Red Robin Gourmet Burgers Inc (RRGB) 2009 Q1 法說會逐字稿

Good day, and welcome to the Red Robin Gourmet Burgers Incorporated first quarter 2009 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.

Thanks, Gwen.

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

We plan to file our 10-Q for the fiscal first quarter of 2009 by the close of business tomorrow.

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 would 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 and Susan Lintonsmith, our Chief Marketing Officer.

Eric will provide detail on first quarter results and an update on our operations initiatives.

Then Susan will share what our marketing team has been doing to drive guest traffic and retention.

Then Katie will review in detail our most recent financial results and discuss our business outlook.

First, I will start with a quick review of our fiscal first quarter 2009 results compared to a year ago.

Total revenues increased 6% to $270.8 million while company-owned comparable sales decreased 8.1% compared to the first quarter of last year.

As we said during our last earnings call, we expected that the year-over-year sales comparisons would be difficult for the first quarter of the year.

As we lapped over our most successful quarter of 2008 which included national cable advertising that began in early February last year.

As you know, we did not have national cable television advertising in the first quarter of this year.

Restaurant level operating profit decreased 1.7% to $47.1 million, or 17.7% of revenue compared to 19.1% a year ago.

Adjusted or non-GAAP diluted earnings per share for the 2009 first quarter were $0.47 compared to $0.43 in the first quarter a year ago, an increase of 9.3%.

Finally, in the first quarter of this year, we opened a total of nine new Red Robin restaurants, seven company-owned and two franchise locations.

Ending the quarter with 298 company-owned and 130 franchise locations, for a total of 428 Red Robin locations across North America.

We are on target to open seven to eight company-owned restaurants in -- additional seven to eight company-owned restaurants in 2009 for a total of 14 to 15 restaurants, all of which will be funded from operating cash flow.

Three more restaurants opened at the end of the second quarter and another three are under construction.

We also expect our franchisees to open a total of five to six new restaurants in 2009.

Including a franchise restaurant that opened early in the second quarter, three new franchise restaurants have already opened so far in 2009 and one is under construction.

Regarding development decisions beyond 2009, our plan are still in the works so we do not have details to share at this time.

However, we will continue to maintain broad flexibility and a strong discipline in any commitments we do make.

As we said before, we expect to have many options available to us.

With that as an overview, given the unpredictability of the current operating environment ,we will continue to focus on things we can control including our targeted marketing efforts, the investment to strengthen our teams and our great service and exciting menu offerings that make a connection with our guests, all while driving efficiencies and excellence across every area of our business.

Now before I turn the call over to Eric, I wanted to highlight our stock ownership guidelines that the compensation committee of our board established for our directors and executive officers.

My ownership guidelines represent four times my annual base salary in stock ownership, and the other five executives' guidelines are based on their positions and require between 1.5 and 2 times the value of their annual salary be held in company stock for the entire term of our employment.

We have outlined these guidelines in our proxy, but I wanted you all to be aware of this and understand that there are only three other restaurant companies out of the 15 in our peer group that have any level of stock ownership guidelines.

Also outlined in the proxy is the amount of tender offer proceeds received by the executive team, for which substantially all of it was used for the acquisition of company stock.

We on our board believe the ownership guidelines support and strengthen increased alignment with our stock holders.

With that, I will turn the call over to Eric.

Thanks, Denny.

Good afternoon, everyone.

In the first quarter of 2009, our comp store sales decreased 8.1% which is driven by a 10.2 decrease in guest counts, partially offer set by a 2.1 increase in average check.

We expected the first quarter of 2009 to be the most difficult comparison of 2009 as we went up against our strongest quarter last year.

In the first quarter a year ago, our comp store sales were up 3.9%.

Driven by a 0.4% lower guest count that was more than offset by a 4.3% higher price and mix.

In addition to the tough year-over-year comparison and the fact that we did not have the benefit of TV in Q1 of this year as we had for most of the first quarter of last year, we continue to operate in a very difficult economic environment where we're contending with very aggressive discounting and promotions for many casual dining chains.

During the first four weeks of the second quarter, our comp store sales were down 11.1% versus being up 0.5% in the first four weeks of the second quarter a year ago.

Please note that the year ago four week period has two weeks of national cable advertising, so we're cycling through that media spend that we had in 2008 in addition to facing a more intense competitive landscape this year.

Susan will talk about some of the marketing strategies that we have deployed in Q1 and what we have planned for Q2.

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

Our first quarter had 244 company-owned comparable restaurants out of the 298 total company-owned restaurants.

Average weekly sales for the restaurants in our comp base were $58,079 during the first quarter of 2009 compared to $63,196 for these same restaurants in the first quarter of 2008.

Average weekly sales for our 41 noncomparable restaurants was $55,245 during the first quarter of 2009 compared to $55,165 for the 42 noncomparable restaurants a year earlier.

For all company-owned restaurants, average weekly sales were $57,352, generated from 4,768, operating weeks in the first quarter of 2009 compared to $62,945 generated from 4,075 operating weeks in the first quarter of 2008.

The 15 franchise restaurants that we acquired early in the second quarter of 2008 will be included in the comparable base beginning in the third quarter of this year.

These 15 restaurants' AUVs were $52,555 during the first quarter of 2009.

Our first quarter 2009 restaurant level operating margins of 17.7% were 140 basis points below the 19.1 margins in the first quarter of 2008.

Our margins in the first quarter this year were negatively impacted by higher food, beverage, labor and occupancy costs and deleveraging from lower average restaurant sales volumes.

These were only partially offset by a decrease in operating costs which reflected the lower year-over-year contributions to our national advertising funds.

Without a doubt, the environment we're operating in continues to be extremely tough.

But as Denny said earlier, we're focusing on the things we can control, and that includes the investments we continue to make to execute our restaurants, manage costs and strengthen our teams so that they can continue to offer guests craveable gourmet burgers and superior unbridled service.

For example, we recently began implementing a systemwide initiative to streamline our operations in our kitchens, in ways that not only intended to reduce costs, but also allow our restaurant leaders to spend more time -- more of their time building and supporting our teams during daily shift operations.

The goals include strategically reducing the amount of raw materials or SKUs in the restaurants that the teams had to manage and improve the schematics and efficiency in the heart of the house using various tools, processes and procedures.

We're currently in the second of three phases of this initiative with the final phase commencing during our June 15 menu rollout.

We are encouraged with the initial results that we're seeing through the first two phases, and we're very happy with the changes that further enhance and build upon our cornerstones, specifically the quality our burgers, our gift of time or throughput and our manager's ability to impact and develop our great team members.

We're also extending this philosophy to other cost centers of our business such as our refreshment center and supply category, and we expect do see more cost savings through these initiatives and efficiencies in the remaining part of this year and into the future.

On the NRO front, we have seen more encouraging results from the work that we have been doing over the last 18 months in regard to NROs strengthening their performance and making sure that they open comp like.

In fact, we have been achieving new all time opening weekly sales volume records and then breaking them consistently with our Q1 NROs.

With our three most recent openings at the start of Q2, we not only set a new systemwide opening sales record of $145,000 during the opening week at our Evansville, Indiana, location, but two of these three restaurants have had four consecutive weeks of six figure sales.

And those three NROs alone have generated nearly $1.5 million in sales during their four weeks of operation.

We're also very pleased with the performance of our NROs that continue to raise the bar on their restaurant operating profits, further demonstrating solid results from our implementation of a -- our strategic and scalable process for NRO training and leadership and deploying it early in the NRO process is really paying off.

In addition, during our last call, we shared some details of some systemwide operational training initiatives that are helping our team members across our system deliver a consistently outstanding Red Robin guest experience.

We're calling it Make a Connection, and it's designed to create loyal guests and increase frequency.

The rollout and ongoing training of this program is well underway in our restaurants, and we believe it is already resonating with our guests as the percentage of positive unsolicited internet feedback we have been receiving is the highest we have seen in years.

In conjunction with this training initiative, we have identified the top 10 loyalty drivers with our guests that increase frequency.

We have recently implemented a strategic and measurable guest satisfaction tool that measures against these loyalty drivers every month and keeps our operators focused on the incredible unbridled service our brand is known for.

Finally, the investments that we continue to make in our team members are not only making our operation more effective and productive, but is also increasing their engagement and helping us reduce turnover which is down significant among our restaurant managers as well as our hourly team members.

So with that overview of operations, let me turn it over to Susan to talk about the results and the plans we have related to marketing.

Thanks Eric.

As most of you know, we used national cable TV in 2007 and 2008 to drive brand awareness and understanding, especially in our newer markets.

In 2009, we decided to capitalize on the brand awareness gains and focus our marketing dollars on more targeted traffic driving and retention initiatives including a robust online double digit media plan, targeted direct mail with coupon promotions and local restaurant initiatives.

Based on this more targeted focus, restaurant contributions to our national advertising fund were reduced in 2009 to 0.25% of revenue from 1.5% in 2008.

The 2009 marketing plan is based on driving traffic by supporting product news.

We started off the year celebrating the fortieth anniversary of the Red Robin brand by highlighting some of our long time Red Robin favorites, including our Royal Red Robin burger which has a fried egg on top and our famous towering onion rings.

Our Feb/March promotion included our innovative and spicy Burning Love burger and Southwest Ancho Chicken Salad, both featuring our new fried jalapeno coins.

To drive incremental traffic, we supported the Burning Love burger with a targeted direct mail piece in mid February that communicated the fun ingredients, our bottomless steak fries and a limited time only call to action.

The mailing supported all of our company-owned locations targeting approximately 5,000 households within a three mile radius of each restaurant offering a $3 off incentive to try the new burger.

The Burning Love burger incentive achieved a redemption rate of more than 8%, which is significantly higher than what is typical for these types of mailings.

We also had a strong internet media program from February through early April that included banner ads, a 15 second online video supporting the Burning Love burger.

Given the success of this burger, which was among the top 10 menu items ordered by guests in that time period, we will be adding the Burning Love burger to our menu in June.

Another key initiative in 2009 is driving gift card sales, both inside and outside our restaurants.

In 2008, in August, we launched third party gift card distribution in several major grocery chains and to date, we have had great responses across the country.

And currently, our gift cards are in 2,400 retail locations with plans to expand into more locations throughout the year.

We expect to add as many as 4,800 additional retail locations this year, which would make our gift cards available in about 7,200 retail locations outside our restaurants by the end of 2009.

Even though this program is still ramping up, we're already among the top 10% of our third party gift card distributer clients.

Based on total dollar sales and the local and regional gift cards categories.

We're also doing much more to drive gift card sales both online and in our restaurants.

To increase the appeal of our gift cards, we have added several card styles that are specific to popular gift card occasions including birthdays, Mother's Day, Father's Day and graduations.

In several markets, we're testing a new gift card in store merchandiser for our restaurant lobbies that feature our gift cards and more.

We're very pleased with our gift card results to date which are exceeding our expectations.

In Q1, we also launched our new guest satisfaction survey program that Eric mentioned to support all company-owned restaurants and several franchise restaurants.

This is a new restaurant level web and telephone survey that we're calling Guest Voice.

It allows us to gather timely feedback on key loyalty drivers such as food quality, service experience, restaurant atmosphere and cleanliness.

We're using the actionable information at the restaurant level to identify where our team should focus their efforts to improve our service experience and continue making meaningful connections with our guests.

The biggest news may be the return of our popular steak sliders for the summer promotion that began this week.

We first promoted steak sliders in February and March of last year, and it was one of our strongest new product promotions we have ever had.

And we're responding to guest demand by bringing them back.

This time, with the option of either two or three steak sliders served with our garlic parmesan steak fries and cole slaw.

Based on the excitement and sales generated by our steak sliders in 2008, we're increasing our marketing support behind this promotion to drive national awareness that our sliders are back.

This will include three weeks of national cable television starting the week of June 8 which will be funded primarily through our corporate marketing budget in Q2.

We will run 15 second ads on national cable TV and will also support the slider promotion with direct mail coupon drops similar to the successful February and March campaign combined with online ads and other marketing vehicles.

Sliders are still a hot product in this industry, and we believe that our sliders are differentiated and will stand above the competition, and we're including them in our new menu that will be in company restaurants in June.

We're encouraged by some of the results from our Q1 marketing plan.

And in Q2, we look forward to being on TV again as an additional marketing element to promote our steak sliders.

So those are some of the marketing headlines.

So now I will turn the call back over to Katie to review our financial results in greater detail.

Thanks Susan.

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

The fiscal first quarter of 2009 was a 16-week period, ending April 19.

Compared to the fiscal first quarter last year, total revenues, including restaurant sales and franchise royalties, increased 6% to $270.8 million.

Restaurant sales grew 6.3%, to $266.6 million and consisted of $221.2 million in sales from our comp restaurants, $12.5 million in sales from the 2008 acquired restaurants and about $32.9 million in sales from our noncomparable restaurants.

As Eric mentioned, the 15 franchise restaurants acquired in the second quarter of 2008 have not been included in our comp store sales metric yet.

Franchise royalties and fees decreased 10.4% in the first quarter to $4.2 million and exclude the $517,000 in royalty contributions from the 2008 acquired restaurants.

The 98 comp restaurants in the US franchise system report a 7.2% decrease in same-store sales while the 18 comp restaurants in the Canadian franchise system reported a 0.8% increase in same store sales for the first quarter.

Our restaurant level operating profit margin was 17.7% which compared to the 19.1% that we reported in the first quarter of 2008.

The 140 basis point margin decrease was driven by 80 basis points of higher cost of sales, 40 basis points of higher labor costs plus 30 basis points of stock compensation expense related to the restaurant team over stock options that were tendered and 70 basis points of higher occupancy costs.

These higher costs were partially offset by 80 basis points of lower operating costs.

Now I would like to go for our food costs in a fair amount of detail so some of Red Robin's trend might be different from what other restaurant companies are experiencing generally.

Our food and beverage costs increased by 80 basis points in the first quarter 2009 compared to the first quarter of last year.

The increase was due primarily to higher ground beef costs and the cost of potatoes used to make our steak fries.

As you may recall, we had contracted the price of our ground beef at 2008 at prices well below the spot market for if majority of 2008.

We have taken the opportunity to contract 100% of our ground beef needs in 2009 through June, and just under half of our volume has been contracted for the remainder of 2009.

Unfortunately, our 2009 contracted price for ground beef this year has been above our very favorable pricing from last year and slightly above the spot price in the first quarter.

The spot market for our ground beef SPEC continues to climb into the second quarter, and we hope our contract in the second quarter will prove favorable to the spot, but we know we will be above the 2008 contract pricing in any case.

Our potato prices are locked in until October when the new crops will be processed for steak fries.

Ground beef and steak fries contributed about 60 basis points to the pressures on margins in the first quarter this year, and we expect that trend will continue.

In addition, we introduced our Prime Rib Dip to our menu in the second quarter of 2008 so we have an increase year-over-year in the first quarter of about 30 basis points due to the addition of that protein to our food costs this year.

We expect to see slightly favorable cost trends in both cheese and fry oil which will help us offset some of these pressures, but our steak slider promotion may cause some additional pressure on food costs in the second quarter depending on how popular this promotion turns out to be.

Our total labor cost increase of 70 basis points is attributed to a couple of items.

First, the labor cost was up 30 basis points as a result of the stock compensation expense from options tendered by our restaurant team members as well as about 20 basis points of minimum wage threats that we identified at the beginning of the year.

We are also experiencing increases in insurance expense for our team members, and as Eric mentioned before, our teams are doing a great job of managing the controllable costs in their business, even as they face declining sales volumes.

Our occupancy cost is largely a fixed cost, representing both base and percentage rent as well as common area maintenance charges and real property taxes and insurance.

The primary reason for the increase of 70 basis points is the deleveraging of this highly fixed cost as we have seen our average restaurant sales volumes decline since last year combined with slightly higher fixed rents, particularly from our more recent restaurant openings and from the acquired properties.

Other restaurant costs increased about 80 basis points as we reduced our national advertising fund contribution at the beginning of 2009 to 25 basis points from 150 basis points last year.

Offsetting this 125 basis point decrease was an increase in corporate marketing spending of about 20 basis points to support several of the initiatives Susan spoke about earlier.

And the remainder is deleveraging from the fixing components of this expense related primarily to utilities and maintenance expense.

Depreciation and amortization expense during the first quarter was 6.5% of total revenue, about 70 basis points higher than a year ago, primarily due to revenue deleverage and assets we acquired in 2008.

General and administrative expenses were $20.2 million or 7.4% of total revenues in the first quarter of 2009 compared to $22.5 million or 8.8% of total revenue in the first quarter 2008.

G&A expenses were lower as a percentage of revenue, primarily die to the reduction in compensation expense on an ongoing -- stock compensation expense on an ongoing basis, which represented $611,000 in the first quarter of 2009 versus $1.5 million in 2008 for the first quarter.

In addition, the reduction in our manager turnover and decreased development has resulted in significantly less manager training expense.

Lastly, our G&A in the first quarter 2008, included an expense of about $465,000 attributed to the national marketing fund compared to a reversal of about $330,000, in the first quarter this year related to the fund.

As we discussed in our call in February, the tender offer for certain outstanding stock options of our team members was completed in the first quarter.

As a result of the offer, we incurred a one-time charge of $4 million related to the acceleration of unvested options that were tendered, of which about $886,000 was related to options tendered by team members in our restaurants which is the 30 basis points I mentioned earlier in my discussion of restaurant labor and $3.1 million of this one-time charge was attributable to options tendered by administrative team members.

Our total cash paid for options was $3.5 million and is reflected in our statement of cash flow and charged to additional paid in capital.

Our pre-opening expense in the first quarter was about the same amount compared to a year ago.

Our pre-opening cost per unit so far this year has been about $275,000 compared to $294,000 per unit in 2008.

We are currently budgeting about $285,000 per unit for pre-opening expense for our 2009 NROs.

As we previously announced, we closed four restaurants during the first quarter of 2009.

This decision was the result of a process to identify those restaurants that are in declining trade areas, performing below accepted profitability levels and/or require significant capital expenditures.

The locations that were selected for closure represented older restaurants whose leases were not extended or were in need of significant capital improvements that were not projected to provide acceptable returns in the foreseeable future.

We recorded a charge of approximately $586,000 during the first quarter of 2009 related to lease termination costs based on estimated remaining lease obligation, net of estimated sublease income and other closing related costs.

Net interest expense was $2.1 million in the fiscal first quarter of 2009 compared to $2.3 million during the same period in 2008.

Our interest expense in the first quarter of 2009 decreased from the prior year due to a lower average interest rate of 3%, versus 4.9% in 2008, offset by a higher outstanding debt balance.

Our effective income tax rate for the first quarter of 2009 was 25.3% compared to 30.3% for the first quarter of 2008.

This decrease from 2008 is primarily due to Federal income tax credit.

We anticipate that our full-year 2009 effective tax rate will be approximately 25.3%.

Net income for the first quarter of 2009 was $3.8 million or $0.25 per diluted share compared to net income of $7.3 million or $0.43 per diluted share in the first quarter of 2008.

Excluding the impact of $0.19 per diluted share related to the tender offer for stock options and $0.03 per diluted share for costs related to the closing of the four restaurants, our non-GAAP first quarter 2009 earnings per diluted share was $0.47.

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

Looking at the cash flow statement, our cash from operations of $25.8 million in the first quarter 2009 exceeded our development capital expenditures of $20.9 million.

On April 19, 2009, we had $8.6 million in cash and equivalents and had a total outstanding debt balance of $218.9 million, including $130.2 million in borrowings under our $150 million term loan, $82 million of borrowings as well as $4.4 million of letters of credit outstanding under our $150 million revolving credit facility.

We have made $2.8 million of the scheduled $15 million in payments required by the term loan portion of our existing credit facility in 2009.

Since the end of the first quarter, we have made additional debt repayments of $6 million on our revolving facility.

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

As of April 19, 2009 we were 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 second quarter of 2009, which is a 12-week quarter, we expect to open six new company-owned and two new franchise restaurants.

Three new company-owned and one new franchise restaurant have already opened during the second quarter this year, and three company-owned and one franchise restaurant are currently under construction.

As Denny mentioned, we expect to open 14 to 15 new company-owned restaurants while our franchisees are expected to open five to six new restaurants.

As Susan reminded you, all company-owned and franchise restaurants in our system now contribute 25 basis points of their restaurant revenue to our national advertising fund, down from 1.5% of revenue in 2008.

And depending on actual revenue performance in 2009, this contribution change could result in approximately $11 million less in the company's advertising expenditures in 2009, or about $50 million less on a systemwide basis.

We will not be providing full-year EPS or revenue guidance at this time.

For fiscal year 2009, which is a 52-week period, we expect comparable restaurant sales to continue to decline based on the current macro economic environment and the significant reduction in our national cable television advertising, which will create more difficult comparisons during certain periods.

We are not currently planning any menu price increases for 2009, but we will carry 1.1% price mix into Q2 which we will roll off in June, making a weighted average price mix assumption of about 0.7% for Q2.

In addition, as I said earlier, we expect certain costs and revenue deleverage to continue to put pressure on our restaurant level profitability.

Therefore, we currently anticipate that without any additional menu price increases, restaurant level operating margins could decline by 50 to 80 basis points during 2009, even after considering the benefit from reduced national advertising contribution and other cost reduction activity.

For every 10 basis point change in restaurant level operating profit during the full-year 2009, diluted EPS is estimated to be impacted by approximately $0.04.

As a result of the completion of the tender offer, future compensation expense associated with tendered unvested options has been eliminated.

On an ongoing basis for outstanding equity grants in 2009, we expect to incur stock compensation expense exclusive of the one-time tender offer charged of about $2.8 million, of which 17% will be charged to restaurant labor and 83% will be expensed in G&A.

Excluding the one-time charge related to the tender offer for stock options in the first quarter, we expect full-year 2009 G&A expense to increase by approximately $2 million.

Depreciation and amortization expense should increase approximately 12% 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 will 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 remind everyone how our debt leverage calculation works.

The total debt outstanding, which was $218.9 million at April 19 of 2009, plus our outstanding letter of credit of $4.4 million is the debt that we use to compute the ratio on.

Our debt does not include operating leases.

Our last 12 months of EBITDA excludes the noncash charges for stock compensation expense, acquisition-related reacquired franchise costs, any asset impairment charges or restaurant closing costs.

Our debt to EBITDA ratio for purposes of our covenant was 2.11 to 1 at April 19, 2009.

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 1 allowed by our credit agreement for all of 2009.

I also want to remind everyone that $206,000 of pre-tax earnings or expense for us equals a penny per diluted share for the full-year of 2009 which is equivalent to about two basis points as a percent of revenue.

This illustrates the sensitivity level of our business from sales, costs and EPS which in this uncertain business climate, makes accurate forecasts extremely challenging.

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

Thanks Katie.

I would like to leave with you a few thoughts before we go to the Q&A portion of our call.

We fully appreciate the challenges we face and are confident we have the right strategies to meet them head-on-and emerge even stronger as and when the operating environment improves.

To grow the top line, we will continue to focus on targeted marketing strategies to drive incremental traffic and frequency and we will make a connection with our guests through our great gourmet burgers, superior service while we invest in our team members that make it happen and continue to manage controllable costs at both the restaurant and our corporate level.

We expect to generate significant free cash flow this year and will continue to pay down debt as reflected in our recent actions, further strengthening our balance sheet.

In closing, I am very thankful to be working with such a dedicated team.

With that, operator, we are ready for questions.

Thank you.

(Operator Instructions) We will go first to Matt DiFrisco with Oppenheimer.

Thank you, can you guys hear me?

Just barely, Matt.

Okay.

Can you just quantify, or what do you estimate -- how much of the comp lag versus say, the Malcolm Naft number that just came out would you say is quantifiable due to the off of the cable advertising?

You cut out the last part of your question, Matt.

Can you repeat that?

Sure, same-store sales, your comp trends as you're doing now of like around 10% or so versus what Malcolm Naft just reported of better than down 5, like better down 4.9-ish.

Can you tell us how much of that differential is due to the cable advertising, the lack of it year-over-year?

That is pretty difficult for us to quantify specifically.

We know we had two weeks last year during this first four weeks of the quarter that we were on advertising.

Again, with the residual from the first quarter advertising as well.

We were up quite a bit of year-over-year, even last year.

When we do a two-year trend for our own business on a -- looking year-over-year on a two year trend, we're still running above the nap track average through the first quarter.

And then I guess can you -- have you seen a change of your consumer -- I know you have talked teens and tweens before but going through the employment data, it looks like the teenage unemployment level is rising and could be pretty bad this summer.

What are you seeing thus far, and is there any strategy you're trying to get that teen into your store if they are not shopping at other -- maybe your neighboring retailers?

Matt, we haven't seen any discernible difference, and our average guest check is almost unchanged.

Okay.

Thank you.

We will go next to Brad Ludington with KeyBanc Capital Markets.

Good afternoon, thank you.

Hey, Brad.

Hi.

I wanted to ask, first off, what is the -- for the $15 schedule debt payment, when that is due?

The $15 million is a quarterly payment that we pay about 2.1 -- or $2.8 million in our first quarter's scheduled repayment.

I think it increases to about $4.8 million in the last couple of payments in June and September.

So it is a quarterly paydown.

Okay.

And now, the steak sliders, you're going to do the marketing -- the cable advertisements for that rollout, can you quantify how much that will be in the second quarter in marketing expenditures?.

Is it something we're maybe not expecting here previously?

Yes, we're planning on spending roughly $1.3 million in the media buy.

And approximately half of that is incremental spend and approximately half of that is incremental spend, half of that is coming from other -- just being reallocated from other resources or other things that we are redirecting into this.

Okay.

It is all in the second quarter.

And it's all in Q2, right.

All in Q2, okay, good.

All -- and that will be all in operating expenses?

It is actually -- yes.

It is in the marketing media spend.

So it will be absorbed by the operating.

In G&A, not operating expenses.

In G&A.

Right.

Okay.

And then last question, you talked being the kitchen initiatives and how you're in phase two of that right now, and you're encouraged by the results.

Can you talk about specific results or quantify what the encouraging data points are?

Brad, a lot of it is since we're in the middle of rollout and we're tracking it, I don't think we're ready to go into detail yet.

(inaudible) from the fields, we're seeing a lot more efficiencies, and we will start really measuring it when all -- it is all in effect come June 15 with the new menu rollout.

All right.

Thank you very much.

We will go next to Nicole Miller with Piper Jaffray.

Thanks, good afternoon.

I just wanted to better understand if the slider marketing is the same period year-over-year.

And then I believe in the first quarter, you have your, I'm not sure if it is labeled GM or franchisee conference, but can you tell us kind of the tone or sentiment from your partners out in the field?

And would there be an opportunity for you to go back on TV advertising in an economic recovery?

Nicole, this is Susan.

I will answer the first part of your question.

We had during Q2 five weeks of television in 2008, and we will have three weeks this year.

It was more front-loaded last year part of the quarter, and it was blinking.

So we were on one week, off the next week.

What we're doing this year is three solid weeks in a row on national cable.

Last year was branding, Nicole -- this is Denny.

Last year was branding, NIcole.

This year the three weeks will be totally focused on sliders.

Sliders last year we ran in February and March, and this year, sliders will be all in Q2 and then on the menu from June forward.

Nicole, in terms of your franchise leadership question, we have some of the highest review scores from the leadership seminar in terms take home value.

We did rollout, Make the Connection as well as our leadership platform in breakouts there.

Obviously, with the economic financing environment, it is making it very difficult for franchisees to grow.

However, I think it is still a great testament.

even during those tough economic times.

As we know, there is not a lot of lending going on, that our franchise partners will do at least five to six and still have new units in the pipeline.

So I think that speaks to the confidence that they have long term in the brand.

Thank you.

And just to be clear, is it just these three weeks of TV for the year, or will there be TV in the back half?

We haven't made any commitment at this time.

We're seeking knowledge as we roll out this campaign, and we will make decisions as we go forward, Nicole.

Thank you very much.

Thank you.

We will go to Destin Tompkins with Morgan Keegan.

Thanks.

Hey guys, just wanted to also just follow-up on the addition to the TV program in Q2.

I thought I remembered you guys testing some product specific promotions in the end -- at the end of last year.

And I would just be curious what you think has changed, or what makes you feel more comfortable about rolling something out now at this point that is a little bit more product specific.

Well, one of the things that is different this time is that we know that sliders is something that was very successful, very popular last year.

We have gotten so many guest comments, when are you bringing your steak sliders back?

So, we know this is newsworthy and instead of doing it in a local market, this is going to be, like I said, national awareness, and that -- it was probably a down economic time for one of the markets that we selected in Q4 of last year.

So that didn't help.

This time we think with the product news and the whole thing of them coming back, this is a great time to go back on with product focused in a real fun TV spot just to let people know, hey, you wanted them, and they are back at Red Robin.

And national -- our test was local that we did --

Right.

-- back in the winter.

Okay, great, thank you.

We will go next to Steven Rees with JPMorgan.

Hi, thanks.

It appears as if the competition has specifically barred growth, becoming a lot more aggressive with price points and discounting of sandwiches and burgers.

So I would be curious to hear from you, how you think that is impacting your business.

Have you seen a noticeable change in trend when the competition has become more aggressive?

Well, we've definitely noticed that there is a lot of discounting out there.

And one of the things we don't want to do -- I can't speculate and say if they are discounting current guests or truly driving in incremental guests, but I can say that when we have targeted prospects with an offer to try our new products, we have received really high redemption rate on it.

But we have not necessarily noticed any change in our business from their specific discounting.

Okay.

And then Katie, thanks for the color on the cogs outlook, but can you talk about your full-year inflation expectation?

Is it still 6%, did that change --

We're still looking at probably mid single digits, somewhere between 5 and 7.

And how that is going to progress throughout the year based on all the contracts enough place today?

Yes, I think a lot of it is going to depend on the spot for hamburger.

We feel like we're contracted, that is why we only contracted for about 40% to 50% of our volume in the back half of the year.

We're hoping we might be able to blend that with favorability that maybe we will see at the back half of the year so, we don't want to lock ourselves down for too much volume in the back half of the year.

So it is really hard to speculate what we are going to see when.

We do know that cheese is coming off and we will probably start to benefit from the reduction in cost of cheese.

Fry oil is coming down, we will probably start to see that sometime starting in June.

So we know that there is some favorability in certain commodities that I spoke about.

We don't know what the potato crop is going to be this year.

Hopefully the grains won't trump the potato plantings and cause us a damage shortage -- or a supply shortage again, but that is, again, speculation.

So that is why we use that 5% to 7% range.

And as we move throughout the year, we will get more visibility but right now, it is hard to predict when.

Okay, and then just -- finally on the labor component, up 40 basis points excluding the charge will look pretty good despite traffic of being down over 10%.

So just -- perhaps you can talk about what you're doing at the store level to manage labor and if we should expect those sort of trends to continue throughout the year in what looks to be a negative tracking environment.

Yes, Steven.

We have been obviously focused on peaking the peaks and utilizing some proprietary software that we have in terms of forecasting.

We're definitely not cutting corners or increasing section sizes.

Some of the benefit that we're seeing or have initially seen is in the heart of the house with the simplicity project initiative that I spoke to.

We are taking anywhere between three and four hours a day out of the heart of the house.

We are reinvesting a portion of that to improve service.

We are -- we will not get labor though, however, at the expense of our team members of our guests.

So we will not go to five, six to seven table sections.

That is not the way to maximize peak hour sales.

So we're using the tools in process as it is a daily commitment to make sure that we peak the peaks and manage the shoulders.

Okay, thank you very much.

We will go next to Joe Buckley with Banc of America.

Thank you.

Could you elaborate a little bit further on the kitchen streamlining and removal of SKUs.

Are you streamlining the menu to some extent as you do that?

Well, Joe, we're looking at the menu very strategically.

Susan and her team as well as our food and beverage division -- I will give you an example.

We have a burger item that is on the menu that sells four a day.

And that menu item actually requires three proprietary SKUs and two prep recipes.

So, we look at that by eliminating a single item that is a little bit on the -- a lot on the lower-end of guest preference, we're able to take prep out of the equation as well as SKUs and replace it with an item that we think is even going to have even stronger guest appeal.

One small example of many of the things that we are doing to streamline the operations back there.

It is not going to be a considerably smaller menu, however.

Okay, and then second quarter advertising plans.

I know you said half of the $1.3 million is incremental.

Is that $50,000 or 60,000 entirely corporate expense, or is that a systemwide expense that the franchisees would share in?

Corporate.

It is primarily corporate expense.

Okay.

And could you remind us how the advertising flowed quarterly last year?

I think you just said you were on second quarter last year for five weeks, what were you on for the first quarter and if you have it, what were you on for the third and fourth quarter of '08?

Yes, in the first quarter of '08, we were on for eight weeks.

It was a pretty solid start, since we were launching two new brand spots.

In Q2, it was the continuation of those brand spots and it was was on a week, off a week, on a week, off a week, on a week, off a week.

So five weeks, but they were like I said, pulsed.

And so that was five weeks, and we're coming in, roughly over the fourth and doing three weeks straight.

Okay.

And (inaudible) were you on a similar number of weeks then during the fourth quarter?

Well, we were on, as you know, 23 weeks total.

So in Q3, we were on seven weeks in Q3 and then three weeks in Q4.

Okay.

Okay, thank you.

Sure.

We will go next to John Glass with Morgan Stanley.

Hi, thanks.

On the 11% comp that you talked about for the first four weeks of the quarter, again, what was the comparable period last year?

Up 0.5.

Okay.

And how did the last four weeks compare to the prior four weeks?

It would seem like it is down slightly sequentially.

Is that true?

Slightly.

Slightly.

Got you.

Okay.

And then Katie, what kind of comp are you planning on for that down 50 to 80 basis points for restaurant margin?

Could you achieve that --

I think you asked me this last quarter, and I didn't answer.

It was based on range of comp assumptions, but we're not going to try to box in a guidance number at this point on sales.

There are a lot of variables that also play into labor and commodities that drive that as well.

So we're not going to give you a range.

But it is based on a range that we have done internally.

Could you achieve it with comps where they are today?

Yes.

Okay.

And then -- that is important.

And then you said down 50 to 80 and last quarter you said down 50 to 100.

So what got better incrementally on margins from last quarter?

Well, we -- one of the things that we saw was some better than we had hoped for Q1 results.

So our estimates of Q1 were -- came in a little bit better.

And then again, we talked about some of the commodity relief we'll see may not be material, we kind of flexed what-if scenarios through our commodities in the remainder of the year so there is some potential for upside there as well.

Got you.

Okay, great, thank you.

And due to time constraints, we will take our last question from Jonathan Waite with Precipio Research.

Hey, good afternoon everybody.

Got a question on the ad campaign.

So in the back half, was it all brand advertising as well?

Yes.

In the back half of 2008, yes, it was all brand advertising.

We launched two new creative spots though, in the beginning of Q3.

Okay.

And then what you're planning on doing is this national advertising for the sliders?

That's correct.

It is national cable advertising.

Okay.

As you look back on this -- as the ad campaign you ran over the last year or two, do you feel like you got an adequate payoff from it, or was the fact that it was mainly brand advertising kind of hindered any sort of traffic that you were able to generate?

We did feel that we got benefit from the television, primarily through advertising awareness and understanding, especially in our newer markets.

We did see our unaided and aided awareness increase significantly in those markets, so that was very successful in our minds.

But as we mentioned in past calls, we believe that our strategy of focusing on product news, and that is what we're doing with steak sliders, is the way to drive traffic for us.

Going forward, is national advertising going to be part of that, your budget and your thoughts on the marketing --

It will definitely be a consideration if the return is there, yes.

Okay.

Well, I guess the question is more, do you feel like you got a good return?

Here we are in the first quarter, you had a down 8, and yet you got up earnings and your four level -- your four wall EBITDA margin is flatish in what could arguably be said, a more competitive environment.

Yes, we felt we got the return out of the TV.

Okay.

Okay, thanks.

Thank you.

And that concludes our question-and-answer session.

I would like to turn the conference back to our speakers for any closing remarks.

Well, at this point, we will -- we thank you for your time today.

It has been a long call, Katie is out of breath.

But we appreciate your time, and look forward to talking to you again.

Thank you.

Thank you everyone.

That does conclude today's conference.

We thank you for your participation.