Red Robin Gourmet Burgers Inc. Q3 2008 Earnings Call Transcript

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 |  About: Red Robin Gourmet Burgers, Inc. (RRGB)
by: SA Transcripts

Operator

Good day and welcome to the Red Robin Gourmet Burger’s Incorporated third quarter 2008 financial results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Miss Katie Scherping, Chief Financial Officer of Red Robin.

Katherine L. Scherping

Thanks Andrea. Before I get started I need to remind everyone that part of today’s discussions, particularly but not limited to our outlook and development expectations, will include forward-looking statements. These statements will include but not be limited to references to our earnings guidance, margins, new restaurant openings or NROs, trends, costs, and administrative expenses and other expectations.

Also these statements are based on what we expect as of this conference call and we undertake no obligation to update these statements to reflect events or circumstances that might arise after this call. These forward-looking statements are not guarantees of future performance and therefore investors should not place undue reliance on them. We refer all of you to our 10-K and our 10-Q filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

I also want to inform our listeners that we will make some references to non-GAAP financial measures today during our call. You will find supplemental data in our press release on Schedules 1 and 2 which reconcile our non-GAAP measures to our GAAP results. Now I’d like to turn the call over to Denny Mullen, Chairman and Chief Executive Officer. Den.

Dennis B. Mullen

Thanks Katie and thanks everyone for joining us today. We also have with us Eric Houseman, our President and Chief Operating Officer. Eric will provide an update on some of our key initiatives in this very challenging business environment and Katie will review in detail our most recent financial results and discuss guidance.

So here are some of the headlines for our third quarter results. For the third quarter revenues, total revenue increased 10.6% and restaurant revenues increased 10.8%, while company owned comparable restaurant sales decreased 2.2% compared to the third quarter of 2007. GAAP diluted earnings per share were $0.43 compared to $0.49 a year ago. On a non-GAAP basis after considering one time charges in both quarters are diluted, EPS for the third quarter of 2008 was $0.45 versus $0.50 a year ago, a decrease of 10%.

Included in our results is an asset impairment charge of $928,000 in the third quarter related to two of our restaurants. Katie will provide more detail on year-over-year comparisons in a few minutes. The third quarter of 2008 was unusually challenging for Red Robin and for the casual dining industry as a whole. The shock effect of the financial crisis on the capital markets intensified pressure on consumers who are already feeling pressure from higher energy costs, food and other costs along with declining home values.

These events have caused us and many restaurant operators to reassess our business and operating plans. We are on target to open 31 new company restaurants in 2008. So far this year, we have opened 27 company restaurants in Q3 and 3 more so far in Q4. Our final 2008 restaurant will be opened this coming Monday. Our franchisees have opened seven restaurants through Q3 and one more has opened in Q4.

Including the new company owned restaurant that will open next week and two additional franchise restaurants that will open in Q4, we have ten company owned and five franchised restaurants currently under construction. We are still cautious about the macroeconomic factors influencing the casual dining industry as well as real estate developments generally. We plan to open up to 20 new company owned restaurants in 2009.

As we said in our last earnings call, we will fund new restaurant development next year from our operating cash flow. So during this challenging period we are maintaining our focus on our fundamental driver of the business which include growing top line sales, managing costs, generating free cash flow, and monitoring our debt. With that I’d like to turn the call over to Eric.

Eric C. Houseman

Thanks Denny. Good afternoon everybody. In the third quarter of 2008 our comp store sales decreased 2.2%. This consisted of a 3.8 increase in price and mix which was more than offset by 6% decrease in guest traffic. For comparison purposes, we reported a 4.8% comp store sales increase in the third quarter of 2007 which was driven by a 3.7 higher price in mix and a 1.1 increase in guest counts.

As you may recall, last year’s third quarter significantly benefited from our second flight of television advertising. It’s also important to note that our two year comp trends have been positive, up 2.6%. This two year trend gives us confidence that while we’re facing a very difficult economic environment right now, we believe that the long term health of our brand and prospects for improved guest counts down the road remain strong.

You’ll also recall that a restaurant enters our comparable base five full quarters after it opens. Our third quarter had 233 company owned comparable restaurants out of the 291 total company owned restaurants. Average weekly sales for these restaurants in our comparable base were

$62,182 during the quarter compared to $63,568 for those same units last year.

Average weekly sales for the 44 non-comp units were $56,111 during the third quarter this year compared to $59,299 for the 46 non-comparable restaurants previous year. The 17 franchise restaurants that we acquired in the second and third quarters of last year were added to the comp base during the third quarter of this year. The 15 existing franchise restaurants that we acquired in the second quarter of this year will be included in the comp base beginning in the third quarter of 2009.

These 15 restaurants AEVs were $54,562 during the third quarter of this year. Our third quarter 2008 restaurant level operating margins of 18.5% were 180 basis points lower than the 20.3 margins in the third quarter of 2007. Our 2008 margins included an incremental 50 basis point contribution to our National Media Fund. Considering the challenging sales environment, our restaurant operators did an excellent job managing food costs and labor despite the volatility we saw in the sales during the quarter.

Specifically, we continued to make progress on managing our controllable labor costs through our operations focus which, combined with price increases from earlier in the year, have helped us offset increases in minimal wages on a year-over-year basis. Additionally, the NRO initiatives that we’ve been working on continue to have a positive impact as NROs are normalizing margins at a faster rate than we have experienced in the past.

We’ve also continued to benefit from better management of pre- and post-opening costs associated with our NROs as we implement various tactics and improvements. On the talent front this last quarter we implemented a new hourly team member selection process and tools to better select and obtain the very best talent out there. We firmly believe that what makes Red Robin’s brand special are the people we surround ourselves with.

This selection process is very similar to the one we created and implemented 18 months ago for our salaried ranks and we are very pleased with the results we have experienced so far with that group. In addition, this quarter we continued to deploy additional progressive training modules focused around our fourth cornerstone, our gift of time. Each year you will remember we focus on through put within our four walls and even in this difficult, economic environment we have restaurants breaking peak hour records and some eclipsing the $3,000 hour which just reinforces the strong emphasis our guests put on being in control of their dining experience.

Now I’d like to talk about some more of the traffic driving initiatives that we have underway. Building guest counts by delivering cravable gourmet burgers in a wholesome, fun environment will continue to be the focus of our sales and marketing teams. While the last of our 24 weeks of national advertising ends this next week, we are very pleased with how guests have responded to our cable advertising this year. The economy may be tough right now but the guests are telling us more than ever how much they love Red Robin, so we believe that our brand building efforts overall are working.

We know that the tough economy is causing consumers to pull back, dine out less, and think about the value that they’re getting when they choose to dine out. To capitalize on brand loyalty that we’re achieving and to encourage guests to choose Red Robin, our latest round of media flights include reinforcement of the value attribute that is core to our brand, specifically our bottomless Red Robin Steak Fries and bottomless signature beverages such as our Freckled Strawberry Lemonade.

Our local restaurant marketing teams are even more focused now than ever on reaching out to kids and families to build awareness for Red Robin and make a positive impact in the communities in which we do business. Some of the community outreach efforts that are raising awareness for us and encouraging guest visits are school programs like Reading with Red and Certificates of Excellence for Outstanding Achievement as well as local fund raisers with police and fire departments and star patient awards to promote wellness just to name a few.

We’re seeing evidence that these programs are generating positive brand awareness for Red Robin and continue to support our traffic driving efforts. Also next week our holiday gift promotion begins. This year we’ll be reintroducing our Gingerbread Shake which is a seasonal favorite with our guests and a great complement to our Gourmet Burgers and our other Red Robin entrees.

Gift cards and bounce backs are also part of the holiday season promotion and we’re bringing them back again this year. We have rolled out a third party gift program as well, primarily in Safeway and Kroger grocery store chains to drive incremental traffic and get the Red Robin brand awareness out there.

It is too early to gauge the results but we are excited about the potential this program has to offer. Our e-club membership is now more than 1.5 million strong and we continue to see that number climb higher and higher. We are also utilizing our e-club data members to give us feedback when it comes to new food and beverage ideas and various promotions that we may be trying to gauge.

Finally, on December 5 we’ll be holding our third annual Next Gourmet Burger Kid’s Recipe Contest here in Denver. This year’s championship competition attracted more than 14,000 entries nationwide from kids ages six through 12 and averaged 4,000 more entries than it did last year. In fact, last year’s champion, 12-year-old Joey Yarwick from San Diego has become a bit of a young celebrity chef himself in the last 12 months and has been a guest on The Today Show now twice.

In a few weeks, Joey will have to pass his Gourmet Burger Recipe Crown to the young boy or girl who wins on December 5. We can’t share any of the ten kid’s finalist recipes with you right now but we can say that whatever they are, they will be crave able, unique and in the Red Robin tradition.

One more note on why this is such a great program for us our Kid’s Recipe Contest not only reinforces what we’re about, gourmet burgers, kids and families, we also receive terrific media coverage for Red Robin and our charitable partner in this program, the National Center for Missing and Exploited Children. This year, not only did we help generate awareness for the great work that the Center does to help kids and parents, but we were able to donate more than $100,000 to support the Center’s programs.

So those are some of the operations and marketing headlines and with that I will turn it over to Katie so she can review our financial results in more detail.

Katherine L. Scherping

Thanks Eric. First of all if you haven’t already seen our news release for the quarter’s results you can find it on our website at RedRobin.com in the Investor Relations section. The third quarter 2008 was a 12 week period ending October 5. Total revenues for the quarter which consist of restaurant sales and franchise royalties increased 10.6% to $208.6 million from $188.7 million last year. Restaurant sales grew 10.8% to $205.3 million from $185.2 million and consisted of $170.2 million in sales from our 233 comp restaurants, $9.7 million from the 15 restaurants acquired in the second quarter of this year and $25.4 million in sales from our 44 non-comparable restaurants.

As Eric mentioned, the 17 California franchise restaurants acquired in mid-2007 have been added to our comp base beginning in Q3 of this year, but the 15 franchise restaurants acquired in the second quarter of 2008 have not been included in our comp store metrics yet. Franchise royalties [in seized] decreased 3.6% in the third quarter to $3.3 million and exclude the royalty contributions from the 15 restaurants acquired in the second quarter this year from which we recognize $384,000 in royalty revenue in the third quarter of last year.

The 94 comp restaurants in the U.S. franchise system reported a 2.9% decrease in same store sales while the 18 comp restaurants in the Canadian franchise system reported a 1.9% increase for same store sales for the third quarter. Our restaurant level operating profit margin was 18.5% which compares to 20.3% reported last year. The 180 basis point margin decline is attributed to approximately 80 basis points of higher food and beverage costs, approximately 120 basis points of increased operating costs and 70 basis points of increased occupancy costs which were offset by 90 basis points of labor cost improvement.

Our cost of sales increased by 80 basis points in the third quarter compared to last year. The increase is primarily due to higher raw material costs in almost every category, somewhat offset by many price increases, stable produce and beverage costs and some mixed shift to higher margin menu items. Our labor costs decreased by about 90 basis points to 33.3% from 34.2% of restaurant revenues this quarter compared to the third quarter last year.

The improvement was largely due to both our continued focus on operations initiatives related to controllable labor and decreased insurance benefit and bonus costs. Those decreases combined with many price increases helped offset year-over-year increases in minimum wage as well as the de-leverage of salaried labor.

Other operating costs increased about 120 basis points to 17.7% of restaurant revenue this quarter, compared to 16.5% a year ago. The increase was driven by a 50 basis point increase year-over-year and revenue contributions to the National Advertising Fund from 1% of revenue to 1.5% in the third quarter this year. Utility and maintenance costs increased 70 basis points over last year due to both cost increases and revenue de-leverage.

Occupancy expense was 6.8% of restaurant revenues in the third quarter or about 70 basis points higher than the same period a year ago, driven by a combination of higher year-over-year average rent expense and sales de-leverage of this fixed cost. Depreciation and amortization expense during the third quarter was 5.9% of total revenues, about 30 basis points higher than a year ago.

For the full year we expected our depreciation and amortization will be about 20 basis points higher year-over-year. The increase is primarily a function of revenue de-leverage on this fixed cost. General and administrative expenses were 7.5% of total revenues in the third quarter of 2008 compared to 7.8% of total revenues in the third quarter last year. G&A expenses were lower in the third quarter of 2008 by about 100 basis points as a percentage of revenue due to the lower performance based bonus expense compared to last year.

Stock compensation expense that is included in G&A was $1.9 million in Q3 of 2008 compared to $1.5 million in Q3 of 2007. Remember that as we run our advertising through the year, the expenses will exceed the contributions in the advertising fund during certain periods. So far through Q3, we have incurred about $2 million of net advertising expense in our G&A; $650,000 in Q1 offset by about a $200,000 benefit in Q2 and then an additional $1.5 million of additional G&A expense in Q3.

In the fourth quarter about $1.6 million of G&A expense will be reversed since the last of our 2008 media flights is scheduled for next week. This is a similar trend to what we saw in 2007 where we incurred $1.6 million through the third quarter of 2007 in G&A related to advertising expense, which was reversed in the fourth quarter. Our expectations for full year G&A leverage is about 60 basis points less than 2007. The majority of this year-over-year savings comes from a reduction in performance based bonus expense.

Our pre-opening expense in the third quarter was about $1.6 million higher than a year ago, due primarily to opening ten company owned restaurants in the third quarter this year compared to only five in the third quarter last year. We have, however, made significant progress reducing the costs related to opening new restaurants, including better management of travel and other pre-opening expenses. We are currently budgeting about $275,000 pre in it for pre-opening expense.

During the third quarter of 2008, we determined that two restaurants were impaired based on a review of each location’s past, present and projected operating performance. The carrying value of each location’s assets were compared to the fair value of those assets, resulting in a $928,000 after impairment charge or a $0.05 impact on diluted EPS in the third quarter. Net interest expense was $2 million in the third quarter of 2008 compared to $2.5 million in the same period last year.

The decrease is primarily due to lower average interest rates of 3.9% in the third quarter of 2008 compared to 6.8% in the third quarter last year, offset partially by additional borrowings under the company’s credit facilities related to the franchise acquisitions and share repurchases during the second quarter of 2008. Our effective tax rate for the third quarter was 21.6% compared to 31% in the third quarter of 2007. The decrease from 2007 is attributed primarily to lower net income and increased tax credit.

We are currently forecasting our full year 2008 effective rate to be approximately 27%. Net income for the third quarter of 2008 was $6.2 million or $0.40 per diluted share compared to net income of $8.2 million or $0.49 per diluted share in the third quarter of 2007. Excluding the impact of the active impairment charge, our non-GAAP third quarter 2008 earnings per diluted share was $0.45. Our third quarter 2007 net income included a penny per diluted share charge for re-acquired franchise costs.

Excluding that one time charge, our non-GAAP income for Q3 2007 was $0.50 per diluted share. Schedule 2 of our earnings press release provides the detail on this GAAP to non-GAAP EPS reconciliation. Looking at the cash flow statement, our cash from operations of $66.9 million year-to-date continued to exceed our development capital expenditures of $65.2 million.

The balance outstanding under our line of credit facility at the end of third quarter was

$214.9 million with about another $80.6 million of the original $300 million still available, excluding the $100 million of additional credit that may be available in the future at our request. You may recall that we amended our credit agreement in June, 2007 just ahead of the tightening in the credit market so we will be benefiting from this agreement through mid-June of 2012.

Taking into consideration our full year capital expenditure estimate of around $80 million our franchise acquisitions, our completed share repurchases and our operating cash flow, we expect our outstanding debt at the end of fiscal 2008 will be around $223 million including $5 million in letters of credit. We believe we have ample liquidity to provide for our future capital needs and we believe we will continue to be in compliance with all of our debt covenants. Our leverage ratio covenant in our credit agreement is based on our last 12 months of EBITDA excluding non-cash charges such as stock compensation expense and impairment charges.

We are currently well below our leverage ratio covenant maximum of 2.5. As Denny mentioned earlier, we will be able to fund our 2009 development out of cash flow and have additional cash available in 2009 to utilize as we deem appropriate. Now let’s talk about our outlook for the remainder of 2008.

As the pressure on the consumer has intensified we have seen declines in sales that we believe will continue through at least the fourth quarter. In order to illustrate our thinking about fourth quarter sales, we deviate from our policy regarding monthly counts for sales metrics. Specifically for our full year revenue and counts for sales assumptions, we have taken into account that our comparable sales in the first four weeks of the fiscal fourth quarter have declined 8% and that we have slightly easier comparisons as we lapped the last two months of 2007.

Therefore we have revised our full year 2008 financial guidance to reflect a more cautious view. We plan to give guidance on our 2009 expectations along with our year end earnings announcement in February as has been our practice in the past. For the fourth quarter of 2008 which is a 12 week quarter, we expect to open one more company owned restaurant in addition to the three we’ve already opened so far this quarter. We expect our franchisees to open three new restaurants this quarter, one of which opened last week.

That would bring the total to 31 new company owned and ten new franchise restaurants opened during the fiscal year of 2008, in line with our full year development plan. For the 2008 fiscal year which is a 52 week year, we expect revenues of $868 million to $873 million. Our projected revenue is based on certain assumptions, including an expected comparable restaurant sales decrease of approximately 0.5% to 1% which includes a full year weighted price mix of 3.6% assuming no additional price increases for the remainder of the year.

Our full year net income per diluted share on a GAAP basis is expected to be $1.65 to $1.75 which includes $0.03 of acquisition related one time expenses and $0.04 of asset impairment charges. Excluding these one time expenses, our non-GAAP EPS is expected to be $1.73 to $1.83 down from prior guidance of $1.90 to $2.05. Our full year guidance update includes the full year weighted impact from the repurchase of shares in early June.

Our margins for the full year 2008 are expected to remain under pressure. We expect about a 200 to 225 basis point decline for the full year of 2008 in our restaurant mobile operating profit margin compared to our margins for the full year of 2007. Included in our restaurant mobile margins for 2008 is the additional 60 basis points in advertising, which will total around

$18 million system wide this year compared to $11.2 million last year.

Our cautious view of our top line sales expectations is the primary driver of the margin de-leveraging we had modeled for the fourth quarter of 2008. I want to remind everyone that now,

$220,000 of pre-tax earnings are expense for us equals $0.01 per diluted share for the full year of 2008, which is equivalent to less than 3 basis points as a percentage of revenue. And every 1% change in GAAP count in the fourth quarter equates to about $0.03 of diluted earnings per share.

Now with that I’ll turn the call back over to Denny.

Dennis B. Mullen

Thanks Katie. While it is still a difficult operating environment, we remain focused on the things we can control, such as our continued efforts to grow sales, increase restaurant operating efficiencies, maintain our financial flexibility, streamline our development costs and build the Red Robin brand. As always, I want to thank our team members who welcome guests 14 shifts a week and the team members here in the home office and in the field who support them for making sure we always deliver great gourmet burgers and excellent service to our guests, that our guest expect.

Because of their passion and talent we will build the Red Robin brand, grow our company, and overcome any obstacles to our continued success. With that we’re ready for your questions. Thank you.

Question-and-Answer Session

Operator

Your first question comes from Matt Difrisco – Oppenheimer & Co.

Matt Difrisco – Oppenheimer & Co.

Given the incremental advertising spend that you are doing, do you think this is the environment if we’re doing a negative comp this significantly? Do you think there is a – as a response could we pull back the advertising for the fourth quarter or anything that might be planned for the first quarter to defend margins a little bit and wait for a day when the consumer might have some more dollars in his pocket to respond to the advertising?

Dennis B. Mullen

Matt, good points or good questions. The fourth quarter advertising is over next week so there’s no opportunity clearly on the national plan to pull that out. That was purchased in ’07. In terms of the ’08 plans we’re currently looking at that. We’re talking to our franchise partners. We’re looking at the environment. We’ll talk about our plans consistent as we have in the past on the February call. That’ll include whatever we’re doing in the marketing arena.

Matt Difrisco – Oppenheimer & Co.

And then also just thinking about G&A in the fourth quarter, is that still going to be a significant point of leverage in your guidance assumptions or has that also obviously with the sales still coming down, I mean I could figure that out, but as far as has anything changed as far as absolute dollar terms potentially being flat to maybe even down than a year ago?

Katherine L. Scherping

We estimate that full year will get 60 basis points of leverage over last year’s percentage so that includes the $2 million – or the $1.6 million we’ll reverse on the marketing spend that we already had forecasted. So that plus some bonus reversals in Q4 that we are just newly forecasting will help gain that EPS.

Matt Difrisco – Oppenheimer & Co.

Can you just remind us on was that pricing consistent in the quarter with your assumption for the embedded in the fourth quarter comp?

Katherine L. Scherping

The fourth quarter – the previous price that we had embedded was 4.0. We’ve revised that to a price mix of 3.6 for the full year.

Matt Difrisco – Oppenheimer & Co.

Can you tell us – just help me with the math, what is that for the fourth quarter?

Katherine L. Scherping

It’s about two two for the fourth quarter.

Operator

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

Brad Ludington – Keybanc Capital Markets

Just to follow up on the G&A I mean on the off chance, I know the environment is negative and this is very unlikely, but on the off chance that the sales improve a little bit, the traffic improves some in November, December, is there a possibility that some of those bonus reversals will come back and hurt your G&A leverage?

Dennis B. Mullen

No.

Brad Ludington – Keybanc Capital Markets

And then looking into ’09, is there any idea of the timing of those up to 20 openings? Or is that somewhat set in stone at this point?

Dennis B. Mullen

Well, as we said nine or I believe it’s nine are under construction which will be open in the – through the first quarter which is a 16 week quarter. Some of them may dribble over into the second quarter. But when we decided to slow it down from the pace we were on, it was a – most of those will be front end loaded for ’09 then. We could have as many as nine of the up to 20 in the first quarter of next year.

Brad Ludington – Keybanc Capital Markets

Do you think there’s any risk in any of these commercial developments being pushed back or cancelled that you’re planning to open in ’09?

Dennis B. Mullen

Well, there’s always a risk especially as you get later in the year and we monitor those even if the sites are – have been approved. So we have until we actually go under construction, we try to maintain as much flexibility as possible to make sure that the developers are delivering what they said they were going to deliver.

Operator

Your next question comes from John Glass – Morgan Stanley.

John Glass – Morgan Stanley

In your fourth quarter comp guidance you’re assuming things get better from down eight in October I presume? If I quickly back into it you’re looking for what like a down five for the quarter? Is that true or no?

Katherine L. Scherping

Yes, between down five and down seven. But we get easier comparison in the last two periods of the year.

John Glass – Morgan Stanley

Is there any evidence yet though to date that things have actually gotten better or –

Katherine L. Scherping

Only two extra days so I think it’s a little too early to comment on that. But we had a negative eight for the first four weeks.

John Glass – Morgan Stanley

And then you know you’re talking about up to 20 units next year and I appreciate the pullback from earlier but it isn’t a change from when I think you talked about that over the summer. Why not? Can you not slow down more? One would think that opening nine stores in the first quarter when things may be even worse than they are now would not be optimal –

Dennis B. Mullen

Let me talk to the last call. Those nine were committed well along and ones we felt very comfortable with. The rest of the stores for the development plan as we have the ability to take, slow those down if we so choose as we continue to monitor the environment.

John Glass – Morgan Stanley

So beyond the nine you could cut back is what you’re saying?

Katherine L. Scherping

And our new openings are doing very well in the markets that they’re in.

John Glass – Morgan Stanley

And then can you – you mentioned your covenants, two-and-a-half times coverage is the – I guess what you need to achieve. What will you be at for the year based on your new guidance?

Katherine L. Scherping

It should be just over two. We’re two and a smidge.

John Glass – Morgan Stanley

So you’re just over two times EBITDA coverage versus the two-and-a-half times that you need.

Katherine L. Scherping

Right.

John Glass – Morgan Stanley

And what happens if you went above – what if you broke the covenant? What is the remedy?

Katherine L. Scherping

We don’t plan to.

John Glass – Morgan Stanley

But there is a [recure] in the debt covenant probably?

Katherine L. Scherping

We’d probably have to go and ask for a waiver.

John Glass – Morgan Stanley

And which would imply higher interest rate probably?

Katherine L. Scherping

Yes. That’s purely speculation at this point. That’s pretty far out.

Dennis B. Mullen

We have a lot of room in that two-and-a-half covenant and if we project it forward if there was any issues moving towards it, we would take other courses of action.

John Glass – Morgan Stanley

And then I guess just any optimism on the commodities front, given that seems to be one area where there may be some possibility for ’09? Have you discussed that with any of your vendors for next year?

Dennis B. Mullen

There is not much optimism on the commodities front compared to this past year. Certainly some commodities are coming down but the drivers for us are hamburger and French fries and those are still difficult issues which we’re working on. So we expect upward pressure on both of those on the commodity front and as long as we’re on the cost pressure front, we might as well talk about minimum wage. We’ve got automatic minimum wages tied to cost of living kicking in January 1, which will cost about 40 basis points due to those states.

Operator

Your next question comes from [Unidentified Analyst] – Banc of America Securities.

Unidentified Analyst – Banc of America Securities

Could you discuss comp trends regionally and then what you’re seeing at lunch versus dinner on a sequential basis?

Katherine L. Scherping

Well I’ll answer the last question first. The lunch/dinner mix has not changed on a year-over-year basis so no change there, it’s still about 50-50. The regional we commented because it was material when we saw Arizona, California and Nevada decline. I’d say from the decline in costs has been generally across the board, not in any one particular region in any material respect.

Unidentified Analyst – Banc of America Securities

And then back to commodities, do you have any contracts coming up in the fourth quarter?

Dennis B. Mullen

Our hamburger contract expires – this is the first year we’ve been on a fixed contract with hamburger. It expires at the end of this year.

Operator

Your next question comes from Nicole Miller – Piper Jaffray.

Nicole Miller – Piper Jaffray

Katie what tax rate for next year just given the volatility in the tax rate this year?

Katherine L. Scherping

It will depend on our forecast for 2009 which we haven’t given any insight on at this point.

Nicole Miller – Piper Jaffray

And CapEx for this year, is it still going to be in the range of 80 to 85?

Katherine L. Scherping

We say approximately 80 now.

Nicole Miller – Piper Jaffray

And does 16 next year seem reasonable? I guess we can just do the same back into how much per store.

Katherine L. Scherping

Yes. We run an average of about 2.2 per unit plus about 275 in pre-opening.

Nicole Miller – Piper Jaffray

And you still have poultry contract is through what part of ’09?

Dennis B. Mullen

All of ’09.

Nicole Miller – Piper Jaffray

And is there anything else contracted for next year?

Dennis B. Mullen

Yes, Nicole, we have obviously as we said poultry through December of ’09. Our seafood contracts are through December of ’09 as well as our bacon contract through December of ’09. We’ve got our new prime rib contract through September of ’09, cheese through April of ’09, fries that we just re-contracted through October of ’09, bread through April of ’09, oil through October ’09 and then the mayonnaise and dressings through April of ’09.

Nicole Miller – Piper Jaffray

That’s a lot so given all that, what is the general inflation that you’re seeing so far?

Dennis B. Mullen

As of today we’re still – with fries it’s just done within the last hour probably, so we’re still running that. And the big wild card is hamburger. The hamburger market’s substantially above where we are on our contract right now. So we’re waiting, negotiating, and we feel fairly confident that we will not sign a full year contract and I’m fairly confident that the suppliers wouldn’t sign a full year contract on hamburger again. We need to get that better quantified.

Nicole Miller – Piper Jaffray

So general, kind of industry rates of inflation on the things that are contracted?

Dennis B. Mullen

I don’t know about industry rates but they have been marginally up for the ones we contracted, with oil, fries and hamburger being the biggest ones which happen to be the three we use the most of. Or the chicken which is last year’s price.

Nicole Miller – Piper Jaffray

And just seeing what advertising for next year, do you expect to hold the percentage [sitting] at one-and-a-half and what kind of dollar amount and weeks would that translate to?

Dennis B. Mullen

I think I answered that. That was Matt’s question is that we’re working on the media programs and plans with our franchise partners and our advisors at this point, and haven’t formulated definitively what we’re going to do and to the extent, certainly given this environment. And we’ll get that quantified as we go forward. In the past two years we haven’t started the media plans until sometime between mid-February and April anyway. We wouldn’t expect to start anything this year if we did it until that same timeframe.

Nicole Miller – Piper Jaffray

And just so we can be better educated, it sounds like you don’t have – you can buy that kind of right in front of actually turning it on.

Dennis B. Mullen

Well you need some lead time but you don’t have to buy in the up front markets, like six or 12 months in advance.

Nicole Miller – Piper Jaffray

As you think about that what are you thinking about is the tone? I mean, it would just be more branding message or do you feel like you could add a value component to that?

Dennis B. Mullen

No, we said in the third quarter call that we’ve – as we look forward we will move from branding to product news, new news. And we have a number of new products in the pipeline that we’ve been working on that would fit that bill in terms of new news, whether that’s done on national television and/or some other vehicle remains to be seen.

Operator

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

Steven Rees – J.P. Morgan

Denny, we’re seeing a lot of discounting and extreme value promotions out there in the casual dining sector and specifically in bar and grill with some coupons for sandwiches and what-not. Do you think this is impacting your business in any or your markets? And I guess I’d just be curious about your general thoughts on the discounting out there and if you think you need to participate in some way?

Dennis B. Mullen

That’s the ultimate question, discounting. We are not going to participate in discounting, have not. If we do product promotions and they’re at a different price, they wouldn’t be an off menu item. So we want to protect the integrity of the menu and the brand. So we don’t expect that we’ll participate in the discounting frenzy that’s going on.

Katherine L. Scherping

And I think with everyone with down sale trends, I think it’s fair to say that I’m not sure that anyone’s taking a significant market share in this environment.

Steven Rees – J.P. Morgan

Katie, I mean, one of the things that you guys talked about at your investor conference this last year was the opportunity to improve the new store opening margins. And it looks like you made a lot of improvement on the sales this year. They’ve been pretty steady. But can you just talk about how the new stores are opening up from a margin perspective? I think you showed a chart that showed them at like a low double-digit rate and then ramping up to the system average over three years. Have they improved and has that ramp up time changed at all?

Eric C. Houseman

Yes, Steven, Houseman here, I’ll answer that one. We have seen dramatic improvement that we’re pretty happy with, both with the top line as well as how these restaurants are normalizing. You know, we’re still fairly into this year. Some of the restaurants that opened in the second or third quarter are still coming off their honeymoon and have only been open ten weeks after that. But we are seeing great improvements and really seeing those things close the gap from that three year run rate that we were experiencing.

Steven Rees – J.P. Morgan

Just finally on the pricing, it looks like you dropped off I think you said 2.2 in the fourth quarter. How are you thinking out pricing next year, 2008 was a pretty high pricing year for you all, sounds like commodities are going to be up and do you think you have room to take pricing in ’09 close to what you took in ’08?

Dennis B. Mullen

Well, the short answer is we haven’t decided. ’08 was a pricing – fairly aggressive pricing year for the industry in reaction – the shocked reaction, frankly, to the commodities driven by corn, etc. So we at this point we’re not taking price, we have a 30 to 45 day window, once we make the decision to pull the trigger to do a menu run assuming we’re not changing products on that menu. But we’re very cautious about pricing in this environment.

Operator

Your next question comes from Dustin Tompkins – Morgan Keegan.

Dustin Tompkins – Morgan Keegan

Katie I had one clarification first. I think you were saying on the debt covenants if you assumed your guidance for the remainder of the year that would put you at a little over two times at the end of the year. Is that correct?

Katherine L. Scherping

That’s right.

Dustin Tompkins – Morgan Keegan

Is that a fully loaded debt to EBITDAR or is it book debt to EBITDA?

Katherine L. Scherping

It’s EBITDA and we get to add back non-cash charges which would be all of our stock compensation expense and the impairment charge. So those are added back to the trailing 12 month EBITDA calculation.

Dustin Tompkins – Morgan Keegan

And then on the G&A the lumpiness of advertising, it sounded like it came in at $1.5 million this quarter and you had previously said at $2 million? Is that correct?

Katherine L. Scherping

No, I think it was $1.6 and we were just a little bit shy of what we booked in Q3.

Dustin Tompkins – Morgan Keegan

And if you back that out, was there – what else – what helped keep G&A a little bit lower in the quarter?

Katherine L. Scherping

Lower performance bonuses.

Dustin Tompkins – Morgan Keegan

And then lastly on labor, is there an opportunity that you can sustain, the favorability that you’ve been running in labor, does it get a lot harder as you lap some of the benefits that you saw in Q4 of last year?

Katherine L. Scherping

Yes, Q4 is going to get a little more difficult. We did start seeing some benefit of as Eric said our focus on labor last fourth quarter and really hunkering down on these NROs, they’re really benefiting us. So can we sustain it? That’s a good question. I mean we’d like to think we can, but our adjustment doesn’t include – our forecast for Q4 doesn’t include a significant benefit.

Operator

Your next question comes from Jeff Omohundro – Wachovia Capital Markets.

Jeff Omohundro – Wachovia Capital Markets

Just another question on the menu, is the planned update on the menu for Q1 still on track and if so how significant an update are you expecting?

Dennis B. Mullen

You know, Jeff, right now we’re taking a look at a lot of different things in the pipeline. We will do a new menu run sometime in Q1. You know, there’s still a lot of questions out there in terms of price, if any, or how much. So it won’t be in the January timeframe but when we do a new menu run, we will make some changes. It won’t be significant. You’re not going to see, you know, steaks on the menu or something.

Jeff Omohundro – Wachovia Capital Markets

On the label leverage in the quarter, which was clearly quite significant, I wonder if you’d give us just a bit more color around how you achieved that? What control of areas really benefited you? And also an update on staffing levels and changes in staffing levels.

Eric C. Houseman

In terms of the initiatives we’ve been talking to a lot of those we saw the benefit that the NROs in terms from a labor standpoint are becoming normalized sooner so there’s less drag on the comp base, as well as in the comp base we obviously are focused utilizing our proprietary scheduling software program, New Stars. We’ve seen some great efforts as well as looking at different ways in terms of how we’re doing things in the heart of the house. We’re fully staffed at the, both in the comp as well as the NRO environment.

I think we talked about before one of our initiatives is getting far enough ahead in the season’s, GMs and KMs, and we’ve almost already identified, I think we have identified 95% of the GM and KMs for the 2009 openings. So that’s helping as well. I did mention that we’re implementing our team member selection program and we have been utilizing that tool at the management ranks and we’ve been seeing some decent reduction in terms of turnovers. So we’re pleased with where we stand from a people standpoint.

Katherine L. Scherping

We also continue to see a reduction in our benefit costs, including our workers comp insurance, we’re seeing some nice savings there and have all year long.

Operator

Your next question comes from Conrad Lyon – Global Hunter Securities LLC.

Conrad Lyon – Global Hunter Securities LLC

Maybe a follow up on the labor question and maybe just gear it towards you, Eric. How flexible are you with your staffing given if the comp’s going to be down 8% is there opportunity to have fewer people on the floor during those periods where you think your sales are going to be weaker than normal?

Eric C. Houseman

Great question, Conrad, yes. Our program takes into a very sophisticated sales forecasting program so obviously it’s built around our parameters of four table sections, that kind of thing. So it naturally does that based on a reduced forecast in sales so that you don’t give up the service aspect of it.

Conrad Lyon – Global Hunter Securities LLC

One other question, maybe this goes toward Katie. I just wanted to double check here. What’s it looking like to build out a unit these days?

Katherine L. Scherping

It’s about $2.2 million CapEx and then about $275 for pre-opening expense.

Operator

Your next question is a follow up from Brad Ludington – Keybanc Capital Markets.

Brad Ludington – Keybanc Capital Markets

Denny, you mentioned that January 1 wage increases would be 40 basis points. Would that be in those states where they hit or system wide?

Dennis B. Mullen

This is system wide. That’s the effect of the system wide increase.

Operator

And it appears there are no further questions today.

Katherine L. Scherping

Okay. Thank you very much.

Dennis B. Mullen

Thank you all very much. We appreciate it. Go Red Robin team members.

Eric C. Houseman

Thanks guys.

Operator

And once again that does conclude today’s conference. We thank you for your participation and ask that you have a wonderful day.

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