Red Robin Gourmet Burgers Inc (RRGB) 2008 Q3 法說會逐字稿

Good day and welcome to the Red Robin Gourmet Burgers, Incorporated Third Quarter 2008 Financial Results Financial Conference Call.

(OPERATOR INSTRUCTIONS.) It is now my pleasure to turn the floor over to your host, Ms.

Katie Scherping, Chief Financial Officer of Red Robin.

Thanks, Andrea.

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 and 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 I and II 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 everyone for joining us today.

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

Eric will provide update on some of our key initiatives in this very challenging business environment, and Katie will review in detail our most recent financial results and discuss guidance.

So here are some of the headlines for our third quarter results.

For the third quarter, revenues--total revenue increased 10.6% and restaurant revenues increased 10.8%, while company-owned comparable restaurant sales decreased 2.2% compared to the third quarter of 2007.

GAAP diluted earnings per share were $0.40 compared to $0.49 a year ago.

On a non-GAAP basis, after considering one-time charges in both quarters, our diluted EPS for the third quarter of 2008 was $0.45 versus $0.50 a year ago, a decrease of 10%.

Included in our results is an asset impairment charge of 928,000 in the third quarter related to two of our restaurants.

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

The third quarter of 2008 was unusually challenging for Red Robin and for the dining--the casual dining industry as a whole.

The shock effect of the financial crisis on the capital markets intensified pressure on consumers who are already feeling pressure from higher energy costs, food and other costs, along with declining home values.

These events have caused us as--and many restaurant operators to reassess our business and operating plans.

We are on target to open 31 new company restaurants in 2008.

So far this year, we have opened 27 company restaurants in Q3 and three more so far in Q4.

Our final 2008 restaurant will be open this coming Monday.

Our franchisees have opened seven restaurants through Q3 and one more has opened in Q4.

Including the new company-owned restaurant that will open next week and two additional franchise restaurants that will open in Q4, we have 10 company-owned and five franchised restaurants currently under construction.

We are still cautious about the macroeconomic factors influencing the casual dining industry as well as real estate development generally.

We plan to open up to 20 new company restaurants--company-owned restaurants in 2009.

As we said in our last earnings call, we will fund new restaurant development next year from our operating cash flow.

So during this challenging period, we are maintaining our focus on our fundamental drivers of the business, which include growing top line sales, managing costs, generating free cash flow, and monitoring our debt.

With that, I would like to turn the call over to Erik.

Thanks, Denny.

Good afternoon, everybody.

In the third quarter of 2008, our comp store sales decreased 2.2%.

This consisted of a 3.8 increase in price and mix, which was more than offset by a 6% decrease in guest traffic.

For comparison purposes, we reported a 4.8% comp store sales increase in the third quarter of 2007, which was driven by a 3.7 higher price and mix and a 1.1 increase in guest counts.

As you may recall, last year's third quarter significantly benefited from our second flight of television advertising.

It's also important to note that our two-year comp trends have been positive, up 2.6%.

This two-year trend gives us confidence that while we're facing a very difficult economic [climate] right now, we believe that the long-term health of our brand and prospects for improved guest counts down the road remain strong.

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

Our third quarter had 233 company-owned comparable restaurants out of the 291 total company-owned restaurants.

Average weekly sales for these restaurants in our comparable base were 62,182 during the quarter, compared to 63,568 for those same units last year.

Average week's sales for the 44 non-comp units were 56,111 during the third quarter this year, compared to 59,299 for the 46 non-comparable restaurants the previous year.

The 17 franchise restaurants that we acquired in the second and third quarters of last year were added to the comp base during the third quarter of this year.

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

These 15 restaurants' AUVs were $54,562 during the third quarter of this year.

Our third quarter 2008 restaurant level operating margins of 18.5% were 180 basis points lower than the 20.3 margins in the third quarter of 2007.

Our 2008 margins included an incremental 50 basis point contribution to our national media funds.

Considering the challenging sales environment, our restaurant operators did an excellent job managing food costs and labor despite the volatility we saw in the sales during the quarter.

Specifically, we continue to make progress on managing our controllable labor costs through our operations focus, which combined with price increases from earlier in the year, have helped us offset increases in minimum wages on a year-over-year basis.

Additionally, the NRO initiatives that we've been working on continue to have a positive impact as NROs are normalizing margins at a faster rate than we have experienced in the past.

We've also continued to benefit from better management of pre and post-opening costs associated with our NROs as we implement various tactics and improvements.

On the talent front, this last quarter we implemented a new hourly team member selection process and tools to better select and retain the very best talent out there.

We firmly believe that what makes Red Robin's brand special are the people we surround ourselves with.

This selection process is very similar to the one we created and implemented 18 months ago for our salaried ranks, and we are very pleased with the results we have experienced so far with that group.

In addition this quarter, we continued to deploy additional progressive training modules focused around our fourth cornerstone, our [gift of time].

Each year you remember we focus on throughput within our four walls and even in this difficult economic environment we have restaurants breaking peak hour records and some eclipsing the $3,000 hour, which just reinforces the strong emphasis our guests put on being in control of their dining experience.

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

Building guest counts by delivering crave-able gourmet burgers in a wholesome, fun environment will continue to be the focus of our sales and marketing teams.

While the last of our 24 weeks of national advertising ends this--next week, we are very pleased with how guests have responded to our cable advertising this year.

The economy may be tough right now, but the guests are telling us more than ever how much they love Red Robin, so we believe that our brand building efforts overall are working.

We know that the tough economy is causing consumers to pull back, dine out less, and think about the value they're getting when they choose to dine out.

To capitalize on brand loyalty that we're achieving and to encourage guests to choose Red Robin, our latest round of media flights include reinforcement of the value attribute that is core to our brands, specifically our bottomless Red Robin steak fries and bottomless signature beverages, such as our Freckled Strawberry Lemonade.

Our local restaurant marketing teams are even more focused now than ever on reaching out to kids and families to build awareness for Red Robin and make a positive impact in the communities in which we do business.

Some of the community outreach efforts that are raising awareness for us and encouraging guest visits are school programs like Reading with Red and Certificates of Excellence for Outstanding Achievement, as well as local fundraisers with police and fire departments and Star Patient awards to promote wellness, just to name a few.

We're seeing evidence that these programs are generating positive brand awareness for Red Robin and continue to support our traffic driving efforts.

Also, next week, our holiday gift promotion begins.

This year, we'll be reintroducing our Gingerbread Shake, which is a seasonal favorite with our guests, and a great complement to our gourmet burgers and our other Red Robin entrees.

Gift cards and bounce backs are also part of the holiday season promotion and we're bringing them back again this year.

We have rolled out a third party gift program as well, primarily in Safeway and Kroger grocery store chains, to drive incremental traffic and get the Red Robin brand awareness out there.

It is too early to gauge the results, but we are excited about the potential this program has to offer.

Our eClub membership is now more than 1.5 million strong, and we continue to see that number climb higher and higher.

We are also utilizing our eClub data members to give us feedback when it comes to new food and beverage ideas, as various--and various promotions that we may be trying to gauge.

Finally, on December 5, we'll be holding our Third Annual Next Gourmet Burger Kids Recipe Contest here in Denver.

This year's championship competition attracted more than 14,000 entries nationwide from kids ages six through 12, and averaged 4,000 more entries than it did last year.

In fact, last year's champion, 12-year-old Joey Yarwick from San Diego, has become a bit of a young celebrity chef himself in the last 12 months and has been a guest on The Today Show now twice.

In a few weeks, Joey will have to pass his gourmet burger recipe crown to the young boy or girl who wins on December 5.

We can't share any of the 10 kids finalist recipes with you right now, but we can say that whatever they are, they will be crave-able, unique, and in the Red Robin tradition.

One more note on why this is such a great program for us.

Our Kids Recipe Contest not only reinforces what we're about - gourmet burgers, kids, and families, we also receive terrific media coverage for Red Robin and our charitable partner in this program, the National Center for Missing and Exploited Children.

This year, not only did we help generate awareness for the great work that the Center does to help kids and parents, but we were able to donate more than $100,000 to support the Center's programs.

So those are some of the operations and marketing highlights.

And with that, I will turn it over to Katie, so she can review our financial results in more detail.

Thanks, Eric.

First of all, if you haven't already seen our news release in the quarter's results--for the quarter's results, you can find it on our website at redrobin.com in the Investor Relations section.

The third quarter 2008 was a 12-week period ending October 5.

Total revenues for the quarter, which consist of restaurant sales and franchise royalties increased 10.6% to $208.6 million from $188.7 million last year.

Restaurant sales grew 10.8% to $205.3 million from $185.2 million and consisted of $170.2 million in sales from our 233 comp restaurants, 9.7 million from the 15 restaurants acquired in the second quarter of this year, and $25.4 million in sales from our 44 non-comparable restaurants.

As Eric mentioned, the 17 California franchise restaurants acquired in mid-2007 have been added to our comp base beginning in Q3 of this year, but the 15 franchise restaurants acquired in the second quarter of 2008 have not been included in our comp store metrics yet.

Franchise royalties and fees decreased 3.6% in the third quarter to $3.3 million, and exclude the royalty contributions from the 15 restaurants acquired in the second quarter this year, from which we recognized $384,000 in royalty revenue in the third quarter of last year.

The 94 comp restaurants in the U.S.

franchise system reported a 2.9% decrease of same store sales while the 18 comp restaurants in the Canadian franchise system reported a 1.9% increase in same store sales for the third quarter.

Our restaurant level operating profit margin was 18.5%, which compares to 20.3% reported last year.

The 180 basis point margin decline is attributed to approximately 80 basis points of higher food and beverage costs, approximately 120 basis points of increased operating costs, and 70 basis points of increased occupancy costs, which were offset by 90 basis points of labor cost improvement.

Our cost of sales increased by 80 basis points in the third quarter compared to last year.

The increase was primarily due to higher raw materials costs in almost every category, somewhat offset by menu price increases, favorable produce and beverage costs, and some mix shift to higher margin menu items.

Our labor costs decreased by about 90 basis points to 33.3% from 34.2% of restaurant revenue this quarter compared to the third quarter last year.

The improvement was largely due to both our continued focus on operations initiatives related to controllable labor and decreased insurance benefit and bonus costs.

Those decreases, combined with menu price increases, helped offset year-over-year increases in minimum wage as well as the deleverage of salaried labor.

Other operating costs increased about 120 basis points to 17.7% of restaurant revenue this quarter, compared to 16.5% a year ago.

The increase was driven by a 50-basis-point increase year-over-year in revenue contributions to national advertising funds from 1% of revenue to 1.5% in the third quarter of this year.

Utility and maintenance costs increased 70 basis points over last year, due to both cost increases and revenue deleverage.

Occupancy expense was 6.8% of restaurant revenues in the third quarter, or about 70 basis points higher than the same period a year ago, driven by a combination of higher year-over-year average rent expense and sales deleverage of this fixed cost.

Depreciation and amortization expense during the third quarter was 5.9% of total revenue, about 30 basis points higher than a year ago.

For the full year, we expect that our depreciation and amortization will be about 20 basis points higher year-over-year.

The increase is primarily a function of revenue deleverage on this fixed cost.

General and administrative expenses were 7.5% of total revenues in the third quarter of 2008 compared to 7.8% total revenues in the third quarter last year.

G&A expenses were lower in the third quarter of 2008 by about 100 basis points as a percentage of revenue due to lower performance based bonus expense compared to last year.

Stock compensation expense that is included in G&A was $1.9 million in Q3 of 2008, compared to 1.5 million in Q3 of 2007.

Remember that as we run our advertising through the year, the expenses will exceed the contributions in the advertising funds during certain periods.

So far, through Q3, we have incurred about $2 million of net advertising expense in our G&A - $650,000 in Q1 offset by about a $200,000 benefit in Q2, and then an additional 1.5 million of additional G&A expense in Q3.

In the fourth quarter, about $1.6 million of G&A expense will be reversed since the last of our 2008 media flights is scheduled for next week.

This is a similar trend to what we saw in 2007 where we incurred $1.6 million through the third quarter of 2007 in G&A related to advertising expense, which was reversed in the fourth quarter.

Our expectations for our full year G&A leverage is about 60 basis points less than 2007.

The majority of this year-over-year savings comes from a reduction in performance based bonus expense.

Our pre-opening expense in the third quarter was about $1.6 million higher than a year ago, due primarily to our--to opening 10 company-owned restaurants in the third quarter this year, compared to only five in the third quarter last year.

We have, however, made significant progress reducing the costs related to opening new restaurants, including better management of travel and other pre-opening expenses.

We are currently budgeting about $275,000 per unit for pre-opening expense.

During the third quarter of 2008, we determined that two restaurants were impaired based on a review of each location's past, present, and protected operating performance.

The carrying value of each location's assets were compared to fair value of those assets, resulting in a $928,000 asset impairment charge, of a $0.05 impact on diluted EPS in the third quarter.

Net interest expense of $2 million in the third quarter of 2008 compared to 2.5 million in the same period last year.

The decrease was primarily due to lower average interest rate of 3.9% in the third quarter of 2008, compared to 6.8% in the third quarter last year, offset partially by additional borrowings under the company's credit facilities related to the franchise acquisitions and share repurchases during the second quarter of 2008.

Our effective tax rate for the third quarter was 21.6%, compared to 31% in the third quarter of 2007.

The decrease from 2007 is attributed primarily to lower net income and increased tax credit.

We are currently forecasting our full year 2008 effective rate to be approximately 27%.

Net income for the third quarter of 2008 was $6.2 million, or $0.40 per diluted share, compared to net income of $8.2 million, or $0.49 per diluted share, in the third quarter of 2007.

Excluding the impact of the asset impairment charge, our non-GAAP third quarter 2008 earnings per diluted share was $0.45.

Our third quarter 2007 net income included a $0.01 per diluted share charge for reacquired franchise costs.

Excluding that one-time charge, our non-GAAP net income for Q3 2007 was $0.50 per diluted share.

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

Looking at the cash flow statement, our cash from operations of 66.9 million year-to-date continued to exceed our development capital expenditures of 65.2 million.

The balance outstanding under our line of credit facility at the end of the third quarter was 214.9 million with about another 80.6 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.

You may recall that we amended our credit agreement June 2007 just ahead of the tightening in the credit markets.

So we will be benefiting from this agreement through mid-June of 2012.

Taking into consideration our full year capital expenditure estimate of around $80 million, our franchise acquisition, our completed share repurchase, and our operating cash flow, we expect our outstanding debt at the end of fiscal 2008 will be around 223 million, including $5 million in letters of credit.

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

Our leverage ratio covenant in our credit agreement is based on our last 12 months of EBITDA, excluding non-cash charges, such as stock compensation expense and impairment charges.

We are currently well below our leverage ratio covenant maximum of 2.5.

As Denny mentioned earlier, we will be able to fund our 2009 development out of cash flow and have additional cash available in 2009 to utilize as we deem appropriate.

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

As the pressure on the consumer has intensified we have seen declines in sales that we believe will continue through at least the fourth quarter.

In order to illustrate our thinking about fourth quarter sales, we deviate from our policy regarding monthly comps or sales metrics.

Specifically, for our full year revenue, comps, or sales assumptions, we have taken into account that our comparable sales in the first four weeks of the fiscal fourth quarter have declined 8% and that we have slightly easier comparisons as we [lap] the last two months of 2007.

Therefore, we have revised our full year 2008 financial guidance to reflect a more cautious view.

We plan to give guidance on our 2009 expectations along with our year-end earnings announcement in February as has been our practice in the past.

For the fourth quarter of 2008, which is a 12-week quarter, we expect to open one more company-owned restaurant in addition to the three we've already opened so far this quarter.

We expect our franchisees to open three new restaurants this quarter, one of which opened last week.

That would bring the total to 31 new company-owned and 10 new franchise restaurants opened during the fiscal year 2008 in line with our full year development plan.

For the 2008 fiscal year, which is a 52-week year, we expect revenues of $868 million to $873 million.

Our projected revenue is based on certain assumptions, including an expected comparable restaurant sales decrease of approximately .5% to 1%, which includes a full year weighted price mix of 3.6% assuming no additional price increases for the remainder of the year.

Our full year net income per diluted share on a GAAP basis is expected to be $1.65 to $1.75, which includes $0.03 of acquisition related one-time expenses and $0.04 of asset impairment charges.

Excluding these one-time expenses, our non-GAAP EPS is expected to be $1.73 to $1.83, down from prior guidance of $1.90 to $2.05.

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 of 2008 are expected to remain under pressure.

We expect about a 200 to 220 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 lower margins for 2008 is the additional 50 basis points in advertising, which will total around 18 million system wide this year, compared to $11.2 million last year.

Our cautious view of our top line sales expectations is the primary driver of the margin deleverage we have modeled for the fourth quarter of 2008.

I want to remind everyone that now $220,000 of pre-tax earnings or expense for us equals $0.01 per diluted share for the full year of 2008, which is equivalent to less than three basis points as a percentage of revenue.

And every 1% change in GAAP count in the fourth quarter equates to about $0.03 of diluted earnings per share.

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

Thanks, Kate.

While it is still a difficult operating environment, we remain focused on the things we can control, such as our continued efforts to grow sales, increase restaurant operating efficiencies, maintain our financial flexibility, streamline our development costs, and build the Red Robin brand.

As always, I want to thank our team members who welcome guests 14 shifts a week, and the team members here in the home office and in the field who support them, for making sure we always deliver great gourmet burgers and excellent service to our guests--that our guests expect.

Because of their passion and talent, we will build the Red Robin brand, grow our company, and overcome any obstacles to our continued success.

With that, we're ready for your questions.

Thank you.

Operator?

(OPERATOR INSTRUCTIONS.) And we will take our first question from Matt DiFrisco with Oppenheimer.

Thank you.

I jumped on the call a little bit later than the beginning, so I apologize if this was mentioned.

But given the incremental advertising spend that you are doing, do you think this is the environment--if we're doing a negative comp this significantly, do you think there is a--as another response could we pull back the advertising for the fourth quarter or anything that might be planned for the first quarter to defend margins a little bit and wait for a day when the consumer might have some more dollars in his pocket to respond to the advertising?

Matt, good point--or good question.

The fourth quarter advertising is over next week, so there's no opportunity clearly on the national plan to pull that out.

That was--and that was purchased in '07.

In terms of the '08 plans, we're currently looking at that.

We're talking to franchise partners, we're looking at the environment.

We'll talk about our plans consistent--as we have in the past on the February call and that will include whatever we're doing in the marketing arena.

Okay.

And then, also, just thinking about G&A in the fourth quarter.

Is that still going to be a significant point of leverage in your guidance assumptions, or has that also--obviously, with the sales still coming down, I mean, I could figure that out.

But as far as--has anything changed as far as absolute dollar terms potentially being flat to maybe even down than a year ago?

We still believe that full year we'll get 60 basis points of leverage over last year's percentage.

So that includes the $2 million--or the 1.6 million we'll reverse from the marketing spend that we already had forecasted.

So that plus some bonus reversals in Q4 that we are just newly forecasting will help gain that EPS.

Okay.

And then, can you just remind us on--was that pricing consistent [for the fourth] quarter in your assumption for the embedded in the fourth quarter comp?

The fourth quarter--the previous price that we had embedded as 4.0.

We've revised that to the price mix of 3.6 for the full year.

Can you tell us--just help me with the math.

What is that for the fourth quarter?

It's about 2.2 for the fourth quarter.

Thank you.

Thanks very much.

Thanks, Matt.

And we'll move to our next question from Brad Levington with Keybanc Capital Markets.

Thank you.

Just to follow-up on the G&A, I mean, on the off chance--I know the environment is negative and this is very unlikely.

But on the off chance that the sales improve a little bit, traffic improves some in November or December, is there a possibility that some of those bonus reversals will come back and hurt your G&A leverage?

No.

Okay.

And then, looking into '09, is there any idea of the timing of those up to 20 openings, or is that still not set in stone at this point?

As we said, nine or--I believe it was nine--are under construction, which will be open in the--through the first quarter, which is a 16-week quarter.

Some of them may dribble over into the second quarter, but when we decided to slow it down from the pace we were on, it was a--most of those will be front-end loaded for '09 then.

So we had--we could have as many as nine of the up to 20 in the first quarter of next year.

Okay.

And if--do you think there's any risk in any of these commercial developments being pushed back or cancelled that you're planning to open in '09?

Well, there's always a risk, especially as you get later in the year and we monitor those even if the sites have been approved.

So we have--until we actually go under construction, we try to maintain as much flexibility as possible to make sure that the developers are delivering what they said they were going to deliver.

Okay, thank you very much.

Thank you.

And we'll move to our next question from John Glass with Morgan Stanley.

Thanks.

In our fourth quarter comp guidance, you're assuming things get better from the down eight in October, I presume?

If I quickly back into it, you're looking for what, more of like a down five for the quarter?

Is that true or no?

Yes, between down five and down seven, but we get easier comparisons in the last two periods of the year.

Is there any evidence yet though to date that things have actually gotten better?

It's only two extra days, so I think it's a little too early to comment on that, but we had negative eight for the first four weeks.

Got you.

And then, you're talking about up to 20 units next year and I appreciate it's a pullback from earlier, but it isn't a change from I think when you talked about that over the summer.

Why not?

Can you not slow down more?

One would think that opening nine stores in the first quarter when things may be even worse than they are now would not be optimal (inaudible).

Well, when we talked at the last call, those nine were committed well along and once we felt very comfortable with the rest of the stores for the development plan as we have the ability to take--slow those down if we so choose as we continue to monitor the environment.

So beyond the nine, you could cut back is what you're saying.

And our new openings are doing very well in the markets that they're in.

Got you.

And then, Katie, you mentioned your covenants - 2.5 times coverage is the--I guess is what you need to achieve.

What will you be at for the year based on your new guidance?

It should be just over two or two and a smidge.

So you're just over two times the EBITDA coverage versus the 2.5 times that you need?

Right.

And what happens if you went above--what if you broke the covenant?

What is the remedy?

We don't plan to.

But there is a cure in the debt covenant probably?

We'd probably have to go and ask for a waiver.

Okay, which would imply a higher interest rate probably?

That's purely speculation at this point.

That's pretty far out, so I--.

--We've got a lot of room in that 2.5 covenant.

And if we projected forward, if there was any issues moving towards it, we would take other courses of action.

Okay.

And then, just I guess any optimism on the commodities front, given that seems to be one area where there may be some possible relief in '09.

Have you discussed that with any of your vendors this--for next year?

Well, there is not much optimism on the commodities front compared to this past year.

Certainly, some commodities are coming down, but the drivers for us are hamburgers and French fries, and those are difficult issues which we're working on.

So we expect upward pressure on both of those on the commodity front and as long as we're on the cost pressure front we might as well talk about minimum wage.

We've got automatic minimum wage that's tied to cost of living kicking in January 1, which will cost about 40 basis points due to those states.

Thank you.

Yes.

And we'll take our next question from Joe Buckley with Bank of America Securities.

It's actually Steven Barlow for Joe.

I guess could you discuss comp trends regionally and then what you're seeing at lunch versus dinner on a sequential basis?

Well, I'll answer the first question--the last question first.

The lunch/dinner mix has not changed on a year-over-year basis.

So no change there - still about 50/50.

The regional--we commented because it was material when we saw California, Arizona, and Nevada decline, I'd say from the decline comps it's been generally across the board, not in any one particular region in any material respect.

And then, back to commodities, do you have any contracts coming up in the fourth quarter?

Our hamburger contract expires with--this is the first year we've been on a fixed contract with hamburger.

It expires at the end of this year.

Thank you.

And we'll move to our next question from Nicole Miller with Piper Jaffray.

Good afternoon.

Katie, what tax rate for next year just given the volatility in the tax rate this year?

It will depend on our forecast for 2009, which we haven't given any insight on at this point.

Okay.

And CapEx for this year, is it still going to be in the range of 80 to 85?

We'd say approximately 80 now.

Okay.

And does 60 next year seem reasonable?

I guess we can just do the same--back in to how much per store.

Yes, and it's about--we run an average of about 2.2 per unit, plus about 2.75 in pre-opening.

Okay.

And you still have poultry contracted through what part of '09?

['10].

All of '09.

All of '09.

And is there anything contracted for next year?

Yes, Nicole.

We have, obviously, as we said, poultry through December of '09, our seafood contracts are through December of '09, as well as our bacon contract through December '09.

We've got our new prime rib contract through September of '09, cheese through April of '09, fries that we just recontracted through October of '09, bread through April of '09, oil through October '09, and then mayonnaise and dressings through April of '09.

That's a lot.

So given all of that, what is the general inflation that you're seeing so far?

It's--we still--as of today we're still--fries was just done like within the last hour, so we're still running that and the big one is--the big wild card is hamburger.

The hamburger market's substantially above where we are on our contract right now, so we're waiting, negotiating, and we are pretty fairly confident that we will not sign a full year contract and I'm fairly confident that the suppliers wouldn't sign a full year contract on fries--I mean, on hamburger again.

We need to get that better quantified.

Okay.

So general kind of industry rates of inflation on the things that are contracted?

I don't know about industry rates, but we--they have been marginally up for the ones we've contracted with oil, fries, and hamburger being the biggest ones, which happens to be the three that we use the most of--or the chicken, which is last year's price.

And just thinking about advertising for next year, what is--do you expect to hold the percentage (inaudible) at 1.5?

And what kind of dollar amount and weeks would that translate to?

I think I answered that with Matt's question is that we're working on the media programs and plans with the franchise partners and our advisors at this point and haven't formulated definitively what we're going to do and to the extent certainly given this environment, and we'll get that quantified as we go forward.

In the past two years we haven't started the media plans for--until sometime between mid-February and April anyway.

Okay.

And we wouldn't expect to start anything this year if we did it until that same timeframe.

And just so we can be better educated, it sounds like you can--you don't have--you can buy that kind of right in front of actually turning it on?

Well, you need some lead time, but you don't have to buy way up--you don't have to buy in the upfront markets like six or 12 months in advance.

And just a final question.

As you think about that, what are you thinking about as the tone?

I mean, it would just be more branding message or do you feel like you could add a value component to that message?

We said in the third quarter call that we--as we look forward we will move from branding to product news, new news.

And we have a number of new products in the pipeline that we've been working on that would fit that bill in terms of new news.

Whether that's done on national television and/or some other vehicle remains to be seen.

Thank you.

Yes.

And we'll move to our next question from Steven Rees with JP Morgan.

Hi, thanks.

Denny, we're seeing a lot of discounting and extreme value promotions out during the (inaudible) sector and specifically in (inaudible) with some coupons for sandwiches and what not.

Do you think this is impacting business in any of your markets?

And I guess I'd just be curious about your general thoughts on the discounting out there and if you think you need to participate in some way.

Well, that's the ultimate question - discounting.

We are not going to participate in discounting, have not.

If we do--if we do product promotions and they're at a different price, they wouldn't be an off menu item.

So we want to protect the integrity of the menu and the brand.

So we don't expect that we'll participate in the discounting frenzy that's going on.

And I think with everyone with down sales trends, I think it's fair to say that I'm not sure that anyone's taking a significant market share in this environment.

Right, that's for sure.

And then, just, Katie, I mean, one of the things you guys talked about at your Investor Conference last year was the opportunity to improve the new store opening margins and it looks like you made a lot of improvement on the sales this year.

They've been pretty steady.

But can you just talk about how the new stores are opening up from a margin perspective?

I think you showed a chart that showed them at like a low double-digit rate and then ramping up to the system average over three years.

Have they improved and has that ramp-up time changed at all?

Yes, Steven.

Houseman here.

I'll answer that one.

We have seen dramatic improvement that we're pretty happy with, both from the top line as well as how these restaurants are normalizing.

We're still fairly into this year.

Some of the restaurants that opened in second or third quarter are still coming off their honeymoon and have only been open 10 weeks after that.

But we are seeing great improvement and really seeing those things close the gap from that three-year run rate that we were experiencing.

Okay.

And then, just finally on the pricing.

It looks like you dropped off to I believe you said 2.2 in the fourth quarter.

I mean, how are you thinking about pricing next year?

2008 was a pretty high pricing year for you all.

It sounds like commodities are going to be up.

I mean, do you think you have room to take pricing in '09 close to what you took in '08?

Well, the short answer is we haven't decided.

'08 was a price--a fairly aggressive pricing year for the industry in reaction to--the shock reaction frankly to the commodities driven by corn, et cetera.

So we--at this point, we're not taking price--we have a 30 to 45-day window once we make the decision to pull the trigger to do a menu run assuming we're not changing products on that menu.

But we're very cautious about pricing in this environment.

Okay, great.

Thank you very much.

And our next question comes from Destin Tompkins with Morgan Keegan.

Thanks.

Katie, I had one clarification first.

I think you were saying on the debt covenants, if you assumed your guidance for the remainder of the year, that would put you at a little over two times at the end of the year.

Is that correct?

That's right.

Is that a fully loaded debt to EBITDAR or is it booked to EBITDA?

How--?

--It's EBITDA and we get to add back non-cash charges, which would be all of our stock compensation expense and the impairment charge.

So those are added back to the trailing 12-month EBITDA calculation.

Okay.

And then, on the G&A, the--obviously, the lumpiness of advertising, it sounded like it came in at 1.5 million this year--or this quarter.

This quarter, right.

And you had previously said at 2 million.

Is that correct?

No, I think it was 1.6, so we were just a little bit shy of what we booked in Q3.

And if you backed that out, was there--what else--kind of what helped keep--manage G&A a little bit lower in the quarter?

Bonus.

Lower performance bonuses.

Okay.

And then, lastly, on labor, is there an opportunity that you can sustain the favorability that you've been running in labor?

Does it get a lot harder as you [lap] some of the benefits you saw in Q4 of last year?

Can you--?

--Yes, Q4 is going to get a little more difficult.

We just started seeing some benefit of--as Eric said, our focus on labor last fourth quarter and really hunkering down on these NROs they're really benefiting us.

So can we sustain it?

That's a good question.

I mean, we'd like to think we can, but our adjustment doesn't include--or our forecast for Q4 doesn't include a significant benefit.

Great, thank you.

And our next question comes from Jeff Omohundro with Wachovia.

Thanks.

Just a--I guess another question on the menu.

Is the planned update on the menu for Q1 still on track?

And if so, how significant an update are you expecting?

Jeff, right now we're taking a look at a lot of different things in the pipeline.

We will do a new menu run sometime in Q1.

There's still a lot of questions out there in terms of price, if any or how much.

So it won't be in the January timeframe.

But when we do a new menu run, we will make some changes.

Okay.

It won't be significant.

You're not going to see steaks on the menu or something.

Okay.

And then, on the labor leverage in the quarter, which was clearly quite significant, I wonder if you could give us just a bit more color around how you achieved that?

What controllable areas really benefited you?

And also, an update on staffing levels and changes in staffing levels.

Thanks.

We'll let House talk about staffing levels.

Well, in terms of the initiatives that we've been talking to, a lot of those obviously are the benefit that the NROs in terms of from a labor standpoint are becoming normalized sooner, so there's less drag on the comp base, as well as in the comp base we've--obviously our focus utilizing our proprietary scheduling software program, New Stars, we've seen some great efforts, as well as looking at different ways in terms of how we're doing things in the heart of the house.

We're fully staffed at the--both in the comp as well as the NRO environment.

I think as we talked about before, one of our initiatives is getting far enough ahead with seasons, [GNs and cans].

And we've almost already identified--I think we have identified 95% of the GNs and cans for the 2009 openings, so that's helping as well.

I did mention that we're implementing our team member selection program.

We have been utilizing that tool at the management ranks and we've been seeing some decent reduction in terms of turnover, so we're pleased with where we stand from a people standpoint.

We also continue to see some a reduction in our benefits cost, including our workers' comp insurance.

We're seeing some nice savings there and have all year long.

Thank you.

And we'll take our next question from Conrad Lyon with Global Hunter Securities.

Yes.

Let me just follow up on the labor question.

And maybe this is geared towards you, Eric.

How flexible are you with your staffing, given if the comps are going to be down 8%, is there opportunity to have fewer people on the floor during those periods where you think your sales are going to be weaker than normal?

Great question, Conrad.

Yes.

Our program takes into a very sophisticated sales forecasting program, so obviously, it's built around our parameters of four table sections, that kind of thing.

So it naturally does that based on a reduced forecast in sales, so you don't give up the service aspect of it.

Got you, okay.

One other question, and maybe this goes towards Katie.

I just want to double check here.

What's it looking like to build out a unit these days?

It's about 2.2 million CapEx, and then about 275 for pre-opening expense.

Okay.

About 2.2.

All right.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS.) We'll go with a follow-up question with Brad Levington with Keybanc Capital Markets.

Thank you.

Just a quick follow-up.

Denny, you mentioned that the January 1 minimum wage increases would be 40 basis points.

Would that be in those states where they hit or system wide?

That's system wide.

That's the effect of the system wide increase.

Okay, thank you very much.

Thank you.

Operator?

And it appears there are no further questions today.

Okay.

Thank you very much.

Thank you all very much.

We appreciate it.

Go Red Robin team members!

Thanks, guys.

And once again, this does conclude today's conference.

We thank you for your participation and ask that you have a wonderful day.