Red Robin Gourmet Burgers Inc (RRGB) 2008 Q4 法說會逐字稿

Good afternoon, and welcome to the Red Robin Gourmet Burgers Inc.

fourth quarter 2008 financial results 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.

Please go ahead.

Thanks, Jake.

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 margin, 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 undue circumstances that might arise after this call.

These forward-looking statements are not guarantees of future performance and therefore investors should not place undo 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 one and two 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.

Thanks, everyone, for joining us today.

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

Eric will provide some details on fourth quarter results as well as an update on our operations initiatives, and Susan will talk about what we are doing on the marketing front to drive guest traffic in the current business environment which continues to be very challenging.

And then Katie will review in detail the most recent financial statements and discuss our business outlook.

But first let's start off with a quick review of the fiscal 2008 results compared to fiscal 2007.

Total revenues increases almost 14% to $869.2 million, while Company-owned comparable restaurants sales decreased 1.4% for the full fiscal year.

Restaurant level operating profit increased 2.8% to $157.2, our 18.4% of revenue compared to 20.5% a year ago.

GAAP basis diluted earnings per share for the fiscal year 2008 were $1.69 compared to $1.82 last year and $0.38 for the 2008 fiscal fourth quarter compared to $0.60 in the fourth quarter 2007.

Adjusted or non-GAAP diluted EPS for the 2008 fiscal year were $1.81 compared to $1.98 in 2007, and $0.43 in the 2008 fourth quarter compared to $0.60 in the fourth quarter a year ago.

In 2008, we acquired the assets of additional 15 existing franchise Red Robin restaurants in four states which added more than 25 million in sales and $0.06 per diluted share to our results.

And finally, in 2008 we opened a total of 41 new Red Robin restaurants, 31 Company-owned and ten franchise locations ending the year with 294 Company-owned restaurants and 129 franchise locations for a total of 423 Red Robin locations in North America.

We are proud of what we accomplished - - we were able to accomplish in 2008 despite all the macroeconomic challenges.

We have again updated our development plans and are on target to open 13 to 14 new Company-owned restaurants in 2009.

Almost all of these openings will be in the first half of this year.

Three Company-owned restaurants have opened already and ten are under construction.

We will continue to fund new restaurant development this year from our operating cash flow.

We expect our franchisees to open a total of seven to eight restaurants - - new restaurants in 2009.

Two of these have already opened and one is under construction.

We have not made any development decisions for 2010 at this time.

We will maintain broad flexibility and strong discipline in any commitments we make to enable us to alter our plans depending on our performance, the macroeconomic environment, and the status of individual development projects.

We expect to have many options available to us ranging from conversions of former restaurants and shopping center end caps to free standing units.

Last week we completed a cash tender offer for certain stock options held by 514 current team members and officers.

Approximately 96% of the eligible stock options were tendered.

Granting stock options and other equity incentives is a material component of our long-term compensation philosophy.

After a comprehensive review of our compensation program and the impact of the decline on our common stock price on incentive awards, we determined that the tender offer was consistent with restoring the incentive value of our long-term awards as many of our team member stock options were substantially underwater.

Also as a result of this tender offer future compensation expense associated with tendered unvested options will be eliminated.

As will the overhang associated with outstanding options that are no longer an effective incentive.

Any options that were tendered under the 2007 performance incentive plan will also provide additional capacity for future incentive grants under that plan.

We expect that the majority of after-tax proceeds received by our senior officers from the tender offer will be used to purchase Red Robin common shares in the open market during the open trading window.

So those are the headlines.

Obviously, we are in the midst of a very difficult economic environment for restaurant operators and customers alike.

We are working through the challenges we face with a focus on the factors that we can control.

It is difficult to predict the business impact of current macroeconomic environment along with the elimination of our national cable advertising.

Which led to our decision not to provide earnings or revenue guidance for 2009 at this time.

We are continuing to take action to drive efficiencies across all levels of our organization to overcome these challenges, and we are proud of our talented team members for their contributions for these efforts.

For 2009 our focus will remain on driving guest traffic, reducing costs, and generating free cash flow.

With that I would like to turn the call over to Eric.

Thanks, Denny.

Good afternoon, everyone.

In the fourth quarter of 2008 our comp store sales decrease of 7.4% was driven by a 9.6% decrease in guest counts partially offset by a 2.2 increase in average check.

Please note that the extremely poor weather in December in the Pacific Northwest where nearly one-fifth of our Company-owned restaurants are located, negatively impacted our total comp store sales by about 1% during Q4.

For comparison we reported a 2.7 comp store sales increase in the fourth quarter of 2007 driven by a 1.5% decrease in guest counts that was more than offset by a 4.2 higher price in mix.

Clearly we are facing challenges and guest counts in this difficult environment.

During the first seven weeks of the 16-week first quarter our comp store sales were down 4.6%.

We expect the first quarter of 2009 to be the most difficult comparison of the year as we go up against our most successful quarter of 2008 in which comps were up 3.8%.

We are just now going up our advertising that began on February 4th of last year, so for those next few weeks we expect to see our comp store comparisons get even more challenging.

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

Our fourth quarter had 241 Company-owned comparable restaurants out of the 294 total Company-owned restaurants.

Average weekly sales for the restaurants in our comparable base was $57,073 during the fourth quarter of 2008, compared to $61,635 for the same restaurants in the fourth quarter of last year.

Average weekly sales for our 39 noncomparable restaurants was $55,188 during the fourth quarter of 2000, compared to 54,022 for the 41 noncomparable restaurants a year earlier.

The 15 franchise restaurants that we acquired in the first half of 2008 will be included in the comparable base beginning in the third quarter of 2009.

These 15 restaurants AUVs were $50,228 during the fourth quarter of 2008.

Our fourth quarter 2008 restaurant level operating margins of 17.1% were well below the 21.4% margins in the fourth quarter of 2007.

While our 2008 margins included an incremental 50 basis point contribution to our national advertising fund, they are also impacted by higher cost in sales and overall fixed cost deleverage.

Despite these challenges our restaurant teams continue to manage to control the costs.

For example the great job our teams are doing to manage control of the labor costs helped offset our minimum wage increase in 2008.

We are continuing to make progress on NRO initiatives that are helping us normalize profit margins in our new restaurants at a faster rate than ever before.

Our teams both within and outside the restaurants are making great progress on the cost reduction front identifying ways that we can reduce costs related to food and beverage, energy consumption, development, occupancy and elsewhere.

In addition, last month we launched a new leadership program at our annual Leadership Summit that supports the development and growth of our operation leaders by adding techniques and training that helps our team members to live a consistently outstanding, great Red Robin guest experience.

We are calling it "Making the Connection".

In order to create loyal guests and increase our frequency.

We believe that this type of training is critical during tough economic times on a number of fronts.

First, typically during these times training and service are the two areas that often erode at restaurants.

But we refuse to let that happen at Red Robin because we believe we can take market share by out-executing our competition and increase frequency by providing legendary service.

Second, this training sends the right message to our internal team members that we are investing in their personal development.

Finally, during uncertain times people want a common vision to rally around and focus on and this program is already accomplishing that during the national rollout which is underway next week.

So with the overview of operations, let me turn it over to Susan to talk about some of our current traffic driving initiatives.

Thanks, Eric.

Our main driver of brand awareness in 2007 and 2008 was our Department of Deliciousness advertising campaign on national cable television.

The intent of this national campaign was to drive brand awareness and understanding especially in our newer markets.

And based on our latest third party research we achieved this goal.

We drove higher brand awareness in all markets with significant gains in our less established Red Robin markets.

Also, the campaign drove strong gains in trial as new guests saw our ads and they came into try us.

In the second half of 2008 while we continued our brand building campaign on national cable TV we began to see a slowdown in incremental traffic.

So to help inform our 2009 plan we tested both pricing and product news on TV in two markets in Q4.

Based on this test and the overall results of our advertising in the second half of 2008 we concluded that in this current economic environment it would be more prudent to capitalize on the awareness gains and focus our marketing dollars on more targeted traffic driving and retention initiatives in 2009.

Therefore we made the decision to reduce our contribution to the national advertising fund to 0.25% of revenue in 2009, down from 1.5% in 2008.

We believe awareness and purchase intent for Red Robin remains strong in this current environment even without national television.

We feel the TV momentum has helped us in recent new restaurant openings.

Two of our new restaurants last month broke Company records in their opening weeks.

In 2009, we are investing significantly more in our national online plan which continues to work really well for us as well as targeted direct mail campaigns and local initiatives which all support product news.

We will focus our marketing communication on our innovative Gourmet Burgers, variety, Honest to Goodness quality and our bottomless value.

We are also directing more resources in 2009 to loyalty and retention efforts.

Our eClub continues to be a key marketing vehicle for us having grown more than 40% annually for the past several years, more than 1.7 million members at the end of 2008.

In addition to launching the new program to encourage loyalty and repeat traffic, we are also focusing on driving incremental traffic through a stronger emphasis on gift cards.

We will have more card options available in our restaurants and online where our consumers are shopping for gifts.

And we'll continue to expand in third party retailer locations across our markets.

Our gift card sales were up 15% in 2008 versus prior year.

Driven in part by expanding into third party retailer locations starting in mid-August of 2008.

We now have our branded cards available in nearly 2,200 retailer locations with plans to expand to at least 1,000 more locations in 2009.

Public relations and local restaurant marketing also remain key components of our marketing plan.

We remain heavily involved with schools and organizations in our local communities.

We support programs that help build traffic and brand relevance at the grassroots level, and we generate media coverage with many of these events, charity partnerships, new restaurant openings and community activities such as our Special Olympics Tip-a-Cop programs and, of course, our annual Gourmet Burger Kids Cook-off which supports the National Center for Missing and Exploited Children.

Also for the last three years we have conducted ongoing independent research studies to monitor our brand equity scores and business drivers among both current and potential guests.

The results continue to show that we have high guest retention and our guests recognize and appreciate what sets us apart including our Gourmet Burgers, our great quality, our fun family-friendly environment and of course our gift of time.

So, again, we will continue to reinforce these strengths in all of our communications.

One last note.

We piloted a new restaurant level web and telephone survey that asked for feedback from guests at the end of their visit.

We have been getting strong participation in these surveys and are really encouraged by the actionable results and value that this is adding to our brand.

We plan to launch this guest satisfaction survey in all Company and several franchise restaurants by the end of this quarter.

So those are some of the marketing headlines.

Now I'll turn the call back over to Katie to review the financial results.

Thanks, Susan.

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

Our fourth quarter 2008 was a 12 week period ending December 28th.

Total revenues for the quarter which consist of restaurant sales and franchise royalties increased 8% to $198.6 million, from $183.8 million last year.

Restaurant sales grew 8.4% to $195.6 million from $180.4 million and consisted of $161.4 million in sales from our 241 comp restaurants, $9.2 million from the 2008 acquired restaurants, and $25 million in sales from our 39 noncomparable restaurants.

As Eric mentioned the 15 franchise restaurants acquired in 2008 have not been included in our comp store sales metrics yet.

Franchise royalties and fees decreased 14.1% in the fourth quarter to $3 million and exclude the royalty contributions from these 2008 acquired restaurants from which we recognize $365,000 in royalty revenue in the fourth quarter of 2007.

The 96 comp restaurants in the US franchise system reported a 5.3% decrease in same-store sales while the 18 comp restaurants in the Canadian franchise system reported a 0.5% increase in the same-store sales for the fourth quarter.

Our restaurant level operating profit margin was 17.1%, which compared to 21.4% reported in the fourth quarter of 2007.

The decrease is attributed to commodity cost pressures that we have experienced throughout 2008 and also the deleveraging of fixed costs as we saw declines in average restaurant sales volumes from the fourth quarter of 2007.

For the full year our restaurant level operating profit margin declined to 18.4% from 20.5% in 2007 or 210 basis points which is about what we expected.

Depreciation and amortization expense during the fourth quarter was 6.5% of total revenues, about 60 basis points higher than a year ago.

For the full year depreciation and amortization was about 20 basis points higher year-over-year primarily due to revenue deleverage and the increase in the assets we acquired in 2007 and 2008.

General and administration expenses were 5.9% of total revenues in the fourth quarter of 2008 compared to 7.6% of total revenues in the fourth quarter 2007.

G&A expenses were lower in the fourth quarter 2008 by about 1.3% as a percentage of revenue due to lower performance based on acquisitions bonus expense.

In 2008, we reversed 1.2 million of bonuses in the fourth quarter compared to $2.4 million in bonuses which were accrued in the fourth quarter of 2007.

Also in the fourth quarter 1.5 million of G&A expense was reversed as the last of our 2008 media prints ran in mid-November and contributions to the advertising fund continued through the remainder of the quarter.

This was similar to the $1.4 million reversed in the fourth quarter of 2007.

For the full fiscal year general and administration expense was $64.4 million, or 7.4% of revenue compared to $51.8 million, or 8.1% of revenue for the same period in 2007, or about 70 basis points of leverage, close to what we expected to see.

Included in the general administrative expense for fiscal year 2007 was $6.4 million of performance-based and acquisition bonus expense for which we did not accrue any expense in fiscal 2008.

Our preopening expense in the fourth quarter was about $435,000 lower than a year ago.

Our preopening costs per unit was $264,000 for the fiscal year 2008 compared to $280,000 per unit in 2007.

We are currently budgeting about $285,000 per unit for preopening expenses for our 2009 NRO.

We plan to close four underperforming restaurants during the first quarter of 2009.

This decision which was reached during the fourth quarter of 2008 was the result of an initiative to identify those restaurants new or old that are performing under acceptable profitability level and are in a declining trade areas and/or require significant capital expenditures.

As a result of the decision to close these locations during the fourth quarter of 2008 we recognize non-cash asset impairment charges of $978,000 related to the (inaudible) carrying value of the long-lived assets associated with two of these restaurants.

We are currently anticipating that additional charges of up to $800,000 will be recognized during the first quarter of 2009 related to lease terminations and other closing related costs.

Net interest expense was $2.1 million in fiscal fourth quarter 2008, compared to $2.5 million in the same period in 2007.

The decrease is due to a lower average quarterly interest rate of 4%, compared to 7.2% in 2007 personally offset by additional borrowing under our credit facilities related to the franchise acquisition and share repurchases during the second quarter 2008.

Our effective tax rate for the fourth quarter was 24.9% compared to 25.3% in the fourth quarter 2007.

A decrease from 2007 is attributed primarily to lower net taxable income and increased tax credits.

We are currently forecasting our full year 2009 effective tax rate to be approximately 27%.

Net income for the fourth quarter of 2008 was 5.8 million, or $0.38 per diluted share compared to net income of $10.1 million, or $0.60 per diluted share in the fourth quarter of 2007.

Excluding the impact of the asset impairment charge our non-GAAP fourth quarter 2008 earnings per diluted share was $0.43.

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

Looking at the cash flow statement.

Our cash from operations of $91.1 million in fiscal 2008 exceeded our development capital expenditures of $83.2 million.

On December 28, 2008, we had $11.2 million in cash and cash equivalent and we had a total outstanding debt balance of $222.6 million including $133 million in borrowing, and our $150 term loan, $82 million of borrowing and $4.1 million of letters of credit outstanding under our $150 million revolving credit facility.

We will make scheduled payments of $15 million required by the term loan portion of our term loan portion of our existing credit facility in 2009.

We are subject to a number of customer covenants under our credit agreement.

And as of December 28, 2008, we are in compliance with all debt covenants and we expect to remain in compliance through fiscal year 2009 which I will elaborate on in a moment.

Now let's talk about our outlook for 2009.

For the first quarter of 2009 which is a 16-week quarter, we expect to open seven new Company-owned and three new franchise restaurants.

Three new Company-owned and two franchise restaurants have already opened during the first quarter of 2009, and ten Company-owned and one franchise restaurant are currently under construction.

As we said earlier during fiscal 2009 we now expect to open 13 to 14 new Company-owned units and franchisees are expected to open seven to eight new restaurants.

As Susan mentioned for fiscal 2009, we have reduced the amount that all Company-owned and franchise restaurants in our system will contribute to the national advertising fund to 0.25% of the restaurant revenue, which is down from the contribution of 1.5% of revenue in 2008.

Now depending on actual revenue performance in 2009 this contribution change could result in approximately $11 million less in the Company's advertising expenditure in 2009 or about $15 million on a system wide basis.

We will now be providing full year EPS of revenue guidance at this time.

For fiscal 2009, which is a 52-week period we expect comparable restaurant sales to decline based on the current macroeconomic environment and the elimination of our national cable television advertising which will create more difficult comparisons during certain periods.

We are not currently planning any menu price increase for 2009 but we will carry 2.2% price mix into 2009.

We will roll off 0.3% in April and the remainder will roll off the last week of June.

Regarding commodities, our cost of ground beef during 2008 was locked at favorable pricing compared to the stock market.

In 2009, we expect an increase in ground beef prices above our 2008 contract as we have only lost less than half of our ground beef at prices above last years contract.

We have chicken costs contracted through the end of 2009 at the same price of 2008 and cost of our steak fries will increase during 2009 as many farmers planted higher-profit grains during the 2008 planting season, and in turn reduced the potato crops planted.

In addition, we expect certain costs such as minimum wage increases to continue to put pressure on our restaurant level profitability.

Therefore, we currently anticipate that without any additional menu price increases our restaurant level operating margins could decline by 50 to100 basis points during 2009, even after considering the benefit from reduced national advertising contributions and other cost reduction activity.

For every ten basis points change in restaurant level operating profit during the full year 2009, diluted EPS is estimated to be impacted by approximately $0.04.

During the first quarter of 2009 we completed a cash tender offer for certain stock options held by employees and officers, including restaurant general managers.

As a result of tender offer we incurred a one-time noncash pretax charge of $4 million, or $0.19 per diluted share, which we reflected in the first quarter 2009 financial results and represents the compensation expense related to the acceleration and vesting on the unvested options that were tendered in the offer which would have otherwise been expensed over their vesting period in the future if they had not been tendered.

Approximately 23% of this one-time expense will be at the restaurant level and 77% will impact corporate general administrative expense.

The gross cash proceeds to be paid for the tendered options will be $3.5 million.

As a result of the completion of the cash tender offer future compensation expenses associated with tender unvested options have been eliminated.

We expect to record $2.5million in stock compensation expense for options as they continue to vest during the fiscal year 2009 excluding the $4 million one-time charge in the first quarter related to the tender offer.

For comparison we recognize $6.8 million in stock compensation expense for the fiscal year 2008.

Approximately 18% of this expense was at the restaurant level, and 82% compacted G&A expense for fiscal 2008.

For the full year we expect G&A expense to increase by approximately $6 million to reflect the assumption that we'll accrue bonus expense in 2009.

Depreciation and amortization expense should increase approximately 11% year-over-year in 2009 and interest expense will be lower than 2008 assuming average interest rates are lower than 2008 and we pay down our debt balance during 2009.

As we said earlier we expect to fund our new restaurant development during 2009 using our operating cash flow.

Taking into consideration our full fiscal year 2009 capital expenditure estimate of around $45 million we expect to use our remaining cash flow to pay down our outstanding debt during 2009 and may make opportunistic purchases of our common stock.

Now let me clarify for everyone how our debt leverage calculation works.

The total outstanding debt which was $222.6 million at December 28, 2008, plus our outstanding letter of credit of $4.1 million is the debt balance we used to compute the ratio on.

Our debt does not include operating leases.

Our last 12 months of EBITDA excludes the non-cash charges for stock compensation expense, acquisition related required franchise costs and any acid impairment charges.

Therefore, our debt to EBITDA ratio for purposes of our covenant was 2.14 to 1 at December 28, 2008.

Assuming we use our expected free cash flow to pay down debt in 2009 including $15 million in scheduled term loan payments, we will stay well below our maximum debt leverage ratio of 2.5 to one allowed by our credit agreement for all of 2009.

Now I'd like to remind everyone that $211,000 of pretax earnings or expense for us equaled a penny per diluted share for the full year 2009 which is equivalent to less than 3 basis points as a percent of revenue.

Now this illustrates the sensitivity of our business from sales and EPS standpoint which in this uncertain business climate makes accurate forecasts extremely challenging.

Now with that I will turn the call back over to Dennis.

Thanks, Katie.

Without a doubt it continues to be a tough operating environment.

We have aggressive plans to drive traffic.

We have a strong brand and we will continue to manage costs and our capital expenditures carefully to maximize cash flow and strengthen our balance sheet.

We also believe that we have the opportunity to take market share as the number of casual dining seats shrinks.

Most importantly, we know we have the best team members in the casual dining business to make that happen.

And with that, I will be ready to take your questions.

(Operator Instructions).

We will go first to Matt Difrisco with Oppenheimer.

Thank you.

Denny, I guess just following up on the last comment there with respect to gaining share.

I guess you're not going to be advertising as much as you did in the year before and you're going to be slowing your growth.

How do you expect to gain share I guess is just the question.

And do you expect, then, overall that you're going to see continuation of contraction throughout all of '09 it appears in your traffic guidance number and your press release?

I think it is going to be individual location by individual location where we have a number of instances where both our chain competitors and private operators have closed and we expect that we would clearly gain share in those markets so I think it is a building process.

It isn't going to happen next week and next month but it will happen as we go forward and as we make decisions about continuing development.

Also, we haven't given guidance so we will see how our marketing efforts work as they can help us drive shares as we go forward.

Well if I'm not mistaken 25 basis points less than what you also spent in '07?

Yes.

We spent about 11 million system wide in 2007.

Okay.

And then to clarify, I think when you were calculating, when you were helping us calculate the credit covenant, you then do not have to capitalize your operating leases.

No, we do not.

We do not.

We do not.

Okay.

Thank you very much.

And our next question will come from Jeff Farmer with Jefferies & Co.

Great.

Thank you.

If you look at the 28 weeks in '08 that you were not running national cable versus the 24 weeks or so that you were running cable.

Was there a meaningful difference in same-store sales or traffic especially as you got towards the back half of '08?

The back half?

Yes.

All of '08 in general, but in terms of the macroeconomic situation got far worse.

What - -

If I think I understand your question.

The first half - - in the first quarter of '08 as Eric said,we were up 3.8% and we started TV in the earlier in '08 than we did in '07.

We started it the Monday after Super Bowl.

So that's why we said the first quarter was a comparison to be much more difficult.

And we weren't impacted by at that point being up 38, we certainly didn't feel we were impacted by the macroeconomic environment.

The second flights and third flights were kind of pretty much lined up until the very end when we had three weeks that were stand-alones that weren't there in '07.

And we saw as we reported in the quarterly calls continuous decline throughout the back half of last year.

Okay.

And then just a quick follow-up.

In terms of talking to a couple of your franchisees they seem to believe that because a lot of your advertising has been heavily brand based and not sort of I guess special, specific, or price-point specific, that when you do finally pull this advertising in '09 that it's not going to have as big an impact as many people think.

Is that a fair assessment or do you agree with that.

When we finally do what, I'm sorry?

When you finally pull your advertising in 2009 which you already have, a lot of your franchisees believe that because it was more of a brand based advertising campaign that it won't have as great an impact as some have feared.

I was just curious if you agree with that.

Only if you tell me which franchisees you're talking to.

No, I don't have any comment on that.

That's why we are not making projections.

We will find out pretty quickly.

Okay.

Fair enough.

Thanks, guys.

Our next question comes from Brad Ludington with KeyBanc Capital Markets.

Good afternoon.

I wanted to start off talking about on the G&A line if you include roughly 3.1 million that will be the one-time non-cash charge.

Is there opportunity on an absolute dollar basis, and again including that non-cash charge, to be relatively flat year-over-year?

Or is that still going to go up?

The charge that we are talking about related to the tender offer?

Is that what you're asking?

Yes.

It's 4 million.

But I thought 23% of that went into the restaurant level - -

You're right.

That component.

It is the same percentage roughly as we have incurred over the years - - G&A split.

So our total spend including the one-time charge is going to be 6.5.

Very comparable to the 6.1 we have taken in the past so that won't really [flex] your G&A.

So year-over-year we will see about $6 million more related to performance-based bonus assumptions.

So if you just take 2008 and add 6 million to it that's about where we think we will land in 2009.

6 million more in bonus.

So then probably close - - (inaudible) now over that 64.2 million closer to 70.

5 to 7 million more.

That's about right.

Okay.

And then looking at your guidance, it says not including - - if no price increase were taken this is where margins would go potentially.

Now that's not saying that you definitely won't take a price, there is just not one planned at this point in time.

Is that correct?

That's correct.

Okay.

And also should we expect any additional closures in 2009 or are you still evaluating other stores at this point?

Brad, this is a continuous process based on the evaluation that we did in the fourth quarter, the decision was made on these four.

We will continue to evaluate as we move forward and we don't have any decisions at this time for any more than four.

Okay.

Well, thank you very much.

Thank you.

Thanks.

Our next question comes from Joe Buckley with Bank of America.

Thank you.

You shared the 4.6% comp decline for the first seven weeks of '08.

But yet you mentioned the advertising in '08 started February 4th.

So I guess I'm curious what that down 4.6 compares against to the first seven weeks just to kind of gauge how we should think about the full quarter.

The rest of the quarter gets much more difficult.

We said the TV started so it obviously gets more difficult.

We are not going to get granular by week, we gave you the first seven weeks to give you some indication of where we were since we weren't giving guidance so we didn't get too far off track there.

It will be more difficult as we go forward offset by the fact that we don't have the media expense along with it.

Keep in mind last year for the first quarter 2008 we did 3.9, we had 4.3% running in price.

What I'm trying to figure is, is it 200 or 300 basis points difference in the back nine weeks?

In terms of the compare?

It gets more difficult.

We can't - - we are not going to say - -

And we are just not sitting here waiting for it.

We are obviously rolling - - we've rolled out some marketing programs et cetera.

We don't know what the offsets are.

We just don't know at this point.

Okay.

And then I take it - - I think you did clarify this already but the stock compensation expense is split between G&A and operating expenses.

The marketing expenses are all in the restaurant operating expenses?

Yes.

It was lumpy in 2008 based on when we did our media flights.

Right.

Neutralized for the full year so there really wasn't an impact for the full year.

But in 2009 it will be fairly smooth throughout the year.

We won't see that lumpiness hitting G&A like we saw in 2007 and 2008.

Okay.

And then what are bonuses based on for 2009?

An internal plan.

Based on what metrics?

Various metrics.

Including EBITDA.

Okay.

Thanks.

And our next question comes from John Glass with Morgan Stanley.

Hi, thanks.

If your 50 to 100 basis point decline in restaurant margins - - I know you're not giving comp guidance, but the biggest driver of that would be comp store sales.

So can you give a range of what you imbedded in that for comps.

We are not going to give a specific range but you're right it is within a band.

We have some internal sensitivities that we have done to look at that.

We think kind of a likely scenario is that 50 to 100 basis points.

But we are not going to get specific as there are just so many variables that impact those models.

Okay.

Then just going to the G&A question again.

I just want to understand this or make sure I understand this.

It going to be up $6 million in absolute year-over-year.

You're going to have $4 million less stock based compensation charge of three in change which flows to the G&A line, correct?

Actually, we will have a one-time charge of $4 million in Q1 in '09.

Are you including that in the up $6 million for the year?

Yes.

Okay.

So after the first quarter G&A ought to decline in year-over-year?

Yes.

So actually G&A probably does end up - - excluding that charge it actually probably declines year-over-year.

Correct?

Because the first quarter has a $4 million hit.

So It is weighted in the first quarter where last year it was more evenly spread throughout the year.

So that stock comp charge was getting spread evenly quarter to quarter.

You just get loaded up in Q1of 2009 with that $4 million this year.

And that's with the bonus in '09.

I'm sorry, say that again?

Then the bonus gets spread out evenly through '09 as we earn it.

We didn't pay out bonus, John, in '08.

Right.

Okay.

Then does the tender offer impact the share account in any way in '09 or maybe - -

No, because those were all options that were anti dilutive and so those don't count in your share count because they were you will underwater or most of them were underwater.

There was only an insignificant number that were added to the share count?

I guess non comp AWS's got better year-over-year in the fourth quarter.

Maybe sequentially weren't that much different than the prior quarters.

But was there any specific reason for that?

Were there openings that were better later in the year or did you see group performance.

We talked about the fourth quarter impact from weather and those are all on comp stores.

So that did impact the comp stores where it wouldn't have impacted it significantly in the non comp base.

Because you didn't open any new stores in the weather impacted areas?

Right.

Got you.

Okay.

Thank you.

Our next question comes from Brian Elliott with Raymond James.

Good afternoon.

I wanted to try - - not sure I understood the contract properly.

I believe, Katie, you said that you're 50% contracted for the year.

Little less than that, yes.

And it is up year-on-year because you had a favorable below spot last year?

That's correct.

All right.

But spot hamburger prices are in free fall.

And so the portion that you're buying spot would that more than offset?

And would your hamburger prices right now sort of 50% spot, 50% contract not be down?

No, it is not down.

Okay.

Okay.

Is the 50% spread through the year or are you 100% contracted for the first half or something like that?

No, we are 50% of our volume is contractor for the full year.

Okay.

All right.

Or less than 50.

It's about 40% roughly of our volume.

Okay.

All right.

All right.

I won't try on any of the other things that we are all needing to use to model it so I won't ask.

Thank you.

Our next question comes from Jeff Omohundro with Wachovia.

Thanks.

Appreciated all the color around your traffic building initiative.

I wonder, though, if you could talk a little bit about your in-store activities, the next menu update and what your thoughts might be around LTOs, the tabletops?

Should we expect perhaps more frequency and intensity around those efforts to provide new news to your regular customers.

Just what you're thinking around the menu.

Thanks.

Good question.

Susan will take that.

Okay, first off to answer your menu question.

Yes, we are planning to do - - launch a new menu in our Company restaurants in June.

And there are - - there is going to be quite a bit of new news on that menu.

At the same time within our restaurant, we are going to continue to do the limited time offers on our cubes.

And as I mentioned we are supporting that news outside of our restaurants as well with the direct mail, continuing with our e-mail - - talking to our eClub.

And then making sure that people know about that news as well as some of the strengths that we talked about earlier, reinforcing those, our bottomless value, et cetera.

So continuing, yes, definitely continuing with the news both inside but promoting it outside as well.

And is it a meaningful change from what we saw in '08 just in terms of the intensity of these efforts?

Yes.

The two places where it is a little bit bigger.

We have a bigger pipeline.

We have even more news that we are testing and that we are launching.

But the places where we are promoting it even more is online.

I mentioned that we are significantly investing more online throughout the year.

As well we are doing it with targeted direct mail around all of our locations.

So making sure we are communicating very well what our product is.

As largest areas as Susan said pipeline of limited time offers which are supported by the promotions last year the television didn't support.

Television was branding only.

Right.

And five promotional windows this year and are bringing back our popular sliders, which I know you love.

Yes.

Great.

Thanks, guys.

Our next question comes from Destin Tompkins with Morgan Keegan.

Thank you.

Given how aggressive the competition is for traffic right now and the fact that you're saving some on advertising, do any of the traffic initiatives you have look to get more aggressive with your price points?

Are any of the LTOs focused on price points?

Or is there not an opportunity to give something back to the consumer from what you're saving on the advertising?

Well, first off we are providing our value message through the bottomless proposition and we are communicating that even more in all of our marketing communications.

But we are not discounting within the restaurant.

We are supporting the new product news as Eric and Denny mentioned outside in a very targeted way.

So we are via our direct mail incenting guests, we're telling them about the promotions and giving them some kind of incentive to come in and try the product.

But we are doing it targeted.

We're not just doing it full market.

We are using the Company that we feel has some very strong targeting metrics.

So we are making sure that as much as possible whatever incentives we are using are targeting and driving incremental traffic.

Are any of the new products maybe lower price point products or maybe offer or support that more compelling value message?

We have a mix.

We have a mix from bringing back our sliders that Eric mentioned to some slightly lower priced burgers.

So, yes.

It's a mix.

Great.

Thank you.

Our next question comes from Steven Rees with JPMorgan.

Hi.

Thanks.

I guess I was just looking for a little bit more color on the comps - - with the deceleration you saw in the fourth quarter and so far in the first quarter.

Has - - maybe you can just comment on your traffic trend at lunch versus dinner, perhaps weekday versus weekend.

And if you have seen any change in any major geographies for you.

We are still 50/50, lunch/dinner, have been for years.

No change there.

Geography.

The only time that we have in the weather in the Northwest in the fourth quarter that impacted us.

So we felt that did have - - wanted to call that out but geographically I think there is no commentary in any other particular area that you would call at this time.

Okay.

And then just do you have an estimate, Katie, of your overall commodity inflation that you expect in 2009 versus what you saw in 2008.

Probably somewhere in the 6% range.

Okay.

And then of the $45 million.

Which depends on the spot market on hamburger, frankly.

Right.

And then on the $45 million of CapEx, about how much of that would be for maintenance or remodel CapEx?

About 11 to 12 million roughly.

Okay.

Perfect.

Thank you very much.

(Operator Instructions).

We will go next to Matt DiFrisco with Oppenheimer.

Hi, this is Jake Bartley in for Matt.

I had a question on the four stores that you closed.

Where were they closed?

And also - -

We are not going to comment on that.

They were just four stores, a couple in declining trade areas.

We have not necessarily notified all of our team members at this point so we are going to be quiet on that.

It looks like you closed a store in the fourth quarter.

Is that true?

Yes, it was a store that came off its lease.

It was a lease termination, it was in Colorado springs.

Okay.

Can you comment on how much the national advertising campaign diluted restaurant level margin in 2008 given the lift you saw on comps and how much it cost you?

It was 50 basis points increase year-over-year.

We are at 1% in 2007.

We went to 1.5%.

And then I think with declining store comps it's hard to know where we would have been otherwise without it.

So we don't comment on that.

Thank you very much.

There are no further questions at this time.

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

Thank you.

To our fellow team members, as always, I want to express our deep gratitude for your continued focus and hard work in good times and tough times.

We will always recognize and take care of our team members who will in turn will make the connection with our guests and will continue to grow our Company for the benefit of team members, guests and shareholders alike.

With that bid you adieu.

Thank you very much.

Ladies and gentlemen, this does conclude today's conference.

We thank you for your participation.

Have a wonderful day.

You may now disconnect.