Red Robin Gourmet Burgers Inc (RRGB) 2010 Q4 法說會逐字稿

Please stand by.

Good day, ladies and gentlemen.

Welcome to the Red Robin Gourmet Burgers Inc.

fourth quarter 2010 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, Katie.

Thanks, Lisa, 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 within the meaning of the Federal Securities Law.

These statements are commonly identified by words such as achieve, expect, will, potential, improve, optimize and other terms with similar meanings.

These statements will include but will not be limited to references to Project RED, including our traffic and revenue driving initiative, our intentions with respect to expense management and our plans for deployment of capital as well as other statements regarding our anticipated margin, new restaurant openings, or NROs, trends, costs and expenses, capital expenditures, LTL campaigns, stock repurchase program, debt refinancing and other expectations discussed during the course of this call.

Although we believe that the assumptions upon which the preliminary or initial results, financial information and forward-looking statements are based, are reasonable as of today's date, these forward-looking statements are not guarantees of future performance and therefore investors should not place undue reliance on them.

Also, these statements are based on facts known and expected as of the date of this conference call and we undertake no obligation to update these statements to reflect events or circumstances that might arise after this call.

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

I also want to inform our listeners that we'll make references to non-GAAP financial measures today during our call.

You will find supplemental data on our Press Release on Schedules 1 and 2 which reconciliation on non-GAAP results to GAAP results.

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

Steve will begin with an overview of our multi-year strategic plan which we refer to as Project RED and then I will briefly review our fourth quarter financial results and discuss our business outlook.

Both Eric and Susan are here to participate in the Q&A after we deliver our prepared remarks.

Now I'd like to turn the call over to Steve.

Steve?

Thanks, Katie and good afternoon, everyone.

As I shared with you on our last call, I joined Red Robin because I firmly believe that both as a brand and as a Company we have great potential.

But meaningful changes are needed for us to meet our goal of delivering strong, consistent and sustainable best-in-class performance.

Further we intend to make progress on that goal concretely and as quickly as we prudently can.

You should know that we just returned from our annual Leadership Summit where we shared the state of our business and our plans for improving it with our front-line restaurant teams and franchisees.

Our entire organization heard my message loud and clear.

It will not be business as usual as Red Robin.

Our team members appreciated the honesty and the transparency regarding where we are and what we need to do going forward, something many of them told me personally that they said was long overdue.

At the event, our teams committed to accountability, innovation and achieving results.

And in acting now to strengthen our brand and improve our performance.

Let's recap what's happened since I joined the Company five months ago.

I began working with our board, our senior leadership, franchisees and many others on the Red Robin team toward two goals -- first, to identify and concretely act on areas where we could quickly achieve improved results.

And second, to plot a course for our sustainable long-term growth and prosperity.

Together we've developed a strategic plan and identified opportunities for strengthening in our business, improving results, and maximizing returns to our shareholders in 2011 and beyond through focus in three areas that we refer to as Project RED.

We provided a high-level view of Project RED in our shareholder update in early January and we'll be talking about these parties in more detail during our call today.

As I explained last month, RED, R-E-D, stands for revenue growth, expense management and deployment of capital.

But it also happens to be the color that is universally associated with urgency.

So not only are we aware of what we need to do to turn our business around and achieve greatness, we know these things require immediate attention and action.

Accordingly, we've been working with an unprecedented level of urgency on our strategies and tactics to make RED a reality.

Let me spend a few minutes on details.

First let's talk about revenue drivers.

We want to drive revenue growth, both today and on a long-term sustainable basis.

To accomplish this, we're implementing a number of traffic and revenue-driving initiatives, including but not limited to, our new Red Royalty Loyalty and Retention Program, taking back our bar and becoming more relevant to young adults, making our marketing spend and our LTOs more efficient and effective.

And implementing a price increase that projects our margins.

Now let me elaborate.

Let's start with Red Royalty.

Red Royalty is an innovative loyalty program that we began rolling out to all Company restaurants on January 24th.

We tested Red Royalty Loyalty for more than a year.

And while some restaurant concepts have run frequency programs in the past, we're proud to say that Red Royalty is a best-in-class loyalty program.

In developing Red Royalty, we went to school on great loyalty programs, mainly outside our industry, to ensure that we had a profitable, easy to understand yet robust and smart program.

As a result, we believe that Red Royalty is the most innovative guest loyalty program in casual dining.

In addition to building a robust database to understand our guest demographics and track actual guest behavior, we can also deliver highly targeted and relevant messages to not only retain and motivate guests to visit more often but also to increase their lifetime value.

Let me give you an example.

Our program enables us to build traffic by focusing on an individual guest's actual visit frequency and their specific ordering behavior.

So we can micro-target the once-a-quarter visitor much differently than we do the once-a-week guest to motivate them to visit more often and profitably.

During our Red Royalty pilot, we saw a 2% impact to guest traffic from incremental visits by Red Royalty members in the 45 test restaurants versus control.

Currently guest acceptance is trending nearly three times stronger than the pilot program with one of every three guest checks being captured in our Red Royalty database.

In just a few weeks we've activated more than a half a million Red Royalty cards.

Based on what we've seen during the early stages of the rollout, we believe the impact on our guest traffic could be comparable to what we achieved during our pilot.

Let's move on to taking back the bar.

More than two months ago, we acted to reclaim our bar and recapture adult guests that we've lost in recent years.

Let me give you some background.

For almost 40 years of our history, and until recently, Red Robin was far more adult and bar focused.

As recently as ten years ago our alcohol beverage mix was nearly 11% compared to the 6% it is today.

And our alcohol mix is well below that of other casual dining concepts whose average across the board is more than 14%.

In fact, best-in-class BJ's is at more than 20%.

Look, we've got to recognize that it took us years to concede our bar business.

And while we are already clawing it back, we're not going to get there overnight.

But most importantly, here's what we already have in place.

We're offering drink and appetizer specials during off-peak day parts.

We're implementing early and late-night Happy Hour and we redesigned our menus and point-of-purchase materials to highlight our alcohol and nonalcoholic beverage business as well as the respected promotions.

During my time with team members in our restaurants, reclaiming our heritage as a vibrant place for adults to visit was the team members' number one request.

Our team members are absolutely thrilled with this effort.

So we have a powerful front line support for taking back the bar.

Why do we care?

Well, every 1% increase in alcohol sales mix, we would expect to realize an additional $6 million in profit.

We believe that by beginning now and over time, we can get back to our historical performance levels in this area.

This is part of our DNA.

Let's talk about LTOs.

I've been in the restaurant business for more than two decades and in some of the most competitive segments.

I was there when Taco Bell broke out nationally and then turned the category upside down with value.

I lived through the burger wars of the 90s with $0.99 Big Macs and Whoppers and the introduction of value meals.

And I grew a regional chicken chain and actually grew share in our core market in the face of entrenched monolithic chicken competitors with budgets many times our size.

So I know we can better leverage our promotional calendar and maximize both revenue and profitability.

And we can also make our marketing spend more efficient.

Accordingly, we've done a number of things in the coming module.

We front-loaded our media plan to spike promotional awareness as early in the flight as possible to accelerate guest count bills.

We've more closely tied the availability of our promotional price to the actual dates of our TV media schedule.

In one of our core themes in our recent Leadership Summit was focusing our restaurant teams on retaining guests and building frequency among trial guests who come in for our LTO promotions.

And of course, Red Royalty was rolled out before our spring LTO, so we can leverage this powerful program against the incremental guests that visit in response to the promotion and driving them back into our restaurants again soon.

Our spring LTO launch is on Monday.

And it features the prime chop house burger at a $6.99 promoted price.

This is paired with our premium spicy avocado chicken wrap at full margin, appealing to a specific and different target audience.

And it showcases our variety which our research has indicated is one of our key opportunities.

And we linked incremental add-ons to the LTO items on the promotional materials in our restaurants to help maintain check.

With these tactics we believe we can drive traffic in sales while minimizing risk to margins.

Finally on pricing.

While we continue to carefully study our pricing strategies, in response to the food-cost inflation we expect to see in 2011, that Katie will cover in a second, we're planning to take about a 1.5% price increase in April of this year.

As a reminder, we haven't taken an increase in menu prices in almost three years.

To summarize, it's important to recognize these are not conceptual, potential, generic or cookie-cutter efforts.

These are revenue-driving initiatives that are in place right now.

We believe that, in combination with a whole host of other restaurant-based efforts, all of these initiatives will have the ability to meaningfully impact guest traffic, same-store sales, margin expansion and long-term profitability.

Let's move on to expense management.

We're focusing on the following -- Administrative and restaurant level expense reduction, reducing supply chain costs, and improving day-to-day business efficiencies and productivity.

Here are a few examples in this area -- Last month we implemented a reduction in force that eliminated 32 corporate positions.

This action, which represents about 16.8% of our Corporate team members, has already resulted in about $3 million in annualized G&A savings in 2011.

We've right-sized our support center here in Denver and I can assure you it is not business as usual here in our home office.

Katie will talk more about the expectation for 2011 SG&A in a few minutes.

In addition, I've charged our operations team with identifying at least 200 basis points of opportunities to improve our restaurant operating margins.

This represents $16 million to $18 million in annualized savings once they are fully implemented over the next 12 to 24 months.

Currently we're evaluating more than 150 distinct areas of cost reduction opportunity up and down the whole restaurant P&L.

We expect some of the benefits from these continuous improvement opportunities to be achieved in 2011, and we anticipate the full benefit accruing in 2012.

For context, let me give you an example of both a big and a little initiative that we've already completed and that are part of the 200 basis points of margin improvement.

Here's a big example.

We recently reduced the number of distribution centers that supply our restaurants from 36 to 13.

We're already anticipating more than $1 million in cost savings rolling through our P&L this year.

And we expect up to $2 million in additional savings to be captured in the next 12 to 24 months.

And now here is a small one.

By going restaurant by restaurant and simply eliminating unused phone lines, we expect to achieve annualized savings of about $150,000.

I make this example to indicate to you that we are scouring every line of the P&L for savings, large and small.

Like our revenue-driving initiatives, these are just a couple of concrete expense-saving examples that in combination should add up to a significant cost reduction over time.

Now these cost reductions facilitate the future growth of our business.

For example, we're launching a major overhaul of our IT infrastructure.

Just a few of the many significant benefits we expect include the following -- It will allow our marketing R&D and operations teams to be more responsive to the marketplace from development of new and innovative products to getting them on our menus more quickly.

It will improve our supply chain and procurement with tools like just in time ordering to make our restaurant teams much more efficient in managing their inventories and food costs.

And replacing a siloed outdated labor management tool with a sophisticated, integrated and predictive model that helps us align our restaurant labor with our sales forecasts and then adjust in realtime.

This investment is an absolute necessity to support our foundation for growth and for our continuous performance improvement.

Finally, in another concrete example of dispatching a sacred cow, we've revamped our incentive compensation programs to align our teams with pay for performance and achievement of EBITDA targets, consistent with our commitment to accountability and results orientation.

Let's now talk about capital deployment.

As part of our mission to drive enhanced levels of shareholder value, we've taken a fresh look at how we deploy capital.

Our goal is to establish a capital deployment strategy that allows us to both grow the brand and maximize long-term shareholder value.

First let's set an accurate baseline and talk about the performance of our restaurants built in 2010.

As the Red Robin management team has said on prior calls, our continued progress on new restaurant performance has given us the confidence to continue NRO development.

Since 2007, the average unit volumes for each successive NRO class have increased and the restaurant level profit margins for the 2009 and 2010 NRO classes outperformed the rest of the system.

Also our average net cash investment for new units continues to decline.

Currently down to $1.8 million per new restaurant for 2011 from about $2.6 million per restaurant in 2006.

In fact, the 2010 class had a cash-on-cash return of about 40% in its first year.

Now based on history, we can expect the return for the 2010 class to normalize more in the 30% cash-on-cash range.

For comparison, the returns on the 2007 class were in the low teens, and each subsequent class has shown steady improvement up to about 20% for the class of 2009.

We believe that the performance of this class of new restaurants is good.

We know it can be better.

As we explore new development opportunities, we are limiting our new Company-owned restaurant growth to 10 units in 2011.

And at this point we've reduced the level of development by half in 2012 to about five units.

However, we will revisit our development decisions as we continue to get traction on the initiatives I've already reviewed with you.

We're also carefully reviewing opportunities to reignite our franchise growth.

As many of you know, over the last several years our new unit development efforts were focused primarily on Company-owned restaurants.

We are looking at strategies to optimize the mix between Corporate owned and franchise restaurants, including a return to actively seeking new franchisees.

And we've been working closely with our existing franchisees to identify attractive NRO opportunities in underdeveloped geographies.

And as a further incentive, we've reduced franchise fees for every new restaurant existing franchisees build to help them capitalize on these opportunities.

Regarding stock repurchases, last August our Board authorized up to $50 million for opportunistic repurchases of our stock through December of this year.

Part of our capital allocation strategy is directed toward maximizing shareholder value in both the long and short-term.

Therefore we'll aim to repurchase up to 25 million of our shares in the next six months commencing immediately.

All subject, of course, to appropriate valuation of our shares and other standard considerations.

We believe that appropriately valued repurchases of our shares demonstrates our own confidence in the future of our Company.

Finally regarding refinancing, our current credit agreement matures in 2012.

We've been exploring a variety of alternatives to take advantage of the current historically low interest-rate environment and maintain the financial flexibility we need to build the business.

We've had multiple discussions with our advisors and bankers and we expect to get this done in the timely fashion and at an attractive market price.

To set the proper level for your expectations of the results of all of these initiatives I've just discussed, I would like to stress that our action plan has many tactics behind it.

While we have outlined several steps that we have already taken on all fronts, it should be clear that our plans impact the short-term, the median term and the long term.

But all of the things I've talked about are real and so is our sense of urgency.

And we are confident that a meaningful performance improvement in our business is attainable, the changes and improvements that we are making are significant and we expect to see earnings growth as a result.

Before I turn the call over to Katie I'll say that I've been in the restaurant business for many years and I know that you can't build an enduring brand or make a course correction overnight.

But I believe we've got the right team in place to improve our performance and build for the future.

I appreciate your interest in learning more about our plans and progress.

With that, I'll turn the call over to Katie for the review of the fourth quarter.

Katie?

Thanks, Steve.

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 fourth quarter of 2010 was a 12-week period ending December 26th.

Compared to the fiscal fourth quarter of 2009, total revenues including restaurant sales, franchise royalties and fees and gift card breakage revenue, which is included in other revenue, increased 5.7% to $192.6 million.

Total restaurant revenue of $189.3 million in the fourth quarter consisted of $180.5 million from our comparable restaurants and $8.8 million from our noncomparable restaurants.

In the fourth quarter of 2010, our comp store sales increased 0.8% which was driven by an increase in guest counts of 1.1% that was partially offset by a 0.3% decrease in average check.

This quarter's comp store sales increase compares to comps being down 10.5% in the same period a year ago and represents our second consecutive quarter of positive comp sales.

You may recall that two of the four weeks of TV media supporting our fall LTO promotion fell in the first two weeks of the fourth quarter so our same-store sales in Q4 did receive some benefit from the TV support early in the quarter.

We ended the year with a significant improvement in comp store sales down only 0.6%, made up of an increase of 1.1% in guest count and a 1.7% decrease in average check.

This compares to the negative 11.1% comp store sales for fiscal 2009.

In the fourth quarter 2010, average weekly sales for the 303 restaurants in our comparable base were $50,565, compared to $50,249 for the 277 restaurants in our comparable base in the fourth quarter of 2009.

Average weekly sales for our 13 noncomparable restaurants were $65,610, during the fourth quarter of 2010, compared to $49,167 for our 29 noncomp restaurants a year ago.

For all of our Company-owned restaurants, average weekly sales were $51,103 from the 3,771 operating weeks in the fiscal fourth quarter of 2010, compared to $50,148 from the 3,606 operating weeks in the fiscal fourth quarter of 2009.

The 106 comp restaurants in our US franchise system reported a 3.4% increase in same-store sales, while the 18 comp restaurants in the Canadian franchise system reported a 0.9% increase in same-store sales for the fourth quarter.

On the NRO front, we opened four new Company-owned restaurants in the fourth quarter and a total of 11 for the full year.

Our average opening-week sales for NROs were just over $98,000 for the restaurants opened in the fourth quarter of 2010, and a little more than $111,000 for the average opening week sales in the 11 we opened in the full year.

Our average weekly sales from the noncomparable store base has been higher than the comparable store average-weekly sales for all of 2010.

Please note that as always the average weekly sales figures that we quote are gross sales numbers that exclude the impact of discounts, which run about 2% to 2.5% of our gross revenue.

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

Gift card sales remained strong in the fourth quarter, up 14% versus Q4 2009 gift card sales and taking our full-year 2010 gift card sales to 27.5% -- $27.5 million or an increase of 22% through third party in-restaurant, business-to-business and online sales.

Our third-party gift card placement during the fourth quarter grew to more than 10,000 retail locations, up from about 7500 at the end of 2009 and achieving our goal for the year.

Our restaurant level operating profit margin was 17.0% in Q4 2010, compared to 17.3% in Q4 of 2009.

The 30 basis-point decrease from the fourth quarter last year was driven by a 60 basis point increase in food and beverage costs, as well as a 20 basis point increase in labor costs, partially offset by a 30-basis point decrease in occupancy costs and a 20-basis point decrease in other operating expenses.

The primary driver of our cost of goods increase year-over-year relates to increased raw material costs of our ground beef and cheese.

As you know, we've been buying ground beef on a spot market in 2010.

The average price for our ground beef since the second quarter of 2010 has been significantly above our 2009 pricing by about 12%.

The average prices for cheese have increased about 10% since the first half of the year and remain high through the fourth quarter.

In addition, we experienced some food cost pressure as a result of the fall LTO promotion as well as the impact from an increase in menu items with slightly higher food cost percentage on incremental items like the Jumpstart appetizers and our new cupcake dessert product.

Labor costs increased primarily as a result of increased restaurant bonuses as well as increases in our insurance benefit expenses offset by reductions in hourly labor rates and payroll tax benefits compared to the fourth quarter of last year.

Occupancy costs benefited from a reduction in our general liability expense in the quarter and leverage from higher average sales volumes.

Selling, general and administrative expense in the fourth quarter 2010 was $19.2 million, compared to $17.1 million in the first -- in the fourth quarter of 2009.

The increase was primarily related to the investment in our television advertising year-over-year.

About $2.1 million for the Company's share of the fall LTO campaign was incurred in the fourth quarter 2010.

And in the fourth quarter of 2009, we had about $833,000 in marketing expense for two of the three weeks of the LTO TV support in ten local markets.

Also included in the fourth quarter 2010 SG&A was $47,000 of CEO transition expense and costs relating to closing two Company-owned restaurants.

During the quarter, we closed one underperforming location and one restaurant at the end of its lease.

We incurred approximately $767,000 in costs relating to the closing.

Our preopening expense of roughly $1 million in the fourth quarter of 2010 was higher than the $433,000 in preopening expense during the fourth quarter of 2009, primarily due to the number and timing of NRO compared to the same period last year.

We opened four NROs in Q4 of 2010 versus two in Q4 of 2009.

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

Net interest expense was $808,000 in the fiscal fourth quarter of 2010, compared to $1.8 million during the same period in 2009.

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

In Q4 2010, we also recorded a reversal of about $250,000 of interest expense that had been previously accrued related to an estimated uncertain tax position that has been removed in the fourth quarter.

We had an effective tax benefit of $1.1 million in the fiscal fourth quarter of 2010, compared to a $422,000 tax benefit in the fourth quarter of 2009.

Our full year 2010 tax is a benefit of $2.6 million, which equates to a full-year tax rate benefit of 54.3%, since general business tax credits, primarily the FICA tip tax credit significantly exceeded the combined federal and state statutory provision on lower income before taxes for 2010.

Net income for the fiscal fourth quarter of 2010 was $2.2 million or $0.14 per diluted share compared to net income of $1.6 million or $0.10 per diluted share in the fiscal fourth quarter 2009.

Included in our fiscal fourth quarter 2010 results were costs related to executive transition and the closing of two Company-owned restaurants.

Excluding the executive transition expense and restaurant closing costs and using a normalized annual tax provision of 6.2%, our fiscal fourth quarter 2010 earnings would have been $0.12 per diluted share.

Schedule Two of our Press Release reconciles the impact on our net income and earnings per share as reported on a GAAP basis in 2010 and 2009 to adjusted amounts excluding certain charges.

Our cash flow statement will be included in our 10-K filing and our cash from operations of $70.6 million for the full fiscal 2010 exceeded our capital expenditures of $35 million.

We paid down debt of $38 million during fiscal 2010.

On December 26th, 2010, we had $17.9 million in cash and equivalents and had a total debt outstanding balance of $158.5 million.

For more detail our balance sheet is included in our earnings release that we issued this afternoon.

Also, note that our credit agreement matures in June of 2012.

As Steve mentioned, we will be actively working on refinancing our credit agreement over the next few months.

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

And as of December 26, 2010, we were in compliance with all debt covenants.

Our debt-to-EBITDA ratio for purposes of our covenants was just above two to one at December 26, 2010, and for all of 2010 we remain well below our maximum debt leverage ratio of 2.5 to 1 allowed by our credit agreement.

Now let's talk about our outlook for 2011.

As I share our thinking on 2011, keep in mind that a 1% change in guest count assumptions for the full year of 2011 equates to about $0.24 a share and a 1% change in price is about $0.42 a share for us.

A 10 basis-point change in restaurant margins is about $0.05 a share and a change in net income or expense of $176,000 is a penny a share.

Also note that if we repurchase shares, as I'm sure you can calculate, the sensitivity increases as does the volatility of EPS and changes to our results.

Through February 14, 2011, our same-store sales were down 0.4%.

This compares to down 7.8% for the same period in 2010.

Taking into account the impact of weather and the timing of Valentine's Day, we would have been up 0.4% and that's without any TV advertising support.

We will launch our spring LTO promotion on television beginning this Monday the 21st and it will run for five weeks.

The price promotion of $6.99 will be on one item and will only be offered for the time we are advertising on television.

The Company's portion of advertising will be about $4.4 million for this slice.

As Steve mentioned, we have several exciting initiatives that have been recently implemented, so to comment on the results of specific expectations for those initiatives this early in the year is premature.

We look forward to sharing our results with you as we move throughout the year.

Our commodity basket generally is expected to increase 3% to 4% in 2011.

We will continue to see pressure from ground beef, which is expected to be above the 2010 average price by between 10% and 15%.

Cheese is expected to be higher in 2011 by about 2%.

We are responding to these inflation threats through both menu engineering and a selection of our promotional items.

In addition, we're expecting to take about a 1.5% price increase in April.

And we also expect to begin to see the benefit in 2011 from having consolidated our distribution system as well as other cost- reduction opportunities we've identified which benefit will be seen in improved margins for 2011.

Labor costs will be impacted by minimum wage increases in certain states, in addition to expected increase in benefit and tax expenses.

Offsetting these labor costs threats will be the upside from leverage on our fixed portion of these costs as sales grow as well as the benefits from our cost-reduction initiatives related to our labor model.

Generally we expect to see margin expansion in 2011 from our expense management opportunities that we have identified, as well as leverage expected from sales growth.

As Steve said, some of these initiatives are already underway.

Others will be implemented in the near term.

And some others will take longer to impact our results.

Here is what we expect to see in SG&A.

Our spending on our television advertising campaigns will still be about 1.5% of revenue in 2011, which is expected to be in the $13 million to $14 million range.

As Steve spoke to earlier, we have taken action on G&A savings which will provide $3 million in annual savings.

We expect to invest in our systems and technology infrastructure.

We expect to pay performance-based bonuses in 2011 as we align our teams' compensation to the improved results we're expecting in 2011.

And we incurred $670,000 in severance in Q1 with the reduction in force.

In addition, we may find ourselves spending a significant amount for legal and Corporate governance advisors this year which could offset those savings initiatives in the near term.

For the year, our SG&A expense will therefore be up slightly compared to the 2010 SG&A.

But we expect to be able to leverage SG&A as a percent of revenue as our sales continue to grow.

Based on our development plans and other infrastructure and maintenance costs, we expect our fiscal 2011 capital expenditures to be between $39 million and $41 million which will be funded entirely out of operating cash flow.

We also expect to make scheduled quarterly payments of $4.7 million required by the term-loan portion of our existing credit facility for free cash flow after capital expenditures in fiscal '11 and we expect to use our remaining free cash flow to make payments on our revolving credit facilities or opportunistically repurchase our stock.

We have a $50 million repurchase authorization outstanding under which we expect to begin executing in 2011.

As Steve discussed, we plan to use cash flow and available credit in the near term to purchase $25 million of stock within the next six months.

In the first quarter, we opened the first of ten new Company-owned restaurants we expect to open this year.

And we have seen -- we have seven Company-owned restaurants currently under construction.

Of the remaining nine restaurant openings, five to six of those will be opened in Q2 and the balance will be opened between Q3 and Q4.

Two new franchise restaurants are currently under construction, with one of these franchise restaurants expected to open later in the fiscal quarter of 2011 and the other in the second quarter.

Our franchisees are expected to open three to four new restaurants this year.

We will not be providing same-store sales revenue or earnings guidance due to the significant sensitivity that small swings in our results can have on our earnings per share as I laid out earlier.

We've provided our thinking on expected trends and improvements for your consideration and how you should view our 2011 plan.

As you have heard, we have many exciting initiatives that we have implemented or will soon be implemented which we expect will have a meaningful impact on our results.

However, the precise timing and impact of the results will be difficult to predict.

Taking that into account, along with our highly sensitive financial model, we think a conservative approach is needed in forecasting in the near term how our current and planned initiatives will impact our financial performance.

We are committed to sharing our results and reporting our progress to you along the way.

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

Thanks, Katie.

Let me summarize.

At Red Robin, while continuing to lay the strategic foundation for sustainable long-term growth, we have also implemented significant concrete initiatives to deliver immediate improvement in comp store, margin and profit growth.

And we will continue to challenge ourselves to deploy capital to maximize returns.

In a matter of a few short months, we have galvanized and focused the entire Red Robin team around a rallying cry of once again embarking on a journey to reclaim the mantle as a best-in-class competitor.

It's no surprise that given the deep and powerful Red Robin culture, our team members have responded enthusiastically and with resolve.

At our recent Leadership Summit with all of our front-line restaurant leaders and franchisees I made it very clear that business as usual is not acceptable and that focusing on results will be a core element of our culture going forward.

The response from our team members was resoundingly enthusiastic.

They embraced the fact that we are now playing to win versus best-in-class competitors, leveraging accountability, innovations and a focus on achieving results.

Our entire organization is now focused on changing, improving and winning.

Ladies and gentlemen, we are, as you know, in the restaurant business.

And it's true in other corners of commerce there are levers to pull and buttons to push to enact positive change.

To label these initiatives generic, cookie-cutter, lazy or uncreative is like the high school basketball player who levels the same allegations at her coach when he simply suggests that if she wants to get better at her free throws, she should stay after practice and shoot an extra 100 free throws every day.

Hardly break-through but fundamental to improving performance.

Of course our goal is to pull these levers and push these buttons with the best of them.

And as a result I commit to you that we will once again grow this brand, deliver short-, medium-, and long-term results and generate strong returns for our shareholders.

In fact, it's happening as I speak, which is why you are hearing tangible results today and you should be expecting and seeing additional tangible results as we move forward.

But at the end of the day, the heart of our business is best-in-class execution.

In the restaurant, every shift, with each and every guest and that is what we will do.

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

(Operator Instructions)Our first question today will come from John Glass, Morgan Stanley.

Thanks.

First, Steve, on your broad statements of positioning of the brand going forward and taking back the bar.

You said this was a legacy business in the bar at Red Robin, but for at least the last decade, or at least during the time the Company has been public, that's not been the case.

The focus has been on kids and families and, in fact, the emphasis was against the bar because it might alienate those customers, so can you reconcile those two things?

Or are you still going to be a family destination with a bar?

Are you changing the orientation of the business and can you advertise both messages simultaneously?

Yes, thanks, John.

First, all of the restaurants that Red Robin has built have approximately 30% of their square footage dedicated to a bar.

We've been in the bar business for 40 years.

The second thing we're very focused on is that we want to build from strength and we have a powerful competitive and differentiated positioning with families and kids.

The reality is there is virtually no kids in our restaurant at 8.30 on a Tuesday night.

There's no birthday parties and there's no Red Mascot.

Same can be said on school days in the late afternoon.

So when we look at early and late Happy Hour, we believe we can appeal to that young-adult segment by having a specific space they can go without compromising our family positioning or our position with kids.

We also know that we have those young adult targets in our restaurants that eat with us already, and so by marketing in the store and creating awareness for early- or late-night happy hour, it costs us very little.

But building awareness of that with that target gets them to come back to take advantage of the promotional offers we've got, whether it's appetizers or beverage/alcohol.

Okay.

That's helpful.

And then I guess you didn't really address specifically, but there's been the controversy in the stock for over the last couple of years as whether you stay with an advertising and Limited Time Offer model or not.

I guess implicitly you are saying that is the strategy going forward, that you will keep advertising spend at least roughly at parity going forward at least for 2011 and LTO stays with the brand.

Is that a fair assessment of what you are saying?

Yes, sir.

That's a good assumption.

Okay.

And is there going to be other meaningful, for example, Katie, maybe even in the first quarter, are there meaningful mismatches in terms of spending that we ought to be aware of that that has driven in the past different margins and different sales results?

Our timing of our marketing is virtually the same year-over-year.

The spending in the total year, about $4.4 million in Q1, about the same in Q2, and then we'll split between Q3 and Q4, the balance.

Okay.

And then just the last, you talked about $16 million to $18 million in savings.

How soon -- I mean, how concrete are those ideas?

Are they just theoretically -- do you think they are a couple [hundred] basis points opportunity of margins and that's what it back-solves to?

Or have you actually identified $16 million to $18 million in savings, and you just have to execute on that?

You know, John, we have identified over 150 specific line items in the middle of our P&L that we've targeted to capture this opportunity.

We've already captured it in our consolidated distribution with $1 million flowing through now and a couple million following.

And the other example was just going through and looking at unused -- canceling unused phone lines, which is $150,000.

The important thing to remember here is some of the savings we're capturing immediately.

Others are going to take us a while to capture.

So over the next 12 to 24 months we should be -- we expect to capture the full value.

This is not a linear function either.

This is going to -- the flywheel is going to take a little while to start to spin and once we get it moving, we'll see the results accrue.

All right, thank you.

Up next we'll take a question from Jeff Omohundro, Wells Fargo Securities.

Thanks.

You outlined some pretty impressive cash-on-cash returns on your recent NROs.

And I know you have a pretty full plate with the broad range of initiatives that you've outlined in the core business.

But nevertheless, I was a little bit curious if you could elaborate on the pull-back in 2012.

I could see 2011, but perhaps the five units in 2012 you could perhaps elaborate a little bit on your thinking around that?

Well, as we discussed, we are looking at taking our capital [employment] and making the smartest decisions we can across a broad range of alternatives.

The other thing that is very important to remember is we can revisit our development decisions for '12 when we get significant traction on the initiatives we've outlined.

Our entire development infrastructure stays in place and can respond very quickly when we start to get traction on these initiatives.

And then also, in the report in your commentary, there was some discussion of the data infrastructure overhaul.

Could you outline the spending around that and then the time frame on implementing that?

Jeff, it's a pretty significant CapEx that's captured in our f$39 million to $41 million expectation for CapEx this year.

There will be some that's related to expense which we talked about which will be in SG&A, but will be pretty much absorbed through some of the savings that we've already implemented in 2011.

So we've captured it in both places.

So the total magnitude of the spending, do you have that?

For the first year, probably in the -- around $10 million, plus or minus fringe.

Thank you very much.

Up next we'll hear from Bryan Elliott, Raymond James.

Good afternoon.

You gave us your food and placement outlook.

Just wondered if you could give us a sense of how protected you might be or what's on spot and update maybe your contract protection, if any.

Thanks.

Yes, Brian, currently we have about 80% of our basket under a contract and then the primary drivers of what is still on spot is certainly ground beef and cheese.

Those are the two that I called out that we see some threats from in 2011 as well.

Great.

Thank you.

Destin Tompkins, Morgan Keegen, has the next question.

Steve, thanks for the level of detail, it was helpful.

I wanted to follow up on the marketing efficiency -- or the marketing that you talked about.

And it sounds like the plan is similar to what we've seen in the past.

But I know you've talked about trying to be a little bit more efficient with those marketing dollars.

And I'm just curious if you can maybe talk about maybe how you're accomplishing that near term or if that's more of a longer term evolution?

That's a great question.

In the module that we launched this Monday, we've done several things specifically designed to deal with that.

We took a look at how we bought our media, and we front-loaded the points more toward the front of the schedule to more quickly drive awareness among guests and consumers to get them to build traffic.

This gives us a reach, or the number of people we connect with, from 45% to 51% in week one, which is significantly higher than we've done before.

The idea behind this is to plant the seed of this promotion quickly with a lot of guests.

So that we can get them in to the promotional period more quickly.

The second thing is Red Robin was rolled -- Red Royalty was rolled out prior to the LTO.

And we did that specifically to make sure that as these new guests that come in in response to this price promotion get exposed to what we believe is a best-in-class loyalty program.

And we're getting a tremendous take on that from our guests.

This gives us, for the first time, the ability to capture that guest who may only respond to a price promotion and speak specifically to them directly after the promotion ends with incentives to come back at full price.

We've also added, as I talked about, premium full-margin products during this promotion.

So we've got the burger that we're promoting which is the Prime Chop House at $6.99.

But we're also talking about the spicy avocado chicken wrap which is a premium high-quality product targeted more toward women and the media will address that.

We've also linked desserts with this product to give us a more -- a better foundation to make sure we take advantage of the traffic and minimize the impact on the margins.

The other thing we talked about, which sounds like a small thing, but it is really going to benefit us, is we've tied the availability of the promotionally priced product very tightly to the television schedule.

So that product is not going to be available for weeks before the TV goes on or weeks and weeks after the TV's over.

And while it sounds like a small thing, we believe that's going to be significant.

Thank you.

And then, Katie, as you were giving some of your guidance for 2011, did I understand that you're expecting restaurant level margin expansion for the year?

Can you help me reconcile that?

Yes.

We would expect expansion for the year from several of these initiatives.

Not the least of which is growing top-line revenue to help leverage some of those fixed costs as well as some of the cost-cutting initiatives that we believe we can impact 2011 with.

Is the timing of that lumpy at all as we look at the year?

Well, as Steve said, it's not a linear equation.

It will build on itself.

So as we begin to implement more and more of these, as Steve said, when the flywheel starts spinning, we'll probably have more impact later in the year than we will early in the year.

Thank you.

The next question comes from Brad Ludington, Keybanc Capital Markets.

Thank you.

I just wanted to start off with a quick clarification.

Katie, when you were going through guidance, you said G&A was going to be up year-over-year, and I'm sorry I missed that.Did you say as a percentage of sales or dollar amount or both?

Total dollars, but we expect to be able to leverage as our sales grow, so you'll see the percentage of revenue -- hopefully it will come down.

And then, even though we have a slight increase in dollars.

Okay.

Thank you.

And then the $670,000 in severance here in the first quarter, since that's not tied to executive severance, or I don't think it is, will that be left in the numbers or will that be taken out in a pro forma reported number?

We'll call it out for you in Q1.

And we'll probably put it on similarly like we do Schedule Two.

Now we'll reconcile that for you with the tax impact of that in the first quarter's result call.

Okay.

And then do you have any idea -- it wasn't included in the guidance comments, kind of a range to expect for the tax rate this year?

For 2011, we'll be somewhere around 10%.

Okay.

And, just finally, and I'll jump off and let somebody else on, the chop house burger, its $6.99 price point, is that going to be system-wide or will there be franchisee that run different price points?

It will be system-wide.

Okay, thank you very much.

Oppenheimer's Matthew DiFrisco has the next question.

Hello.

Yes, this is Fong Lee in for Matt.

Thanks for taking my question, guys.

I just wanted to follow up on the operating leverage that you guys had mentioned in 2011.

You had provided some historical context with the 1.5% price translating to approximately $0.42 in EPS.

But I'm assuming that number probably doesn't include commodity pressures and pressures from the investments that you are planning to make going forward.

But if you do net out the savings from those investments, I'm just wondering, what kind of cost would you need to start leveraging that margin?

Positive one, two, three or could you even leverage it with the negative comp?

Well, even if you don't grow top-line and you take a lot of this margin expansion opportunity with cost reduction, you're going to automatically lever your margins.

So I'm not going to get into plus or minus any type of top-line discussion, but we talked about fairly substantial $16 million to $18 million of restaurant margin P&L impact.

Even without growing the top line, that's pretty substantial savings.

Okay, great.

And then one last question is if you could maybe clarify, did Valentine's Day help you guys or did it hurt?

No, it hurt us, because last year it was on a Sunday and so you had people coming for lunch and for dinner on Valentine's Day a year ago and it was Monday this year, so it hurt us this year.

Okay, got you.

Thank you very much.

Next up we'll hear from Joe Buckley, Bank of America, Merrill Lynch.

Thank you.

Two questions.

Katie, one -- back on the tax rate, what level of earnings, just kind of directional to get back to a more normalized tax rate?

Well, we have about plus $7 million in tax credits just from our FICA tip tax.

So anytime you have more tax provision that you have than that, then you end up with an effective rate that's positive.

Okay.

That's helpful.

And then question on the Red Royalty Loyalty Program.

Could you just describe sort of what is the motivating factor for the guests?

What are you giving to the guests?

And you referenced doing it purposely before the first LTO.

So will you be signing guests up in the store and in the restaurants and, if so, how will you do that?

So, yes, to answer the second part of your question, we're definitely activating them in the restaurant.

So as guests come in, currently we are handing them a card and activating them and encouraging them to go online and register, which is where we subtract their demographic information as well as their behavioral.

The incentive to them is that, first when they register, they get an appetizer -- free appetizer.

Because that's really important to us that we are able then to connect it with that person.

They get their birthday burger on this card.

And they get ongoing buy nine and get the tenth free and that could be an entree or a burger.

So that's an ongoing reward for them.

And then, obviously, we will, once we track their behavior and understand how we can segment, do the surprise and delights.

Okay.

Thank you.

Next up we'll take a question from Bryan Elliott, Raymond James.

Thanks.

Wanted to actually -- a couple of follow-ups.

First on that -- the Red Loyalty program, it went by quick and I missed it.

There was a three X comment about the now versus the test in the script.

I'm hunting for it.

Do you recall that?

Yes.

We had said that we're getting three times the acceptance rate.

So roughly one out of every three transactions is being captured on the loyalty card and in our database.

And that's 3 times what it was in test?

Correct.

So one in nine?

Versus one out of ten.

So one in ten and it's all -- and it's one in three?

That's correct.

Okay.

And so -- and you said in test.

You got 2% traffic lift, you think, from the program and I think you said that that's what you expect now that it's fully implemented.

Can you reconcile the 3 times and the no incremental traffic from that?

It makes us feel much better about the 2%.

Okay.

Fair enough.

Other clarification related to the advertising.

It sounds like you've really looked under -- looked in every corner and done a lot of process in time and motion and lots of looking at details, and have identified a lot of potential efficiencies with a high degree of specificity.

The advertising specifically?

You, Steve, have a lot of experience with brands that had limited budgets but needed to be effective.

Can you characterize or can you talk about any changes maybe in the -- you talked about front-loading, but from an efficiency standpoint was the -- are there things that you're doing now or think you can do in the future that might improve the reach and effectiveness for each dollar of TV budget that you have?

You know, Brian, that's a great question and I do have a very specific answer to it.

I did get that question at the last quarter around learning from previous situations as they apply to Red Robin.

I'm not comfortable giving that specific response to a very, very broad audience.

But I see we're chatting a little bit later and I'll be happy to take it at that point.

Okay.

Very good.

Thank you.

At this time there are no further questions.

I'll turn the conference back over to our speakers for any additional or closing remarks.

Well, I appreciate your time and attention.

Thank you very much.

Have a great evening.

And, ladies and gentlemen, that does conclude today's conference.

We would like to thank you all for your participation.

Have a great day.