Red Robin Gourmet Burgers Inc (RRGB) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Red Robin Gourmet Burgers Incorporated first-quarter 2014 earnings call.

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 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 including the Company's traffic- and revenue-driving initiatives, sale growth expectations, previously announced franchise acquisitions, expected operating margin, anticipated costs, expenses, intentions with respect to expense management, plans for development of capital, resources and other expectations discussed within the course of this call.

Although the Company believes the assumptions upon which preliminary or initial results, financial information, and forward-looking statements are based are reasonable as of today's date, these forward-looking statements are not guarantees of future performance, and therefore investors should not place undue reliance on them.

Also, these statements are based on facts known and expected as of the date of this conference call, and the Company undertakes no obligation to update these statements to reflect events or circumstances that might arise after this call.

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

The Company has posted its fiscal first-quarter 2014 press release and supplemental financial information related to the quarter's results on its website, www.redrobin.com in the investor section.

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

Please go ahead, sir.

Thank you Jamie, and thanks everybody for joining us this morning.

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

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

Q1 marked another strong quarter for Red Robin.

We continued to differentiate Red Robin from our competition and grow market share.

As you can see on Slide 2, we generated a 5.4% increase in same-store sales, improved our restaurant level operating margin by 90 basis points, and grew earnings per share by $0.16, or 24%.

Recognized earnings per share were reduced by $0.03 due to acquisition costs.

The comparable restaurant revenue gain stemmed from a 4.9% increase in average check, as well as a 50 basis point increase in guest count.

Despite industry headwinds, we outperformed our peers in traffic for the eighth consecutive quarter.

We notched a 315 basis point positive variance to the category over the 16-week period, as measured by BlackBox Intelligence.

We attribute most of this to our marketing programs, new product innovation, and guest engagement initiatives implemented in our restaurants.

We also believe we are seeing continued benefits of the new plating and presentation, the new menu, and RRR service components that we piloted in our original brand transformation locations, and consequently accelerated to the entire system last summer.

As we discussed on our last earnings call, we increased our advertising this quarter, adding more weeks of TV.

Some of these added weeks fell in the first quarter to support Reds Tavern Double value messaging and the extension of our Finest Line of burgers.

We've made strides over the past two years in key brand attributes, such as product variety, service, and value; improvements that our guests are rewarding us for with more visits.

While pleased with this progress, we still have significant opportunities when compared to our best-in-class competitors.

In the first quarter we permanently extended Robin's Finest lineup with the DGB, the Damn Great Burger, and the Black and Blue Burger, giving guests three premium burgers to choose from.

We now have three distinct burger menu platforms: Red's Tavern Double starting at $6.99 every day, to our famous Gourmet Burgers, ranging from $8.99 to $10.49; and our Finest half-pound Black Angus burgers, priced starting at $12.99 and above.

All are served with our famous Bottomless Steak Fries.

Through these efforts we continue to reinforce our positioning as the undisputed burger authority.

As our PPA growth indicated, trial of these Finest burgers were strong, as people traded up from our other burger lines.

Our favorable growth in average check also reflects better accommodating the over-21 crowd at the bar, while remaining a top destination for families.

Our improved guest service model is being reinforced by our new labor management system, which creates a labor schedule customized to an individual restaurant's traffic pattern and unique product mix.

This guides managers to schedule the right people at the right place in the right time every shift.

The roll-out was smooth and adoption exceeded our expectations which benefited our four-wall profitability in Q1.

Turning to brand transformation, we're pleased with the traffic driving sales lifts from the 34 locations transformed to date.

We just recently finalized a new brand identity for signage and exterior design, and we'll now go back and complete the exterior updates on these 34 locations.

The new design will be incorporated into our remodel going forward, as we plan to fully transform at least 50 restaurants this year in select markets.

Our road map can be summed up by the three Es: guest engagement, operational efficiency, and footprint expansion.

Having addressed engagement, let me briefly touch on two franchise acquisitions related to our expansion strategy.

First, we acquired four franchise restaurants in the upstate and mid-Hudson areas of New York in February.

We now own and operate a total of 12 locations in New York State and have 3 additional restaurants under construction.

We took a second step when we announced plans to acquire 32 franchise restaurants in Canada and the United States for approximately $40 million.

We expect to close on this transaction late this summer.

The acquisition included 14 US locations and 18 Canadian locations in British Columbia and Alberta, which in aggregate generate annual revenues of approximately $88 million.

We will integrate the US stores into our operation while managing the Canadian group separately.

Our plan is to employ the same Project Red strategic approach to enhance the Canadian business that we utilized so successfully a few years back here in the States with Red Robin.

Leading our efforts will be Denny Post, who in addition to our Chief Marketing Officer role is also being charged with running our Canadian operations as the President of Canada, spearheading that integration.

She will be supported by our experienced and proven operations team who will work closely with the corporate office in Vancouver to implement Project Red and ensure as seamless a transition as possible.

Most importantly we intend to respect our longstanding Canadian guests and make decisions that will further cement their relationship and affinity to the Red Robin brand.

As an organization we're thankful to have sufficient bench strengths to support these integrations, thus allowing the team members in these restaurants to continue serving their guests without distraction.

With these acquisitions we will be realigning our senior operations team by increasing the number of Regional Vice Presidents from its current level of six to eight.

This will reduce the average spans of control and provide greater career growth for a couple of our Regional Operations Directors, too.

In addition to Red Robin Gourmet Burgers' expansion, we are well positioned for our Red Robin Burger Works development.

We have four of our updated Burger Works 2.0 sites in development in downtown Chicago and Washington DC.

In addition, we closed one of our original locations which was in a low traffic satellite location on an urban commuter college campus here in Denver.

The 2.0 prototype is much more closely aligned with the flagship Red Robin brand.

Red Robin Burger Works development will continue in dense, urban areas in downtown business locations with heavy daytime traffic for the foreseeable future.

With that, I'll now pass it over to Stuart.

Thanks Steve, and good morning everyone.

After giving a quick summary of our first quarter results, I will spend a few minutes covering our capital deployment activity, and then provide additional color on our outlook for the remainder of 2014.

Earnings per diluted share were $0.82 in our 16-week first quarter, an increase of 24% over last year, which exceeded our expectations.

The outperformance resulted are primarily from greater than expected increase in the average guest check, along with a quicker normalization of our new labor management system.

These positives more than offset the weather-related headwinds that others have talked about and acquisition-related costs.

Total revenues increased 11.1% to $340.5 million, while adjusted EBITDA increased 13.6% to $37 million, and first quarter net income rose 26% to $11.9 million compared to a year ago.

If you'll refer to Slide 7 of the supplemental, comparable restaurant revenue grew 5.4%, which was comprised of 0.5% increase in traffic, about 1.4% increase in price, with the remaining 3.5% due to mix shift and increased sales of add-ons.

As Steve mentioned, our expanded Finest Line of burgers resonated with guests, and complemented the ongoing sales increases of adult beverages, appetizers, and desserts.

Our traffic growth also continued to outpace the industry.

While absolute growth was below what we expected, our traffic growth still outperformed our casual dining peers by 350 basis points, as Steve mentioned.

We attribute about half of the outperformance to our added media and the remainder to other marketing and engagement enhancements that we've made over the past year.

Remember that we were off-media most of the first quarter of 2013 as we were revamping our media strategy and producing new creative.

Our restaurant-level operating margin increased to 22.4% in the first quarter from 21.5% a year ago as a result of the flow-through of the higher average check and effective labor management more than offsetting the increased commodity cost and wage inflation.

Our new labor management system which Steve discussed was adopted by our managers more quickly than we expected.

The labor standards that are behind the scheduling provide custom schedules to each restaurant based on their unique mix, and enables us to update those standards in real time for any changes in procedures, recipes, or sales mix.

Depreciation, G&A, selling, and pre-opening expenses were together generally in line with our expectations for the quarter, except for approximately $600,000 of acquisition-related expenses.

I now would like to spend a few moments discussing our capital deployment strategy following the announcements of our franchisee acquisitions.

Over the past four quarters we have generated $113 million of adjusted EBITDA, as you can see on Slide 12 of the supplemental.

With taxes and interest around $13 million and maintenance capital of $10 million to 15 million a year, we have about $85 million of cash flow annually to deploy for growth at the appropriate returns.

Further, our debt to trailing four quarter EBITDA at the end of the first quarter was about 0.8 times, so our leverage also provides us with the flexibility to pursue value-enhancing opportunities as they arise.

We anticipate making around $70 million of growth investments this year.

The primary investments in this regard are in new restaurants and in remodels under our brand transformation program.

We typically achieve an IRR in the mid to upper teens and cash-on-cash returns of 20% to 30% on these investments.

Further, we are making investments proving out Burger Works to meet the needs of time-pressed fast-casual guests.

We believe Burger Works has a good chance to become an additional growth concept, given our advantages of recognized quality and infrastructure leverage.

The franchisee acquisitions we announced were opportunistic in nature.

With a $48 million combined purchase price we are adding well-run units in markets where we are currently growing like Chicago and New York State, or believe there's potential for growth like in Western Canada.

The acquisition closing later this summer is comprised of 32 restaurants that have been well maintained, though have lower average unit volumes than our Company-owned units.

They have been open for an average of 15 years, and we project investing an additional $1.5 million of capital plus remodel costs over time.

We plan to fund the acquisition with our existing credit facility which has more than adequate capacity.

While making meaningful investments to create value, we have generated cash in excess of our investment needs, which we have used either pay down debt or repurchase shares.

In the first quarter of 2014 we repurchased $7.5 million of stock, and over the past year our repurchases have totaled $12.5 million.

Before covering our outlook, let me provide a quick update on our IT investments in the Oracle Fusion Supply Chain system.

Last quarter we mentioned that we were testing the system in about 35 units as we worked out some complexities the software was causing at store level.

Rather than subject our managers to continued testing, we decided to pull the software back into the lab for rework and software updates.

We won't test in-restaurant again until this work is completed, and don't have a reliable timetable when it will be ready.

As you have seen in our press release, we have made a few updates to our outlook.

Our comparable revenue guidance remains unchanged and implies lower growth in the coming quarters as the benefits of additional media roll-off and pricing moderates to 1.1%.

Restaurant-level operating margins should be near 21.4% for the year, higher than we originally projected as productivity initiatives and the leverage of higher average guest check offset headwinds from commodities, minimum wage, and healthcare.

The minimum wage in California, a state which represents over 20% of our total labor costs, increases by $1, or 12.5%, on July 1 and then another $1 on January 1, 2016 for a 25% increase over 18 months.

The improvement in restaurant-level profits will be partially offset by about a $2 million increase in our depreciation related to brand transformation remodels, including accelerated depreciation related to a planned 100 remodels in 2015.

Our new store openings, we are on track to open 20 full-service Red Robins plus 5 Burger Works.

Our pre-opening expenses will be around $6.5 million, excluding acquisition costs which will be reported on this line.

Also we have increased our projected tax rate to 27.5%, as we've previously assumed that WOTC would get extended.

This has not yet been passed by Congress so we have removed this credit from our guidance.

Our guidance excludes the impact of the acquisition of the 32 restaurants pending closing of the transaction.

As previously announced, annual sales are approximately $88 million and we anticipate closing in the third quarter.

We expect around $1.5 million of additional acquisition and integration expenses coming mainly in the second and third quarters.

As I referenced earlier, average revenue per restaurant is about $2.8 million, which is about 10% below our average unit volumes.

Restaurant-level operating margins are therefore also lower.

Furthermore, keep in mind that the additional office in Vancouver, regional management, and other related overhead costs will increase G&A, and that franchise royalties will decrease.

We expect the acquisition will be dilutive to earnings per share in 2014 due to the acquisition expenses and accretive in 2015.

We will provide updated guidance including the acquisition on our next earnings call.

Now I'll turn the call back over to Steve for a few comments before we take your questions.

Thank you, Stuart.

To conclude, we're off to a solid start in 2014 as we continue to make progress on our engagement, expansion, and efficiency initiatives.

Our strategic road map is enabling us to elevate the Red Robin brand and outperform our peers, while staying true to our brand promise.

We're making progress against our goal of exceptional service, while significantly improving our restaurant atmosphere through the brand transformation project.

We are laying a strong foundation for our business, and we are building shareholder value by serving more guests, more often, and leaving them even more delighted with their experience each and every time.

In closing, let me express my appreciation to our entire team, both those in our restaurants who deliver our brand promise and those here in Denver who support our restaurants, for all their efforts, dedication, and hard work.

We look forward to working even more closely with the 2,500 team members who will officially join our organization upon closing the franchise acquisition, and I'm confident we will have a bright future together.

Now let's open it up for questions.

Thank you.

(Operator Instructions)

Our first question is from Joe Buckley with Bank of America Merrill Lynch.

Thank you.

Actually, I guess questions on two topics.

First, on the sales numbers, which were quite impressive with the traffic increase.

I'm assuming there had to be some weather impact in those numbers.

Have you guys taken a stab at estimating what that might have been for the first quarter?

Hello, Joe, this is Stuart.

Continuing in the past practice, we try not to use weather as an excuse one way or another.

So, we actually don't spend a lot of time doing analysis to try and figure out what it was.

Okay.

And then, second topic, you gave us kind of a thumbnail sketch of the pending acquisition, but just a few questions on that.

What are you including in acquisition costs?

And, like the $600,000 the first quarter, was that simply related to the New York acquisitions, or are there some expenses related to the pending 32-unit acquisition in the first-quarter numbers as well?

Joe, this is Stuart again.

Most of the $600,000 in the first quarter was actually -- it includes, obviously, the New York acquisition which closed, as well as then the other 32.

And because of the nature of that acquisition, with being the US and Canada, there's actually two different legal transactions.

So, what we've incurred so far is largely legal and due diligence costs.

There'll be a little bit more of that coming as well, as in most of the rest of the costs will be integration, including some market research.

We talked about Project Red, so we're going to do a little bit of research here in the second quarter, for Canada particularly.

And then, really, just largely some retraining and a little bit of IT costs and things like that, that we've got to bring them onto our systems here in the US.

Okay.

And I know you said the threshold-level margins, as are the average unit volumes, both below your corporate average, but can you size that all for us?

Are they at the 20% mark in restaurant-level margin?

Again, if you sort of look at it in terms of what we're acquiring, what they did last year, it's closer to the mid-teens.

Okay.

And then, just the SG&A -- level of SG&A spend against those restaurants.

I know you're keeping the Vancouver restaurant open, and you mentioned adding a couple regional VPs that is somewhat related to that acquisition, but should we assume kind of a full load of SG&A against that?

Or should there be some synergies, maybe from folding the US restaurants into what you already have?

You will definitely get some synergies here in the US where we can leverage those 14 restaurants.

If you think about it sort of in total, sort of the $88 million and you split it up, the 18 units in Canada and try to allocate it out, the G&A load of Canada will be about, I don't know, probably 5% of their sales sort of on average, if you look at Canada and together.

So together, you'll probably end up with a G&A load of everything all-in of $3.5 million on an annual run rate.

Okay.

Okay, that's very helpful.

Thank you.

Our next question is from Will Slabaugh with Stephens.

Yes, good morning guys.

This is JR on for Will.

Another fantastic quarter, congrats.

Switching gears here to the Finest line, I know that's the topic of conversation we've been focused on, and just wondering if you'd go into a little more detail about how that continues to perform?

Maybe speak to mix a little bit at the same time, and kind of have you seen that impact the tavern mix, or similar to last quarter's, mainly both mixing pretty well?

Good morning, JR, this is Denny.

We're not going to talk specific mix numbers, but I can assure you that we are continuing to see most of our guests trade from Gourmet into Finest, up the line, and each of these platforms representing what they should in terms of Value, Gourmet, and Finest.

The addition of the two permanent, D.G.B and Black & Bleu, did broaden the line -- very pleased with that.

And we believe there's still room to grow.

Great.

And, Denny, probably you can answer this one as well.

The marketing spend increase, I know you said it met expectations.

Just wondering when it was off air, were you able to leverage the loyalty program?

Is that going to be the game plan moving forward when media is on and off, leverage more of that loyalty program than usual?

Well, our overall goal is to maintain top-of-mind awareness among our guests and potential guests.

So, yes, we're trying to use the various vehicles -- be they digital, television, Red Robin Royalty, any of the other things that we participate in, use them to their best extent to maintain our top-of-mind awareness.

And so you will see those stretched out as much as possible so that we have activity virtually every week.

All right, thanks.

Sure.

Our next question is from Alex Slagle with Jefferies.

Thanks.

A question on the restaurant-level margin guidance, implies deleverage the rest of the year after we had the first quarter being a lot of leverage.

Is there something one-time in nature that benefited the first quarter, or is it really just more of a conservative same-store sales and inflation outlook for the rest of the year, with obviously the high beef costs and minimum wages and benefits?

Maybe you could walk through those pieces.

Good morning, this is Stuart.

I think the biggest impact will be the increased labor costs in California that will really impact the second half.

And, again, if you compare it to the original guidance, we had in the first quarter assumed that we would have some additional cost related to the labor rollout that we didn't have.

So, we got those benefits quicker than we thought, and the rest of it was really built into the guidance for the rest of the year.

You will continue to get some commodity increase, more in the back half than we had in the first half, as well.

Okay.

Does the -- in terms of your previous comments about cost of goods and labor, each probably being up a little bit year over year, is that still the outlook, or is the labor management deployment, that rollout --

It's still the outlook, both in the cost of goods, both from a commodity as well as a mix impact.

So the Finest burger from a COGS impact obviously has a bigger piece -- and then the California labor, too.

Okay.

And, what was the commodity inflation in the first quarter, and then expectation for the second?

Any color on that?

Yes, the first quarter was around 2.5% and we think, for the year, it'll continue to be still around 3%.

Okay, thank you.

Our next question is from Alton Stump with Longbow Research.

Yes, thank you.

Good morning, and great job on the quarter.

Just a follow-up on the input cost front.

I think it was actually up in the 2.5% to 3% range that you had guided to previously for the full year, and you mentioned that it's in that range still, I guess.

How is that the case with the recent beef cost inflation?

Any color on where you're hedged at, or how much you're hedged on the commodity front, namely beef?

If you look -- again, we don't -- ground beef, we buy all fresh ground beef and we buy it on the spot market.

Our view of it is, is when you go out and try to buy forward that you're usually paying such a premium over the current market price that whatever short-term benefits you could get, long term you'll end up paying more.

So we buy -- ground beef is on the spot.

The rest of it, if you look in our supplemental, there's a schedule out of our commodity contracts by group, and we're pretty well locked in really through the fall on most costs, and in the progress of negotiating new bread contracts and a few others, that's the next one burning off in June or July.

Okay, that's helpful.

And then, one quick follow-up.

I realize that it's obviously one quarter into the year, so it's always difficult to look or change your full-year comp growth guidance, but was impressed that you were able to put up a positive guest count, even with harsh weather in the first quarter.

Any color on how you think guest count, how that will trend over the course of the year to get to that low single-digit comp guidance?

Is that looking for a flat number internally, or would you expect it to go down again, any color there?

Yes, guest count growth is -- this is after -- in the scheduled dining industry that's been negative for the last X number of years and, on a same-store basis, about 2%, again as the industry continues to add new stores faster than the population growth, that flat continues to sort of be the new up.

So, if we're going to be plus or minus 0, we're happy with those.

I will point out that comps get tougher, right, versus what we're cycling over a year ago, from a guest count perspective.

And then, also, just as I sort of touched on in my prepared remarks from a same-store sales basis, first quarter benefited from the extra media.

We are burning some price off, we got about 30 basis points of price in the first quarter that'll be burning off.

And then the other thing, probably on a mix standpoint, is appetizers [that we] rolled out to $3, $5, $7, $9 in May last year, so we'll be lapping that.

Okay great.

That's helpful.

Thanks, guys.

Our next question is from John Glass with Morgan Stanley.

Thanks.

First, can you just talk about the labor productivity?

Sounds like you got a higher adoption and faster adoption.

Are we seeing, in the first quarter, the full benefit now then, or did it kind of accelerate the adoption through the quarter so it could, in fact, improve in subsequent quarters?

Yes, John.

This is Eric.

We saw -- we rolled it out in October, November of last year.

So, and it was very well adopted by our operations teams in the field.

So we did probably realize the full benefit in Q1 of this year.

John, the other thing I'd add is -- going back to Project Blueprint that we often talk about on these calls, is if you look at what that allows us to do now.

So, as we change procedures in the restaurant -- we've just gone through and done a study on pre-portioned items in the restaurant -- as we make those labor changes we can affect that labor model right away.

So, the tool enables us to continue to identify savings and inflow those through.

You mentioned there was an advantage this quarter because your advertising was increased, particularly versus a year ago where you're still retooling it.

Can you remind us what the second quarter comparisons are from an advertising standpoint?

Yes.

They will be pretty consistent (multiple speakers) for the remainder of the year by quarter, pretty consistent in terms of weeks.

Both rate and weeks.

Yes.

Okay.

And then, finally, I think you said 100 remodels in 2015.

Is that correct?

And I think that's an uptick from what you had previously talked about, at least 50 a year.

Is there a reason for that?

Or -- clearly there's greater confidence -- is the sales lift better?

Or is this just, now that you've got better visibility, there's no reason not to accelerate?

So, it's probably more your latter -- there's greater visibility, there's no reason not to accelerate.

Steve mentioned we've finalized what we think is the exterior that seems to be working well, and initial feedback on that is good.

And, really, our goal is to get the whole system done by the end of 2016.

And the guest feedback continues to be very strong.

Great, thank you.

Our next question is from Jeff Farmer with Wells Fargo.

Great, thank you.

Just keeping on that topic.

So, I think you've had the first 12 re-imaged restaurants have been done for something like 18 to 24 months at this point.

I am curious how the sales and margins have trended.

And I guess, more importantly, what you've learned about how your customers are sort of reacting to the three zones in the restaurant?

Have they learned quickly?

What's sort of the anecdotal feedback been?

Any other highlights on how these restaurants are working would be very helpful.

Jeff, I'll let Stuart speak to the specifics around what we've seen from a financial standpoint, but I can assure you that the guests -- we've done what we call dine-alongs, where we go in without them realizing we're from Red Robin, visit competitors in our own restaurants and get their impressions, as well as some quantitative feedback, pre, post on all of these locations -- and the guests really appreciate, particularly, the zones.

They love the fact that we still welcome our core guest of families and do constantly update a job of relating to small children and welcoming those families in.

But, for the adult parties, which still constitute the majority of our guests, they really like the opportunity to be seated in the bar, to be with other adults, and to have a different experience, while still enjoying the same great burgers.

And then, again, that gathering space that we've designed operates as a flex in between the two.

We're also beginning to learn about patios and some other things in this overall development.

So, all in all, guest feedback has been extremely strong.

Stuart, you want to talk to the results?

Yes, just in terms of the sales impact.

We talked about most of the impact is really on guest counts, and what we saw from the original 12 is, once they anniversary, we continued to see a little bit of actually outperformance versus the control group, which is better than what we expected.

Certainly usually when you hit the anniversary you sort of plateau.

So, relative to that control group, continued to perform well.

And that's one reason we went ahead and pulled some of those brand transformation elements forward, and starting to see the whole system benefit from some of the service changes in plating and presentation.

And that anniversary experience also speaks to guests discovering the new environment and beginning to appreciate it and use it for other occasions.

All right, that's helpful.

And just one other follow-up.

I think my understanding is that something along the line of 50% of your market development in 2014 is going to be in sort of less developed, or less mature markets -- I think it's Florida, New York, New Jersey, things like that.

So I'm curious if we should expect maybe a little bit of sales or margin headwind associated with sort of a little bit more rapid development of these newer markets, or if that's just a little bit overblown on my part and you shouldn't see anything really in terms of a margin or a top-line pressure with that development strategy?

Jeff, I think that's completely fair.

What we find is, as we move into new markets, while there may be initial pent-up demand for -- you get a little bit of honeymoon sales -- that over time the annual -- the average unit volumes when we move into a new market is a little bit lower than our legacy markets.

And it just takes us a little while to build that up as we build the brand recognition and market penetration, start to really be able to leverage Royalty.

It's hard to do that when you just got a couple units in a marketplace.

So, we saw that when we entered the Washington DC/Baltimore market a number of years ago, and continued to build that out.

We expect to have the same pattern in New Jersey and New York, New England, and Florida.

That's helpful.

And just final one, sorry.

I think it is roughly 50% new market development in 2014?

Can you put that in perspective?

Yes, that's about right.

And, of this year, I think about 6 or 7 of those also will be mid-size of the 20 this year as well.

Actually, it may be 8, I think, of this year's 20 are the mid-size units.

I guess my question was, relative to 2012 and 2013, is that a big step up, that 50%, or were you running a similar number in terms of new market development in 2012 and 2013?

It is a step up.

Okay.

All right, thank you.

Our next question is from Bob Derrington with Wunderlich Securities.

Yes, thank you.

Stephen, can you give us a little perspective on the consolidation within your franchise group?

Clearly, these are some pretty sizeable acquisitions I guess in total, these two that you've made this year.

How should we think about that going forward?

Are there more opportunities out there, or do you suspect that you might pause after these and digest them for awhile?

I think it's safe to assume that we will pause and digest these.

Going forward, our franchisees can always look to us as a potential exit if that's what they so desire.

We encourage them to continue to develop the brand in their operating footprint, and of course all of them are looking at the potential capital expenses of the brand transformation, and so that's kind of what's generating the activity right now.

Along the line of the brand transformation, the fact that you're moving from 50 to 100 clearly sends a strong signal to us, I guess, that you're pretty satisfied with the returns.

Can you give us some kind of color on how should we think about the sales lift on those stores as they come into the pool?

I think directionally you talked about a mid-single digit comp in the past.

Is that reasonable?

Bob, this is Stuart.

Again, in going back to the brand transformation remodels, again while the initial group that we did we saw sort of 5% to 6% guest count lift in those.

As we pulled some of the elements forward, we're probably not going to see quite as strong a lift in the going forward, you get that big bang effect, you typically get a stronger lift.

So we expect to continue to see sort of a, call it a 4% to 4.5% lift, all it is on a mix basis, right?

Some of these will be newer units as you go into some of the newer markets, and then that will give us the 12%, 13% IRR that we need to get on these, even maybe a little bit more -- initial ones, we're getting closer to a mid-teens IRR, and there's no reason we don't think we can get that, again as we do some newer units and try to make sure we're moving -- transforming entire markets now, right?

So you'll get some that do really well and you get some restaurants where you'll get lower growth because they're already at capacity and we just can't add a patio.

So we're trying to go in and put patios in and things like that where it makes sense as well.

Got you, very good.

Thanks, guys.

I appreciate it.

Our next question is from Chris O'Cull with KeyBanc.

Hi.

This is Dave Carlson actually on for Chris today.

Denny, question for you.

When you think about technology with the brand, do you think tablets are a good fit for the Red Robin position?

As we talked about last quarter, we are certainly open to them, particularly if they deepen the connection between our guests and our team members.

And we're doing some experimentation now, learning about it, and we'll approach it as it benefits our brand and our guest experience.

Okay.

And then, on the guest count stuff, you guys said that, in terms of the relative performance, about half of it was driven by the increased media, the other half from the guest engagement, things of that nature, over the past year.

Is there anything else that drove guest count gains during the quarter in your opinion?

And why would we not see this continue?

I know that you guys are lapping some more difficult comparisons on traffic, but what could stop this from continuing at this pace?

Well, again, guest counts is the toughest thing to get right now.

It's a real battle.

I would say, back to kind of the earlier part of your question, Red Robin Royalty continues to be an effective tool for us, and, as we've spoken to, we don't get into the details of it because it's a closely held opportunity for us.

But we get smarter and smarter about how we target the segment.

And I think, to the extent that we can continue to build that program and use it over the coming years, it will continue to provide advantage for us.

Great.

The other thing I continue to caution everybody on is, it is a competitive environment out there, right, so what could stop us is a competitor doing something else that really -- that resonates with guests or does something that -- do something to really drive their sales or guest traffic that maybe we don't react to.

I know there's lots of burger tests and lots of chains around this country.

Sure.

The final question.

On the acquired units, the 4 and the 32, when do those enter the comp base?

Those will enter, I think it's after the five -- same as the regular comp base, after five full quarters of operation.

So (multiple speakers) entirety of both periods.

Great.

So not immediately.

Okay, thank you.

No.

Our next question is from Peter Saleh with Telsey Advisory Group.

Great, thanks.

Denny, I want to ask about the beverage program.

In early February, you introduced some 79 new drink options, with a lower price point.

How is that performing, and what's the alcohol mix looking like these days?

Our alcohol mix is up modestly, year over year, about 10 basis points.

PPA is up higher, I think we're about $0.08 is what we're saying, in terms of PPA.

And that really reflects the program, which is we've traded heavily discounted lower margin alcohol-only guests during Happy Hour for the ability to serve every guest, every time, every day, every hour, every seat in the restaurant, not just the bar.

So, we're building this program over time.

And I think as guests become, again, aware -- because this isn't something we've marketed outside the restaurant other than some inclusion on our website -- that we have terrific drafts and bottles beginning at $3.50, that we've got wines and some of our call beverages at $4.50, and a great Sauza Gold Margarita at $5.50, as they become aware of that and as they begin to trust us for that and it becomes part of their routine and habit visit to Red Robin, we'll see that growth continue.

In the interim, I can assure you that it's a good move for us.

Great.

And then, Stuart, on the acquisitions this quarter and what's going to be happening this summer, were all these restaurants paying the standard royalty rate, or were they below the average rate?

There's a little bit of difference on the blended average post, around 3.5% sales.

Okay, very helpful.

And then, lastly, on menu pricing for the rest of the year, just given the commodity inflation, or what you're seeing right now, do you plan to take more, or do you plan to just let your pricing kind of roll off for the rest of the year?

We don't plan to take anymore.

We always, obviously, have that option if the environment changes, but right now we're trying to do the right thing for value for the guests and not take any more price.

Great.

Thank you very much.

Our next question is from Bryan Elliott with Raymond James.

Thanks.

Good morning.

A couple clarifications.

First, the 3.5% royalty that you just mentioned, Stuart.

Is that on just Canada, or is that on the entire --

It's on the $88 million.

Okay.

LCI.

A couple other clean-up questions.

The acquisition cost, the $600,000 you called out and then the projection, are those mostly in pre-opening, did you say?

Yes, so annually for the year, we expect -- or total we will expect there to be around $2 million, $600,000, we're going to bucket into that pre-opening and acquisition.

So it stands out a little bit more.

So again, $600,000 was in the first quarter and the remainder will hit largely in the second and third quarter, probably actually a little more weighted to the third quarter with the acquisition -- with the integration timing, so you'll see that hit in that line.

Okay.

Okay, that's helpful.

And, Q1 CapEx, did I miss that?

Yes.

It's in the supplemental.

Okay, I'll look it up.

Don't worry about it.

It's about $32 million.

All right, thanks.

And then, I guess, Denny, big picture question.

I don't know if you've had a chance to go back and maybe do some deeper research or anything on kind of understanding sort of the traffic gains, or do you think you -- maybe you're not in a position to do anything other than guess, but how much might be new discovering customers and how much might be existing fans coming more often?

Is there a way to think about that?

The best I can offer you is our research tells us there's a larger base who are now open to the prospect of coming to Red Robin.

So I think, with our advertising and other efforts, we're broadening our appeal.

And I certainly think that's what's starting to show up in our modest guest-count increases.

Well, it's damn good relative to the industry, even if you characterize it as modest.

Well, I'm sticking with -- I love Stuart's flat is the new up.

Yes.

Yes, that's my --

All right.

Thanks a lot.

Thanks.

Our next question is from Steve Anderson with Miller Tabak.

Yes, good morning.

I know you referenced the testing, you're suspending the testing for the new supply chain system.

And, just want to see, modeling out the next few quarters, what kind of impact that's going to have on the SG&A line, you're foregoing that expense for the time being.

Yes, Steve, this is Stuart.

Most of that was really in capital, so there won't be any meaningful change in the G&A line by -- about bringing that back into the lab.

All right, thanks.

(Operator Instructions)

It appears there are no further questions at this time.

Mr. Carley, I'd like to turn the conference back to you for any additional or closing remarks.

Thanks, everybody, for your time this morning, and we look forward to talking to you here in another couple months.

Have a great day.

That concludes today's conference.

Thank you for your participation.