Texas Roadhouse Inc (TXRH) 2007 Q4 法說會逐字稿

Good day, and welcome ladies and gentlemen, and thank you for standing by. Welcome to the Texas Roadhouse Incorporated fourth quarter 2007 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided for you at that time on how to queue for questions. I would now like to turn the program over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse. Please go ahead.

Thank you Milicent, and good evening everybody. By now everyone should have access to our earnings announcement released this afternoon, for the fourth quarter and the year ended December 25, 2007. It may also be found on our website at TexasRoadhouse.com under the Investors section.

Before we begin our formal remarks, I need to remind everyone, that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance, and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC, for a more detailed discussion of the risks that could impact the future operating results, and financial condition of Texas Roadhouse.

On the call with me today as always is G.J. Hart, our CEO. G.J. is going to provide some general comments on the business, and then I will walk you through the financials, and then we will open it up for questions. G.J.?

Thank you Scott, and good evening everyone. First off, let me thank our team members for a great 2007, especially with all the challenges facing the industry today. The fourth quarter was tough, but overall the year was very solid, with comp store sales growth of 1.4%, and EPS growth of 15%, despite an impairment charge we incurred during the fourth quarter. During the year we opened 32 new restaurants, and completed our second round of franchise acquisitions, in which we acquired nine franchise restaurants. This pushed us past the 200 store count on the company side, with a system total approaching 300. In fact, company operating weeks increased over 24% for the year.

Now let me touch on a couple of the highlights from the quarter. We were able to generate diluted EPS of $0.09 which was $0.01 lower than the prior year. As was mentioned in the release, we did have a negative $0.014 impact from an impairment charge in the current quarter. In addition comparable restaurant sales were 0.8% less than last year, and restaurant operating costs were 134 basis points higher than last year. Versus our own expectations, sales for the fourth quarter were lower than anticipated, and food and labor costs were both higher than anticipated, particularly in December. Regarding sales, as I mentioned, fourth quarter comparable restaurant sales decreased 0.8%. Our average check was up about 1%, but traffic was down just under 2%.

On the check side of things, we continued to give up about a point, due to negative mix shift, about half of it being attributable to alcoholic beverages, with the remainder beyond trade driven. Regarding pricing, we overlapped 0.8% at the end of October, an additional 1.6% at the end of December. So far this year, we have taken approximately 1.1% of pricing, comprised of 0.5% on soft beverages, taken at the beginning of January, and 0.6% on various menu items, which have been rolled out over the last week or so.

On the margin side of things, restaurant margins were 134 basis points lower than last year's fourth quarter. The pressure was driven by commodities and labor, which affected us most in December, and continues to affect us today. From a G&A perspective, we continued to leverage our base business, as we had 110 basis points of leverage for the quarter, and 61 basis points for the year. Scott will walk you through those details. On the development side, we opened ten new company restaurants during the quarter. Our new restaurants continue to open with healthy sales volumes.

Now let's talk about our plans heading into 2008. As we announced in our release, we have moderated our expectations for 2008, which we believe is the right thing to do given the current environment. Accordingly for the year, we are estimating diluted EPS growth of between 5% and 15%, including the impact of an additional operating week, which could add $0.01 to $0.02 per share, or two to four points of EPS growth.

I know this is a fairly wide range so let me spend sometime helping you understand why that is, and how we're looking at 2008. There are three main variables -- inflation, pricing, and traffic.

In terms of inflation, while we experienced cost escalations all year, driven by food and labor, those pressures kicked up a notch in the fourth quarter, and remain higher into 2008. As a point of reference for much of the year, commodity inflation was running in the 2% to 4% range. However, during the fourth quarter it began increasing, ended up around 6% in December and January. Throughout this period, we started seeing the variable items like produce and dairy go against this, with wheat based products taking a big spike as well. On top of food inflation, labor also continued to increase, driven by wage rate pressures. We estimate that overall labor inflation right now is somewhere in the 4% to 5% range. Add to that increased pressure from items like utilities, and we are simply experience a higher cost structure, than originally projected.

So in 2008 what can we do to help manage the inflationary pressures? On the food side, we have locked in our protein costs, with one exception. We elected to float about 25% of our beef costs. This decision was based on the premium built into the futures market, and that's beneficial to us right now, although we'll have to see how the rest of the year shakes out. Also, we are working on getting better yields on our rib-eyes and ribs, by working with our vendors to provide us product in line with our original specifications. While we are optimistic that this will result in better yields, and better food costs, without any impact on the guest experience, we will continue to evaluate as to what extent this plays out.

With regards to labor, I can tell you more about what we are not doing, versus what we are doing. As we said before, we are not asking our operators to cut back staffing, because this is a time we believe our competitors will. We look at it as an opportunity to continue to do the right thing for the long-term success of the business, and to help steal share. As far as continued labor inflation is concerned, the easier part to quantify is the impact of recent and future tip wage increases.

The more difficult part to quantify is increases in federal and state minimum wages. To that point, while we have very few minimum wage employees in our restaurants, it is difficult to quantify what we call compression, that is, if minimum wage increases $0.70, what kind of impact does that have on those say, making $9 an hour? I can tell you that it does have some effect, just difficult to tell how much, and when. So as you can see, there are a lot of unknowns, as it relates to both labor and commodity inflation, that we will continue to evaluate this throughout the year.

The second variable is pricing, and how much of it flows through. We do have approximately 1.1% pricing in our menu as of today, after taking half a point at the beginning of the year on soft beverages, and 0.6% on various menu items during February. As will you recall, during 2007, we discussed how not all of our pricing flowed through due to mix shift. Keeping with that theme, we'll have to see how much flow through we get in 2008.

As far as our philosophy on pricing is concerned, our pricing would be, our preference would be not to take any. But reality tells us that inflation is here to stay, at least for awhile, and we have to evaluate and consider the pricing needed to mitigate these pressures. Let me assure you, we are being very cautious about pricing, and not just simply taking increases to boost near term performance. Consequently, we have a few menu items in test today, with different pricing levels in various markets. We are gauging our guests' reaction, and evaluating them over the next couple of months. At that time, we'll see what the inflation outlook is, and make our determination as to our course of action.

The third variable is traffic. The same inflationary pressures hitting us, are also hitting our guests. We are cognizant of that fact. We believe that our value proposition will continue serving us well in this environment, and we remain committed to our value positioning, and operations focus. As we have said many times before, tough times are an opportunity for us to differentiate ourselves, and steal share from our competition. This is exactly how we were looking at this period, and while we are being so methodical about pricing.

So for 2008, we believe we are doing the right thing for the long-term success of this brand. On top of this, we felt it was prudent to take a more conservative stance as it relates to the use of our shareholder capital. As such we are reducing our new restaurant development goal for 2008, to approximately 30, which is a couple less than 2007, but still good growth. We are in good shape on our development, and are confident that our current pipeline of locations will generate returns in excess of our cost of capital.

In conjunction with the slight development slowdown for 2008, our Board of Directors authorized a $25 million stock repurchase plan, as a means for us to return some capital to our stockholders. We will look at this, much like we do the acquisition of franchise restaurants. That is, we will be opportunistic concerning when, and how many shares, we repurchase. Speaking of franchise acquisitions, we still are in ongoing talks with various parties. There are no material transactions imminent, but there is a possibility you could see some franchise acquisitions yet this year. I will now turn the call over to Scott, to review the financials.

Thanks G.J., during my review of the fourth quarter, please note that many of the numbers I will mention are listed in the schedule of supplemental financial and operating data, that as always, was included in the press release.

Starting at the top of our income statement for the fourth quarter of 2007, as compared to the same period in 2006, revenue increased 22%, while company-owned restaurant sales increased just under 23%. The growth in company owned restaurant sales was driven by operating week growth. As G.J. mentioned earlier, comparable restaurant sales of company owned restaurants, decreased eight-tenths of 1%, versus an increase of 3.3% last year. For the quarter, our average check increased 1%, as our traffic was down 1.8%.

From a new restaurant sales perspective, I'll offer a little more color on average weekly sales. For the quarter, average weekly sales for restaurants opened during 2007, was just under $72,000 per week, which was slightly higher than the overall company average. For the year, average weekly sales at restaurants opened during 2007, are running just over $2,000 higher than the overall company average. Returns at these sales levels, are well in excess of our cost of capital.

Franchise royalties and fees were $2.4 million which is $400,000 lower than last year, primarily due to the acquisition of non-franchise restaurants, during the third quarter of 2007. In terms of cost as a percentage of sales and as G.J. mentioned earlier, restaurant operating costs were 134 basis points higher than last year, and I'll touch briefly on the specific lines. Cost of sales was up 90 basis points. During the quarter we experienced higher dairy, produce, and nonprotein related food costs, which more than offset our pricing. Dairy costs were high all quarter, and have continued on that trend, heading into 2008. Produce costs are up as well, although not as high as dairy. On the nonprotein related food items, it's really bread mix or wheat-related products that are up for us.

Restaurant labor costs were up 109 basis points. While negative same store sales growth certainly did not help, we continued feeling pressures from wage rate inflation, driven at least in part, by various state tip and minimum wage rate increases. For the quarter, the majority of labor pressure resulted from front of house labor.

Rent expense line was basically flat with the prior year. Other restaurant operating expenses were down 61 basis points versus last year. The biggest driver of this unfortunately, was manager and market partner bonuses. Given that sales and restaurant margins were down for the quarter, so were partner bonuses, as a percent of sales. In addition we continued seeing benefit on this line, resulting from buying outs in equipment leases, about this time last year, so we had lower equipment rent, which was offset by higher interest and depreciation. We've now wrapped this benefit, so this won't a benefit going forward, and partially offsetting these benefits were increased utilities, supplies, and other costs due to inflation, in the deleveraging associated with negative comp sales.

Similar to last quarter preopening expenses were about $300,000 less than last year, due to the timing of new restaurant openings. Depreciation and amortization costs were 84 basis points higher than last year, driven primarily by the cost of new restaurants.

The next line item, impairment, is a new one for us. For the quarter, the $1.7 million related to a charge, incurred on one restaurant, as we are now estimating its future cash flows will not support its carrying value. Due to the materiality of the charge, we've decided to create a new line on our income statement. Going forward, this line will include both impairment and closure costs. For 2006 we reclassed impairment charges, from other operating costs. The $380,000 for the fourth quarter and $101,000 that was incurred in the third quarter of 2006, both related to charges on restaurants which we relocated during 2007. Going forward, and given the size of our system, we do anticipate we'll have some more of these costs, as we proactively manage our real estate portfolio.

G&A expenses as a percentage of revenue were 110 basis points lower than last year, due in part to bonuses being 32 basis points lower, primarily as a result of us falling short of our initial plan. In addition, as we discussed last year, the fourth quarter of 2006 included a 25 basis points negative impact, from re-classing of certain fees, from the income tax expense line into G&A. So it was a positive force this year. Other than these, we had a few miscellaneous things to the good and the bad, and the rest was really leveraging of the base business.

Our effective tax rate for the quarter was 31.2%, which was lower than what we had been running, and lower than projected, due to margins coming in lower than anticipated. Thus, credit, specifically our FICA TIP and WOTC credits, had a greater impact as a percentage. For 2008, we are estimating our income tax rate will be approximately 35% for the year. Our weighted-average diluted share count was about 76.7 million, basically in line with last quarter.

Now on the full year 2008 guidance, as noted in the release, and as G.J. mentioned earlier, our 2008 guidance is for diluted EPS growth of 5% to 15%, which includes the positive impact from the extra week that we'll have during the fourth quarter of 2008. Our forecast does include the following two assumptions. First, we'll open approximately 30 company restaurants, which when combined with 2007 openings, and acquisitions, we estimate will result in over 20% operating week growth. Second we'll generate comparable restaurants sales growth of flat, to up to 1% for the full year. While this is a broader range than we typically provide, we believe it's prudent given the inflationary and consumer pressures that G.J. discussed with you. Whether we are on the high-end or low end, fully depends on what inflation turns out to be, from additional pricing we might take, combined as always with what traffic turns out to be. Now I will turn the call back over to G.J.

Thank you Scott. We are both thankful and fortunate that we have legendary team members, and a strong highly valued brand with significant development opportunities. 2008 has the look of a tough year, and we believe we are doing the right thing for the long-term success of the business, by taking a slightly more conservative approach. Even so, we are still projecting to grow operating weeks over 20%, and certainly still view ourselves very much in a growth mode. While you have heard us talk about things like slightly more conservative growth for 2008, and implementing a share repurchase plan, you have not heard us talk about changing our long-term growth model. Simply put, we are just being more prudent in the short term, given the environment.

Before opening the call up for questions, I do want to take a moment to thank all the Texas Roadhouse team members for their continuing commitment to offer legendary food, legendary service, to each and every guest that we serve. Now let's use 2008 as an opportunity for Texas Roadhouse to further distance itself from the competition. With that, that covers our prepared remarks, so operator if you would, please open the lines for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from David Tarantino, with Robert W. Baird.

Hi, good afternoon. First question, G.J., you mentioned that you're not changing the long-term growth model that you outlined in December. Should that be, should we assume that you might reaccelerate the unit growth rate as you look out into '09, or I guess a follow up to that would be, what are you looking for in '08, to determine what type of rate you might grow in '09?

Hi, David. You know, I think right now it's uncertain as to what we will do in '09. We first have to see what '08 brings us. So as we said in the remarks, we really need to analyze what inflation, what pricing looks like, all the things that we talked about. Again, as we said, we are not changing that long-term growth strategy, so you might see us go back to that, depending on what the results look like in 2008.

Okay, thanks. Just a question on some of the assumptions that are embedded in guidance. In terms of pricing that you've already taken with the 1.1%, have you assumed any additional pricing in the guidance for the balance of the year?

No.

And then a follow up to that, have you assumed any benefits related to the initiatives related to food yield, or the new labor module in the guidance?

David, this is Scott. I think what our message to you is, that we are not prepared at this time, pretty much for competitive reasons, to talk about what pricing we may take, or may not take, going forward as there's a lot of things going on in the industry that we are seeing with our competition. So I think we are going to keep that pretty close to the vest. But chances are we are going to do something.

And I think on the yields it's really too early to tell. We are optimistic about it sitting here today, as we are somewhat optimistic about the floating beef costs that we have. But we don't have specific guidance for any of those items that we are willing to share with everybody.

Okay. Thanks.

Our next question will come from Jason West with Deutsche Bank.

Can you guys talk a little bit more about the food and labor cost inflation numbers that are now embedded in the '08 guidance? I think the numbers sound a little more conservative, or bearish than where you guys had been indicating in December, then in January, I think you said around 1% to 2% on food, and then 2.5% to 3.5% I believe on labor, just wondering sort of why those numbers now seem to be a lot higher?

Well, Jason, this is Scott. We've seen continued inflation on the dairy side, and the produce side, and I think we felt by this time, the dairy side would start to moderate, we really haven't seen that piece of it. And then secondarily, we do have a couple of big wild cards which makes the range fairly large, with the beef that we do have floating, and the yields on the new, newly spec'd rib and the rib-eye products. So again, that creates a pretty wide range for us, which is somewhat driving some of the earnings range that we are seeing.

On the labor side, it's a little more predictable for us, that being probably in the 3% to 4% range. It really just depends as G.J. mentioned how much flows through on the federal and state minimum wage increases. We kind of have a pretty good idea on the tip wage side. As an addendum to that, there are some states, from time to time, that sort of get in the game so to speak, they kind of pop in and decide they're going to change the tip wage, or minimum wage. We don't know that today, but that might happen three months from now, for example, and it's happened in the past.

So all that said, probably the labor a more realistic inflation range is probably in that 3% to 4%. So when we are sitting here right now with pricing totaling 1.1%, you can see there's a bit of a gap there, between those two.

Then just broadly, I think in the past you guys have given us a little help on the restaurant margin, how you see that playing out. Can you talk you about where we might see restaurant margins fall out for the year?

We are not going to give any specific guidance to that, but suffice to say, that if labor inflation does turn out to be 3% to 4%, and if you have food inflation closer to 2%, our pricing needs to be well above two, probably closer to three, for us to hold margins flat. If it's, if our pricing is less than that, like it is now, chances are margins would be a little bit lower. Again a lot of it depends on how much fluctuation we get in the beef cost, and also to a certain extent what our traffic trends end up being.

Got it. Thanks a lot guys.

We take our next question from Destin Tompkins, Morgan Keegan.

Scott, a couple questions on development. Can you give us some guidance on kind of the timing of new restaurants, you mentioned over 20% of operating wheat growth, did you reduce the 35, from the 35 back to the 30 units, did you take some of that out of the back half of the year, or the first half of the year?

Hello, Destin, absolutely the five reduction is definitely out of the last quarter of the year. Everything else will be relatively evenly spread out amongst about half first half of the year, half second half of the year, from the development piece.

Can you give us an update on what your CapEx outlook is for 2008?

It would be close, pretty close to this year, within a few million dollars of this year, which was about $101 million excluding acquisitions.

Okay. And then on the average weekly sales, Scott, it looked like they were a little bit lower than what you had indicated for the class of 2007. Is it that the restaurants that had been open more than a year are falling off, or were the acquired restaurants at a lower volume, and they are pulling down the average unit volumes? Can you give us a little clarity there?

I think if you're saying that the average unit volume growth was less than same store sales growth, that's kind of been the trend all year. And, yes, that's saying that the new stores that are opening, once they get past their honeymoon curve, are coming into the system a couple thousand dollars below the system average. So even for the 2007 ones, they are not out of their honeymoon curve yet, so you bake in the honeymoon curve if you're projecting them in '08, they are probably going to be a few thousand dollars less than the system average, once they come out of their honeymoon curve.

Okay. Great. One more quick one on the quarter to date trend, have you been able to tell what the mix impact has been, now that you've lapped some of the previous pricing?

The mix impact looks like it was about seven tenths down which is a little bit less than what it was running before. It was more like 1.1, 1.2 before.

Okay. Great. Thanks.

Jeff Omohundro, with Wachovia your line is open, please go ahead.

Thanks, just a couple questions. First, in that guidance on the 5% to 15% EPS, is there any share repurchase assumed there?

No.

And then next, on your, on the momentum from December into January, is that performance that you've provided regarding the down 1.5%, is there much of a shift from December, or is that a continuation of that trend, or how has that changed?

Jeff, I will tell you in December our comps were negative two. So we've actually gotten a little bit better in January than we were in December. And December we had a little bit of benefit from Christmas being, I think it was on Tuesday versus Monday, which means Christmas Eve was Monday instead of Sunday, so we had a little bit of benefit there and we were still down two.

It feels like we've been impacted more by weather, particularly in December, January. We haven't quantified it, but anecdotally, it seems like there's been more snow in inches I guess you could say, in those parts of the country that get a lot of snow, than we had last year, or even the year before that.

And then lastly, just wondering if we don't see much of an improvement in this macro environment, are there new local store marketing initiatives that you might pursue? And at what system side would you consider perhaps pursuing something more broadly than a local store?

Jeff, it's G.J., let me comment on that. I think at the last call I talked about us getting much more intensity around our local store marketing effort, and that continues. We are not changing our strategy relative to being a local home town favorite, and really adding that intensity to being more creative in sharing best practices of the local store marketing efforts that work.

One of the things I will tell you is that we do have a permission based marketing program, that we have well in excess of 100 names, that we are trying to be more creative with, in getting information out to our loyal guests. And one of the areas that we are looking to improve upon, is letting those folks know that our Call-Ahead program is available, and to share it with a friend, those that may not be joining us, because the biggest problem is our waits are so long. So it's things like that that will continue to add that intensity to it.

The question about media, if you will, is not one that we've discussed, and it's not one that we hope to pursue, or don't want to pursue any time in the near future. I believe again through our efforts of providing the operational focus that we have, we'll continue to drive our traffic and steal share from our competitors.

Pretty good. Thanks.

Our next question will come from Keith Siegner, Credit Suisse.

I was wondering if you could you give a little more detail about the comp trends by region, and by menu mix, if you can give us a better sense? You mentioned the weather. Does that show up in the regional comp trends?

Yes and no. Essentially, we were a little bit stronger in the Midwest believe it or not, the Midwest and the Southwest, and a little bit weaker in the West and the South and the Northeast. It's basically the trend. We are not going to get into specific menu items, or menu mix items, but regionally that's kind of been the story.

And then quickly on the impairment line, obviously baked into the current guidance in terms of same store sales and other trends, how should we think about that impairment line, did things have to get much worse from here, or how many do you kind of have in the plan, what might we see in that line item?

We have a few stores that are, if you will, break even-ish on net income. The restaurant that we impaired was significantly negative in cash flow. And we are very much contemplating closing that restaurant in the near future. These other restaurants, we are still kind of debating how much is related to the environment, versus site selection versus operations, and how much better do we think we can get. And our system, takes a lot of operational resources to run a restaurant, so our preference may just be to close a store, and move on. Will we have impairment as defined by GAAP this year? It really depends on what happens to the trends in those specific restaurants.

Last question, then, are those stores relatively recent class years, or are they older stores?

It's both.

Both. Okay. Thank you.

Our next question will come from Steven Rees, from JPMorgan.

Hello, thank you. I just wanted to ask about the five units or so, that you cut back on this year, versus prior guidance. Was there any commonalities among those units that made them marginal units, based on geography, or new markets, or were they simply just the ones that you could cut back on, because they were further out in the fourth quarter?

It's a little bit of both, Steve, this is Scott. It's a little more difficult for us to cut back on units scheduled to open in the next six months, we are already in permitting, we are under construction in a lot of them. We have people hired for a lot of them.

So we take a look at, okay, do we have stores in the third or fourth quarter, that are maybe a little more on the fence on from a return standpoint, and if you believe things may get tougher, or more challenging, those would be the first stores you are going to put off, and if you can put them off indefinitely, you will do that. If you can delay them six months, before you have to make a final decision, you'll do that. And you may be able to delay hiring people for those restaurants. So, essentially that was kind of our thought process.

But you could have cut more than five if you wanted to right?

We could have cut more than five.

Just on the pricing cuts, I realize it's still early, but perhaps you could provide some color in terms of, how price sensitive you think your customer is today, versus last year, I know the mix has been negative for awhile, but that does appear to be getting worse, (inaudible)--?

The mix issues with price, it is a little debatable on how much of that is customers pushing back, versus, is that a reflection of the way we've taken price, meaning taking it on a few items on the menu, versus most of the items on the menu. So there is a debate, over how much of that is driving the mix shift. But in the price test that we're doing going forward, we are trying to really hash that out, and get a better feel for how much of it's determined by what items we specifically touched, versus how much the guest is really saying, hey, I don't like what you're doing here, as well as traffic dynamics, with the price test as well. We are very cautious. We have a number of different levels of pricing that we're testing, but again we are still going to remain very cautious and protective of our positioning.

Would you consider a tiered pricing structure, perhaps in regions that are less price sensitive?

This is G.J., the answer is, we have tier pricing now around the country, and that's become even more challenging for us, as we've had these states take tip wage increases in particular, and where we used to have three or four menus, today we might have 15 price menus, so we are already doing that.

Okay. Great. Thank you very much.

Barry Stouffer, BB&T Capital Markets, please go ahead.

Good afternoon, just had one question, the sales slow down in December and into the first quarter, would you characterize that as broad-based, or caused by specific geographies?

This is Scott, how are you doing, I would say it's broad-based.

Okay. Thank you.

We will take our next question from Bryan Elliot, with Raymond James.

Good afternoon, I'm on a cell phone, can you hear me okay?

Yes, you're fine.

I wanted to follow up a couple additional modeling questions, Scott. On the other operating expense line, where you've gotten some benefit from the accounting change, or the repurchase of the lease, that's behind us, kind of 12/31, is that correct, and would that line sort of move, with leverage, deleverage from comps going forward here, starting in Q1?

That is absolutely right.

Okay. And in the G&A piece, can you help us understand the range of bonus, there was some bonus benefit last, in the fourth quarter here, was that some recapture of previous, or was that basically done in Q4, and got us to where we were for the year? And then looking forward, what kind of range is embedded in the guidance, and how much swing might there be, if we get a nice recovery? Give us a sense of the range between I guess zero and full, in the G&A line.

The bonuses in the fourth quarter were lower, but not I would not say substantially lower, than what they've been in prior quarters, because we still came very, very, close to our plan for the year. So it wasn't that big of a benefit for us. So therefore it's not going to be that big of a deal to lap it next year. We still expect to get some G&A leverage next year, and I think we've said our model is to get 20, 30 bps of G&A leverage every year, and we've got a good shot at that this year.

And so if we get a recovery, the bonus might heat up the leverage, additional leverage on that. If we don't get a recovery, you'd still expect to do somewhere in that range then, recovery in the business overall?

Yes, I mean our bonus target is going to be in the 10% to 15% range, so we have to get over 15% growth to have that really become, well over 15% growth, to have the bonus number become any kind of material number for us.

Okay. Very helpful. Thank you.

Conrad Lyon, FTN Midwest.

Good afternoon everybody. Scott, first question, just want to confirm, the 5% to 15% earnings growth, that's off of the $0.51 number for '07. Is that right?

That is correct.

Okay. Thanks. With respect to the development plans here, did you guys have to cut any leases, or will we see any charges with respect to that?

No, there's no earnings charge or anything from lowering the number of stores.

Okay. Maybe just kind of ask a macro question here, with the beef recall this weekend, and the one that we had later in the year with tops, granted it's different segments of beef, but do you find your customers sensitive at all, to beef recalls, or is there a way to play up to this, and say, your outfit is a little bit more safe than others?

It's G.J., I'll comment on that. In the past when we've had these things, whether it be Mad Cow or other beef related issues, we haven't seen any change, and really haven't seen anything affect our guest base. That's not to say it wouldn't happen in the future. I think this particular beef recall, while terrible, I think is somewhat overstated, because of the type of recall that it is. Most of those products have already been consumed, and so I don't see it having a lot of effect on our guest base at all.

Thank you very much.

And we go now to Paul Westra, Cowen and Company-- Cowen and Capital, excuse me.

How are you, guys? A couple more follow-ups, fourth quarter comp trends, I know you gave most of the answer with December comps down two, did things hit a wall in December, or did they gradually come down from the two and a half in the third quarter, steadily down?

Well, October was 0.3, and November was negative 0.2. So really, December really dropped off quite a bit, and December is a five-week month for us.

Segueing on as we look forward, obviously comps were running down 1.5, you have flat to up 1, for the year. I think you mentioned that pricing 1.1 is assumed to be stable throughout the year. Could you give us an idea what gives you can boost traffic from current trends up a couple hundred basis points?

Repeat your question, Paul.

Comps are negative 1.5 now, I think your guidance assumes that pricing remains at positive 1.1, and your yearly comp guidance is for flat to up 1. You're assuming a couple hundred basis point recovery or so in traffic throughout the year. I was wondering if you can point to some things you are doing that gives you confidence that, that can be--

Well, I think, remember, we are testing some pricing, so there could be out of that zero to one, there could be some pricing in there. We think our traffic was a little bit impacted by the weather, that we've seen so far, and we've got an opportunity to pick that up a little bit here, as we get farther into the year. So that's kind of all I can comment on, at the moment.

Then another question on capital allocation, your share repurchase plans [I'm sure] (inaudible) starting 25 million is still reasonably light compared to your line of credit. Just give us an idea where you see your capital allocation with respect to your line of credit. Should we assume most of there should be targeting toward acquisitions given G.J.'s comments that we might see a couple this year?

There's always a potential for that. As we said in the past, there are very opportunistic deals, we are talking to people all the time. Certainly we want to maintain a somewhat conservative balance sheet, and also maintain the flexibility in our balance sheet that should opportunities arise, we can take advantage of those opportunities whatever they may be.

How did you come up with the $25 million number?

I think it's a number that, we feel we want to make it clear, we are pretty serious about a share buy-back program, okay, buying a sizeable number of shares, but at the same time, we are not changing our strategy, we are still going to open up a lot of restaurants, we are still doing 30 this year. We haven't changed our growth model. We are just being a little cautious here, given the environment that we are in. We just saw oil go above $100 a barrel today, and those kind of things just make us a little bit cautious.

Great. Thank you.

(OPERATOR INSTRUCTIONS). We move now to Larry Miller, RBC Capital Markets.

I just had a couple quick follow-ups for you guys. When would be the next opportunity that you could take price? I know you're probably rolling out menus all the time, but just so we get a sense?

Well, Larry, it's G.J., as we said we are in the midst of testing several different versions. I think you'll see that, you'll see us take some action one way or the other, sometime later in the second quarter.

Then obviously there's some things that changed relative to your plan into the fourth quarter on the negative side. Is there anything other than the beef that you're floating at 25%, and the specs that you've been working on, that give you some optimism about 2008? You've done a good job managing labor, is that somewhere we might look for some positive delta relative to current expectation?

Larry, this is Scott. I would say we don't have any silver bullets. If anything, when we talk to our folks we tell them to, keep on the pressure on the competition by keeping our food quality high, no short cuts, keep portioning up, and keep staffing levels up. We are not going to produce a new labor model that miraculously has 50 or 100 less hours of labor a week in it. Again, we are definitely positioning the concept for the longer term, and we believe when things do turn around a little bit, that we are going to be sitting very, very, well with our guest base.

On the food cost side you're assuming that cheese and wheat, or dairy generally speaking, continue at this rate. Is that correct?

We've assumed on dairy and produce that they continue at this rate. Just on wheat, I'd comment that we did do a contract in late October, for our bread mix, which is the predominant amount of wheat that we use, which runs through the bulk of 2008, and that contract obviously is pretty favorable at the moment, given the markets. So that is already embedded into what we are saying from a guidance perspective.

Thanks, guys.

We will take a follow-up question from Destin Tompkins, with Morgan Keegan.

Thanks, just a couple quick ones, gift card promotion has been a big deal in the past. Can you give us any update on how this year went, and if you expect any kind of meaningful redemptions in Q1?

Destin, it is G.J., gift cards year over year in total, were up slightly. We felt it was a good year, in spite of it being a much more challenging environment, with gift cards. Yes, we do anticipate a higher redemption rate in the first quarter.

And then, Scott, on the interest expense line, should we assume that you guys are going to use your line of credit to pay for these share repurchases, assuming you do some, or should we assume interest expense at a similar run rate that Q4 came in?

You know, with Q4, interest rates have come down. LIBOR is a couple percent below what it was in Q4, I think today, so that's going to help us. By reducing the number of stores that we open this year, we are going to have a little bit of free cash flow, we believe. Which depending upon, if we buy back stock, which will depend upon in part what the share price is, and if it's appetizing enough for us, I won't comment on what those numbers are, but we may use a lot of free cash flow to buy back stock, and so I don't know if we are going to borrow much money, if you will, to buy back stock. I can tell if you we do any franchise acquisitions, those will all be debt financed deals. So those would come into play with higher interest expense.

And then just a confirmation, the management, the GM conference in '08, is apples-to-apples, it's in second quarter as it was last year, is that correct?

Yes, that is correct.

Thanks.

At this time we have no other questions standing by. I'd like to turn the program back to our speakers for any additional or closing comments.

All right, well, we appreciate your time this evening, and we look forward to giving you results of our first quarter later on in the year. Good evening.

Thank you, everyone, for your participation in today's conference, and you may disconnect at this time