Red Robin Gourmet Burgers Inc (RRGB) 2010 Q2 法說會逐字稿

Greetings and welcome to the Red Robin Gourmet Burgers Inc.

second quarter 2010 earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Katie Scherping, Chief Financial Officer for Red Robin Gourmet Burgers.

Thank you Ms.

Scherping, you may now begin.

Thanks, Shay.

Before I get started I need to remind everyone that part of today's discussion will include forward-looking statements.

These statements will include but will 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 reflect events or circumstances that might arise after this call.

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

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

We plan to file our 10-Q for the fiscal second quarter of 2010 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 Schedule 1, which reconciles our non-GAAP restaurant level operating profit to income from operations and net income.

Now before we turn the call over to our Chief Executive Officer, Denny Mullen, to kick off the discussion of our most recent quarter's results, I would like to introduce our independent Board Chair, Pattye Moore, who joins us today to share some governance updates.

Pattye?

Thanks Katie, and good afternoon everyone.

We have a lot of important news to cover on today's call, so let me get started.

First, in addition to our earnings release this afternoon, we also issued a separate press release announcing the appointment of Stephen Carley as Chief Executive Officer and Board member effective on or before September 12, 2010, implementing the planned succession of Denny Mullen.

The Board of Directors and I are pleased that Steve is joining the Company as he brings significant restaurant food service and consumer branded management experience to the Red Robin team.

This is the culmination of a rigorous selection progress undertaken by the Succession Committee and the Board with the assistance of Korn/Ferry.

We interviewed multiple candidates and the Board is very confident in Steve's experience and fit with Red Robin.

Beyond his restaurant experience, we also believe that Steve is a good cultural fit, which is very important to Red Robin.

He understands our unique positioning in the casual dining marketplace.

We look forward to his future contributions to the Company as the entire team remains focused on driving improved financial results and long-term returns for shareholders.

Denny will remain on Board until Steve starts and has agreed to be available as needed to ensure a smooth transition.

I can also assure you that the Board is fully engaged in the on-boarding process for Steve.

Steve will be getting out to meet shareholders and key constituents as soon as it's practical.

At this point though, I would like to pause and take a minute on behalf of the Board and the entire Red Robin team to thank Denny for his many contributions, particularly during these most recent turbulent times.

Second, we recently added Glenn Kaufman to the Board of Directors.

Glenn is the fourth new independent Director added to the Board this year and he also brings significant restaurant industry and business experience to our Board.

With Glenn's appointment, our Board continues to be comprised of a majority of independent Directors.

Third, the Board voted in favor of adopting a shareholder rights plan to protect our stockholders from coercive or otherwise unfair takeover tactics.

The Board determined, with the assistance of its legal and financial advisors, that a shareholder rights plan will afford stockholders appropriate protection and allow the Board time to fully execute its fiduciary obligation in a thoughtful and measured manner.

Four, consistent with our focus toward appropriately allocating capital towards store openings, debt reduction, and share buybacks the Board extended the previously authorized $50 million stock repurchase authorization to December 31, 2011.

I believe these developments all support the Board's commitment to sound corporate governance and a long-term focus on driving shareholder value.

I'll now turn the call over to Denny to cover some of this quarter's highlights.

Denny?

Thanks Pattye and thanks everyone for joining us today.

In addition to Pattye and Katie, we also have Eric Houseman, our President and Chief Operating Officer, and Susan Lintonsmith, our Chief Marketing Officer.

Eric will provide an update on the operations initiatives and Susan will share details on our marketing efforts.

Katie will review in detail our most recent financial performance and business outlook.

As we reported in the earnings release, our comp store sales decreased 1.2% in the second quarter of 2010.

This follows a 2.3% decrease in comp store sales that we reported last quarter and double-digit decreases in comp store sales that we reported during most of 2009.

Our limited time offer promotions in the spring and summer of this year continue to contribute to improving comp store sales.

And we did achieve nearly 1% increase in guest counts in the second quarter, compared to Q2 of last year, which we believe is contributing to some of the market share gains.

However, there were some macroeconomic challenges that worsened in the second quarter and had negative impact on consumer spending and consumer confidence.

We believe these challenges diminished the impact of our Q2 television media support compared to the impact of the TV in Q1, specifically the widely publicized downturn in consumer confidence in June and July as well as the underemployment and unemployment levels have continued to create headwinds to strengthening guest count and sales trends.

Since early in the first quarter of 2008, our restaurant -- excuse me, our restaurants operating in certain regions of the country have negatively impacted our results.

Until the most recent quarter, these regions had not materially changed so we did not specifically call them out.

However, during the second quarter of this year, our results were negatively impacted by lower restaurant sales in California and Arizona, which have been more heavily impacted by macroeconomic factors.

Excluding the impact, from our comp restaurants in these markets, our comp restaurant sales would have been approximately 30 basis points positive while our guest counts would have been positive 2.5% compared to the second quarter of 2009.

The 72 comparable restaurants in California and Arizona represented 25% of our total Company comparable restaurant sales in the second quarter of 2010.

Even in the face of continued challenging economic factors, and their effect on our overall financial results, we remain pleased with the performance of our restaurant openings this year.

In the second quarter, we opened one new Company restaurant and on July 19, we opened another new Company restaurant, our first in the fiscal -- current fiscal quarter and our fifth Company NRO of 2010, all funded from operating cash flow.

In addition, two new franchise restaurants opened in the second quarter.

As we said previously, we expect our average cash investment for new Company-operated restaurants development in 2010 to be around $1.7 million per restaurant, net of landlord contributions.

Seven new Company-owned restaurants were open -- excuse, are currently under construction.

Three of these expected to open during the fiscal third quarter for total of four Company NROs in Q3 and another three are planned to open in Q4, for a total of 11 Company-owned NROs for 2010.

All new Company restaurant development is being funded again with operating cash flow.

Our franchisees are expected to open a total of four to five restaurants this year.

Currently two new restaurants -- franchise restaurants are under construction and two have already opened.

Eric will discuss the impressive operating results we have seen from 2010 from NROs, which gives us confidence to continue adding restaurants to our system.

We are evaluating development opportunities for 2011, and we are currently planning up to 15 new restaurants for 2011.

Like 2010, these will be internally funded and we will be taking advantage of varied real estate opportunities that exist including former restaurant and retail space conversions and mall locations in addition to a few traditional freestanding locations.

And now I would like to turn over the call to Eric for an operations update.

All right.

Thanks Denny, and good afternoon everyone.

In the second quarter of 2010, our comp store sales decrease of 1.2%, was driven by an increase in guest counts of 0.9%.

That was offset by a 2.1% decrease in our average check.

About a 0.5% of the average check percentage decrease was a direct impact of the LTO, which was priced at $6.99, combined with a 0.2% decrease from the higher Q2 2009 steak slider promotion price point of $10.99.

The 1.2% comp store sales decrease compares to comps down 11.5% in the same period a year ago and as Denny mentioned, it was also a significant improvement from our comps over the last several quarters.

We believe the success of our LTO promotions, supported through our TV media, has allowed us to outperform the [NapTrack], Casual Dining Industry Guest Count Performance Index since February when we launched the spring campaign.

Also, in the second quarter 2010, average weekly sales for the 290 restaurants in our comparable base, were $54,549 compared to $56,335 for the 245 restaurants in our comparable base in the second quarter of 2009.

Average weekly sales for 19 non-comparable restaurants was $58,449, during the second quarter of 2010 compared to $56,053 for our 44 non-comp restaurants a year earlier.

As Denny mentioned, we opened five new Company-owned restaurants so far this year, and we continue to benefit from the ongoing efforts to strengthen our new restaurant openings.

In fact, our five NROs so far this year have averaged more than $118,000 in their opening week sales and have achieved better than comp-like margins.

The efforts of our teams and the infrastructure processes, tools, and systems we put in place over the last 18 to 24 months has given us the confidence to continue growing the Red Robin Brands nationwide, both from a top end as well as bottom line profitability perspective.

In fact, our restaurant level operating profit for our 2010 restaurant openings is about 500 basis points better than our 2007 NRO class.

For all Company-owned restaurants, average weekly sales were $54,786, from the 3,705 operating weeks in the first -- in the fiscal second quarter of 2010 compared to $55,973 from the 3,619 operating weeks in the fiscal second quarter of 2009.

Please note that the average weekly sales figures that we quote are gross sales numbers that exclude the impact of discounts which run about 2.5% to 3% of our gross revenue.

So the restaurant revenue that we report on our income statement reflects our weekly sales multiplied by the operating weeks net of these discounts.

As you can see from a labor cost as a percentage of sales year-over-year, we are still experiencing a negative impact from deleverage.

In addition, we experienced some significant sales volatility from week to week in the post-media period early in the second quarter, after our spring LTO promotion was complete.

Dramatic week to week swings in sales volumes are very unusual for us and do make it difficult for our operators to react to their staffing levels quickly enough to impact the labor in the restaurants.

We did, however, see the labor productivity in these -- in our restaurants stabilize by the end of the quarter.

I mentioned on our last call that we have been working on strengthening our certified designated trainer and regional training focus on our great beverages, especially our Bottomless Beverage Offerings and our handcrafted Monster Milkshakes, this to reinforce both Red Robin variety and value.

In the second quarter, we rolled out an initiative to equip team members with the tools and training to educate our guests about our beverages and to help our guests make a beverage selection that maximizes their Red Robin dining experience.

Early feedback that we've received on this effort is encouraging and our team members are excited about this focus and with it the flexibility it gives them to engage with our guests and provide even higher levels of guest service.

Our guests are telling us that they appreciate the knowledge we are sharing about all of our quality, variety and value that we offer in our beverage selections.

In addition, we continue to work with our third party guest satisfaction vendor, Empathica, on specifically what drives guest loyalty at the restaurant level.

We've actually evolved our model to become more and more detailed and prescriptive around these insights.

This feedback and performance metrics give our general managers more specific data in terms of the operational deliverables within the four walls of our restaurants to strengthen our level of guest service at the unit to unit level.

We are also expanding this model and methodology to focus on the team member loyalty drivers.

That is what makes a great work experience for our restaurant teams which should contribute to increased job satisfaction, greater retention and lower turnover.

So with that overview of operations, let me turn it over to Susan to talk about our most recent and upcoming initiatives related to marketing.

Susan?

Thanks Eric.

As in the first quarter, the big headline for our marketing efforts was our latest Limited Time Offer, or LTO.

During our summer LTO, which started June 14, we again promoted two craveable and innovative limited time items, our Big Melt Bacon Burger and our Honey Mustard Chicken Sandwich, each at an attractive $6.99 price point, and each reinforcing Red Robin quality, variety, and value.

Like the spring promotion, the summer LTO was supported with four weeks of national cable TV over a five week period plus local network in select markets.

The promotion ran for seven weeks in restaurant during which we also supported the campaign with an integrated and comprehensive digital plan.

Now similar to the way we shared results for the spring LTO last quarter, we will divide the second quarter which was 12 weeks into two parts, the first eight weeks and the last four weeks.

And then we will also look at first four weeks of the third quarter.

The first eight weeks of Q2 was prior to the TV media and the last four weeks of Q2 had three weeks of TV.

We'll also remind you what our same-store sales and guest counts were in the first four weeks of Q2.

Regarding same-store sales, during our Q1 call, recall that we told you that in the first four weeks of Q2, our same-store sales were down 1.2%.

By the time we were eight weeks into Q2, again before our summer TV media support, our pre-media same-store sales were down 2.6% compared to down 11.6% in the first 8 weeks of Q2 last year.

During the last four weeks of Q2 this year, with the three weeks of TV, our same-store sales improved to up 1.6%, or a positive lift of 4.2%.

For the first four weeks of Q3, which had TV support in the first week of the quarter, our post-media comps remained up 1.4%.

Regarding guest counts, in the first four weeks of the second quarter, our guest counts were down 0.1%.

For all the first eight weeks of the second quarter, which was pre-media TV support, our guest counts were down (inaudible) compared to 12.7% down in the first eight weeks of Q2 last year.

During the last four weeks of Q2 this year, during which time we had three weeks of TV media support, our guest counts have approved -- improved to up 4.7% or positive lift of 5.7% versus the pre-media period.

Last year's guest counts for the last four weeks of Q2 were down 11.1%.

For the first four weeks of Q3 which, again, had one week of TV media in the first week of the quarter, our post-media guest counts were up 4.1%, versus prior year.

So we continue to be pleased with the results of our LTO promotions based on the strengthening of our total brand awareness which continues to be up versus prior year.

We told you during our last call that we raised the National Advertising Fund or NAF, from 25 basis points to 150 basis points from the beginning of the second quarter until the end of the year.

This budget funds digital media throughout the year and national television for both our summer and fall LTO promotions.

About 75% of the contributions to the NAF are paid by the Company.

Katie will break down the media investment for Q3 and Q4 later in the call.

On our last call, we also talked about the new menu that we rolled out to our restaurants in late May.

In addition to wide selection of gourmet burgers, salads, and entrees, we added or replaced nearly a dozen items with new menu items including our new Pub Burger and Patty Melt, some new pasta offerings and our Jump Starters, lower-priced appetizers.

The new Jump Starters have positively impacted our appetizer sales.

Also, the momentum of our gift card sales continues to be strong.

Gift card sales during the second quarter of 2010 were up 36%, or $2.4 million versus prior year.

Generating close to $9 million in gift card sales year-to-date through third party in restaurant, business to business, and online sales.

Our third party gift card placement during the second quarter grew to more than 8,400 retail locations up from 7,400 at the end of 2009 and up from about 3,100 locations at the end of Q2 last year.

We also have commitments that will add nearly 1,600 locations in the back half of 2010 so we are on track to achieve our goal of 10,000 retail locations for our gift cards by the end of this year.

On the social media front, our Facebook page now has more than 75,000 followers, which is about three times the number from a year ago.

We also continue to grow our followers on Twitter.

We currently have more than 2,000 and in the second quarter, we began testing Foursquare and limited locations as a means to reach out to our guests and let them know about our limited time offerings when they are near a Red Robin Restaurant.

Looking ahead to Q3, our fall LTO promotion kicks off in September and features two new limited time items, each at a competitive price point and both reinforcing Red Robin quality, variety, and value.

The fall LTO will be supported with another four week schedule of TV media.

We also had exciting market initiatives that we're launching this year to drive sales.

We have increased our focus on beverages, both alcoholic and non-alcoholic.

We've also developed a new menu design that tested very well with guests and helped highlight our menu variety.

In September, we will launch this menu in roughly half the country.

Please note that we do not plan to take a price increase this year.

And our loyalty program, Red Royalty, which we have been piloting for a year, will be rolled out to about one-third of our Company-owned restaurants by November of this year with plans to expand to the remainder of the corporate restaurants in Q1 of next year.

We are excited about the learnings and the improvements we've made to this program.

We believe Red Royalty will help us retain guests, improve visit frequency, and provide invaluable information on purchase behavior.

Also, last week, we launched our fifth annual Kids' Cook-Off promotion.

We are proud to be featuring our latest winning burger, the Spicy Honey Glazed Bacon Burger created by 10-year old Emma Potts of Bonney Lake, Washington.

Our Kids' Cook-Off is a huge hit for the Red Robin brand and continues to be one of the most impactful public relations programs.

Overall, our PR programs this year has generated 25% more news coverage than the first half of 2009, reaching 63 million consumers and Cook-Off continues to be one of the biggest contributors to the success of our PR efforts.

Finally, we are continuing our focus on new product development to make sure we're all anticipating and satisfying the needs of our guests and have a robust pipeline to continue with our successful LTO new product strategy.

So those are some of the marketing headlines.

We are pleased with the success of our spring and summer Limited Time Offers and we look forward to the results of our fall LTO promotion and our great marketing initiatives during the balance of this year which we will discuss more with you on our call in November.

Now I will turn the call over the 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 RedRobin.com in the "Investor Relations" section.

The fiscal second quarter of 2010 was a 12 week period ending July 11, 2010.

Compared to the fiscal second quarter last year, total revenues including restaurant sales, franchise royalties and gift card breakage revenue, which is included in other revenue increased 0.1%, to $201.3 million.

Total restaurant revenues of $198 million, were flat year-over-year and consisted of $185.1 million in sales from our comp restaurants and $12.9 million in sales from our non-comparable restaurants.

Franchise royalties and fees increased 1.4% to $3.1 million.

The 109 comp restaurants in the US franchise system reported a 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 second quarter.

Before I begin my discussion of restaurant level operating profit, or RLOP margin, I want to remind you about the reclassification of our marketing and advertising expenses to SG&A.

Our prior year numbers have been adjusted to reflect the classification change which we talked about on our last few calls.

The margins that I will be referring to today will be the RLOP margin and the selling, general and administrative expenses for the second quarter 2010, compared to the adjusted percentages from second quarter 2009.

Our RLOP margin was 18.3% in the second quarter 2010, compared to 19.7% in the second quarter 2009.

The 140 basis point decrease from the second quarter of last year was driven by a 90 basis point increase in labor costs, 20 basis points of higher food costs, 10 basis points of higher occupancy costs and 20 basis points of higher other operating costs, mostly related to higher service and maintenance expense.

Our increase in labor is mainly due to 50 basis points of deleveraging on salaried wages and fixed cost benefits from lower sales volumes, and a 20 basis points decrease in our labor productivity early in the quarter/ Also impacting labor costs was 20 basis points related to the LTO running at a promotional price point of $6.99.

Our occupancy cost increase is due mainly to deleveraging from lower average restaurant volumes, uncertain fixed costs year-over-year.

Our cost of goods basket is generally down from 2009, except for the impact of increased ground beef and higher produce prices as well as the negative impact on COGS from the LTO items.

Selling, general and administrative expense in the second quarter of 2010, were $20 million in the fiscal second quarter 2010, compared to $18.5 million last year.

About $3.3 million for the Company's share of the summer LTO campaign was incurred in the second quarter.

As I explained earlier, all of our marketing and advertising expenses are now categorized as selling expenses and are reflected in this expense category.

In the second quarter of 2009, recall that we spent about $1.2 million on some limited time national cable TV, in support of our slider promotion in the summer of last year.

Finally SG&A expenses in Q2 this year also included higher Board of Directors and governance-related fees offset by lower performance-based bonus expenses compared to the second quarter of last year.

Our pre-opening expense of roughly $375,000 in the second quarter 2010 was lower than $588,000 in pre-opening expense during the second quarter last year, primarily due to fewer openings and the timing of NROs compared to the same period a year ago.

Our pre-opening costs continue to average about $275,000 per unit.

Net interest expense was $1.3 million in the fiscal second quarter of 2010, compared to $1.6 million during the same period in 2009.

Our interest expense in the second quarter of 2010 decreased from the prior year, primarily due to lower average outstanding debt balance as we have continued to pay down debt with free cash flow.

You will recall that last quarter, we began recording revenue from gift card breakage and other income.

In the second quarter this year we recorded about $200,000 in gift card breakage income, which is in the range we expected to record on a quarterly basis ongoing.

Also, as we said in our last call, we have not yet recorded any breakage on our unredeemed gift cards for our third party gift card program since we don't have enough history from this program yet to make an accurate estimate of breakage income.

Once we have determined that we have adequate history from the third party gift card program, we will quantify and record breakage into income at that time.

Our effective income tax rate for the second quarter of 2010, was 9.1% compared to 23.2% for the second quarter of 2009.

The decrease is primarily due to more favorable general business and tax credits, primarily the FICA Tip Tax Credit, which as a percentage of current year income before tax, did not change at the same rate as the change in our taxable income.

Net income for the fiscal second quarter of 2010, was $4.3 million or $0.28 per diluted share, compared to net income of $6.4 million or $0.41 per diluted share in the fiscal second quarter of 2009.

Our cash flow statement will be included in our second quarter 2010 10-Q filing tomorrow but note our cash flow from operations of $34.9 million in the first half of the year exceeded our capital expenditures of about $17.2 million.

We paid down debt of $8.3 million, through Q2 of 2010.

On July 11, 2010, we had $11.9 million in cash and cash equivalents and total debt outstanding balance of $163.9 million, which included $108.7 million in borrowings under our $150 million term loan, $46.9 million of borrowings under our $150 million revolving credit facility and $8.3 million outstanding for capital leases as well as $6.2 million of letters of credit outstanding.

In the second quarter 2010, we paid down $8.3 million in debt and since the end of the second quarter 2010, we've made additional debt repayments of $3.9 million on our revolving credit facility.

We're called at our credit agreement matures in June 2012.

We are subject to a number of customer covenants under our credit agreement and as of July 11, 2010, we were in compliance with all debt covenants.

Our debt-to-EBITDA ratio for purposes of our covenant was just below two to one at July 11.

The leverage ratio below two reduces our borrowing spread on LIBOR plus 1% to LIBOR plus 87.5 basis points.

Assuming we use our expected free cash flow to pay down debt in 2010 including $18.7 million in scheduled term loan payments, we will stay below our maximum debt leverage of 2.5 to 1, allowed by our credit agreement for all of 2010.

Now let's talk about our outlook for the remainder of 2010.

We have updated our 2010 guidance to take into account results, we saw in the second quarter from the summer LTO TV promotion and some other trends I will discuss in a moment.

While we still expect to experience deflation in our commodities for a large portion of our commodity basket, we have modified our expectation to a deflation of between 0.3% and 0.5% for the year taking into account the impact from ground beef prices that were higher in the second quarter than what we had expected previously and higher prices in the back half of the year on cheese.

In addition, we have adjusted our guidance to reflect the higher labor cost we experienced in the second quarter.

Our G&A expense has been increased to take into account the cost we have incurred and continue to incur related to our additional Board and governance-related expenses.

For the 2010 fiscal year, which is a 52 week year, we expect revenues of $866 million to $873 million and net income of $0.90 to $1.10 per diluted share.

This represents a $0.20 reduction in EPS for the full year from the guidance we gave you back in May.

These projected results are based upon certain assumptions, including an expected comparable restaurant sales results of down 0.5% to up 0.5%, for fiscal 2010.

Our sensitivity of a 1% change in comp restaurant sales is approximately $0.22 per diluted earnings per share.

So the impact from a decrease on our same-store sales assumption of 50 basis points equates to a decrease in EPS of about $0.11 from our prior guidance.

Our adjusted view on comps for the balance of this year is due to a more conservative view of the current consumer spending environment, as well as our current view that select markets will continue to lag compared to our system-wide comps.

Our annual financial guidance includes expenses related to TV support of our LTO promotions during 2010.

Total 2010 system-wide spending for television is expected to be approximately $18.1 million, up from $2.3 million in fiscal year 2009.

The Company portion of that expense is expected to be $15.6 million for the year.

Here is how our SG&A will break down by quarter for the remainder of the year.

For run rate G&A expense, we expect to incur between $16.5 million and $17.5 million per quarter for the remaining two quarters.

Adding to that, will be Company-only TV marketing expense which is expected to be $3.3 million in Q3, and $2.3 million in Q4.

So let me summarize for you the decrease in our EPS guidance of $0.20 for the remainder of the year, but before I do, let me remind you that $178,000 of pre-tax income or expense equals $0.01 a share for us.

$0.11 of the decrease relates to the decrease of the same-store sales assumptions of 50 basis points and associated cost deleverage.

7% accounts for -- $0.07 accounts for the COGS increase in hamburger and cheese above prior estimates, $0.03 is accounting for the higher labor cost from the second quarter, another $0.03 has been decreased to capture the Board and governance-related expenses incurred and expected to be incurred and a $0.04 benefit has been added to reduce our tax rate assumption to between 10% in the low end and 14% on the high end for the year.

The EPS guidance I've shared with you does not include the cost of the transition of the CEO position which we are estimating could amount to between $2.5 million and $4 million over the balance of the year with the majority of that expense being incurred in the third quarter.

Based on our development plans and other infrastructure and maintenance costs, we expect our fiscal year 2010 capital expenditures to be approximately $35 million to $38 million, which will be funded entirely out of operating cash flow.

We also expect to make scheduled payments of $18.7 million required by the term loan portion of our existing credit facility from free cash flow after capital expenditures in fiscal 2010.

And we expect to use our remaining free cash flow to make payments on our revolving credit facility or opportunistically repurchase our stock.

As Denny mentioned in 2010, we expect to open 11 new Company-owned restaurants with the remaining six restaurants to be opened fairly evenly between Q3 and Q4.

Our franchisees are expected to open four to five new restaurants this year, of which two are already open.

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

Thanks Katie.

In closing, while some of the challenges impacting consumer confidence in spending intensified late in the second quarter, we continue to be encouraged by the strength in our comp restaurant sales and the positive impact that our LTO promotions and TV support are having on our brand awareness and guest traffic.

As we have shared, we have some great marketing initiatives underway focused on Red Robin quality, variety and value that we are confident will help us continue building that momentum.

We also continue to work on strengthening operations and expand our restaurant base and are encouraged by the strong performance of our 2010 new restaurant openings.

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

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions) Our first question comes from Jeff Omohundro from Wells Fargo Securities.

Thank you.

I wonder if you could elaborate a bit further on the weaker markets mentioned, California and Texas, and efforts to rejuvenate sales in those markets such as further tweaking LTOs, and other efforts you might be pursuing?

Thanks.

It's California and Arizona.

Sorry, California and Arizona.

Not Texas.

And we are not taking other than the initiatives that we talked about with the television is the same.

We ran some -- the television was national cable which we supported some markets around the country and two of those markets were in California that we supported with local network.

Other than that, and the beverage initiative that Susan mentioned, which is national, we are not doing anything out of the ordinary for California other than amping up service as best we can.

And then just, I guess, a housekeeping item.

It was mentioned in the guidance regarding the CEO transition costs that wasn't in that SG&A line, will that be separately disclosed as a separate line item?

Yes.

And Jeff, I just want to correct what I said, we estimate it to be $3.5 million to $4 million.

I think I stumbled over that and said $2 million, so it's really $3.5 million to $4 million and that has not been considered in our $0.90 to $1.10.

It will be broken out separately, yes.

Thank you very much.

Our next question comes from John Glass from Morgan Stanley.

Hi, thanks very much.

Last quarter, I think you said you were surprised after the LTO had run its course.

It's on a decline in comps as you enter the second quarter and this quarter you said traffic and comps, I think are still positive but I think there is a mismatch.

Did you have -- you had TV this year for a week into the third quarter and you didn't last quarter, is that accurate?

That's correct.

So how do you -- I guess the larger question is, how do you know you are not going to experience the same fall-off that you did last quarter?

Is there any evidence in the weeks that you haven't had TV, for example, that it's sustaining?

And Eric I think you mentioned some volatility in sales.

I presume you meant there's a decline but were there actually volatilities where some weeks actually spiked up and down -- and is it just obvious as just sales that had fallen off after the LTO ended last quarter?

Yes, John we did see rather large spikes up and down as much as 15% swing either way from week to week.

I'm sorry.

Why is that then?

I mean what's happening if you're -- why are sales going up, I guess, during those periods then and also, if you could just address the question about why you think you are not going to experience the same erosion in sales now that TV has concluded that you did last time?

One of the reasons, John, for taking our guidance down 50 basis points was to reflect some of that pattern that we did see so that has been accounted for in our guidance.

Could you be just a little more clear then?

Are you -- once now that advertising is over, what are the trends looking like then?

Well, I think we mentioned -- we talked about California not being a strong as the rest of the country, so we have to take that into account.

That was something new that we saw in the second quarter trends that we haven't seen yet before so we took that into account when we adjusted our guidance.

But you don't want to be specific about trends ex TV?

Well, we don't -- we've never gone week to week but the four weeks in period eight, we is the week that Susan was talking about.

We had one week of TV in the first week that there was -- the sales, as Eric said, were sporadic or erratic, as the case may be, but frankly, that, if you want to -- we had as strong as last week of that four weeks as we did the first week or the second week.

So we are in the first week of period nine and we will see how it goes.

That's only been three days, so --

And then just lastly, what -- in the first two promotions is there anything you've learned in terms of the type of products you are going to promote going forward that you might change that would make the back half look better in terms of sales either or margin, either price points that work better?

Is there anything that, is concluded from these first two experiences?

We still think that having a burger combined with a variety item is the way to go.

We do find that when we put it with a salad, it does communicate variety even stronger than when we did it this summer with the Chicken Sandwich.

So we are going to continue that winning recipe of the burger with the salad at an attractive price point and we feel we have a good price point base on our summer learnings.

Got you.

Thank you very much.

Thank you.

Our next question comes from Brad Luddington from KeyBanc Capital Markets.

Thank you.

Just a follow up on John's question right there.

You just said that you think you've found a good price point based on summer learnings, does that mean that very likely stick with the $6.99 price point on the fall LTO?

It is very likely, yes.

Okay.

And then, on the -- Katie on the guidance change, I'm sorry, I got everything you talked about except for the first one you said $0.07 to hamburger and cheese, $0.03, $0.03 plus $0.10.

What was the first one?

It was $0.11 for the change in same-store sales.

Okay.

Then looking at the menu design that seems to be testing well, you said that you will put that out to half the system, is the logic just to test that on a larger basis or why not the whole system on that?

We are rolling it out to half the system just based on our learnings and where the opportunities are so what we had found through our research that we've talked about in the past is that we had a better opportunity to communicate a variety in parts -- in probably our less developed markets.

So we know we have a strong menu regardless, whether it's our current [postcard] or this format.

The one does communicate variety a little bit more strongly in our less developed market so is we're leveraging that learnings and making that move.

Okay.

So some more to drive traffic in less developed in core markets, probably same menu still?

Yes.

At least for a while.

Okay.

Then just finally on the -- I don't know if this is for Pattye or Denny or whoever, the shareholder rights plan that was announced, is that just driven by speculation that we've seen about LBO talks with you guys and others or was it something driven by another issue?

Well, this is Pattye, the Board doesn't comment on speculation and as I mentioned earlier, we adopted the plan really to afford appropriate protections for our stockholders and to allow the Board time to exercise fiduciary obligations.

That's the reason why we adopted the plan.

Okay.

Thank you.

Thank you our next question comes from Joe Buckley from Bank of America.

Thank you.

Pattye, just to follow up on that and I'm assuming there's probably a filing on the shareholder rights plan but what are the key aspects of it?

Not going to go into that detail right now.

But it will be filed.

It will be filed.

Okay.

Then just from the second half marketing plans and forgive me if you shared this, did you mention the number of weeks that you will be on in the third quarter and the fourth quarter?

No I didn't break it down specifically.

So we do have four weeks for the fall promo, of which two weeks are in Q3 and two weeks are in Q4.

Okay.

Would that be the extent of the TV advertising for the balance of the year?

That is correct.

Okay.

And just one last one.

It's interesting the arizona/ California breakout.

Is this the first quarter that, that was so dramatically or significantly different?

Joe, you may recall back in early 2008, the first quarter that we really saw the dramatic difference between California and Arizona performance against the rest of the system, we called it out then.

But we didn't continue to call it out because it was staying about the same delta from the rest of the system on an ongoing basis and what we saw from the second quarter is the lift from our promotional campaigns were impacting the rest of the system more than they were California.

So California is still a drag for us and we called it out because now it's becoming more material once again.

Okay.

Thank you.

Thank you.

Our next question comes from Destin Tompkins from Morgan Keegan & Company.

Thank you My question is on one follow-up on the LTO pricing.

I know you had the $5.99, $6.99 price point.

Do you see any different mix with that change in pricing?

We did see a slightly lower mix of the two promo products so we reported that we saw about 10% during the spring at the $5.99.

At the $6.99 it was a little bit lower, it was about 7% total.

However, we don't know how much of that is based on the price point itself, or it could just be the two products or it could be the economy or it could be whatnot.

So yes, we did see a slight difference in the mix.

Okay.

Great.

Eric, you talked about the performance of new restaurants and I think you mentioned the most recent class had 500 basis points better of RLOP margin than maybe 2007.

If I think about the unit economics overall with a pretty dramatic reduction in the cost of investment that you guys have realized over the last couple of years, combined with little bit better top line and margin performance, how does the unit economics compare not only to 2007 but maybe to some of the peak years where you were opening a lot of restaurants and they were performing pretty well.

I don't know when those, maybe 2005, 2006 timeframe, are you seeing overall unit economics that are [comparable] to that?

Well, clearly Destin, we've reduced the cost of the capital investment.

So from 2005, if you look at the -- we referenced 2007 because we had talked about that before, and if you even actually go back further than that, the incremental improvement gets even more beneficial.

Okay.

How do you think about that in terms of --- do you feel like it's because you have been able to reduce the number to 11, has it allowed you to the opportunity to scrutinize locations and focus a little bit more closely on those restaurant openings.

And I don't know if that's the case but if it is, how do you think about it as you go back to 15 next year, and what do you think has been the driver of that better performance?

I would say since 2005, we've created a much better discipline around the entire process from, obviously, taking the investment costs out to how we open these to how we successfully look at our succession pipeline.

There is really no material difference going from 11 to 15.

If we were to go from 11 to 35, from an infrastructure standpoint, I mean the deals are the deals, obviously there is great real estate deals out there in this type of environment because not everyone is growing.

So yes, I think the going from eleven to 15, I don't see that being anything material.

Keep in mind Destin, the initiative around NROs was really focused on the lead times to get this experience management into those NROs as opposed to rookies, if you will, and if we have adequate lead times gearing from eleven to 15, as Eric said, is no big deal and that's in the plans.

Great, thank you.

Thank you.

Our next question comes from Nicole Miller Regan from Piper Jaffray.

Hi, how are you doing?

This is Josh on the call for Nicole.

Doesn't sound like Nicole to me.

No, just had a question for you on the new product introduction process, I just wanted to see if you could remind us a little bit about how new items get onto the menu.

It seems like you're adding -- have a lot of new faces on the menu and what have you learned from that process and has that changed recently?

Then I also had a follow up.

Okay, it hasn't changed that recently.

We've had a pretty disciplined new products process in place for probably the last 18 months.

We do thorough testing from Ideation's concept screening, ops testing, market testing, and we are looking for new products that have that LTO that would go on our national calendar and be supported with television versus those that fill menu gaps.

And we are always trying to keep our menu fresh and new and rotate some items on and off so we do have a pretty disciplined process to look at that.

We have looked at something that's like a turf analysis on our burgers to make sure that we have the optimal line-up as well.

Okay.

Thank you.

Back to the Red Royalty program, can you talk to us about the learnings from that and it seems like there were some ongoing tweaks to it as you tried to test at a couple of markets.

What has been the opportunity at this level, or even just generally on your ability to track repeat visits and then also incent customers to come back in more frequently?

Okay.

The big learning over the year that we had it in the 17 restaurants was that we were able to influence and impact guest behavior with this program.

We did see an incremental frequency once they were in the program versus prior behavior versus the control.

So we were able to through this time period go in and understand the different components of the program and which ones had the higher ROI and which ones really drove the guest behavior.

So based on that we talked in the past about all the different pieces of the program, we have moved away from a part that was not as high from an ROI.

We did test both programs conceptually with guests and we found out that the one that we are launching is actually more profitable and has just as high or attractive as the one that was tested in market.

So we just leverage the learnings to make sure that we're driving appropriate behavior profitably.

Okay, thanks.

Is the new beverage program still in the process before or is that a result of what you -- in between LTO learnings and Red Royalty program as well?

Well it's something that we started several months ago as part of our (inaudible) sales initiative but we've accelerated it even more focused now that we have some people focused on it and we are continuing to make sure we fill that pipeline.

Because we all know that if you can recommend a couple of fun beverages, that it's more likely that the guests will order it.

Got you.

Okay, thank you.

Thank you.

(Operator Instructions) Our next question comes from Peter Saleh from Telsey Advisory Group.

Great.

Thanks for taking my question.

Just wondering -- given what you seen on the -- from the advertising strategy over the past couple of quarters, do you feel like this is the strategy you will stick with and going into 2011?

We still are working on our plans for 2011 but the short answer is yes.

Okay.

Following up on that, is there a way to, I guess, start planning our media buying now or maybe in the next couple of months whereas you can reduce our your media cost or get more impressions for your dollar?

We are working with our agency on that.

We will probably make that call in the next couple of months.

I know our upfront buy would be in the fall time period so we will let you know on -- in our next call what we decide to do there.

Great, thank you.

Thank you our next question comes from Greg Ruedy from Stephens Investment Management.

Thanks.

I was hoping to get a little more color on the Jump Starter introduction, you -- it sounds like you are getting a better average check from that, but how about from throughput perspective, any push back on the convenience factor?

Currently, no, we're not.

That's why we tested this in multiple markets over the course of a number of months so that it wouldn't impact throughput and we looked at things in terms of cook times, things that could be done in multiple baskets in the same fryer and then we also sourced multiple -- looked at multiple vehicles to allow for ease of assembly and delivery to the table.

So it's been a very well received by team members as well as our guests and we are looking to -- the when the trifold menu that Susan alluded to, actually looking to add one or two more items to the Jump Starter menu.

The Jump Starter lets the -- affords the guest the opportunity to control their own dining experience, so it doesn't affect the (inaudible) of time.

Okay.

Wanted to go back to california/arizona.

Can you skew maybe those two states from a socioeconomic background versus the rest of the system and more importantly, is immigration part of what is happening there?

That's a good -- I don't think that from our base know -- the sites we selected, the sites we have, demographically, even socio-demographically are similar to other parts of the country.

Southern California is little softer than northern California for us.

We only have -- we don't -- we have one store in Tucson and that's a franchise store.

So our others concentrated in the Phoenix metro area.

At this point, we don't think that's an issue.

Okay.

On the 2011 development, how many leases have been signed at this point?

You mean for -- I'm sorry -- 2011.

How many leases have been signed?

Zero have been signed.

Okay.

That's all I had, thanks.

Let me elaborate if that seems strange.

The reason zero have been signed is we didn't want to sign until we had board approval last week to proceed which is similar to what we did the prior year.

The August Board meeting is the meeting that the sites and the details are presented to the Board and the request for CapEx is either approved or modified.

Thanks for taking my questions.

Thank you.

Thank you.

At this time, we have no further questions.

I would like to turn the call back over to management for closing comments.

Okay.

Well, thanks everybody for joining us.

As always, our success is driven by the talent and passion of our team members who we thank each and every day for their hard work and dedication at Red Robin.

I've enjoyed chatting with you all over the last five years and the Company looks forward to chatting with you at the end of the third quarter.

Thank you very much.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation