Red Robin Gourmet Burgers Inc (RRGB) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Red Robin Gourmet Burgers Incorporated first-quarter 2011 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 today, Ms.

Katie Scherping, Chief Financial Officer of Red Robin.

Please go ahead, Katie.

Thanks, Sara, and thanks, everyone, for joining us on our call today.

Before we get started, I need to remind everyone that part of today's discussion will include forward-looking statements within the meaning of federal securities laws.

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

These statements will include, but not be limited to, references to Project RED, including our traffic and revenue-driving initiatives, our intentions are respect to expense management and our plans for deployment of capital.

As well as other statements regarding our anticipated margins, new restaurant openings, or NROs, trends, costs and expenses, capital expenditures, LTO campaigns, stock repurchase programs, and other expectations discussed during the course of this call.

Although we believe that the assumptions upon which our 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 our 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 will make some references to non-GAAP financial measures today during our call.

You will find supplemental data in our press release on schedules 1 and 2, which reconcile our non-GAAP results to our 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.

I will summarize our thoughts for the quarter, and then Steve will provide an update on our multi-year strategic plan, which we refer to as Project RED.

And after that, I will be back to provide details of our first-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, before I turn the call over to Steve to discuss the Project RED initiative, I would like to share with you a summary of our results for the quarter and how we are thinking about the balance of the year.

Our restaurant revenues were up more than 5% year over year, as we benefited from a 1.9% lift in comp restaurant sales and some very robust sales results from our non-comparable restaurants, whose average sales volumes continue to run above our average comparable restaurant sales volumes.

On the margin side, we saw some great traction from our Project RED initiative, resulting in a 160 basis-point improvement from the first quarter of 2010, to 19.8%.

The main driver of our margin expansion came from our labor cost reductions.

Our cost of goods did benefit from our cost-reduction initiatives in the quarter, but that was more than offset by the continued increase in commodity pressure, particularly from ground beef.

Our earnings per share of $0.56 in the quarter were outstanding, and reflect the hard work of our home office and restaurant team and their focus on results.

While the first quarter generated some impressive financial results, I want to spend a minute giving you some insight on how we're thinking about the balance of the year.

Our margin expansion from last year is still expected to be meaningful, with a majority of the benefit coming from our labor costs, which we expect will be down as a percentage of revenue by 80 to 100 basis points for the full-year 2011 compared to last year.

The biggest threat to the balance of the year is coming from commodity pressure, which should come as no surprise to you since the entire industry is claiming similar challenges.

Ground beef could be higher by as much as 20% year over year, which has a meaningful negative impact to our margins.

There is still a great deal of uncertainty about the macro impact that the economy has on consumers and what that could mean from a top-line perspective.

I would caution you not to extrapolate our first-quarter results for the remainder of the year and instead, balance the enthusiasm from our strong first-quarter results with the threats that I will outline for you for the remainder of the year.

I will get to that in more details in the quarter's results and more specifics in our outlook in just a few minutes.

But now, I would like to turn the call over to Steve.

Steve?

Thanks, Katie, and good afternoon, everyone.

First of all, I want to thank our Red Robin Team Members across the organization for all their ideas and hard work in delivering a great kick-start to 2011.

While we have more work ahead of to us accomplish our long-term objectives, our team wasted no time in addressing our challenges with accountability and results.

We're encouraged by the initial traction that we have achieved so early this year, and there is still a lot of opportunity for us to realize in future quarters.

During our call in February, we shared with you the details of Project RED, our strategic plan for strengthening the Red Robin's performance in the short term, and building a foundation for sustainable long-term growth and prosperity.

As a reminder, RED stands for revenue growth, expense management, and deployment of capital.

I am pleased to report that our Team Members have been executing on our plan with a renewed sense of urgency and focus on achieving these results.

I can assure you, it is not business as usual here at Red Robin.

So, let me spend a few minutes updating on you our progress.

First, how we're driving revenue.

We rolled out our proprietary loyalty program, Red Royalty, to all our Company restaurants in late January after a very successful pilot test.

This is not simply a frequency program like the kind that so many other restaurants and retailers have attempted.

Our program is a best-in-class loyalty program designed to help us gain valuable insights into our guest demographics, behavior, and preferences, which in turn will allow to us retain and motivate our guests more effectively and increase their lifetime value to the Red Robin brand.

While our loyalty program is still a very new program -- as a matter of fact we're still in the process of rolling it out to our 2 largest franchisees -- we have already distributed 1.5 million loyalty cards to our guests, and we're very pleased with the early results.

We also talked about elevating our beverage sales to the next level and taking back the bar, recapturing adult guests that we lost in recent years and reclaiming our heritage.

This is one of the many great ideas that came directly from our Team Members.

Not only has it been universally embraced by our restaurant teams, it is just fun to bring back drinks that is made Red Robin famous, like our Electric Watermelon and our Screaming Red Zombie.

Through a combination of stronger emphasis on beverage sales, our new adult beverage menu, plus our focus on non-alcoholic beverages and the actions we're taking to optimize our bar atmosphere and service, we have seen an increase in our average guest check for beverages.

Remember, every 1% increase in beverage alcohol sales mix contributes about $6 million to the bottom line.

So, there continues to be a tremendous profit opportunity here.

For perspective, it took us about 10 years for our bar business to erode to where we are now, and it won't come back overnight.

Regarding our limited-time offer promotions, we said that one of our revenue-driving goals was to make our marketing spend more efficient and in the process, maximize both revenue and profitability.

With our spring limited-time promotion, in the first quarter we accomplished this in the following ways.

We front-loaded our media plan to drive promotional awareness early in the flight to build momentum for guest awareness.

We price-promoted only 1 of the 2 items we featured, and the promoted price on that single item was $1 higher than last year.

We rolled out our loyalty program before the spring LTO to leverage guest traffic driven by the promotion and get people enrolled early in the period so we could generate incremental visits from those guests.

And finally, the innovative thinking of our Social Media Team helped us drive awareness and traffic on the shoulders of the promotion, with our Obey the Egg campaign before the media flight and our current Chief Burger Officer program that began after the spring limited-time offer flight to celebrate National Hamburger Month in May.

The Chief Burger Officer promotion in particular, has been a big social media success for us.

We're encouraged by the early results of our revenue-driving efforts.

The promotional environment in casual dining has never been more fierce, so we have to continue to raise our game.

Clearly, we have many initiatives going on at the same time, so it is difficult to isolate the specific contribution that each is making to our top line.

But our total strategy is having a positive impact.

Our same-store sales in the first quarter of 2011 were up 1.9%, consisting of a positive 0.9% in guest traffic and a 1% improvement in price mix.

This compares to our first quarter of 2010, where same-store sales were a negative 2.3%.

And remember, our first-quarter sales this year were lapping a nearly 12% lift in same-store sales during last year's LTO and TV media support.

On pricing generally, we announced in February that we will take a 1.5% price increase in April in response to the food cost inflation we expected to see this year.

That price increase took effect with the introduction of our latest menu on April 18, so the increase did not have any impact on Q1 results.

We'll let you know how the increase impacts our results in our Q2 call.

The new menu, however, incorporates significant changes in design and format, specifically to drive incremental sales of appetizers, new entree combos like riblets and mac and cheese, shareable desserts, which we all expect to drive higher guest check averages, too.

We're in the early stages of this process also.

One final point on revenue initiatives.

We'll launch our summer LTO at the end of this month.

It will feature 2 distinctive items, our Five Alarm chicken sandwich and our new Summer Strawberry Salad.

Similar to our spring LTO, we'll price-promote just one item, the Five Alarm chicken sandwich, and we'll offer the salad at an attractive retail price point that reflects a strong gross margin.

As we saw in Q1, we expect incremental sales of existing and new shareable appetizers, like our new sweet potato fries, new menu items and desserts like our Apple Pie Bites, again to help us mitigate guest check average and margin impact from the promotional products.

Let's talk about the second leg of RED -- expense management.

As a reminder, our focus is on managing our controllable costs and these initiatives include reducing administrative and restaurant level expenses, reducing supply chain costs, and improving day-to-day business efficiencies and productivity.

In addition to the reduction in force we told you about in February, our teams have been working relentlessly to identify and execute on our challenge to find and capture 200 basis points of opportunity to improve our restaurant operating margins.

As we have said, this represents $16 million to $18 million in annualized savings when fully implemented progressively through the end of 2012.

The ongoing process of identifying, evaluating and implementing these initiatives is not only beginning to yield savings benefits, but is also reinforcing our culture of accountability, innovation, and results.

Of the 200-plus cost reduction opportunities we have identified, we acted on 40 of them in the first quarter.

The examples are big and small, simple, and not so simple, and include things like a $900,000 savings annually from reducing food waste; $350,000 in annual savings from changing to a more environmentally-friendly kids' cup; another $350,000 from renegotiating our trash removal contract.

And on the small-but-significant side, $50,000 in savings from simply switching to a brown paper towel.

And the list goes on.

We're looking at opportunities throughout the P&L for potential savings.

Some of these examples of savings may sound nominal, but there is the potential for hundreds of them, and when taken as a whole they help us move the fly wheel significantly.

With our commodity basket continuing to rise, these cost reductions will help mute the expected increases in raw material costs.

Remember, these savings again are not linear.

The complexity of harvesting them increases over time as we pick off the easy and obvious ones first.

But by the end of 2012, two important milestones will be achieved.

Not only will we have captured the $16 million to $18 million in savings, we'll have embedded a continuous improvement ethic into the Red Robin culture, too.

Regarding labor savings that we achieved during the first quarter, our restaurant teams chalked up impressive gains in productivity through focus, a little leverage on the top line, and a benefit versus last year.

As Katie shared earlier, this was the biggest cost reduction that contributed to over 160 basis points of margin expansion in the quarter.

Going forward, this will continue to be an area of opportunity as we strive to strike the right balance between productivity and guest service.

The D in RED, capital deployment.

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

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

One of our goals is to continue to improve new restaurant performance.

Our development plans still include 10 new Company-owned units opening this year, and we'll base development decisions beyond 2011 on the progress we make with our Project RED initiatives.

I will say that the 2010 class of new restaurants still continues to generate strong sales and margins, and AUVs are well over 100% of the comparable restaurant AUVs in the first quarter.

The restaurant margins in the first quarter from these NROs were over 24%, compared with the comparable restaurant margins of 19.7%.

Cash-on-cash returns from this class are still holding strong at nearly 40%.

And last week, we broke a Company record for opening week sales in the continental United States, with our newest restaurant achieving $150,000 of sales in its first week.

In the first quarter, we kicked off our initiative to overhaul our data systems and infrastructure.

The teams are diligently working on this multi-faceted multi-year initiative and, although very early in the project, we are on task and on budget.

We expect to realize significant cost savings in the long term from this investment, along with a healthy return on our invested capital.

On the franchising front, we continue to engage our existing franchisees in conversations about how we can support their new unit development, and looking at how we can reignite growth with additional new franchisees in the system and any other approach to optimize our franchising model.

As we look at our stock repurchases, during the first quarter, we repurchased more than 397,000 shares of Company stock for approximately $9.5 million, which is consistent with our publicly stated intent of buying back up to $25 million worth of shares in the first half of 2011.

We intend to complete this program, assuming appropriate stock valuation and other considerations.

Finally, regarding debt refinancing.

As you may have seen in our press release last week, we closed on our new credit agreement, which will give us a strong, flexible and scalable capital structure to support our strategy for long-term growth and profitability.

Katie will provide more details on the credit facility in a few minutes.

Looking at the quarter, we believe we have made significant strides in all areas of revenue improvement, expense management, and the deployment of capital, which have and will continue to positively impact top-line sales and profit margins that ultimately will lead to significantly improved shareholder value.

With that, I will turn the call over to Katie for details of the first quarter.

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 first quarter of 2011 was a 16-week period ending April 17.

Compared to the fiscal first quarter of 2010, total revenues, including restaurant sales, franchise royalties and fees, and gift card breakage revenue, which is included in other revenue, increased 4.1%, to $286.8 million.

Restaurant revenue of $281.5 million in the first quarter consisted of $267 million from our comparable restaurants and $14.5 million from our non-comparable restaurants.

In the first quarter of 2011, our comp store sales increased 1.9%, which was driven by a 0.9% increase in guest count and a 1% increase in average check.

This quarter's comp store sales increase compares to comps being down 2.3% in the same period a year ago, and represents our third consecutive quarter of positive comp sales.

In the first quarter of 2011, average weekly sales for the 301 restaurants in our comparable base were $56,977, compared to $55,896 for the 286 restaurants in our comparable base in the first quarter of 2010.

Average weekly sales for our 14 non-comparable restaurants were $66,685 during the first quarter of 2011, compared to $56,560 for our 22 non-comp restaurants a year ago.

For all of our Company-owned restaurants, average weekly sales were $57,405 from 5,038 operating weeks in the fiscal first quarter of 2011, compared to $55,909 from the 4,906 operating weeks in the fiscal first quarter of 2010.

The 107 comp restaurants in our US franchise system reported a 2.5% increase in same-store sales, while the 18 comp restaurants in the Canadian franchise system reported a 1.2% decrease in same-store sales for the first quarter.

On the NRO front, we opened 1 new Company-owned restaurant and 1 franchise restaurant in the first quarter.

So far in the second quarter, we have opened 2 new Company-owned restaurants and, as Steve mentioned, the sales trends from our recent NROs is ahead of our expectations.

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

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

The impact of our Red Royalty rewards program may cause this discount percent to increase as the program gains momentum over the balance of the year.

Our restaurant level operating profit margin was 19.8% in Q1 2011, compared to 18.2% in Q1 2010.

The 160 basis-point improvement from the first quarter last year was driven by a 120-basis-point decrease in labor costs, a 60-basis-point decrease in other operating costs, a 40-basis-point decrease in occupancy costs, partially offset by a 70-basis-point increase in food and beverage costs.

The primary drivers of our cost of goods increase year over year relates to increased raw material costs, primarily our ground beef and produce.

As you know, we have been buying ground beef on the spot market since 2009, and ground beef prices have risen sharply since the beginning of 2011, even beyond our prior expectations.

The average price for our ground beef for the first quarter of 2011 is 16% higher than the first quarter of 2010.

In addition, produce pricing was higher in the first quarter of 2011 compared to the first quarter of 2010, as well.

I will give you an update on our commodity outlook in just a minute.

As Steve mentioned earlier, we have had increased focus on our operations on cost control overall.

This focus has helped us achieve some significant labor savings so far this year.

In addition to leverage on fixed labor expenses, the focus on productivity has resulted in a better matching of labor hours and guest traffic, and brings the hours paid more in line with sales.

Last year, you may recall that we incurred a significant number of training hours to support the hiring of team members in advance of our first wave of television media in the first quarter of 2010.

These training hours have been reduced since we have improved the anticipation of staffing needs around our television media flights since that first flight a year ago.

In Q1 2010 our labor as a percentage of revenue was 130 basis points higher than the same period in 2009.

While we won't expect to see the continued benefit of reduced training hours in the following quarters this year, we do expect to see benefit from the other labor-reduction initiatives we have implemented.

I will talk more about our expectations for labor costs in just a minute.

Other operating expenses were lower as a percentage of revenue due to improved cost of supply, service and maintenance costs and utility costs, as well as leverage on the fixed portion of these costs.

As Steve mentioned, we have implemented several cost-reduction initiatives and behavior changes at the restaurant that have benefited these cost categories.

Occupancy costs benefited primarily from leverage from higher average sales volumes.

Selling, general and administrative expense in the first quarter of 2011 was $32 million, compared to $30.8 million in the first quarter of 2010.

About $4.4 million for the Company's share of the spring LTO campaign was incurred in Q1 of this year.

Last year in the first quarter, the $6.6 million cost for the 4 weeks of TV support for the spring LTO campaign was funded entirely by the Company, and included about $1.2 million that would have represented the franchisees' portion of the spring 2010 media campaign.

Also, we spent about $1.4 million for local television in Company-owned markets in the first quarter of 2010, which we did not spend in 2011.

In the first quarter of 2011, we incurred $785,000 in severance costs related to the reduction in headcount implemented in January.

Also, we have accrued about $1.4 million in higher-performance-based bonus expense in the first quarter this year compared to last year.

And finally, about $1.6 million was incurred in 2011, primarily for our data and systems infrastructure project and for legal and corporate governance expenses compared to the prior year.

Our pre-opening expense of $661,000 in the first quarter of 2011 was lower than the $877,000 in pre-opening expense during the first quarter of 2010, primarily due to the number and timing of NROs compared to the same period last year.

We opened 1 NRO in Q1 of 2011 versus 3 in Q1 of 2010.

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

Net interest expense was $1.4 million in the fiscal first quarter of 2011, compared to $1.9 million during the same period in 2010.

Our interest expense in the first quarter of 2011 decreased from the prior year, primarily due to lower average outstanding debt balances, as we have continued to pay down debt with free cash flow, as well as a lower average interest rate, as our interest rate swap expired in March of 2011.

In the first quarter of this year, in addition to $128,000 of ongoing gift card breakage from our restaurant-based gift card program, we recorded initial cumulative gift card breakage in the amount of about $438,000 from our third-party gift card sales, plus ongoing breakage revenue of $191,000.

The total other revenue recorded in the first quarter of 2011 related to gift card breakage revenue was $757,000.

We now expect gift card breakage revenue from restaurant and third-party gift card sales to be between $350,000 and $385,000 per quarter on an ongoing basis.

Recall that in the first quarter of 2010, we recorded $3.5 million for the initial cumulative gift card breakage on our restaurant-based gift cards.

Schedule 2 in our press release adjusts our net income and EPS for the impact of the initial breakage revenue in each quarter.

Our effective tax rate for the first quarter of 2011 was 11.5% compared to 17.1% for the first quarter of 2010.

The decrease is primarily due to more favorable general business tax credits, primarily the FICA tip tax credit as well as the 2011 HIRE Act tax credit as a percentage of current-year income before tax.

We anticipate that our full-year 2011 effective tax rate will be approximately 11.5%.

Net income for the fiscal first quarter of 2011 was $8.7 million, or $0.56 per diluted share, compared to net income of $4.9 million, or $0.32 per diluted share, in the fiscal first quarter of 2010.

Schedule 2 of our press release reconciles the impact on our net income and earnings per share as reported on a GAAP basis in the first quarter of 2011 and 2010 to adjusted amounts, excluding initial cumulative gift card breakage revenue as well as our severance expense.

Our non-GAAP adjusted income in the first quarter of 2011 was $9 million, or $0.58 per diluted share, compared to the prior-year period of $2.3 million of adjusted net income and $0.15 per diluted share.

Our cash flow statement will be included in our 10-Q filing tomorrow, and our cash from operations of $29.9 million for the fiscal first quarter this year was 25% higher than the first quarter of 2010, and exceeded our capital expenditures of $7.6 million.

We paid down debt of $16.4 million during the fiscal first quarter of 2011, and we also repurchased $9.5 million, or 397,000 shares of the Company stock in the first quarter of 2011 in accordance with our announced intent to do so back in February.

On April 17, 2011, we had $14.6 million in cash and cash equivalents, and had a total outstanding debt balance of $141.8 million.

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

On May 6, we closed on an amendment to our credit facility.

The new facility replaces our prior credit agreement that was due to mature in June of 2012.

The new facility is comprised of a $150 million term loan and a $100 million revolving credit facility.

The interest rate is based on LIBOR plus a margin between 2.25% and 3%, depending on our leverage ratio.

Our commitment fee on the unused portion of the facility ranges from 1.25% to 2%, also based on our leverage ratio.

Our initial margin will begin at LIBOR plus 2.75%, and the commitment fee is 1.5% through the end of the third quarter.

The terms in the new credit facility provide for a flexible capital structure that will allow us to execute our long-term growth initiative and also give us the financial flexibility to prudently allocate capital, including stock repurchases.

We are subject to a number of customary covenants under our new credit agreement, and we are currently in compliance with all debt covenants.

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 $0.25 a share, and a 1% change in price is about $0.43 a share for us.

A 10-basis-point change in restaurant margins is about $0.05, and a change in net income or expense of $174,000 is $0.01 a share.

Through May 15, 2011, the first 4 weeks of the second quarter, our same-store sales are up 0.5%.

This compares to down 1.2% for the same period in 2010.

We did have the benefit in the first quarter of lapping over 2010's Easter weekend.

And since Easter weekend in 2011 fell in our second quarter, the first 4-week results I just quoted include the impact of Easter timing as well, which was a negative 2.3%.

We will launch our summer LTO promotion on television beginning May 30, and it will run for 4 weeks.

We are advertising a promotional price point on the Five Alarm Chicken Sandwich and an attractive price point for the Strawberry Summer Salad.

Like the spring's promotion, we will only offer the promoted price for the time we are advertising on television, and the Company's portion of advertising will be about $3.8 million for this flight.

Our menu price increase of 1.5% took effect with the April 18 menu rollout, and we have seeing solid benefit from the changes we implemented with this menu in the add-on items, combination entree selection and beverage category.

Our original expectation for commodity inflation early this year was for a 3% to 4% increase.

After recent pressure from ground beef that exceeded even the high end of our expectations, our updated expectation is that our commodity inflation will be between 5% and 6% for the full year, primarily driven by an expected increase in ground beef prices of over 20% year over year.

We have responded to this inflation threat with initiatives at the restaurant level that Steve mentioned earlier, but considering the rapid increase in commodity inflation, we expect to see for the balance of the year, these savings will be somewhat muted by the raw material cost increases.

We have several more initiatives in the list of 200-plus that Steve referred to under the Project RED discussion that address the raw material costs, but timing and complexity of implementation will take several quarters to implement fully.

As we have demonstrated in the first quarter, both sales leverage and our focus on management of labor hours has been a benefit to the margin.

As I mentioned, though, in 2010 we had an unusually high amount of training wages that were paid in Q1 that were not repeated in the remainder of the year.

In addition, the payroll tax holiday that we benefited from in 2010 is no longer in effect, so we will be lapping over the 2010 reduced payroll tax expense this year.

As a guide, even with these factors, we would expect to our labor cost initiatives to result in about 80 to 100 basis points of savings for the full year of 2011 compared to 2010.

Generally, we expect to see margin expansion in 2011 from our expense management opportunities that we have identified, as well as leverage from expected sales growth that will be somewhat offset by food cost inflation.

As Steve said, some of these initiatives are already underway and benefiting our results and others will be implemented in the near term, and others will take longer to impact the 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 we disclosed in February, we have taken action on G&A savings, which will provide $3 million in annual savings.

but we expect to continue the investment in our systems and technology infrastructure, which could total between $2 million and $3 million of expense in 2011.

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

And we incurred $785,000 in severance in Q1 from the reduction in headcount.

In addition, we incurred a significant amount for legal and corporate governance advisors in the first quarter, which will offset these savings initiatives in the near term.

For the year, our SG&A expense will therefore be higher by $2.5 million to $3 million, compared to the 2010 SG&A.

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

The full benefit of our SG&A savings should be apparent in 2012.

Based on our development plans and other infrastructure and maintenance costs, we expect our fiscal 2011 capital expenditures to be a total of $39 million to $41 million, made up of approximately $19 million to $20 million for restaurant expansion, $12 million to $13 million for maintenance capital, and about $8 million for investment in our data infrastructure project, which will be funded entirely out of operating cash flow.

Our new credit agreement requires us to make scheduled quarterly payments beginning on June 30, of 2011 of $1.875 million, required by the term loan portion of our credit facility.

We expect to use our remaining free cash flow to make payments on our revolving credit facility, if any, opportunistically repurchase our stock, or seek other capital deployment opportunities.

We have a $50 million repurchase authorization outstanding, under which we began executing in the first quarter of 2011.

As Steve discussed, we plan to use available cash flow and cash-on-hand in the near term to purchase the remaining $15.5 million of stock by mid-year, subject to appropriate valuation of our shares and other considerations.

In the first quarter, we opened the first of 10 new Company-owned restaurants that we expect to open this year, and our franchisees opened 1 of the 3 to 4 new franchise restaurants expected to open in 2011.

So far in the second quarter, we've opened 2 new Company-owned restaurants, and have an additional 8 new Company-owned restaurants currently under construction.

Of the remaining Company-owned restaurant openings this year, 4 will be open in Q2 and the balance will be open between Q3 and Q4.

One new franchise restaurant has opened so far in the second quarter this year, and another is currently under construction and is expected to open early in the fourth quarter.

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 earnings per share, as I laid out earlier.

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

As you have seen in our first-quarter results and heard earlier from Steve, we're encouraged by the traction we are achieving on Project RED initiative.

With we believe that we'll continue to make progress in these areas.

However, the precise timing of these results, as well as pressure from the commodity environment, make their impact difficult to predict.

Because of the uncertain timing combined with our highly sensitive financial model, we're taking a conservative approach in forecasting how our current and planned initiatives will impact our financial performance for the balance of the year.

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

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

Thanks, Katie.

In closing, last January, we brought the leadership of Red Robin, both Company and franchisees together, to face the brutal facts regarding Red Robin's recent performance and to take a hard look at exactly where we stood when we measured ourselves against our best-in-class competitors.

This transparent confrontation with reality both jolted and sobered a team with a proud tradition of winning and a culture that is unique and highly valued.

When this team collectively realized both of these legacies were at risk, they were galvanized into action.

When it became clear that results, and not simply activity, were what counted, they focused with purpose and passion.

This renewed commitment to Red Robin's cultural values, enhanced by a focus on accountability, innovation and results, were critical drivers of our solid Q1 performance.

We're proud of what we've accomplished so far, and we're energized to keep charging forward and making more progress.

I am more confident than ever that we will continue improving our performance, strengthening our foundation and building a great best-in-class restaurant Company.

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

(Operator Instructions) We'll go first to Brad Ludington with Keybanc Capital Markets.

First off, congratulations.

What a solid quarter.

Katie, I think you said this and I just missed it.

Did you say what the price of the Five Alarm sandwich is going to be on the promo this year?

No, we didn't.

And, will you share that?

It will be similar to last year.

That was a $7.99 price point last year, correct?

It was a $6.99 price point last year.

Okay.

And then, what was the bar in non-alcoholic beverage mix change year over year?

Was that measurable, or was it just minor improvement?

It was minor improvements.

I think, as Steve mentioned, that we have seen an increase in average guest check from our beverages overall.

And, what was the mix of the LTO here in the first quarter, of your total sales?

About 4.5% overall.

(Operator Instructions) Next, we'll go onto Jeff Omohundro with Wells Fargo.

Thanks, and I echo those comments of congrats.

My question really is on the labor front.

First, Katie, perhaps when you look at the labor improvement year over year, you talked a bit about the change in training hours.

How significant is that?

When we look at the total basis points improvement year over year, about how many basis points came from that reduced training?

I would say probably around 20 basis points.

And then, it sounds like the balance, much of it is related to productivity enhancements.

But, perhaps you can give maybe a little bit greater detail on the components.

In particular, I am curious, which part of these changes might impact guest satisfaction, guest service?

Is it noticeable on the guest side?

Is it more productivity-related, where it wouldn't really impact that guest experience?

Jeff, this is Houseman.

I will take that labor question.

It really is a multiple approach in terms of labor.

It includes not only looking at our shoulders and increasing our labor targets when we don't have guests in the building, but some policies and procedures in terms of some of the innovation that we're doing at the heart of the house in terms of process improvement.

It also includes a real focused, diligent approach in terms of our hourly team turnover, because part of that training piece is not only, as Katie point out on the call, to prepare for television, but it is also the lower your average turnover is, the less you need to train additional team members.

It is also a real focus on our average wage rate across the countries and making sure that those align with the practices of our competitors, specifically in tip credit states.

So, it is quite a lot.

It is just not 1 thing.

We looked at our vacation liability and process and procedures around that.

It is a really comprehensive approach.

I will tell you that our guest service scores have not gone down, but have actually gone up quarter over quarter.

And, we are very passionate about making sure that we are not distracting from the guest experience in these type of things.

It's really to the real philosophy of our project blueprint, looking at ways that we can take costs out that don't even touch the guest.

So, it is not as deep as changing, for example, the number of tables per server.

It is more peripheral items?

We have not changed our standard in terms of tables per server at all.

And from Stephens, we'll hear from Will Slabaugh.

Congrats again on the quarter.

Could you talk about the sales progression throughout the quarter and, in particular, any lift that you're seeing there from the initiatives you put in place, such as Happy Hour or the loyalty program?

And give us an idea how those trends progressed throughout the quarter and maybe into the current month if you would.

I am not going to give specifics, but we did see the lift when we are on television, that 4 weeks we were on TV.

As Steve talked about, we heavily weighted those front-end TRPs to drive awareness early in the promotion this time around.

So, we did see the lift from that.

There is a combination of a lot of things that are working to help benefit that revenue line.

We're just not going to try to break each 1 of those out, but suffice it to say that we're very pleased with how all of them are coming together and working together to drive that top-line revenue.

That's great.

As a follow-up there, I wondered, with just 1 more quarter under your belt, if you could give us an idea of your confidence level in that $16 million - $18 million number.

And, if you have any sort of percent of a way that you feel like you are through that.

Do you still think you are in the early innings there?

Yes, Will, this is Steve.

We are in the early innings.

We are very pleased with the traction we've gotten year to date.

We looked at 40 separate parts of blueprint that we not only realized, but captured in the P&L in the first quarter.

That improves our confidence about our performance going forward.

As I said, it is not a linear process.

We picked some low-hanging fruit.

We've got some big opportunities going forward, which are a little bit more complex, going to take us some time to plan those and carefully make sure that when we trigger them we don't impact our team members or our guests inappropriately.

But, we do feel good about that $16 million - $18 million number annualized by the end of '12.

Moving on to John Glass with Morgan Stanley.

Maybe just as a follow-on to that.

It looks like you did achieve, on the controllable side, more than 200 basis points in this first quarter between labor and the operating lines.

But, at the same time, Katie, it sounds like you're saying don't count on at least those same 200 basis points to repeat themselves.

So, are you already hitting that stride of the $16 million - $18 million, which is 200 basis points?

Or, were there some one-time anomalies?

Katie, maybe just 1-liner those again for me, that are not repeatable going forward.

So, we shouldn't think of this labor and operating expense ratios being carried through to the rest of the year.

Yes.

I think as we talked about the 80 - 100 basis points of labor saving, that's still a material number for us in the grand scheme of things.

But, as we talked about, commodity pressures have risen very rapidly, and our ability to respond and react to those from a blueprint or an expense management position is just going to take a little longer to be able to mute some of those impacts.

So, that is going to be offsetting the benefit as we see margin expanding from some of these other initiatives.

That's going to mute some of that savings as we work throughout the year.

So, we do still expect margins to expand for the full year, but just have it tempered by the impact of the commodity environment that we're working through right now.

So, labor went down by, it looks like, 120 basis points.

You are saying 80 is the right way to think of that going forward.

80 - 100 [basis points] for the full year on a full-year basis.

What about that operating line, though.

That went from 14.4% - 13.8%, so, that also went down pretty materially.

Is that something you can reproduce?

Or, was there some 1-time items in there that were not replicable?

I think that's probably a sustainable savings on the full-year basis.

I think we'll be able to achieve that.

I think the labor was a little bit aggressive in the first quarter, so don't extrapolate that and use the 80 - 100 [basis points] for the full year.

And then again, the commodity costs are really going to pressure that overall margin expansion this year.

Do you have any color on how you think the commodity picture shapes up for the next 3 quarters?

Is there a peak, for example, this quarter in the burger market?

Or, does it come in the third versus last year?

Historically, our peak for ground beef is always from Memorial Day basically through Labor Day.

That's when the highest cost for ground beef always is, and this year will be no different, although it will be higher than it has historically it has been.

And then we'll see it fall back., we expect, in the fourth quarter.

But, is the rate of inflation going to be higher in that quarter?

I know the absolute price is, but it probably was high last year as well.

Where is the highest rates of inflation in your commodities likely to be, do you think?

It is a little earlier this year than it has been.

As I said, historically it is Memorial Day to Labor Day.

We have seen it higher earlier, so it spiked a little bit earlier.

And that spike will probably continue on for the rest of the summer.

Bryan Elliott from Raymond James has our next question.

I haven't had a chance to see the new menu yet, so maybe you could give a little more color on what changes in the layout are, and give us a sense of what the changes are trying to create, changes in behavior.

This is Susan.

The menu that is out there now is the tri-fold in all of the Company restaurants.

Recall that we launched in 50% of our system the tri-fold about 9 months ago, so we do have that format.

We have a couple of new jump-starters with our Zucchini Slices and our Freshly Breaded Mushrooms.

We added some combos, so if you look at the entree category, we have about 4 new combos including Ribs and Clucks, Ribs and Mac and Cheese, Seafood Scatter, et cetera.

And then we brought some old favorites back.

So, we always try to keep it fresh and listen to our guests, so we did bring back Clam Strips from several years ago and an item like Southwest Pasta.

The other thing that we did on the very back of the menu was we freshened up our bar menu.

As Steve highlighted, we did bring back some of our favorites.

We also launched some real fruit drinks as well.

That's helpful.

Maybe a follow-up question to Steve.

What do you think about the size and the breadth of the menu here?

Is it about right?

Is it maybe a little too many SKUs, or is there room to add some SKUs?

What is your general thinking on that?

Bryan, a year or so ago, we got research that indicated 1 of the issues consumers had with Red Robin was around variety and the veto vote.

For the last couple of years, we have been proactively dealing with that by thoughtfully adding items -- salads, wraps, sandwiches and other proteins to thoughtfully expand the SKUs, address this veto-vote issue, but still keep the menu in manageable proportions.

And while we changed the format to a tri-fold and added some combos, we are always diligent every time we look at this to drop items off.

About a year ago, too, I know from an ops standpoint, we did a heart-of-the-house review on the number of SKUs we had, and we went through and simplified that significantly.

And took a hard look at 1-time use ingredients and made decisions around that, too.

So, we're happy with the menu in total.

We think it's got enough variety to deal with about anybody's dining requirements without being too complex to execute.

Next, we'll hear from Nicole Miller Regan with Piper Jaffray.

This is Josh.

I am calling for Nicole.

I know it is still early in the program, but what incremental data points have you learned about your guests or do you have now that you couldn't quantify before from the rollout of the Red Royalty program?

It is still really early, but we have been really excited about the guest and team member acceptance of this program.

We are seeing increased frequency as part of the behavior, and we're continuing to monitor it and to segment the database.

So, we have a lot of learnings to come that maybe we can share on our next call.

Okay.

Does membership in the program allow you access to more frequent feedback?

How are you using that to get to kind of pull your guests for their thoughts and experiences with the brand?

What it really provides is a little more insight as to their behaviors and what they're ordering and their frequency.

We are constantly listening to our guests on the blogosphere in social media, utilizing our past e-mail database to get feedback and obviously our guest response.

So, we are listening to our guests a number of ways.

This helps us to really understand better the behavior.

So, this is a little bit more passive, I guess you could say, rather than going out and directly probing them.

At this point, yes.

From Telsey Advisory Group, we'll hear from Peter Saleh.

Out of the 160 other cost-cutting opportunities, can you give us some examples of some of the bigger initiatives that you haven't touched on yet?

We've got a comprehensive list of over 200 things we're looking at.

As we may have discussed earlier, the distribution consolidation project, which we're currently reaping benefits from, is a great example.

We went from 36 - 13 distribution centers, and that was a big-bang 1.

There is probably not a lot of those of that magnitude still out there.

And so, we are looking at a very broad range of stuff.

But, as I mentioned a little earlier, there are still things we're harvesting this quarter in the multiple 6-figure range, and we will build to that $16 million - $18 million savings by the end of '12.

When we think about your IT spend going forward into fiscal 2012, I know this year you're talking about $2 million - $3 million in IT spending going on in the SG&A line.

Is that going to be recurring or is that more than 1 time and just for this year?

A portion will be recurring.

We'll still have some capital investment yet to make in 2012.

But, the expense on the SG&A line will probably be pretty similar.

Next, we'll hear from Matthew Dundon with Pine River Capital.

Two completely unrelated questions.

The first is, what is your strategic posture in thinking about gourmet hamburger chains, expanding into your markets?

How do you deal with Five Guys and other places like that are really trying to eat up some of the space between concepts like yours and the quick-service burger joints?

And then secondly, what are you thinking about labor force compliance in the context of immigration?

Restaurateurs have to be looking at what's happening to Chipotle and looking at their processes.

What are you doing, and what are you seeing the best practices there?

Matt, this is Steve.

Let me try to take at least the first 1 around better burger competition.

We are closely tracking, both nationally and by trade area, the development and implications of these folks popping up in our trade areas.

As we tell our franchise partners, we can do things that these guys can't.

We have a full bar, we have a significant commitment to team members who give a fantastic level of surprise-and-delight service, and we spend a lot of money around ambience.

Also, to our check averages, 1 of the most cost-effective in casual dining.

So, what we look at strategically is making sure that we hit on all elements of our price value equation, which is quality of the product, the retail price of the product, the level of service we give, and then the experiential part of the equation.

And when we hit on all 4 of those cylinders, we do quite well against virtually everybody.

On labor force compliance, we have been using E-verify for years, over 3 years now, to deal with the issue head-on.

So, we do not feel that we're in the same position Chipotle is in.

That is all the time that we have for questions today.

I will turn the conference back over to Mr.

Carley for any additional or closing comments.

Thanks very much for your questions and attention.

We appreciate it, and we'll talk to you next quarter.

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

We thank you for joining us.