Texas Roadhouse Inc (TXRH) 2008 Q2 法說會逐字稿

Welcome to the Texas Roadhouse, Incorporated second quarter 2008 earnings conference call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions.

Now, at this time, it is my pleasure to turn the conference over to Scott Colosi, Chief Financial Officer of Texas Roadhouse. Please go ahead.

Thanks and good evening, everybody. Thanks for being on the call with us this evening. By now, everyone should have access to our earnings announcement released this afternoon for the second quarter, ended June 24th, 2008. It may also be found on our website at texasroadhouse.com under the "investor" 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 is G.J. Hart, our CEO. G.J. will provide general comments on the business and then I'll walk you through the financials and then we'll open it up for questions. G.J.?

Thank you, Scott, and good evening, everyone. In Q2 we had what I would call another respectable quarter as we were still able to generate positive earnings per share growth, versus the second quarter of 2007. In general, it's a challenging environment and we suspect it will continue to be that way for at least the next few quarters. As such, we are focused on doing what we believe are the right things for the long term success of the business and for the long term benefit of our shareholders. But before I get into the discussion of strategy, I want to touch on a couple of the results from the quarter.

For the quarter, diluted earning per share increased 14% from the prior year, to $0.14 per share. The $0.14 is a l little better than our original plan, due to better than anticipated restaurant margins driven by the benefit we realize from floating a portion of our beef purchases. While this has been an advantage, we did elect to the lock in a portion we had been floating for the remainder of the year because of the volatility of the beef market. So we are now 100% locked in our proteins for the balance of 2008.

Partially offsetting the slightly better than anticipated margins, is continued softer sales. In the second quarter, comparable restaurant sales decreased 0.3%, a little better than our first quarter trend, but still negative. For the quarter, our average check increased slightly by 0.4%, while traffic was down 0.7%. On a check side of things, we did take some pricing with our menu in May of about 1.2%. And rather than taking it on a handful of items it was much more across the board.

In addition to pricing, we added a couple more value oriented items to the menu. Our Baby Blossom, which is a smaller version of our popular Cactus Blossom appetizer, has been doing very well. It is much more conducive for sharing with two or three people and, at $2.50 less, is a great value. We also added a 1/3 Slab of Rib entree that includes two sides for under $10. We now have 19 entrees, including burgers and sandwiches, priced under $10. We also added a couple of combo items with our pulled pork - a pulled pork and chicken combo, and a pulled pork and rib combo. These give us a couple of combos on the lower end, the $11 to $13 range. While it is early, these have been well received by our guests and we believe they really help us communicate our value position.

As far as pricing for the rest of the year is concerned, right now we have about 2.5% pricing on our menu. We do continue to see negative mix shift of 1% to 1.5%, mainly entree driven at this point, as we can see guests trading down to lower priced items. On top of this, the success of our value oriented entree items is having about 0.7% negative impact on check. So, overall, we are getting about half a point in check right now.

On the margin side of things, I mentioned restaurant margins were better than we had anticipated. However, they were still down 79 basis points versus last year, primarily resulting from continued wage-rate pressures and higher utility cost. For the remainder of the year, they remains somewhat of a wild-card, especially utilities. We are still encouraging operators to invest in the business as opposed to cutting cost for the sake of better margins in the short-term. Given our partnership structure, our operators are in this for the long haul.

On the development side, we opened ten new company restaurants during the quarter, which brings our year-to-date opening to 16. We remain on track to open approximately 30 for the year. In addition, we acquired three restaurants from franchisees at the beginning of the second quarter and we announced, subsequent to the quarter end, we acquired eight restaurants from a franchise group in Tennessee for just over $9 million.

Now, let me touch briefly on our plans for the remainder of 2008. Given the continued uncertain consumer and inflationary environments, we are leaving our diluted earnings per share growth goal for the year unchanged at 5% to 15%. I can tell you as we sit here in late July, we think we will be more in the middle of that range but we will continue to see how the year plays out.

Before talking more about our future plans, let me turn the call over to Scott to review the financials and a discussion of some of the assumptions incorporated into our 2008 guidance. Scott?

Thanks G.J. During my review of the second quarter, please note that many of the numbers I will mention are listed in the schedule of supplemental financial and operating data that was included in the press release. So starting at the top of the income statement for the second quarter of 2008, as compared to the same period in 2007, total revenue increased 20%, with company-owned restaurant sales increasing 21%. The growth in company-owned restaurant sales was driven by operating week growth as both comparable restaurant sales and averaging of volumes were down from the prior year. As G.J. mentioned earlier, comparable restaurant sales at company-owned restaurants decreased 0.3% versus an increase of 1.9% last year. For the quarter, our average check increased 0.4% while traffic was down 0.7%.

From a restaurant sales perspective I'll offer a little more color on average weekly sales. For the quarter, the 164 restaurants in our same-store sales base averaged about $77,600 a week in sales. These restaurants have been opened 18 months as of the beginning of the quarter. There were 32 restaurants that are in our average unit volume base but are not in the same-store sales base that have been opened 6 to 18 months as of the beginning of the quarter. These approximate 32 restaurants averaged about $71,200 a week in sales. Our newest 26 restaurants, which were opened sometime over the last nine months and thus are in neither our same store nor our averaging of volume calculations, averaged about $76,350 a week in sales during the quarter. While our newer restaurants are averaging a little less than our older ones in terms of volumes as a group, we anticipate the returns will still be well in excess of our cost of capital.

Franchise royalties and fees were $2.5 million, which was $300,000 lower than last year, primarily due to the acquisition of nine franchise restaurants during the third quarter of 2007, and another three at the beginning of the second quarter this year.

In terms of margins as a percentage of sales, restaurant level margins were 79 basis points lower than last year for the second quarter. Thus, for the year as a whole, we are down about 89 basis points.

Let me touch briefly on the specific lines for the second quarter. Cost of sales was down 13 basis points. The driver of this was the 25% of our beef volume that we were floating during the quarter. As G.J. mentioned, we did make the decision to go ahead and lock up this portion of our beef needs for the remainder of the year, so we are now locked in all of our proteins for the balance of 2008. Partially offsetting the benefit from floating a portion of our beef was the fact that our bread mix, shortening, oil-based ingredients and dairy costs remained higher, on a year over year basis, as they were during the first quarter.

Labor costs were up 55 basis points and, similar to the first quarter, labor costs were impacted by the deleveraging associated with negative same-store sales growth and pressure from increases in minimum and tipped wages. With another federal minimum wage increase effective last week, we expect to continue to experience wage-rate inflationary pressures.

Rent expenses up slightly, about 8 basis points from the prior year due to us having a higher percentage of lease-restaurants, as approximately 90% of our deals in 2008 are leased. After being basically flat year-over-year in the first quarter, other restaurant operating expenses were up 30 basis points versus last year. The real driver here was utilities, specifically electricity and natural gas. On top of this, there was some deleveraging associated with negative averaging of volumes.

Preopening expenses were just over $100,000 more than the prior year. Now, while we did open four more restaurants during the quarter this year as compared to last year, the timing of preopening costs can vary a little depending upon the timing of the openings for the year.

Depreciation and amortization cost were 18 basis points higher than last year, driven primarily by the cost of new restaurants. G&A expenses, as a percentage of revenue, were quite a bit lower than last year, 69 basis points. The entire amount of the deleverage here was due to the fact that our annual Managing Partner Conference was about $1 million less this year than last year. If you recall, we had a late change of venue last year that resulted in a higher than normal cost. Excluding this benefit, G&A was basically flat as percentage of sales, with the second quarter last year, as negative 1.7% average unit volume growth, prevented any leveraging of the core business.

Our effective tax rate for the quarter was an even 35% which was consistent with the first quarter but lower than last year due to higher tax credits, primarily the FICA tip-credit. Part of the reason for this is the increased minimum wage in numerous states. For 2008 we continue to estimate our income tax rate will be approximately 35%.

Our weighted average diluted share count was an even 76 million, which was just over 800,000 shares lower than where we were at the end of 2007, due to the repurchasing of 1.6 million shares of common stock through the end of the second quarter at an average price of $9.29. On the subject of share repurchases, as of the end of our second quarter, we had repurchased about $15 million worth of our common stock and, subsequent to the end of the second quarter, our Board of Directors increased the authorization for share repurchases from $25 million to $75 million. One thing I do want to make very clear as it relates to share repurchases and our result in capital structure, is that we have historically had a very conservative balance sheet with a conservative amount of leverage attached to it. And we absolutely plan to maintain this. With that said, we will continue to be opportunistic as it relates to share repurchases and evaluate the anticipated returns of such, much like we would the development of new restaurants or the acquisition of restaurants from franchisees.

Now, on to full year 2008 guidance. As noted in our release, our 2008 guidance is unchanged at diluted EPS 5% to 15%, which includes the positive impact from the extra week, as we will have during the fourth quarter of 2008. As G.J. mentioned, as we sit here in late July, we would think somewhere more in the middle of the range is more likely than being at the 5% or 15% side of things. I do want to mention that our forecast includes the following three assumptions - first, we'll open approximately 30 company restaurants; second, we'll generate comparable restaurant sales growth of negative 1% to flat for the full year; and third, based on reducing our same-store sales expectations and higher utility cost, we are now anticipating our restaurant margins will be down 80 to 120 basis points for the year.

Now I'd like to turn the call back over to G.J.

As I said last quarter, it continues to be a tough environment for restaurant operators, driven by both consumer and inflationary pressures. However, we remain committed to doing what is right for the long term success of our business and believe this has paid and will continue paying dividends. So from an operational perspective, we are maintaining the course and looking at this difficult time as an absolute opportunity to further distance ourselves from our competition as they may begin to cut food quality and service in the name of efficiencies. We strongly believe that this will result in increased market share, as common sense tells us that when guests have a bad food or service experience in this environment, there's very little chance that they'll be making a return visit.

Operations aside, I can tell you that we continue to focus on our capital allocation strategy. While we definitely believe we have a lot of runway in front of us in terms of development, we are also cognizant of how challenging the sales and cost environment is and the results and impact on the returns, especially given the inflation and construction costs over the last several years. We strive to create shareholder value by generating returns on invested capital in excess of our cost of capital. Not by growing for just growth's sake.

As we look at our capital allocation, we see it as a balance of three things - one, the development of new restaurants; two, the acquisition of franchise restaurants; and three, share repurchases. Fortunately, being free cash flow positive affords us tremendous flexibility with regard to the timing of each. So as we look at things, we do plan to create value by adding new restaurants, given the fact that we have a store model that can create returns in excess to cost of our capital. The real challenge is determining at what rate that will be, especially here in the near term. In addition, we will continue to supplement company-owned restaurant growth by opportunistically evaluating franchise acquisitions. And, as Scott mentioned, our Board did recently increase our share repurchase authorization so you can assume, and we will continue to opportunistically evaluate the repurchase of our stock. While our capital allocation strategy will likely be a combination of new restaurant development, acquisition of franchise restaurants, and share repurchases, we are proud of our historically conservative balance sheet and intend to maintain it, as we definitely understand that leverage cuts both ways.

Switching gears a bit, let me remind you that our business continues to really be all about our team members and their commitment to executing our mission of Legendary Food and Legendary Service. We are not asking or encouraging our operators to cut back one bit, as we believe tough times represent an opportunity for us to out-execute much of the competition and take more than our share of the market.

Before opening the call up for questions, I want to once again take the time to thank all the Texas Roadhouse team members for their continued support, effort, and commitment to offering Legendary Food and Legendary Service to each and every guest that walk through our doors. And I want to say a special word of welcome to the managers and team members of the restaurants in Tennessee we recently acquired. With this most recent acquisition, we are gaining much more than eight restaurants. We are also inheriting an experienced set of operators who are focused on executing our mission. We look forward to many great years ahead with you.

With that, that covers our prepared remarks so operator, please open the lines for questions.

[ OPERATOR INSTRUCTIONS ]. Our first question will come from Larry Miller with RBC Capital Markets.

Hey guys. Nice job in a really tough environment. You have a lot to be proud of there. Can I ask a couple of questions and I'll hop off the line? On the beef contract, what was the rate that you guys ended up locking in on and what can we expect for 2008? And as you sit here, today, and you are thinking about what beef might be in 2009, is there going to be an opportunity, first of all to contract -- because I'm hearing a lot of folks aren't offering contracts -- and as you think about, maybe, in your non-beef exposure for next year, any areas of opportunity there that you might be able to offset any inflation that you might see in 2009? Thanks.

Sure. Hi Larry, it's G.J. Firstly, our beef, our 25% that we locked in recently, I will tell you is a little bit more than what that portion of the floating beef in the first half, but less than our contract price that we had on the balance of it. Somewhere in between and that's about as far as we want to go with that.

And in terms of 2009 on all proteins, we are in the midst of discussions that we will be having over the next several weeks with our vendor partners and we'll have a much better sense of, kind of, where we are going into 2009. I think it's fair to say that it's uncertain right now for our vendor partners as well as us. I don't know that anyone has told us at this point they are not offering contracts, and we've had a few discussions already. So I think it's uncertain and really there's not a lot more I can add until I've had these meetings.

Thanks. If I might ask two more quick ones. Scott, can you talk about the return on capital on those three groups? What is the return in capital of the comp base? What is the return on capital of the non-comp base and then the stores less than nine months? And then, historically, you told us a little bit about monthly comparisons that you have. What is Q3 of last year look like on a monthly basis? Thanks very much.

Are you talking about this year or last year?

Last year. You were down 3% at the start off the quarter. What are the comparisons look like for this time last year? I just couldn't remember.

Last year in April we were up 3.7, May up about 0.8, in June up about 1.2.

I was thinking Q3.

I'm sorry. Q3 last year, 2.6 in July, 3.3 in August, and 1.5 in September.

Okay. Thanks.

With regards to the returns, I'm not going to get too specific on the returns. I'll tell you that certainly the returns are much higher on the older stores, as they've got a little bit higher sales and certainly they have much lower investment costs. So, certainly today, our return equation is much tougher to get to that mid-teens to high-teens IRR levels that we are looking at. Whereas, historically, on EBITDA return basis, which is typically what we report when we go to our conferences, EBITDA percent of the total investment including capitalizing leases and including preopening and so forth, we historically were opening up in the mid to higher 20s and now we are talking in the low 20s to 20% range, it's kind of where we are currently. And needless to say, we are certainly concerned as we look into the future with continued inflation in both construction costs and operating costs.

But you guys will continue to open stores as long as you are above that 15% to 18% range?

As long as we can attain those types of mid-teens IRRs, mid- to high-teens. Mid-teens, kind of, if we are opening property. Higher teens if we are leased. Yes. We'll continue to develop restaurants.

Ok. Thank you very much.

Our next question comes from Greg Ruedy with Stephens Incorporated.

Good afternoon. Wondering what sort of contingencies you might have in place should other key retailers rationalize their store-base and have you felt anything to date?

You mean in terms of other restaurant companies closing their doors?

Or just retail across the board, yes.

I think it's fair to say we are starting to see some closures. I couldn't tell you that any of the major casual-dining chains we've seen anything significant. Certainly, they have slowed down their growth, and you guys track that better than we do. But in terms of contingencies, I think we look at it as an opportunity from a real estate perspective, and we continue to evaluate those opportunities as they come before us.

Certainly, Greg, this is Scott. Certainly, we have got to be paying attention, i.e. if we are going into what would be a new development. We have definitely got to be paying attention and make sure that whoever the anchors are going to be, that we are confident that they are, in fact, going to develop those locations or we are not going to be just there by ourselves.

Okay. Going back to your capital allocation strategy, the three prongs that you mentioned in growth for growth's sake -- If we are looking out to next year, can you disclose how many leases you have under contract, and how should we maybe compare to this year's in an absolute terms?

Greg, this is Scott. We are not going to get into development for 2009. We'll get a lot more specific at our next conference call at the end of October, but, suffice it to say, whatever development we do have in 2009, a very high percentage of those locations are going to be leased locations. That I can tell you, I know that for sure.

Okay. The eight franchisees you acquired recently, it looks like they're about -- their A.V.s are $0.5 million below the system average. What kind of opportunity do you have to push them towards that average or are they almost mature units that are pretty much locked in where they are at?

Greg, this is Scott again. We never think of unit as mature and therefore we can't grow sales in a unit, but the mix of stores - some are very old, meaning they are ten years old in our system, some are just a few years old. So it's really across the board. We believe they are very high quality operators and they've had great leadership throughout their history, so I think we are very bullish on if they can continue to grow as the rest of our system grows.

Great. I appreciate it. I'll pass it along.

Our next question is from David Tarantino with Robert W. Baird.

Good afternoon and congratulations on good results in a tough environment. Scott, just a clarification question on the quarter to date comp number that you gave for Q3. Could you disaggregate that between check and traffic and, also, would there be an impact from the timing of July 4th this year in that number?

I can't give you Q3 off the top of my head what guest and traffic was. I'd have to look that up for last year. I have to look that up. For July, our check was barely positive, so traffic was about down 3. Yes, we believed the 4th of July was pretty impactful, probably about a point, meaning that 4th of July was on Friday this year versus on Wednesday last year. So certainly that hurt us a bit for the month.

So just to clarify, the traffic quarter or in the third quarter would be down about 2% excluding that shift? Is that the way to read it?

I'd rather say it another way. July may have impacted us by a point. It's really a ballpark guesstimate for it. The actual number is we are down 3 for the month.

Okay. Thanks. And a question, G.J., on overall pricing philosophy. Given the response you've seen since the increase that you had in May, what's the appetite for increasing prices as you look out into potential inflation issues in 2009?

Well, first in terms of the price increase we took with -- and in addition to products that we put on the menu. It's really too early to tell the real effect of what's happened. Clearly, we knew by putting items on below ten bucks and with the Baby Blossom, that they would have an effect and, as I mentioned in the script, that that was the case. Now, in terms of going forward, we are going to be testing some additional pricing as we go through the balance of this year in anticipation of what we may or may not have to do going forward.

Okay. Thank you.

Our next question is from Destin Tompkins with Morgan Keegan.

Thanks. I wanted to follow up on the commodities question. Looking at 2009, obviously there's a lot of fear about what could happen to the protein prices, especially. If, in fact , we did see a 10% to 15% increase in those protein costs, can you give us kind of what your thought process might be in terms of menu

Well, I think it's way too early to be talking about 10% to 15%. Like I've said this before, costs may go up, but that doesn't mean you are going to get it on the demand side. And given the macro environment, I would suggest to you that we've seen, particularly in retail, not that there's been a real trade-off from these high priced middle cut meats. So, I think it's way too early to suspect that at this point. And, in fact, if you see most recently, you see some of the things like ground chuck and some of the end cuts going up faster than you do the middle cut. So I would tell you that I wouldn't be that pessimistic at this point.

In terms of what that pricing might look like, I would suspect with continued wage inflation and with that kind of inflation on food, you'd be looking at maybe somewhere between 3% and 5% pricing to stay even.

Okay. Thanks. That's helpful, G.J. Additionally as you look at your guidance for the rest of the year, just doing some quick math, you need to average around negative 1% comp or so to get to the low end of your guidance. Is there anything you guys have planned from a promotional standpoint or a menu standpoint that might give you a little bit more confidence that you can see in acceleration, or is it easier comparisons that you see out there that maybe give you more confidence?

Well, I would tell you that from promotions -- as you know we don't vary promotions very often. We are going into our Great Steak promotion and then beyond that we are already planning for our gift card promotion into the fall and into Christmas. We continue to intensify our local store marketing efforts. We continue to increase the number of training conferences that we do for our local store marketers, and beyond that, we are really not doing anything significantly different. We hope that we'll continue to execute and that's why you hear us talk about continuing to focus on those fundamentals and that we believe we'll continue to steal share by executing. With as many items as we have under $10, and really where we're positioned, and we believe stronger than ever before compared to our competitors, we believe we are well positioned to go through the balance of this year.

So you really haven't changed your thought process in terms of whether it's advertising or couponing or some sort of other promotional activity at this point?

No, sir.

Great. Thank you.

We'll go next to Jeff Omohundro with Wachovia.

Thanks. Just two questions. First, I wonder if you can give us an update on the seating capacity expansion test, how that's tracking and perhaps an update on the investment costs behind that.

Hi, Jeff, it's Scott. We've had four lease-locations where we've added seats to them and they've been opened for a while now and they continue to do very, very well -- strong sales results and very high return on invested capital in those four locations. So we've got a number that are in the process of either being constructed or permitted-out or recently just got done, literally within the last couple of weeks. So really by the end of this year, probably early next year, we are going to have a really good view of how this thing is shaking out on a larger scale because we'll have a dozen restaurants kind of up and going with these extra seats. The cost looks like it's going to be between $125,000 and about $150,000.

Okay. And you mentioned the labor pressures that I think we are all aware of. I wonder if you can also address some of the initiatives that the company is pursuing to help reduce turnover and to help mitigate some of the cost pressures. Thanks.

Jeff, it's G.J. In terms of turnover, we are better year-over-year in turnover at the moment, and we think part of that really centers around the selection process in the first place, and then also making sure that our managing partner in each and every restaurant validate that new hire. And we've been on that bandwagon for quite a while now and we are starting to see some benefits from that. And right now we are returning around 10% or 12% better on an hourly turnover basis than we were a year ago.

In addition to that, we are making sure that from a training perspective, that we've got training coordinators in every one of our restaurants and making sure that the new folks coming into our systems really understand what the expectations are. And I think we're doing a better job at that. Ultimately, that is driving the improvement in our turnover as well.

Thanks.

Our next question then is from John Glass with Morgan Stanley.

Thank you. Just following up, first, on the expanded seating capacity -- what percentage of the store base could effectively be expanded and is that going to be a material part of your '09 capital plan or capital allocation?

Hi John, it's Scott. You know, that's really hard to say at this point what percentage of the system. One would hope it will be a relatively significant portion of it, but certainly we'll know much more about that once we get into the year next year. That said, I don't think it will be a very material part of our capital plan for 2009.

Okay. And then on the cost of goods, you've seen a benefit year-to-date, although that benefit seemed to have diminished this quarter versus the first quarter. So thinking about how you put new beef contract into place now, what happens in the back half of the year, I guess, to the basket of commodities?

Well, the new beef contract is going to, in effect, raise our food cost a little bit, a slight amount, for the remainder of the year. And then it really comes down to what happens with some of the floating stuff such as dairy, potatoes, some of the other produce items, primarily are the things that will move our food costs around a little bit. And also, just kind of what happens to some of the new items we put on the menu, that G.J. talked about earlier - the 1/3 Slab of Ribs, the pulled pork combos - those are lower food cost items, the pork items especially, as a percent of sale. So we'll have to see how that all pans out.

Are you thinking now food cost switches from favorable to unfavorable, to the second half versus first half?

I would say, food cost can still be a little bit favorable year-over-year, the second half of the year.

Just, what happened in July in your view? A number of restaurants have seen this down tick. In your opinion, is it a regional issue? Is it a day part issue? Or is it just simply the consumer and gas prices and all the stuff we've all talked about ad nauseum?

Certainly, John, this is Scott. You can speculate on all those fronts. We really haven't seen any material change regionally from one month to the next. I would suspect, certainly with gas moving well over $4 a gallon, at least for most of the month and part of June, certainly I'm sure that's had an impact.

Thank you.

Our next question is from Steven Rees from J.P. Morgan.

Hi. Thank you. Just on the Tennessee franchise acquisition, the units -- you said it wasn't expected to be accretive to earnings this year, but yet the overall unit volumes looked to be pretty healthy at $3.5 million. Is there something with the margin performance of those units, of the investment in G&A, that you have to make that's leading to it's not being accretive?

Hi, Steven. This is Scott. There's two things there with that acquisition. One is, we are leasing all the real estate assets. So we have a lot of rent. One reason why the purchase price is just over a million dollars a restaurant in that deal. So, of course for the accounting rules, you have the full rent impact, plus you have a lot of straight line rent that you have to book. On top of that, we have got amortization of an intangible asset. We've got the expensing for stock grants for the operators in the program and, of course, you have got book to depreciation. So there's a lot of non-cash expenses that weigh down the earnings impact where, from the cash flow perspective, it's actually accretive from sort of a cash flow per share perspective.

Okay. But the actual restaurant level margin seems that they're pretty healthy?

They are in line with where they should be given the volumes of restaurant.

Okay. Thank you. And then, G.J., on the -- You are pretty successful in the value promotions in the second quarter stabilizing traffic, some of the smaller portions, and now with traffic getting a little bit worse, do you think you have to be more aggressive communicating this value and do you plan on coming up with even more lower priced options?

Well, we are always looking to do more R&D work to see what we can do on the value side. So yes. That is continuing. I will tell you that we do need to be more conscious about having the communication strategy around these new items and, in addition, there are -- we've alway had a "two for" program for the folks that are coming in in the early day part and we continue to believe that we can push that area as well, to screen value. But absolutely. Value is where it's at and we will continue to communicate it through our local store marketing efforts.

Okay. Just finally on the mix, it doesn't sound like it got significantly worse -- down 1 to 1.5 -- and you said it's mostly entree driven, but are you seeing any weakness in beverage sales?

Alcohol sales are pretty much been consistent but they are down -- Sorry, I take that back. I think, they are down about three tenths of that during the period. I think we are continuing to see premium alcohol sales go up, and what that's really telling us, I think, people are, if they're going to have a drink, they are going to get the best. So we are seeing that.

Great. Thank you very much.

Our next question, then, is from Paul Westra with Cowen & Company.

Great. Thanks. Good afternoon. Most of my questions were asked, but just a modelling question, Scott. This extra week in the fourth quarter, can you expect some extra leverage from that falling into the P&L? Is that in your margin guidance?

Yes. That is all in there from the extra week.

Do you expect, I guess dollar profits -- more impactful than sales?

I think that the impact on margins is negligible from the extra week. We are giving you full year guidance of margins being down 80 to 120 basis points. The impact of the extra week is negligible on that.

And then the second question on pricing, I know you run at 2.5 now. G.J., you mentioned you are doing some testing. When is the next window which would take price, like 1.25, I guess it's falling off? Later in the year?

Well, I think I said we are going to be testing. We aren't testing anything yet. My sense of it, is at the earliest would be later to very end of this year or the beginning part of next year.

You will make that decision post what you will likely lock in '09?

Absolutely. We need to really understand where we are headed from a cost perspective and we think we'll have a pretty good feel of that over the next month or so.

Lastly I'll ask the question one more time. Obviously, July stepped down, here, a little bit -- it was impacted by the July 4th shift. Obviously, your forward top guidance would be about year to date -- why the confidence that the top is going to improve going forward versus July's step-down?

Paul, this is Scott. We are not forecasting or modeling a significant change from where we were the first half of the year. And I think I'll -- the first half of the year our comps were down 0.7. We are going to have a little bit more pricing the second half of the year than we had the first half of the year. We have got a few months later in the year where we do have relatively easier comparisons. That's kind of what is driving our range on the negative 1 to 0. We are not putting a lot of weight to July, at this point.

Oil has come back a little bit. Gas price has come back a little bit. We don't know if it's going to last or not. Could get worse. Could get better. Obviously, we don't know. That's kind of what went into our thinking.

So, conversely, July -- what you saw didn't really shake your confidence that the world has changed dramatically?

Yes, we don't get shaken from a few weeks of down sales too easily. But again, we are feeling like we can achieve what we did in the first half of the year when we have less pricing in the numbers. We think we can at least duplicate that in the second half of the year.

Great. Thanks. Congrats on a solid quarter.

Thank you.

[ OPERATOR INSTRUCTIONS ]. We'll next go to Keith Siegner with Credit Suisse.

Two really quick questions. One, the value has had a broad demographic appeal and you talked about the 25% of your customers that come up from family dining and the 25% that come down -- Just for us who are trying to gain a little bit of insight into the bigger picture, have you seen any different trends, maybe in the traffic, across those different demographics that makeup your customer base?

Keith, it's G.J. That's a very hard question to answer. I always like to say that, in these days in our restaurants you'll see more BMWs in the parking lot than ever before, but we don't have hard facts or data to tell you exactly that. With 300 plus restaurants, it's hard to know that, but we believe that we are getting some higher income folks into our buildings just by walking through them. To give you data, there really isn't any.

That's okay. Just any kind of insight was definitely helpful. And then just one last quick question. The Tennessee franchises, I'm pretty sure it's my understanding those have the Friday lunch? Is that the case? If they are ones with Friday lunch, now that they're company-owned, do you think about that any differently?

Well, actually, Keith, to be fair, those Tennessee -- the older stores in Tennessee, actually almost all of them, are open for lunch seven days a week.

Okay.

And that's the one market that's been that way for as long as they've been open. It is yet undetermined whether or not we will eliminate lunch or not. It's fair to say that we probably will test that at some point.

Okay. Thank you.

Our next question is from Barry Stouffer with BB&T Capital Markets.

Good afternoon, gentlemen.

Hi Barry.

Just had one quick question. I was curious if you can comment at all on the food -- [ inaudible ].

We can't hear you at all.

Is this better?

Yes.

My question was just if you could comment on food cost in the third quarter relative to the second quarter? It sounds like you are expecting some increase because of the change in the beef contract?

Well, you'd have a little bit of increase because of the beef contract. You'd have a little bit of a decrease because of the pricing that we took.

Okay.

And that's going to come down to really menu mix and what kind of shifts we see or don't see, and some of the floating stuff with regards to produce and dairy specifically. So, all that means in total, you could have something from flat to up slightly for the quarter.

Versus second quarter?

Yes, sir.

Thank you.

Our next question then is from Jason West with Deutsche Bank.

Yes. Thanks guys. I was wondering if you can talk a bit about the outlook for free cash flow for '08. And a follow-up question on that -- For each restaurant that you guys open, what is the average CapEx now running at?

Jason this is Scott. The average CapEx, now, is probably about close to $3 million. Is probably about the average. So that assumes we are leasing about 80% of the land. So if we don't -- we open one less store, we probably save $3 million on average in capital spending. If we open one more store, we are spending $3 million more.

From a free cash flow perspective, we are expecting to be $10 millionish of free cash flow, that is after our capital spending on new restaurants, but prior to any acquisitions and prior to any share repurchases. So we've made two acquisitions this year. They totaled about $17 to $18 million right now in total, and then it comes down to the share repurchase and how much we spend on share repurchases will dictate how much money we have to borrow on our credit facility to fund everything.

Okay. And just a follow-up on pricing. You guys said you were running about about 2.5% right now. And what falls off as we move through the back half of the year?

Nothing falls off in the back half of the year. We are going to have the approximate 2.5 all the way through to the beginning of next year.

Okay. And then a last one on the guidance, it looks like the food costs got pretty good visibility. You are not expecting a big jump it doesn't sound like, barring some of those un-hedged items. You do have a pretty -- a lot easier compare on the labor line in the back half of the year. It just seems like the guidance would be pointing towards higher end based on some of those big items. I don't know if there's anything on G&A or other operating that's going to be a big delever in the back half or something I'm missing there.

One thing in the third quarter is we are lapping our insurance credit. Typically, when our actuaries review the reserves that we have set up for insurance claims, typically the last couple of years, we have gotten some pretty big credits on the current year's worth of claims. So we are lapping a pretty big one. It was 600,000 or 700,000 from last year that were coming up and lapping this year in the third quarter. We haven't assumed anything in our forecast for that, there's being a benefit or not. Certainly, if there's a benefit, that would help us. But as always, there's always the risk of of there being an expense that we have to take.

Okay. Thanks.

Our next question is from Bryan Elliott with Raymond James.

Good evening. Can you hear me okay?

We can, Brian.

Thanks. Just a couple of quick housekeeping things actually. What was stock comp expense in the quarter, the non-cash? Do you have that, Scott?

Let me see if I can quickly dig that up here.

While you are doing that, you took some price in May. Did you take a little more in June as well? Did we have that wrong?

No. We just took it in May.

Okay, stock comp for the second quarter was $1.9 million. I think you answered your question on the price.

Yes. And do you have a wheat contract that expires shortly in August?

September. And we are working on a new one now. As you probably are aware, wheat prices have come back quite a bit.

Is that an annual? Was that put in place this time last year?

Yes, sir.

Okay. All right. That's all I've got. I appreciate it.

[ OPERATOR INSTRUCTIONS ]. We'll next go to Conrad Lyon with Global Hunter Securities.

Good afternoon. Just a quick question. It's geared more towards the franchisees. How are the transactions evolving or the recent ones, these days? Is it more you guys going out or are the franchisees coming to you? Is there any major shift there?

I don't think there's really been any shift at all. They know that we are open to a dialogue, and most of them have approached us.

Okay. And, Scott, quick housekeeping question. I don't know if you mentioned this. What was your CapEx for the quarter?

I can't tell you for the quarter, but I can tell you year-to-date. Our development, or our CapEx on the ongoing business is $53 million and then you've got the $8 million from the three store acquisition as an addition. So total cash used in investing activities is about $61 million year-to-date.

Thank you very much guys. You bet.

Last question in the queue is Matt Difrisco with Oppenheimer.

Thank you. Just two questions. I won't hold you up, here. First, on the preopening, I think Scott you mentioned during your prepared remarks, preopening the timing could vary. Are we expecting, then, a large portion of these ten stores to fall into the second half of the year or are we still running around that $400,000 per store rate?

We are still running between $400,000 and $450,000 depending upon if it's a leased property and how much the rent is and how much of the rent we have to expense up front, that kind of thing. But we are running pretty consistently around that average.

But, I guess having the ten stores and being in the mid 3s there, or low 3 million range, are you inferring, then, that there is upwards of a million dollars that could fall into the third quarter related to these ten stores?

I would say that you have kind of got a certain amount of run rate on preopening, and that run rate is going to be influenced on current openings we have now and also on future openings, both in the fourth quarter and into next year. So that's all going to come into play into what the current run rate of preopening is and how much we are spending month to month. So I think so far this year, we've had a relatively consistent amount of preopening month to month, and I would presume that will -- you could extrapolate that forward for the rest of the year.

Okay. And then looking at your average weekly sales, I know there's been some mention of this in the last couple of calls and looking at the analysis that we were able to do, given that you give such granularity on you're operating weeks, and the same store sales, and you're volumes -- looks like you've narrowed that gap now. Is it right to assume then -- it looks like the stores outside the comp base are starting to come closer to the trends that you are seeing within your older comp stores, so one could deduct that the volumes are coming closer to par, or something that is a little bit better than we saw, the gap being so wide the first quarter?

They are a little bit close in the second quarter, but I would not say it's a material difference that says that the trend has changed.

Okay. Thank you.

And now at this time I would like to turn the call to G.J. Hart for any additional or closing comments.

Thank you all for joining us tonight. We look forward to seeing you or talking to you at our next call. Good evening.