Red Robin Gourmet Burgers Inc (RRGB) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Red Robin Gourmet Burgers second quarter 2011 conference call.

At this time, all participants have been placed in listen-only mode, and the lines will be opened for your questions following the presentation.

As a reminder, 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 will not be limited to, reference to Project RED including the Company's traffic and revenue driving initiatives, intentions with respect to expense management, and plans for deployment of capital, and other expectations discussed during the course of this call.

Although the Company believes 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 the Company undertakes no obligation to update these statements to reflect events or circumstances that might arise after this call.

Participants on the call today should refer to the Company's 10-K and other filings with the SEC for a more detailed discussion of the risks, uncertainties and other factors that could impact the Company's future operating results and financial conditions.

I will now turn the call over to Steve Carley, Chief Executive Officer of Red Robin.

Thank you, Lisa, and thanks everyone, for joining us on our call today.

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

As we mentioned in the press release, we've also posted supplemental financial information related to our second quarter 2011 performance on our website prior to this call.

The supplemental information includes a summary of our second quarter results, cost of goods, and SG&A drivers, and outlook information that, in the past, we have shared on the call.

This quarter we posted this information on our website, so you can focus on our live discussion on the progress we're making on our strategic plan.

We encourage you to visit the Investor section of our website, in the presentation area to review this information.

With me on the call here at Red Robin are Eric Houseman, our President and Chief Operating Officer, and Denny Post, who joined us just days ago, as the Senior Vice President and Chief Marketing Officer.

We also have with us today, Christina Carlson, Vice President and Controller, and Ted Watson, Vice President of Financial Planning and Analysis to help answer any questions you have after we deliver our prepared remarks.

So let's get started with a few financial headlines from our most recent quarterly performance.

As we shared in our earnings release, and as you can see on slides three, four, and five of the supplemental information, during our fiscal second quarter our restaurant revenue increased 7.1% to $212.1 million, and total revenues increased 7.2% to $215.8 million.

Red Robin's Company-owned comparable restaurant sales increased 3.1%, driven by a 4.5% increase in average check, which was partially offset by a 1.4% decrease in guest counts.

GAAP diluted earnings per share were $0.44, versus $0.28 in the fiscal second quarter last year, and our non-GAAP adjusted earnings per diluted share were $0.48, compared to adjusted earnings per diluted share of $0.29 in the same period a year ago.

On the development side, we opened six new Company-owned Red Robin restaurants, and one new franchise restaurant was opened during the second quarter in 2011.

Our restaurant-level operating profit margin increased to 20.8% from 18.3%, driven by decreases in labor, other operating, and occupancy costs.

These were partially offset by increases in food and beverage costs.

Finally, our cash flow from operations year-to-date through Q2 increased 55.6% to $54.2 million.

Overall, we're very pleased with our second quarter performance which represents our fourth consecutive quarter of higher same-store sales, and our third consecutive quarter of higher earnings.

We've also consistently grown our revenue since Q3 of last year, and we've improved our restaurant-level operating profit, in both the first and second quarters of this year.

You may recall from our first quarter call that Red Robin team members did an outstanding job, delivering a great kickoff to 2011 as witnessed by the Q1 results.

We're very encouraged by the momentum we've established early this year, but we didn't let up, because we all knew there was much more work to do for us to improve our business, and deliver solid and sustainable best-in-class business performance.

Our results to date in 2011 reflect our team members' continued focus, passion and commitment to achieving that goal.

As I said, we wanted to spend most of our time on the call talking about our progress, toward our long-term strategic plan, which we are talking about under the acronym, Project RED.

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

Slides six through nine cover Project RED initiatives, and I'll talk about those next.

Here's some examples of the progress we made in Q2.

First on slide seven, the revenue side.

Since rolling out our proprietary loyalty program, Red Royalty, to all of our Company restaurants early this year, we continue to be encouraged by our early results.

We're still only six months into the program, but the level of Red Royalty registrations is encouraging and ahead of expectation, and we're already gaining considerable insights into the lifetime value of these most loyal guests.

Remember, the strength of our loyalty program is in the knowledge we gain about our guest demographics, their behavior and their preferences, which in turn allow us to retain and motivate our guests, based on their specific behaviors and frequencies of visit.

In June, we began rolling out the program to our two largest franchisees, and last week we expanded to another three franchise groups.

We're also encouraged by the results to date in our Taking-back-the-bar initiative.

You'll recall this initiative is to recapture guests that we lost in recent years, and reclaim our heritage as a fun place for adults to unwind and socialize.

It's also part of a big effort to increase beverage sales generally, in all of our restaurants, and it's already beginning to pay off.

Since the roll-out of our Happy Hour program and our spring beverage menu, we've seen steady increases in beverage per person average sales and alcohol beverage mix.

This year through the second quarter, our overall beverage mix is up year-over-year, and the gains are primarily coming from the sales of alcoholic beverages.

As we've said, it took us a decade to drop to where we are, from our peak of 11% about ten years ago.

And we don't expect to turn it around overnight, but we have improved the mix by 40 basis points, since we renewed our alcoholic beverage focus, so we're heading in the right direction.

Remember, every 1% increase in alcohol sales mix contributes about $6 million of EBITDA, so there's a big opportunity for us in maintaining our momentum in the adult beverage area.

Let's talk for a minute about our most recent limited time offer promotion.

We told you that one of our goals was to make our marketing spend more efficient, to maximize both revenue and profitability.

While we believe we've become more efficient with our marketing investments, the results of our summer LTO did not meet our expectations.

In retrospect, there's a number of factors that could have contributed to this, such as the timing of the TV, media flights, we decided to promote a spicy chicken sandwich, given our estimate that we were going to be at peak ground beef prices, and that was against a year-ago promotion that featured a beef burger, and other factors contributed.

Nevertheless, the LTO was still a relatively new tactic, and we'll apply what we learned to make future promotions more successful.

We do believe we've got a strong LTO offering in the fall, and we'll continue to explore ways to optimize our media, including our spending levels, timing, the products we feature, and the relevant price points.

The bottom line is this, we still see TV media as an important tactic for us, so we're committed to make it work harder for us to drive guest traffic, and revenue going forward.

Finally, let's talk about the new menu that we introduced on April 18, which included a 1.5% price increase.

In addition to the price increase, there were a number of improvements designed to drive incremental sales of beverages, appetizers, entrees and entree combos, and shareable desserts.

We believe the price increase and the new menu were contributors to the increase in price mix, as well as margin contribution that we saw in Q2.

Our per person check average was up 4.5% year-over-year.

About 1.2% of the increase was driven by the price increase, and 3.3% was driven by mix shift, with more guests adding appetizers or a beverage to their meal, or moving to an entree or a combo, which was among our goals for the new menu design.

So we're very happy with these early results.

So on the revenue driving initiatives, we're encouraged by the traction we're achieving overall.

And with so many moving parts, the new loyalty program, happy hour, promotional items, the new menu and other initiatives either in test or in place, it is really difficult to pinpoint with precision, how each specific initiative is contributing to results.

But in combination, we're seeing meaningful gains in driving revenue.

One cautionary note that you'll likely have heard from our casual dining peers, is the continued economic uncertainty that's putting significant pressure on guest count.

While we believe we have strong programs in place to drive revenue, we expect guest traffic to be challenged, at least through the balance of the year.

Let's move on to the E for Project RED, expense management on slide eight.

Recall our focus is on managing our controllable costs, including reduce of administrative and restaurant-level expenses, reducing supply chain costs, and improving day-to-day business efficiencies and productivity.

During the second quarter, we continued to make progress toward our goal of capturing cost saving opportunities to improve our restaurant margins, representing $16 million to $18 million in annualized savings when fully implemented progressively through 2012.

We're still on track to capture at least 200 basis points of savings by the end of next year.

Like examples we shared with you last quarter, the ideas for capturing savings and improving productivity are big and small, simple and complex.

The areas of opportunity where we've either already achieved savings, or remain in the exploratory stage number nearly 250 separate line items.

We made significant improvements in COGS, cost of goods, supplies, service and maintenance costs.

For example, a change in our smallware supplier alone, should save us as much at $800,000 annually.

On the COGS front, we made some spec changes, like simply increasing the case count for the same quality lemons, which are going to save us $400,000 annualized.

And we began buying onions that were unpeeled, which believe it or not, will save us about $800,000 every year.

And even with the addition of a small piece of new equipment to prep the onions, we're saving in both labor and food cost.

There are many more opportunities across the P&L, and we'll pursue every one that represents true, sustainable savings.

And we'll continue to look at improvements that do not diminish our high standards of food quality and our great guest service.

Also you will recall from our first quarter results, that our restaurant teams made impressive gains in productivity through focus, leveraging the top line, and a benefit versus Q1 of last year.

Well, during the second quarter, our teams continued to look at ways to improve labor costs.

We expect our labor costs to be lower as a percentage of revenue by 100 to 120 basis points for the full-year 2011, compared to last year.

As we said before, some of the savings we're capturing, could be muted to some degree by raw material cost increases, and the timing and complexity of some of the improvements could take several quarters to implement fully.

But in addition to the actual savings, we're also benefiting from a culture of continuous improvement that is being created here at Red Robin, as well as helping us truly establish a sustainable operating model, that will contribute to our bottom line in the long term.

On to the D for Project RED, capital deployment.

As shown on slide nine, our goal is to establish capital deployment strategies that allow us to both grow the brand and maximize long-term shareholder value.

We continue to make great progress improving new restaurant performance, and as a result of that we're expanding our development plans for 2011 to 12 new Company-owned units, reflecting our traditional 5,600 square foot prototype.

Through the second quarter, our 2010 class of new restaurants is still generating strong sales and margins, with average unit volumes that are well above our comp AUVs, and restaurant margins of nearly 25%.

Cash on cash returns from the 2010 class are still holding at nearly 40%.

In addition to these 12 full-sized units, we're planning on opening one of our smaller 2,000 square foot to 4,000 square foot prototypes in Denver in the fourth quarter of this year.

As we said in our announcement of plans for these smaller modified menu and service format units, the reduced footprint could enable us to accelerate development into non-traditional locations, that have not been available before because the space requirement for the larger prototype, as well as leveraging Red Robin's expertise as the gourmet burger experts.

For development in 2012, as opposed to the five units we had discussed previously, we are now expecting to open between 12 and 15 new restaurants, given our performance of our recent NROs, which will include both our full-sized restaurant footprint, and our smaller prototype unit.

We're also on target with our initiative to overhaul our data systems and technology infrastructure.

The savings we achieved from the administrative cost reductions earlier this year, allowed us to cover a good portion of the 2011 expense for this multi-faceted, multi-year initiative, which will be about $3.6 million this year.

The investment should support the long-term sustainability of many of the process improvements, and cost savings we're achieving in operations among other benefits.

So we expect a very attractive return on our invested capital.

On the franchising side, we're working closely with our existing franchisees to evaluate growth plans within their operating footprints.

And we expect to have a good view of their potential expectations around growth, among our current franchisees by the end of Q3 this year.

We also repurchased 25,000 shares of our stock for about $840,000 in the second quarter of this year.

So far in Q3, we've repurchased 154,000 shares of stock for about $5.3 million.

And finally, regarding debt refinancing, as we announced early in the second quarter, we closed on our new credit agreement.

This gives us a strong, flexible and scalable capital structure to support our strategy for long-term growth and profitability.

So to summarize where we are on Project RED during the second quarter, we continued to make significant progress, in revenue improvement, expense reduction, and optimizing the deployment of our capital.

We're seeing the benefits of these improvements to our business in our top line sales, our operating margins, and our bottom line results.

To talk about the outlook for the remainder of the year, I'm going to turn the call over to Ted Watson, our Vice President of Financial Planning and Analysis.

Ted?

Thanks, Steve.

As in prior calls, we will not be providing full-year same-store sales, revenue, or earnings guidance, due to the significant sensitivity that small swings in our results have on our earnings per share.

The supplemental information on slides ten and 11 provide some guidelines for modeling our financial performance for the balance of the fiscal year.

Factors to consider in forecasting future performance include the continued challenges to consumer confidence that we've seen in the headlines over the last week or so.

This will likely exacerbate an already weak macroeconomic environment, and create significant pressure on guest counts for at least the balance of the year.

And finally, the intensified discounting activity in casual dining is not showing any signs of diminishing, so we expect these headwinds to continue for the foreseeable future.

Through August 7, the first four weeks of our fiscal third quarter, our same-store sales were up 0.5%.

This was driven by a 5.8% increase in average check, and 5.3% decrease in guest counts.

This is compared to same-store sales being up 1.4% in the first four weeks of -- in the first four weeks of Q3 of 2010, which were driven by a 2.7% decrease in average check, more than offset by a 4.1% increase in guest counts.

Recall that in the first four weeks of Q3 last year, we were in the final stretch of a very successful LTO promotion, and had one week of TV media in those four weeks, versus no TV support in the first four weeks of Q3 this year.

We expect to spend approximately $4.6 million in TV advertising during the balance of the year to support our fall LTO, which will feature an innovative beef burger at an attractive price point.

About $2.6 million of this TV media support will be spent in late Q3, with the balance in early Q4.

If you look at slides 12 to 14, you can see the following.

We took a 1.5% price increase in April, and we are expecting our year-over-year price mix to be up approximately 4.5% to 5% in Q3, and 3.5% to 4% in Q4.

We expect our commodity costs to increase between 5% and 5.5% for the full fiscal year 2011.

As Steve mentioned earlier, our labor costs in fiscal 2011 should be about 100 to 120 basis points lower, compared to last year.

SG&A expense for the full fiscal year in 2011 is expected to be in the range of $100 million to $101 million, including about $2.4 million in executive transition cost and severance expense.

And looking at interest expense, we anticipate interest expense of about $1.5 million per quarter for the balance of 2011, and an effective tax rate of about 10% for the full-year.

CapEx for the full fiscal year should be between $43 million and $45 million, again all funded with our operating cash flow.

And finally, we accelerated our new unit development, and now plan up to 12 new full-sized Company-owned restaurants this year, plus the opening of one of our new smaller prototype restaurants by year's end.

And in 2012, we expect to open between 12 and 15 new units, and this includes both our traditional footprint and our new smaller prototype.

That's our outlook for the balance of 2011.

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

Thanks, Ted.

In closing, I'd like to thank our many talented and passionate team members across the organization, who continue to work tirelessly to improve our business performance.

As a result of their dedication, hard work, and focus on accountability, innovation and results, we delivered a solid first half to 2011.

Our job now is to continue building on that momentum, finish the year strong, and bring us ever closer to our goal of becoming a high performing, best-in-class restaurant Company.

And before I conclude, I do have one more piece of great news.

We're pleased to announce the appointment of Stuart B.

Brown, as our new Chief Financial Officer.

Before joining our team, Stuart was the Chief Financial Officer of DCT Industrial Trust here in Denver.

We'll have more information on the appointment, and Stuart's professional track record in a press release and 8-K filing, before the market opens tomorrow morning.

With that, operator, we would be happy to take questions.

Thank you.

(Operator Instructions).

Our first question today comes from Destin Tompkins, Morgan Keegan.

Thanks.

Steve, my first question is on the same-store sales trends in the early part of the quarter.

Do you have a sense of the traffic weakness, do you feel like that's more marketing-driven, the mismatch in marketing year-over-year?

Or do you feel like some of the recent volatility we've had in the macro environment has been the driver there?

Can you kind of give us some sense of what your feel is?

Sure, Destin.

As we looked across the quarter, we got our normal lift with TV while we were on air, versus the pre-trend, and we got a little bit of a drop-off when we went off air.

This was exacerbated by the fact that we didn't have the same year-over-year media schedule.

It was a week or so off.

But as we mentioned in our results for the first four weeks of Q3, there's been a noticeable slowdown in guest traffic, and I think that's a macroeconomic situation.

Okay.

And then given the average check benefit, and it looks like most of that's coming from mix benefit, is there -- do you see any risk of maybe the consumer getting sticker shock from a significantly higher check than maybe what they've had in the past?

Destin, that's always the risk.

Remember that these mix shifts are driven by the guest.

They are consciously deciding to add an appetizer, get a shareable dessert, or trade up from an entree to an entree combo.

So that is reflective of guest behaviour.

Now there still is always sticker shock when the check is delivered at the table, and its a little early for us to understand the implications of that.

But the great part about mix shift is, that's the guest making their own calls independently within the menu.

Great.

That's helpful.

Thank you.

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

Thanks.

First, on the unit development step-up expected for 2012, could you update us on the real estate side of that, where you are in terms of signed leases or letter of intent?

And then as a follow-up, the -- an update on the pre-opening cost per unit, whether you would expect a shift with the smaller prototype?

Thanks.

Yes.

That's three questions, Jeff.

Let me see if I can answer them in order.

We are on track from a real estate perspective to hit that 2012 number, number one.

Number two, with smaller -- with a smaller prototype, particularly the smallest one, we do expect lower pre-opening costs but we haven't opened one yet, so that's tough to peg down.

And I can't remember the third part.

Well, actually, as a follow-up to Destin's question, it's sounding like the mismatch on marketing doesn't fully explain the slowdown in traffic.

Is that correct, just as a clarification from his question?

Yes, that's a good assumption.

Very good.

Thank you.

Up next we'll hear from John Glass, Morgan Stanley.

Thanks.

A couple of just odds and ends.

One is, you talked about the 1.5% up pricing in April, so what is your effective pricing now?

Can you parse out price from the mix, you talked about that 4.5 to 5?

Yes.

Sure, John.

The pricing realized to date is about 1.2%.

So that leaves you about a 3.3% mix that we're seeing.

Okay.

That's helpful.

So it's really not -- so to your point it's really more the guest electing to trade up, than it is you just putting a price increase on top of them.

And then can you talk about, I mean the competitive set has gotten more intense.

And I think your deceleration, let's say over the last -- this quarter and into July, is a little bit at odds with what we've seen in some brands like Chili's, for example, since they reported as well today, Applebee's.

Do you think there's something at work there?

Have you noticed -- have you dialed down to the level of looking at their timing of their promotions, and has that been an impact for you, vis-a-vis, maybe your suggestion of the macro?

John, we're not seeing much difference in lunch versus dinner initially.

But the second observation is true.

And that is that the casual dining competitive marketing environment is evolving or devolving depending on your perspective to look a lot like QSR.

They're doing back to back promotional modules, reflecting LTOs, price discounting combos, and lunch focus.

And so there's not -- our biggest competitors aren't taking much of a break between promotional news, and of course, we're in three times a year with the big LTO.

Wrestling with that is going to be a big part of our strategic planning for 2012, and our annual plan for 2012.

Just two other odds and ends.

What is your average check right now?

The average check for the quarter was right at $12.

Okay.

Great.

And then finally, you talked about the smaller prototypes being part of your development plan next year.

How small, and how many of those are there?

I thought I heard you say 2,000 square feet to 4,000 square feet, which would be awfully small at least, relative to existing units, I think.

So can you just -- is there a range of smaller units you're testing next year or is it just one?

And exactly how big is this, and what kind of format is it?

Well, John, we're still in the final phases of sorting that out, but we do have prototypes that enable us to go into spaces as small as 2,000 square feet, and we've got a mid-scale, mid-range prototype at about 4,000 square feet.

So this is great learning for us, and we're excited about opening up that non-traditional channel of distribution, which that smaller prototype will get us to.

So we are looking at opening one of these smaller ones up in Q4.

And would it, I'm sorry, would it be in a mall?

Would it be in an airport?

I mean what kind of a location would a 2,000 square foot Red Robin fit into?

Well, the initial one will be a traditional retail.

Okay, thank you.

Our next question today comes from Brad Ludington, KeyBanc Capital Markets.

Thank you.

Yes, I wanted to ask on the increase in G&A guidance.

If you kind of net out the executive transition cost, it still looks like you're raising it, $5.4 million to $5.9 million over the previous guidance.

Am I missing something there, or if I'm not, what drove that increase year-over-year, or from quarter-to-quarter?

Yes, Brad, the increase in SG&A is really a few things.

Again, I would preface it, with the success we're seeing with our 200 basis point initiative, and the traction we're seeing in the middle of the P&L, we've decided to make some additional investments in the business.

So that includes performance-based compensation, if you're looking at performance-based bonus.

Again, we did not give merits to our home office at the beginning of the year.

We were telling people that we need to prove the performance and get traction in the business before we'll do that, so we've now put merits out there at the home office.

Other things include we've accelerated NRO development.

So again, as we're pleased with the success of our NROs, we've accelerated two units into 2011, and we ramped up next year.

So again, we're having some additional spend related to support that growth.

And then finally, the other big piece is in our infrastructure.

Again, as you heard about our ERP implementation, we're accelerating some of that into this year.

But again, we should see the benefit in 2012.

Okay.

And then -- well, one other question on that, I almost forgot.

I'm sorry.

Does that full guidance include the -- I think it was $785,000 of severance expenses that were in G&A in the first quarter?

Yes, it does.

Okay.

Thank you.

Then also, I was just -- Steve, on the LTO this quarter, I was wondering -- what mix -- what was its percent of sales?

How does that mix during the quarter?

The LTO, the featured product on television for the LTO this year was about 1% of mix.

That was down from the LTO performance in summer of 2010, which was about 3.3% of mix on the featured product.

Okay.

Thank you.

William Slabaugh, Stephens, is up next.

Hi, guys.

Congrats on the quarter.

Wonder if you could remind us how far you made it through that 250 line items on the cost initiative side, and then relate that to the percentage completed, of what you would call the overall cost opportunity there?

Well, as we've talked our target is to get to an annualized rate of $16 million to $18 million by the end of 2012.

This isn't a linear process.

We're going to probably see a preponderance of the benefits next year, as we go forward.

But we are very pleased with the progress we've made to date.

And we are confident, given the traction we're getting, that we will hit that $12 million to $18 million annualized number by the end of next year.

Okay.

And then on the check again, you mentioned this in your script, but wondering if you could touch a little more in depth on what moved that check up, kind of touching on whether it be alcohol, apps, the shareable deserts you mentioned, kind of quantify if you could, the things that affected that check the most.

Will, it was a few things.

I'm not going to get into specific percents, as far as contribution, but the main items we saw, we saw increased penetration with our appetizers.

We saw guests shifting out of hamburgers and sandwiches, into entrees and combo meals.

So again, higher PPA there.

And then finally, with our beverage menu, we have seen obviously, an increase in alcohol, in the beverage menus also deserts, so we've seen an uptick in our deserts.

So I think it's a combination of those three things driving that.

Okay, thanks.

And just lastly on the cash balance, it's about double what that balance has been for the past five years or so.

So just wondering if that's the timing of CapEx needs, store openings, things like that, or if you're more comfortable now keeping a bit more on the books?

I think the strategy is, we have such a low cost of debt, a favorable debt contract, we're still working for our 2012 strategic plan.

As we get a more out of that plan, get a little more traction on where we're going, I think you'll see the capital be put to use.

Okay, great.

Thanks, guys.

Ryan Elliott of Raymond James is up next.

Hi, I just wanted to drill down a bit on the food inflation outlook.

Have you -- are you just estimating your ground beef, or have you contracted for any length of time for the second half?

No, we're still -- Bryan, we're still buying ground beef on the spot market.

We don't have anything under contract.

So that's our forecast, given what we see right now.

Okay.

So there's some room for that possibly, with the glut of current supply anyway maybe to come down some?

Yes.

If you recall, we said 5% to 6% commodity inflation on the last call, and we dropped that to 5% to 5.5%.

Again, that's mainly ground beef driving that.

Yes, and you're locked on the other proteins, as I recall, chicken, I guess being the most important one?

Yes.

We're about 75% contracted through Q3, which includes chicken, and then about 60% contracted through Q4.

Okay.

Great.

Thanks.

Thanks, Bryan.

We'll take the next question today from Philip Juhan from BMO Capital Markets.

Thanks.

Fantastic quarter, guys.

Steven, I guess one, I want to congratulate you on your generation of cash, your $54 million in the first half of the year in operating cash flow.

And really, you add back the $2 million of the one time spending in the second quarter, $56 million, sort of pacing towards a $110 million plus operating cash flow for the year.

And the way we look at it, that's a 17% sort of cash flow yield on the existing asset base, after your $12 million to $13 million of maintenance capital spending.

So really fat cash flow yield there, it's a very strong cash flow trend.

I guess the question is, what's really the plan for that cash flow?

We see the $40 million of cash sitting on the balance sheet.

If you could speak to that a bit, I'd appreciate it.

Well, Phil, of course we've got authorization from the Board for up to $50 million of stock repurchase.

We are planning to capture about $25 million of that this year.

We have expanded, we have accelerated our new restaurant openings scheduled for 2011, and doubled our forecast of new restaurant openings for 2012.

And then we will continue to have some capital against our ERP infrastructure program next year too.

So --

And I guess -- with the strength of the cash, it seems like you could accelerate the share repurchases even further.

And then, also perhaps accelerate development even further off of a very low base, and particularly excited about the small -- I guess the possibilities and the potential, particularly the return potential, of the small format prototype.

So I guess the question there is, are you -- will we perhaps see accelerated development opportunities here in the future, in addition to what you announced today?

Well, Phil, the issue of course, with development, particularly with the large prototype, is you've got a 12 to 18 month pipeline development for the real estate.

We feel good about being able to hit that 12 number for 2012.

But getting any further than that, but that just takes time to source the sites, put the LOIs in place, and negotiate the deals.

We are excited about the smaller footprint capabilities too, recognizing that we haven't opened one yet.

So I think it's incumbent on us to finalize what that looks like, get one open, understand if our assumptions are appropriate, and then make decisions from there.

Okay.

Thanks, Steven.

Thanks, Phil.

Next up is Joe Buckley, Bank of America.

Thank you.

A couple questions.

Going back to the traffic numbers again, the loyalty program, I think you had shared with us in prior calls had about a 2% traffic lift in test market.

The loyalty program's also sort of front-end incentive loaded, it seemed to me the way, the way you've described it in the past.

So talk about the effectiveness of the program, talk about what you saw in the test markets, is some of that change in traffic that you had heavy incentives to get people in when they first signed up for the program, and then it's a little bit less incentive-driven as time goes on?

Yes, I think, Joe, we're still learning exactly how the mechanics of Red Royalty are working.

We're pleased with the activation and registration levels.

They're running ahead of expectation.

We also know that from some of our preliminary analysis, that a registered Red Royalty user has a lifetime value of about ten times more than someone whose activated the card, but hasn't registered.

We're still trying to process that.

And that gives us an opportunity going forward, to be much smarter about our incentive.

I think your assumption that the program did have front loading, from a discounting and a traffic building standpoint is correct.

Remember we had, we rolled it out early in the first quarter, so we got a bunch of that in place initially.

We are intending to reroll, or revisit or reinvigorate our discussion around Red Royalty, with the operating team here in the next week or so.

But it's something we're going to be talking to them about an ongoing basis.

Okay.

Then a question on the media match-up for the fall LTO, from the spending it sounds like it's very late in the third quarter, maybe going into the fourth quarter this year.

How does that match, or not match, week over week with what you did last year?

Joe, in Q3 of this year, again we spent about $2.6 million in the third quarter.

That compares to last year for the third quarter, where we spent $3.4 million.

And then looking at Q4, we'll spend about $2 million this year, and that will compare to last year's Q4 of about $2.1 million.

Okay.

So am I correct in perceiving that the fall LTO laps both the third and fourth quarter this year, or is that inaccurate?

That's correct, it's the last two weeks of the third quarter, and the first two weeks of the fourth.

And what was it last year?

It was the same time frame.

Okay.

And then just one more question.

On the $16 million to $18 million of targeted cost savings, where do you think you are at this point, in getting to that $16 million to $18 million target?

Joe, we're in a really good place on getting to that target.

We're getting great traction.

We have captured, as you can see in the P&L real savings, and as we look at our pipeline going forward, we believe that we are on track to hit that number at the end of 2012.

There's some things that are very simple, as we've talked about.

We went to a brown paper towel from a white paper towel, and saved ourselves $50,000.

And there are some things that are very, very complicated, we have to be careful about so we don't impact the quality of our products or our guest service, which makes it a little tough to call exactly when we're going to be able to get those in place.

But as we're looking at our progress, we're feeling really good about hitting that number at the end of 2012.

Okay.

Thank you.

(Operator Instructions).

Next we'll go to Peter Saleh of Telsey Advisory Group.

Great.

Thanks.

If I recall correctly, a couple quarters ago, you guys had indicated that you would try and expand the Red Robin footprint with the use of franchise funded unit growth.

So if you're looking to expand next year by 12 to 15, any thoughts on where the franchisees will wind up?

Peter, we -- in had the first quarter we talked to our franchisees, about being back in the franchise business.

We haven't sold a franchise at Red Robin since about 2004.

We're following that up, with a franchise meeting we had with our franchise partners here in the second quarter, where we have asked them to think about, and put together a plan about what they feel their growth opportunities may be, and their operating footprint.

We will have some insight into what they feel about that, by our Q3 conference call.

But I think that as we look at 2012, there's a couple of new franchise stores in the pipeline potentially.

Right now, that's about it.

And the franchise sales, and new store opening pipeline is a big fly wheel to get going, and we're just beginning to push on it.

And my next question is, given the amount of cash that you have on the balance sheet, any thoughts on just being on TV more often?

I know in the past, part of the reason that you weren't on TV, was there wasn't enough capital to fund it.

So seems like the capital shouldn't be an issue at this point.

Well, Peter, the capital isn't the issue.

We have plenty of cash.

There is the reality of just being thoughtful and efficient about the spend we have.

We're not averse to incremental spend on the marketing side.

We would like our franchise partners to match that which is fair.

That, as you can imagine is a dynamic conversation, and one we won't shy away from, but we're not sure what the outcome will be.

But I think our initial guidance around marketing spend this year and next year remains the same.

Great.

Thank you.

Howard Penney of Hedgeye Risk Management is up next.

Hi.

Thanks very much.

My understanding that there's a little bit of a lead time with new unit development, and that the macro environment is not -- has been tough for the last couple years.

And if I hear you correctly, may have even turned down a little bit here in the short run.

Why is it the right time to be accelerating unit development?

And more importantly, how do you know you're going to get the right read on the new prototypes that you're going to be opening, given the challenging environment?

Thanks.

Yes.

Well, Howard, that's a two-part question.

We've been building the standard 5,600 square foot prototype for a long, long time.

And as we look at the outstanding performance of our new restaurant opening classes in 2010 and 2011, it gives us a lot of confidence that, that prototype and our existing track record in successfully identifying, and building cost effectively the big prototype is a smart bet.

And I said earlier on the smaller footprints, we're going to walk, before we run on that.

We need to get one open.

We need to test our assumptions around cost, and then around revenue and margins, and we will not hit the accelerator until we're satisfied that we understand that.

Thank you.

We'll now go to -- actually, ladies and gentlemen --

(Operator Instructions).

Okay.

And we'll now go to Bryan Elliott of Raymond James.

Hi, just thinking about the traffic and the mix and all the variability here, in sort of sales results, and your cautionary comments, and I guess the discounting discussion as well, we're pretty good out here, at taking a data point, and not really thinking about it on the second or third order level.

So when I look at the voluntary increase, which you pointed out so clearly in check from customers trading up, but think about the traffic thing, I'm wondering if, are we seeing a change in behavior?

Or are we seeing a potentially -- I don't know how you measure this, but maybe you have some insight into it, are we maybe just seeing a change in the mix of consumers who are coming in, and the people who are coming in are ordering per normal, and we've just lost a portion of the lowest paying, low check, never buy a beverage or dessert or appetizer type customer, who is being pulled away by the discounting that's going on in the category as a whole?

Is that a possible explanation, based on what you can tell, to square all the data points here?

Bryan, I think that the answer is -- we don't know.

And your speculative thoughts, are as good as ours at this point.

The one thing we do know, of course, is that our boxes are built in trade areas where the household income average is $70,000 plus, so we've always had, and continue to have kind of the same kinds of guests coming in to see us.

We looked at lunch versus dinner.

We don't see ourselves getting hurt, particularly one day part over another.

But we take it from us, we are drilling down on this from a research, and a competitive standpoint to really understand what's going on.

And as you can appreciate, the static on the radar screen created by what's happening in the macroeconomic environment makes it even tougher.

All right.

If I may, am I still live?

Yes.

One more quickie on the small prototype.

Are we -- you envision that being a full service, or is it more of a limited service customer order system as you envision it?

Bryan, we're in the final stages of sorting that out.

We'll be in a better position to help you with that in our Q3 call.

Okay.

Great.

Thanks.

Thank you.

Next up is a follow-up, Destin Tompkins, Morgan Keegan.

My question's on the labor expense.

I think going back to the first quarter, you saw 120 basis points of improvement.

I believe at the time the implication was, is that we wouldn't see quite as great of an improvement as we went through the year.

Clearly, the second quarter came through with pretty strong performance.

And you've raised your guidance, but it still implies more of that's front end loaded.

I'm just trying to get a sense of how much is conservatism, why couldn't we see that same type of savings year-over-year continue in the back half of the year?

Destin, as we did mention on our last call, one of the other benefits in 2011 on labor in Q1, was actually going against some decisions that the Company had made the previous year in Q1.

And what I mean by that is, that as they were looking toward the kickoff of the LTO, they made some hiring decisions, and some training decisions and some staffing decisions, that as we looked at that this year, we decided not to do.

And we figured we would get some overtime in place of that, instead of ramping up the hiring, selection and training, and then ultimate turnover.

That proved to be a very wise decision in Q1, but benefit was exaggerated going against the previous year.

We're not going to get that same benefit in quarters two through four, this year on a year-over-year comparable basis.

But as you look at the second quarter, obviously you saw pretty significant benefit, which I think was a different issue.

Was there different dynamics at play in the second quarter, that you don't expect to continue?

Well, I think as we guided we're looking for a 100 to -- about 100 basis points of labor benefit for the full-year.

We also undertook some Q4 2010 initiatives in the fourth quarter, that we're going to be lapping this fourth quarter, so there are several reasons why that momentum is going to slow just a little bit versus what you saw in Q1.

Fair enough.

Thank you very much.

And ladies and gentlemen, that is all the time we have for questions today.

I'd like to turn the conference back to Mr.

Carley for any additional or closing remarks.

Thanks, Lisa.

Thanks everybody for joining us today.

We appreciate your interest in Red Robin, and we look forward to sharing our third quarter 2011 results with you in November.

Take care.

Once again, that does conclude today's conference.

We would like to thank you all for your participation.