Red Robin Gourmet Burgers Inc (RRGB) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Red Robin Gourmet Burgers Incorporated second-quarter 2013 earnings 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 the 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 not be limited to, statements that reflect the Company's current expectations with respect to financial conditions of the Company, results of operations, plans, objectives, future performances, and businesses 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 and 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 performances; 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 this call 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 operations, operating results, and financial conditions.

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

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

Please go ahead.

Thanks, Jake, and thanks, everyone, for joining us on our call this morning.

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 Stewart and I delivered our prepared remarks, all of us will be available for Q&A.

First, let's review our second-quarter headlines, which we have included on slide 2 of our supplemental financials.

Certainly a key takeaway from our second-quarter performance is the continuing solid execution of our strategic plan, with results that speak for themselves.

In terms of our top line, we have now achieved 3 years of consistent quarterly same-store sales increases.

In the second quarter, we grew restaurant revenues by 6.6% while we continued strengthening our operations and significantly improved our operating margins.

Our bottom-line financial results were solid with a 48% increase in diluted earnings per share to $0.77.

This is noteworthy when you consider the significant investments we're making in our infrastructure, labor management, plating and food presentation, service, and brand transformation.

However, while we are encouraged by our performance we continue to operate in a very challenging environment.

That is very clear to us when we see that we once again outperformed our peers, but continue to chase our goal of positive guest traffic.

We are well aware that, regardless of everything else, without delivering positive traffic we can't achieve positive performance on a long-term sustained basis.

As we've discussed, our three areas of focus include engagement, efficiency, and expansion and are the backbone of our strategic roadmap.

We have shared with you some of the specific tactics on the roadmap; so today we will limits are remarks to updates on some of what we view as the most important initiatives.

I will focus on areas of guest engagement, and Stuart will provide some updates on our progress in the areas of efficiency and expansion in his remarks.

One of the big engagement headlines during the second quarter was the ramping up of our new advertising campaign -- 24 Burgers.

A Million Reasons, which was launched in late Q1.

We are still in the early days of the new campaign but we believe it is creating a more consistent voice for our brand, effectively conveying the many reasons for visiting Red Robin and making a stronger connection with our core guests.

During the second quarter, we also had a full plate of menu innovations designed to delight our guests.

Our latest menu launched in early April and illustrated on slide 4 features our new $3, $5, $7 and $9 appetizer lineup, which is perfect for guests looking for variety and selection, being able to manage their portion sizes, and conveying excellent value, as well as our new Blue Moon Beer Shake and expanded dessert offerings.

During the second quarter we also unveiled our summer limited time offer promotion featuring the Berserker Berger, inspired by our tie-in with Twentieth Century Fox's Wolverine movie franchise.

As you can see on slide 5 the promotion gives us a platform for a signature limited time offer burger, consistent with reinforcing our burger authority.

We also used this opportunity to reinforce our Tavern double-value platform with the flavorful and unique Kuzuri Tavern Style, kuzuri being Japanese for Wolverine, as I am sure you all know.

In addition to adding craft beers to the menu, we rolled out our unique and distinctive Can-Crafted Cocktails, which generated a lot of buzz with our team members, guests, and the media, very effectively reinforcing our ongoing strategy to take back the bar.

Lastly, our Red Royalty program is currently at 2.5 million registered members and growing.

We are capturing a significant percentage of sales through our loyalty program, and it has become a great way for us to drive incremental visits and increase PPA among these very loyal Red Robin guests.

Another example of this critical engagement work is our brand transformation initiative on slide 6. As you know, the first phase of testing this initiative began with the remodel of an initial group of 21 restaurants, with varying levels of investment.

While we were pleased with the results from the Group as a whole, the 9 restaurants that received a full transformation delivered the most favorable guest response and the biggest boost in performance.

These restaurants also deployed new plating and presentations, significant changes in our service model, full interior reimaging, and exterior changes.

We used the initial learnings from the test to identify the most impactful changes that we could pull forward and launch across the entire system independently from a brick-and-mortar remodel, so they can begin contributing to guest engagement and sales right now.

Among the steps we took in Q2 was to have all of our bartenders reapply for their jobs.

Those who were rehired were requalified and retrained so they can better serve our guests and elevate the experience in our bar.

More recently, in mid-July we rolled out systemwide those changes we identified for immediate deployment, including new plating, new food presentations, and new service models.

While we're still testing our brand transformation remodel initiatives, including the optimum level of investment for individual units, guest feedback continues to be positive.

Just as important, our Team Members are excited about the changes, and they are continuing to adopt the new standards.

It will take us a few months to get these new service changes seated with our Team Members, followed by consistent coaching and focus for the next year to completely ingrain these new behaviors.

With this learning in mind and seeking to build on it, we plan to remodel an additional 20 existing Red Robin restaurants this year.

With that I will pass it over to Stuart to speak about our financial results.

Thanks, Steve, and good morning to everyone.

Obviously we are very proud of our success this quarter, as you have read about in our press release.

The steps being taken by marketing and operations are clearly resonating with our guests and enabling us to strengthen our brand both strategically and financially.

Our robust operating performance versus a year ago was a result of several factors, including a higher average check with favorable menu mix, lower average cost of those items enjoyed by our guests, and some benefit from favorable workers compensation adjustments.

Diluted earnings per share were $0.77 in the second quarter, compared to $0.52 per share a year ago, while year-to-date EPS was $1.43, an increase of 16% over last year.

As you see on slide 9 of our supplemental, total revenue growth was 6.5% in the second quarter.

Our outstanding comparable restaurant sales growth of 4.3% was despite the headwinds of a disappointing macro environment and was comprised of a 5% increase in average check and a 0.7% decline in traffic.

270 basis points of the average check gain was due to increased sales of appetizers, alcoholic beverages, sides, and desserts.

The remaining 230 basis point check increase resulted from pricing.

As mentioned on our last call we adjust our comparable sales for the restaurant level promotional costs, which last year were reported in Other Operating Costs and totaled $1 million in the quarter.

If you recall, our April 2012 launch of Reds Tavern Double brought everyday value to the menu, increasing guest counts, and resulted in a slightly lower average check.

In April this year, we followed up that successful launch with a new appetizer lineup, which Steve discussed, as well as the new dessert card.

While we knew that cycling over our Tavern Double introduction was likely to be a traffic headwind for us, consumers in general have continued cutting back on restaurant spending more substantially than we had anticipated.

Although we expected guest traffic to be slightly better than our 0.7% decline, we still outperformed our casual dining peers by 240 basis points.

We attribute our traction versus competitors to relevant marketing programs, which are bringing guests into Red Robin to enjoy one of our 24 great burgers, to our great Team Members who delight our guests and make them eager to come back, to our Red Robin Royalty loyalty program, and to our brand transformation initiative.

Our restaurant level operating margins in the quarter increased 220 basis points to 23.3%, which was well above our expectation.

As shown on slides 11 through 13 of the supplemental, the improvement was mainly the result of improved mix, including the increased sale of higher-margin appetizers, along with lower ground beef costs.

We also benefited from the leverage of the higher sales on labor and fixed costs as well as about 30 basis points or $700,000 of one-time favorable workers compensation adjustments.

Below restaurant level operating profit, depreciation, general and administrative costs as well as selling expenses were generally in line with expectations.

The increase in general and administrative cost over last year resulted from investments in staffing to support growth and innovation, higher incentive compensation, as well as increased project costs.

Adjusted EBITDA in the first half of 2013 reached $62.2 million compared to $58.6 million last year, an increase of 6.3%.

Year to date, we have paid down $52.5 million on our credit facility, and the balance at quarter end was $72.5 million.

Our capital investments year to date have totaled $32 million.

This is comprised of about $21 million for new units, $3 million of IT and project-related investments, and $8 million of maintenance capital and other.

We have opened 5 new restaurants in the first half of the year and increased our number of operating weeks by 3.8%.

We remain very pleased with the results of the brand transformation remodels we completed last year, both from a guest and a financial standpoint.

As Steve mentioned, we tested three different levels of remodels and are especially pleased with the results of the full transformation.

The 9 full remodels cost on average of almost $400,000 for the brand transformation elements and resulted in an average sales lift of around 6% relative to their control group, which should give an IRR well in excess of our 12% hurdle rate and a cash payback of 5 years or less.

Looking at our updated guidance for the year, we expect overall consumer trends in casual dining to remain challenging.

However, despite our cautious near-term outlook we believe our longer-term thesis remains intact due to the number of potentially valuable initiatives we have on our roadmap.

We have increased our comparable sales growth expectations to around 3% based on the success in the second quarter and some expectation of our continued taking of market share, albeit in a shrinking market.

Also, this considers about 90 basis points of price increases which are rolling off in October.

We have raised our expectations for operating margins to about 21.3%, given the strong second quarter, but remind everyone that we continue to incur additional training and other costs related to our new labor management system and other service changes.

These costs are expected to total about $600,000 in the second half of the year, although most will be incurred in the third quarter.

In addition, cost of goods sold moderated in the back half of last year, so our comparisons in food costs are more difficult for the remainder of 2013.

We anticipate opening 15 additional Red Robins this year and potentially several more Burger Works in the second half.

This will result in 5.2% increase in operating weeks for the remainder of the year, excluding last year's 53rd week.

Preopening costs will increase to about $1.7 million due to the increased openings versus last year, the vast majority of which will be incurred in the third quarter.

All 15 full-service units and one Burger Works are currently under construction.

General and administrative costs are anticipated to increase above previous guidance due to higher incentive compensation costs, costs associated with our new supply chain systems, as well as higher manager training costs associated with our new restaurants.

Our new supply chain systems have been in test in about a dozen restaurants; however, assuring scalability and mitigating defects has taken longer than anticipated.

Just this week, we increased the pilot to 36 restaurants.

But continuous optimization of the system will push completion of our deployment well into 2014.

Manager training costs have increased due to higher cost of hiring and training managers, particularly on the East Coast, as well as in anticipation opening 20 new units in 2014, which will be more weighted to earlier in the year.

So when you put it all together we expect our earnings growth in the third quarter to be minimal, with higher earnings growth returning in the final quarter compared to the $0.38 of adjusted EPS earned in the fourth quarter of 2012, excluding the 53rd week.

When I reread our earnings call remarks from the second quarter of last year, we concluded by stating that our goal was the strengthening of our value proposition for guests, differentiating ourselves further from mainstream casual dining and fast casual competitors, and accelerating our organic growth.

I think we've made good progress on all of these fronts, as demonstrated by a very successful quarter.

While we have thus far clawed back market share, the environment remains shaky and we have a number of initiatives that have not yet been fully implemented.

Thus, we do not take our current position for granted and appreciate the great deal of work ahead of us.

I will now turn the call back over to Steve for some final remarks before we take your questions.

Thank you, Stuart.

In conclusion, I could not be more proud of the results from our culinary, marketing, and operation teams in the second quarter, particularly in light of the industry headwinds and the fact that we lapped our very successful Tavern Double launch last year.

Our focus on elevating the guest experience with new food and beverage selections and enhanced service model is beginning to get traction and will continue building awareness and differentiation for Red Robin with our new advertising campaign.

The environment for casual dining sector continues to be a challenge and has softened more than we expected even just a few months ago.

This further compounds the challenge of accomplishing our goal of positive guest traffic counts.

It is our objective to continue developing a pipeline of products and guest engagement initiatives that we believe will equip us to best weather the continued consumer volatility and the inevitable increase in marketing and promotional efforts of our competitors.

Of course, our accomplishments to date are grounded in the hard work, talent, and passion of the Red Robin team.

So, again, I want 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.

Hey, guys.

Congrats on the quarter.

I wanted to ask you first about check mix, and more specifically the impact the new appetizer menu had on your check.

It sounds like that was a big piece for you out of the gate.

So I am just curious how that trended for you throughout the quarter.

Yes.

No, we launched the new appetizer lineup at really the beginning of the quarter, so we got most of that during the quarter.

We will be continuing, I think, to see some lift to that, right?

It is a new lineup, it is resonating well.

I think the one thing I will caution people on, even though that was a big driver of our check, is you do get a lot of new trial and things like that when you roll these out.

And we can expect to continue to see some lift although I am not sure we will continue to see as strong a list as we roll through the next few quarters.

Got you.

Then on the traffic side, I wondered if you could talk how your traffic was impacted, as you did lap over the introduction of the Tavern Double that you mentioned.

Any more commentary you would care to share about traffic trends throughout the quarter or into July?

Yes, we don't really give a lot of traffic trends during the quarter.

Obviously the environment -- if you look at Black Box and I think some of the comments from our competitors, the quarter was fairly weak throughout the quarter.

I think we were strong relatively throughout the quarter, so there wasn't any specific trends in there.

Last year we talked about the Olympics and we did -- we performed well during the Olympics last year, during [competitors], so we had that headwind as well as Tavern Double.

Got you.

Thanks.

Alex Slagle, Jefferies.

Thanks, guys.

Question on the average unit volumes, the volumes of the Red Robins not in the comp base; they just seem to have fallen off some over the last year and a half.

You used to talk about the new stores, the non-comp stores [gapping] above the comp base.

I think it is due to some of the bigger NROs back in the 2011, 2012 class normalizing after honeymoons.

Just wondering if you could provide some more color on that, and what you are seeing as geographically or competitively.

Yes, hey, Alex.

This is Stuart.

I just wanted to -- a couple of different things going on.

A, if you look in our supplemental, we disclosed sales per square foot; that may help you.

So if you look at the NROs, there is a couple things going on.

A, we've got the 4,000 square foot unit.

So if you look at it on an AUV basis those perform a little bit lower although on a per square foot basis at least as well.

And the other thing that may be -- if you are looking at trying to back into an NRO, because we don't provide NRO numbers -- that $1 million adjustment that I have talked about between cost of sales last year and sales this year, you've got to be sure you are picking that up.

Sales would have been $1 million higher if we hadn't made that accounting change, so that may mess up your numbers.

So I think our NROs continue to perform strongly.

In our cash-on-cash returns we target over 30% and it's still delivering that.

Great.

That makes sense.

And a quick question on the TV advertising strategy, the pulsing strategies taking on, what you have seen with it.

And is it as effective as you expected at this point?

Hey, Alex, this is Denny.

Yes, we thank you for picking up on exactly what we call it, it is pulsing and it is designed to drive more continuous top-of-mind awareness amongst our target.

And we are very encouraged by the results so far and looking forward to seeing it play out further this year.

Okay, thank you.

Jeff Farmer, Wells Fargo.

Great.

Thanks and good morning.

Just wanted to follow up on the first question, I believe, which was really just -- what consumer factors do you believe have most weight on traffic, your traffic and industry traffic in general?

So what is going on out there?

We have heard a lot of different management teams give us different opinions on this.

But from your perspective, what has had the casual dining consumer a little bit spooked over June, July, August?

Hey, Jeff.

Good morning.

This is Stuart.

I will start and let my colleagues here jump in.

I think everybody has got their own theory to what is causing it.

I know Walmart came out with their theory this morning as to what is causing their sales slowdown.

I think it is just an environment that continues to be volatile from a consumer spending standpoint.

Consumers are clearly, clearly pulling back at spending in retail, I think as Steve and I both mentioned, more than we expected to happen at this point in the economic cycle.

Good news is that we have got a lot of great things going on in the business to offset that.

And if those things keep resonating, we can continue to outperform the rest of the industry.

So feel good that we have got some things that we have rolled out, some other things in the pipeline.

So I am not sure if anybody else wants to jump in.

I was just going to add -- this is Denny -- that I agree.

I think the consumer, the guest remains tentative.

They remain cautious.

What they are not necessarily looking for is just the best deal as much as they are looking for the best experience.

And I think we have an edge there.

We welcome families.

We have a uniquely multigenerational concept that -- if you're going to gather together and come out, Red Robin is one of those places where you not only get a great meal, you also get a great experience.

And I think that is what is going to give us an edge over time.

Okay.

Then just one more follow-up, and you guys touched on this with your opening remarks.

But I think it was since April 2011, that was the first time you did that pretty meaningful new menu launch.

You have done a good job of driving mix, appetizers, alcohol, dessert, everything you pointed to.

I think coming here through the second quarter of '13 you have actually seen your average check increase by almost 10% over that a little bit more than two-year period.

So according to my data, that is one of the biggest numbers in casual dining, if not the biggest.

So my question.

How do you balance the shorter-term benefit of that higher check versus what could be some longer-term traffic pushback with the pretty significant increase in that average check?

We keep a very close pulse on our relative value compared to our competitors.

And again, I have not seen any degradation at all in terms of how people view the overall value of Red Robin.

Again, we have a lot of choices.

We are offering them everything from a $3 appetizer to a $9 one, from a $6.99 burger to a $9.99 LTO.

So the guests, when they are in control and they opt in, tend to give you credit for giving them those choices.

And again, we track our value relative to our competitors and have seen no degradation.

Jeff, the other thing I will point out is we continue to have one of the lowest average checks in casual dining.

Our average check in the quarter was about $12.15, so relative to our peer group it's still one of the lowest.

Okay.

Thank you, everyone.

Yes, Jeff, this is Steve.

The other thing I would point to is, if you have been in a Red Robin restaurant the last several weeks, I am sure you have noticed the plating and presentation of some of our classic signature burgers.

And the feedback we are getting from our guest is very, very positive.

We are literally taking the wrapper off of some of the greatest gourmet burgers in the industry and highlighting them as they come through the dining room.

And that also helps deal with the value perception, too.

Yes, it raises the perception.

Bryan Elliott, Raymond James.

Hey, good morning.

Thanks.

A couple things, I guess, I would like to touch on.

First real quick, Denny, so this pulsing strategy with the advertising, would you expect that to over time lessen the traffic volatility?

The brand used to be able to at times see some big spikes in traffic when the LTOs were particularly successful; but obviously it would come at the expense of check.

Would you expect that pulsing to level off that whole pattern?

Yes, that is the goal.

Yes, okay.

And Steve, could you give us a quick Burger Works update, what you are seeing as you continue to move forward?

And obviously with the plan to continue to build them you are happy.

But there has been some variability in results.

Could you give us more detailed update on what is happening with that concept?

Sure, Bryan.

We have got 5 Burger Works open in 5 pretty disparate trade areas, and that has given us a lot of learning on where we think the concept is going to work from a real estate standpoint.

We have made a lot of progress on the four-wall margins and the economic model.

We are going to be opening another Burger Works here in a matter of weeks, 8 weeks maybe, in Fort Collins.

And we are looking forward to getting some more learning from that.

So we are encouraged with the Burger Works performance.

We still have some more learning to get under our belts, but we are optimistic going forward.

And we will be able to give you a little bit more detail on our next quarterly call.

Okay, great.

Last question for Stuart, could you -- you went pretty fast over some of the guidance and some of the other things.

Could you clarify or reiterate the comments on the full remodel, what you are seeing?

So they cost $400,000 on average.

I know you hope to get that down as you do more of them, maybe get some reengineering going should you decide to roll out that systemwide.

But the returns that you quoted were what again?

Yes, I think I am so excited about the results in [BTI] that maybe I read too fast.

So yes, we are getting an average sales lift of around 6% on the full transformations, so that is giving an IRR well over 12%.

And that is versus the control group.

We are using a test and learn process, so we have got a control group of 25 or so restaurants for those 9 remodels.

So we've got pretty good data all the way up and down the P&L as well as guest feedback.

So as Steve talked about, we will get another 20 done this year.

We will take a little bit of a pause to read that out.

And actually a little bit, while we are taking that pause we're also going to look at what do we do with either lower-volume restaurants, restaurants with a shorter lease term.

So we will be testing sort of a lower-cost version also early next year.

So we will get some -- we are continuing to learn and improve.

Okay.

And the 12% hurdle rate includes some cost of capital or something?

That is not a pure 12%, right?

There is a holdback or something in that?

Yes, so what there is is basically, the way we look at it is that we remodel our restaurants every 6 or 7 years anyway, just to maintain sales.

So of that $400,000, we back out $100,000 to $125,000 of basically normal facelift costs.

So the returns will be on -- the excess capital is what we're going to be getting the return on.

Okay.

You talked about a 5-year payback or a 20% cash-on-cash return.

Is that just a pure cash flow from the sales lift over the $400,000 cash investment?

I didn't talk about cash-on-cash returns, but the payback is 5 years or less.

Well, was it that -- we're seeing payback in cash on cash?

Yes, I guess you end up in the same place, yes.

(laughter)

I am just understanding your definitions, right.

No, the cash on cash, the way I look at cash on cash, people can include and exclude lots of things.

So I try not to talk about cash on cash too much, because what people include when they measure it are always very different.

Yes, okay.

So when you gave that comment you were referring to cash flow lift relative to the $400,000 cash investment, full investment?

Yes.

Okay.

Thanks a lot.

Chris O'Cull, KeyBank.

Great, good morning.

Steve, I am sure I missed your comments about the premium burger test.

But are these items expected to be rolled out later this year?

Denny -- I will give that to Denny.

You didn't miss a comment.

We are still in test with premium and encouraged by what we are seeing; but for competitive reasons, not willing to disclose our plans.

Fair enough.

Do you guys plan to replace the pricing this fall when it rolls off?

No, currently no plans to replace the pricing.

Okay.

Is there a reason for that?

Yes.

Commodities, quite frankly, have come out more favorable than what we expected.

So while ground beef costs were actually down year-over-year in the first half, particularly ground beef and some other, obvious other moving items as well, we will start to cycle against harder numbers.

But the pricing that we took in February fully offset the commodity and labor inflation.

Okay, okay.

Then, Stuart, the G&A expense, it has been up more than expected each quarter.

I would think this would be a fairly predictable.

Would you comment on why you are seeing some of the surprises and how much expense is not likely to recur in '14?

Yes, we'll obviously fill in '14 guidance next year.

It's a couple of things that are really driving it.

A piece of it is -- that are going ahead is the -- I mentioned our new IT systems in supply chain, that that is taking longer than what we anticipated to get that fully rolled out.

So those costs you get to basically burn rate as your rolling that out; and those costs will be ongoing is what -- sort of reiterated through well into 2014.

So this costs will keep on going.

Obviously with the outperformance through bonus plans and things like that we are accruing higher incentive compensation.

I would like to say that would continue to repeat; but performance will dictate that.

And then the investments that we are making overall in staffing and personnel, I think I talked about it on last quarter's call.

You look at the results that we are getting from the culinary innovations in our restaurants, that is a contribution from some of the new people that we have added.

And I think the way I look at it, we've got a fairly diligent process for adding headcount around the areas, is that those are all people that are adding value either in Red Royalty or culinary, rolling items out.

So we are -- those people are giving us some benefit on the top line as well as COGS. .

Some of the project costs associated with -- or the IT project costs, how are they -- you are saying they are ongoing into '14.

But I would think eventually the project teams would roll off, and you would just have the technology.

At what point --?

Yes, and that is a fair point.

In this year obviously we are rolling out labor management; that won't repeat.

But as we have talked about, our roadmap and the initiatives, we have guided some pretty good initiatives with payback that we see -- I'm going back to Steve's analogy of the airplanes at O'Hare.

We have got those opportunities that we are going to continue to look at.

So I would anticipate some elevated level of investment I would say for the next 18 to 24 months.

And again those will be giving us -- we will be getting paybacks on those.

But a lot of those development costs, as we catch up from a number of years of not investing, will continue to be elevated for the next couple of years.

Okay, great.

Thanks, guys.

Jeff Omohundro, Davenport Company.

Thanks, just a couple.

First, another one on the remodeling.

You got another 20 to do this year, the full remodels; and then it sounds like in 2014 you will be testing a lower-cost remodel.

Then you had also mentioned taking a pause.

I am just wondering if there is any update in terms of where you are in this process and how soon you might flip the switch to go on a broader remodel strategy.

Yes.

If you think about timing us, we probably won't -- we will take a little bit of a pause if you look at when we hit the green button this year to do the 20.

We will get those 20 fairly well.

So in terms of what are capacity is to do more, we could do more if we continue to see these results; I think you will see us put our fit on the accelerator a little bit.

Just given all the moving parts right now, I am not willing to go out and put a number out there in terms of how many we can do.

But we are testing a variety of scenarios from -- if these continue to work really, really well, that we could go through the whole chain fairly quickly.

Okay.

Then of the Wolverine movie tie-in, just some thoughts around this interesting effort, which really seemed to resonate.

It seemed like it was well suited from a product standpoint and from a customer demographic standpoint.

How pleased were you with that effort?

And how unique was it in terms of a creative vehicle for you?

Thanks.

This is Denny.

I think what I am most pleased with is the team found a way to take a July 26 movie release and make it work for us from June all the way through now, essentially.

And again, so you've got the impact of June in the results we are talking about this morning.

It is not at all unique for restaurants to tie in with blockbuster films.

I think our burger authority and our ability to bring forward two unique burgers made it particularly strong.

We stayed out of the tchotchkes and items for sale, which I have seen burn many a restaurant chain.

I have been a part of some of those.

So I think our approach was to focus in on a great, terrific burger and a great Tavern style.

And it was unexpected.

There is also a natural affinity between our concept, Red Robin, and going to the movies.

It fits.

Our location strategy benefits from it.

And we actually did some in-theater advertising as well this year that was designed to broaden our awareness at that key time.

So I am real pleased with it, and we will have more to share I think -- I know, next quarter.

Was the $1.50 price point on the Kuzuri-style trade-up versus $1 -- how happy were you with that (multiple speakers)?

We actually tested our way into that by first taking the Pig Out up $1.50, which is also our most expensive style, and saw no decline in appeal.

So we will continue to look at appropriate pricing for styles on Tavern; but no evidence that it caused us any harm.

Then last question, just on the pacing of unit development, a little bit below my target in the quarter, resulting in a more back-end loaded development profile this year.

I think it might have been Stuart who said that next year there will be a little more balance.

Maybe elaborate on that statement.

And then just in general what you might be seeing in terms of real estate, in terms of trends and momentum around desirable sites.

Thanks.

Yes.

Jeff, in terms of new unit openings, yes, they are fairly back-end weighted this year and that is just the way the spacing became available.

Then next year it will be actually more front-end weighted so you will see more probably in the first quarter than you will in the second, third, and fourth.

We have got a lot of great sites in the pipeline.

I think from a real estate availability location you continue to see high demand for sites; very little new development.

So some of our sites are conversions, either from other retail or other restaurant chains.

And I think it is a testament to our relationships with particularly the large developers and the sales momentum that we have that we are able to be a preferred tenant for casual dining spaces.

The Burger Works spaces and also the 4,000 square feet that we are testing, there continues to be pretty good demand for both of those spaces.

Burger Works sites, everybody is out there looking for 2,000 to 2,200 square feet and unless you -- what we're learning is you've got to be almost willing to sign the day you see the space to lock it up.

So there is a lot of competition out there for retail sites.

The $1.7 million year-over-year preopening in H2 versus the prior year, I think you said the bulk of that in Q3?

Exactly, so the total for the year -- the total for the back half will be about $3.5 million, most of that in Q3.

Very good.

Thank you very much.

Conrad Lyon, B. Riley & Company.

Hey, thanks.

First, I will say this, I do like the new presentation; checked it out.

Great.

Question.

I noticed you also tweaked with some of the core burgers, which I liked.

Are you seeing any cost of goods favorability from that?

Let me just elaborate a little bit, too.

I noticed -- I don't know what you call them, but like a cup for the fries; it looks like you can get more consistent portion sizes as well.

But the core question here is are you going to be COGS-neutral, maybe COGS-beneficial with the new menu and so forth?

Goal was to be COGS-neutral with a reinvestment in some of the things like the garnishes, which is I think what you are speaking to, like the fried jalapeno on top or the other elements that we are bringing along.

So yes, we are looking to elevate presentation across the board, and some of those are minor investments.

Okay.

Let me shift back towards the unit development store.

I just want to -- I appreciate your excitement, too.

So I think you said, what, 5.2% operating week growth or thereabouts in the back half.

Is that what I heard?

Yes.

Okay.

And does that assume just normal size Red Robins in the back half?

Or are there any of the smaller footprints going in?

No, there will be about 5 of the midsized, the 4,000 square foot units.

5 of the 15 will be midsizes.

Okay.

Got you there.

Then regarding CapEx for the first half, just backing into it, I think you said something like $21 million for the 5 units.

Is that strictly for the 5 units, roughly $4 million a unit?

Is that right?

Yes.

No, $21 million includes development of cost of some of the units that will be opening in the back half.

Got you.

Okay.

Fair enough.

Thank you.

Joe Buckley, Bank of America.

Hi, thank you.

Just a few details you may have touched on, but I want to make sure I get them.

Can you give us the alcohol mix in the quarter and how that might have changed?

Do you have it?

Yes, I've got it.

It is about 7.5%; so we continue to claw back 30 to 50 basis points year-over-year.

So in the third quarter I think it was up -- sorry, second quarter was up about 30 basis points; the first quarter went about 50.

So 7.5% mix.

Okay.

And Stu, what was the food basket inflation in the quarter?

And what are you thinking now for the second half?

Overall for the year I think our commodity inflation basket is going to be around 2%, which was down from our initial 4% which we'd brought down to 3%.

And this is as ground beef continued to be favorable through the second quarter.

So that inflation if you looked at what is going forward, obviously the grain markets where corn prices are is great.

It is just going to take a while for some of that to flow through.

Ground beef obviously will take a long time to flow through.

Chicken, you should start to see some benefit from the harvest really late first quarter next year; it takes a few months for that to flow through.

So we have still got a little bit of headwinds on COGS in the second half and feel a little bit better right now where things are, at least given the harvest end.

Okay.

Then the 20 remodels planned for this year, the 20 additional ones, are those all full remodels, full transformations?

Yes, I think we said on the last call those will all be full transformation.

15 of those were selected basically using our test and learn software of ones that we think should continue to perform really well.

We have got 5 in there that are -- continue to learn from in terms of different demographics, different types of trade areas.

Okay.

Very helpful.

Thank you.

John Glass, Morgan Stanley.

Thanks.

Just a couple of follow-ups as well.

First just on the advertising spend, what was it relative to year-over-year?

Was there an increase that may have accounted for the better than industry average sales?

And also maybe the weeks on air, was that significantly different year-on-year?

Consistent with our pulsing strategy we did have more weeks on air.

But we are spending it differently, not more, at this point.

So overall we are not increasing our spending, we are just spending it differently.

Overall weeks, John, year-over-year we are fairly consistent.

Okay, that's helpful.

Then as it relates to development next year, it seems like you are very focused on both your remodels as well as on your smaller prototypes.

Can you talk about, if you haven't before, what the overall capacity growth you think of as next year?

And also can you talk about franchise acquisition?

There was a time when the brand thought franchise acquisitions was a better way to grow; maybe valuations were more attractive.

How do those factor into growth going forward?

Are there any ones or geographies that are still attractive left out there for you?

Yes, I will touch first on the capital deployment strategy, which is sort of you sit down and say -- okay, we are generating cash, what is the best way for us to put that to use?

The returns that we are seeing both from new units and from the brand transformation continue to really score well.

So that to us is what we have got to sit -- as we sit down and finalize our plans for next year, balance that out from a capacity standpoint, impact on the organization.

Because as you add new units it's -- each new unit, it's for a new manager, some training.

So we are going through and figuring that balance out right now but feel good about the opportunities.

And as you mentioned, the 4,000 square foot unit is performing well also.

So using that to fill in, in some of our existing markets, feels great.

I'm not sure, second part of the question, John?

Was franchise acquisitions.

And by extension also their willingness to develop.

If you are not in the acquiring business, are they willing to develop given all these developments?

Yes, let me start and I will hand it over to Eric.

So we have gotten franchisees opened 1 new unit in the second quarter.

There is a couple of more in the pipeline, probably to open this year, 1 may move into January.

So they are starting development, and also excited about the 4,000 square foot.

Eric?

Yes, our franchise community is very excited about the 4,000 square feet as well as the potential Burger Works down the road.

We are not -- obviously we always want to be an exit strategy for great operators out there, and we will always be opportunistic and weigh that against our cost of capital and how we exercise that.

Okay, great.

Thank you.

Robert Derrington, Wunderlich Securities.

Thank you.

I am kind of curious.

Last year, Stephen -- or maybe Denny, you could answer this a little bit better -- the Tavern Double was especially successful for you during that period of time of the Olympics.

As we come into this period of time with a weak economic backdrop, does that give you a tool that you might use to flex during this period of time, talking about it with your Red Royalty Loyalty fans?

How should we think about your strategy as we go forward?

Absolutely, Robert.

That is why -- part of the reason that we obviously wanted it on the menu; it's there for us every day.

It is an everyday value, and we still have a lot of awareness that we can create of the $6.99 Tavern Double and, importantly, $6.99 Tavern Double with Bottomless Fries, which makes it even more of a unique offering.

So that is why we continue to focus on new styles that we bring to bear and balancing our overall media strategy and creative strategy.

We continue to use that as part of our -- one of our many 24 or 1 Million Reasons.

In fact, I know that we are planning on posting -- you will see the reel today on our site that includes some of the things that are on air now.

And you will see a spot called Burger Daddy that focuses on that exact offering.

The other thing that I scratch my head over is there was a question earlier on the call about the fact that your average check is up over last couple of years; but however, when I look at your menu you have got a broader variety of items at more price points that let the consumer flex up and down.

Is there -- have you seen anything that has given you any reason why consumers would be standoffish or concerned about how much they pay for your experience?

No, I have not.

And again, we keep our finger on the pulse of how the guest perceives our value relative to competition, and value isn't just about price.

It is about the experience that they have.

We think overall, between new plating and presentation, between our tremendous service, between us welcoming them in in a way that no others do, the absolute value of the Red Robin experience is superior to any of our competitors.

Great.

Again, congrats for great quarter.

Steve Anderson, Miller Tabak.

Good morning.

Taking a look at your paydown of debtors, what I think is an unsung achievement that you have done to date.

Looking at your run rate it looks like you are probably going to be going at maybe about $2.8 million annual interest costs maybe going to next year, versus you were running in the low $4 million range.

As you contemplate possible expansion of the concept as well as the remodels, do you see having a need to go into your credit facilities to expand it?

Hey, Steve.

This is Stuart.

Thanks for pointing that out.

It is always near and dear to a CFO's heart to (multiple speakers).

So we will -- we are obviously increasing the number of unit openings here in the second half.

We have got brand transformation coming.

So we will be using more cash relative to cash flow generated in the second half than we did in the first half.

And I think you will continue to see that next year as well, with the new unit openings and the remodels.

So I don't -- if we have to dip into the credit facility it would be a minimal amount.

But just given where our leverage is at well under 1 times, it is $72 million of debt, EBITDA over the last four quarters has been about $105 million.

So from a leverage standpoint, it is in great shape.

Great.

Thank you.

Peter Saleh, Telsey Advisory Group.

Great, thanks.

Denny, I wanted to ask about the NFL tie-in, it's something that you guys just recently launched.

Is this something that is going to continue throughout the course of the season?

Is there any way to tie this in with your Loyalty program?

And maybe you could talk a little bit about your expectations for that.

Sure, I would be happy to, Peter.

That grew out of a long-standing relationship that we have had here in our home market with the Broncos.

What used to be a feel-good relationship and promotion, we turned into a traffic driver last year with a triggered promotion associated with sacks for the Broncos.

So we learned about it first here last year.

We had two opportunities, so it is not an overall NFL relationship.

It is a selective opportunity in two different markets.

In addition to the Broncos we have added the Seahawks this year, which of course benefits a large percentage of our system.

And we have added the Bears in Chicago, which is more of an emerging market and an opportunity for us.

I will remind you, these are all triggered promotions, so they are not certain in terms of triggering what is called a Tavern Double Tuesday following the game.

But it is -- again, speaking back to the question earlier, it is another great way to keep Tavern Double in the conversation, and it fits our overall desire to have a balance of men and women in our concept.

In fact we are working closely with the Broncos now on how do we help them build their female fan base through our Red Robin Royalty program associated with their Orange Crush initiative.

So any time we have things that can relate back to Red Robin Royalty, we love it and particularly when they can help us get forward that story of everyday value of Tavern Double.

Should we expect to see more markets this year coming on?

Not this year, no.

Not likely.

Again these take a while to negotiate and we are not as deep-pocketed as some of our competitors.

But we think we have a lot to offer, and so we will certainly continue to consider them in appropriate markets.

Great.

Then, Stuart, I wanted to ask about -- just going back to the remodels.

For the new units that you guys are going to build in the back end of the year, what maybe one or two key elements from the remodels are you going to be incorporating into those new units?

Peter, why don't I get you to hold that thought.

We're actually -- we will be touring a ground-up unit that will take some of the decor items in Secaucus, New Jersey, and are planning to do an investor meeting there where we will take everybody through that in early November.

So I think it is the second week of November, I think.

We're working on a Hold the Date and getting that out.

So hold that question till then.

And just to tease a little further, we might even feed you.

Fantastic.

Thank you very much.

(Operator Instructions) Bryan Elliott, Raymond James.

I just wanted to follow up on the NFL tie-in as well.

I would like to get some help for my own purposes here.

So I would like to know the depth of research that you did.

You are implicitly betting on the Seahawks offense and the Bears' secondary.

Could you go through the logic of your analysis there, and help us out as we are putting our fantasy picks in?

Thank you.

There you go.

Well, my biggest concern is I need Von Miller to stay out of jail right now.

That is all (laughter) -- so, yes, we actually triggered all three first week out, so we were very pleased with that.

And we did do some research, but I am sorry I can't help you with your fantasy league, Bryan.

Bryan, this is a little-known area of strength for Denny.

She may be available outside of this environment to provide you with some of that feedback.

As the youngest daughter in the family I watched a lot of football with my dad, trust me.

Well, I will be sure to follow up on that.

Thank you.

That will conclude our question-and-answer session.

I will turn it back over to Steve Carley for any closing remarks.

Well, thanks, everyone, for joining us this morning.

We are looking forward to talking with you again in early November when we will share our third-quarter results for 2013.

Have a great day.

Take care.

Ladies and gentlemen, this will conclude your conference for today.

We do thank you for your participation.