Red Robin Gourmet Burgers Inc (RRGB) 2007 Q3 法說會逐字稿

Good day and welcome to the Red Robin Third Quarter 2007 Financial Results Conference Call.

Today's call is being recorded.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Ms.

Katie Scherping, Chief Financial Officer of Red Robin.

Please go ahead.

Thanks, Gwen.

Before I get started, I need to remind everyone that part of today's discussion, particularly but limited to our outlook for fiscal 2007 and development and marketing expectations for 2008 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, 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, and you will find the supplemental data in our press release on Schedule 1, which reconciles our non-GAAP measures to our GAAP results.

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

Denny?

Thanks to all of you for joining us today.

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

Eric and I will provide an update regarding various business initiatives while Katie will provide a financial review of the third quarter as well as talk about our annual guidance for 2007 and development expectations for 2008.

Before I talk about our earnings, I wanted to give you some of the highlights of the quarter.

Our second national cable television flight ran from mid-August until the end of September for a total of five weeks on air.

We used the same series of commercials, targeting adults 25 to 54 with families as we had in the earlier flight, which ran a total of six weeks from April through early June.

The campaign has run on national cable television networks and focused on the brand as a whole and not on any specific promotions or discounts.

We are pleased with the response we have seen from our guest space, as we have now sustained positive traffic trends for two consecutive quarters and achieved our highest comparable sales results since the first quarter of 2006.

For the third quarter, same-store sales increased 4.8%, including traffic growth of 1.1%.

As we have said in the past, building national brand awareness takes time and cannot be achieved in 11 weeks of cable advertising.

However, based on the positive impact we and our franchise partners have seen on our system-wide results from this initiative, we will be increasing the contributions to the national advertising fund to 1.5% of sales in 2008 from both company and franchise-owned restatement.

This will buy us about $18 to $19 million in advertising in 2008, both on national cable television for about 24 weeks, an increase of 13 weeks over 2007, and the balance will be spent on Internet and media.

From a development perspective, we opened five restaurants in the third quarter, which were all opened prior to our August earnings announcement.

We also supported the opening of two franchise partner restaurants, for a total of seven new Red Robin restaurants opened during the 12 week period.

We currently have three restaurants under construction that are expected to open in the next couple of weeks and 10 more under construction of the 30 to 33 we expect to open in 2008.

On July 16th, we completed the acquisition of one of the remaining two franchise restaurants from our California franchisee, along with the acquisition of the Fresno location, which was under construction at the time we closed the original 15 locations back in June.

Our cash consideration paid out in the quarter for these two restaurant locations was $4.8 million.

On a GAAP basis, we earned $0.49 per diluted share for the quarter, which included $0.01 of reacquired franchise costs, compared to $0.36 a share last year, which included $0.06 per diluted share for reacquired franchise costs related to the Washington acquisition.

In summary, we've had three initiatives in 2007 that we have been focusing on -- our building cost initiative, which has taken about $300,000 out of the cost of building our new prototype, our NRO normalcy focus, which Eric will discuss in a minute, and finally building brand awareness through national advertising campaigns on national cable television and the Internet.

We are very encouraged by the improvement we have seen in our performance of our 2007 NROs as well as the increase in our guest traffic, both indicators that these initiatives have had a positive influence on our business.

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

Thanks, Denny.

Good afternoon, everyone.

As Denny said earlier, in the third quarter of 2007, our comp store sales rose 4.8%, which consisted of the 3.7% increase in price and mix along with a 1.1% improvement in guest counts.

These results in terms of both overall comps and guest counts were our best since the first quarter of 2006.

For comparison purposes, we posted a 0.8% comp gain in the third quarter of '06 which included a 1.4% increase from price and mix and a 0.6% decrease in guest count.

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

Our third quarter had 184 company owned comparable restaurants out of the 246 total company owned restaurants.

This includes the 13 restaurants acquired from our Washington franchisee at the beginning of the third quarter of 2006 which were added to the comp base this quarter.

The 17 acquired franchise restaurants in California will be added to the comp base beginning in the third quarter of 2008.

Average weekly sales for the 184 restaurants in the comparable base was $64,909 during the third quarter of '07 compared to $61,938 for these same units last year.

Average weekly sales for the 46 non-comparable restaurants was $59,299 during the third quarter of this year.

That's up 8.4% compared to $54,705 for the 43 non-comparable restaurants in the third quarter last year.

The total non-comparable units' weekly sales averaged 91.4% of total comparable unit sales in the third quarter, which is essentially even with that of the second quarter of this year and up about 87.2% from a year ago.

While there are several drivers that can influence this metric, we're seeing only a nominal difference between non-comp sales volumes from new markets versus those from more mature markets.

In fact, the average unit volumes from our 2007 class of non-comp restaurants, a total of 23 at the end of the third quarter, were about 12% higher than the average unit volumes generated from the 2006 class of openings, a total of 25 restaurants at the end of the third quarter last year.

While improved brand awareness has improved our sales system wide, we attribute the stronger sales performance of the 2007 openings to both the NRO normalization initiatives that we have spoken about in the past as well as improved brand awareness in both new and existing markets resulting from our national advertising campaign.

You'll remember that our long-term model calls for restaurant margins in the 20% to 22% range, and historically it has taken new restaurants about three years to normalize to these levels.

Our NRO initiative is designed to help accelerate this process by maintaining as much of the honeymoon sales as possible and reaching more comp-like profitability sooner than what we have experienced in the past.

This is done through additional investments in leadership and training surrounding the opening of a restaurant, which is costing us about 20% more in pre opening costs and additional post-opening training expense, but we feel it is well worth the investment.

The success of this initiative is particularly relevant as we begin to accelerate growth next year, and we hope to reduce the historic drag that newer units have had on overall operating margins.

We have seen some positive results in our new restaurant class as these normalization initiatives are beginning to take hold with our 2007 NROs.

Our comp comparisons will begin to get easier in the fourth quarter as we do lap negative guest count trends.

We also expect to continue to benefit from our price mix increase of roughly 4.5% that we're currently realizing.

We have received numerous calls about how the California fires affected sales trends or whether we have suffered any damage.

We've had a total of four operating days lost in the first two days of the fires from two restaurants that needed to be closed.

We sustained no damage to those restaurants and the impact on our fourth quarter results from the closures is not material.

We did have some team members unfortunately that were personally impacted, and we're working with the Red Robin Foundation to provide them with the support that they need.

Now I'll take a moment to switch gears a little bit and talk about our menu.

We did not introduce a new menu in conjunction with the price increase that we took in late August, however during the quarter we began featuring two new insanely delicious gourmet burgers, namely our Blackened Bayou Burger and our Sonoma Turkey Burger, as well as the previously successful Whiskey River BBQ Chicken Salad, which were all featured on table cubes and banners within our restaurants.

We also highlighted the fresh flavor of blueberries with our Blueberry Vanilla Shake, Blueberry Pomegranate Limeade and Absolute Blueberry Limeade.

We are also currently testing a new menu shell to continue our focus on driving guest preference while managing margin contribution and cost of goods.

We also have some exciting new menu items in the R&D and testing pipeline that we're excited about which reinforces the Red Robin brand equities.

Look for the Sicilian Burger, Red Robin Sirloin Steak Sliders and the Jamaican Me Crazy Chicken Burger to come to a Red Robin near you in 2008.

Additionally, we just kicked off our annual holiday gift card bounce back promotion this last week that will run through the remainder of 2007.

Lastly, on another media front, last week we held our second annual The Next Great Gourmet Burger Kid's Recipe Contest here in Denver.

This year's competition attracted more than 10,000 entries from across the nation from kids ages 6 through 12 and generated national media coverage, including network television coverage of the finals event where 10 amazing kids from across the country built their gourmet burger creations at the Johnson & Wales Culinary Institute here in Denver.

Eleven-year-old Joey Yarwick from San Diego and his Au Brie a la Francais Burger took home this year's grand prize.

His burger will be sold in all U.S.

Red Robin restaurants next summer with a portion of the proceeds benefiting the National Center for Missing and Exploited Children.

This program will continue to build awareness for the Red Robin brand well into next year, when we publish the follow-up kid's recipe cookbook featuring each of the finalist's gourmet burger recipes, along with 40 other kid-invented burger recipes and celebrity burger recipes, including the one from Chef C.

J.

Jacobson from Bravo's hit show, "Top Chef 3 - Miami" which featured Red Robin in the episode.

In conclusion both our media campaign and NRO initiatives are in the early stages of their influence on long-term business model, but we feel with the results we've experienced so far, we are on track to drive long-term performance and create both brand equity for our company and shareholder value for our investors.

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

Thanks, Eric.

Now let's talk about the results for the third quarter of 2007, which was a 12-week period.

Total revenues for the third quarter of 2007, which consists of restaurant sales and franchise royalties, grew 27% to $188.7 million from $148.6 million last year.

Restaurant sales grew 27.5% to $185.2 million from $145.3 million and consisted of $140.7 million in sales from our 184 comp restaurants, $12.9 million in sales from the acquired and managed California restaurants, and $31.6 million in sales from our 46 non-comparable restaurants.

Franchise royalties and fees increased 6.6% in the third quarter to $3.4 million from $3.2 million.

Last year we recognized royalty contributions of $398,000 for the California restaurants in the third quarter of 2006.

The 89 comp restaurants in the U.S.

franchise system reported a 2.4% increase in same-store sales, while the 18 comp restaurants in the Canadian franchise system reported a 3.9% increase in same-store sales for the third quarter.

Now turning to costs, please note that our restaurant level operating profit margins were impacted by an incremental 50 basis points in contributions to our national advertising fund, for which there is no comparable cost last year.

Specifically, our 20.3% restaurant level operating profit margin in the third quarter was 50 basis points lower than our 20.8% results for the prior year's third quarter, but still within our long-term range of 20% to 22% as well as our best results so far this year.

The year-over-year change is primarily attributed to about a 40-basis-point increase in cost of sales, a 30-basis-point increase in labor costs, a 30-basis point increase in operating expenses, which includes the 50 basis points related to the national marketing fund, and these increases were offset by a 40-basis-point reduction in occupancy costs.

Our cost of sales was negatively impacted by 40 basis points this quarter by higher costs in most of our food and beverage categories, as we had expected.

Hamburger and, to a lesser extent, cheese were responsible for the bulk of the increase, although most raw materials ran unfavorably compared to last year.

Please note that we took a 0.9% price increase in late April in conjunction with our new menu rollout and then an additional increase in late August.

We realized a price mix benefit of 3.7% for the third quarter, and we are currently running about 4.5% in price mix since we just rolled off about 1% in early October.

These price mix increases helped to limit the full affect in the third quarter of the commodity cost pressure.

The food cost increases we have recently seen are consistent with the threats we anticipated in connection with the price increase we implemented in late August.

We believe our current pricing will mitigate the cost threats we have identified in Q4, and we expect the price to continue to help protect our operating margins into 2008.

We will continue to closely monitor the cost of goods landscape as we more forward into 2008.

Our labor costs were up 30 basis points, to 34.2% of restaurant revenues.

In third quarter 2006, we realized a 40-basis-point benefit from releasing some of our health and welfare insurance reserves.

While we continue to see lower costs in all our insurance benefits from 2006, third quarter 2007 appears higher on a relative basis.

Although we faced the impact of higher minimum wage rates year-over-year along with higher labor costs from our new restaurant openings, their impact has been somewhat minimized by additional operations initiatives to reduce controllable labor costs as well as the benefit from our price increases.

The recent federal minimum wage increase only had a nominal affect on our hourly cost structure since we operate in states where the state minimum exceeds the federal minimum.

However many state minimum wages are now indexed to inflation, so we expect they will rise annually in tandem with the CPI or some other widely used metric.

Many of these increases will come at the beginning of 2008.

The 30-basis-point increase in our other operating costs to 16.5% of restaurant revenue this quarter compared to 16.2% a year ago is primarily the result of incremental costs of our marketing and advertising spending.

Total occupancy cost margin improved 40 basis points to 6.1%, due primarily to a reduction in our general insurance costs, which we have experienced most of this year.

General and administrative expenses were 50 basis points higher compared to last year at 7.8% of total revenue.

In the third quarter, we incurred about 60 basis points of expenses primarily related to the national advertising campaign, which we did not incur on a year-over-year basis or on trend.

For the full year of 2007, we expect that we will achieve about 40 basis points of leverage in G&A as we will not incur any material advertising expense in the fourth quarter now that we are off the air.

Our pre-opening expense in the third quarter 2007 was $1.1 million compared to $2.5 million last year, down 110 basis points on a percentage basis.

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

We opened five restaurants early in the third quarter this year and eight in the third quarter last year.

The third quarter 2007 pre-opening expense included $762,000 of costs incurred for the five restaurants we opened in the third quarter this year, and about $342,000 of pre-opening costs incurred in the third quarter this year for restaurants we will open in the fourth quarter.

We are budgeting around $280,000 per unit for pre-opening expense, which is up 20% from last year and reflects the extra effort to ensure our NROs start strong and stay strong.

Net interest expense rose to $2.5 million from $1.6 million last year.

Our interest expense increase reflected increased borrowings to fund both our growth and the two franchise acquisitions, but was somewhat offset by lower average interest rates this year.

We recorded an effective tax rate of 31% in both periods and also expect the full year 2007 effective tax rate to be approximately 31%.

Net income for the third quarter was $8.2 million, or $0.49 per diluted share on a GAAP basis compared to net income of $6 million, or $0.36 per diluted share last year.

In the third quarter of 2007, we incurred $0.01 per diluted share in reacquired franchise costs compared to $0.06 per diluted share in the third quarter last year related to the Washington acquisition.

Lastly, we incurred $1.8 million in pre-tax stock compensation expense, or $0.07 per diluted share after tax, in the third quarter of 2007, and $1.3 million in pre-tax stock compensation expense, or $0.05 per diluted share after tax, in the third quarter of 2006.

For the 12-week third quarter, the company opened five new restaurants and our franchisees opened two new franchise restaurants.

Now with regard to our 2007 annual guidance, we are still expecting to open 26 new company owned restaurants, while our franchisees are expected to open 14 new restaurants.

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

For the full year, which is a 52-week fiscal period, we are narrowing our anticipated revenue range to between $763 and $767 million, from $760 to $772 million previously.

This is inclusive of our California franchise acquisition, and we expect comparable restaurant sales to increase approximately 2.5% to 3%, with our fourth quarter comparison being the easiest of the year.

We also have narrowed our full-year GAAP EPS guidance to between $1.70 and $1.74 per diluted share from $1.65 to $1.76 previously.

Our 2007 GAAP EPS guidance reflects an estimated $0.05 of accretion from the California franchise acquisition and the total impact of $0.16 for the following charges: the one-time charge of $0.08 per diluted share related to the reacquired franchise costs, $0.01 per diluted share charge related to acquisition-related integration expenses, and $0.07 per diluted share charge related to the California litigation settlement.

Excluding the $0.16 in one-time charges, our diluted earnings per share for the full year of 2007 would be between $1.86 and $1.90, which is at the top end of our original guidance we gave in February for fiscal 2007 of $1.75 to $1.85, plus about $0.05 for the California acquisition accretion.

Also included in our full-year 2007 EPS guidance is $0.28 to $0.30 per diluted share for stock compensation expense.

And a few final notes.

The price mix we are currently carrying in the fourth quarter is made up of about 0.5% from December 2006, about 0.9% that we added in April 2007, and the price mix from late August that we are realizing at about 3.1%.

Keep in mind we'll roll off about 0.5% from our mid-December 2006 price increase in the fourth quarter this year.

We expect to realize between 4% and 4.5% of price mix during the fourth quarter of 2007, and we reiterate our commitment to maintaining our restaurant margins over the long term at 20% to 22% and to gain G&A leverage over time.

Keep in mind that our national advertising campaign is impacting our margins by an incremental 50 basis points from March forward to fund our portion of the 1% contribution to the national advertising fund.

When we increase this fund in 2008 to 1.5%, we will see a 50-basis-point impact on our restaurant margins next year from the increased marketing contributions.

Taking into account the success of our cost reduction initiatives in our new building, our total 2006 capital expenditures will be around $75 million, of which 12% to 15% is for ongoing maintenance.

Finally, in 2008 we plan to open 30 to 33 new company owned restaurants, of which 10 are currently under construction, with franchisees opening 11 to 13 new franchise restaurants, of which two are currently under construction.

Approximately 75% of our company owned 2008 development will utilize the new prototype design and about 60% of our 2008 new restaurant operating weeks will come from restaurants opening in existing markets.

We plan to provide you with more detail about our 2008 expectations on our call in February, when we discuss our fourth quarter and full year 2007 results.

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

Thanks, Katie.

To summarize, we are pleased with the improvements we have made so far in our business.

Our national advertising campaign helped drive positive traffic in the third quarter and although we will not be running the campaign in the fourth quarter, we hope to see momentum continue through the end of the year, especially against easier comparisons as we approach our busy holiday season.

We feel that the results we have seen thus far from the 2007 NRO class give us confidence that the NRO normalization initiatives are working.

Our new store volumes are both higher than what we have seen in previous time periods and are also more aligned with that of our comparable base.

Our real estate pipeline is in very good shape as we plan to accelerate the rate of openings next year to between 30 and 33 restaurants.

Roughly 75% of all new units will feature the more cost-effective prototype, which thus far has yielded the same average unit volumes.

We also have several endcap locations in 2008 plans, which are typically lower cost to build than a freestanding unit.

Finally, we are authorized to repurchase up to $50 million in company stock.

We did not make any purchases during the third quarter, but we may consider repurchases that would be accretive to earnings and determined by us to be the best use of our capital.

As always, I'd like to send a huge thank you to all of our great team members in our restaurants and here at the home office for making it happen every day at a Red Robin for our guests.

With that, Operator, we are ready for questions.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go first to John Glass with CIBC Work Markets.

Hi.

Thanks very much.

First a question just on your fourth quarter comp guidance.

With roughly 4% pricing and your comps below that, you're estimating negative traffic.

Is that what you're experiencing right now or are you just being conservative perhaps?

John, we're not going to comment into a quarter on where we are, but we feel comfortable with the 2.5% to 3% guidance we gave for the full year based on what we see today.

Okay.

And then could you talk a little bit about your performance in your California stores recently, you know, excluding maybe some of the fire issues.

Is the economy, the real estate market, is anything in this California market changed for you recently.

Well, I believe, as we said in the last call, it really held true for this call also.

We have seen no material differences in these markets.

We're clearly aware of some other reports and discussions about subprime issues in California and Arizona and we watch those markets, but at this point through the third quarter we've seen no reason to discuss those separately.

Gotcha.

And then just lastly, any initial thoughts on the timing of the media use in LA?

Do you expect that 24 weeks will overlap pretty directly with the 13 last year or any sense of how you might use it, say, differently?

Good question, John.

We're in the process of the buy now, but we basically will start shortly after the Super Bowl and it will run concurrent with -- at the same time when the 11 weeks did run in '06, so it'll lap over top of that.

And then it'll run later into the fourth quarter, which we have no TV in the fourth quarter this year.

Okay.

Thank you.

Thank you.

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

Hey, guys.

One quick sort of comp question.

On the Washington units as well as, you know, maybe kind of other stuff rolling into the comp base, was there a material impact on the comps or is it pretty much neutral to the overall same-store sales right now?

I'll give you the impact that the Great Western Dining Washington acquisition had on our comp base this quarter.

It raised our comp by about $1,561, so when you take that into account, yeah, it did benefit that average comp unit easy.

But on the same-store sales, was that noticeable or not really?

It was not hugely material but, you know, they're more mature restaurants so they're not growing at the same rate that some of other, newer restaurants are.

Understood.

And just one thing on commodities.

I thought I recall, maybe I'm mistaken, that you guys had a chicken contract through '08 but you actually started to take higher prices to extend that deal here in the third quarter.

Is that accurate or am I mistaken on that?

Well, we re-contracted it early on in the third quarter and we still were a little bit beneficial to prices that we saw in late 2006 because we didn't re-contract our 2007 contract until later in '06.

We were still in Q3, running a little bit higher, but then we've got the contract that we're currently running right now go through the end of '08.

And will that be -- fourth quarter to fourth quarter a year ago, would that be up a little bit on your chicken costs?

Yes.

It'll start looking at higher third quarter to third quarter.

Okay.

Thank you.

We did that, Andy, when we did the price increase in August.

We built that into our model.

Certainly.

Okay.

Thanks.

Thank you.

And we'll go next to Jeff Omohundro with Wachovia.

Thanks.

I guess first maybe you can update us on the accretion that you had previously targeted for the Top Robin acquisition.

Do you sense you're still on plan to reach those goals for this year or next year?

Yes.

The accretion guidance we gave back when we announced the acquisition was between $0.05 and $0.06, and we're realizing closer to $0.05 and we kind of tightened up that guidance for the full year to $0.05.

And then just wondering, on that store opening target for '08, any sense at this point on how it might map out, either by quarter or first half, second half?

In terms of units?

Yeah.

Yeah.

It's fairly even.

I would say it's a little bit heavier weighted early on because one of the phenomenons that we had in '08 is some of the units that we did push off from '07 as we slowed down, we pushed off into early '08.

So there'll be a little heavier weight but not hugely different.

It'll kind of match what we -- we were front-end loaded in '07 also, so it'll match the weighting that we had in '06, but then we'll have more openings, you know, later in the year as we ramp from 26 to 33 -- 30 to 33.

Thanks.

And then lastly, certainly a lot of focus and some success with your national TV effort.

Just wondering if maybe you can talk a little bit also about your newer efforts in your Internet media campaign and how you're linking the two.

Well, we're still on the Internet.

We're still, you know, showing Internet -- I guess they're --

Banner ads.

Banner -- thank you.

They're still running all the way through the end of the year, so we'll still be on the Internet for the balance of the year.

And there will be an Internet component in our 2008 plan.

We're still finalizing that.

Do you mean a linkage from the cable TV to the Internet, a number of the stations we ran on like Bravo, et cetera, you could go on their web site and click a link that would automatically take you to the Red Robin game that we had going on through the year.

And you can still go from those web sites back and forth, and we had a tremendous number of hits and building in our E Club membership, which is now over a million members.

Great.

Thanks.

Thank you.

And we'll go next to Steven Rees with J.P.

Morgan.

Hi.

Thanks.

It looks like the advertising has done a nice job allowing a pick-up in traffic, but I'd be curious to know if you've got any research or evidence that tells if this traffic growth is coming from new customers that maybe didn't know the brand before or just increasing frequency among your existing guests?

Well, we think it's clearly both.

We're in the process of doing segmentation research which we do every year at this time, so we'll have a lot more data as we get into the fourth quarter call.

But, you know, given some of the restaurants that have maturity that saw a lift out of it, we would expect that many of that was current customers coming more often.

Then obviously in new markets, we certainly expect it was a new trial.

Okay.

And then can you just talk briefly about your lunch versus your dinner traffic trend, if there's been any changes there or are they both filling up nicely?

Yeah, it's been 50-50 and it's still 50-50 for the last quarter.

It's been 50-50 for a long time.

We saw no change.

Okay.

Great.

Thank you very much.

Thank you.

And we'll go next to Conrad Lyon with FTN Midwest.

Yeah, I just want to follow up on the advertising.

You sort of answered this but, I mean, if there's a one-liner, like with respect to what you've learned, what did you learn that was positive and what did you learn that was negative from the recent advertising spots that you ran?

Pretty hard pressed to find something negative with the results we got, quite frankly.

I would say the only negative we got was the upset guests in Florida since we only had one unit there.

Or Louisiana.

[inaudible] drove five hours to get --

So I think the positive is we wanted to see comp lift and we did see that comp lift across the board.

Okay.

In many, many different markets, which we thought was great.

And therefore we've made the decision with our franchise partners to increase the contribution and increase the amount of marketing next year.

Yeah.

I'm assuming by doing that your franchisees approved of the campaign and approved the results?

Yes.

Okay.

Yeah.

We communicate with our franchisees, and we share our results with them and they share theirs with us on the sales side, but we go more granular with them.

So we've been communicating all through this, because this is a big step for the company.

Okay.

Let me goes towards the characteristics within the store.

Lunch, dinner, 50-50, like you said.

Appetizers, any shift there?

My question kind of stems from this, consumer getting pressured a little bit.

Maybe they're not picking up appetizers or maybe straying away from beverages.

Are you seeing any changes there?

No, we didn't see any change there in appetizers.

In alcohol, it stayed at 21%, non-alcoholic stayed at 7% this quarter versus same quarter in '06.

Okay.

Great.

Right.

Thank you very much.

We'll go next to Howard Penney with FBR.

Thanks very much.

The beautiful thing about national advertising is it helps your sales trends immediately.

The bad thing about it is it becomes addictive and requires you to spend more and more money every year, therefore, sort of paying attention to the return that you're getting from that investment is important.

What was the return from that investment this year?

What do you expect it to be next year, and how do you get to those numbers?

Thanks very much.

Our assumption was that we would break even on the spend if we could generate 2% in positive comps so, you know, we feel like it has returned what we expect it to.

And given the environment generally in casual dining relative to where we may have been, I think we definitely saw the return on that investment.

Especially from where we were in the first quarter, which was --

Negative.

Negative substantially.

So it's a breakeven proposition next year as well?

We're not talking about the results, you know, our expectation for next year until we give guidance in February.

I mean from that return.

I mean, you would -- just that one little --

We would certainly expect it to that and more.

Perfect.

Thank you.

Thank you.

We'll go next to [Joe Fisher] with Bear Stearns.

Hi, guys.

Calling in for Joe Buckley.

I was wondering on -- when you look at '08 for the new media, are there going to be new spots?

Are you planning kind of a different, you know, a new commercial or whatever you want to call it or are you just kind of stick to the same ones?

We won't use the same commercials.

We'll use the same tone and tenor, if you will, and we've had the agency make various tests for us which we've copy tested and we actually will be shooting those commercials in the next couple weeks.

But they will be new commercials for '08.

Okay.

And I know you're obviously increasing the amount you're going to spend.

Are you going to be able to buy more efficiently in kind of your second year, so you'll get even more bang for the buck, you know, more than the increase in spend?

We should be because we're doing upfront buys.

Last year we bought open market buys a month or so before we started running, so we're doing the buy now so with upfront you should get better buys, you know, better reach and frequency.

Well, we spent $11 million this year.

We plan to spend between $18 and $19 million next year.

We'll get 24 weeks next year.

We had 11 weeks this year.

So that's the relative proportion of what we expect to see.

It's not, you know, double the money for double the amount.

Yeah, yeah.

Okay.

And just one other thing.

On bringing the investment costs down of the new units, this kind of new prototype, could you just talk a little bit about that, maybe remind us what the size was and the new cost and if you have any existing units, how they're performing, you know, if the capacity's the same and still seeing the same kind of average weekly sales and things like that?

Yep.

Well, as I said in my comments, we're very comfortable with the ones we've opened because the volume is the same as the existing one.

The difference in square footage is the old -- not old, but the one we opened recently before the new prototype as 6,300 plus or minus.

The new prototype is 5,700 plus or minus square footage, with the same number of seats.

And it's $300,000 less investment from the start of '06 -- I mean, start of '07 investments to where we are today.

And that puts it about 2.2?

Yep.

Currently four of those open.

And the cost is around 22 to 250 -- 2 million, 250.

Right.

We realized that savings we expected it to be.

Okay, great.

And just one last thing.

The acquired stores from franchisees are they just automatically into the comp base?

No.

No, we brought the Washington acquisition in the comp base the third quarter this year.

We acquired them Q3 last year, so the California acquisition won't go into the comp base until Q3 of 2008.

Okay.

Great.

Thank you.

Okay.

And we'll go next to Nicole Miller with Piper Jaffray.

Good afternoon.

Hi, Nicole.

I'm not sure if it's been asked.

I've been jumping on and off.

But what will the ad cycle run like next year?

Will it be similar to this year in terms of the months and the length?

No, Nicole, it'll be 26 weeks versus 11 weeks -- 24 weeks.

It'll start immediately after the Super Bowl, so it'll obvious be -- and it'll run on into early November, so it'll be intermittent throughout the year, matching up with the campaign that we ran this year.

I'm sorry.

It will run that whole time?

It'll run --

On and off.

On and off during that time.

So we ran --

24 weeks on air during, you know, the 52 weeks of the year.

Okay.

Okay.

And that's up from 11 weeks?

Yes.

And can you talk about the results you're seeing at the Evans, Georgia, that next-generation prototype and maybe I just was catching a tail end of a conversation.

Katie, were you talking about how many of those are open?

Yeah.

Yeah, there's four of them that we've opened this year.

And where are they?

The one in Evans.

Alamance.

Crossing.

Alamance Crossing.

North Carolina.

North Carolina, our franchise partner in Michigan, and then we'll open up Orchards, Colorado here next week.

And the endcap in Fort Myers is the prototype footprint.

And you talked about the cost savings.

I mean, it looked pretty clear on that.

What kind of volumes are you seeing?

I mean, it's not --

Same as existing restaurants.

Okay.

And then, you know, really -- I guess my real question for the night is, you know, you're one of the only companies in your segment with, you know, this positive comp, positive traffic, clean balance sheet, when would you consider more seriously executing on a share buyback you announced last quarter or other methods to return value to shareholders?

Well, we seriously considered it after the Board approved it.

We obviously are not going to disclose when and if we're going to do it until it's done, and it's a matter of alternative use of capital.

And when we were going through the Top Robin acquisition, we felt that the Top Robin acquisition and the accretion from that was much more beneficial to shareholders than a stock repurchase, keeping in mind we only have $16.5 million in plus or minus outstanding to start with.

So that'll be our position going forward.

It's a matter of best prudent use of capital that we and our Board think is appropriate.

Well, thanks and congratulations on the, you know, success to date.

Thank you very much.

[OPERATOR INSTRUCTIONS]

We'll go next to Matt DiFrisco with Thomas Weisel Partners.

Hi.

With respect to the 68% operating weeks in 2008 for the plan to be in existing markets, what do you guys do to look at as far as limiting the cannibalization and the proximity of these stores to the existing stores in those markets?

Matt, I think we're a long way away from worrying about cannibalization with 380 restaurants.

The only place it would probably be an issue would be Seattle, and we opened one up in Smokey Point, which is North Seattle, and the closest one, I guess, would be Everett, Eric?

Yeah.

You know.

And we haven't seen any affect on that.

But we're not looking to backfill into markets with the runway that we think we have in untapped markets or markets where we're not that close to existing ones, especially like California.

Great.

And then I guess a little bit as a follow up there, has the advertising at all changed your view of certain markets as far as the amount of stores a market can hold because you might be reaching a larger audience these days?

Not yet.

You know, the advertising, this is our first foray into advertising, 11 weeks.

Again, we've got so many markets where we have single units or, you know, one or two units, that have plenty of space.

I mean, we have, you know, three or four restaurants in San Diego County for instance.

We could spend a lot of time down there.

Okay.

And then last question, looking at the better investment costs on the prototype, the smaller prototype, why wouldn't we be seeing faster growth by the franchisees adopting this in a way, or is it just a matter of sort of signing them up and the development pipeline catching up and then maybe this would be '09 where we'd see an occurrence of an uptick in absolute numbers of store openings by the franchisees?

Well, it's two issues.

I mean, the franchisees clearly have had deals in the pipeline that they've been working on for a long time so I think that's one thing on the conversion from their viewpoint.

The second is that many of them, there's only, you know, so many franchisees that have the ability to expand in their territories.

And we've always said that that number would be coming down as the franchisees build out of their territories.

Okay.

Actually, if I could just get one last question.

On relative G&A --

They're probably also waiting and seeing, you know, what kind of results, especially on the cost side -- not especially but clearly on the cost side, because our franchise partners were, you know, saying a year to a year and a half ago, you know, we've got to get -- we're concerned about the cost of the building.

And we heard them loud and clear and we had the cost initiative.

Sure.

I mean, that's been the experience with other companies.

Usually they wait for the company to see --

And rightly so.

Right.

And we've had a couple franchise partners here in Colorado look at the one we're opening up in Westminster next Monday just within the last week, and we expect more will visit.

Okay.

And then just a last bookkeeping question to Katie.

Can you -- I think I might have missed it, but why was G&A up year-over-year as a percentage of sales and then just the trend going ahead, is it a year?

Can we revert back to leverage or expect that in '08?

Is that within the guidance?

Yeah.

And I think I said we still expect about 40 basis points of leverage on a year-over-year basis.

The third quarter, because we had a heavy weighting of our advertising in the third quarter, we hit G&A with about 50 basis points year-over-year that wasn't there last year, obviously.

But next year it should smooth out so you won't see a heavy weighting in any one particular quarter.

The contributions and the spend of marketing and advertising as they run will be more even throughout the year.

And the 40 bps is in relation to the full year being leveraged?

Yes.

The full year will still see leverage of about 40 basis points.

Thank you.

And we'll go next to Bryan Elliott with Raymond James.

Good afternoon.

Actually, clarification on that last question.

The increment obviously relates to sort of soft costs supporting the advertising.

Given the budget increase next year, should we plan on some pressure on the G&A line from the budget increase of advertising?

I think you're going 11 to I think you said 19.

Will there be a commensurate rise in the G&A flow through or are the costs sort of in place and you can just raise it at the store level line?

Yeah.

We don't think that there'll be a material increase in the G&A support for that marketing spend.

There may be a little bit, but still within our range of G&A leverage that we expect to get over time, so we'll be able to absorb that.

Okay.

Very good.

Could you also refresh my memory, the chicken contract question but maybe more globally on some of the other key items?

Where are we as far as contracts and, you know, [inaudible] do we have and where are we on a year-over-year basis thinking about into '08 food costs?

I would say most of our commodities are contracted except for we don't contract hamburger, so that's one of the commodities that we let fluctuate with the market and we're actually seeing some favorable pricing on hamburger.

We've contracted generally most of other commodities that we do under contract through the end of '08, and took into account the increases that we expected when we did our price increase in late August.

We had visibility to what those contracts were going to look like so we think we're in pretty good shape, at least for the early part of '08 pending any natural disasters or anything else.

But we think we're in pretty good shape from a contracting standpoint.

Good shape being defined as sort of flat cost of goods?

Cost of goods we anticipated that will be covered by our price increase.

On dollars or percentage cover?

Percentage.

Percentage.

Percentage, okay.

Thanks a lot.

And it appears there are no further questions at this time.

I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you all for joining the call today.

We look forward to talking to you in February and getting more granular on guidance for 2008, and thanks to all the great team members.

Good night.

Thank you everyone.

That does conclude today's conference.

You may now disconnect.