Texas Roadhouse Inc (TXRH) 2009 Q3 法說會逐字稿

Welcome to the Texas Roadhouse Inc. third quarter 2009 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 question session. (Operator Instructions) I would like to turn the call over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse Incorporated.

Thank you Stephanie and good evening everybody. By now everyone should have access to our earnings announcement released this afternoon for the third quarter results ended September 29, 2009. It may be found on the website www.texasroadhouse.com under the investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements.

These statements are not guarantees of future performance and therefore undue reliance should not be replaced upon them. We refer all of you to our recent filings for SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse.

In addition, we may refer to non-GAAP measures. The reconciliations to such measures can be found under the investor relations section of our website.

On the call with me today are G.J. Hart our CEO and Price Cooper, our Vice President of Finance. G.J. will provide some insights about the performance and direction of our business and Price will give you the financial update and then we will all be here to help answer any questions. I would like to turn the call over to our Chief Executive Officer, G.J. Hart.

Thanks Scott and good evening, everyone. Over all our third quarter was better than anticipated. Sales were slightly better than our forecasts, but the real story continued to be a favorable cost of environment and its affect on our P&L.

On the sales side, we experienced sequential improvement each month during the third quarter and this trend has continued into October. We certainly are pleased with this, but make no mistake the sales environment remains uncertain and we are never satisfied with negative same-store sales.

We maintain our focus on legendary food and legendary service as our operators continue to provide quantity and portions regardless of the economic environment. We also continued with our commitment of legendary service something that is integral to our culture. We have not pursued mass couponing or discounting and we have stayed focused on our four wall execution and accentuating our everyday value message.

Part of that message is price and we believe that we benefited from our conservative approach over the last few years. Because of that, we know that when I guests come to Texas Roadhouse, we know they will leave feeling good about the money they spend, which has been the cornerstone of our brand since the beginning and has helped get us through the current recession.

Regarding the cost side of our business, favorable trends continued into the third quarter led by commodities, which were considerably lower than the prior year. In addition, utility costs were also lower enabling us to gain leverage in spite of negative average unit volumes. And the labor side, our operators did a good job managing in a tough environment.

For the balance of 2009, we continue to anticipate a favorable cost environment led by commodity deflation and lower year over year natural gas and electricity rates. And as we look forward into 2010, we expect another year of food cost deflation.

Currently, we have fixed price contacts in affect for over 50% of our commodity costs for 2010. We anticipate food cost deflation will be in the 2% to 3% range.

This is certainly a positive given that we remain in a challenging sales environment and we continue to estimate that there we will be pressured in other areas including labor.

From a balance sheet perspective we have remain conservative putting $11 million in the bank during the quarter. We will get more into 2010, but first, Price will walk you through the financials.

Thank you, G.J. During my review of the third quarter, please note that many of the numbers I will mention are listed in a schedule supplemental financial and operating data that was included in the press release.

Starting at the top of our income statement for the third quarter of 2009 as compared to the same period in 2008. Total revenue increased 4% with Company restaurant sales increasing 4% as well. Growth in Company restaurant sales was driven entirely by operating [weak] growth as both comparable restaurant sales and average unit volumes were down from the prior year.

During the quarter we opened one company restaurant and closed two restaurants. Of the restaurants we closed during the quarter was due to poor performance while the other one was a situation where we had the opportunity to sell the existing restaurant as a gain. Then we built a new restaurant essentially relocating it about 10 miles away.

Our traditional franchisees' opened one restaurant during the quarter. In addition, our Andy's outreach fund, which is our charitable assistant fund, owns a restaurant which opened during the quarter it is included in the franchise restaurant account. The purpose of this restaurant is to support our employee assistance program into perpetuity and cost of the build this restaurant will be funded 100% with donated funds.

For 2009, we are on track for 17 Company owned restaurant openings. Comparable restaurant sales of Company restaurants decreased 4.6%. The sales decrease was driven by lower traffic as average check was only up 15 basis points.

By month, comparable restaurant sales were down 5.6% in July, down 4.4% in August and down 3.9% in September. As we reported in our release, comparable sales for the first four weeks of the first quarter were down 2.3%.

From an average unit volume perspective, those restaurants that are in our average volume unit based but not in same-store sales base continued to perform a bit worse than our same-store sales, same stores. Our average unit volume decrease in the quarter was 5.7% compared to the same-store sales decrease of 4.6%.

As we have done in the past, I will offer some color here. For the quarter, the 214 restaurants in our same-store sales base averaged $68,000 a week in sales. These restaurants have been open at least 18 months as of the beginning of the third quarter of 2009. There were 29 restaurants in our average unit volume base but not in our same-store sales base that have been open six to 18 months as of the beginning of the quarter. These restaurants averaged $61,600 a week in sales.

Our newest 12 restaurants which were opened sometime over the last nine months and are not in our same-store or averaging unit volume calculations average $74,000 a week in sales during the quarter.

Franchise royalties and fees were $2.1 million, which was more in line with last year as we now overlap acquisitions from 2008. We experienced our second consecutive quarter of restaurant level margin expansion with restaurant margins for the third quarter as a percentage of sales being 133 basis points higher than the prior-year period.

The year-over-year improvement continued to be led by the cost of sales line which was down 243 basis-points from the prior year. As anticipated, our food cost deflation is trending better during the back half of the year and we are estimating food cost deflation of 2.5% to 3% for the full year. The food cost deflation was greater for the third quarter due to year-over-year favorability on some beef and chicken cost relative to the first half of the year and the fact that we overlap some unusual high produce costs, specifically potatoes, from the prior year.

We continue to experience margin pressure for the labor side of the business, driven by negative average unit volumes and increasing average hourly wage rates. We anticipate labor will continue to be a pressure point. With regard to other operating costs line, our total utility costs were down 53 basis points from the prior year. The benefit of this was overshadowed by three things.

First with margins coming in higher, managing partner market partner bonuses were up 35 basis points. Second, the adjustment to true up our liability for the self insured portion of our general liability insurance resulted in $700,000 less of a credit this year. Last year, we reported a credit of $900,000, where as this year's adjustment was a credit of $214,000. Finally, negative average unit volumes added pressure.

Rent continue to be a pressure point for us driven by negative average unit volumes. As has been the case throughout the year, preopening expenses continue to run lower than the prior year due to the fact that we are planning to open 17 restaurants in 2009 as compared to 29 in 2008. Depreciation and amortization costs of the percentage of total revenue were 25 basis points higher than last year driven by higher costs and new restaurants and negative average unit volumes.

On the next line of our income statement, impairment and closure costs, I will point out that this was the credit of $201,000 for the quarter. This is due to the fact that we had a $600,000 gain on the sale of the restaurant I mentioned earlier that we closed during the quarter. Partially offsetting this gain was a $400,000 impairment recorded in conjunction with other restaurant we closed during the quarter. G&A expenses as a percentage of revenue were 52 basis points higher than last year.

A couple things here. First, bonuses were $2.1 million higher driven by the fact that last year we were behind on our plan and thus no profit portion of bonus was accrued. And this year, we are ahead of our plan so we actually had to accrue additional bonus. The second large item impacting G&A and partially offsetting the impact of higher bonuses is the fact that costs associated with dead restaurant sites were $350,000 lower than last year.

If you recall, we mentioned costs a little higher last year as we are in the process of eliminating sites in conjunction with reducing our targeted openings for 2009.

The effective tax rate for the quarter of 33.7% was higher than anticipated and higher than last year due to margins coming in better than anticipated and various tax credits, primarily the FICA tip credit, representing a smaller percentage of pretax income. For 2009, we are projecting our income tax rate to be approximately 32.4%.

Our weighted average diluted share count was 71.6 million which was 1.8 million lower than last year due to our share repurchase a activity during 2008. As has been the case all year, we did not repurchase any shares during the quarter. So as of the end of the quarter we had $18 million remaining on our $75 million share repurchase authorization.

Now, let me touch briefly on our capital structure, balance sheet and cash flow. We ended the quarter with total booked debt of $126 million, which was basically flat with last quarter, as we used the excess cash flow from operations as capital expenditures grow our cash balance by $11 million during the quarter.

As you saw in our release, our excess cash flow from operations less capital expenditure for the year for the third quarter has been $34 million. And for the year, we anticipate it will be $50 million to $55 million. From a leverage perspective, we ended the quarter with an adjusted debt to EBITDA leverage ratio of just under two times.

Finally, I want to make a few comments regarding our estimated diluted earnings per share growth for 2009 and 2010. With regard to 2009, we did increase our guidance from up 5% to 10% to up approximately 20%. While this implies fourth quarter will be roughly flat with the prior year period, I will note that we did have an extra week during the fourth quarter of 2008.

Concerning 2010, assuming the same store sales are in the negative 2% to flat range, we would estimate diluted earnings per share growth would be flat to up 10% as compared to 2009. A couple of comments I would mention about the range.

First with regard to the same-store sales, the negative 2% to flat is just a range to give you an idea of our estimate of the sensitivity inherent in our model. We are not projecting what sales will or won't be but rather want to give you a range of diluted earnings per share assuming a given range of same-store sales.

Secondly with approximately 15 company openings for 2010, we would anticipate capital expenditures of $50 million to $55 million and thus a sizable amount of excess cash flow from operations less CapEx. And finally, our estimates include food cost deflation of 2% to 3% and exclude any pricing action.

With that said that would like to turn the call back over to G.J. to talk more about our plans going forward.

Thank you, Price. Fortunately, 2009 continues to be a solid year for us from an earnings growth perspective with year-to-date earnings per share up 28%. Operationally, we believe that we are doing the right things for the long-term success of the business by focusing on our four wall execution. Furthermore, we believe this approach has enabled us to further distance ourselves from our competition and uniquely position us for the economic recovery.

In terms of our financials, we take pride in being good stewards of capital and maintaining a conservative balance sheet. We would certainly like to be able to justify faster expansion, however with the growth and development costs outpacing our sales performance of the recent years, the cushion between our internal rates of return and our cost of capital does not justify anything more aggressive as that at this time.

So as we look forward to 2010, we think it will be a year of transition in several ways. First from a sales perspective, we are optimistic that we will see better macroeconomic environment that results in an improving sales environment at a point during the year.

Second, we believe it will be a year of transition from a new unit investment perspective. We see landlords becoming more flexible in what they are willing take on in the form site cost risk for a small increase in rent rates. In addition, we have a new prototype for we have been able to take some cost out of the construction in the kitchen without reducing any seating capacity and in some cases increasing seating capacity. We believe the combination of these two items can help us bring our total capitalized cost per restaurant down by a couple hundred thousand dollars or more, which is great.

It is a little early to say at this point whether this will result in increased growth going forward as unfortunately, sales have continued to fall putting further pressure on the sales to investment ratio. So, while we believe we can make sufficient returns on invested capital in our current metrics, it is tighter than we would like. And in order to justify increasing our new store growth, we would need to see the sales to investment ratio and thus expected returns improve.

From a balance sheet and cash flow perspective, being conservative has provided us with the ability to maintain our investment in food and service during this challenging economic environment and this whole downturn has given us a fresh opinion on what conservative really means. So another year of conservative development should provide us with another year of $50 million or so in excess cash flow, which we would anticipate putting in the bank and/or using to pay down some debt.

In summary, sales have improved somewhat sequentially but we will tell you it is still tough out there. The commodity cost side equation looks good for the balance of 2009 and into 2010.

We are committed to doing the right things for the guests long-term and not sacrificing food quality or service, as we believe these two elements are essential to our long-term success. In addition, we continue to scream value to our guests with over 20 meals under $10 in most markets and our $7.99 early dine program. And from a capital allocation perspective, we continue to be conservative and long term in our thinking.

As always, before opening the call for questions, I want to truly say thank you to all our team members who make legendary food and legendary service happen each and every day. That covers are prepared remarks. So Operator, if you would, please open the lines for questions.

(Operator Instructions). The first question is from John Glass with Morgan Stanley.

Hi, thanks very much, a couple questions. Could you remind us the progression of the same-store sales were in the fourth quarter of last year?

Yes, this is a Price. October was down 4.3%, November was down 3.4%, and December was down 5.9%.

Great. And then you talked about some food visibility for next year and half of your commodities are contracted. Did you contract the first half of the year or do you have the full year contracted for half? Or maybe you could just outline what you have got -- what type of commodities you've got locked in for next year so far?

It is a mixed bag. We have some of it locked in for the whole year, some of it for six months, and it is really hard to say exactly how much of each at the moment.

I guess just for beef specifically, what have you done?

On beef specifically, we have essentially locked in about 85% of our beef. However, a portion of that 85%, a very small portion, is floating like we have done in the previous two years.

Great. And then you talked about the development costs coming down and you are still cautious about the outlook or ramping up growth again. Can you talk about what the current cost of a building is in your newest prototypes now. What the before and after is? How much have you reduced the cost of the building going into 2010 say versus this year or maybe the last couple of years.

Hey, John, this is Scott. What's happened -- the biggest change in the build -- two changes in the building. One is, we are doing less site work than we have historically in that we're paying a little bit more in rent but we are saving a lot in site work. And specifically site work risk that comes into play, and that is multiple hundred thousands of dollars depending upon the site and the surprises that you might have in a sight.

Second part is what Price and G.J. talked about with us going to a slightly smaller prototype and that could save us $100,000 to $200,000 depending upon the building, the size of the building and we end up with. And again, we are not giving up any seats and in some cases we are getting a few more seats.

So the combination of the building being a couple hundred thousand dollars less -- and a building can cost you between say $750,000 to $900,000 for just the building. And then the site work on top of that could be $100,000 to $1 million depending really upon what you have to do at the site. There are some other fees on top of that that go into building a building; architectural engineering fees, permitting fees and things we call general conditions to have certain contractor type folks on site. When you ask about what is the building cost, there's actually multiple parts to it. But the actual shell of the building itself is $750,000 to $900,000.

Your average unit volumes have fallen by five to six, 7% over the last 18 to 24 months. Have you been able to take out more than that in the building costs that you can actually maintain a good sales to investment ratio or are you still worried that you have not taken out enough to maintain the sales investment that you want?

Between the building costs and the site work, we can take -- we think we can take enough out to offset the sales declines that we have had over the last few years in average unit volume. That said, we would like that ratio to be even stronger before we were to really accelerate development.

Okay. Thank you.

The next question is from Destin Tompkins from Morgan Keegan.

Thank you, I'd like to get your thoughts on menu pricing as you look into next year and the fact that the food deflation will be 2% to 3%. And then on the negative mix shift, do you anticipate any relief there? It seems like that has been running negative for a while. Any thoughts on when we might see that reverse somewhat?

This is a G.J. In terms of pricing, we have not made any decision at this point as to what we will or will not do. At this point, we need a little bit more clarity on the balance of this year and if we make a decision it will probably be later this year.

And Destin, this is Price. On the negative mix, we actually did see it get a little bit better. I mean, it's only been one month but as we have gotten into October, our negative mix for the third quarter was down about 1.4% as we got into October we saw it would be negative by about 0.8 as opposed to 1.4.

Really, half of our negative mix has been coming from alcoholic beverages and about half of it continues to be from entree trade down. And keep in mind, we overlap our last pricing next April on 1.4. Not sure if that may be a turning point on when we will see some of that negative mix subside or exactly when it might be.

Great, that is helpful. And then on the cash balance, as you mentioned, it has built quite a bit from where it was at the beginning of the year. Can you give us some sense of what level you're comfortable with? When would you look to pay down more debt as opposed to just letting cash build?

Destin, it's Scott. I think the level that we're comfortable with is sort of a moving target at this point. I can tell you we are at least comfortable with what we have got on the balance sheet now being $35 million. Chances are we will pay down some debt in lieu of getting our cash balances get too much higher. I think we are trying to take a cautious approach and making sure we as best as we can know where everything stands with the whole banking community, and just what is going on in the world.

So certainly things seem pretty volatile still as they stand today. The story seems to change from day to day in the news and what is really going on. So as long as that continues to happen, we are going to continue to allow some cash to build on the balance sheet.

Thanks, one last one. Are there any expansions built into the CapEx numbers, the $50 million to $55 million for next year?

This is Scott again. If you are talking about adding seats, we will still do a few more restaurants and adding seats with the criteria that we have out there which starts with the stores have to have pretty high sales volumes for us to allow the additional of seats. We are rapidly approaching sort of the end of that list.

So I don't anticipate a significant number being done next year, but we will still do a few here and there.

The next question comes from Matt DiFrisco from Oppenheimer.

Thanks, I just wanted to go a little further into the recent openings in say the last year or two of openings. Is there anything that makes you cautious or concerned may be that those openings are in more competitive areas or is there anything that you are seeing outside just typically the macro picture that we're seeing as far as might be explaining the lower volumes?

Hey Matt, this is Scott. I would tell you that first, we're pretty happy with the sales that we are generating and given the economic environment that we're in, we're still doing -- (inaudible) the amount of transactions per week or guest counts per week in our restaurants. We are still doing very good volumes and we're pretty happy about that.

I think that said, there really isn't really anything in particular that would stand out that would explain why our volumes are a little bit below the average in our system. We are not opening in more competitive areas per se than we have in the last few years. We're still opening primarily in midsized markets, which has kind of been our bread-and-butter since the beginning. We think it is just more of the economic environment that we're in. And we expect these restaurants to continue to perform pretty well going forward.

Okay. Also, I guess when we look at our model there is no real difference either from -- you have always historically had higher volumes off of older stores than you have had newer stores. I was just curious if there is anything more recent that you might have changed.

Looking at the costs that you are reducing, you emphasized also the site. Is there anything as far as --- are you going into develop trade centers may be with existing restaurants going forward that you might be doing some shared costs as far as some of that site development? Or are you sticking to sort of your knitting as far as sometimes you have been known as a brand that can stand alone and be out there off the highways rather than stand in the middle of a lifestyle center. Is this sort of the part of the model where you are going into some end caps and some of the cost savings from those end caps?

No, not necessarily. We are doing a few inlines or end caps, I stress the word "a few" but by and large, our development has been very similar to where it has been before. It is just a situation where the landlord in this case has or we have basically expected the landlord if we are going to do a deal to pay for site work. And again we are willing to pay a little bit higher rent to take that whole risk out of the equation.

Okay. And then just last question regarding the rent. It looks like it moderated a little bit here and grew about 6% year-over-year per operating week. Still giving you obviously deleverage in a negative comp environment. But going forward, I guess from your guidance of conservative topline flat to down two, yet being able to get flat to positive 10% earnings growth. Are you assuming then in that type of guidance or environment rent also to be less inflationary if almost benign next year?

This is Price. I would anticipate it being less inflationary. Keep in mind that less inflationary is really driven from 2008 franchise acquisitions that we had. So it is kind of softened out on a year-over-year basis as we overlap those during the third quarter.

So we still expect general inflation there, and the majority of our deals going forward will be lease versus owned sites. But we have overlapped a hurdle if you will from the prior year franchise acquisition.

Can give us a little color on how you see those; the lower performing stores, after they have been opened and start to enter the comp base. Are you seeing them build from that and are they growing at a -- given the lower base -- are they growing little bit faster as brand equity builds up in those markets and those trade centers or are they still somewhat being laggards?

This is Price. I would not say that they're going any slower or faster. They enter our comp base at a little volume than our existing stores in our comp base, and then they grow or don't from there. I would not say its any higher or lower than the average based on the newness of them.

Appreciate the detail. Thank you.

The next question comes from David Tarantino from Robert W. Baird.

Good afternoon, congratulations on good results in a tough environment. First question is on the restaurant operating expenses, specifically labor. Why do you think you were able to achieve less deleverage than in prior quarters despite having weaker same-store sales. In particular what do you think is driving the underlying efficiencies and how sustainable do you think those are?

I would say the operators have done a really good job managing that line in a declining sales environment. Really focused on clock in and out times specifically during the prep hours, which is before as you know we have guests actually in the restaurants doing a good job monitoring that.

Okay. As I look at the implied guidance for the fourth quarter even when adjusting for cycling the extra week, it looks like you are looking for less margin expansion than you have seen in the prior quarters. What line items in particular do you think will be less favorable than they were in Q3 for example?

This is Price. Without getting too specific into line item by line item, I would say in general, we still expect food costs to be favorable and still expect some pressure on the other lines of the P&L.

Okay. Just to clarify on food costs, would they being more favorable in Q4 year over year or less favorable than what you just saw. I know you called out produce for example as being high last year. Are you cycling unusually high costs again in Q4?

Not cycling as much as from unusually high costs. We do have some contracts. Our wheat contracts renewed during the -- late in the third into the fourth quarter. So while we are not cycling some high-costs from last year, we have got some lower-costs sequentially on a few of our items.

Okay. Thanks. Last question may be for G.J. It seems like there is some openness to taking some pricing actions even in an environment where you are seeing deflation. Is that a shift in mindset versus prior years where it seems like you are more averse to taking price increases even though the inflationary pressures were there. Maybe if you could just talk through that math and how you are thinking about your ability to take pricing, thanks.

Actually, David, there is really no shift at all in our philosophy around pricing at all. It is something that we continue to be conservative about. But here again, we need to continually evaluate the marketplace; our cost structure and all the things associated with considering to take price.

You have not heard a shift at all in our opinion. All I said was it is something that is under evaluation as it is every year, and we have not made the decision at this point.

Okay, thanks a lot.

Next question is from Jason West with Deutsche Bank.

Thanks, could you give us a number on just the pricing in the third quarter and then what that looks like in the fourth quarter as well. I guess you said you go to kind of zero pricing in April of next year?

That is right, Jason. This is Price. We have got -- it's about 1.5% in pricing through March of next year.

Okay. That is what it was in the third quarter as well?

That is right.

And could you talk a bit more on October or sort of the progression through the quarter in terms of where you see some improvement. I am assuming it was mostly in traffic. And was it weekend, was it during the week, was it in certain markets like Texas, which we are hearing is still showing signs of getting worse but some of you guys have seen improvement there. If you can talk a bit more about what you are seeing?

Sure. During the quarter, it was not really driven by any specific markets. In fact, Texas for us got a little softer during the quarter. And then once we got into October, we saw the North East get a little better.

We did see check be a little better year-over-year as we got into October. And really as far as day part, it is more so on the late week, like a Thursday through Saturday timeframe that we saw more improvement as compared to the third quarter year over year.

Okay and last thing, just anything on competitive environment that's changed recently. Any closures happening out there that are starting to have some benefit or anything along those lines that has changed would be great.

Jason, this is G.J. We continue to see some sporadic closings here or there. There's been nothing wholesale to point to from the competitive landscape. You do see more mom-and-pops struggling but nothing -- really it has not accelerated from the last quarter.

The next question is from Jeff Omohundro from Wells Fargo Securities.

Just another question on the cash build. When you are thinking about uses of cash debt pay down versus share repurchase and perhaps franchise acquisitions and remodeling, how are you thinking about prioritizing those uses right now?

Jeff, this is Scott. Every -- all of the things that you described have different strategic impacts for us. We kind of look at it as such. Meaning franchise acquisitions, there is a cash return, there's people challenges, there's development challenges with franchise acquisitions. So there's a number of questions that we would answer there.

Share repurchase, we definitely have places where we are more comfortable buying stock and we will do so. But as well, we still want to have a certain amount of cash on hand just to take a conservative nature towards our balance sheet.

First and foremost, but most importantly, we are going to want to make sure we have got a strong balance sheet that gives us the flexibility to do whatever it is we need to do. Whether it is pay down debt, even though our debt is costing us about 1% right now on a variable basis. We went to make sure that we have got the appropriate amount of cushion and security on our balance sheet.

Another question on the development going into 2010, the 15 sites that are contemplated, do you control that real estate? It sounds like a couple of them perhaps are going to be slightly different formats; end caps and so forth. But for the balance is there much difference in terms of types of sites you are taking and demographics?

This is Scott. No, I would tell you that the development plan for 2010 is very consistent with 2009, 2008.

Very good. Thanks.

The next question is from Steven Rees with JPMorgan.

G.J., your company is one of few in this space that has not aggressively cut expenses in the face of declining sales. So, I guess I'd just be curious to hear from you philosophically and whether or not you see an opportunity to more aggressively manage or perhaps cut your controllable costs in 2010? Or now with sales trends stabilizing, do you see an even greater opportunity to perhaps take more share with many of your competitors still scrambling to cut costs.

Well, on the cost side, we have taken the approach that -- the exact opposite quite frankly. It is an investment in the people that we've got in this business to get the maximum amount of return from them. I think that is so far proven to be the right choice and the right course of action for us.

Having said that, as it relates to our operators, they have done a great job managing things like the labor line as we answered just earlier. We do continue to be prudent in terms of our approach on how we manage labor. And in terms of the support center, we continue to be prudent in terms of not being overly aggressive in terms of hiring folks, but we absolutely have taken the position that we want to take care of our people and invest in those people to make sure we get the maximum return.

In terms of going forward, as things stabilize we do believe that we are positioned well given the fact that we have not changed our philosophy around food and service. We have not created smaller portion sizes. We have not gone from three table stations to five table stations.

We think that the guest long-term appreciates that and will come back in time as things rebound. I think we are absolutely positioned to steal share will as we go forward.

As a related follow on to that, COGS this quarter at 33 too, I think that is an all-time low or perhaps as low as we have seen since 2003. I guess as you think about 2010, how much lower could this line go or how much lower should it go perhaps in the absence of pricing. At what point, do you think it is necessary to maybe get more aggressive to take some share in terms of your promotions?

Hey Steve, it's Price. As far as how much lower could it go, we are saying 2% or 3% food cost deflation. So assuming no pricing would it be 68 to 95 basis points or so, just mathematically. What was the second part of your question there?

I guess I was sort of asking at some point do you think you have an opportunity to perhaps get more aggressive on promotions just given that you are running such low food costs, as low as we've seen?

I think the one thing that we have done this year is just scream our value proposition louder and louder and we have really done that through our early dine program.

We really have not talked about the participating in this mass discounting couponing. We don't think it's the right long-term decision for our business. So, at this point, we would rather focus on the quality and service and that ultimately we'll steal share that way. We have not even had a discussion about aggressively going to promote our product.

Great, and then just finally, I know you said overall food cost deflation was down two to three. On the beef component, the 85% that is locked in, can you talk about what sort of pricing that is year-over-year?

Hang on here one second. Steven, it's Price. On beef specifically, you are talking mid-single digits deflation year over year is what we are looking at for 2010.

Okay. Great, thank you very much.

Next question is from Greg Ruedy with Stephens.

Thanks, I wanted to follow on the discounting question. Many of the casual dining competitors have gone with bundled discounts that have arguably been away from some of your menu mixed drinks. Now they seem to be back with a focus on ribs. How do you think about your need to invest in culinary, if they continue to enhance their focus on steaks, proteins, et cetera?

Well, R&D and culinary piece of our business is always important to make sure we stay relevant. So we have a good strong team working on things. Obviously, we will continue to improve the quality of our products. So, it's something that we are keenly aware of and we continually test new products. While having said that, we don't necessarily have anything huge in the pipeline at this point that we can comment on.

Okay. I will circle back to the seat expansion discussion. And head wind next year to the comps from the seat expansion? How much help are you getting on the shoulders on a labor line?

Greg, this is Price. I don't know specifically on the labor line. from a comps store sales perspective. I haven't looked at it recently but it was a very, very negligible impact. So I don't think it would be much from a labor line because most of that labor is just tip wage; server labor because you have got about the same in the back of the house.

Okay. Last one, housekeeping. The franchise fees I think in the past have been waived or lower. I apologize if I missed that, but is there an update there?

Price here. We have got a handful of franchise restaurants that we continue waiving fees on. Just partnering with them through a difficult time for them as well. But no more than we had last quarter and it is temporary.

Great. That is all I have, thanks.

Next question is from Keith Siegner with Credit Suisse.

This is actually Karen on for Keith today. (multiple speakers) I'm sorry, is that better?

A little bit.

This is actually Karen on for Keith today. Two quick questions. Are there any calendar shifts that we should be thinking about in the fourth quarter? And also just the October comp if there was any shift with Halloween this year versus last year. And then as another way of looking at new unit growth and investment. Is there a particular sales to investment ratio that you're targeting? And how should we think about rent as a percent of sales on the units that you are building now?

This is Price. I will take the first part you were talking about --- inquiring about calendar shifts during the quarter.

There are two calendar shifts. One, we had this weekend actually where Halloween moved from Friday to Saturday and then in December we will have Christmas move on us from Thursday to Friday. And we estimate those two for the quarter will have a drag on comps of about 1%. None of that impact is included in the 2.3% for October because that was our four week period through last Tuesday.

This is Scott, on the development question you asked about sale to investment ratio. Ideally, we would like to be and 1.2 to 1. We are not there today and which is the principal reason why we are opening less restaurants than we have in the past.

Certainly if we were at that range, we've got the cash flow either sitting in the bank or on our credit facility, we would love to be building a lot more restaurants. And that is ultimately what we would like to work towards is getting to a 1.2 to 1 sales to investment ratio.

I think another one of your questions was what rent as a percent of sales are we comfortable with? That really varies by individual deal. That number is going to be a little bit different depending upon what it is we are renting. For example, are we just renting the land, are we renting the land and building? In the case of an end cap or an inline, where it is located, North East, Midwest, whatever. That really varies depending upon the individual deal.

Okay. Thank you.

(Operator Instructions). The next question is from Conrad Lyon with Global Hunter Securities.

Hi, thanks. Question about the opening for 2010; opening schedule. Any color or any sense of what the distribution of openings will be by quarter?

Conrad, this is Scott. It is going to be a little more weighted towards the second half of the year. So, probably in the 30% to 40% of restaurants first half and the balance in the second half.

Okay. Last question, G&A for 2010. How should we think about that? Looking for some leverage there?

You know, I think the leverage on --- this is Scott again. The leverage will be marginal. Just given that the sales environment that we are in. So it will really come down to what kind of same-store sales change we have next year will sort of more or less dictate the leverage that we have.

We are not going to grow G&A in absolute dollars very much because we are not developing a significant number of restaurants next year and that is kind of our guide to increase headcount. So that is the starting point, to increase headcount from a G&A perspective.

There aren't any magical inflation things that are going on next year. We will be lapping some pretty high bonuses from this year given the year that we have had, so that will help us a little bit next year. But all in all we expect dollar growth to be pretty small.

Okay, gotcha thanks.

We have a follow-up from Matt DiFrisco with Oppenheimer.

Thank you, I got a little lost there. I'm sorry there were some headlines come across what you said about Halloween. I was unclear was that included in the quarter to date October trend?

No, Matt, this is Price. It wasn't.

So but you feel comfortable with the -- I mean did that have the effect that you had expected as far as I guess most are calling it out to be anywhere from 1% effect on the overall quarter, 3% in a month? Does that seem like it had that sort of an impact?

What we said is that between Halloween and Christmas combined, we're estimating those two together could have about a point impact for the quarter.

Okay, that's great, thanks for the clarity.

It appears that there are no further questions at this time. I would like to turn the conference back over to G.J. Hart for any additional or closing remarks.

Well, we appreciate you joining us this quarter and we look forward to seeing you on the next call. Good evening.

That concludes today's conference. Thank you for your participation.