Red Robin Gourmet Burgers Inc (RRGB) 2013 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the red Robin Gourmet Burgers Inc.

first-quarter 2013 earnings conference call.

At this time, all participants have been placed in a listen-only mode.

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 continue, plan, expect, intend, project, should, 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, 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 conditions.

The Company has posted its fiscal first-quarter 2013 press release and supplemental financial information related to the quarter's results on its website, www.RedRobin.com, in the Investors section.

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

Please go ahead.

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

But first I'd like to review our first-quarter headlines which we have included on Slide 3 of our supplemental financials.

Overall, we continue to be pleased with our performance and this quarter marked our 11 consecutive quarter of positive same-store sales.

We also increased restaurant revenues despite having seasonality and marketing headwinds.

As we said during our Q4 call in February, we expected sales and earnings to be negatively impacted due to our lapping of a Q1 2012 that had a week of strong holiday sales and our change in media timing.

The impact in Q1 2013 was a shift of about $8 million in sales into the fourth quarter.

Our year-over-year guess traffic was down 60 BPS and both net income and diluted earnings per share decreased compared to Q1 last year.

Nevertheless, our continued same-store sales growth and our market share gains and the progress we are making on our key roadmap initiatives give us confidence that we are strengthening our business and positioning Red Robin for long-term growth and profitability.

As you may recall, our strategic priorities and roadmap for 2013 and beyond are focused on three fronts -- engagement, efficiency and expansion, as illustrated on Slide 4. Engagement is about how we connect with our guests, enhance their experience, and ultimately drive the topline.

Efficiency is about increasing productivity and managing margins.

And expansion is about growing our operational footprint and effectively deploying our capital.

On our last call, I shared examples of initiatives we have in each of these areas.

They're all queued up for deployment over time, some short-term and some long-term.

The analogy we used as of Friday afternoon at O'Hare Airport was the planes landing, the planes on approach, and planes queued up to the horizon, and that's what it looks like going forward with Red Robin.

I won't be repeating all of these initiatives we've completed or have in the pipeline in each of these three focus areas, but I do want to provide an update on a couple of them, namely our brand transformation efforts and the development of our next generation restaurant prototypes.

Moving to Slide 5, as you know, one of the ways we are enhancing the guest experience is through our brand transformation work.

This came out a lot of work and deep guest insight and competitive benchmarking about where the Red Robin brand was winning and where we had opportunities.

Our goal is to serve more guests more often, and leave them more delighted.

I want to stress this is a lot more than just new paint and wallpaper.

We started this effort with the transformation of 21 restaurants late last year with varying levels of investment.

We are pleased with the results so far, especially the restaurants that underwent a full transformation.

That includes new plating and food presentations, service changes, full interior reimaging, and exterior changes.

To give you an idea of our conviction here, one thing we did is had every team member reapply for their jobs against new, enhanced job specs.

And not everyone got rehired.

We are still deep in the testing phase of this initiative, and as we said before, we are going to take the full six months or so to evaluate the performance of the transformed units, and we'll have much more to share with you on the specific metrics at our Q1 call in August.

In the meantime, Denny will provide some additional color on guest response to the transformations, and most importantly, some changes we'll pull forward through the entire system this year.

Given the results to date, we've added plans to transform an additional 20 restaurants this year with the appropriate level of investment based on what we believe is the most attractive ROI for each unit.

Slide 6 summarizes our work on our new restaurant prototypes.

Our learnings from brand transformation, design work and guest feedback have given us a lot of insight into how we can better engage with our guests and elevate the Red Robin brand.

We're using that insight to incorporate refinements for future openings and we have plans to test the new restaurant prototype with two new sites to be developed later this year.

This is where the engagement platform of our roadmap bridges to our expansion platform.

I also mentioned on our last call that, in the fourth quarter last year, we opened the first of our 4000 square-foot full-service Red Robin restaurants.

Since then, we've opened another two.

And with this significantly smaller footprint, we couldn't be more encouraged with the results.

The smaller units have a number of advantages, including greater flexibility in site selection as we expand with a much lower construction cost while still providing operating capacity for very healthy volumes.

With these results and our successful relationships with landlords, we now expect to include seven of the midsized units among the 20 new Red Robin restaurants we are opening and planning this year.

Plus, we're going to be several new Burger Works units.

And speaking of Burger Works, we've completed a number of important changes to these initial units, and we continue to evaluate Burger Works' performance in different types of trade areas as we set the expansion plans.

We are currently working with landlords for a number of new Burger Works locations, including expanding the test to additional markets.

With that brief overview of the quarter and several initiatives on our roadmap, I'm going to turn the call over to Denny to give you more perspective on our marketing initiatives.

Thanks Steve.

I'm happy to share insights today about the guest response to BTI and what we will be doing next on this very important multifaceted initiative.

I'd also like to take this opportunity to speak very briefly about our new ad campaign and our media strategy.

Plus, I'm going to provide a quick sneak peek of what's coming in the summer.

Slide 8 illustrates our brand transformation work.

To gauge guest response to our transformed stores and the associated server and presentation changes Steve alluded to, we used a variety of qualitative and quantitative insight tools.

The patterns of feedback were both consistent and illuminating.

We got a lot right.

Our guests really appreciate the spaces and the environments we've created to accommodate everyone from adults out for an evening of beer and burgers to a five-year-old celebrating their birthday with their family.

They love the freshened look, the new plated presentations, and the improved server interactions.

The lobby functions much more effectively now, and the bar is a cooler place to hang out.

What else did we learn?

Well, we did learn that we have an opportunity to add more whimsy back into the design to deliver greater pop from the exterior as well as dial up patio presentations, particularly where we have opportunities to increase year-round seating and drive revenue.

We continue to refine the design as we transform 20 more locations this year, optimizing the investment as we go for maximum returns.

We are more than happy with what we have accomplished so far, but we still aren't content to stand pat.

We are going to keep improving and continue to evolve this work.

While we finalized remodel designs, we have the opportunity to pull forward into this year the server, plating, and menu presentation improvements.

All our guests will soon be enjoying burgers on red plates with our famous Bottomless Fries featured in a new and fun way along with reenergized service components to optimize guest engagement tableside and particularly in the bar.

Starting with the upcoming Burger News in our summer promotion and moving across the entire menu by the end of summer, our guests system-wide, both Company and franchise, will soon be enjoying an upgraded dining experience.

To ensure we have a steady base of guests crossing the threshold to experience our great new presentations, we have begun a new ad campaign tagged "24 Burgers.

A Million Reasons" created for us by our new partner, the Vitro Agency.

It's capped off with our distinctive "Red Robin, Yum".

This new campaign features a spokeswoman who mirrors our quirky brand personality and relates equally well to both our key target of adult women as well as the men they make all the decisions for.

You can see a screenshot of the new campaign on Slide 9. We have a new media strategy to support this approach which, without increasing national spending this year, allows us to pulse media and build critical top-of-mind brand awareness throughout the year.

Our agency team pulled out all the stops to get the new campaign on air in record time, allowing us to capture two weeks of media in our Q1.

Our coffee testing and impact tracking to date show that we are off to a strong start.

And with at least, at least 1 million reasons to love Red Robin, there's a lot more creative runway ahead.

We put a link on the Investors site if you would like to view the first five spots in the new campaign.

With a growing Red Robin Royalty base, new ad campaign, and some terrific new burger news set for this summer, we are rearing to go.

Next week, we begin sneak peeks for our summer menu, which includes That Exciting Burger News, and a pioneering new cocktail.

We will also begin testing, emphasis testing, our first premium burgers in select locations.

Just like our Tavern Double launch last year, the intent is that these will be permanent, not limited, additions to the menu, rounding out our Barbell of Burgers.

I am proud of how our pipeline process is taking hold, beginning with the successfully launched beer shakes, $3, $5, $7, $9 apps menu and desserts, this summer's LTOs and rolling through core menu platforms, as well as some exciting new platform work for the future.

With that, I'm going to pass it over to Stuart to speak about our financial results.

Thank you Denny, and good morning everyone.

We are very pleased with our first-quarter results.

I'll provide some color on this quarter's underlying performance, as well as our outlook, incorporating the progress we've made on the initiatives which Steve and Denny reviewed.

Our earnings per diluted share were $0.66 for the first 16 weeks of 2013.

This is down from $0.71 per share reported last year, due mainly to the sales shift of an estimated $7.5 million to $8 million related to the fiscal calendar change shifting sales into the fourth quarter, as well as the lapping of more media weeks.

If you assume a 25% flow-through, the impact of these two items reduced first-quarter EBITDA by about $2 million and first-quarter earnings per share by about $0.10.

Topline sales this quarter were generally in line with our expectations despite tougher than anticipated market conditions.

Comparable sales grew 2.2%, resulting from price increases to offset inflation and guests adding on more beverages and appetizers, offset by a modest guest count decline.

Our average check increased 2.8%, of which 1.9% related to pricing, and the remainder due to higher sales of beverages, both alcoholic and non, sides and appetizers.

Denny touched on our new appetizer program and dessert menu which we kicked off on April 8 and is resonating well with guests.

This growth more than offset the 60 basis point decline in comparable guest counts.

We are very proud of the initiatives taken by our marketing and operations teams which allowed us to continue taking market share from competitors.

According to Black Box Intelligence, we outperformed our casual dining peers by 360 basis points on guest counts during the quarter.

This is our fourth consecutive quarter taking market share and follows a 390 basis point out performance last quarter.

We attribute the out performance to items like our Great Tavern Double at an everyday value of $6.99 with Bottomless Fries, and Red Robin Royalty.

Further, our higher income core guest base has shown improving consumer confidence, which is a competitive advantage.

As discussed on our last call, our comparable sales are calculated comparing the 16 weeks of this quarter against weeks 2 through 17 of 2012, so they are not skewed by the shift in holiday week sales related to last year's 53 week calendar.

It is also adjusted for $1.9 million of restaurant level promotional costs which were previously in other operating costs.

Our restaurant level operating profit margins improved 30 basis points to 21.5% in the first quarter from a year ago.

The improvement was mainly a result of our leverage in our higher average check, lower hamburger and cheese costs, and favorable mix.

The cost savings that we pursue as part of Project Blueprint continue to offset some of the investments we are making back into the guest experience, including a new interactive iPad based training program for all of our hourly team members which we rolled out this quarter.

And if you look at Slide 15 in the supplemental, you can see how we've improved restaurant operating margins over time, 330 basis points higher than Q1 2010.

Selling, General, and Administrative costs were $37.6 million in the first quarter, or about $1.5 million higher than we expected.

The variance resulted primarily from higher performance based incentive accruals, investments in staffing to support growth and culinary innovation, as well as an additional menu run.

G&A includes costs related to the development, research, and testing of a number of our roadmap initiatives, including our new information technology for our restaurants, brand transformation, and more.

Depreciation expense increased $1.2 million over 2012 due to the opening of new restaurants, restaurant improvements, and the placing into service of our new financial systems.

The decrease in interest expense reflects the impact of the debt refinancing late in 2012 as well as our lower average debt outstanding.

We continue to generate significant cash flow which we are investing to improve and grow Red Robin.

Capital investments in the first quarter totaled $13.6 million with spending on our new restaurants, maintenance capital, kitchen equipment upgrades, and IT systems.

We remain pleased with the performance of our new units, including the 4000 square foot midsized prototype that Steve discussed and have increased our planned new restaurant openings based on successfully identifying additional sites and growth markets and fill-in trade areas.

We now expect to open 20 full and midsized units in 2013, relocate twos unit and open several Burger Works.

As you've gathered by now, the brand transformation initiative is showing good promise.

We will pull forward some changes system-wide and expand the remodeling test to an additional 20 units this year.

We will incur one-time operating expenses of around $800,000 to $900,000 and accelerated depreciation estimated to be $600,000, but pending the final selection of locations.

We project spending $400,000 per remodel.

We are also planning to expand three restaurants to add capacity.

These, combined with increasing the number of restaurant openings, will result in 2013 capital expenditures of around $70 million.

Our other expectations for 2013 remain mostly consistent with what we discussed on our earnings call in February.

Comparable store restaurant revenues are projected to grow 2.5% to 3%.

Restaurant level operating margins are expected to be approximately 20.9% as favorable commodity costs are partly offset by one-time rollout costs for brand transformation elements and restaurant systems.

Our general and administrative costs are now expected to be closer to $87 million versus our $83 million to $84 million as previously projected, reflecting the higher costs in the first quarter in addition to investing in talent to support the accelerated growth and ensure the proper testing and rollout of our roadmap initiatives.

Depreciation is now expected to be a bit north of $59 million, which includes the accelerated depreciation mentioned a moment ago.

We are confident in the investments we're making in our people, our systems and our restaurants to enhance guest engagement, improve efficiency, and expand our footprint, thereby providing greater value for all of our stakeholders.

Steve, let me turn the call back over to you for some final comments before Q&A.

Thank you Stuart.

I'd like to wrap up our prepared remarks by reiterating how encouraged we are by the momentum we have achieved engaging our guests, and what that implies both for this year and beyond.

We continue to raise the bar on great Gourmet Burgers and other craveable Red Robin entrees, apps, and creative beverages.

But just don't take it from us.

Make sure you get to a Red Robin this summer and check it out for yourself.

We've got an exciting summer menu lineup that launches on June 3, including an innovative and mouthwatering new burger, a new Tavern Double Style and, from the bar, some first-to-market cocktails and other refreshing beverages that you'll only find at Red Robin.

Of course the strong lineup and our continued success as a company is possible because our talented and passionate Red Robin team.

So again I want to make sure to thank my fellow Red Robin team members across the organization for their commitment and outstanding work taking care of our guests each and every day.

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

(Operator Instructions).

Will Slabaugh, Stephens Inc.

Thanks guys.

I wanted to ask if you could talk a little bit more on the remodels about the ROIs you're expecting or maybe beginning to see at the newly remodeled restaurants.

I know it's early there but it seems like it least it's safe to say that the more intensive remodels are providing a superior return.

This is Stuart.

Again, we've been able to read the results for -- most of these have been done for five or six months.

We want to continue to read them and watch guest count trends.

But I can tell you today the full remodels are getting returns that are over our -- well over our 12% hurdle.

And that's about as much detail as we're going to give right now.

We will be able to provide some more colors, as Steve said, next quarter.

Okay.

Great.

And I also want to ask you about the premium test that you mentioned.

Wonder how big that would be across about how many restaurants and then if you're willing to tell where that might take place.

We are starting small with a select number of restaurants in our area, and we'll measure that first and then decide what's next.

Then just lastly, if you could talk about any sort of inter-quarter trends that you guys saw?

I know it was a very choppy quarter for most just maybe from the consumers' reaction during what turned out to be a pretty volatile month.

I think what we saw was pretty consistent with what most everybody else saw, although I don't think we were hit quite as hard in any of the periods.

So again, strong January.

I think February is where most people fell off and that was a tougher month for us and then some recovery back in March.

I don't think we were that uniquely impacted.

Great, congrats guys.

Bryan Elliott, Raymond James.

Thanks.

A question, those were a few of mine actually.

But one I have, Stuart, did I hear correctly food costs -- that burger and cheese costs were actually down in Q1, and I think I heard you say you expect commodities overall now to be down for the fiscal year.

Yes.

Hamburger was down for the year-over-year was down actually in the first quarter versus a year ago, and in cheese favorable as well.

So we expect commodities to be favorable for the year, but not down year-over-year.

Looking at where hamburger prices are today, we expect a hamburger to be favorable to our previous guidance really through the whole first half and then really start to pick up more in Q3 and Q4 as we sort of cycle with somewhat lower numbers.

And also in the back half, the other thing on COGS is we've renegotiated our cod contract, and we actually sold 1.7 million pounds of cod, so we'll have favorable cod pricing in the second half compared to a year ago.

All right.

And on the timing of the Creative, the new campaign, remind me.

I missed what the details on that one.

Is just breaking now, and are we doing national cable from right from the get-go?

Yes Bryan, we are national media, including network syndication and cable.

So you might see us pop up.

In fact, we launched in The Voice, so we've got some higher quality program than we've had in the past.

We got two weeks in Q1, and then we're using a pulsing strategy throughout the remainder of the year.

Okay.

And as far as percent of sales going, is the selling expense that we saw in Q1 in the press release, that's the same basis that we've historically seen the -- I think it was called advertising expense prior?

Is that right?

Yes, right, exactly.

Sort of 2.8% of sales, and that's our contribution to the fund.

Right, okay.

We are continuing to hold that as far as planned spending now for this year, although we'd actually pre-booked it, we didn't spend it in Q1.

We're going to spend it in Q2, Q3, Q4.

Correct.

Yes, okay.

Thank you.

Jeff Omohundro, Davenport & Co.

Thanks.

Sort of a follow-up to Bryan's question regarding media.

When thinking about lapping some more challenging upcoming comparisons, in part benefiting from the Tavern Burger's successful rollout last year, just wondering how you are thinking about drivers of traffic, how you see that splitting between the new media efforts and the new burger news that's upcoming.

And also, how the new media strategy integrates with the investments that you made in social media and how you might track the results from those two efforts?

Thanks.

Terrific, thanks Jeff.

I'll take that one.

I guess first I'll go backwards.

How we track it is waking up every morning and checking sales and guest counts, so that's certainly most critical.

But we are tracking using Nielsen which tracks online, guest response, etc., and allows us to make real-time changes in our media mix.

In terms of the overall media mix, I think it is a balance in terms of more investment this year.

We are starting to move more aggressively towards social media and that kind of guest engagement via social media because we think we can really win there, and also it's a great tie to our Red Robin Royalty program.

That said, our traditional media is very much still there.

The whole discussion about -- really what you're asking is balance of message between LTO news and other elements of the campaign.

I would say that the way the campaign is constructed, 24 Burgers.

A Million Reasons, allows guests to discover something new about our brand.

And so even though it may not be a limited time only A spot, and you'll see one of them on the five focused on Bottomless Fries, it reaches out and touches some guests who may not have been aware of that proposition.

So the campaign itself is designed to help people discover new things about Red Robin into which we can drop LTO news when appropriate.

Hopefully, that's pretty much gives you an overview.

I would encourage you to look at the five spots and get some sense of that.

But we will have more balance and a growing emphasis on social media and digital media over time.

And on the subject of check growth in the quarter, how did that align with your goals in the period and how you see that evolving through the balance of the year?

This is Stuart.

A couple of different things going on.

First of all, we are continuing to work through sort of the take back the bar initiatives, knowing that beverages, really alcoholic and non-alcoholic, remain an upside for us.

We do a great job in Freckled Lemonade.

It's really a really strong platform for us we can lean into.

But we know we've got more things.

Denny alluded to a couple of fun things coming this summer on the beverage side.

On the appetizer side, we had tested that late last year, the $3, $5, $7, $9, and we knew that was going to work well, so that rolled out on the new menu.

And our new desserts was really a point where we just didn't have enough sort of small indulgences on the menu, and that's really rolled out in April.

So your question is, wait a minute, you're going to be sort of essentially lapping Tavern Double, which wasn't a check issue, that was a guest count issue, and bringing everyday value onto the menu.

Well, now, we've got some things to continue to bring people into the restaurant but also help check.

And lastly, on the guidance around Burger Works from 5 to 6 to several, how are you -- could you maybe give a little more granularity about how pleased you are with the progress of that?

Has there been some refinement in target there?

Jeff, as we talked when we put these initial ones up, we went to a variety of different trade areas to get a feel for how effective they were, and we also tested some stuff inside these restaurants, including digital menu boards and a new POS system.

So we are in the process of evaluating how these perform by different kinds of trade areas.

We have learned that the POS system we did look at which was different than the one we have in the big Red Robins did not meet our expectations, so we're in the process of swapping that out.

And we've got -- we've done some great work in the middle of the P&L.

It's not quite complete yet, but we really like the direction we're going there.

And so we are fine-tuning all the elements of the brand, including its look and feel, and how much familial resemblance it will have the big Red Robin, and we are taking are learning from brand transformation and applying that.

So we are being very thoughtful and very prudent about where we are going with this.

We want to get it right, and then we've got a long runway from there once we get this thing optimized.

Very good, thanks.

Joseph Buckley, Bank of America.

Thank you.

Just a few questions, just the timing of things for the balance of the year.

First, could you talk a little bit about price, what you took in the first quarter, and what kind of runs off over the balance of the year, what you're additional plans might be?

This is Stuart.

So we exited the quarter with about 2.2% in price total, so we took about 0.9%, just under 1%, last year in October.

And 1.5% we took in February this year.

So, we will be cycling over that first 90 basis points later in the year.

Okay.

And Stuart,$800,000 to $900,000 of incremental expense, I think you said associated with remodels.

How -- first, how will that flow?

And then secondly, what is that?

Is that like almost like marketing expense to draw some attention to the remodels?

No, so the $800,000 to $900,000 is really going forward.

There's a couple different pieces of it.

One piece is going forward some of the brand transformation that Denny and Steve talked about, the new food plating, the presentation, some of the training that goes around that in terms of some of the service changes we're making.

That's a big piece of it, as well as some of the IT systems we will be rolling out; there'll be some training costs around that.

The bulk of it will really hit in the third quarter.

Okay.

And then as you go forward with the remodels, what key aspects of the remodels did you sort of -- I won't say settle on, I mean settle on but choose?

Select?

I think the most important part to that is the elements that separate and provide unique zones for our guests.

As I mentioned, everything from adults in the bar to families in another section of the restaurant, and some transitional area in between, so the elements that help us create more intimate environments for the right kinds of parties and associated guests.

I think also again the lobby has been a big win in terms of having a key hostess leading the charge in the lobby, and just the sense of the guests knowing where they go to begin their Red Robin evening, as well as some of the other elements that work very well for us, just the bright, updated kind of fun components of the restaurant, and of course the plating and presentation.

We know we have an opportunity to go back in and dial up, as I said, some of the whimsy around the brand and the design, but for the most part I'd say the function elements are really strong.

(technical difficulty) also continues to be an opportunity for us.

Just one more on the timing aspect of things.

So you did two weeks of advertising the first quarter versus four a year ago, I believe.

How does it line up for the balance of the year?

Is there any big skewing of being on air versus not being on air, or vice versa?

Again, the strategy has shifted, so you're going to see us on air more often at more pulsed and lower weights than we've been in the past.

So it's a very different strategy, and won't fully align with our LTO 12 weeks on a year approach.

There'll be some variances that we see within the weeks, but within quarters it should balance itself out with weightings.

Yes.

Okay, thank you.

Alex Slagle, Jefferies.

Thanks.

A question on the components of the same-store sales guidance.

It looks like you're looking for increased visits.

I just wanted to kind of get your thoughts on that because you were happy with the first quarter to the point you see traffic being a little bit better than previous expectations, or maybe a function of the acceleration and the new Creative in the two weeks that you saw there in the first quarter.

Good morning Alex.

This is Stuart.

The biggest component continues to be price, which for the year will average about 2%.

And to the remainder is a combination of check in terms of guests adding items on, appetizers, desserts, beverages, as well as potentially I guest counts.

You've got to remember, in the first quarter, if we hadn't had this media shift, the $7.5 million to $8 billion, guest counts would have been positive 0.5% to 1%.

So if you sort of normalize for that, we would have had actually positive guest count in the first quarter.

We are not dependent upon positive guest count.

We continue to want to obviously keep taking market share from our competitors, but I think it will be a combination of average check as well as some guest count.

Okay.

And the total Red Robin builds, that's 20 now versus the previous outlook, 15?

Yes, it's 20 plus several Burger Works.

Call it 20 to 23 total, including Burger Works versus last year.

Last quarter, we said 20, which included five Burger Works.

Right.

Okay.

And then the 20 remodels you talked about, timing of that, did you mention that?

Yes, we are settling on the locations now, so there will be some permitting and things like that.

So it's really all the back half of the year.

Okay, thank you.

Jeff Farmer, Wells Fargo.

Good morning everyone.

Most of these questions have been asked and I am curious, so I'll just take advantage of the opportunity to ask you guys about your thoughts on the casual dining environment in general.

Just from a promotional standpoint, are your peers getting more and more aggressive?

Do feel that we've stabilized at this point?

What's your view?

This is Steve.

I look at the casual dining landscape and it continues to evolve into what we would have thought was the QSR landscape 10 years ago.

There's continuous promotion across multiple dayparts by every single major player, and if they see any softening in their traffic, they go deeper into price point oriented kinds of stuff.

Simultaneously, there appears to be a growing bifurcation between brands that are relevant and differentiated and giving the guests -- meeting the guests' expectations, and those that aren't.

And that's kind of a secondary theme, which is why we are so focused on this brand transformation element of dramatically enhancing our guest service and our guest experience, and continuing to elevate our food and its presentation.

To build upon what we've learned through a lot of guest insight and competitive stuff is a terrific brand equity, And we want to continue to differentiate and become even more relevant, not only to our core group of families but also, as Denny mentioned, to continue to claw back that place for adults, particularly young adults, as a great spot to go to have a beer with your pals.

That's helpful.

Then one final question, different direction, and you did touch on this a little bit.

It sounds like four franchise unit openings planned for '13.

Again, as you guys pointed out, it's been a while since you've seen that many.

What is sort of behind the scenes there?

How have these guys been sort of rekindling development?

What's your expectation for 2014 and '15?

Are we going to see this number continue to grow on the franchise development side?

The franchisees of course are -- their optimism continues to grow as their business strengthens.

We brought them in and have very transparent and open with them on what we are doing and where we are trying to go.

And that fuels their optimism.

They continue, especially the smaller franchisees, those with two, three, four units continue to struggle with financing surprisingly in this kind of environment but still true.

But I think you should look at three to four new units in the out years too as a good base.

Okay.

I appreciate that.

Thank you.

Chris O'Cull, KeyBanc.

Thanks.

Good morning guys.

Denny, I may have missed this, but do you expect to increase the amount of media impressions with this new strategy and without increasing the spending as a percentage of sales?

Yes.

Yes is a complete sentence.

Yes.

Also we've shifted target toward a stronger key female decision-maker in the household, so we are buying differently now, and that comes from the inside about who makes the decisions in the household about where to go, and particularly related to Red Robin.

Okay.

So, it's a combination of a new buying agency plus better consumer insight into what media you are buying?

All of the above, yes.

We are very pleased with our new buying partner.

Great.

There seems to be two approaches to remodels in the industry, companies that target strong year one sales that try to sustain that lift, and then another group that creates sales layers into their design to build on the comp each year.

How would you describe Red Robin's approach?

This is Stuart.

I think we are still learning and testing.

Obviously, the next 20 we're going to do is we picked using the same analytical software we did to analyze the first 21, so that, A, there are some in there that, based on the demographics and things of those locations, we think will do very well, and other ones that are sort of in different demographics that we need to test and do some more research on.

So we are still learning.

Is there going to be significant changes?

It didn't sound like there were going to be significant refinements to this next group.

No, they will be fairly close, but I think, again, because we got most of it right, so we just have an opportunity to go back in and dial-up some of those elements.

You saw it, so we appreciate you coming to visit and we'll take some of the advice you gave us when you were out there.

So --

Great, thank you.

Everyone is a designer now.

Everyone is an interior decorator, we've discovered.

John Glass, Morgan Stanley.

I am not a decorator, so --.

But I do have a question on the prototypes.

Can you talk about the learnings of the midsize prototypes that you've built so far?

Are you able to get the same kind of sales productivity of a full-size in maybe certain smaller markets?

And how do you think of these as -- you said partially it is going to be six, your existing 28 is this year.

Do you envision evolving entirely to a smaller prototype, or is it going to be dependent on the market size?

This is Eric.

We have three of them in the ground so far, and another two under construction currently.

We are real happy with the sales performance obviously at a much reduced cost of capital, the hurdle rate in terms of sales is much, much lower to get a 30% to 40% return on cash on cash.

To the point that I think a little bit of that is fueling some of the franchise growth, because I see the great returns, still has a lot -- it's still a full bar, still our full menu.

It's the hurdle rate.

So, we are really pleased with the performance so far.

And to your point, I think you nailed it on the head, it just gives us another tool in the toolbox when we are looking at real estate across the country to go in so many different areas that we may not have been able to get into with a successful square foot big-box.

If I could also just clarify a couple of things, I wasn't clear on the food cost commentary.

I think, at least the beginning of the year, you had said or maybe late last year sort of mid single-digit inflation.

You saw deflation this quarter, but you're expecting still inflation but at a reduced rate this year.

Is there a rate of inflation you're not targeting for '13?

Yes.

(inaudible) it's built into our operating margin goals, but we expect commodity inflation this year to average about 3%.

So deflation was only on hamburger, not all the other categories.

Got you.

But year-over-year, you were down in food costs.

Maybe that was some promotional activity as well or mix.

Yes, there is certainly some mix and you get some leverage obviously on the higher beverage sales and things like that.

Got you.

And then just another clarification on the Burger Works strategy from five to six to you're saying several now.

How do you define that?

It sounds like you are still refining the concept a little bit, so are you slowing it down or speeding it up?

This is Steve.

I think you can interpret several as more than one and less than 10.

One of the things we're learning in the real estate market which is no news to those guys who also cover fast casual is this 2000 to 2200 square foot box in a great trade area as an end cap is the hottest piece of real estate in the country right now.

Everybody wants that exact piece.

We find that we are somewhere between six and 10 folks talking to a landlord on that particular piece of property.

And so going after those is a little more problematic.

Number two, once we get them, it only takes 90 days to build out.

So we are not trying to be cute here.

There is just a lot of moving parts on that particular piece of real estate.

And once we get several closed, we can have two or three open in 90 to 120 days.

So, there's a lot of variability.

We are currently looking at markets outside of Denver, and that's exciting.

And that's one of our objectives, is to get some more experience outside of our core market.

So it sounds more like it's the variability, you just don't want to commit because of real estate availability, not a viability of concept issue or still need to refine the concept issue.

Is that fair?

It is overwhelmingly the former.

We are still doing some refinement and improving the financial performance, but the real estate and the availability of sites, the competition for those sites is a big challenge.

Thank you.

Peter Saleh, Telsey Advisory Group.

I wanted to come back to the remodels, just wanted to ask are there going to be any changes to the back of the house or all the changes going to be primarily to the front of the house and the exterior?

The primary changes that we have just tested are front of house.

We have completed our kitchen transformation initiative which has involved some changes to the heart of the house to improve overall quality and flexibility for our menu.

But those are separate and have gone system-wide prior to us doing any front of house remodels or exteriors.

Great.

Steve, can you just talk about to-go sales?

I know it was one of the initiatives you guys had some quarters ago.

Where do you stand on pushing more on the to-go sales?

We know to-go is a big opportunity for us.

Our competitors who do a good job with it are doing 10% of their sales in to-go.

We are probably doing 2 of our sales in to-go.

It requires a real focus around both the heart of the house and then the guest-facing part of it.

It is in our strategic plan.

We are going to get after it here in the next year or so.

But it's one of those planes that's queued up to land here in the next 12 to 18 months.

We don't want to do it haphazardly, and so we're going to take the time to get it right.

But it's relatively complicated as you take a look at the folks that doing a good job with it, they not only have great heart of house support but they have great guest-facing kinds of service and technology to make to-go work.

So we know it's an opportunity, it's queued up, and we're going to take it in sequence when it makes sense.

Greater.

Then just a little bit housekeeping.

Alcohol as a percentage of sales, where do you guys stand versus where you were last quarter?

We continue to do -- make great progress around that.

In Q1 of '13, our bev-to-alcohol percent was about 7.5.

That's up 40 basis points from a year ago Q1 '12.

And as you know, we've talked about trying to grow bev-to-alcohol about 50 basis points a year, slow and steady.

It took us 10 years to lose it, and we are not going to get it back all at once.

But we're excited about what the summer has to offer with some of these best first one-of-a-kind cocktails that we are going to be bringing out.

Also, to correct, our to-go percentage is just a little under 5%, which is about half of where we are.

Up 20 basis points from last year.

And that is up 20 basis points from last year.

Thank you.

Great, thank you.

Steve Anderson, Miller Tabak.

A housekeeping question, this time on the G&A line.

Just sort of can you go through with me like where the jump was, and that jump versus historical rates is not going to recur in the following quarters or in '14?

This is Stuart.

So G&A, if you sort of look at -- a couple different things going on.

Obviously, I mentioned on the call we had a little bit of incentive-based pay that was a little bit of a one-timer in the first quarter.

That was about $700,000.

The bulk of it really is increased salaries.

Let me just touch for a second on where it is that we are investing because, as we're talking of increasing growth in the other initiatives, we've got -- with the increased growth, that sort of puts us over the tipping point with a new restaurant opening director, so we're going to have to add a new opening director.

In the Northeast where we are growing, we are going to add two restaurant directors.

We're going to add a -- we've hired on-staff full-time now a labor engineer to help us with labor-management.

On Red Royalty, which you've seen such great success on, we've added a director of Red Royalty, so we are, investing making investments in a number of areas of our business.

And they are not capitalized, but these are things that, as we go through and make these decisions, one of my jobs is to be sure we've got the discipline that we're getting returns on all of these.

As so these are things we all feel good about.

So those are areas we are adding in and investing.

That's really the primary driver of G&A.

Keep in mind we do have G&A.

We've got Icube, which is our new IT systems.

There's been $4 million worth of expenses related to that this year going through G&A.

Again, that will not go away next year because we've got some other pieces we'll add onto that.

Labor-management is about another $1 million of expense going through G&A.

So there some other things going on there also.

Thank you.

(Operator Instructions).

Bryan Elliott, Raymond James.

Thanks.

I wanted to circle back to the learnings from the 21 initial physical brand transformation testing.

So a key aspect of your business has been the appeal to families with small children.

And you've talked a lot about those of us that are beyond that, not necessarily one or even those that have small children but getting away for the night, not necessarily wanting to sit next to a high chair.

And so in context of that, the fear that maybe the changes might alienate that key part of your audience, can you give us some help on what your follow-up research and all other anecdotes may be on how the families with children are responding to sort of arguably being corralled into the playpen and high chair area?

Those were your words, not ours.

I'm not a decorator either, but I am creative with words.

I will say from the very start our goal has been more guests more often, more delighted.

So we weren't looking to give up anyone.

There is no evidence of any deterioration at all in our family base.

We continue to be, as one guest described us, the beacon of hope for large parties no matter what the age of your party.

And we went out of our way to create some new interactions, particularly with our younger guests, that we are getting very good feedback on.

I'd be happy to go sit with you.

I will not put you in a high chair but we can try it out in the back.

But yes, there's no evidence that there's been any deterioration in our appeal.

We still stand as the place to take a great evening with your family.

Great, thanks much.

That's all the questions we have in the queue.

I would like to turn the conference back over to Mister Carley for closing remarks.

Thanks everybody.

We appreciate your time and attention and we will talk to you here in August.

That does conclude today's teleconference.

Thank you all for joining.