Sonic Corp. F4Q08 (Qtr End 08/31/08) Earnings Call Transcript

Sonic Corp. (SONC)

F4Q08 Earnings Call

October 17, 2008 10:00 am ET

Executives

Pat Watson - Corporate Communications

J. Clifford Hudson - Chief Executive Officer

W. Scott McLain - President

Stephen C. Vaughan - Chief Financial Officer

Analysts

Steve West - Stifel Nicolaus & Co.

Joseph Buckley - Banc of America Securities

Matthew Difrisco – Oppenheimer &Co.

Brad Ludington - Keybanc Capital Markets

Sharon Zackfia - William Blair & Company

Lawrence Miller - RBC Capital Markets

Christopher O'Cull - SunTrust Robinson Humphrey

Greg Ruedy - Stephens Inc.

Steven Rees - J.P. Morgan

Paul Westra - Cowen & Company

Jeffrey Bernstein – Barclays Capital

Presentation

Operator

Good day and welcome to the Sonic Corp. fourth quarter conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Mr. Pat Watson.

Pat Watson

Good morning everyone. This is Pat Watson with Corporate Communications. Sonic is pleased to host this conference call regarding results for the fourth quarter and fiscal year ended August 31, 2008. These results were issued earlier this morning. Today's audio and video presentation may be accessed at the Investor section of the company's web site www.sonicdrivein.com.

Before we proceed I would like to remind everyone that management's comments in this conference that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this morning and the company's annual report on Form 10-K, quarterly reports on Form 10-Q, and in other filings with the Securities & Exchange Commission. We refer you to these sources for more information.

Lastly, I would like to point out that management's remarks during this conference call are based on time sensitive information which is accurate only as of today's date, October 17, 2008. For this reason and as a matter of policy, Sonic limits the archive replay of this conference call webcast to a period of 30 days. This call is the property of Sonic Corp. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the express written consent of the company is prohibited.

With those announcements I'll turn the call over to Cliff Hudson, the company's Chairman and Chief Executive Officer.

J. Clifford Hudson

We wanted to address a number of things about fiscal year 2008 and there are a number of positive highlights about our business, not the least of which the year was a record of sales growth and the health of our business that is 22 years unmatched, I think, in our industry. In addition to that we continue to have record sales in a number of new markets that we’re going into, which show good trends for our brand over a longer period of time looking forward.

We have also seen a period of time with significant development activity that does include new brand development, new drive-ins in the states of New Jersey, Michigan, and Minnesota. We have opened our first drive-in the Chicago area just recently. Though we had been in Illinois previously, going into the Chicago area is a new venture for us.

All of these openings have occurred at record volumes and they are performing in line with other new stores in new markets. This discussion that we’ve had in the past about high sales levels in new markets continues to be the case.

In addition to that, our franchisees, on a broader basis, continue to make substantial investments in our brand. You see now, from the data released today, that we had the opening of 140 new drive-ins. That’s completely new drive-ins. We also have the relocation or rebuilding of 64 drive-ins by existing operators. Those may not be on the same site, but certainly in the same trade area, as the long-standing drive-in, so additional investment by our operators in our business. And then the retrofitting of 800 drive-ins when the fiscal year ended August 31, 2008.

So really very substantial, continued investment in the growth of our brand by our operators across the system.

Now the year also had some very significant challenges and these challenges of which we are all keenly aware and our management team continues to focus on, the most significant of which is the significant decline in same store sales for our partner drive-ins and something which we will talk more about in a few minutes, but against which we have significant focus.

The year also represented one of increased commodity and labor costs. The de-leveraging impact from the decrease in partner drive-in performance in the latter half of the year, combined with these increased commodity and labor costs, has resulted in very little earnings growth for the fiscal year ended August 31, 2008.

For that fiscal year ended August 31, 2008, the earnings per share, as you know now, were $0.97 per share compared to $0.96 a year ago, fiscal 2007, excluding special items. The increase reflected the positive impact, though, of the growth on the franchising side of our business because the partnership drive-in piece was not a picture of growth, but the franchising side was.

We know that consumers continue to look for a customer service experience of some good quality and consistency with a high quality of food at a reasonable price and in a few moments I am going to talk about the initiatives that we’re implementing and have begun implementing more so over the last few months and well into this fiscal year they’re geared towards meeting those needs.

Regarding the same store sales performance of partner drive-ins and the same store sales performance of the system, broader the fiscal year, system-wide same store sales, as you know now, increased just slightly, 0.9%. This included franchise drive-in same store sales increase of 1.4% but unfortunately a decline on the year with partner drive-in same store sales, a decline of 1.6%. Thus the differing story in our system of our own drive-ins versus the franchise.

For the fourth quarter the franchise drive-ins increased by 0.8%. The system-wide same store sales for the quarter were slightly negative at negative 0.6% and this mostly reflects a decline in the partner drive-in same store sales, which were negative 6.3%. So again, something of the Tale of Two Cities that relate to a significant degree to some operating challenges on our partner drive-ins, which we continue to address.

As it relates to the traffic and check indicators of the health of our business in the fourth quarter, the system-wide traffic was flat and the check was slightly negative, as you see, at a negative 0.6%. The positive traffic growth in our franchise drive-ins, though, no doubt was as a result of the success of implementation of our happy hour. With the success of our happy hour implementation we’ve seen an average check decline, positive traffic growth but average check decline, particularly at our partner drive-ins.

That’s in no small part because none of the partner drive-ins historically had happy hour so the impact there in terms of average check is stronger on our partner drive-ins versus franchise.

We will lap over the introduction of the happy hour next month so in terms of impact on check, margins, etc., we anticipate that the lower check impact of the afternoon drinks will diminish on a year-over-year basis.

Now as to the partner drive-ins there are a number of changes. The partner drive-ins that we have initiated, in an attempt to affect their performance, and as you might expect the larger part of those have to do with impacting customer service.

First of all, we have restructured incentive plans for our store-level management. That includes the individual manager as well as the assistant manager. Restructuring incentive plans to ensure that their bonus compensation is directly aligned with quality customer service, particularly in the case of assistant managers, but also improve sales and profit margins, particularly in the case of the individual manager. So much more focused, simplified bonus programs for store-level management.

In addition to that as it relates to the organization, we have somewhat flattened the organizational structure by reducing layers between the president and the drive-in-level directors, those who oversee multiple units in a market. This has improved the communication and access with senior management and individual partner drive-ins and we think will result in better performance over time.

We have also implemented a tip-credit wage program. This really should provide for additional incentive for our carhops to provide quality customer service with a focus on the tip-credit wage. There is an additional benefit including the defraying of future impact of minimum wage increases on our system. But we’re also looking at it from the standpoint of the savings that are being generated through the program will be used to reinvest in labor to improve service in the future, and in turn, sales at partner drive-ins.

As a result of these changes we have seen a significant improvement in the speed of service as well as overall customer service scores, through independent third-party measures with our mystery shopper program. Those changes have been concrete and in the most recent past have put our service times and scores more on par with our franchises.

While the changes have not immediately resulted in positive same store sales performance to date, we have no doubt that implementing these types of initiatives, getting these kind of service results, are strong indicators that the strategies are having a positive impact and that as we are able through marketing, or otherwise, to drive higher sales that we will be able to retain those sales as a result of more positive performance, more positive service, that our customers will experience at those partner drive-ins.

Now we have talked in the recent past about re-franchising activities as well. We are in the early stages of initiatives to re-franchise underperforming drive-ins and also then to moderate the pace of development of new partner drive-ins. Our belief is that this approach will result in a more efficient use of our capital but also ensure that we’re well positioned to operate our remaining partner drive-ins efficiently.

There have been times in the past in my experience with our company both in the late 80s and the late 90s where when we did that, that is exactly what occurred. Our remaining drive-ins were more effectively operated and those that we re-franchised were also more effectively operated by owner-franchisees and the brand was better off in both cases.

Over the next several years we expect that this initiative of re-franchising will reduce the percent of partner drive-ins from roughly 20% that we have as part of the system today to 12% to 14% of the system. The excess cash that is generated from the re-franchising activity will be used to pay down debt or for other shareholder value driving initiatives as those become available over time and we will do so opportunistically as opportunities present themselves.

So as it relates to this re-franchising, we are in negotiation with several parties right now for several partner drive-in markets that we have indentified for re-franchising and we, of course, had questions, understandably, will the credit markets negatively impact the ability to do so. And we believe that the parties with whom we’re discussing this right now, that our clear understanding of their circumstance, that some of the broader problems we see in the market place should not negatively impact their ability to acquire these drive-ins.

But it also should give you some sense, there are a number of folks that we are negotiating with for acquisitions of partner drive-ins, the strong level of interest, should indicate to you the confidence that many of our franchisees have in our brand and the opportunity they see here for growth of their businesses and the sustained growth of brand.

As I mentioned, in the late 90s when we did this, we re-franchised, at that time about 20% of our partner drive-ins, we saw a positive impact on the remaining drive-ins, both in terms of sales and profits. And we would expect the same thing to occur in this circumstance with a fewer number of stores and narrowed focus for our operations folks.

As it relates to system-wide initiatives, we continue, as we have in the past, to focus on quality of our products that we offer, but also the speed of service and products offered at a competitive price. We have implemented, in the recent past, a customer satisfaction feedback system. This is a system-wide initiative. It is in all drive-ins across the system. It’s redundant but I want to make that clear. It’s not just partner drive-ins.

The objective is to obtain direct feedback from our customers as another means to both understand what is occurring across the system and make sure we can drive exceptional service to our customers.

We are also, in an attempt to ensure a level of refinement about this approach to our business, this aspect of our business, we are working with a third-party pricing consultant to assist both partner drive-ins and franchisees to develop store-level pricing strategies, store-based, trade-area pricing strategies, to be more competitive with our peers and in some cases place more emphasis on value than we have historically.

In terms of other system-wide initiatives that we continue to focus on, we do continue to increase our investments in marketing, both at local at a national level. And in the process emphasize our distinctive menu with new products, but also value offerings such as $2.99, $2.99 extra-long chili cheese coney and tater tot combo.

Total media investments that we expect to see this year should exceed $200.0 million and about $100.0 million of that is going to be on national cable. So continue growth in those marketing expenditures, but also a refinement of message that we will be taking to the consumer.

In conclusion of my remarks before turning it over to Scott McLain, the President of our company, I should say that we continue to drive our business using this multi-layered growth strategy that we have talked about for a number of years and utilized quite successfully. It focuses not only on growing sales but also improving operations, using our capital more efficiently, and increasing our brand presence across the country in a way that no other brand, I think at this point, is seeing in terms of the growth rate and presence of the brand. Across the country, the rate of growth that we’re experiencing.

We believe that our continued growth of the brand with increased investments in media and new store openings, along with these initiatives to improve sales that I have laid out, our own re-franchising of underperforming stores, and our more moderate partner drive-in development, will yield solid results for our shareholders over the next several years.

I would now like to turn it over to Scott McLain to talk about the development activity in the fourth quarter and for the fiscal year.

W. Scott McLain

Fiscal 2008 was a good year for Sonic development. We opened 169 drive-ins, including 140 by franchisees. We completed 967 retrofits, including 800 by franchisees, which now puts us at roughly 60% of all Sonic drive-ins that have the new look. Relocations to better trade areas and the complete scrape and rebuild of existing drive-ins also increased to 69 versus 42 the previous year.

While we don’t count these as new drive-in openings, they do require a new drive-in to be built and they are probably our highest ROI activity, routinely generating sales increases of greater than 25%.

Were we to count these as new drive-ins, it would add roughly 2% to our overall system growth rate.

The increased focus on retrofits, relocations, and rebuilds by our existing franchisees had somewhat of a constraining impact on new drive-in openings, which were slight lower in fiscal 2008 than in the previous year. However, when relocations and rebuilds are added to the mix, total development activity by franchisees actually increased by 23 drive-ins, or 13% for the year.

Our development pipeline continues to be strong. Although we terminated a number of non-performing area development agreements during the year, our ADA commitments stood at 973 at the end of August, a 7% increase from the beginning of fiscal 2007 and over a 50% increase from where we stood three years ago.

We also sold 481 development options in June of 2007, which gave existing franchisees the right to open under the more favorable Number 6 License Agreement any time in the next five years. And over 400 of those renewed with additional payments in May of this year.

When you consider the development options on top of record ADA commitments, the committed portion of our pipeline continues to be at record levels.

Performance of new drive-ins overall remains strong with average openings now over 1.3 million, roughly 30% greater than what we were seeing just three to four years ago.

High volumes continue in the 27 drive-ins opened since March 2006 in new markets, which are averaging roughly $2.0 million in sales during their first year, and approximately $1.6 million their second year.

As Cliff mentioned, we opened our first drive-ins in New Jersey, Michigan, and Minnesota over the summer, with very strong sales.

In summary, we have a lot of momentum on the development front. Our pipeline is as strong as it’s ever been and we continue to see a very good new store sales result, particularly in new markets.

However, the effect of the current turmoil in the credit markets on our development is difficult to predict. We have raised our credit requirement significantly over the last few years and newer franchisees who are scheduled to open the larger portion of our new stores are very strong financially, as a group.

The majority of these new franchisees, as well as our existing franchisees, tend to use either cash or local banks as their primary source rather than national lenders. To date, we have not lost a project because of financing, although it is taking more equity and more time to put deals together.

This will likely have somewhat of a dampening effect in the short term on overall development, including new store openings. However, assuming some rebound in credit conditions, it will hopefully be short-lived.

We ended the year with 3,475 total drive-ins. With the new states we entered this summer, we are now operating in 37 states. We have also sold territory in several additional states and we are well on our way to becoming a truly national brand.

I will now turn the call over to Steve Vaughan, our Chief Financial Officer, for his remarks on our financial performance.

Stephen C. Vaughan

For the fourth quarter ended August 31, 2008, we experienced a 3% decline in earnings per share. For the year earnings per share increased 1%, from $0.96, which is adjusted for debt refinancing charges, to $0.97. Lower than expected sales of partner drive-ins were a major contributing factor to our fourth quarter performance.

Same store sales at our partner drive-ins were challenging during the fourth quarter, decreasing 6.3%. For the fiscal year partner drive-in same store sales decreased by 1.6%. However, as Cliff mentioned, we are seeing positive results in our mystery shopper scores and believe it is just a matter of time before this improvement in service begins to manifest itself in better sales performance.

Our franchising income, including franchise fees and royalties, increased $2.3 million during the quarter and $11.5 million for the fiscal year. This increase demonstrates the sound nature of our franchising business model, higher franchising income reflecting solid new store development, positive same store sales in franchise drive-ins, as well as the impact of a slightly higher royalty rate.

Our royalty rate increased by approximately 6 basis points during the quarter. This increase was primarily driven by our new drive-ins opening under the newer form of license agreement that has a higher royalty rate.

A number of factors impacted our operating margins during the quarter. Higher prices for several commodity items as well as higher labor costs resulting from the July increase in the federal minimum wage were exacerbated by a decline in same store sales and resulted in a decline in drive-in level margins of 400 basis points during the fourth quarter. For the fiscal year, margins deteriorated by 150 basis points.

We expect that the year-over-year increase in commodity costs will moderate slightly during the first quarter and then moderate further as we move into the latter part of the year, based upon current trends.

We did implement a 1% to 1.5% price increase in July to partially offset commodity and labor cost increases. As we implement our new pricing strategy smaller, targeted price increases will take place throughout the coming year.

Effective August 1, partner drive-ins implemented a tip-credit wage program. As Cliff mentioned, the primary purpose of this program is not to save money but to provide quality customer service. Over time, however, we do anticipate this program will help defray the impact of future minimum wage increases.

For the fiscal year SG&A grew modestly at 4%, while depreciation and amortization grew by 12.3%, reflecting our increased capital investment in retrofits, rebuilds, and relocations.

We did re-franchise 11 drive-ins during the fourth quarter which resulted in a gain that produced a $2.4 million increase in other income. As Cliff mentioned, we are actively negotiating with several groups and are confident in the potential for a successful outcome in our refranchising strategy. However, the timing and amount of these transactions will be somewhat unpredictable. Going forward, we will break out gains from re-franchising the partner drive-ins should they become material.

We experienced a slight increase in interest expense during the fourth quarter due to higher borrowings. For the fiscal year interest expense increased due to borrowings under our variable funding note for $32.0 million in share repurchases made during the first quarter, as well as capital expenditures of $126.0 million, including franchise acquisitions.

We currently have $175.0 million outstanding under our variable funding notes, with interest expense on notes based upon LIBOR. With the turmoil in the credit markets we have recently seen an increase in LIBOR of approximately 200 basis points. If this higher rate continues throughout the year, our interest expense will be approximately $3.0 million to $4.0 million higher this fiscal year versus our original expectation.

The existing availability under variable funding notes was $25.0 million prior to the bankruptcy filing of one of variable funding note lenders. As a result of the bankruptcy that amount has now been reduced by one half to $12.5 million. However, we are currently carrying approximately $30.0 million in cash investments over and above our normal operating needs.

Looking to FY2009, we do not anticipate needing to utilize any of our cash investments or the remaining availability under the variable note, as our free cash flow, after planned capital expenditures of $60.0 million to $70.0 million and $38.0 million in mandatory principal payments is expected to be positive.

Under our existing fixed rate notes mandatory principal payments are required through the term of the issue. This feature allows the company to de-leverage over time. We are pleased to report we have consistently exceeded our debt compliance covenants and we anticipate this compliance will continue into the foreseeable future.

Finally, system drive-in sales were adversely impacted by losses related to hurricanes in the first part of the fiscal year. Further, insurance deductibles associated with property and business interruption losses at partner drive-ins are anticipated to negatively impact earnings by approximately $0.01 per share in the first quarter.

So to summarize, we face a number of challenges in FY2009, including tightening credit markets, weakening consumer sentiment, higher commodity costs, as well as the impact of the recent hurricane. All of these factors have the potential of negatively impacting our earnings outlook, particularly for the first half of the year. However, we remain optimistic about the longer-term outlook for our brand and continue to see significant growth opportunities at the drive-in and national levels.

This concludes our prepared remarks and we would be happy to accept your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve West – Stifel Nicolaus & Co.

Steve West - Stifel Nicolaus & Co.

Can you maybe explain the tip-credit wage initiative you are doing and really what does that mean? Are we supposed to be tipping at Sonic, because I’ve never done it in the past? You make me feel cheap here.

And also just a follow on question about some of the re-franchising you’re doing.

J. Clifford Hudson

On the tip-credit issues, the majority of our customers do tip at Sonic, so you are in the minority. And how they greet the customer, interact with the customer, that can significantly impact their tipping. And that’s really why we believe that this initiative is not just cost-saving initiative but it’s more about motivating our carhops to provide good customer service.

Steve West - Stifel Nicolaus & Co.

So would you expect that to have some relief on the labor line this year?

J. Clifford Hudson

I think it will over time. It’s not something where we went in and reduced anyone’s pay. It’s something that we are phasing in over time. So I think you will see the benefit of that become progressively greater as the quarters move along.

Steve West - Stifel Nicolaus & Co.

And on the re-franchising your earnings guidance contains re-franchising gains. Can you quantify that? And then maybe talk about as credit is tighter, if things get really bad would you be able to and willing to step in and guarantee loans for franchisees to ensure that your growth initiatives are carried out for the year?

J. Clifford Hudson

I will deal with the second half of the question and Steve will deal with the first half of the question.

The process of re-franchising, as those discussions are occurring today, the folks with whom we are negotiating are extremely well capitalized and so our focus is to consummate those transactions as quickly as possible and we will deal with the eventualities of a tightening credit market at a later date as those circumstances arise. But with the parties we are negotiating with right now, we don’t see liquidity nor net worth nor available funds as being a limiting factor.

Stephen C. Vaughan

And on the first part of your question, the guidance that we gave last month anticipated that roughly one half of our growth would come from operations and the other half would come from the re-franchising gains. Again, the re-franchising gain piece will be less predictable as to what quarter those will occur in, but that is roughly what that guidance was based upon.

Operator

Your next question comes from Joseph Buckley - Banc of America Securities.

Joseph Buckley - Banc of America Securities

I would like to go back to the tip-credit again. It sounds like existing employees were kept on the old system where they’re making at least the minimum wage, is that correct?

Stephen C. Vaughan

Yes, that’s correct.

Joseph Buckley - Banc of America Securities

So then as you’re hiring new people, are they coming under the tip-credit provision, and is it a full tip-credit provision where you pay them, I think the rate is $2.13 an hour?

Stephen C. Vaughan

Yes, new employees, or new carhops, it is just for the carhop position, but they do come it at a tip-credit wage. We are not utilizing the full minimum amount so it will depend upon the drive-in but it will be something higher than that minimum tip-credit wage amount.

Joseph Buckley - Banc of America Securities

How often does your carhop base turn over? What’s the turn-over rate like and at what point will this become a significant benefit to margin?

W. Scott McLain

We do have turn over in our carhops but one of the things that helps us have minimal turn over in carhops is the fact that they do get tips and they can earn significant money. The primary reason to do this, for us, is not to manage our margins. The primary motivation for us in doing this is to be able to have more carhops and to have the carhops that we have serve our customers better. Because we believe that our sales and profits will benefit more from better and faster and friendlier service than they will from us trying to squeeze our margins. So that’s kind of the philosophy with which we’re adopting this.

Joseph Buckley - Banc of America Securities

Does the carhop employee base turn over 100% a year? A full year from now will it be fully implemented, do you think?

Stephen C. Vaughan

Roughly, yes.

Joseph Buckley - Banc of America Securities

The [inaudible] margins in the fourth quarter, is there any reason to think they’re going to change much in the first half of fiscal 2009?

Stephen C. Vaughan

I think a lot of it will depend upon our sales results. Some of the deterioration that occurred in the fourth quarter was de-leveraging from the lower same store sales at partner drive-ins.

Joseph Buckley - Banc of America Securities

You mentioned food costs being a little bit less onerous. Could you just elaborate on that, where you’re seeing some relief?

Stephen C. Vaughan

Beef costs right now are really our biggest challenge. They’re at between 30% and 35% year-over-year. As we look out into the future months, we don’t believe that these levels they’re at currently are sustainable. And then we also have been able to lock in some of the savings in dairy and cheese so we anticipate that based on current contracts that we will see the second quarter become less challenging on a year-over-year basis.

Operator

Your next question comes from Matthew Difrisco – Oppenheimer &Co.

Matthew Difrisco – Oppenheimer &Co.

Can you give us some of the numbers behind your EPS guidance from last month? It sounds you’re at least holding to the 12% to 14% growth. What is your same store sales if you’re expecting about 7% of that growth to come from your operations?

J. Clifford Hudson

We have not given specifics other than to say that we anticipate same store sales will be positive. That is what that guidance is based upon, but no specific range.

Matthew Difrisco – Oppenheimer &Co.

And do you have an estimate of how many stores you expect to be developed by the system or the franchisees?

W. Scott McLain

I think, to be honest with you, as we said, we have a tremendous amount of momentum on the development side. We’ve got a great pipeline and we have every reason for optimism. However, to be honest with you, with the current credit situation, it’s difficult to predict how that’s going to impact us going forward.

Absent the credit situation we should have a very good year for development. But, the credit situation, you know, if you can tell me exactly what’s going to happen with credit, I can tell you exactly how many stores we’re going to open.

Matthew Difrisco – Oppenheimer &Co.

Well, I guess the question is, then, can you do the 7% operating EPS growth without doing the development. How are you getting to that comfort with today’s market, 7% EPS?

Stephen C. Vaughan

The guidance is based upon what we laid out in our release last month, 155 to 165 franchise openings. I think what Scott is saying is that the world has changed quite a bit in the last three and a half weeks and so it has added more uncertainty to that guidance. But the 5% to 7% growth from operations is based upon 155 to 165 franchises.

Matthew Difrisco – Oppenheimer &Co.

What about store closures? Do you expect, in the environment, we had a weighted number over the last 12 months? Is that 30+ going to go up, stay the same, or possibly go back down?

W. Scott McLain

I don’t see any reason for it to be materially different than what it’s been in the past. We’ve got 3,500 stores, we’re a 55-year-old chain, and so every year we have a number of stores that close in kind of the ordinary course of things. And as franchisees decide to relocate or rebuild or retrofit, sometimes they will look at the lower-volume stores that they have. But I don’t see why that’s going to be significantly different this year than it was last year.

Matthew Difrisco – Oppenheimer &Co.

Presumably you’re looking for gains on the sale of these franchisees. Does that imply, then, that they’re relatively older stores with less tangible asset value or have they been opened most recently?

W. Scott McLain

It really will be a mixture of both. We’ll re-franchise some newer and some older stores.

Matthew Difrisco – Oppenheimer &Co.

The minority interest expense line, it seems like it came down. I know that it correlates with the margins in the stores, but has it benefited in the last couple of quarters, specifically this quarter, from some of the reorganization you talked about? Have you lost some middle-management that may have been participating in that minority interest line that are no longer going to continue to participate in that?

J. Clifford Hudson

Well, the minority interest line, as you alluded to, is the expenditure, it’s the profit-sharing at store level with our partnership drive-ins. Store-level and supervisory-level. Our turn over, to the extent that that has modified in the recent past, has frankly been less voluntary. In other words, with the poor performance of partnership drive-ins, there has been some increased turn over but a large part of that has been forced.

Now, as it relates to this diminished profitability or this diminished sharing, the minority line, what we have done and I didn’t allude to earlier, I made comment about our refocusing incentives. What I didn’t say and perhaps should have said, was that we have also gone back in this more sluggish situation and to avoid the potential for turn over with the partners we want to keep, we have restructured the economics of those deals to decrease the likelihood of turnover.

So if it’s someone that we wanted to leave, they’ve left. If it’s someone we wanted to keep, we have restructured the terms of it to increase the likelihood of their staying and then simplified the incentive compensation so as to drive better customer service behavior.

Matthew Difrisco – Oppenheimer &Co.

Does that then have an impact on the income statement as far as causing the labor line to go up and the minority interest to go down? Are you giving them cash, not based off of profitability?

Stephen C. Vaughan

It can if there is a marginal partnership deal and we determine that that partnership isn’t viable.

J. Clifford Hudson

Where we determine that the living off of profits is not viable we will shift more to cash.

Stephen C. Vaughan

Which would increase labor and bonuses.

J. Clifford Hudson

And it’s not something we would anticipate for the long run, but rather, you might say a stop-gap, for some period of time, in order to right-size this thing so that the store-level manager, we can make sure that they can make a living and not feel like they’ve got to look for employment elsewhere during this more difficult period.

Matthew Difrisco – Oppenheimer &Co.

That’s a good philosophy, managing for the long term and not just managing for near-term leverage. But I guess that had a little bit of an impact on the labor line this quarter?

Stephen C. Vaughan

That’s correct.

Operator

Your next question comes from Brad Ludington - Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

The $2.4 million that you mentioned earlier from the re-franchising gain, that was on the other revenue line?

Stephen C. Vaughan

That’s correct. Yes.

Brad Ludington - Keybanc Capital Markets

And then when you said that half of your earnings growth was based on re-franchising gains, that would imply about $5.0 million to $7.0 million throughout the year?

Stephen C. Vaughan

Yes, that’s correct. Throughout FY2009.

Brad Ludington - Keybanc Capital Markets

And do you know approximately how many stores that would represent?

Stephen C. Vaughan

No.

Brad Ludington - Keybanc Capital Markets

The re-franchising time frame, do you expect to reach the 12% to 14% by a certain year?

J. Clifford Hudson

We did say over the next several years. We did say 2 to 4 years I believe is what the comment is. But Steve has also made the comment to you that the predictability of that, quarter by quarter, year by year, there’s no reason to expect it to really be smooth. It’s going to depend on a variety of factors.

Brad Ludington - Keybanc Capital Markets

Just clarification, you will lap the roll out of happy hour in November?

J. Clifford Hudson

That’s correct, yes.

Operator

Your next question comes from Sharon Zackfia - William Blair & Company.

Sharon Zackfia - William Blair & Company

I want to delve a little more into the divergence and the comps between company-owned and franchise. And I understand what you’re saying about service and all that but I’m just wondering, when you look at your own stores, which clearly you have more detail on, are you seeing a difference in the way the customers are using the stores? Are they coming in less for treats? Is it combo meals that are weaker? Are they trading down? What is it that you are really seeing at the company-owned stores?

J. Clifford Hudson

I’m going to answer broadly and if one of these guys wants to talk more about particulars, they will.

But I think the more recent past and if this is redundant of what you heard previously, my apologies, but it is what has occurred. In terms of this opening of performance, in the earlier part of the decade a number of things had been done to actually close the gap. We went through a period of time where partnership drive-ins had more positive same store sales and the gap between the two began to close. That has not been the case, not certainly in the last year, but perhaps longer.

But over the last year what we have seen is less artful price increase application than we needed, compounded then with application of constraints on labor that were unwise. And as we moved into the spring and an increase in business, a level of service that went through substantial decline. And so all those are variables that we could control and did not manage in a way that could have been managed and will be managed differently going forward.

But then exogenous circumstances of a pretty dramatic shift of consumer sensitivity to both service and price and so with our prices higher, our service lower, and I’m talking about in partner drive-ins, you saw this gap open up.

So you could focus on it and say is it just combo meals, is it just evening, whatever. In fact, it was broad. And it was not just attributable to just one promotional item or another. So in some ways when you lay out those mismanagement elements I’ve just laid out, the attempt to correct those steps lie in the complement to the elements of not managed so well, i.e. how are we approaching pricing, i.e. how are we approaching staffing, how are we approaching incentives, customer service incentives for our management? So I think this is a bigger source of that shortfall than one promotional item or one day part.

Sharon Zackfia - William Blair & Company

I think that’s all fair. It looked as if in your previously giving guidance that you were looking for a return to flattish comps in company-owned and I think probably all of us are having a little bit of a difficult time rectifying negative 6% with a return to flattish comps. And I appreciate all that you’re doing but none of those are kind of an easy silver bullet to getting comps back up to flattish. So I’m trying to figure out where that optimism comes from? Is it coming from those easier comparisons that you start to face in the second half of this next year, or is there something you’re already seeing with some of these initiatives that gives you the confidence that you can improve those company-owned results?

J. Clifford Hudson

There are actually at last two-fold with the company-owned results. One is, one of the things that occurred last winter into the spring was poor service and then as you drive business, one happy hour, etc. but moving into spring where business picked up, with poorer service and then traffic picking up, it’s a bad combination. You’ve got increased traffic and you’re not ready to serve them and turn people away.

So what we would hope and expect to do, and are working to do, is reverse that dynamic. That in fact, we have seen customer service rank empirically and subjectively, third-party, we have seen customer service improve at our own drive-ins such that service times are on par now with franchise operations. When I say on par, I think in the month of August we were actually better than franchise operations. And again, this is third-party empirical data. That’s quantitative.

So that’s the first step, being ready to address those customers. The second step is marketing initiatives to work to drive traffic. And so part of your question is are we doing something different, are we seeing something different. Yes, they’re operating the service boards. What other basis is there going to be for expecting of a different outcome? Approaching our marketing initiatives differently than we were a year ago and even six months ago, to attempt to drive that traffic. And as we’re able to do so, a belief that we will retain sales better than we were six months ago.

Sharon Zackfia - William Blair & Company

When you say change your marketing, does that mean the forms of media being used or the message?

J. Clifford Hudson

It’s all of the above.

Sharon Zackfia - William Blair & Company

Just in terms of the franchise developers, I’m just curious at this point, real time data point, is how much they’re generally being asked to put down at this point for new unit development versus maybe a year ago.

J. Clifford Hudson

Not all are the same. But I would tell you that the average is probably 20% to 30% down as opposed to you might have been looking at 10% to 15% down a year ago.

Operator

Your next question comes from Lawrence Miller - RBC Capital Markets.

Lawrence Miller - RBC Capital Markets

On same store sales, you said in the release that it had improved year-to-date and I realize that this economy is a real state of flux. So I was hoping you might be able to give us a little of color on the trend in the quarter in that it would help us understand the first quarter of 2009.

J. Clifford Hudson

We’re not surprised that you want more data on what’s happened in the last few weeks. I think we indicated a year ago that our objective going forward was to give you information on the quarter completed and give you quarter-by-quarter data rather than give you 3 and 5 week data. And our intent is to stick with that because the shorter period of time is less meaningful. Giving you information, even on a 3-month period, we’re a 50-year-old brand doing $4.0 billion. It seems to be difficult to extrapolate any long-term anything.

Lawrence Miller - RBC Capital Markets

Just so much has changed and I think we’re all trying to get a handle on what the new run rates are so that would have been helpful.

On same store sales, when the franchisees left that happy hour program, did their mix stabilize or was there still some negative trend, as that usage built on that program over that second year?

J. Clifford Hudson

Many of our franchisees that have had happy hour have done that for a number of years. And I can’t tell you specifically what happened in month 13, in month 14. What I can tell you is that those franchisees who have done happy hour for the longest period of time tend to have very high average unit volumes and very high customer service scores and it has been a very good way for them to drive their average unit volumes over time, which is one of the reasons why they were pushing us, so to speak, to adopt us for the system.

Lawrence Miller - RBC Capital Markets

I’m also trying to just juxtapose in my own mind the change in the tip-credit strategy and your comments that service standards have been sort of behind the decline in partner drive-thrus. I know you have talked about it a bunch but my sense is that new employees coming in would be more resentful of the fact that they’re getting paid less than existing employees who are getting minimum wage plus tips. How do you manage that transition process? I realize that the turnover in fast food is really high and over the two or three year period everybody will cycle through, but just as you’re trying to get that same store sales trend rectified, is this the right time to make that switch?

J. Clifford Hudson

I do understand your point. We haven’t had really an issue as we have rolled this out, in that regard. And I think our goal is for our carhops to give great service and make a lot of money. And as long as new person coming in, no matter what their tip-credit wage is, walks out at the end of the day with a healthy amount of money, then they’re going to be pleased. And that’s been our experience to date.

I would also point out that we do have some franchisees who have used tip-credit over time and their experience has been that’s it’s been very good for service for them.

And my intuitive reaction to when is the best time to do this is quite the opposite of what you just described saying is this really a good time to do it. In a period of time where we have greater challenges from a competitive standpoint, in a period of time where we have higher costs because of minimum wage, and a period of time when our own partner drive-ins have been providing poorer service and we’re working to rectify that, having an initiative that allows greater labor on lot ultimately, to deliver service, it would strike me as this is a pretty darn good time to implement it.

The challenge that you’re describing, whatever that challenge is, friction it may cause between employees, etc., whatever that challenge is, that challenge is going to be there no matter when you do it. But doing it at a time where the competitive challenge is more price-focused and we can do something to drive service more completely, it’s a darn good time to do it.

Lawrence Miller - RBC Capital Markets

And Steve, you mentioned contracts on dairy. Can you give us a sense of what items you are contracted on and for how long? Just on the majors.

Stephen C. Vaughan

Again, that’s the bag in the box that goes into our drink mix, those are on long-term contracts with annual inflationary adjustments each calendar year. And those roughly increase at probably about a 2% rate.

Beef is month-to-month. It makes up about 12% of our costs. And it’s currently up between 30% and 35%.

Our chicken is on a fixed contract through the end of calendar 2009. Flat.

And then a couple of other areas, dairy and cheese, right now are roughly flat. And we’ve got those partially locked in through the remainder of the year. It’s various months. We’re looking for opportunities to continue to lock those in.

So those are the larger items.

Operator

Your next question comes from Christopher O'Cull - SunTrust Robinson Humphrey.

Christopher O'Cull - SunTrust Robinson Humphrey

Over the past few years you’ve almost doubled the number of shifts you operate within a Sonic. By my count it’s at least probably 28 shifts a week now. Do you think you have the right level of store management to execute the brand at the desired levels?

J. Clifford Hudson

That’s an interesting question. Because over time as we’ve looked at different initiatives, we have looked at some of these. As an example, we looked at breakfast several years ago. When we implemented breakfast, I mean you can look at it, as a matter of fact some of our operators at the time said we were already kind of stressing management, to which our response was, really breakfast was an avenue to another place.

Meaning breakfast provides the incremental sales to support incremental management. And at that time the common structure was instead of having a manager and two assistant managers, move to three assistant managers. And really it was a ticket to better management component across all day parts because it with just a few hours additional opening, you would increase your assistant management staff by one third.

But also, frankly, our view was that it would in the long run allow a more reasonable life style on the part of the lead manager. And so over time, particularly with the implementation of breakfast, you’ve got some late-night activity, etc., but with the implementation of breakfast it really did provide that sufficient management infrastructure.

Now you question is, is that sufficient with where we are? We believe the answer the yes. We fashioned that. The irony, just so you’ll know, in 2001 when we started rolling out breakfast, our comment to our operators was, off the cuff, I think our average unit volume was probably 850 to 900 at the time. And we told our operators with this additional management component, better service across all day parts as a result, it really is a path, or an avenue to take to you to $1.1 million AUV. And that’s in fact what has happened.

So I guess the implicit in your question is perhaps that there is a doubt that there is sufficient, but I think that we are comfortable with where we are.

W. Scott McLain

And I think one of the things that makes us hopeful about partner-driving performance is that assistant managers do run a lot of the shifts and it is important that they are properly incentivized on the right things. And so one of things that SRI has done is change their incentive structure for assistant managers so that it is purely focused on customer service. And that change has been one of the big key reasons why SRI service has improved dramatically over the last couple of months.

Christopher O'Cull - SunTrust Robinson Humphrey

I was just wondering though if you’re not seeing maybe managers kind of muscle through in terms of just the short term here to benefit customer service, and that may wane over time.

J. Clifford Hudson

I think what we did see in the winter into the spring was that attempted muscling. And this is the management issue referred to earlier of too great a constraint in the fall a year ago on labor costs. And so quite frankly, the foul-up on our part was you might say too many open positions as you got into the spring. Too many open positions in assistant manager level across SRI.

So the process, the summer, with the change in management at the top, the process in the summer was to get those positions filled, even at the expense of additional labor and deterioration of margin. Get those positions filled and get them right-focused from an incentive standpoint. Simply, which was done, dramatically simplifying what they had to focus on to get bonuses and so here we are.

I think your question is a right one but perhaps more applicable to where we were three and nine months ago.

Christopher O'Cull - SunTrust Robinson Humphrey

When do you expect to get store-level pricing in place?

Stephen C. Vaughan

We actually have it in test right now and expect that we will be able to put it in our partner drive-ins I believe in the next month to sixty days.

Christopher O'Cull - SunTrust Robinson Humphrey

Scott, it sounded like you had expected franchise openings could be dampened in the near term. But shouldn’t those franchisees already secured financing and probably have some construction underway? Is there a risk that it could be an issue later in the fiscal year?

W. Scott McLain

Yes, it could be. I think the good news for us is that we have very strong franchisees, as I mentioned earlier, who tend to be very well capitalized and so hopefully their projects will continue and they will be able to open on time. We have not lost a single project due to financing. It is taking a little more equity and it may take a little more time to put deals together, but so far all our franchisees have been able to secure financing and keep their projects going.

J. Clifford Hudson

We have gone through an assessment, to look at on an aggregate basis, what is the source of financing for franchise expansion. The greatest majority, three quarters or more, of our franchisees go through local or regional banks rather than national banks that may be changing approach to that side of their business. So I think is good news for our operators.

The other piece of good news for our operators is we are seeing some moderation in terms of cost of new openings, both land and materials. And that’s a very different picture versus 12 to 24 months ago.

Operator

Your next question comes from Greg Ruedy – Stephens Inc.

Greg Ruedy - Stephens Inc.

You’re looking to compete on both a premium and value perspective. Can you kind of highlight for us where you’re feeling pressure? Is it equal parts? Is it more of one more so than the other? Any color would be helpful there.

J. Clifford Hudson

Equal parts meaning quality and?

Greg Ruedy - Stephens Inc.

Are you feeling more pressure on the high end of your menu from the consumers or is driving share more difficult from value promotions, dollar menus, etc.?

J. Clifford Hudson

Let me kind of give you a caveat and then try to answer your question. That is, I’m not real interested in laying out what all our marketing strategy is. I mean, some of it historically, as a general matter, has been apparent, product and service differentiation. We are in a different environment now where there are some things going on that we have slow to respond to and we have got to do that. So we’re going to do that.

I’m not trying to be cute with you at all, I’m not real interested in laying out, if we’d done this we probably could have driven that, so here’s what we’re going to do in the next 90 days in order to get this. I’m not really interested in going there.

Operator

Okay, I’ll switch gears then. You had a nice average check driver with the pay at the stall initiative. Can you highlight for us where the credit card usage is as a percentage of transactions? And then what is the likelihood that number could flatten or reverse, given the consumer credit crisis?

Stephen C. Vaughan

That number has been pretty constant over the last six months.

Greg Ruedy - Stephens Inc.

And concerns that that number could reverse itself if people’s credit card limits are getting reduced?

Stephen C. Vaughan

We haven’t seen any [inaudible] .

Greg Ruedy - Stephens Inc.

Could you talk about your decision to discontinue the reporting of the core versus the developing market numbers?

J. Clifford Hudson

So here’s the deal. As our business develops, we have had to look at our business differently. And as it has developed this year we had to look at it differently still. But if you go back a year or more ago, what we started seeing was, so we’ve been doing national cable for several cable now. We started seeing really good performance, really strong performance. New store openings, new markets. It gave us the confidence to start moving to new markets with greater speed and more openings.

And we started seeing that there are layers to our brand that are geographic, that are core markets. South Central U.S., developing markets. South of the Mason Dixon line but east and west, South East and South West. New markets, more Northern tier.

We have to manage those markets differently, from a marketing standpoint, development standpoint, and so on. But in terms of reporting you start saying what’s going on in the core markets, what’s going on in the developing markets. Gee, what’s going on in new markets now.

We finally got to the point where we said we’re going to balkanize our discussion of our business to a point that it’s not even a brand and from our view point may not even be helpful to understanding that the long-term health of the business, the fact that we can go into new markets in a way we couldn’t five years ago, is great, great news for our brand and great, great news for a long-term stockholder.

But if we open 100 stores this year in new markets and you come back next year and see what happened to those 100 stores in the second year, and we break all that out, I mean quite frankly, the way so short-term focus a lot of times on comps, somebody is going to panic about what happened to the new market second year and my reaction is, hey, their sales are still above what it cost them to get into business, they’re profitable, this is a great strategy for that individual operator in that new market and it’s a great strategy for us as a franchisor and we’re just slicing and dicing up our reporting in such a way that all it does is cause frantic.

So let’s cut it out and let’s talk about what’s happening to our brand, our growth dynamics, our continued expansion of a business that over a ten-year period went from $1.0 billion to almost $4.0 billion. That’s what we ought to be talking about, not how do we balkanize reporting in such a way as to get everybody shaking in their boots.

So that’s why we did it. That’s why we said it a year ago and that’s why we’re sticking to it.

Operator

Your next question comes from Steven Rees – J.P. Morgan.

Steven Rees - J.P. Morgan

I had a question on the SG&A growth outlook. At up about 4% in 2008 it looked like it was very well managed. But how should we think about growth in SG&A dollars in 2009 and beyond, with the re-franchising process? I would assume there is some opportunity to lower that?

Stephen C. Vaughan

We will evaluate it as we move forward with the re-franchising strategy. We will evaluate opportunities to manage that number as to what level of growth we have.

Steven Rees - J.P. Morgan

Is it reasonable to assume another year of sort of lower than average growth at around mid-single digits in SG&A?

Stephen C. Vaughan

Yes, I think that’s reasonable.

Steven Rees - J.P. Morgan

And in the past you have talked about total media expenditures and it’s been an important driver of growth, I think up double-digit on an annual basis since 2003. Can you talk about your plans in 2009 for media expenditures, where you expect those to come out?

W. Scott McLain

I don’t have an exact number, but in excess of $200.0 million and half of that, or approximately half of that, will be spent on national cable advertising, which has been a great thing, particularly in our newer markets and helping them get the great sales results that we’re seeing in those new markets.

Steven Rees - J.P. Morgan

And do you have a final number for 2008? I think the original plan was like for $190.0 million. Is that where it came out at?

Stephen C. Vaughan

Yes, it’s going to come in right around $190.0 million.

Steven Rees - J.P. Morgan

What pricing factor will you have in the system for 2009, excluding the potential price increases from the localized pricing? At company stores.

Stephen C. Vaughan

We are not announcing that in advance.

Steven Rees - J.P. Morgan

But are you currently running?

Stephen C. Vaughan

Right now we’re running between 1% and 1.5%.

Steven Rees - J.P. Morgan

And that’s the total effective pricing?

Stephen C. Vaughan

That’s correct.

Operator

Your next question comes from Paul Westra – Cowen & Company.

Paul Westra - Cowen & Company

I want to circle back on a few topics if you can further quantify. First, on the speed of service comments, can you give us an idea of where your company stores were relative to speed of service versus franchisees. Were they sell to? And we know now that they are at par or even better.

J. Clifford Hudson

What do you mean what they sell to? I didn’t understand your comment?

Paul Westra - Cowen & Company

I know that your service scores dropped and your speed of service slowed last year.

J. Clifford Hudson

Yes. It had developed a pretty good gap. It’s measured in less than a minute. The order of magnitude was probably 30 to 40 seconds slower on average by last spring. And by August not only had the gap been closed but we have moved a couple of second in total service time, meaning from the time they pushed the button or placed an order to delivery, we had closed the gap. And actually, gone ahead of franchisees.

Paul Westra - Cowen & Company

Now prior to slipping to 30 to 40 seconds behind, were you historically lagging slightly or were you at par with them?

J. Clifford Hudson

We were close to them. Some months we might be a little slower, some months we might be a little faster, but we did not have a gap of that magnitude historically.

In the last winter is when we saw the gap open up, the quantitative piece, the time of service, we saw the gap open up. And we saw overall service scores begin to decline.

W. Scott McLain

Another quantitative piece is last month, our average service time was the fastest it has been in 18 months. So a real improvement.

Paul Westra - Cowen & Company

Another clarity question. On the carhop tip plan, what percentage would you say on an average shift? Is it 10% or 20% more carhops on the new program versus the prior program?

J. Clifford Hudson

I don’t have a hard number for you.

Stephen C. Vaughan

It’s probably greater than that. Because typically you would see two or three carhops and a lot of the franchisees that have implemented that program have talked about like a 50% increase.

W. Scott McLain

Adding even one carhop, on most shifts, is a very big increase in service.

Paul Westra - Cowen & Company

So if you can add a whole carhop to one shift it would be a pretty big percentage increase in coverage.

W. Scott McLain

It allows you to give much better and faster service.

Paul Westra - Cowen & Company

And the goal, especially as you head into next year with the new federal minimum wage of $7.25, is the goal of this plan, would you say on a total compensation basis, for a new carhop with the tip plan, are you trying to gear it to be in line with minimum wage or slightly above it or significantly above it?

J. Clifford Hudson

I would really like to see it be well above the minimum wage level.

Paul Westra - Cowen & Company

And is that achievable with what you’re seeing currently?

J. Clifford Hudson

Yes, it is.

Paul Westra - Cowen & Company

You talked about the health of your franchisees, you talked about the people you are talking to now on the re-franchising effort are super well capitalized. I’m trying to get a handle on what percentage of your current franchise base would you say are in a position in today’s credit market are in a position to potentially do a transaction? I don’t want your top layers but just trying to get a feel, of who are so well capitalized that they are a candidate for a transaction.

J. Clifford Hudson

I don’t have that reaction for you to say what percentage are do well capitalized. I just don’t have a reaction to that. But I would say that folks that are interested in acquiring drive-ins are both inside our system, currently operating, and not part of our system currently. So the sources of potential acquirers is broad. The pool is broad.

Paul Westra - Cowen & Company

Okay then, what percentage of the transactions would you suspect looking back, will be from within or?

J. Clifford Hudson

If you would tell me who the highest bidder is going to be I will give you an answer.

Operator

Your next question comes from Jeffrey Bernstein – Barclays Capital.

Jeffrey Bernstein – Barclays Capital

Just on that re-franchising question. I know you have you said a bunch of deals that are currently in the process of being worked through and it seems like they are well capitalized. I am just wondering perhaps, how many you would expect in year one, in terms of how many units will be re-franchised, just based on the pipeline that you have right now, that you think you’re pretty confident in?

J. Clifford Hudson

I’m not going to give you a quantitative response to that. We have targeted, internally, the markets we want to sell. We have reached out to franchisees we think are logical buyers. We have numerous people outside of that group who have reached out to us. And so this is a fluid situation that can involve just a few stores, or depending upon the appetite of the person, quite a few stores. And that can occur in stages, even, with one buyer, so I’m really, month-to-month, quarter-to-quarter, I’m not going to get into the projection business of how many anybody is going to buy in a given quarter.

Jeffrey Bernstein – Barclays Capital

You talked at length about the commodity cost. I’m just wondering, as you put together an overall basket, based on what you know today, what would you say is the commodity cost expected increase for fiscal 2009?

Stephen C. Vaughan

It’s really hard to see all the way out through the end of the year. I can tell you the current quarter, we’re in the high-single digits from a commodity cost overall inflation rate. We do anticipate in the next quarter that should kind of come down to kind of a mid-single digit rate. But, again, the second half of the year, we would expect that to come down further but it’s hard to quantify it. So many unknowns right now.

Jeffrey Bernstein – Barclays Capital

I’m just wondering then, would the guidance you gave a month ago, for 12% to 14% earnings growth and then you kind of said earlier today that things have changed in the past three and a half weeks, with the comp pressures consistent as well as cost pressures. And it’s just difficult seeing about them and now with unit growth somewhat uncertain with the credit environment, I’m just wondering why not set a more cautious earnings growth outlook, considering all the uncertainties rather than kind of having it at such a level where you might be forced a quarter or two from now to bring it down if things remain at the current challenge levels. Just kind of a bigger picture.

J. Clifford Hudson

Well, I think one direction some things have moved another. And so I think it makes sense for us to communicate to you the consequence of these various elements moving as they become more concrete rather than communicate to you differently simply because [audio tone]. And so it’s not, we’ll report to you, the quarter ends November, we will report to in January and we will see what the mix looks like. At that time you may say I told you so, but we may be in a position that we say we told you so.

I mean, I’m not trying to be cute. It’s a fluid situation. And some of these levers that we can pull, we’re pulling them hard. And we’ll see when we report the first quarter whether that should have been the circumstance. I don’t think it will because we’re moving against all these and if we felt like it made more sense to pull back and say we need to give you more conservative guidance, we would do that.

Jeffrey Bernstein – Barclays Capital

Thank you.

J. Clifford Hudson

We appreciate all of you participating. It’s a challenging time for our business. All of you know, all too well, the challenges that are exogenous to our business that we’re all confronting. But you should rest assured that the marketing elements, the development elements, the SG&A control elements, the operational pieces that we can control, we’re moving against in a very concerted fashion to positively impact the performance of our business and the performance of our brand.

So we appreciate your continued engagement with our brand and we’ll look forward to visiting with you after the end of the first quarter and give you an update on where we are with these various initiatives.

Operator

This concludes today’s conference call.

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