Red Robin Gourmet Burgers Inc (RRGB) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Red Robin fourth quarter 2007 financial results conference call.

At this time, all participants have been placed in a listen-only mode and the floor will 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.

Please go ahead.

Thank Keith.

Before I get started I need to remind everyone that part of today's discussion, particularly but not limited to our outlook and development 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, cost, 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.

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

Denny?

Thanks Katie, and thanks everyone for joining us today.

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

Eric will provide an update on the key initiatives that have and will continue to contribute to the business results and Katie will review in detail our most-recent financial results, as well as guidance for 2008.

But first let's start with a quick review of the 2007 results.

Total revenues increased 23.4% while Company-owned comp restaurant sale increase 2.4% on a 52-week comparable basis.

As a reminder, our fiscal 2006 year had 53 operating weeks.

The total Red Robin system is now in its second year of more than $1 billion in sales.

Restaurant level operating profit increased 19.5% to $153 million.

GAAP basis diluted earnings per share was $1.82 which is $0.04 above the high end of our full-year EPS guidance that we provided on our update last month related to a decrease in effective tax rate and compares to $1.75 last year.

Katie will talk you through these comparisons year over year in a few minutes.

In 2007 we also acquired the assets of 16 existing franchise Red Robin restaurants in California, as well one location that was under construction at the time but has since opened for a total of 17 restaurants.

We also assumed management of another franchise restaurant that was part of the California franchise portfolio and we acquired significant territory in California which we are currently evaluating for additional restaurant development opportunities.

And finally in 2007 we opened a total of 40 new Red Robin restaurants; 26 Company-owned and 14 franchise locations, and we ended the year with 249 Company-owned and 135 franchise locations, a total of 384 restaurant locations in North America.

Looking at our fourth quarter results we earned GAAP diluted earnings per share of $0.60 which compares to $0.53 in the fourth quarter of 2006.

We also opened four new restaurants in the fourth quarter of 2007; three Company-owned and one franchise restaurant.

So far in 2008 we have already opened six new restaurants; five Company owned and one franchise, and as of today we have 14 additional restaurants under construction; then Company and four franchised.

You may recall that we had three major initiatives going in 2007, which included launching the national media advertising campaign to help brand awareness, reducing the cost of new restaurant development, and implementing new restaurant opening initiatives to improve the performance of NROs in 2007 and beyond.

We have certainly made significant progress in all of these areas in 2007 and these contributed to our performance throughout the year.

For example, according to third-party research, which measured the effectiveness of our brand-building efforts, we are pleased to report that the national marketing initiatives launched in 2007 had a measurable positive impact on both incremental revenues and traffic at our restaurants.

As we previously announced, in 2008 we plan to invest even more in brand building media, including network and cable advertising as well as the internet.

Our 2007 investment of $11.5 million will increase to about $18 million to $19 million in advertising in 2008, which will buy us 24 weeks of advertising, more than double the 11 weeks we had in 2007.

We launched two new commercial starting February 4th and we will be on and off air for 26 week -- 24 weeks until the middle of November.

In addition our building cost initiatives have been implemented.

We will -- when we updated you last quarter we said that our development teams have taken about $300,000 out of the cost of building our new prototype restaurant.

In 2007, we opened five restaurants with this prototype design.

In 2008, about 75% of our restaurants will be built using the new building prototype.

And in 2007 we implemented a number of programs designed to normalize new restaurant performance, including measures to strengthen our restaurant-level leadership and retention, improve training protocols to boost proficiency and productivity, and generally invested more in resources and dollars to help our new restaurants achieve a more comp-like, more normalized sales and margins earlier than they have historically.

Based on the progress we've made in 2007 we are increasing 2008 development to between 30 and 33 Company restaurants.

We also said that we will continue evaluating franchise acquisitions on an opportunistic basis after consideration of many factors, including earnings accretion.

In this regard, and as we have disclosed in separate announcements on January 17th and January 31st, we intend to acquire the assets of 15 Red Robin franchise restaurant restaurants for a combined purchase price of $29 million, including eight existing restaurants in Wisconsin, three in Minnesota, three in northern Indiana, and one in New Jersey.

We also plan to acquire an additional restaurant that is currently under construction in [Duclair, Wisconsin] which will open in May of this year.

In addition these acquisitions allow us development rights-- allow us access to development rights in territories that were formerly subject to exclusivity provision.

The combined revenue from the 15 restaurants -- existing restaurants was approximately $41.8 million in 2007.

We expect to close on these acquisitions in the second quarter and we will update our 2008 financial guidance at that time.

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

Thanks Denny.

In the fourth quarter of 2007 our comp-store sales were up 2.7% on a 12-week comparable basis.

This is made up of 4.2% increase from price and mix, partially offset by 1.5% decline in guest counts.

Though our guest counts declined in the fourth quarter, please keep in mind as intended or anticipated we did not run any media during this period whereas we did have local advertising running in the fourth quarter of '06.

For comparison purposes we posted a 0.2% comp gain in the fourth quarter of 2006, which included a 3.2% increase from price and mix almost entirely offset by a 3% decline in guest counts.

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

Our fourth quarter had 192 Company-owned comparable restaurants out of the 249 total Company-owned restaurants.

The 17 acquired franchise restaurants in California are not currently included in the comparable base, but they will be included beginning in the third quarter of 2008.

Average weekly sales for this group of restaurants was $64,957 in the fourth quarter of '07.

Average weekly sales for the comparable base was $62,873 during the fourth quarter compared to $61,421 last year.

Average weekly sales for non-comparable restaurants was $54,022 during the fourth quarter of this year compared to $53,557 last year.

Approximately 61% of our operating weeks from the non-comparables restaurants in the fourth quarter of 2007 were from units in new markets compared to 63% in the fourth quarter of 2006.

The performance of our non-comparable restaurants average unit volume represented about 85.9% of our average comp-store sales volumes in the fourth quarter of 2007.

This is slightly lower than the 87.2% in the fourth quarter of 2006, but not unexpected given the fact that we ran no media in Q4 of '07 and we had fewer new restaurant openings in the fourth quarter of 2007 compared to the fourth quarter of 2006, thus losing some increased (inaudible) period sales benefits during Q4 of '07.

Our fourth quarter margins of 21.4% were nearly flat to 21.5% margins in fourth quarter of 2006.

However, the 2006 fourth quarter margins included about a 50 basis point benefit from the additional week in 2006, so taking that benefit into account, we had 40 basis points better margins in 2007.

Keep in mind that also Q4 of 2006 didn't have the increment media cost as well.

Our price increases help us combat some cost challenges and offset some of the 50 basis points of incremental costs related to our media campaign year over year.

We attribute some of our ability to sustain margins to our focus on labor cost and food cost, which we believe are being influenced by the NRO normalization initiatives that we've discussed in recent quarters.

Our long-term restaurant margin goal is still to achieve 20% to 22% margins, but in the near term we will experience some additional pressure from the increased media expenses that were raised from 1% to 1.5% of restaurant revenue system wide in 2008, as well as continued headwind from food and labor costs.

We know that 2008 will be a challenging year for all of us as well as our industry, given the macro economic environment and continuing cost pressures.

To partially offset some of these headwinds we will be taking a 0.5% price increase in late March with the roll out of our spring menu.

Now that we're six weeks into the new year I'd like to spend a few minutes talking about what we have in store for the coming months.

On November call we mentioned that we were testing a new, easier to navigate, and even more visually appealing menu shell to continue our focus on driving guest preference while helping to maintain margin contribution and cost of goods.

The test was very successful and last week as a warm up to the introduction of the new spring menu we also introduced some new promotional items.

They include our Red Robin Signature Sirloin Steak Sliders and our new Sicilian Burger, both of which are insanely delicious and highlight what Red Robin is all about; high-quality food made with fresh, honest-to-goodness ingredients.

In the beverage department we've added a Sunset Sangria and the So-Peachy Sangria and our Mandarin Cream Lemonade to the promotion as well.

At the end of March we will launch our new spring menu featuring four new gourmet burgers.

In addition to the Sicilian Burger that is available on our current promotional menu we'll be adding a Blackened Bayou Burger, a Jamaican Jerked Chicken Burger, and our new Prime Rib Dip.

These will further elevate the quality of what Red Robin has to offer our guests while providing craveable and unique food offering.

In addition to new and innovative menu items we'll continue to generate brand building news around our gourmet burgers through consumer and trade media relations focusing on our key attributes, including Red Robin's quality, unique menu selections, deliciousness and, of course, our kid and family-friendly atmosphere.

In fact, one of our highly successful programs to return this year will be the next Gourmet Burger kids recipe contest, a proven winner for both Red Robin and our guests, especially our younger guests who love their burgers and have some world-class burger recipes of their own to share.

During 2007 in only at second year, this contest attracted more than 10,000 entries and generated extensive national media coverage for us.

Finally, on a paid media front, as Denny mentioned a few minutes ago we saw a measurable, positive impact from our national advertising campaign on cable television and the internet and we'll be more than doubling our on-air time in 2008 to build on the momentum that we've achieved so far.

We believe that increased investment in national media will boost brand awareness even further, in both existing and as well newer Red Robin restaurants.

As we saw last year our media campaign helped drive growth in guest counts and provided ongoing support for our new restaurant openings.

Last month we provided our team members with a sneak preview of our new television commercials at our leadership summit and the reaction was overwhelming positive.

And just about two weeks ago, beginning on February 4th, we began our 2008 media campaign on national cable television, which is already generating great buzz.

If you have not seen them our commercials can be found on our website.

We're eager to see what our 2008 media will do and we'll share those results with you on our first quarter call in May.

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

Thanks Eric.

First I'll talk about our results for the fourth quarter 2007.

As Denny mentioned earlier, you may recall that the fourth quarter of 2007 was a 12-week period while the fourth quarter of 2006 was a 13-week period.

The impact of the additional week on our results contributed about $14.4 million in additional revenue, about $1.9 million in net income and $0.11 of per diluted earnings per share in the fourth quarter of 2006.

As I go through our results the comparisons I will make will be a fiscal year to fiscal year GAAP basis and where material I'll highlight the additional contribution from the extra week in 2006.

We provided Schedule 2 in our earnings press release to help you reconcile our GAAP reported net income and EPS to non-GAAP net income and EPS on a comparable basis.

Total revenue in the fourth quarter of 2007, which consists of restaurant sales and franchise royalties, grew 12.3% to $183.8 million from $163.8 million.

The 53rd week contributed about $14.4 million to total revenue in the fourth quarter of 2006, so excluding the extra week our total sales would have increased 23.1% over the fourth quarter of 2006.

Restaurant revenues grew 12.5% to $180.4 million from $160.4 million or 23.6%, without the extra week, and consisted of $142 million in sales from 192 comp restaurant, $13.1 million in sales from the 17 acquired or managed restaurants in California, and $25.3 million in sales from our 41 non-comparable restaurant.

Eric already covered comparable sales metrics so I won't discuss those specifically, but please note that the 17 acquired California restaurants will not be included in our comp-store sales metric until the beginning of the third quarter of 2008.

As we've done in the past these restaurants are reported on separately as our 2007 acquired units.

In addition we measure our comps in the fourth quarter and year over year on a comparable 12-week and 52-week basis by realigning similar weeks of 2006 to calculate our same-store sales year over year.

Franchise royalties and fees increased 2% in the fourth quarter to $3.4 million, which excludes royalty contributions from the 17 acquired California restaurants from which we recognized $382,000 in royalty revenue in the fourth quarter of 2006.

The 92 comp restaurants in the U.S.

franchise system reported a 1.3% increase in same-store sale, while 18 Canadian franchise system reported a 6% increase in same-store sale for the fourth quarter.

The restaurant level operating profit margin of 21.4% was slightly below the 21.5% reported last year.

Taking into account the impact of the extra week last year, which benefited margins by 50 basis points, our margins improved by 40 basis points, as Eric mentioned, earlier compared to the fourth quarter of 2006.

Our cost of sales increased by about 40 basis point to 22.8% this year from 22.4% of restaurant revenue last year.

The increase was due primarily to higher raw material cost, particularly hamburger, poultry, steak fries and cheese, as well higher beverage costs.

Our labor cost decrease by 50 basis points to 33.2% from 33.7% of restaurant revenues this year compared to last.

A large part of the improvement was due to operations initiatives on controllable labor and leverage from our benefit cost and price increases that helped offset the year-over-year increase in minimum wages.

The 30 basis point increase in our other operating costs of 16.3% of restaurant revenue this quarter compared to 16% a year ago was primarily the result of the incremental cost of our national advertising fund contribution of 50 basis points of revenue, which began in March of 2007, offset partially by sales leverage and lower utility cost.

Occupancy expense was 6.3% of restaurant revenues in the fourth quarter or flat compared to a the same period a year ago.

Depreciation and amortization increase by 40 basis point to 5.9% of total revenues from 5.5% a year ago due primarily to the leverage from the extra week in 2006.

General and administrative expenses were 50 basis points lower than the fourth quarter of 2007 at 7.6% versus 8.1% of total revenue in Q4, 2006, due in part to the benefit of marketing contributions with no corresponding expense in Q4, 2007, which was the opposite of what we saw in the third quarter of 2007 where expenses exceeded contributions in the third quarter.

For the full year G&A leverage was 20 basis points.

Our preopening expense in the fourth quarter of 2006 was $1.3 million compared to $1.8 million last year.

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

We opened three Company-owned restaurant in the quarter compared to seven last year.

The fourth quarter 2007 preopening expense included $682,000 of cost incurred for the three restaurants we opened in the fourth quarter and $597,000 of preopening cost incurred in the fourth quarter for restaurants we have opened or will open in or after the first quarter of 2008.

Our preopening cost per restaurant average $280,000 in 2007 and we expect that average preopening cost per restaurant to carry into 2008 as well.

Net interest expense rose to $2.5 million from $1.9 million last year.

Our interest expense increase reflects the increased borrowing to fund our growth and to fund the California restaurant acquisition, offset by lower interest rates.

Our effective tax rate for the fourth quarter was 25.3% compared to 24.2% in the fourth quarter of 2006.

The effective tax rate contributed $0.04 to our diluted EPS compared to our updated guidance, which included a tax rate assumption of 31%.

Our full-year effective tax rate for 2007 is 29.2% as we continue to benefit from tax credits from tips and other initiatives we have recently implemented.

We are currently forecasting our 2008 effective tax rate to be approximately 30%.

Net income for the fourth quarter of 2007 was $10.1 million, or $0.60 per diluted share, compared to net income of $8.8 million, or $0.53 per diluted share in the fourth quarter of 2006.

Net income for the fiscal fourth quarter of 2007 included $1.5 million in pre-tax stock compensation expense or $0.07 per diluted share after tax.

Net income for the fiscal fourth quarter of 2006 included $1.2 million in pre-tax stock compensation expense or $0.05 per diluted share after tax.

Recall that Q4 2006 includes $1.9 million of net income and about $0.11 benefit to diluted EPS for the extra week.

For the fiscal year 2007 GAAP diluted earnings per share were $1.82 versus GAAP diluted EPS of $1.75 in fiscal 2006.

Excluding the after-tax impact of acquisition integration cost reacquiring franchise costs, legal settlement expense, and the extra week in 2006, fiscal 2007 diluted EPS would have been $1.98 versus $1.71 in fiscal 2006, or 15.8% growth in EPS year over year.

Schedule 2 of the press release lays out this reconciliation for you.

Excluding the $47.8 million paid for the acquisition of the California franchise restaurants, our capital expenditures were $77.8 million for the year most of which was for new restaurants.

We expect our capital expenditures to be about $85 million to $95 million in 2008, excluding any 2008 acquisition consideration, which is currently expected to be about $29 million.

The balance outstanding under our line of credit facility at the end of the year was $144.4 million with about another $144 million of the original $300 million still available, excluding the $100 million of additional credit that may be available in the future at our request.

Now let's talk about our outlook for 2008.

Consistent with our practice in 2007, we will not provide quarterly revenue, quarterly comparable restaurant sales and quarterly earnings per share 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 expectation for both Company-owned units as well as franchise units.

For the first quarter of 2008, which is a 16-week quarter, we expect to open eight to nine new Company-owned and one to two new franchise restaurant.

For fiscal year 2008 we expected to open between 30 and 33 new Company-owned units and franchisees are expected to open between nine and 11 new restaurants.

For the 2008 fiscal year, which is a 52-week year, we expect revenues of $880 million to $893 million and net income of $2.00 to $2.20 per diluted share.

These projected results are also based upon certain assumptions, including an expected comparable restaurant sales increase of approximately 2% to 3.5% with a late March price increase that Eric mentioned of approximately 0.5%.

This guidance excludes, however, the impact from the previously-announced 2008 potential acquisition of 15 Red Robin franchise restaurants, including reacquired franchise costs and acquisition-related integration expenses.

We will update financial guidance after those acquisitions are closed.

Our annual financial guidance also includes expansion of a advertising campaign that will funded by Company-owned and franchise restaurants.

Total 2008 spending is expected to be approximately $18 million to $19 million, up from $11.5 million in fiscal 2007.

Each restaurant in the system, Company-owned and franchised, is contributing 1.5% of their restaurant revenue in fiscal year 2008.

With that I'll turn the call back to Denny.

Thanks, Katie.

To summarize we are pleased with the financial results for Red Robin during the fourth quarter and the full year of 2007.

In 2008 we plan to expand our efforts to build our brand, drive increased restaurant sales, and support new restaurant growth to both existing and emerging Red Robin markets.

While we grow the top line we will also continue our efforts to improve operating efficiencies to help offset some of the continued industry cost pressures, as well as continue the discipline of reviewing opportunities to take costs out of our building, all of which we believe will contribute to the increased profitability and greater returns to our stockholders.

As always, we remain focused on our heritage and passion, which is, of course, our fantastic team members serving the highest quality gourmet burgers and a variety of other insanely delicious menu items that have made us the premier destination for Americans families.

As we have said in the past, our success in 2007 would not have been possible without the talent and hard work of every one of our Red Robin team members and I want to personally say thank you for their efforts.

Operator, with that we would like to open the call for questions.

Certainly.

(OPERATOR INSTRUCTIONS) We'll go first to Jeff Omohundro of Wachovia.

Thanks.

I guess my question I want to focus on is on the advertising spending plan this year and I guess first, if you could just comment a little bit about your thinking around the timing of your spending and how the presidential election cycle and the olympic might impact that as we think about it quarterly?

Hi Jeff, Denny.

First of all we increased to 24 weeks and when the polls on and off through most of the year.

We will be off air during the opening and closing ceremonies of the Olympics and the election campaign is not on cable anyway -- national cable.

It's usually local and there will be some noise out there for everybody when the campaign is on but we don't expect that to be an issue.

And then my other question is also on the advertising front, but in terms of your alternative efforts.

I think you've been in the process of finalizing some internet advertising efforts, for example.

Just maybe an update on that effort, as well?

We did internet last year so we're doing similar programs this year where we will be driving customers to our website to get them opted -- hopefully opted into our Eclub, et cetera.

We have various syndicated television spots where -- like Oprah, et cetera, whee people can then go to their website and opt directly -- or click directly through our internet website and we will have a promotion, if you will, like we did last year, a game promotion on the internet later this year.

And then lastly, I might have missed it but did you comment on the existing markets versus new markets in terms of your development for 2008?

Thanks.

Yes.

Our 2008, Jeff, our operating weeks will be split fairly evenly between new and existing markets, which is different than the last couple of years where we've been heavily weighted into the new markets.

Great.

Thank you.

Thank you.

We'll go next to Dustin Thompkins with Morgan Keegan.

Thanks.

I just wanted to ask on the same store-sale guidance of 2% to 3.5%, as we look to the comparisons you're lapping they get more difficult through the year.

Is it logical to think that the sales trends would be better in the early part of the year?

The sales trends are difficult in Q2 and Q3 because we were heavily on advertisement during those periods of time.

In Q4, as we stated, we were negative -1.5%, so our guest counts in Q4 are actually going to be easier, we hope, in Q4 of '08.

Okay.

The television matches up in Q2 and Q3 of where we were last year and will be -- not only matches up, but will be heavier, so to the extent we're copying over the Q2, Q3 last year's improvements, we expect that they will be in good shape there.

But, given that Q1 is a fairly easy comparison where you weren't on air, wouldn't it be logical to expect that we'd see a little bit better trend in Q1 than -- say in later in the year?

Our guidance reflects the easier Q1 obviously.

Okay.

And then on the menu pricing, just to clarify, did you roll over a 0.5% in December and then when you put the 0.5% won't that be lapping a 0.9% from last year, so after we get through that going forward is that about 3.6% you'll be running until we get to August?

No, we've got -- we actually rolled the 0.5% in December, so we're carrying about 4% into the beginning of this year.

We'll roll off 0.9% in April as we bring the 0.5% and the late August will roll to 0.9%.

So what will you be running from April to August?

About 3.4%

3.4%, okay.

And then just wanted to ask about the impact of TV as you have experienced being off air in the fourth quarter and you're getting to roll back on air or I guess you recently just rolled back on.

What has been your experience when you've gone off air and the tailwind that you've benefited and what are your expectations as you go through the year?

We're frankly not going to get into that because last year was the first year we went on TV so we don't have enough history or background.

We'll talk about that -- how the first quarter is going on TV on the first quarter.

Okay, great.

Thank you.

We'll go next to Nicole Miller with Piper Jaffray.

Thanks, good afternoon.

I'm traveling so I hope that the connection's okay.

I missed the beginning of the call.

Can you give the stores and the comp base, noncomp, and the acquired number of units that match up to the average weekly sales?

The number of comp units is 192, number of noncomp units is 41 and then we have 17 that are in the acquired -- 2007 acquired class.

Thank you.

Looking at the 0.5% price increase do you have an opportunity to be more aggressive throughout the year?

At this point we're comparable with that 0.5% and we'll evaluate it as we go forward.

Looking back at 2001 and 2003, did you benefit from the last round of tax rebates and how do you think about the tax rebate benefit, if there is one, for later this year?

Well, I think there's a few people that were around there but, yes, I think the Company benefited to some extent.

We're not going to quantify what it was.

Your guess is as good as mine, but we hear statistics that the customers are going to spend between 40% and 60% probably of that tax rebate.

To the extent they spend it and it's at their disposal we certainly think we will get our share.

We didn't build that into the projections, though.

Okay, and then just my final question.

Can you share advertising feedback, both from franchisees and what you've heard from consumers so far?

Feedback in terms of nonquantitative, yes.

The general --

Yes.

-- the feedback has been -- likability has been very strong.

We've gotten lots of e-mails, et cetera, both from -- we've talked to our team members in restaurants to see what guests are doing about the television commercials.

It's been positive.

Same with franchise partners.

Thank you.

We'll go next to Steven Rees with JPMorgan.

I wanted to ask about (inaudible).

I think in the past --

Steve, we're having a hard time hearing you.

Can you hear me now?

There you go.

Great.

I wanted to ask about the new unit margin performance.

I think in the past you have talked about a three-year ramp-up process and with all the NRO initiatives wanted to see if you're seeing any improvement in terms of the new unit margins and how that ramp-up period is progressing?

Yes, the 2007 class, Steven, we did see an improvement.

Historically we did say it took us three years to ramp up to that normalized comp-like level.

We're not far enough into it yet to claim exactly what that shrunk to from three years.

We're fairly confident is going to be less than three years though.

Okay.

And then in terms of the new unit sales volumes I think you've seen that bounce around between 85% and 91% of system average this year.

What are you expecting for 2008 or what are you modeling?

You know, Stephen, internally it's just a trend for us.

It's such a dynamic number and restaurants are coming into that and going out, so it's really hard to quantify.

And then, like I mentioned on the call, when you -- if you have a quarter that doesn't have a lot of honeymoon sales drastically can move that because the basis is so small.

So really it's not necessarily -- we're looking at these more in terms, like Katie mentioned, where are they at when they enter the comp base in terms of average unit volume and margin performance.

This year they ran anywhere between 85% and 91%, 92%, depending whether or not we were on advertising and as Eric mentioned, about the volume of new unit openings in any particular quarter certainly influences that AUV as a percentage of the comp AUV, so when you model it, you have to model it actually looking at all those variables.

Okay, great.

Thank you very much.

We'll go next to Joe Buckley, Bear, Stearns.

Hi, everyone, it's Joe Fisher.

I was just curious, kind of an update on the commodity side of things.

You gave us a lot of detail on the December analyst meeting, but I was trying to piece together what you're thinking when it all comes -- all comes together for the year and also if you've done anything on the hamburger side?

I think you were paying a spot back then.

Yes, Joe, good question.

I'm glad you asked the question about the hamburger, let me address that one first.

We just recently decided to go ahead and contract that.

We have been buying on spot historically.

We never contracted before, but given the opportunity and the threats that we see in the near term this year we decided that now was the time to contract out so we did.

90% of our food cost is under contract right now, so we have very good visibility to 2008 cost.

Those costs are included in our forecast in our guidance that we just gave, so we're very confidence that we have some good visibility to those food costs this year.

And was that -- that hamburger, was that contracted up significantly year over year?

I'm not exactly sure --?

It was about 6% year over year on average.

I'm sorry, 6%?

Yes.

Okay.

And then just one other question.

I was wondering if your development team is seeing any change in the real estate landscape when you're going into -- whether it's new or existing markets, whether it's cheaper or it's just easier to obtain certainly locations, if you could talk to that?

Well, I've got all these people in the room so I'll have to say it's never easy but we expect -- we're negotiating harder, we're demanding more, and we expect that to bear some fruition as we go through the year.

Okay.

And one final one.

Has there been any change -- any noticeable change in mix shift as you are taking these price increases?

No, not at all.

Great.

Thank you.

And no change in lunch/dinner mix either.

We'll go next to Conrad Lyon with FTN Midwest.

Good afternoon.

Nice job of lapping that extra week.

First question has to do with the acquired units at Wisconsin there about.

You talked about it in the last press release being -- closing it in the second quarter and being accretive.

Does that still hold true?

Yes.

Okay.

Can you give us an idea of the condition of these restaurants.

Do you think it's going to require any significant CapEx, so forth?

They're relatively new restaurants, frankly, especially the Wisconsin ones.

Okay.

And I'm assuming -- it looks like you got, at least on the surface, a pretty good deal in terms of price.

Does that imply that there's some margin opportunity there?

I'm assuming perhaps maybe the restaurant level margins might be a little bit lower than, say, your average.

Well, in terms of the price, if you will, we believe it's fair and the franchise partner believes it's fair.

We always hope and aspire to improve average unit sales and margins, but these are good operators.

All right.

Let me move over to labor.

I believe in -- especially earlier in 2007 I think you guys added additional labor and perhaps some other costs there to reinforce the message and enhance guest service, especially in newer markets.

Do you think that you might see any benefits to labor this year, might you tail back a little bit or will the staffing change this year do you think?

I think early on in the year.

in 2007.

our new unit openings we were experimenting with the right level of staffing and as we settled into a more consistent methodology of staffing, I think we saw improvements to that later on in the year and we expect to carry that into 2008 openings.

Okay.

Does that answer your question?

Yes.

Bottom line, your outlook for labor do you see it being maybe just flattish to slightly up?

Yes, there's going to be minimum wage pressure.

Before price increase it's about 30 basis points of minimum wage pressure.

All right.

Thank you very much.

(OPERATOR INSTRUCTIONS) We'll go next to Bryan Elliott with Raymond James.

Good afternoon.

I may have missed this, but in the prepared remarks did you reconfirmed what you said in December that new units and new markets the gap between that and new units and old markets have fully closed?

Is that still the case?

I would say the gap is narrowing.

When we're off advertising we notice a bigger delta between new and existing markets.

We know that advertising has a very heavy influence in our new markets.

So when we are off advertising and we were dark all of Q4 we saw a bigger impact of that delta, but we expect to close the gap as we're on more consistently in 2008 for advertising.

All right.

And I believe I also heard you say that some percentage of your '08 stores would open with a new prototype, 75-ish I think it was.

Yes, 75%, that's right, Bryan.

Just wondered why they all couldn't benefit?

Because we have many of them that were in the process in '07 that already have opened in the first part of this year.

They were the old prototype that we pushed out.

Once the deals are in process they take 12 to 18 months, so if they were in process last year we couldn't go back to start over again.

I would have cost more than the cost savings.

Yes, okay, fair enough.

Thank you.

Thank you.

We'll go next to Howard Penney with FBR.

Thanks very much.

A series of questions, if you don't mind.

The first two.

What do you expect the all-in inflation cost for the new units in 2008 to be?

And then, can you elaborate a little bit more on labor in this quarter and how you were able to manage the labor cost given the decline in traffic?

And then I have a question to advertising.

Let me address the construction cost.

We're not expecting to see a significant increase in construction cost.

We think with the reduction in cost that we've taken out of the building that we can control that inflation.

It will be minor, if any.

Howard, I can answer the labor savings questions.

We've done a lot of things this year, obviously, with our own initiatives focused on tools, processes, and different things in our heart-of-the-house as well as front-of-the-house operation.

We have been behind the scene taking "labor" out of the business model by going to some precut and preprepared prep items in the kitchen.

So it's an ongoing focus for us.

We have a lot of proprietary tools that we use in-house and I think the in-our-own initiative is actually bleeding off and best practices are being developed that are being implemented in our comp restaurants.

That's helpful.

Thank you.

And a big picture advertising question, if you don't mind.

Your decision to go advertise on a national basis is really going to change the complexion of this Company in a sense that there's a level of volatility.

I guess.

associated with advertising, given that we've seen other companies who do this have relative degrees of success with different promotions, whether they raise consumers or not.

And then also, for 2009 to have an impact over 2008 that 1.5% is going to have to go to 2% or 2.5% ow whatever that inflation rate that you're going to see in order to see the impact.

Can you just talk about how you're going to manage this advertising program and maybe limit some of the volatility when success is working and not working and what you see you're going to spend incrementally over the next few years to continue this positive effect>

That's a -- first of all, it's a leap on your part not ours that we would naturally increase advertising as a percentage of sales going forward in future years.

So to back up, we went into the national campaign to build the brand, so we're not building it for a spike on promotion, we're not doing price promotions, we're not doing specific product promotions.

That's the way we rolled it out last year for the 11 weeks and that's the plan and it's already in place and bought for this year.

That's the 1.5% level.

We've made no decisions what we'll do in '09 or beyond.

Naturally to the extent that sales increase in '08 and naturally by the fact that we have 30+ restaurants more coming on plus the franchise acquisitions, we will have -- the pot will be a little bit bigger if we stay at the 1.5% level, but we're making no commitment on the promotions.

This is a branding campaign that we committed last year and are fully committed to in '08.

Great.

Thanks very much.

We'll go next to Joe Buckley from Bear, Stearns.

Hi, just a follow up.

I was wondering if you can comment on any kind of regional strenth of weakness out there?

Joe, we really haven't seen material weakness in any particular region.

As we said in the past if we have -- if we do, we will certainly discuss it specifically.

Okay.

Great.

Thank you.

We have no further questions at this time.

I'd like to turn it back to the speakers for any in additional and closing remarks.

Well, we thank everybody for joining us on the call today and we look forward to talking to you all soon.

Ladies and gentlemen, this concludes today's conference.

You may disconnect at this time.