Red Robin Gourmet Burgers Inc (RRGB) 2008 Q2 法說會逐字稿

Good day, and welcome to the Red Robin Gourmet Burgers Incorporated second quarter 2008 financial results conference call.

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

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

Katie Scherping, Chief Financial Officer of Red Robin.

Please go ahead ma'am.

Thanks, Kevin.

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, 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.

Also, these statements are based on what we expect as of this conference call, and we undertake no obligation to update these statements to reflect events or circumstances that might arise after this call.

These forward-looking statements are not guarantees of future performance and therefore investors should not place undue reliance on them.

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

I also want to inform our listeners that we will make some references to non-GAAP financial measures today during our call.

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

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

Denny?

Thanks Katie, and thanks everybody for joining us today.

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

Eric will provide an update on some of our key initiatives that have been underway to drive guest traffic and sales in this very challenging business environment.

And Katie will review in detail our most recent financial results as well as update our 2008 guidance.

For the quarter, total revenues increased 15.6% while company-owned comparable restaurant sales decreased 0.4% compared to the second quarter of 2007.

GAAP diluted earnings per share was $0.49 compared to $0.29 a year ago.

On a non-GAAP basis, after considering one time charges in both quarters, our diluted EPS for the second quarter 2008 was $0.52 a share versus $0.44 last year, or an 18.2% improvement.

Katie will provide more detail on the year-over-year comparisons in a few minutes.

The second quarter was clearly challenging for the casual dining industry as a whole, due to the difficult economic environment, and for Red Robin specifically as we lapped our first and very successful national advertising campaign of a year ago.

Despite disappointing sales trends, we were pleased with the overall performance in the second quarter as we achieved revenue growth, controlled our spending and continued strengthening the Red Robin brand.

We continue to believe we have good visibility generally on the cost side of our business for the balance of 2008, but our visibility for revenue in the second half of the year is less clear.

We will be lapping our toughest comp of the year in Q3 with the consumer environment remaining under pressure from macro economic influences.

We will be on advertising three weeks in the fourth quarter this year when we were dark in all of the fourth quarter last year.

So, as we have laid this out in our press release, and as Katie will share with you later in the call, we have updated our fiscal 2008 guidance to reflect this top line uncertainty and related deleverage.

As we review our development plans for the back half of 2008, we are on target to achieve our planned openings of 30 to 32 company restaurants this year.

So far this year we have opened 17 company restaurants through Q2, and two more so far in Q3, as well as four franchise restaurants opened in Q2 and two more in Q3.

We have 14 company-owned and six franchise restaurants currently under construction.

We have realized our planned savings from the new prototype unit and are achieving improved profitability in our newer restaurant locations.

Having said that, we continue to remain cautious about the macro economic factors influencing the casual dining industry, as well as the real estate development generally.

And we believe that taking a more measured pace for our 2009 development is the right approach for next year.

As a result, we expect our 2009 development of new restaurants will be in the 17 to 20 restaurant range, which we will fund from our operating cash flow.

Our future capital deployment strategy may also include the repurchase of our stock.

Our board recently authorized an additional 50 million stock repurchase that is in addition to the previously announced 50 million share repurchase which we completed this past June.

As we mentioned in our previous call in May, during the second quarter we completed the acquisition of the assets of 15 existing franchise Red Robin restaurants from three franchise partners, including eight in Wisconsin, three in Minnesota, three in northern Indiana, and one in New Jersey, as well as one in Eau Claire, Wisconsin that had been under construction when we first announced this transaction, but was opened by the company on May 5.

As we have stated in the past, we evaluate franchise acquisitions on an opportunistic basis after considering many factors, including accretion to earnings and opportunities for further company development in those markets.

The expected results for these 2008 acquired restaurants are included in our guidance for the balance of the year.

While it is still a very difficult operating environment, we were pleased with our progress on development cost reductions, new restaurant opening efficiencies, and our brand building efforts through our television advertising.

Our continued efforts to increase productivity and take costs out of our business, as well as the price increases we have implemented this year, will help us to manage some of our cost pressures.

And we encourage that, even as consumers adjust their spending to this difficult economy our brand remains strong and is growing.

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

Thanks, Denny.

Good afternoon, everyone.

In the second quarter of 2008, our comp store sales decreased 0.4%, which consisted of a 4% increase in pricing mix which was offset by a 4.4% decrease in guest traffic.

For comparison, we reported a 3.1% comp store sales increase in the second quarter of 2007, which was driven by a 2.4% higher pricing mix and a 0.7% increase in total guest count.

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

Our second quarter had 207 company-owned comparable restaurants out of the 281 total company-owned restaurants.

Average weekly sales for the restaurants in the comp base were $64,842 during the second quarter, which compares itself to $65,090 for those same units last year.

Average weekly sales for our 43 non-comp restaurants was $56,233 during the first quarter (Sic -- see press release) this year compared to $59,979 for the 50 non-comparable restaurants last year.

The 17 franchise restaurants that we acquired in the second and third quarters of last year are not currently included in the comp base, but will be included beginning the third quarter of this year.

Their average weekly sales were $61,254 in the second quarter of 2008.

The 15 existing franchise restaurants that we acquired in the second quarter of this year will be included in the comp base beginning the third quarter of 2009.

These 15 restaurants' AUVs were $54,905 for the period of time we owned them in the second quarter of this year.

Our second quarter 2008 restaurant level operating margins of 18.6% were 140 basis points lower than 20% margins in the second quarter of last year.

However, do remember that that includes an incremental 50 basis point contribution to our national media fund.

In late June we implemented approximately a 2.7% price increase that we had planned and talked about during our call in May.

In addition to operations initiatives to help manage controllable labor and other costs, the price increase did help offset some of our cost threats and sales deleverage, but the decline in comp sales caused much of the fixed cost deleverage in the quarter.

Nevertheless, our operations initiatives for both new and existing restaurants are continuing to gain traction and we'll continue to focus on these initiatives moving forward.

We are also pleased with the results we are seeing in terms of managing our pre-opening and post-opening support of our new restaurants.

Now I'd like to talk about some of the traffic driving initiatives that we have underway.

First and foremost, we will continue to differentiate ourselves in casual dining as a family-focused, kid-friendly destination, a dining experience both kids love and a place where grownups can feel comfortable.

In fact, outside experts on "kid friendliness" have recognized Red Robin for the great dining experience we offer families.

"Parents" magazine recently named Red Robin one of its top ten family restaurants, and we couldn't agree more.

While staying true to our family-focused, kid-friendly dining roots, building our brand and winning our share of guest counts continues to be the focus of our marketing and sales efforts.

Our most recent flight of media begin on July 4 with 37 cable spots featuring our Five Alarm Burger and our Blue Ribbon Burgers and will run 11 weeks through the beginning of November.

We recently saw strong evidence that our advertising is rising above the competitive crowd.

A.C.

Nielsen last month ranked our Blue Ribbon Burger spot with the robot dad as the number one, most recalled new TV ad in the entire US.

In addition we continue to receive positive feedback about our brand from our guests, including a growing number of requests from guests wanting us to open a Red Robin in a neighborhood near them.

These and other signs tell us that, while the current economy is a difficult one right now, our brand remains strong among current and prospective Red Robin fans.

During this quarter we will continue our local restaurant marketing focus at the unit and regional level, as well as utilize some targeted eClub blasts to generate repeat guest traffic.

Nevertheless, we know that among our loyal guests, as consumers tighten their belts with spending, they're looking for value in their casual dining experience.

So we are reinforcing the brand equities and great guest experience that have always been part of the Red Robin brand.

For example, this week we started including 15 second TV advertising spots that reinforce our signature bottomless messages of both beverages and streak fries, and highlights the value that has always been available at Red Robin.

For the second half of the summer we'll be promoting a couple of our delicious gourmet burgers, the blackened bayou burger, and the blackened chicken burger.

These burgers not only reinforce Red Robin's leadership in the gourmet burger category, but they also provide a spicy southern kick for our more adventurous gourmet burger lovers.

We're also promoting a new Peachy Keen Splash Lemonade, a new addition to our signature bottomless lemonades.

It's a complement to our very popular Freckled Lemonade as a refreshing, end of the summer beverage made with real peaches.

We also continue to see strong guest preference from some of our other crave-able items such as our recently introduced Prime Rib Dip.

Finally, in good times or tough times our greatest competitive advantage will always be our amazing unbridled team members.

Beyond the intense focus, our restaurant teams continue to have operational efficiency and execution within the four walls.

Our team members are even more energized around delivering the great service and experience our guests expect and deserve.

We all understand the challenges out there, and every one of our team members has the talent and the passion to create guests for life with unbeatable smiling burgers and unbridled Red Robin service.

With that, Katie I will turn it over to you.

Thanks, Eric.

Now let's talk about the results for the second quarter 2008 which was a 12 week period ending July 13, 2008.

If you haven't already seen our news release on the quarter's results, you can find it on our website at Red Robin.com in the investor relations section.

Total revenues for the second quarter of 2008, which consist of restaurant sales and franchise royalties, grew 15.6% to $206.4 million from $178.6 million last year.

Restaurant sales grew 16% to $202.9 million from $174.9 million, and consisted of $157.7 million in sales from our 207 comp restaurants, $12.3 million from the 17 acquired restaurants in 2007, $6.7 million from the 15 restaurants acquired in the second quarter of this year, and $26.2 million in sales from our 43 non-comparable restaurants.

As Eric mentioned, the franchise restaurants acquired in mid 2007, and the 15 franchise restaurants acquired in the second quarter of 2008, have not been included in our comps or sales metrics yet.

Franchise royalties and fees decreased 7.4% in the second quarter to $3.4 million, and exclude the royalty contributions from the 17 acquired restaurants in 2007 and the 15 restaurants acquired in the second quarter this year, from which we recognized a combined $816,000 in royalty revenue in the second quarter of last year.

The 87 comp restaurants in the US franchise system reported a 1.5% decrease in same-store sales, while the 18 comp restaurants in the Canadian franchise system reported a 4.5% increase in same-store sales for the first quarter.

Our restaurant level operating profit margin was 18.6%, which compared to the 20% reported last year.

The 140 basis point margin decline is attributed to approximately 60 basis points of higher food and beverage costs, approximately 15 basis points of increased operating costs, and 60 basis points of increased occupancy costs which were offset by 40 basis points of labor cost improvement.

Our cost of sales increased by about 60 basis points in the second quarter over last year.

The increase was due primarily to higher raw material costs in nearly every category, somewhat offset by menu price increases and favorable produce and beverage costs.

Our labor costs decreased by about 40 basis points to 34% from 34.4% of restaurant revenues this quarter compared to the second quarter of last year.

A large part of the improvement was due to our continued focus on operations initiatives related to controllable labor.

Those operations initiatives, combined with menu price increases, helped offset the year-over-year increase in minimum wages.

Other operating costs increased about 60 basis points to 17% of restaurant revenue this quarter compared to 16.4% a year ago.

The increase was driven primarily by a 15 basis point increase year-over-year in revenue contributions to the national advertising fund from 1% of revenue to 1.5% of revenue in the second quarter this year.

Occupancy expense was 6.5% of restaurant revenues in the second quarter, or about 60 basis points higher than the same period a year ago, driven by a combination of higher year-over-year average rent expense, additional common area maintenance charges and revenue deleveraging.

Depreciation and amortization expense during the first quarter (Sic -- See press release) was 5.7% of total revenues, about 20 points higher than a year ago.

For the full year of 2008, we expect that our depreciation and amortization will be flat on a year-over-year basis.

General and administrative expenses were 7% of total revenues in the second quarter of 2008 compared to 7.9% of total revenues in the second quarter last year.

G&A expenses are lower in the second quarter of 2008 by about 60 basis points as a percentage of revenue due to lower performance based bonus expense compared to last year.

Keep in mind, as we run our advertising through the rest of 2008, the expenses will exceed the contributions in the advertising fund during certain periods.

So far in the first half of 2008 we have incurred about $450,000 of net advertising in our G&A, $650,000 in Q1, offset by about a $200,000 benefit in Q2.

For the third quarter, G&A expense will include approximately $1.9 million in additional G&A expense, and the fourth quarter about $2 million of G&A will be reversed when we have relatively very little advertising similar to the trend we saw in 2007.

Our expectations for our full year G&A leverage is about 70 basis points less than 2007.

A portion of this year-over-year savings comes from reduction in the performance based bonus expenses.

Our pre-opening expense in the second quarter was about $560,000 lower than a year ago due to one fewer company-owned restaurant opening in the second quarter of 2008 compared to a year ago, as well as improved management of travel and other costs related to new restaurant openings.

We are currently budgeting about 280,000 per unit for pre-opening expense.

Net interest expense was $1.8 million in the second quarter of 2008 compared to $1.9 million in the same period last year.

The decrease is primarily from lower average interest rates of 3.7% in the second quarter of 2008 compared to 5.9% in the second quarter last year, offset by additional borrowings under the company's credit facilities related to the franchise acquisition and share repurchases during the second quarter 2008.

Our effective tax rate for the second quarter was 27.8% compared to 29.4% in the second quarter 2007.

The decrease from 2007 is attributed to increased tax credits.

We are currently forecasting our full year 2008 effective tax rate to be approximately 29%.

Net income for the second quarter of 2008 was $7.9 million, or $0.49 per diluted share, compared to net income of $4.9 million or $0.29 per diluted share in the second quarter of 2007.

Our second quarter 2008 net income includes about $0.03 per diluted share for reacquired franchise rights and acquisition integration related expenses.

Second quarter 2007 net income includes about $0.15 per diluted share of acquisition costs and related expenses, as well as legal settlement expenses.

Excluding the impact of these one time charges, our non-GAAP second quarter 2008 earnings per diluted share was $0.52 compared to $0.44 last year, or an increase of 18.2%.

Schedule 2 of our earnings press release provides the detail on this GAAP to non-GAAP reconciliation.

As you can see on our cash flow statement in our press release, our cash from operations of $52.4 million year-to-date exceeded our development capital expenditures of $41.8 million.

For the year, excluding restaurant acquisitions and share repurchases, we expect all development capital needs to be funded from our operating cash flow.

As we look to 2009, we will fund our 17 to 20 new restaurant developments from our operating cash flow.

We will continue to evaluate our most effective use of available cash as part of our overall capital deployment strategy, which may include the repurchase of our stock.

The balance outstanding under our line of credit facility at the end of the second quarter was $216.8 million, with about another $72 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.

Taking into consideration our full year capital expenditure estimates of between $80 million and $85 million, our franchise acquisition, our completed share repurchase, and scheduled debt repayments, and our operating cash flow, we expect our outstanding debt at the end of 2008 will be around $215 million, including $4.5 million in letters of credit.

We believe we have ample liquidity to provide for our capital needs well into the future, and we believe we will continue to be in compliance with all of our debt covenants.

Now, let's talk about our outlook for the remainder of 2008.

Our practice is to provide annual revenue, comparable restaurant sales and earnings per share guidance.

We will provide guidance for these metrics which we may update throughout the year if circumstances and visibility change.

We do provide quarterly unit development expectations for both company-owned units as well as franchise units.

For the third quarter of 2008, which is a 12-week quarter, we expect to open nine to ten new company-owned, and two to three new franchise restaurants.

For fiscal year 2008, we expect to open 30 to 32 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 $888 million to $894 million, down from prior guidance of $905 million to $918 million.

Our projected revenues are based on certain assumptions including expected comparable restaurant sales of approximately 1% to 2%, which includes a full year with weighted price mix of approximately 4%, assuming no additional price increases for the remainder of the year.

This month we will roll off about 3% of menu pricing from a year ago.

Our full year net income per diluted share on a GAAP basis is expected to be $1.87 to $2.02, which includes $0.03 of acquisition related one time expenses.

Excluding these one time expenses, our non-GAAP EPS is expected to be $1.90 to $2.05, down from the prior guidance of $2.04 to $2.23.

Our full year guidance update includes the full year weighted impact from the repurchase of shares in early June.

Our margins for the full year 2008 are expected to remain under pressure in the second half of the year.

We expect about a 190 to 200 basis point decline for the full year of 2008 in our restaurant level operating profit margin compared to our margins for the full year of 2007.

Included in our restaurant level margins for 2008 is the additional 50 basis points in advertising which will total around $18 million system-wide this year compared to about $11.2 million last year.

As Denny mentioned earlier, we feel we have good visibility to the cost side of our business, but our cautious view of our top line sales expectations is the primary driver of the margin deleverage we have modeled for the second half of 2008.

I want to remind everyone that now $235,000 of pre-tax earning or expense for us equals $0.01 per diluted share for the full year of 2008, which is equivalent to less than 3 basis points as a percent of revenue.

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

Thanks, Katie.

Looking ahead we remain focused on the things we can control in a difficult operating environment -- taking care of our guests, managing costs, and deploying our cash to the most effective use of capital.

We believe our talented and unbridled team members are staying focused on living our values, building our brand, and delivering an unbeatable guest experience with our fantastic gourmet burgers.

Operator, with that, we're ready for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll go first to John Glass with Morgan Stanley.

Thanks.

A couple questions.

First, Katie, if you can just flesh out a little bit the second half earnings guidance and why it's going to be so much worse than it was in the second quarter?

It would look like your comp expectations aren't going to get worse.

In other words, the 1% is a good number.

Is there something specifically in the margins that are going to be, excluding the advertising shift which I think is essentially a wash in the back half or even a benefit, is there anything else in the margins that is unusual relative to the first half?

Other than we are planning to lever G&A which is on a positive note, we're going to lower our tax rate, as well to 29% from the previous guidance of 30%.

But really it's all sales and the change in our assumptions around our comp store sales.

For year-to-date we are running about 2%, and our full year guidance is built around a 1% to 2% same-store sales expectation.

But in the second quarter your comps were slightly negative.

I don't think you expect them to get any worse than slightly negative in the back half of the year?

Q3 is our most difficult comp of the year.

So the answer would be, from a guest count standpoint, yes, and we're going to be rolling off price.

There's no more incremental acquisition expense related in that guidance other than the $0.03?

No, no.

Just the Q2 expense.

And then when you think about free cash flow, you talked about free cash flow generation.

First of all, can you maybe just talk about the theoretical CapEx for next year on the lower number of stores, or if not, can you at least just talk about what the maintenance CapEx of this business is excluding growth so we can figure that out?

And how do you intend to deploy that?

At this point, given the leverage that you have, maybe you can take on more debt but wouldn't it be prudent to start paying some of that down, just based on the environment?

Let me answer your first question about the expectation for our CapEx.

Our current investment per unit is running around $2.2 million of capital spend plus the pre-opening costs associated with that.

Our maintenance CapEx historically has run between 12% to 15%.

We will re-evaluate that for next year and we'll give you more specific guidance as we give our 2009 visibility overall, but that is our historical trend.

And then from a debt versus -- how we use capital, we have a very low cost of capital.

You can see in the second quarter we ran a 3.7% interest rate.

That is a very low cost of capital.

But certainly we would weigh in the opportunity to pay down debt, buy back stock, or continue to develop more restaurants.

Those are all options for our cash flow as we move forward.

That's my last question then which is, is that lower -- can you explain the lower interest rate, 3.7%, and how long do you have that rate for?

Yes.

We locked $120 million of debt in a swap until March of 2010.

And then we'll roll off $50 million of that.

So we'll have $70 million swapped for another year.

And it's a LIBOR plus.

So we locked in 2.7925% as that interest rate, and then we pay a margin on top of that based on our leverage ratio which is currently sitting at 1%.

Thank you.

We'll go next to Brad Levington with Keybanc Capital Markets.

Thank you.

Good afternoon.

I wanted to look at the new $50 million repurchase authorization.

I know that goes through 2010 but should we expect that there will be any measurable repurchases in the second half of '08?

We'll report on that as we -- when and if we buy as we go through each quarter in the 10-Q.

Not as we go.

And then on the labor line, it was controlled pretty well this quarter.

Can you go into a little more detail on where you were able to cut some of the controllable labor costs out?

Yes, Brad.

We've been talking for numerous calls that that's been one of our focuses.

And really the focus is in the heart of the house, in the kitchen, looking at prep efficiencies and various initiatives, but also managing our proprietary labor management system that we refer to as New Stars.

Okay.

Thank you very much.

We'll go next to Jeff Farmer with Jefferies & Company.

Thank you.

Eric alluded to some 15 second commercials highlighting your bottomless fries and drinks.

Considering how invisible your casual dining appears to have been in terms of advertising or owned value offerings, do you think you're going to need to get a little bit more aggressive in coming quarters or heading into '09?

We'll not get more aggressive on television in terms of values or discounting the balance of '08.

'09 we will probably move more away from branding and more to product specific, more than likely featuring burgers, but not in terms of discounting.

Any idea whether or not you'd introduce a price point in any of this advertisement?

It's too early to tell for '09.

And chicken, it's your greatest commodity exposure, and you've talked about this for a while, but it looks like you're contracted for what amounts to 100% of your needs through December '09.

I'm just curious if that is a fixed price contract or, more specifically, if chicken were to jump in '09, would you guys be covered?

It is a fixed price contract subject to act of God clauses, which all contracts probably have.

Okay.

And then just following up --

Material adverse change.

And then just following up on the labor question real quick.

I think you guys began your initiatives in the fourth quarter of '07.

Is it fair to assume that you'll begin to roll off that as we get into the fourth quarter of '08, or do you have anything else up your sleeve as we roll into '09?

We will roll off those initiatives but the initiative that started with the NRO efficiency initiative, and has been rolling out to comps and non-comps, is never ending.

Okay.

Thank you.

We'll go next to Jeff Omohundro from Wachovia.

Thanks.

Another labor question.

I wonder if you can just talk about turnover and also staffing levels and service scores.

Thanks.

Sure, Jeff.

Actually we've seen a reduction in our management turnover by about 8% year-over-year.

Restaurant turnover continues to run in the mid to low 90s, so well below the 100% to 150% mark for team members, hourly team members.

Continually obviously always focused on guest service.

We are piloting an IVR program with a company called Empathica to make sure that we are staying in touch with our guests, but it's something that service scores, Mr.

Shopper scores, we haven't seen any material impact.

And your staffing levels?

Staffing levels have stayed the same.

Obviously we reviewed our [gift to] time reports every day per restaurant per region and it breaks it down to even tables per server.

And then my other question was any new trend on new unit performance?

On what, I'm sorry.

On your new store performance.

Yes.

We are very pleased from both the retention side as well as the initiatives that we are putting in place.

We are seeing good traction.

So not out of the woods yet but it's a never ending journey.

Thanks.

We'll go next to Joe Buckley with Bank of America.

Just to follow up on that, the reduction in expansion plans on the company side for '09 down to 17 to 20, is that related in any way to new market concerns or issues?

Or what is driving that decision?

In no way related to new markets or existing market issues.

As you know, we are 18 months out in development so we just want to take a more cautious look as we look out into '09.

Many of those '09 transactions are already done so it's just a matter of slowing down a few and pushing a few into '10 and getting a better feel for the economy.

It reflects a more aggressive stance, perhaps, on share repurchase?

I know you added $50 million to the buyback but is that part of the capital deployment decision going on?

It's not a more aggressive approach.

We are free cash flow, we will be materially larger free cash flow with that lower development, and one of the options we want to have open to us, and that's why it's an open purchase, is additional stock buy backs or, as John said earlier, debt repayment, before we deploy more capital into buildings.

Okay.

And then a question on geography.

Did you see any material difference in California or other subprime mortgage markets or any geographical variances you'd highlight across the chain?

Well, we highlighted in the last call, so-called CAN markets -- California, Arizona, Nevada.

They continue to be under lots of pressure for us.

It's probably not getting any worse but it's certainly not getting any better.

Okay.

Can you quantify it at all just to?

We quantified it in the first quarter call that we would have been up over 6% if it wouldn't have been for those three markets.

I don't have the percentage at hand but I assume it will be similar to that.

It wasn't quite as dramatic this quarter primarily because we were down in almost all regions.

So it didn't happen quite as order of magnitude as Q1.

And then lastly I know you said you are going to highlight the bottomless drinks and bottomless fries.

As you've moved pricing, have you moved pricing on either of those categories?

How do you feel about beverage pricing, perhaps, as you go forward?

Yes.

We haven't moved beverage pricing in the last couple of price increases especially in our Freckled Lemonade and our Monster Milk Shakes.

So we feel pretty good there.

And obviously they haven't moved fries since they are included anyway and have been bottomless forever.

Any thoughts of maybe taking some price in those categories?

We are just -- we haven't made any decisions that we would publicly talk about pricing, but I would say we are nervous about pricing in this economy.

Okay.

Thank you.

Thank you.

We'll go next to Matt DeFrisco with Oppenheimer.

This is Jake Bartlett in for Matt.

I had a question about the new prototype and just was wondering if you are getting the similar sales levels from the smaller sized stores and margins from the smaller prototypes.

As well as, for 2009, how many of the 17 to 20 do you expect to be the new prototype?

The seat configuration is the same in the new prototype so it's not smaller in that vein, it's just smaller square footage slightly.

And there's no difference in sales between the current one and the older prototypes, so to speak.

We may have 40 prototypes in the system anyway.

And a lot of the new restaurants we've opened the last couple years have been end caps, modifications of different prototypes.

And what was the last part of your question?

Will all new development be the new prototype -- yes.

We're using that floor plan as our go-forward prototype.

Okay.

And then in terms of the 2009 development, you mentioned you have 18 month look out.

Is that to assume it's going to be more front end loaded development and that you're really pulling back in the back half of the year as we model 2009?

Yes.

Okay.

And is there any regional focus for the 2009?

Are you remaining in certain, keeping development in certain markets that you identified as stronger rather than the others that are noticeably weaker?

It's pretty much across the board.

Even if the next question is are we building in California, the answer is yes.

California is still one of our strongest AUV markets, has been forever and still is even though it's down.

And we will be building there.

Okay.

And a number of conferences have talked about the July 4th effect.

Did you see any shift in sales given the date of July 4th this year?

It happened on a Friday so it's a bad weekend.

There's no question we had a shift in sales.

Friday is the big day for us.

Shift and/or loss, however you want to determine it.

is there any way you can quantify that?

No, no.

Thank you very much.

Thank you.

We'll go next to Steven Rees with JPMorgan.

As you finish fiscal 2008 with a significant increase in advertising, how are you going to measure the return or the effectiveness as you think about whether or not to continue to grow that in 2009?

Well, it's always a tough question.

A good question, but a difficult question.

We know in the past what happens when we go dark.

We will have some experience later this year when we go dark again.

We also know what has happened to some competitors when they went dark.

So you have to make a business judgment on whether or not sales would have dropped materially if you were off market.

We think that we've -- we saw last year with a successful introduction very good returns.

This year, we have some timing differences and lapping up against last year's, but we feel confident that TV, in terms of branding and now moving out of branding into product promotions, will be a real benefit for us.

Okay.

And I think you said three weeks versus zero in the fourth quarter.

But what is the actual weeks in the third quarter versus last year?

What do you mean, last year?

You mean actual calendar days?

No, the planned advertising weeks in the third quarter versus the third quarter last year.

We will be on seven weeks this quarter, this year -- or, the third quarter this year -- versus five last year.

Okay.

And then just on the '09 development, it sounds like you cut what you could this far into the pipeline.

Would you have cut more if you could have?

I am not going to speculate on that.

And, Katie, can you just give us the expected maintenance CapEx for 2008?

It's about 15% of our total CapEx so we gave a guidance of 80 to 85, so about 10% to 15% of that.

You think that's probably a rough estimate for 2009?

That is what we have run historically.

Thank you.

Thank you.

We'll go next to Conrad Lyon with Global Hunter Securities.

Hi.

I want to ask you more about the menu pricing.

Average check over the last four quarters has been up about 4%.

How do you look at it going forward?

I think you said it's a very touchy environment here, but maybe you can help us look in terms of how far out that may go.

Because it looks like you may run into a point where you may not be able to take some price for sometime and maybe put some pressure on margins.

Is that a fair statement in how we should look at menu pricing?

I'm trying to quantify that statement.

All we said is we haven't decided on further pricing at this point certainly because the environment is part of it.

We obviously just took price not too long ago, so we are still measuring the effect of price mix on that.

On a macro basis, we monitor and we'll continue to monitor food at grocery stores versus food away from home and see what that relationship is.

We don't want to be accelerating price in excess of what is going on at grocery stores, and other factors and advice that have come into play.

Okay.

And then let me just go back.

I think this may have been asked but where would the likely places be for pricing?

Well, again, we sell hamburgers.

So pricing has been on hamburgers across the board.

Pricing up an item that sells $0.01 to 1% doesn't get us much.

The short answer is it will probably be on the menu.

But beverages, I think you were talking about the beverages.

Beverages, our menu stands on its own in terms of the food products.

Beverages, everybody sells beer so you have to be more conscious of what some of those factors.

And, again, alcohol is not a big part of our business.

Okay.

Lunch is 50% so we have to be -- and the menu is the same at lunch and dinner so we have to be very careful for the lunch price value equation.

Got you.

Let me ask you a different question now.

With respect to the company, now that you have got over 400 stores, how do you look at growth?

Or how should we look at growth with respect to the company and where the earnings growth is going to come from going forward?

More from company growth?

More from margin management?

It's kind of all of the above.

In terms of the runway, we've always said we have 400 stores, there's plenty of room for quite a few more Red Robin stores around the country over time.

So we don't think that is an issue.

The issue is then on terms of top-line growth, we are always trying to build sales.

That is part of the whole marketing push and operational push, and then what we do in 2010 and beyond, we'll determine that as we see how the economy works out and how we go forward.

We have a number of stores -- and it's in our investor presentation -- stores that do under $2.5 million.

There are opportunities for us to move those up.

Our system averages 3 plus so, to the extent we can move those up, there's tremendous operating leverage.

The same as there's been negative operating leverage when the revenues go down.

Last question.

Some areas like, for instance, Canada seem to be doing very well.

Do you guys see that as an opportunity, maybe potentially acquiring some of these stores, or going into that territory, or both?

Our franchise partner in Canada is certainly doing well.

They've done a number of remodels.

I can point out the system average is substantially lower there than it is here, in Canadian and our dollars, but they've been a nice push on remodels and doing a great job operating.

We always can learn from them and hopefully they can seek knowledge from us.

In terms of acquiring, we wouldn't talk about that until it was done, anyway.

And in terms of expansion in Canada, our franchisee up there is now under construction with the first one that's been built in many, many years, so we look forward to them continuing.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS).

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

Thank you.

Good afternoon.

I wanted to follow up on the questions around new unit performance.

It looked like the non-comp restaurants, the average weekly sales were a little bit slower than what they had been in past quarters, calculated around 86% or 87% of the comp base.

Is there any update?

Am I missing something?

Is that on plan or are those stores trending a little bit softer than they had been?

Dustin, we've been running around at 86%, 87% for the last four quarters since Q4 of '07, essentially.

Q2 and Q3, we saw a big influence from our national advertising campaign, particularly because a lot of those restaurants were in new markets that are in our non-comparable base.

So you saw that influence of that advertising campaign really shoot that number up in Q2 and Q3 last year.

When we went dark in the fourth quarter we came back down to that 86% run rate.

That is where we are sitting right now.

And it's dynamic as you move restaurants in and out of that base and things like that.

So it's hard to really wrap your arms exactly what's causing that but we use that 86%, 87% as just a barometer of a percentage of comp, but that's it.

Okay, that's helpful, and that leads to my second question on the advertising.

As you mentioned, Q3 is your hardest comparison.

Obviously the advertising was a big success in Q3 last year.

As you look at Q3 this year, given that you've got distractions from the Olympics and the elections, do you expect your advertising to be less effective even relative to maybe how effective it was in the second quarter?

How should we look at that effectiveness?

There's a lot of variables which is why we took down our full year guidance, because there are so many unknowns and we are going up against our toughest comparison in Q3, in Q4.

As we come into the elections we are going to be on advertising when we weren't last year.

So we, quite honestly, the visibility on exactly what is going to happen, we don't have that great a visibility, so we are doing our best to estimate what the upside and the downside could be, and that's where we got the 1% to 2% same-store sales.

And then lastly, just, Denny as you were describing 2009 development, it sounds like you guys are pretty committed on the 17 to 20.

How flexible is that number?

Could it be lower if you wanted it to be?

Well, we don't want it to be, so at this point we are committed to doing that.

We think they are all great sites.

And this is not a shut down.

This is just a slowdown to be more prudent and push some things out.

Okay.

Great.

Thanks.

Thank you.

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

Thanks.

Good afternoon.

Katie, can you give us an update what is the actual debt ratio, and how does that compare to your allowable debt covenant?

We have two debt covenants.

We have a fixed charge ratio and we have a leverage ratio.

Our leverage ratio max is 2.5.

We are well underneath that.

And our fix charge ratio, we have plenty of cushion under that, as well.

So even rolling out our visibility through the end of this year we are not in any threat of hitting either of those ratios.

If you were to extend the line of credit to the total amount available under your current guidance, would you still be within those ranges?

Yes.

We would want good visibility to what we think our 2009 cash flow is going to be, obviously, to have more certainty to that.

But we are very comfortable we would not hit that leverage ratio.

Because that helps us consider when and how you could potentially buy stock back.

Is there an actual authorization in place?

Yes.

For how much?

$50 million.

Another $50 million?

Right.

I'm sorry I missed that.

I hopped on late.

And the '09 development, I might have missed this at the beginning, is that also the 17 to 20 that you are saying?

Yes.

But '08 is unchanged correct?

Correct.

And then in July, or end of June, was there a menu price increase and how much was that?

The late June increase was actually the last week of June.

It was about 2.6%, 2.7%.

And we roll off next week.

Roll off how much?

3%.

Okay.

And actually, Denny, I thought what you said was interesting early on, the price, because you have to be careful with the value lunch proposition.

Could you, in fact, then just split your menu into lunch and dinner and take price at the dinner time?

We haven't since 1969, so it would be a difficult sell around here to do that, but -- we haven't thought about it.

We just wanted to point out that lunch is 50% of our business, which is a great thing, and it's the same menu lunch and dinner.

And this is my last question.

Katie, I think last year you said it was like a 2.2% comp, if I remember correctly, required to cover the $10 million to $11 million in marketing.

What is the comp percent this year and how are you measuring that?

It's about the same.

It's about the same, it's a little over 2%, between 2% and 3%.

I'll hop off.

Thanks.

Thanks.

We'll take a follow-up question from Joseph Buckley of Banc of America.

I wanted to ask two questions on share repurchase.

Could you talk a little bit about trends of same-store sales during the quarter?

You obviously executed the $50 million sometime in May.

I forget when you announced that you had done it.

Was the outlook for the quarter significantly better at that point, could you say, just because of sales trends?

Our share repurchase was executed the last week of May and the first week of June.

As we saw gas prices rise significantly in June and July, is really when we started to see the impact to our same-store sales and probably more particularly in the back half of June as we entered our last period of the quarter.

So that's what is causing us to take a more conservative view on the back half of this year, as well, from the macroeconomic impact that we are seeing currently.

And then the guidance, I know the guidance obviously includes the effect of the $50 million that was done.

Are you assuming anything done with the additional $50 million in the guidance or is that --?

No.

The only assumption that we have made includes the $50 million that's been completed.

Okay.

Thank you.

That does conclude the question-and-answer session.

I would like to turn the call back over to management for any additional or closing remarks.

Thank you for your time and thanks to all our great team members out there.

We'll talk to you in a quarter.

That does conclude today's call.

We do appreciate your participation.

You may disconnect at this time.