got on our assumption.

We were pretty conservative in the way we looked at it, we hope, but without a lot of experience in this realm we looked at it as a breakeven proposition for this year.

Okay.

And then, secondly, on I guess some of the newer markets where you have the underperforming stores, you mentioned that you're still very committed to developing in those markets and you're working on national advertising, hoping to increase the sales there, but I imagine over the next couple of months you're starting to look at 2008 sites now.

Do you expect to open in some of these newer markets in '08, kind of hoping that there's a pick-up from the national advertising, or will you wait on signing any new leases until you've actually seen if it works?

Well, we have lots of geography, whether it's new markets and you call a North Carolina, a new market, et cetera.

We'll--we have a number of deals in the pipeline for '08 that we--some deals we've had in the pipeline for '07 that were pushed into '08, so we would be heavy loaded in the first quarter.

We still have the ability for a period of time not to have to pull the trigger on that, and we want to measure both the NRO normalcy project and the early feedback from the new markets on the national marketing program.

Okay, so it's safe at least right now to assume '08 openings are probably more of your existing markets then--and you'll kind of see what happens going throughout this year?

Yes.

And, again, as for Katie's definition, as, you know, if we have three restaurants in Alabama, for instance, for that three-pronged definition it would then become an existing market, so as we fill them up they become existing.

Right.

Thank you.

Thank you.

And our next question is from Jeff Omohundro with Wachovia.

To spend [inaudible] you're looking at how much of the [inaudible] would be covered by it--

Jeff, you're breaking up, we can't hear you.

Jeff, can you--we couldn't hear you at all.

Can you hear me now?

Okay, there you go, that's better.

Sorry about that.

Just my question is on the media strategy and, in particular, how you anticipate spending the money, what type of media buy exactly that you're looking at, how much of the system gets covered?

And, also, when you think about the media strategy are you initially driving toward brand awareness or is there a real goal here to drive traffic?

And, if so, how would that be accomplished?

Okay.

Well, Jeff, it's--the media campaign the $11 million plus will be national cable, so every market in the country will get it.

It'll be 11 to 12 weeks, we haven't bought--the buys aren't final but it'd be 11 to 12 weeks in total, so it would be [flighted], and weighted more heavily towards the front end of the [flights].

It will not be discount, it will be brand--building brand awareness, which we think will drive traffic in both existing and new markets.

Did I cover your questions?

Yes, that's perfect.

Thank you.

And then just one on the menu initiatives.

I believe I heard there's a plan to modify the fries with the Knife & Forker.

I wonder if you could talk to that and what exactly--what exact change is being made there?

Well, Jeff, there's, really the addition is the our signature garlic parmesan steak fries that we're adding to the Knife & Forker, and we think ultimately we want that Knife & Forker category to kind of be a little bit of a Toyota Lexus from our burger category as we move forward.

We want those to be, proud of those and their representation.

Is this a new SKU being brought in, or is it just a new preparation?

It's a new preparation.

Okay.

Very good.

Thanks.

And our next question is from Joe Buckley with Bear Stearns.

Hi, thank you.

A couple more questions on the advertising.

Is the $11 million the total media campaign or is that the Company?

That's total, Joe.

That's total, okay.

So franchisees are contributing 1%, as well?

Correct.

Yes, yes.

And as you shift one-half percent of your prior working dollars into this, where is it coming out of?

What were you doing that you might do less of on other marketing?

In '06 we did a considerable amount of radio, local radio, and some billboards, and so it'll be--we will not be doing radio in '07, and we have some billboards that carry on but there'll be lesser emphasis on billboards, also.

And the media campaign will be, in addition to national cable we will have a very, very strong internet presence.

Okay.

And, Katie, on the breakeven assumption, what kind of flow through assumption do you make on an incremental dollar of sales?

About 50 basis points, or about 50% I mean.

Okay.

And then just one last question on the--just on the non-comparables, well, not on the non-comparable stores.

I guess last quarter you talked about I think it was 8 stores that had entered the comp base and comped--had about 12% or so, and I think you had 3 more coming, 3 or 4 in the fourth quarter, and then a bigger number in the first quarter.

Are those new stores, are they into the comp base, what their comps were, and when kind of backed into the impact on the overall number?

We didn't see a marked change in the fourth quarter impact, like we did with the third quarter, those 8 that came in in the third quarter we quantified.

But because it wasn't a material impact in the fourth quarter we didn't, we thought that [inaudible] because it wasn't material.

So the comps so negatively in the third quarter become much better in the fourth?

Well, those 8 units were heavy in the third quarter and impacted it heavily.

There was only an additional 3 units coming into the comp base in the fourth quarter, and those didn't have a material impact on the comp base.

Okay.

How about the 8 that were in the third quarter, were they still comping very negatively in the fourth?

I don't have that information right now.

Joe, I can look it up for you.

Okay.

Okay.

Thank you.

Thanks, Joe.

And our next question is from Conrad Lyon with FTN Midwest.

Hi, good afternoon.

Hey, the first question has to do with same store sales guidance for the year.

I'm assuming you probably are looking at, what, a week first half and then an acceleration in the second half, and then perhaps you can talk about trends quarter to date?

Yes, I mean we talked about the last three quarters of the year being more heavily weighted just primarily from the impact of the advertising campaign and the lack of advertising in the first quarter this year even compared to last year.

And you'll remember last year we had a 4.7% comp store increase in Q1 of '06, I think it was 4.8 actually, so we did have a very strong Q1 of '06, so we expect Q1 of '07 to be very challenging because of that, as well.

And we said we had, as I said, we feel continued pressure on guest counts in the first quarter.

We expect, obviously, the--or not obviously--we expect the national media program will ramp-up--as it ramps up get us to the guidance for the full year.

Okay.

A second question, can you give us an indication of the accretion for the California franchise yet, or no?

Nothing until we close.

Okay.

Let me shift over to the Washington franchise, real quick.

Do you have the restaurant level operating margin for that group of stores that you acquired?

They're similar to our comp stores, somewhere in the 21, 22% range.

Okay.

Do you also have what the contribution was from those stores before they were acquired, contribution to net income that is?

Before?

Before they were acquired?

Yes, I mean--

In other words, have we improved their margins since we acquired them, is that what you're asking?

Yes.

Absolutely.

Okay.

Okay.

Let me ask, okay, I'm also trying to get at the California stores, let me ask you this then, can you talk about the average weekly sales at the California stores, [inaudible], are they north or south of the Washington stores?

Well, the Washington stores were $4.2 million just doing the math, and if you do the math that we disclosed on the 17 stores that did $56 million you get to $3.2, I think as we said in the press release.

Yes, okay.

That's what I thought.

And they operate at similar margins [inaudible]?

Yes, I'm sorry.

Okay, all right.

Good enough.

Thank you.

Thank you.

Our next question is from Destin Tompkins from Morgan Keegan.

Thanks.

I had wanted to clarify something on the development for '07.

I think you mentioned two new markets in '07, but can you give us how many new restaurants out of the 24 to 27 would be considered new, in new markets?

I think I said that we expect about--of our operating leases in 2007 we expect to run them at 60 plus percent range again in 2007, overall for the full year.

And we're heavily weighted in the first half of the year with units in the totality, so that'll stand true for 2007, as well.

Okay.

And as we look at the 24 to 27 it's still a pretty solid rate of new unit growth there, is that more based on the fact that the pipeline was pretty full before you decided to temper the growth, or is that a rate we should look at that's more reasonable for fiscal '08, as well?

You shouldn't look at any rate for fiscal '08 because we're not discussing it yet.

The answer was, to your first part of the question, we were what--as we talked on the third quarter, and said afterwards we were well committed.

The development team has done a tremendous job of getting these projects underway, so it was a matter of not walking away from deals that we were already committed or landlords that we were going to do business with.

Okay, great.

Thank you.

And then on menu pricing, Katie, I know we've got the 0.9% that you're talking about in Q2, what will that bring total menu pricing to, kind of what are we carrying forward?

Our price increase that we're carrying forward, we've got the April '06 price increase we took, that's about a 1.5%, we've got an October '06 price increase of about 1.5, and about a half a percent that we took, it was moderate, in December.

So we're carrying about somewhere around 3.5 into the beginning of the year, but we'll roll-off that 1.5 in April, about similar timing with when that new price increase comes in at 0.9.

Okay, so we'll have, you know, what is that--2.9% at that point?

Yes, somewhere around there.

Okay, great.

Thank you.

And our next question is from Mike Smith with Oppenheimer.

Well, good afternoon.

On the stores that you're set to close on at the end of the second quarter, will they pay a normal royalty or will have one of those [odd] charges again?

We'll probably have another charge.

We haven't quantified it yet, though.

Thanks.

Our next question from Nicole Miller with Piper Jaffray.

I just wanted to follow-up on some first quarter issues.

Can you quantify how much food costs may be impacted by produce?

About 20 basis points.

Okay, thank you.

And if that's the case I would assume then that the [ease] in comparisons combined with taking price and acceleration from the TV advertising relative to comps would provide some leverage to costs--to food costs in the back half of the year?

Yes.

And then one last question, on G&A what are the expectations, can you just kind of give us a percentage growth to look for for '07?

We talked about 20 to 30 basis points of leverage, we're hoping that we see that, depending on how well we do with this marketing campaign.

It's difficult for us to commit, but we'd like to see 20 to 30 basis points this year.

That's great.

Thank you so much.

Uh-huh.

Thanks, Nicole.

[OPERATOR INSTRUCTIONS.]

Our next question is from Mr. [George Appleyard] of [Appleyard Investments].

Yes, good afternoon.

Congratulations on a very nice quarter.

You mentioned that you're considering newer markets.

What are, first question, what are the possibilities or are you looking into about international expansion for your product?

We're not looking into international expansion.

We have more than enough to do here.

So, fair enough.

Now, about the advertising campaign that you will be launching, is there any further information as far as are you using a celebrity or are you going to be approaching this as a family atmosphere, or you do not want to release this information at this current moment?

Let me go back to your first question, we are in Canada, we have a franchise partner up there that has 18 restaurants, so.

Right, [inaudible].

You meant over the water.

Yes.

And the second question, in spite of Katie wanted--wanting to appear in the commercials, we're not using any stars or anything of that nature.

You--actually, the commercials are on our website so you can go see them.

Okay, so they already have been launched.

And a third question, do you have any comment as to in terms of there's been a lot of, shall we say, short sellers in your security, and they sort of are [inaudible] in one end but at the same time they can always help a company grow faster than they want.

Do you have any comments about the short interest in your security?

We have no comments.

Fair enough.

Congratulations, again.

Thank you.

Thank you.

And that does conclude our question and answer session today.

I'd like to turn the call back over to Mr. Denny Mullen for any additional or closing remarks.

Thank you all for your time.

We look forward to talking to you at the end of next quarter.

Thanks.

Bye.

And that does conclude today's conference call.

Thank you for your participation.

You may now disconnect.