Red Robin Gourmet Burgers Inc (RRGB) 2013 Q4 法說會逐字稿

Good morning ladies and gentlemen.

Welcome to the Red Robin Gourmet Burgers Incorporated fourth quarter 2013 earnings call.

(Operator Instructions)

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, believe, intend, should and other terms with similar meanings.

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 in business, including the Company's traffic and revenue driving initiatives, sales growth expectations, expected operating margin, anticipated cost, expenses, intentions with respect to expense management, plans for development of capital, resources and other expectations discussed within the course of the call.

Although the Company believes the assumptions upon which preliminary or initial result, 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 risks, uncertainties and other factors that could impact the Company's future operating results and financial condition.

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

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

Please go ahead, Sir.

Thank you, Alan, and thank you all for joining us on our call this morning.

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

After Stuart and I deliver our prepared remarks, we will be available to answer your questions.

If you turn to slide 2 of the supplemental financials, you can see that we finished the year with operating results that included a 3.7% same-store sales gain, 110 basis point restaurant level margin expansion, and EBITDA in earnings per share growth in Q4.

While we are not immune to the industry headwinds in this intense competitive environment, we believe our success relative to others is the result of remaining true to our brand, staying focused on our key strategic initiatives, and executing improvements our guests are continuing to give us credit for.

While proud of the progress we've made, we remain mindful that there is still much to be done.

We are in the early innings of building a better Red Robin, and the many changes we've made are still new to our team members, so we have a lot of opportunity to improve our execution.

Compared to fourth quarter 2012, comparable sales rose 3.7% despite fewer holiday shopping days and December weather challenges.

Same-store sales growth came from a strong 5.1% increase in the average check, due primarily to menu initiatives, offset somewhat by a 1.4% decrease in guest counts.

Despite the disappointing decrease in guest counts, we gain market share for the seventh consecutive quarter, exceeding industry traffic trends by 140 basis points, according to Black Box Intelligence.

For the full year, we out-paced the category by 240 basis points.

We attribute some of our progress to our focus on the three Es of our strategic road map: guest engagement, operational efficiency and footprint expansion.

I will briefly address how we executed on engagement in Q4, and Stuart will address progress on efficiency and expansion.

During the fourth quarter, we introduced the first burger in our new Finest line.

The Smoke & Pepper Burger was priced at $13.49, and served with our famous bottomless steak fries.

The guest response exceeded our expectations.

Our Finest burgers are the most recent example of a long tradition of serving the best in burgers, reinforcing our burger authority and providing our guest with great value.

The Finest line bookends our best-selling gourmet burgers, and it is complemented on the other side with our everyday value Tavern Double, starting at just $6.99, again, with our famous bottomless fries.

We will continue to build out our barbell of burgers going forward.

Together with our $3, $5, $7 and $9 appetizers, updated dessert offerings, and innovative adult beverages, the Smoke & Pepper Burger contributed significantly to a positive mix shift in Q4 overall, despite not launching until mid-November.

The fourth quarter also marked the first full quarter we had our new plating and presentation executed in the restaurant.

These changes are resonating with our guest, as evidenced by improvements in our guest voice and brand tracking scores.

We continue to reinforce the recently introduced Triple R service model, which stands for recognize, recommend, and reassure, and links directly to our brand transformation learnings.

The Triple R service guides our team members to anticipate guest needs, educate them about our various offerings, and make sure that we provide them with the unique dining experience they desire.

It's one step to evolving the Red Robin brand, and like any significant behavioral change, will take time, repetition, and relentless focus to ingrain into the system.

We have taken the first steps in a long journey toward consistently excellent execution.

In the fourth quarter, we successfully deployed our new labor management system.

This new tool is designed to enhance our service by assuring that each restaurant has a labor schedule unique to that restaurant's guest traffic pattern and product mix.

It will help our managers put the right people at the right time in the right places, to enhance our guest service.

The national deployment has gone smoothly, and the adoption of this tool in ahead of expectation.

Regarding our brand transformation locations, we initiated 19 remodels in the second half of 2013, on top of the 13 initial pilot locations in 2012.

The sales lift in our 2012 restaurants have remained near 6%, driven primarily by traffic increases.

And we were encouraged with the initial results of our most recently remodeled locations.

We are planning to re-transform 50 more of our restaurants in 2014.

You will recall that our brand standard design better accommodates guests of all ages, in space attuned to their dining expectations on that occasion.

(technical difficulty) we are in their early innings, but remain on track, as market research shows our guests appreciate this new approach.

We continue to use Red Robin Royalty to uniquely engage our guests.

Registered members now total more than 3 million, up 50% from 2012, and we continue to get smarter about how to best to profitably reward our guests for their loyal engagement.

Red Robin gift card sales were also up significantly in Q4, up 15.7% to $28.4 million, as our resurgent brand story drew greater interest from B2B and third-party channels.

Lastly, you may recall we announced promotional partnerships last fall with the Denver Broncos, Chicago Bears and Seattle Seahawks.

We got two out of three right, and we were elated that the Broncos and Seahawks made it to the Super Bowl.

Many of our team members thoroughly enjoyed the Seahawks win, while others, not so much.

(laughter) Fans rooted for the Tavern Double Tuesdays all season long, and their teams delivered.

Before handing off to Stuart, let me briefly discuss our progress with Burger Works.

Based on learning from our five pilot locations, we have evolved a concept to bring it much more closely aligned with the Red Robin brand.

We are dialing up our speed of service, and we are focusing our future development on downtown business locations with heavy daytime and good residential.

We are focused on differentiating Burger Works by offering our legendary burger quality at competitively superior speed, with a high touch service level for the fast casual environment.

Our newest location in Fort Collins opened during the fourth quarter, and is the first example of our Burger Works 2.0.

We are excited to announce that we signed LOIs to roll Burger Works out with this updated look into Chicago and Washington, DC over the coming months.

With that, I will pass it over to Stuart.

Thank you, Steve, and good morning everyone.

Steve covered the highlights.

We are pleased with our fourth-quarter performance, which capped off an outstanding 2013 for Red Robin.

Despite a more challenging environment than we had anticipated, our initiatives continue to engage our guests and strengthen our brand.

In 2013, our annual revenues exceeded $1 billion for the first time, and increased 4.1% over 2012, while on a GAAP basis, net income rose 13.8% to $32.2 million.

Note that fiscal year 2013 consisted of 52 weeks, while fiscal year 2012 had 53 weeks.

The extra week in 2012 generated revenue of $21 million, and approximately $0.21 of earnings per diluted share.

On an adjusted basis, net income also increased 13.8% in 2013, to $34.4 million, or $2.37 per diluted share.

We recorded a one-time refinancing charge in 2012 of $2.9 million.

And in 2013, had impairment charges and a nonrecurring special bonus totaling $3.1 million.

Excluding these one-time items, and the results of the extra week in 2012, net income increased 27% in 2013 compared to the prior year.

The board granted a nonrecurring special bonus in the fourth quarter, based on our exceptional 2013 results.

We consider this payment to be an appropriate an adjustment to earnings, as it was not expected and therefore not considered in guidance, nor was it part of our standard management incentive compensation plan.

We provide a reconciliation table of adjustments, which we believe makes for a more meaningful comparison to last year, as well as our original 2013 outlook.

We realize that some of you will similarly exclude it from Q4 performance, though some may not, and we understand that.

Now, moving on to revenues.

As you see on slide 10 of our supplemental, our fourth-quarter comparable restaurant sales growth rose 3.7%, which brought the full-year comp growth to 4%.

The 4% annual growth exceeded our initial guidance of 2.5% to 3%, with less menu pricing than anticipated, and was in line with our most recent expectations as communicated on our third-quarter earnings call.

Fourth-quarter sales composition, though, was a little different than we had expected, with weaker industry traffic but improved mix, providing a higher average check.

As Steve mentioned, our comparable guest counts decreased 1.4% during the quarter, resulting in a guest count decline of 0.3% for the year.

Though we were disappointed in traffic growth wasn't stronger, our traffic exceeded Black Box casual dining index by 140 basis points in the fourth quarter, and by 240 basis points for 2013.

Our average guest check increased 5.1% in the fourth quarter and 4.3% for the full fiscal year.

Of this, price flow-through was about 1.7% in the fourth quarter and 2.1% for the year.

During the quarter, average check benefited from mix, including guests trading up to our new Smoke & Pepper Burger, as well as more guests choosing to enjoy our appetizers and beverages.

Our alcoholic beverage mix increased 40 basis points year over year to 8% in the quarter.

Our restaurant level operating margins increased to 21.7% in the fourth quarter, up 110 basis points from a year ago, and in line with our guidance last quarter.

This improvement is due mainly to the leverage of the higher sales and fixed expenses, as well as lower local marketing expense and lower supply costs.

As previously mentioned, our fourth-quarter general and administrative costs of $22.8 million include the $1.6 million nonrecurring special bonus.

Excluding this item, G&A costs were in line with our expectations, as were selling and depreciation expenses.

Pre-opening costs were $1.9 million in the quarter, as we opened 10 new Red Robins and one Burger Works, bringing our total openings this year to 22 new units.

So $1.5 million non-cash impairment charge in the quarter resulted from the write-downs of four restaurants, including one older location, which we plan to close in 2014.

The impairment charges, as well as the nonrecurring special bonus, reduced our fiscal 2013 tax rate to 21.8%, which would have been 23.1% without these two items.

To briefly discuss our 2013 investment activity, we invested $78.9 million, including $50.7 million in new stores, $10.3 million in maintenance capital, and $6.6 million in IT systems and projects.

We also invested $11.3 million for remodeling or adding capacity to 19 restaurants under our brand transformation initiative.

We continue to be very pleased with the initial results, as Steve discussed, and we covered at our November Investor Day, with returns expected to well exceed our 12% IRR hurdle rate.

Further, our adjusted EBITDA was $109 million for the year, an increase of almost $4.6 million over 2012, and over 2011 an increase of $16.4 million.

We have strengthened our capital structure during the year by paying down $47.3 million of debt and returning $5 million to shareholders in the form of buybacks.

Our debt to EBITDA, as defined in our debt credit agreement, improved to 0.8 times at the end of 2013, from 1.3 times at the end of 2012.

Now, moving on to 2014, with the consensus outlook calling for continued weakness in consumer spending and casual dining, and a continued oversupply of restaurants, we believe that our focus on delivering innovative burgers and beverages in a fun environment with great everyday value will allow us to continue to taking market share.

Regarding sales, we expect 2014 total revenues to grow in the high single digits.

This is comprised of comparable restaurant sales growth in the low single digits, and an increase in operating weeks of 6% to 7% from new openings.

The drivers of comparable sales growth will continue to be mix improvement, with more consistent media throughout the year and higher sales from our brand transformation remodels.

Restaurant level operating margins are expected to be slightly north of 21% in 2014, down from 2013.

Everyone has seen many casual dining chains relying even more heavily on discounts and coupons.

We are on a different path, where we reward our most loyal guests by giving them the ability to manage their occasion and their check from everyday value to our Finest line.

We believe this is a key differentiator, and supports our continued take in the market share.

In an environment with weak consumer confidence and disposable income, our sales guidance includes only about 1% of price in 2014.

We will be sacrificing some margin in the short term to continue providing great value to our guests.

And after several years of investing more in talent to support our strategic initiatives, our general and administrative costs are expected to be approximately $93 million in 2014, allowing us to leverage sales growth.

About one-third of that expense should hit in the fiscal first quarter, with the remainder spread over the year.

Selling expense is expected to increase to 3.1% of total revenue, from 2.9% in 2013.

While our media budget is modest compared to many of our competitors, the success of our new media approach has encouraged us to invest in keeping our message on air more consistently to drive top of mind awareness.

Depreciation expense is expected to be between $59 million to $60 million in 2014, while interest expense should be near $2.5 million.

Our effective tax rate should be about 26.5% on the increased net income, and assumes the renewal of the work opportunity tax credit quarter.

Our quarter-over-quarter earnings growth will be a little bumpy, with limited growth in the first quarter.

Compared to 2013, our restaurant level bonuses and benefits, as well as G&A, will be seasonably higher in the first quarter.

We expect capital investments of $85 million to $90 million in 2014, with $40 million to $45 million to build 20 new Red Robin locations and 5 new Burger Works.

Further, our guidance assumes that we will remodel 50 restaurants to our new brand standards.

Total investments in remodels and maintenance capital will be about $35 million, while investments in IT systems and other projects will total $8 million to $10 million.

Following our successful 2013, we will continue to focus on those same strategic initiatives that have been working for our guests and our shareholders.

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

Thanks, Stuart.

In closing, I would like to reiterate how pleased we were with the progress we have made in 2013 in transforming the Red Robin brand.

While we made considerable headway, there was still a lot more to do to deliver on our mission of serving more guests more often and leaving them even more delighted with their experience each and every time.

Before we take questions, let me thank our team members in the field and here in the home office for all that they have and continue to do.

Their positive attitude about all the changes we are making, and their willingness to go beyond the call of duty, are what make Red Robin such a special place to work and such a wonderful place to enjoy a great meal with friends and family.

We look forward to 2014 as another year to build upon the foundation we've laid, and to execute as a team against engagement, efficiency and our expansion initiatives.

With that, Operator, we'd be happy to take some questions.

(Operator Instructions)

Will Slabaugh with Stephens Inc.

Just a quick question on the Finest line introduction.

Just wondering if you could talk a little bit more about how that performed?

If you'd speak to the mix at all?

And then at the same time, if that impacted the Tavern platform mix at all?

This is Denny.

The mix exceeded our expectations, but we did not see it impact the lower end of the menu at all.

I think people traded up from our gourmet line to the Smoke & Pepper.

We are mixing it on Smoke & Pepper at about 5% at this point, and very pleased with the trial that we've driven out of the blocks.

Great.

And if I could hit on appetizers or desserts -- anything outside of the entree that you guys better on over the past year, any significant changes?

Or are you seeing much of the same as far as that mix just slightly improving quarter to quarter?

Continuing to see it improve in appetizers.

And alcohol overall contributed about half of the lift, and the Finest the other half.

Alex Slagle with Jefferies.

Stuart, a question.

Wondering if you could provide a little bit more granularity on the expectations for restaurant margins in 2014?

I understand the higher cost of goods and labor; that makes sense.

But any color you could provide on the operating and occupancy costs for this year -- it looks like you'd been getting good leverage on operating costs in recent quarters.

And wonder why or why not that might continue?

If you up and down the key drivers of the restaurant level operating margins, I think you will see COGS and labor each increased 20 to 30 basis points.

We've got some initiatives in place to help offset some of that.

Also concerns, given what everybody has seen with the weather, but utility costs, both for our own cost in the fiscal first quarter, as well as the impact that's going to have on consumers when they get their utility bills and open those up.

But so, labor is going to be driven with the minimum wage increases.

We are going to be putting in place a program this year, also, to improve our team member and manager retention.

We've been in line with the rest of the industry, but we think we have got some opportunity there.

And that's what's going to be driving a little bit of the benefit increases.

And occupancy increase as a percentage of sales, we will get a little bit a leverage on that.

But again, with the 20-plus openings in 2013 and 2014, you won't get a lot of leverage on that line.

Thanks.

Joe Buckley with Bank of America Merrill Lynch.

A few clarifications.

The $1.6 million special bonus -- how broad was that within the Company?

The details of that will be in the proxy, but that was largely given to the executive team.

Okay.

And then, Stuart, did you say the G&A -- about one-third of that will be in the first quarter?

I realize this is a 16-week period, but I think you mentioned maybe bonus accruals being part of that.

The reason why it might be that high?

But is there anything else we should be thinking about?

No, normally, our first quarter is a little bit higher.

We also do our annual general managers' conference, and we do that with vendors and franchisees.

So our first quarter is typically about 30% to 31% of our overall G&A spend.

It will be a little bit higher this year due to some timing, actually, really, of the way we expect insurance cost to hit this year versus last year, regarding overall benefit cost.

So it's just a little bit of a timing issue, and I just wanted to highlight that, because you will get the benefit of that later in the year.

(Operator Instructions)

Bryan Elliott with Raymond James.

A quick clarification from me, as well.

I missed the -- I got the part on the advertising, that you are going to spread it more evenly through the year -- elaboration on that?

And what was the percentage of sales that you forecast?

As a percentage of sales, we forecast about 3.1% for the year, which is up about 20 basis points over a year ago in terms of timing.

I'll hand it over to Denny.

Yes, and we will have more weeks on air this year.

I'm not inclined to say exactly where and when, but our entire intent is to, again, continue the strategy that was working for us last year of maintaining the pulsing strategy at lower levels.

All right.

And also, if I could ask about the Finest line.

So as you look at that, that maturity or end of 2014 or something, can you give us a little description of what we might see on a menu at that time in that category?

I can certainly let you know, as we've been out there with at least three others in test, that we have others in the pipeline, and will continue our relationship with the South Beach Food and Wine Festival Burger Bash to continue to use that to drive LTOs around this.

So we are very encouraged, again, by having now three platforms, the Tavern platform, the Gourmet platform and the Finest, to work with.

And we will look for opportunities to build all three out.

Fair enough.

John Glass with Morgan Stanley.

I wanted to step back and just ask about the average check increases in a broader context.

Over the last three years, it has increased by about 10% cumulatively.

And I understand that's been willful, and you've done that, and consumers have traded up on their own volition.

But at the same time, it probably, at some point, creates a value question in their minds: I'm spending of lot more at Red Robin than I used to.

How do you think about that?

And then how do you think about the context of 2014 being light around pricing?

Do expect to get an average check lift, this year, about 4%?

Could it be that high in 2014, as well, as these plans play out?

I will take the last question first.

Yes, and we are certainly planning on that.

Even though we are taking modest price increases this year, we believe we have pricing power in the brand.

We are just not choosing to take it right now because we don't need to, frankly.

I think from a standpoint of mix, we watch very carefully the impact on value.

We track with our guests on an ongoing basis to measure value, and our value scores are at or above historic highs.

I think what's happening is the guest is opting in.

And again, they are seeing a range of prices on our menu, from $6.99 now up to $13.49 within our burger platform.

$3, $5, $7, $9, a $3.50 starting price now on our new beverage pricing menu.

And it's all adding up to great value.

And great value is not just price, obviously; it's the combination of our great service, our new plating and presentation, the quality of the food.

And all of that is keeping us in a very good place on value.

Thank you.

And Stuart, can you just clarify the fourth-quarter tax rate?

I think you gave the full year, I think ex items, it was somewhere still in the mid-teens.

If that's right, why was it lower than your expectations initially?

Yes, it was lower than our initial expectations, really, because of the special items, which are tax-deductible -- the impairment as well as the special bonus.

And so that's what really brought the net income expectation down, and the tax rate down, as well, for the fourth quarter, because you are truing up the full year.

But ex items, isn't there a lower tax rate still?

Or was that not the case?

It was slightly lower, but not meaningful.

(Operator Instructions)

Jeff Farmer with Wells Fargo.

Going back to the menu and mix and things like that, over the last three springs, you guys have introduced a new menu, proving to be a pretty meaningful traffic and mix driver for you.

I think in each of the last springs -- 2011, 2012, and 2013 -- as we look at the spring menu release for 2014, do you think you still have some low hanging fruit there?

Are there still some meaningful opportunities on the menu?

I think we still have meaningful opportunities.

We continue to work this carefully.

And again, as I referenced, we now have three platforms in our burger lineup to work against.

So we have news opportunities, and continue to work very hard to make the menu work hard for us.

Okay.

Then on the dollar basis, looks like your total ad spending is up roughly 25%, again in dollars, in the back half of 2013 versus the back half of 2012.

Just curious how you allocated those incremental dollars?

I know you talked about pulsing a lot.

But just elaborate on that a little bit?

And if you think your customers -- how do they respond to that increased media?

What have you seen?

Jim, this is Stuart.

You've got to remember, one of the things, because we've got a national advertising fund with our franchisees, the way the expense actually hits and the timing of media don't always align.

So we had a little bit of extra media in the fourth quarter, but very small and at very low weights.

So the actual media we ran in the fourth quarter was down significantly from the third quarter, although up a tiny bit from last year.

And so the expense is really a function of our contributions into the fund.

Okay.

That make sense.

You were reminding me of that.

So that -- was it the third quarter that you essentially spent twice what you spent in the third quarter of 2012?

You double --

(multiple speakers) We were much heavier in third quarter, yes.

Last year (multiple speakers) quarter.

Okay, I going to -- same question there.

How have your consumers responded to that incremental media?

Did you get what you wanted to see?

Certainly, as we shared in our last earnings release, we were very pleased with the third-quarter results and the traffic results.

Okay.

And then just final question for you, Stuart.

A lot of moving pieces on the margin front, in terms of restaurant level margin down.

Looks like, again, a lot of G&A leverage, at least based on my model.

Are you willing to cut to the chase from an operating income margin perspective -- flat, sideways, up, down -- how should we think about that?

Let me refer back to the Investor Day and go down even the line further.

One of the questions we got at the Investor Day, we put up our guidance for mid to teens EPS growth.

I think when you run these numbers compared to the $2.37 adjusted earnings of 2013, you should probably come out in the mid-teens EPS growth.

All right.

Thank you.

Chris O'Cull with KeyBanc.

Denny, the brand has made some significant improvements the past several quarters.

Do you have any research to suggest it's being used differently or by a broader demographic?

Or maybe the competitive set is changing at all?

We certainly are seeing, I think, more guests open to the Red Robin brand.

Again, as we track, we track not only our actual guests as well as general perception of the brand.

So we are seeing an improvement in interest in the brand.

That certainly translates.

And then, again, I think the mix shifts would tell us that we are starting to see some occasion lift, as well as the activity that we've gone to at around Over 21 and the bar, et cetera.

I think we're starting to accommodate, as our long-term goal, all ages, an all age environment, in the occasion they most want to enjoy.

So for example, two adults can come in, be seated in our bar, and enjoy a meal and a beverage.

Families, more than welcome in our restaurant any time.

So we've got a lot of good activity going on from that standpoint.

When you look at -- I'm sure you do customer segmentation work.

When you look at some of the increased spending you've seen, is there a new customer group that's forming at Red Robin?

Or are you seeing just across-the-board add-on and trial of this new Finest line?

We started with fundamental occasion segmentation research a few years ago.

So we focus more on the occasion segmentation.

And the strength that we had at the unplanned dinner occasion, as well as rounding out the unplanned adult dinner occasion.

So we are seeing lift there.

So from a segmentation standpoint, more focused on adding occasions.

We've always been a broadly appealing brand.

Okay.

And then lastly, the Smoke & Pepper.

I think you said that fixing at 5%.

What do think the mix will be when it's not being advertised?

We've seen, with a promotion, when we've come off air here the last quarter, we've only dropped off about 0.6%.

So we are about 4.5% on Smoke & Pepper alone.

Again, the trial has been so strong, and the guest response to the quality of burger so high, that I'm confident we are going to be able to maintain a pretty healthy mix on this end of the barbell.

One last one, I'm sorry.

You think that this segment -- or this section of the menu can mix over 10%, eventually?

Don't know.

Don't know yet.

Alton Stump with Longbow Research.

If you could talk a little bit -- obviously, you mentioned that you only expect to have 1% higher pricing in the current year.

Any outlook, any color, on the mix front?

How much you think that could add to same-store sales in 2014?

We talked about same-store sales being in the low single digits.

Obviously, industry traffic is going to continue to be tough to come by.

So we will continue to use our media programs and things like that to try to make sure we are taking market share and outperforming the industry.

In terms of mix, you've seen the good benefit already from the $3, $5, $7, $9 appetizer rollout we rolled out in May of last year.

So we will start cycling against that.

And we are trying to build a menu and structure that lets our guests pull items through our system.

So depending upon the occasion, the economy, where it is, that we are touching all the different price points.

So when somebody wants to come in and celebrate an occasion, they can trade up to our great Finest line.

If there's different occasion, they feel like wait, I've got less to spend, we've got great items on the menu.

So we are building a program to let the guest really drive the average check.

But we want to be sure we are providing the great items on there for that.

And so we think we've got upside, and it's continued upside in mix, also compared to our peer group, our alcohol mix -- again, at the quarter, was 8%.

Many of our peers are in lower teen percent.

It's going to take us years to get that back.

Our target is 40 to 50 basis points a year, clawing that back.

So we think we've got some upside, but we will let our guests decide.

Okay.

That's helpful.

And then just hopefully a follow-up, and I think someone already answered it.

But just, on the alcohol side, how far away do you think we are (inaudible) did it, back up to 10% of your sales?

Two years, three years, more than that?

I think, again, our target is 40 to 50 basis points a year, and we've got some really interesting programs in place that we are starting to roll out this year to really try to catch up with our peers on that.

Next we will go to Peter Saleh with Telsey Advisory Group.

Great.

I just wanted to ask about -- I didn't hear you guys mention weather at all.

Any thoughts on how much that impacted your traffic in the quarter?

I think we are obviously impacted, as everybody is.

We try not to use weather as an excuse.

Just, again, we are a little bit more weighted to the West Coast than maybe some of our peers are.

So you may get less weather impact in California, Washington, or in Oregon.

And our -- generally, when we see a big storm like this happen, there will be some sort of cabin fever afterwards where you pick some of this back up.

And so we try not to let weather be an excuse.

We do have some seasonality, so that if we had a big snowstorm during Christmas break or New Year's break or something like that, that could impact us.

But overall, we try not to talk much about weather.

Okay.

And then just on the commodity outlook for 2014, what are your expectations?

And what are some of the moving parts there?

I think consistent with the answer earlier.

We expect COGS to be up probably by 20 basis points.

It's at 2.5% -- it's 2.5% to 3% commodity inflation, plus a little bit of mix in there as well.

As we sell more of the Finest line, that mix impacts our margin, as well.

And again, it's really, I think, driven largely by increases in ground beef.

We've seen a pretty big spike here in the first quarter.

We don't think it's going to stay spiked up there that high.

Again, if it does, you see tradeoff at the retail level, where consumers buy less ground beef and switch into chicken and pork.

And that helps, then, create, quote-unquote, an oversupply.

The droughts in California, obviously, is hurting dairy prices right now.

In our supplemental, you can see how we are contracted out for that.

So I think the 2.5% to 3% is probably a pretty good number.

Denny, I just wanted to ask about the Integer partnership.

Can you talk a little bit about that, and how you see that benefiting you in 2014?

Sure.

We have just consolidated in a number of individual relationships with small agencies here in Denver into one single local relationship with Integer.

And they will be complementing our national relationship with Vitro and Initiative, who do our national creative and buying.

There's some efficiency there, certainly from a spending standpoint.

And we think, also, the opportunity to work very closely with them to continue to better integrate all of our efforts, all the way through our calendar, be it mass media down through one-to-one media in Red Robin Royalty.

So that was the goal.

There is some good upside for us in just having one strong partner rather than multiple.

Bob Derrington with Wunderlich Securities.

Thank you.

Could you give us a little bit of color, Stephen, about how the new stores are performing?

Some good, the bad -- what range of expectations you are seeing?

You have opened more stores this past year than you have in quite some time.

Our target for our new stores is to get a 30% cash on cash return.

We are continuing to see the most recent classes in that area.

We are continuing to build stores out, in many cases, in markets where we don't have a lot of penetration, like Florida and New York / New Jersey.

That's going to take a little more time, as the brand gets traction and folks understand who we are and what we do.

But that's how it's looking going forward.

One point I would add, too, is just going back to our Investor Day presentation.

Our midsize unit is the 4,000-square foot units that we are using in different markets also continue to perform well.

And again, allow us to use as fill-in for markets that we were heavily penetrated, but have a maybe a trade area that's missing, then we can use a 4,000 square foot unit to go in and not cannibalize.

Got you.

That's good color.

If I could follow up with one.

As you looked into your business, and obviously there's a lot of other brands looking at tablets and order devices inside the restaurants.

Can you give us a little bit of perspective on where you stand and what your thoughts are around the opportunity there?

It's certainly a very hot topic across the industry.

We are watching it, looking at some experiments ourselves in a few markets.

And it will work for us if it deepens the connection between our guest and our team member; really frees up the team member to focus on great service.

That's where we see the greatest opportunity, because that's always been our strength.

But again, aware of it, and we will follow it as we see upside opportunity for us.

But primarily, as it will benefit the team member.

Joe Buckley with Bank of America Merrill Lynch.

Yes, I was wondering if we could get an update on the IT initiatives?

Where you are, what benefits you might be realizing at this point, and what you might pick up in terms of benefits in 2014?

Joe, this is Stuart.

Just to bring everybody up to speed, on our rollout of Oracle Fusion, we went live on the financial systems in January of 2013, so we've been on that for a full year already.

And it has been working quite well.

The rollout of the supply chain systems, we have been piloting now in about 35 restaurants.

We did some restaurants where it's working really well; some other restaurants where I think it's working less than we'd like it to.

We are in the process of working closely with Oracle and our own IT team to actually work some of the system issues out that makes it more complicated for our general managers to operate the system than it should.

We are in the process of working through that now with the 30 that we have before we go live with more.

That said, the results that we've seen from the ones who are really operating it well, we are really pleased with in terms of inventory levels, the automated ordering that they are getting out of it, the automated prep schedules.

So with that said, we expect to have it rolled out to the whole team, really, by the end of this year.

And then once that, we will really start to then build up data for the business intelligence pieces in place, and that will take us a few months as well, to really start to get some more corporate level information and leverage out of it.

And the other piece of it that we have rolled out already is some of the training pieces as well, that come with that.

We've rolled out a new team member foundation's training platform, iPad based, and that's also one of our IT initiatives that we've rolled out.

And Steve -- on the other big IT initiatives, Steve covered the labor management system that we rolled out last year in the fourth quarter, and that's gone more smoothly than expected.

Okay.

What is [left] beyond 2014, Stuart?

One more time?

What would be --

Other issues beyond it?

The --

Yes, like (multiple speakers) --

The biggest piece is around HR, upgrading our HR systems, and payroll would be the next big pieces of it.

Okay.

Thank you.

Bryan Elliott with Raymond James.

A question on free cash flow and how we should think about -- or what you are thinking about as the use of that, as we look forward?

Debt pay-down versus stock [repurchases]?

And also, was there anything unusual in interest expense in the fourth quarter?

It looked low.

Yes.

It's -- very astute, Bryan.

Yes, we put in place a new deferred compensation program in the fourth quarter -- it's actually on your last question.

The new deferred compensation program, we have got to recognize -- we consolidate, so we recognize a little bit higher G&A expense from that, and then the income that's earned on that plan gets grossed up in interest.

So net-net to the bottom line, it's a wash, but it was about $250,000 of higher G&A expense in the fourth quarter, and about $250,000 of less interest expense, if you will -- investment income that goes against the interest expense.

Coming back to your free cash flow question, if you look at the EBITDA that we generated in 2013, go with $109 million adjusted, we will obviously be investing a significant portion of that in new stores, in the BTI remodels, in 2014; maintenance CapEx.

And consistent with our past plan, excess cash flow that we generate will continue to pay down debt, and we've got $45 million remaining under our board authorization for share repurchases.

Thank you.

Chris O'Cull with KeyBanc.

Just one follow-up regarding the new premium burger.

Did you see a lower or higher attachment rate of alcohol or appetizers with the new line?

Chris, love to be able to answer that.

This goes back to the systems question that Cheryl (laughter) answered earlier.

(multiple speakers) Our ability to look at item attachment in our current systems are a little more cumbersome than we'd like them to be.

So we did see overall beverage attachment go up.

We have got initiatives against both of those.

Including some great new beverage -- adult beverage menu items we rolled out on that same promo card.

Great.

Thanks.

Now, I would like to turn it back to Mr. Carley for any additional remarks.

Thanks, everybody, for your time and attention.

We look forward to bringing you up to speed at the end of the first quarter, in May.

Have a great day.

And that does conclude today's call.

We thank everyone again for their participation.