Red Robin Gourmet Burgers Inc (RRGB) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Red Robin Gourmet Burgers, Inc.

third 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, Inc.

Thank you, Ms.

Scherping, you may now begin.

Thanks, Christine.

And thanks, everyone, for joining us on our call today.

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 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 third 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 Schedules I and II, which reconciles our non-GAAP results to GAAP results.

With me here on the call at Red Robin are Steve Carley, our Chief Executive Officer, Eric Houseman, our President and Chief Operating Officer, and Susan Lintonsmith, Chief Marketing Officer.

I'll provide details of our most recent financial performance and our business outlook, and Eric and Susan will be here to participate in the Q&A after we deliver our prepared remarks.

But before we get started with our review of the fiscal third quarter results, I'd like to turn the call over to Steve for some opening remarks.

Steve?

Thanks, Katie, and good afternoon, everyone.

I want to introduce myself to you and start off by telling you how excited I am to be a part of the Red Robin Team.

I've been here for nearly eight weeks now, and I've already had a chance to listen to and learn from many of my fellow team members.

I strongly believe that, while Red Robin has accomplished a great deal in its 40-plus years of history and has grown to be one of the strongest and most recognizable brands in casual dining, Red Robin is a company with much greater potential.

There are areas in which we are strong, but we can be even stronger.

There are areas of our business that are doing well, but improvements are needed to turn our performance into good performance

In the relatively short time I've been here, I have already seen this is an organization with a strong and inspiring culture, considerable talent, and a true passion for winning.

My goal is to work with our leadership and our board to plot a course for long-term growth of prosperity an unleash our team members so we can become the best casual dining brand in the industry.

After our review the quarter, I'll share more of my thoughts on this.

Until then, I will turn the call all over to Katie for the review of the third quarter.

Katie?

Thanks.

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

The fiscal third quarter of 2010 was a 12 week period ending October 3.

Compared to the fiscal third quarter of last year, total revenues, including restaurant sales, franchise royalties and fees, and gift card breakage revenue, which is included in other revenue, increased 4.2% to $194.8 million.

Total restaurant revenue of $191.6 million in the quarter consisted of $182.1 million from our comp restaurants and $9.5 million from our non-comparable restaurants.

In the third quarter of 2010, our comp store sales increased 0.9%, which was driven by an increase in guest counts of 2.6% that was partially offset by a 1.7% decrease in average check.

This quarters€™s comp store sales increase compares to comps being down 14.9% in the same period a year ago, and represents the first quarter of positive comp sales since Q1 of 2008.

We believe the success of our LTO promotions supported through our TV media has allowed us to continue out performing the casual dining industry guest count indexes during periods when we had TV media support.

Now, regarding same-store sales, during our Q2 call, we told you that in the first four weeks of Q3 our same store sales were up 1.4%.

Recall that the first four weeks of Q3 benefited from one week of TV media from the summer LTO.

By the time we were 10 weeks into Q3, before our fall TV media support began, our pre-trend same store sales were up 0.4%, compared to down 15.4% in the first 10 weeks of Q3 last year.

During the last two weeks of Q3 and the first two weeks of Q4 this year, covering the four weeks of TV from the fall LTO, our same store sales improved to up 4.2%, or a positive lift.

For the first four weeks of Q4, which had the final two weeks of TV support, our comps were still up 4.3% compared to down 11.6% for the first four weeks of the fourth quarter last year.

In the third quarter 2010, average weekly sales for the 297 restaurants in our comparable base were $52,019 compared to $51,964 for the 269 restaurants in our comparable base in the third quarter of 2009.

Average weekly sales for our 15 non-comparable restaurants were $58,240 during the third quarter of 2010 compared to $49,385 for our 35 non-comp restaurants a year ago.

The 110 comp restaurants in the US franchise system reported a 3.5% increase in same-store sales, while the 17 comp restaurants in the Canadian franchise system reported a 0.6% decrease in same-store sales for the third quarter.

On the NRO front, we've opened eight new Company-owned restaurants so far this year, three in the third quarter, and one just last week.

We continue to benefit from ongoing efforts to strengthen our new restaurant openings, and their NROs have averaged nearly $150,000 and their opening week sales, and continue to achieve better than comp-like margins.

For all Company-owned restaurants, average weekly sales were $52,296 from the 3730 operating weeks in the fiscal third quarter of 2010, compared to $51,667 from the 3648 operating weeks in the fiscal third quarter of 2009.

Please note, as always, the average weekly sales 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 we report on our income statement reflects our weekly sales multiplied by the operating week, minus these discounts.

The momentum of our gift card sales continue to be strong.

Gift card sales during the third quarter 2010 were up 26%, or $700,000 versus prior year, generating $12.4 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 third quarter grew to more than 9200 retail locations, up from about 7500 at the end of 2009.

We also have commitments that will add another 800-plus locations in the fourth quarter, so we are on-track to achieve our goal of over 10,000 retail locations for our gift cards by the end of the year.

During our last call, we also told you about our loyalty program, Red Royalty, which we rolled out to about 45 Company-owned to date with plans to expand the rest of our corporate restaurants in late January of 2011.

Red Royalty is a great loyalty program that gives us insight to guest behavior and dining patterns, and enables us to deliver targeted and relevant messages, or incentives to increase guest retention and frequency.

We are encouraged by the results of the year-long pilot and the feedback that we've received about the program so far.

Before I begin my discussion of restaurant level operating profit margins, or RLOP, margins, 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 margins and selling, general and administrative expenses for Q3 2010, compared to the adjusted percentages for Q3 2009.

Our RLOP margin was 17.5% in Q3 2010, compared to 18.7% in Q3 2009.

The 120 basis point decrease from the third quarter last year was driven by a 100 basis point increase in food and beverage costs, as well as the 70 basis points increase in labor costs, partially offset by approximately 50 basis points decrease in occupancy costs.

The primary drivers of our cost of goods increase year-over-year relates to increased cost of our ground beef, produce, and cheese.

As you know, we have been buying ground beef on the spot market in 2010.

The price for round beef in the third quarter has been significantly above our 2009 pricing by 14% to 15%, and even exceeded the increase we expected to see back in August.

We expect to see a slight decrease in the cost for ground beef as we move through the fourth quarter, but our cost will still remain well above 2009 pricing by over 14%.

Cheese prices have increased and remained high through the third quarter, and we don't expect to see relief that we anticipated in the fourth quarter.

Produce year-over-year continued to be higher as we saw and increase in our menu produce usage items, such as salad.

Also, you may recall that we had a favorable impact on cost of goods in the third quarter of 2009 from a true up of food and beverage rebates of about 40 basis points.

Labor costs increase primarily as a result of increased restaurant bonuses, as well as increase in our insurance benefit expenses compared to the third quarter last year.

Occupancy costs benefited from a reduction in general liability reserves in the quarter.

General and administrative expenses in third quarter 2010 were $22.6 million in the fiscal third quarter of 2010, compared to $16.1 million last year.

About $3.4 million for the Company's share of the summer and fall LTO campaigns was incurred in Q3.

In the third quarter last year, we had about $400,000 in marketing expense for one of three weeks of local advertising we ran in 10 markets to promote the test of the first of our LTO promotions supported by TV media.

Finally, SG&A expense in Q3 this year also included $2.3 million in executive transition costs for the change in our Chief Executive Officer, partially, offset by higher performance-based bonus expense as we reverse $1.7 million in performance-based bonus expenses in the third quarter of 2009.

During the quarter we determined that four of our restaurants were impaired, based on our review of each restaurant's past, present, and projected operating performance.

The carrying value of each restaurant's assets was compared to the fair value of those assets, resulting in a $6.1 million asset impairment charge.

Our pre-opening expense of roughly $740,000 in the third quarter 2010 was higher than the $125,000 in pre-opening expense during the third quarter of 2009, primarily due to the number and timing of the NROs compared to the same period last year.

Our pre-opening costs continue to average between $250,000 and $275,000 per unit.

Net interest expense was $1.1 million in the fiscal third quarter of 2010 compared to $1.3 million during the same period in 2009.

Our interest expense in the third quarter 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.

In the third quarter 2010, we recorded a tax benefit of 41.3%, compared to an effective tax rate of 16.3% in the third quarter of 2009.

The tax benefit is primarily due to a reduction in our income, including the one-time charges for impairment and the CEO transition expenses, offset by favorable general business and tax credits, primarily the FICA Tip Tax Credit.

We anticipate that the effective tax rate for the full fiscal 2010 will be a benefit of approximately 46%.

We reported a $4.2 million net loss for the fiscal third quarter of 2010, or a loss of $0.27 per diluted share as compared to net income of $5.7 million or $0.37 per diluted share in the fiscal third quarter of 2009.

Included in our fiscal third quarter 2010 results were executive transition costs of $2.3 million and $6.1 million in impairment charges, creating a tax benefit of $2.5 million, resulting in a non-GAAP diluted earnings per share of $0.11.

Schedule II of our press release reconciles our GAAP net income and earnings-per-share to the non-GAAP net income in EPS.

Our cash flow statement will be included in our third quarter 2010 10-Q filing tomorrow.

Our cash from operations of $51.6 million through the third quarter of this year exceeded our capital expenditures of about $26 million.

We payed down debt of $36.2 million through Q3 of 2010.

On October 3, 2010, we had $11.2 million in cash and equivalents, and had a total outstanding debt balance of $160.8 million, including $104 million in borrowings under our $150 million term loan, $45.2 million of borrowings under our $150 million revolving credit facility, and $11.6 million outstanding for capital leases, as well as $6.2 million of letters of credit outstanding.

In the third quarter of 2010 we payed down about $6.4 million in debt.

Note that our credit agreement matures in June of 2012.

We are subject to a number of customary covenants under our credit agreement, and as of October 3, we were in compliance with all debt covenants.

Our debt to EBITDA ratio for purposes of our covenants was just above 2 to 1 at October 3, 2010, and the leverage ratio above 2 changes our borrowing spread from LIBOR plus 87.5 basis points to LIBOR plus 100 basis points.

Assuming we use our expected free cash flow to pay down debt in 2010, including the $18.7 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 agreements for all of 2010.

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

As we stated in our Q3 earnings release today, we are suspending our full-year guidance for 2010 and beyond until further notice, with respect to specific revenue, comparable restaurant sales, and earnings per-share estimates.

Steve will share more about the rationale for this decision in a moment.

I will provide you with some of the trends in our sensitivities around our sales and margin assumptions.

Keep in mind that a 10 basis points change in Q4 in same-store sales assumptions equates to about $0.01 a share for us, and that a 10 basis point change in restaurant margin is about $0.02 per share.

With respect to our same-store sales, we told you that the first four weeks of Q4 were up 4.3%.

We don't have any more TV media planned for the remainder of the year, and as we encounter more difficult comparisons moving through the quarter, we expect to see our comp store sales trends decline from Q3.

As I shared earlier, we will continue to see pressure on our cost of goods in Q4, primary from hamburger, which is expected to be above Q4 in 2009 by about 14%, and a continued impact from the higher price of cheese.

We expect that the higher insurance benefits expenses we incurred in Q3 will continue into Q4 and will impact our labor costs.

Here's how our SG&A will break down for the fourth quarter.

For run rate G&A expense, we expect to incur about $17 million in the fourth quarter.

Adding to that will be Company-only TV marketing expense, which is expected to be $2.3 million in Q4 for the two weeks of TV media that have already run.

We expect our CEO transition costs for the remainder of 2010 to be nominal.

There may be up to an additional $400,000 to be incurred in 2011.

Taking into account the trends I've shared in sales, margins, and G&A, we would expect that our fourth-quarter results would be lower than the Q3 non-GAAP adjusted EPS of $0.11.

Based on our development plans and other infrastructure and maintenance costs, we expect our fiscal 2010 capital expenditures will be approximately $34 million, which will be funded entirely out of operating cash flow.

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

We expect to use remaining cash flow to make payments on our revolving credit facility, or opportunistically repurchase our stock.

In the fourth quarter, we plan to open the last four of our eleven new Company-owned restaurants in 2010, one of which opened last week.

And our franchisees are expected to open the last 2 of 4 new franchise restaurants planned for this year, one of which opened only this year week.

With that, I'll turn the call back over to Steve.

Thanks Katie.

Let me start with a brief assessment of where I think Red Robin is today, and then I'll address some early thoughts I have on the things I believe we need to focus on to make Red Robin the brand stronger and more relevant to our guests.

Remember, as I said at the start of the call, I have been here about eight weeks, so I'm applying what I've learned in that relatively short period of time to some preliminary ideas, but there is still work to be done until we finalize both our long-term strategic and financial plans.

Let's talk about our focus on building the Red Robin brand.

Over the past five years, our target consumer and the competitive landscape have evolved.

Some of the greatest attributes of our brand have been leveraged in other formats or sectors to drive consumer traffic.

When I looked at Red Robin's cornerstones -- our values, our people, our burgers, and the gift of time, it became clear that some of the equities that had made Red Robin so unique and successful for 40-plus years were, more recently, at risk of being marginalized by competitive tactics.

For example, our guests have come to love the gift of time.

It allowed them to visit Red Robin, have a great meal, and be out of the restaurant and 37 to 42 minutes, depending on whether the guest was visiting us for lunch or dinner.

But that same attribute has been successfully utilized by the fast casual industry.

Improved fast casual quality and service has made that traditional Red Robin point of difference less unique.

Five years ago, consumers didn't have too many alternatives where they could get a great meal, combined with quality and service, quickly.

But today, drive up to any strip mall or retail center at you will find many more places where you can have quickness and quality in your dining experience, and without having to settle for fast food.

A second cornerstone, providing the best burgers, remains a key tenet of our brand.

However, we've witnessed almost every national player in casual dining add, upgrade, or promote burger offerings.

Today it is tough to find a non-ethnic-focused chain that hasn't developed and promoted a burger menu.

In addition, competitive encroachment is coming from outside of casual dining.

Fast casual burger players have undertaken significant expansions of their store bases in the last few years.

Today they are in almost every one of Red Robin's markets, and in some places like California, multiple fast casual burger players have opened near Red Robins.

While our research indicates that these chains cannot match our innovation, quality, or service, they are attracting considerable consumer attention and trial, and are undoubtedly here for the long run, and growing.

So, as I look at the evolving casual dining marketplace, I don't believe Red Robin has itself evolved enough to remain as relevant to our guests or as differentiated as we need to be.

And while that's disappointing, the Red Robin brand remains strong, and I -- as I said earlier, there is tremendous potential to grow from where we are to a great brand, and many opportunities to improve Red Robin's financial performance.

Now, as I look at restaurant level margins, there is a clear opportunity to restore margin levels Red Robin was accustomed to by applying many of the same tactics that have effectively been utilized at other best-in-class operators.

There are certain areas that Robert Robin has been too slow at affecting change.

As you would expect after only 60 days, I won't be specific, but there are opportunities for investment to achieve greater long-term efficiencies out of our operations.

In addition, I am confident we can rebuild sales momentum is by doing a better job of listening to our guests and creating consistent excitement in our restaurants.

While Red Robin's advertising efforts have accomplished significant brand recognition and strong awareness around our LTOs, we need to do a better job of earning guest loyalty through more efficient marketing spend.

This doesn't mean we should stop TV advertising, because we don't intend to.

It just means we need to be more efficient in how we spend those dollars and we need to make sure those dollars are driving an appropriate return on our investment.

So, how do we get Red Robin back on the path to consistent and sustainable sales and profit growth?

In a word, change.

And in this effort, nothing is sacred.

We will look at everything we do as an organization and identify if there are better, more efficient ways to do it.

That includes the front of the house, the heart of the house, our systems, our marketing and every area of support from the home office.

In conjunction with our Board of Directors, we recently launched our long-term strategic planning efforts, which will help us identify the select investments that will drive the change we need to improve performance and strengthen our business.

While I am excited about what this will mean for Red Robin, I need to make sure the expectations of those who follow our business are appropriate.

These things we need to accomplish as a brand not going to be achieved overnight.

While I'm confident that significant performance improvement is attainable, as we finalize our plan and initiatives for the short and long-term, it is important that you understand the task at hand will take some time to implement.

Some initiatives we'll do sooner, and others will take longer.

Therefore, we intend to communicate any significant year-over-year changes in our strategic plans during our quarterly calls or in other public forms.

I commit to provide transparency into our business, and you'll find I will be candid about what I think is going right, and what needs to improve.

However, we don't think it's productive to offer revenue or earnings guidance, now or into the future, including 2011, based on significant sensitivity that small swings in revenue or cost can have on our earnings per share.

In addition, I would urge you all to take a conservative approach in forecasting how these changes will impact our financial performance over the next year.

While the economic environment has improved, it is still fragile.

And more importantly, we do not see the competitive landscape changing much.

So, to wrap up, while I've only been here short time, I'm more excited now than I was on day one about the opportunities we have at Red Robin to drive long-term shareholder value.

This is a great brand with passionate team members who do are doing a good job of taking care of our guests everyday.

Our restaurants already produce solid volumes and, as Katie stated, our NROs continue to perform with strong margins.

And I'm confident we can improve sales momentum and rebuild margins, which will drive profit contributions over time.

With that, Operator, we'd like to open the call for questions.

Thank you.

Thank you.

Will now be conducting a question-and-answer session.

(Operator Instructions) Our first question is from Jeff Omohundro with Wells Fargo.

Please proceed with your question.

Thanks.

My first question is for Steve.

I wonder if you could let us know what you think about Red Robin's current value positioning.

How you see it changing in the future, and particularly in light of the rising commodity costs environment?

Thanks, Jeff.

As I said in my prepared remarks, we've launched strategic process and we're right in the middle of wrestling with issues like that.

And we are very rapidly going to roll into the 2011 plan.

So, at this point in time, we are still dealing with that from a concept basis.

On the marketing front, you alluded to your thoughts around becoming more efficient in the marketing spending.

Do you see significant changes in the composition of the spending?

For example, the waiting on TV?

As I said my remarks, I think what we need to do is a better job of earning loyalty through more efficient marketing spend.

It doesn't mean we're going to stop TV advertising, because we don't intend to.

It just means we're going to be looking at ways and tactics to be more efficient, so we get a better return on those dollars driving appropriate return on investment.

And then lastly, more of a housekeeping matter.

But --

Jeff, we lost you.

We lost you, Jeff.

Operator, are you still there?

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

Please proceed with your question.

Thank you, I just wanted to hit on a couple of things.

First off, I didn't hear quite right on the openings for 2011.

Was that -- did you say around six stores in 2011?

No, I don't think we talked about it on this call, but in August we talked about the Board approved up to 15 openings, and that hasn't changed.

Okay.

But it might be a little prudent to be a little conservative in comparison to the 15 number right now?

I think Steve's remarks would be conservative, period.

Okay.

Then, I want to ask, just looking at what is going on in the environment right now, how are franchisees responding?

It seems -- we've done channels checks in the past where we saw the limited time offers at a little bit higher price point, I think, in some franchise markets.

How are franchisees responding to the promotions that have been done?

I know that that doesn't mean they'll be the promos in the future, but what are you hearing from them?

This is Susan.

We've had some great support from the franchisees on the last two, where we did it around the $6.99.

We've had 100% of the system at that same price point.

Okay, thank you.

Our next question is from Matt DiFrisco with Oppenheimer.

Please proceed with your question.

Hi, this is Eric Gonzalez in for Matt.

Just had a quick question.

Last quarter you called out California and Arizona as being regional issues, in those areas.

I just wondering if you saw the same thing, given [Nat's] regional ranking.

He'd called out the Pacific Northwest as sort of falling lower, as well as California's remaining second to last in his regional rankings.

I just wanted to see if you have any other regional issues?

We've called out California and Arizona in the past.

And primarily it is just when we've seen trend changes period to period or quarter to quarter that have been different than the prior period.

We didn't really see anything significant in Q3 than what we have been seeing.

California for us is such a large weight, as you know, and we still continue to see it dragging down the performance of the rest of the system.

Okay.

My last question is, I know you mentioned that your comps are up 4.3 in the first four weeks of the fourth quarter.

I just want to see how you think about advertising.

You mentioned that you're getting a 4% or 4%-plus lift in comps on advertising.

What's causing you to stop advertising and not buy more TV or spend more on TV advertising for the rest of the quarter?

In other words, where is your breakeven point and how come you just don't continue the advertising to drive comps?

It's a good question, Eric.

We really don't have unlimited spending, unfortunately.

We would probably be buying lots of TV, like Applebee's and Chili's spend multimillions of dollars.

So, we do have a limited budget, and so back to Steve's point, we need to make it as efficient and leverage that investment as best as possible going forward.

But we have been pleased with the results we've seen this year, and I think we learned a lot from advertising program that we had in place in 2010.

Is it fair to conclude the comp benefit that you're getting is enough to justify the spending?

No, I would say we're happy with the benefit we've received all year.

Okay.

All right, thank you.

Our next question is from Joe Buckley with Bank of America Merrill Lynch.

Please proceed with your question.

Hi, it's actually Steven Barlow for Joe.

Could you discuss the -- what is the status of your commodity contracts?

How much you've contracted for this year and looking into next?

Let's talk about next year, because several of our contracts are coming due over the next few months.

We're about 25% contracted for 2011 at this point.

Okay.

And just on the decision to suspend guidance, and I guess the comments related to sensitivity.

It doesn't seem like it's that -- the model is that dramatically more sensitive than it has been in the past.

Is there something to read there, or --

You're right.

I mean, we -- It's's not more sensitive.

I think as we move forward, based on what the strategic plan lays out, we may be doing some things differently and making changes that then create additional sensitivity, but not so much from it EPS standpoint, but just how we invest going forward in some of the strategic planning that we need to effect over the next year or so.

Great, thanks.

Our next question is from Destin Tompkins with Morgan Keegan.

Please proceed with your question.

Thank you.

Steve, I appreciate the straightforward assessment of the challenges that the brand faces at this point.

I'm just curious, I know you're still new to a lot of things and trying to establish a plan, but I was wondering if you could maybe expand a little bit on some of the things you talked about.

Whether it be marketing, earning customer loyalty, would that encompass maybe more of a brand message as opposed to a LTO message?

Or as it relates to the menu, are you open to broadening the options, or is the burger-centric focus still a key part of how you're looking at things?

Can you give us any more detail, realizing that we're still pretty early here ?

You know, Destin, you've done a great job of outlining a lot of the things we're wrestling with in our strategic planning process as we look at this competitive landscape change and the encroachment of both fast casual and casual dining competitors are in the middle of executing.

And that is exactly what we are doing, and back to my prepared remarks -- which is about all we want to share at this point in time.

Okay.

And then, Katie, following up on the commodity question, you mentioned 25% contracted.

Can you give us an idea of what that includes?

Where do you see exposure?

Is it in that 25%, how much of is that is chicken, and where do you see -- what could be pressure points next year?

And do you have any kind of idea of what kind of inflation rate we might be looking at?

Yes.

When we look at overall inflation, we don't expect to be significant in 2011.

We're contracted to the end of 2011 on chicken, and that is about 12% of our basket.

We have contracts for fries through very late into 2011.

So, that's probably the biggest pieces -- some seafood and some other minor commodities in our basket.

But I think next year, given our thinking on hamburger and where we've been in 2010 with some of the historical pricing highs that we've seen, that really are almost astronomical relative to ground beef pricing in our recent history.

We don't expect to see that go much above where it has been in 2010.

So, that hopefully will moderate, if not come down in 2011, just depending on where some of the grain prices go.

So, that's kind of how we're thinking about 2011, with 25% contracted right now.

We'll be looking at contracts for additional commodities as we move through the rest of this year into early 2011.

Is it fair to assume that we could see a little bit higher prices in the first half of 2011?

Until we anniversary what you experience in the third quarter this year?

I would expect, yes.

I would expect that first quarter, since we had a fairly moderate ground beef pricing in the first half of the year, and then it really spiked in the back half.

We're probably going to have some threat early on in '11 from that, yes.

Great, thank you.

Or next question is from Bryan Elliott with Raymond James.

Please proceed with your question.

Thanks, good afternoon.

A couple things.

First, maybe Katie.

One thing I noticed in the disclosures, it seems like the discounts actually shrunk a fair amount, and I am wondering if that's indicative of fewer comps, better service?

Or is that employee meals, or what might explain that?

Or it might be just random noise.

And secondly, on the -- wonder what the mix on the LTOs.

In the past you've given us that, and it was about 10%, I think, each of the first two campaigns of the discounted items, and what we saw in this last campaign.

I want to clarify that our LTOs don't provide a discount, they're just a lower price.

Yes, I misspoke, sorry.

Okay.

The mix on those -- I'll answer your questions backwards.

The mix on those, actually for the very first spring promotion that we did, we had a much higher mix of about 10%.

And it's come down in each of the promotions since then.

We did change the price point to $6.99, and then ran very different products in each of those other promotions.

As far as year-over-year discounting, a year ago in 2009, you'll recall we did some direct mail and we has some direct mail couponing, and some e-club efforts that were going on.

Kind of in lieu of doing advertising on television a year ago.

So, that would drive up our discount line from a year ago versus where it is today.

That's right, I forgot that.

Thank you.

And actually, one for Steve, if I may, as well.

Steve, obviously the last 10 years you were in a highly competitive situation with a relatively small brand with a smaller budget against behemoth kind of competitors.

You laid out a pretty clear picture of the competitive dynamics that you see.

I just wondered maybe what learning you can bring from the success at El Pollo in looking at some of the similarities that you see here.

Well, I think, Brian as I mentioned a little earlier, one of my initial reads was that our target consumer and the competitive landscape has evolved significantly, and many aspects of both the brand and the core values of Red Robin have been leveraged by our competitors.

I think that is clear.

The second piece revolves around what we talked about earlier, in the sense of using this strategic planning process, which then rolls into our plan for 2011.

To really figure out how to be smarter better and more efficient with the pool of marketing dollars we have.

That is a top of mind exercise for us.

And I am certainly bringing my experience and perspective from that David and Goliath exercise to this one, too.

Anything specific that you did there that might be applicable here?

I think, as I said, one of the issues that we've got here at Red Robin is really listening to our guests.

So, we've committed to do a much better job of that.

Also, being much more focused on the competitive landscape, as I mentioned before.

To be sensitive to both the casual dining and the fast casual players.

Then, to use the arrows we've got in our quiver much more efficiently and effectively to address those, on a much more nimble and responsive basis.

Great, thanks.

Thank you.

Our next question is from Greg Ruedy with Stephens.

Please proceed with your question.

Thanks.

Circling back again to the competitive landscape.

Maybe, Steve, if you could highlight for us where you think we are in the lifecycle of the fast casual growth, and if you could highlight for us some cases where Red Robin has had those fast casual competitors come in and then been able to recapture share?

What were some of the qualitative aspects that allowed for the bounce back?

You know, I'm going to stick to my prepared remarks on that one, Greg, as it relates to our assessment on the competition, and especially fast casual.

I will say that it is a key focus point for us in the strategic planning effort.

And we are taking full account of what has happened to date, and assuming they will continue to be a significant focus of -- with the consumer from both an awareness and a trial generation standpoint.

Great, thank you.

(Operator Instructions) Our next question is a follow-up question from Brad Ludington with KeyBanc Capital Markets.

Please proceed with your question.

Thank you.

Katie, I just wanted to ask, should we -- and I apologize if I missed this earlier, should we expect to see any more executive transition costs or any related costs in future quarters?

Not in the fourth quarter, Brad.

We have about $400,000 remaining that we think we'll incur at some point in 2011.

That'll be it.

Okay.

Thank you.

There are no further questions in the queue at this time.

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

We appreciate everybody's time and attention this afternoon, and stay tuned going forward.

Thank you.

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

You may disconnect your telephones at this time.

Thank you for your participation.