Red Robin Gourmet Burgers Inc (RRGB) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Red Robin Gourmet Burgers third-quarter 2012 conference call.

At this time all participants have been placed in a listen-only mode and the lines will be open 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 continue, plan, expect, will, and other terms with similar meaning.

These statements will include, but will not be limited to, statements that reflect the Company's current expectations with respect to the financial condition of the Company; results of operations, plans, objectives, future performance and business, 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 the assumptions upon which 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 Form 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 condition.

The Company has posted its fiscal third-quarter 2012 press release and supplemental financial information related to the quarter's results on its website, www.RedRobin.com, in the Investors section.

I want out turn the call over to Mr. Steve Carley, Chief Executive Officer of Red Robin.

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

With me are Eric Houseman, our President and Chief Operating Officer; Denny Post, our Chief Marketing Officer; and Stuart Brown, our Chief Financial Officer.

After Stuart, Denny, and I deliver our prepared remarks we will all be available for Q&A.

If I first want to say that we are very pleased with our most recent quarterly results.

You may recall that during our second-quarter call in August we said that we were taking action to blunt anticipated challenges to guest traffic in Q3 due to three weekends of the Olympic Games, slowing consumer demand generally, and other headwinds.

The success of our marketing initiatives and the solid operational performance of our restaurant teams contributed to a stronger than expected fiscal third quarter 2012, and allowed us to outperform the casual dining category in an intensely competitive market.

During the quarter, we again achieved year-over-year improvement in guest counts, gains in restaurant revenues, and continued expansion in our operating margins.

We were especially pleased with the performance of our Tavern Double platform with the flavor innovation and everyday value it offers to our guest and our Red Royalty program, which continues to connect with our guests to drive frequency.

As we shared in our earnings release, and as you can see on slides three and four of the supplemental information, during Q3 we grew total revenues of 3.4% to $213.3 million and increased company-owned comparable net restaurant sales by 1.1% including an 80 basis point increase in guest traffic.

Restaurant-level operating profit margin improved 90 basis points to 19.7% in the third quarter compared to 18.8% a year ago.

In terms of our bottom line, earnings per diluted share grew to $0.24 compared to GAAP diluted earnings per share of $0.14 and adjusted earnings per diluted share of $0.24 a year ago.

As you know, our long-term strategy for building the Red Robin brand is a multi-pronged approach that includes enhancing the guest experience and strengthening our value and quality perceptions to drive revenue growth, as well as managing costs and optimizing our use of capital.

Denny will update you on the third quarter's marketing successes that drove guest traffic and revenues, but I will first update you on some very key initiatives in our strategic plan.

During Q3 our restaurant teams continued to make progress streamlining our operating costs.

There is no rock too small for us to look under to find potential savings and here are some examples.

We found out about $120,000 in annual savings by changing the spec for the appearance with our onions.

Now we chopped our onions and put them in salsa, so the appearance of the onions isn't important but we still were able to change the spec and save $120,000.

In addition, we expect to save about $275,000 annually with our to-go packaging.

It uses less material and, therefore, is cheaper.

And more than $0.5 million each year we will save by switching to a washable, reusable kids beverage cup.

Besides the cost benefit, the packaging and kids cup initiatives are a win for the environment.

All three of these examples show once again that we can find operational cost savings that don't diminish the guest experience.

On slides five and six you can see our cost-saving ideas having an impact; not just on the continued expansion of our margins, but also on the investments we are making back into the business.

Not only are we making big investments like our technology infrastructure improvements and brand transformation effort that I will talk about in a moment, we are interesting in improvements like enhanced audiovisual packages and flat screen, high-definition TVs in our restaurants to support our bar initiatives and new kitchen equipment to enhance the quality of our food.

We are also reinvesting savings to support the innovative ideas from our culinary team.

We are absolutely putting the savings to good use, building our business wherever it makes sense.

Regarding our brand transformation initiative, we are on track to open a number of transformed restaurants in the fourth quarter, reflecting varying levels of investment.

Now this is not simply a restaurant remodeling effort.

It is part of our overall strategy to make the Red Robin brand more relevant to our current guests and to attract more of them more often and leave them so delighted that they tell all their friends.

This continues an evolution of our brand to build profitable sales.

Like every other guest-facing initiative we are working on, the changes we are making are informed by comprehensive consumer research and involve everything from the physical space and layout of the restaurants to the team member uniforms, our service model, our menus, and our food presentation.

Over the next several months these restaurants will, in effect, serve as a laboratory for us to test what is really important to our guests and determine the returns from these investments.

We expect to have conclusive findings by Q3 of next year and we will determine the next steps based on what we learn.

On growth of new full-size Red Robin restaurants, we opened four new units in Q3 and we are on track to open a total of 10 for 2012.

Also, three franchise restaurants in Texas that closed over the summer have since reopened under the management of a different franchisee.

So far in Q4 we have opened new Red Robin restaurants in Washington state and Florida and later this month we expect to open another Florida Red Robin location.

In 2013 we are planning on opening up to 15 new full-size Red Robin restaurants in markets that include Florida, New York, New Jersey, and Chicago.

All markets where we are very underpenetrated.

Finally, on Red Robin's Burger Works, we said that our plan was to have five units opened by the end of this year.

We achieved that goal in the third quarter with the opening of a Burger Works near the University of Colorado in Boulder and another on Denver's Metro State College campus.

Remember that our objective behind Burger Works was to enhance our long-term growth profile with a smaller footprint that combines our great burgers and a fast casual service system.

Burger Works allows us to penetrate trade areas we haven't been able to serve in the past with full-size Red Robin restaurants.

Our first five Burger Works vary in size, in trade area, and quite frankly, in performance and consistency of execution.

But as intended, they are generating a lot of learning that we can use to tweak the model to deliver an even better guest experience and improve the ROI.

We have a lot of runway ahead of us with Burger Works including urban locations, stadiums, airports, college campuses, and other opportunities.

Moving forward, while we continue to refine the model and test at existing Burger Works units, we plan to open up five more Burger Works in 2013.

So moving on to slide number seven I would like Denny to share some of the highlights of our key marketing initiatives from the last quarter that were big contributors to our outperforming the market and helping us sustain the Red Robin brand.

Denny?

Thanks, Steve, and good morning, everyone.

As you know from tracking Black Box and other industry sources, traffic has been hard to come by this year and particularly in the last quarter.

That is why I am so proud of the way that the menu and marketing teams continue to come together to outperform competitors today and to set us up for even further and stronger growth in the future.

A key focus area continues to be delivering innovative flavor combinations that make us gourmet at an everyday value to our guests.

Our Tavern Double platform, which we launched in the second quarter and more recently used to create news through new Tavern styles and The Big Tavern, continues to meet our expectations.

This platform now accounts for a significant mix and has emerged as the most successful new platform launch in our history.

During the third quarter we featured the Tavern Double on TV to reinforce everyday $6.99 with bottomless fries value, while also bringing back the popular Oktoberfest Burger, supported with online and social media as well as strong in-store merchandising.

The best part, this one-two combination allowed us to sell the Oktoberfest at full price this year rather than taking the $3 discount we did last fall.

This top-line/bottom-line balance worked well to drive profitable results as you will see when Stuart takes you through the details.

We are also having greater success with menu options that help build average check.

Along with the Oktoberfest burger LTO, we introduced warm pretzel bites, a great new shareable appetizer that generated incremental sales.

Other check drivers included our bar business, frequent trade up to Tavern styles, and featuring a popular entree, in this case our hand-battered, made-to-order Arctic cod fish and chips.

Another key part of our marketing strategy is becoming even better at engaging guests through our Red Royalty program.

During the third quarter we leveraged Red Royalty to drive repeat, profitable traffic.

One of our successes was an offer that offset traffic softness during the Olympics.

We are using Red Royalty for micromarketing in key geographies to generate awareness of new menu items and to segment our guests with smart rewards.

Membership has reached 1.9 million guests, and while it is already an effective and profitable program for us, we continue to refine it and link it with other engagement tools such as e-blast and social media for even greater impact.

During the third quarter we also made further progress against our bar and beverage initiatives.

Take Back the Bar initiatives continued to increase our alcohol beverage mix, up to 7.2% as of Q3 this year.

Taking Back the Bar is also about differentiating our brand, being more relevant to adult guests and creating a great dining experience in our bar.

The addition of a master mixologist to our culinary team has already generated benefits in the form of improved core beverage items, greater variety of both alcohol and non-alcohol beverages, and offerings that set us apart such as our Sam Adams Oktoberfest Beer Shake.

The beer shake story was picked up by national outlets ranging from The Today Show to CNBC and in many markets across the country.

This fun new item really captured people's imagination.

It generated more PR impressions in a month than we achieved for legacy programs in an entire year.

It was unexpected and it spoke to the whimsical nature of our brand.

Looking ahead we still have a lot more opportunity to increase beverage mix, and we are confident we have a slew of strong concepts in the pipeline.

As Steve is fond of saying, this is a marathon, not a sprint.

And while we are pleased with our progress so far, we know we have a long runway ahead to become best-in-class.

Last, on the advertising front we will have a new agency partner in place by year-end with the experience and the media leverage we need to go to the next level.

Those are just a few of the headlines from Q3 on the menu and marketing front.

With an unprecedented investment in quantitative, qualitative, and sensory research we are developing a robust pipeline of new products, evaluating new kitchen equipment to expand our capabilities, and breaking new ground in marketing.

We have multiple market tests in place this fall, all supported by operations and other teams across the enterprise partnership, for which I am very grateful.

We are just starting to rock 'n roll.

Now I am going to turn the call over to Stuart to give you more perspective on our operating results and the outlook for the rest of the year.

Stuart?

Thanks, Denny, and I appreciate everyone joining us on the call this morning.

As Steve and Denny already covered, we had a great quarter.

We exceeded our expectations and demonstrated our ability to nimbly and profitably drive the top line while effectively managing expenses.

Earnings per diluted share were $0.24 in the third quarter on higher sales and higher restaurant level operating margins.

This was better than we had anticipated entering the quarter, although flat versus last year's adjusted earnings per share.

Looking at the big picture versus a year ago, the improvement in restaurant level operating results was offset by investments in projects supporting long-term infrastructure and growth, including pre-opening expenses, as well as a much higher income tax rate.

Year-to-date adjusted EPS has risen 13% to $1.48.

As shown on slide nine of our supplemental, our revenues in the third quarter totaled $213.3 million, an increase of $7.1 million, or 30.4%.

And that included 1.1% growth in comparable restaurant revenue due mainly to higher traffic.

Year-to-date comp sales were up 0.9%.

Revenue from comparable units in Q3 included approximately $1 million from a reduction in liabilities associated with our Red Royalty loyalty program.

We defer revenue from the cost of earned rewards and the cost of rewards is lower than we had set aside.

The cumulative impact of this adjustment boosted comparable restaurant revenue by 0.5% for the third quarter and just 0.1% on a year-to-date basis.

Now that we have over a year of good data on member behavior we were able to perform a thorough analysis of our Red Royalty program and are confident that the structure is working well, rewarding our loyal guests in a way that is profitable for the Company.

Our average guest check increased 0.3% in the quarter due mainly to last October's price increase, the changes in our loyalty program, and increased alcoholic beverage sales.

These increases, however, were offset by lower appetizer sales and the increased mix of the everyday value Tavern Double.

When comparing our guest count trends to data from Black Box, we appear to have outperformed by 250 basis points as we increased counts by 0.8% while casual dining as a whole was down 1.7% in Q3.

As you see on slide 11, our strong year-over-year restaurant level performance continued this quarter with margins up 90 basis points to 19.7%.

Specifically, cost of sales were down 70 basis points from last year as lower prices on dairy, produce, and pork more than offset increases for beef and potatoes.

Restaurant labor increased 60 basis points to 34.2% due to higher variable compensation, although other operating costs fell 90 basis points due to lower card processing fees, utilities, and supply costs.

Looking to slide 12, over the past two years we have expanded restaurant margins by a full 220 basis points from 17.5%, despite cost of sales being up 40 basis points.

Selling, general, and administrative costs were $24.5 million in the quarter, an increase of $1.6 million versus a year ago, mainly due to the cost of expanding our gift card program as well as investments in our IT infrastructure partly offset by severance costs which we incurred last year.

We expensed $1.2 million this quarter related to the development of our new finance and supply chain systems, an increase of $400,000 over last year.

And year-to-date we have expensed $4.2 million related to these systems.

SG&A costs overall were less than expected this quarter as some costs related to the production of gift cards for the holidays shifted into the fourth quarter.

Gift card sales this year are expected to rise well over 20%.

Depreciation increased both sequentially and compared to last year due mainly to $600,000 of write offs and accelerated depreciation related to our brand transformation initiative and upgrades to some of our kitchen equipment.

We expect about $750,000 of additional depreciation in the fourth quarter related to these initiatives.

Looking at slide 13, the continued growth in EBITDA is enabling us to fund investment in our infrastructure, to improve our guest experience and value proposition, and to extend growth with new full-service restaurants, Burger Works, and remodels.

Year-to-date adjusted EBITDA is up 9%, or $6.5 million, to $78.5 million.

If you look back over the last two years, EBITDA through the first three quarters has increased $18 million, or 30%, in what has been a fairly competitive environment.

Year-to-date we have invested about $43 million, including $22 million in new restaurants, including the one we acquired in Clifton, New Jersey, $10 million in maintenance capital, and $9 million in IT systems and corporate initiatives.

The cash we have generated also funded $7.9 million of share repurchases in the quarter.

Year-to-date we have purchased approximately 521,000 shares for $15.7 million, which represents 3.7% of our share base at the beginning of the year.

Regarding guidance, you can see the update in the third-quarter earnings release and on slide 16 and 17.

Steve and Denny have already provided updates on a number of the initiatives that we have in the pipeline.

Our capital investment expectations for this year of $55 million to $60 million includes approximately $7 million in Q4 for our brand transformation initiative and the upgrading of audiovisual in about 100 restaurants that we talked about last quarter.

Additionally, we will expense about $700,000 for training, research, and other costs related to brand transformation in the fourth quarter, which is included in our updated SG&A guidance.

We are still in the early stages of transforming Red Robin to assure continued and sustainable growth, but our track record of margin improvement over the last two years has already delivered significant value for shareholders.

Looking ahead, the initiatives we are undertaking to drive top-line growth, business insight, and enhancing the guest experience require time and resources to design, test, and implement, but we are highly confident in the opportunities we see in front of us.

Although we will communicate our 2013 outlook on the fourth-quarter earnings call, we think it would be helpful if we provided some direction on our call today.

First, the impact of our 53rd week this year is meaningful.

That holiday week is a very profitable one, as it has sales about 40% higher than an average week with restaurant level operating margins of approximately 30% for the week.

With low selling and corporate costs those operating results flow strongly into earnings.

We estimate that week to be worth $0.15 to $0.20 to earnings per share and $4 million to $5 million to EBITDA.

For 2013 that week shifts from being in the first quarter to being in the fourth quarter, so Q1 2013 results will be lower than the same period of 2012.

The impact of commodities, based on current markets, is expected to raise our cost of goods around 5% next year.

Our goal will be to offset the dollar impact of inflation by improving sales mix, and to some degree, by increasing price.

Further, as Denny touched on, we will be evaluating the timing of our marketing and media plans with our new agency partner to assure that we are optimizing effectiveness, so you should anticipate some noise in comparability if we change media plans.

Our update in February will include estimates on comparable sales growth in margins as well as the impact of key initiatives in the pipeline.

Lastly, on new stores, we will continue expanding our base and plan to open around 15 new Red Robin restaurants and up to five additional Burger Works.

With that I will turn the call back over to Steve.

Thank you.

Thanks, Stuart.

I will wrap up our prepared remarks by reiterating that 2012 is a foundational year for Red Robin as we transform our business and position the Company for sustainable long-term growth.

Given our progress so far this year, we are on track to meet our objectives for 2012, including continued operational discipline, building our new product pipeline, elevating the guest experience, and expanding our restaurant base through new unit development.

I want to once again thank all my fellow Red Robin team members across the enterprise for their continued hard work, passion, and focus on results.

Our success would not be possible without them.

Finally, we want to make sure everybody stays safe out there on the East Coast as Hurricane Sandy makes landfall.

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

(Operator Instructions) Jeff Omohundro, Davenport & Company.

Good morning and congratulations on your quarter.

I have a couple of questions.

I guess my first one just a clarification on Stuart's comment regarding the 2013 commodity outlook.

Was that a 5% blended commodity inflation for 2013?

And was I correct to say that you are suggesting that you can offset that magnitude of inflation, or the expectation to offset it, through price and mix?

Jeff, you are right, you understood the comment on the 5% right in terms of offsetting it.

We are doing everything we can to provide options for our guests to trade up themselves.

So they can add PPA on; we can improve overall profitability per check.

Again, things like the pretzel bites and other appetizers that we have in the pipeline will help with that.

So that is our first priority is to offset it that way, but we obviously will continue to keep in our pocket the ability to take price to offset it as well as things play out.

Then, secondly, you have maintained the 0.5% comp guidance for the year despite the strong Q3 results and certainly the prior year is more challenging.

But I am wondering if that would suggest that you are seeing a deceleration in Q4.

Perhaps you can address that and the state of the competitive environment you currently are seeing.

No, I think Q3, if you look at the Black Box numbers on traffic, was already pretty competitive.

So in terms of looking where Q4 is, we are expecting to be a lot of the same.

Obviously we have got a cautious outlook, just as consumers stay skittish around the fiscal cliff and things like that so we were remaining fairly cautious.

If things turn around better and people feel better, then it will be great for us, but that is not what we are counting on.

Have you seen a shift in trend so far?

Looking at the national data from Black Box I think it has been fairly consistent.

Thank you.

Thanks, Jeff.

Will Slabaugh, Stephens.

Thanks, guys.

Wondered if you could address the menu for a second, talk about where you are now versus maybe where you want to be down the road; what additional opportunities would mean from a mix or a traffic standpoint.

And then if you could kind of work into the [barbell] strategy that you have now and kind of what that may look like going down the road.

Will, this is Denny.

Great question.

I think we have made, obviously, some progress with extending our barbell with the addition of the Tavern Double, but we see an opportunity to continue to broaden the range of offerings within our burger authority as the core of our menu.

We also have a lot of upside.

I think if there is a weakest parts of our menu it's generally the appetizers and the desserts.

Have a number of things in tests that we think will make a big difference there as well, give guests another reason to add-on either at the front or the back or hopefully both ends of the meal.

As well as what we have got going on around beverages and greater variety and, like I said, some of the fun kind things that we are doing.

So I am very fortunate, I think we have a very clear strategy around burger authority that gives us a lot of room to move and a lot of things go along with that -- the right sides, the right beverages, etc.

So lots of room to play here and just started down the pathway, I think you will be seeing a lot of things coming.

So fair to assume we should see something on the higher end of the barbell here fairly soon at least?

Yes, we are certainly looking at that and have a good possibility of that given some of the things we are doing around kitchen equipment, etc., for later next year perhaps.

Great.

Then just one more question for me about the Oktoberfest promotion.

You mentioned you were able to run at a full price point this year; wondering how that compared this year versus last year.

Mix was only marginally lower, frankly, year over year, so you can do the math.

It made a big difference.

Guests really love that burger.

Thanks.

Jeff Farmer, Wells Fargo.

Great, thanks.

Good morning, everyone.

You alluded to this, but could you just provide some color on how the Tavern Double mix has trended really since I guess that April introduction all the way through October?

Is it continuing to build momentum at this point?

I have been really pleased the way it has settled out.

I mean there is a significant percentage of our guests who are voting with their wallets to choose Tavern Double.

With the addition of the Big Tavern this summer we are also seeing a number of guests opt over into that item, which has the same dollar trade up for tavern style.

So I think across the board we are really pleased with the way it has settled in and how sustained and, I guess, confident almost it is in its path.

Even like things with when the Oktoberfest rolled in this fall we continue to see Tavern Double maintain its share.

Again, it sounds like you don't want to provide too much on the mix, but is it at least fair to say that it is a double-digit percentage of your mix at this point?

Yes, yes.

Okay.

Then you alluded to this again, but obviously in August you guys were thinking that you were going to see some negative same-store sales.

Things proved to be a lot better than that and you touched on this, but what were some of the bigger surprises for you on the top line?

Where did you guys outperform relative to your initial expectation?

Well, I think some of the initiatives we were able to institute with our Red Royalty program made a big difference for us in terms of daypart traffic and some other things, particularly around the Olympics and some initiatives that really, really worked for us.

I would say Red Royalty was, I wouldn't say the biggest surprise, but we were certainly very pleased with the outcomes.

Jeff, this is Stuart.

The other thing I would add is that as we started to look out in terms of where we felt like the market was heading later in the summer and into the early fall, Denny and her team had set up some promotions and activities that they had tested earlier in the year that we were able to pull out and use just in that circumstance.

Okay.

And then one more.

You guys began to discuss 2013 a little bit.

Obviously in April you pointed to upper teens EPS growth for 2012; looks like that is probably in play.

But as it relates to the mid-teens EPS growth out to 2013 with the pieces that you gave us, is that still a reasonable expectation for 2013?

So going back -- this is, again, on a 52-to-52-week basis so let me clarify that.

I think the biggest change -- and again, we will put full guidance out in February.

I think going back to where we expected the economy to be going into 2013 I would say there is a lot more volatility today than we would have expected.

That said, we will give a lot more color in February.

Okay, thank you.

Conrad Lyon, B. Riley & Co.

Thanks, everyone.

Question about Burger Works average weekly sales.

The question is twofold; one is to just see where it is tracking and then also, for modeling purposes can you talk about that yet, where it is going?

Especially as we go into next year.

I just got to make sure that I am not actually seeing the trend of a bigger box store get muted by it too much.

First, there is only five open and the last two just opened, literally, weeks ago, so there is a pretty big range in their performance.

I think it is safe to say that it is not material to the big box numbers at this point.

And we have opened in very different trade areas on purpose to try and understand the dynamics and see how the boxes work.

We are getting a lot of great learning and we are not done, but I think safe to say that it is not material by this point on our total business.

Conrad, I will try to be clear in our disclosures and things like as to what is talking about just the big box.

So if you look at our average weekly sales and things like that right now those are just big box numbers and we will figure out how to give some color as Burger Works becomes meaningful later on.

Got you.

This might be too early too, but going into next year is there an average weekly sales range that you would like to see or is that just too much variability in terms of sites?

Conrad, there is really no secret on the business model behind a fast casual burger concept.

There's a couple of folks out there doing it really well.

You need to do $20,000, $20,000-plus a week in sales and a 20% operating margin and keep your occupancy costs below 10%, and everything then works.

So we are looking at that same model for Burger Works.

Got you, okay.

Different question on marketing.

I think, Stuart, you said there might be more noise next year.

Directionally, does that mean you would like to be a little bit lower perhaps?

Not in terms of [value].

I think it is more of a timing is what I was referring to.

As Denny sits down with the new marketing agency to figure out what is the most effective timing, weights of media -- Denny, I will let you jump in -- that is what could cause some noise.

One of our reasons for seeking a new partner is to get to a much more vibrant mix of media for tools.

So I would expect that we are going to be doing a lot of things differently next year and are already planning for that.

Got you.

Is there a set window or kind of -- like, what quarter where we might expect that?

Just to model accordingly.

We will give color as we have it.

The balance is not giving information to competitors but keeping, obviously, our investors informed to what is going on, so we will try to do that as well as we can.

Okay.

Last question here, just in terms of company-owned same-store sales to franchise same-store sales.

Not a huge gap, but I am just wondering if there is anything that was noticeably different just in terms of -- speaking domestically here, maybe just different menu price increases or different operational procedures?

Certainly we, obviously, don't control their pricing so there could be some pricing differences, and obviously there are some regional differences.

And they are not all today on Red Royalty, so that could have some impact as well as to how we are performing versus them.

Okay, fair enough.

Thank you.

Bryan Elliott, Raymond James.

Thanks.

Couple clarifications first, just to make sure, Stuart, I understand the mechanics of the Red Royalty actuarial change.

So as I heard it -- just went to make sure I heard it accurately -- that better history and understanding of how people are using the reward system, therefore, you are able to tighten up the actuarial assumptions and the deferred revenue set aside for future benefits and that added 50 bps to Q3 comp?

Yes, that is exactly.

So if you think about it, really over in the past, basically the last year since Red Royalty has been out there, as people earn rewards we set aside the cost of that.

And the accounting is you set that aside and basically you defer revenue.

So for every burger you buy and your buy nine, get the 10th free, we set aside revenue to cover that redemption of the reward.

What we have seen really over the last year is we have seen fewer people claim those rewards than have been earned.

So really you have to look at it on what the impact is really over the last 12 months, which is more meaningful to comp sales in the quarter over the last year.

It has really been 0.1%; it has been a pretty subtle number year-to-date.

And just thinking about that, going forward I guess that would actually be, if that continues, probably a slight net benefit until we lap this change in assumption and accrual rate?

What I would say is that over the last year earnings have been a little bit lower than would have been otherwise just because we have been setting these discounts aside, these incentives aside.

So those incentives going forward will be a little bit lower as we set that aside on future earned rewards.

Okay.

Also appreciate the color and detail on the contracting and positioning.

My question is about the burger mix up to 13% and wondering -- I know a few years ago, and this may have been simply because of what commodities were like at that moment in time, but this is more of a big picture question than that.

A few years ago when we got that kind of data from your predecessors on chicken, actually, often was a little bit higher COG than hamburger partly because of the female skew of your customer base.

I am wondering if that mix, both of maybe customer base and/or of beef, ground beef versus chicken preferences, is changing meaningfully.

Or is the beef percentage up so much more than poultry simply because of the market price changes in those commodities?

It is a couple different things.

It is price really.

I think that is probably the biggest thing weighting it up is you have had obviously more inflation in hamburger than poultry the last few years, so that is probably the biggest driver.

I don't have the mix right here in front of me on burger -- on hamburger burgers versus chicken burgers.

It probably has not changed that much over the last couple of years.

Okay, all right.

That was really the question, thanks.

Finally, if you could just give us a sense of on the big technology upgrade and installation effort.

You kind of touched on it from a cost standpoint a little bit, but if memory serves you were hoping to kind of have it in place, I believe by the end of third quarter more or less, and have kind of the training done and the modules turned on and really begin to use it.

I guess I'm looking for a confirmation that you actually got there and that is part of why the fourth quarter is going to see significantly more tests and initiative that Denny mentioned.

So on the finance side we have gotten almost all the testing done.

We've got one module we are finalizing up.

So we will be, as opposed to turning it on here, which we were sort of talking about actually doing here at the start of November, we are going to push it till the start of January just to get sort of all the final testing and shakedown of the systems as well as make sure we have all the training in place.

So we are in pretty good shape on it.

Again, most of the testing is done.

On the supply chain side, which is really what impacts the restaurants, we are expanding that this week.

We have been in parallel already in one restaurant and we are expanding that I think about three restaurants this week, so we are continuing to expand the supply chain running parallel on the restaurants.

All right.

And the POS and all of that, are we done with that?

Yes, the POS was not changing at all, so we weren't changing out the POS system.

That is still there.

So probably in terms of just overall timing this is running a few months later than we would have anticipated.

So in terms of final rollout on the finance piece will be in January and the supply chain piece out in the restaurants will push more into the summer next year than we anticipated.

Okay, all right.

Well, that always happens.

All right, great.

Alex Slagle, Jefferies.

Thanks.

Good quarter.

I had a question on the brand transformation, restaurants you plan to open fourth quarter, if you could talk about the different levels of investment and what differentiates those different units.

Yes, I think, Alex, we are just beginning this process and we are looking at several different ways to approach it pretty consistently with what a lot of folks in the space to do.

Everything from a very, very high level of investment that includes everything on the outside of the building, completely redoing the inside, then a bunch of physical space changes to something significantly less than that to try and understand what resonates with the guest and where we get the best ROI.

It is organic right now, so we are going to get some open in some various levels of investment.

We are going to begin to read them and see.

We will do some consumer research and we probably will make changes from what we learned there.

Okay, thank you.

Andrew Charles, Bank of America Merrill Lynch.

It is Andrew Charles on for Joe Buckley today.

So we were wondering, did the $1 million Red Royalty incentive revenue flow through to earnings materially, or how did that flow through?

That would have flowed through almost completely right through RLOP and into EPS.

One thing I will point out -- one thing just to remember is with that you have got the impact of that -- on a year-to-date basis again the impact is much smaller, so probably increased our RLOP margins year-to-date by 10 basis points.

The other thing to remember on the bottom-line impact though as well is we did have a higher depreciation related to brand transformation of about $0.5 million.

Okay.

You said last call you hoped to modestly increase prices with the October price role off.

I know looking into next year you talked about how you would like to increase the mix in the price slightly.

Can you just talk about maybe how much price you took earlier this month when the price rolled off?

Yes, we rolled in about 90 basis points of price.

Okay, so 90 is being replaced?

Yes, essentially.

(multiple speakers) from last year.

Okay, thank you.

Nicole Miller, Piper Jaffray.

Thanks.

Good morning.

Can you talk a little bit about the trends, the comp trends within the month, this quarter?

And then also if there is any variability we should know about looking into the current fourth quarter, if one month is easier or more difficult than another?

Nicole, this is Stuart.

Yes, we don't give color by month.

Obviously, we put out some promotions anticipating it to be sort of a soft month, and Denny's team was able to do that very effectively.

I think it terms of what is going on for the fourth quarter, if you compare it to a year ago traffic in the fourth quarter was down about 80 basis points, and then we had price flowing through of well over 3%.

So I think overall, the economy is going to stay fairly consistent in Q4 to what we saw in Q3.

I think the consumer is going to stay volatile.

And just thinking about how the product mix is changing and the platforms are evolving and reflecting on what you have done with TV to this point, what permission do you feel you now have or what opportunity in terms of advertising your brand differently, whether it is tomorrow or next year or five years into the future, do you believe you have now that you have repositioned the brand?

I would say number one, we are not done.

So having said we have repositioned the brand, it is still progress.

I would say the one insight is that we do tend to, when we are able to be on air, kind of punch above our weight class.

There is an awareness that we are able to generate, and awareness is our biggest challenge is keeping ourselves top of mind for key meal occasions, in particular the dinner occasion.

So I see some opportunity there that isn't tied only to product news but doesn't at the same time eliminate product news.

So it is a balance of top of mind awareness for key occasions with the advantage of occasional product news mixed in.

Okay, thank you.

Steve Anderson, Miller Tabak.

Yes, good morning.

You answered a lot of my questions regarding the third-quarter menu price increase this year.

You haven't given any guidance regarding the timing for the next one.

And wanted to ask also about the alcohol.

I remember you said 7.2%.

It was 7.1%, as I recall, last quarter.

For reference, what was it in the year-ago quarter?

We are up from a year, so alcohol mix in Q3 was about 7.2% and we are up about 70 basis points from a year ago.

Year over year.

Year over year.

Okay, I appreciate that.

Thank you.

David Dorfman, Morgan Stanley.

Thank you.

I wanted to get some more color, if I could, on some of the puts and takes in the fourth quarter with respect to your restaurant level margin guidance.

I think you said 20.5%.

And then where might the extra week flow into those lines at the restaurant level?

And then looking at if cost of sales, I don't know if you are anticipating it staying lower in the fourth quarter like it was in the third or bouncing back -- I was surprised to hear that dairy was a source of benefit -- but if it stays low it implies some sort of less inflation, or more inflation perhaps, in labor and operating.

So where do all the gives and takes pan out to your guidance?

David, I think you have very quickly analyzed it correctly in terms of the -- the impact of the extra week is probably 20 to 30 basis points on the operating margin in Q4 and so you have got to sort of normalize for that.

So if you look at -- really it comes down to cost of sales and cost of sales is -- you hit dairy, which is really one of the biggest ones.

It was favorable in Q3, but we are already seeing the bounce back -- obviously most of the market has -- in terms of our pricing and what we had contracted already bouncing back in Q4 as a lot of the dairy herd has, quite frankly, gone to slaughter.

That helped keep feed prices a little bit lower than we expected in Q2 and Q3, but now they are springing back in terms of dairy prices.

So that is one of the big drivers is sort of putting a little bit of a cap on RLOP growth in the fourth quarter.

But if you look at RLOP growth, you had I think 90 bps in the third quarter and then I guess your full-year guidance would be flattish in the fourth quarter.

Is that sort of the maturation going forward that a lot of initiatives in place have hit their run rate and the new things are just sort of incrementally going to take in, but these 100 or multi-hundred basis point improvements are largely behind us?

And now it's just finding the right way to tweak the model to get a little more here or there and get -- obviously a lot of it's sales dependent as well as we look forward to the fourth quarter?

I would say while the surface looks fairly flat in terms of gradual increases in RLOP that we are -- as you look out underneath the surface it is probably a little bit bigger because we are still finding, as Steve touched about our initiatives and things, a number of ways to save cost.

We are just putting that back in the business right now.

So, for example, brand transformation, a lot of that is going to get in G&A in terms of research and things like that.

But training costs; as we open up restaurants in new markets, in Florida and New York and New Jersey, training costs, replacement costs as we move managers into those markets, we are basically offsetting some of those costs with investments just to keep growing the business.

And those investment costs are mostly at the restaurant level, not G&A?

There will be some of both.

We will try to call those out though.

Great, thanks so much.

(Operator Instructions) Peter Saleh, Telsey Advisory Group.

Congratulations on a good quarter, guys.

Just wanted to ask, Denny, on the advertising can you remind us how many weeks on TV you were on this quarter and how that compares to last quarter, third quarter of 2012 -- 2011?

We laid right over last year's weeks and we had two weeks in this quarter.

An additional two weeks at the beginning of Q4 as well, so it sort of a four-week slight overlapping at quarter end.

It was exactly like last year.

As you think to 2013 do you guys anticipate being on TV more or the same as this year?

I anticipate it looking different next year.

Again, television is not the only tool in the toolbox, particularly as we demonstrated with our Red Royalty programs and some other things.

Social media, the emerging of more and more digital media and activity and targeting.

So I'm not certain yet.

I think what we will see is a different kind of mix next year, different kind of investments.

All right.

Then just on the comps, so when you guys gave guidance back in August you had indicated you thought the quarter would be negative so that implies, I guess, July was probably your weakest month.

Is it safe to assume that you had improving trends throughout the quarter?

No, I don't think you can draw that conclusion.

Again, we were -- if you go back and look at the conference call remarks, it was as much looking out to what we expected for the rest of the quarter with the consumer.

And while we are teeing up ways to blunt the impact of that, quite frankly those were just more effective than we thought they would be.

Great, thank you very much.

It appears there are no further questions at this time.

I would like to turn the conference back over to Mr. Steve Carley for any additional or closing remarks.

Thanks, everybody.

That wraps up our call for this morning.

Thanks for your attention and we appreciate it.

Thank you.

That does conclude today's conference.

We do thank you for your participation.