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Executives

Greg Ashley - Vice President of Finance

James J. Buettgen - Chief Executive Officer and President

Michael O. Moore - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Daniel P. Dillon - Chief Branding Officer and Executive Vice President

Kimberly S. Grant - Chief Operations Officer and President of Ruby Tuesday Concept

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Robert M. Derrington - Northcoast Research

Keith Siegner - Crédit Suisse AG, Research Division

Peter Saleh - Telsey Advisory Group LLC

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Rosemary Sisson

Ruby Tuesday (RT) Q2 2013 Earnings Call January 9, 2013 5:00 PM ET

Operator

Greetings, and welcome to the Ruby Tuesday, Inc. Second Quarter Fiscal Year 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Ashley, Vice President of Finance for Ruby Tuesday. Thank you, Mr. Ashley. You may begin.

Greg Ashley

Thank you, Robin. And thanks to all of you for joining us this evening. With me today are J.J. Buettgen, President and Chief Executive Officer, Ruby Tuesday; Michael Moore, Executive Vice President and Chief Financial Officer; Dan Dillon, Executive Vice President, Brand Development; and Kimberly Grant, President, Ruby Tuesday Concept and Chief Operations Officer.

I would like to remind you that there are likely to be forward-looking statements in our comments, and I refer you to the note regarding forward-looking information in our press release and our most recently filed Form 10-Q.

We plan to release our third quarter fiscal year 2013 earnings in early April. Our second quarter earnings were released earlier today after the market closed, and a copy of our press release can be found on the Investor Relations section of our website at rubytuesday.com and is also available on Business Wire, FirstCall and other financial media outlets.

Our format today includes an overview of our second quarter financial results, an outlook for the remainder of fiscal 2013 and a review of our plans and strategies. At the conclusion of our prepared remarks, we will respond to your questions.

As most of you know, J.J. Buettgen joined Ruby Tuesday as our President and CEO in early December and has been on the job now for almost 45 days. We look forward to the investment community spending time with J.J. in person over the next several quarters as we are out on the road.

I will now turn the call over to J.J.

James J. Buettgen

Thank you, Greg. I would like to welcome all of you listening in this evening on our second quarter earnings call. Before we get into the details of our second quarter results, I would like to take a few moments to speak to the transition of leadership at Ruby Tuesday. I'm honored to be leading the Ruby Tuesday teams and excited about the opportunity to grow and strengthen the company. This earnings call represents the first time in the 40-year history of the organization that somebody other than Sandy Beall has led the team or represented the organization to the investment community. On behalf of the Ruby Tuesday Board of Directors, the over 30,000 employees who currently work for Ruby Tuesday, as well as the tens if not hundreds of thousands of employees who have worked for the organization throughout its history, I'd like to personally take this opportunity to congratulate Sandy on a spectacular career as an entrepreneur, restaurateur, visionary leader and CEO. Starting with the spark of an idea, a group of partners, investors and friends, Sandy built Ruby Tuesday from 1 restaurant into an iconic American brand and one of the largest full-service dining companies in the world with nearly 800 restaurants. Sandy created tremendous opportunity for investors and, most importantly, for the legions of employees, myself included, who have been able to build and develop careers as part of the Ruby Tuesday team. He is one of the few true pioneers who helped build and grow the casual dining industry. Sandy, we would like to thank and congratulate you on a phenomenal career at Ruby Tuesday and wish you great success in all of your future endeavors.

As Greg noted earlier, I've been here for a little over a month now, and these first few weeks have been valuable, constructive and informative and a time for learning the rich history that makes Ruby Tuesday unique. While we do have some near-term challenges, we also have a tremendous amount of opportunity in front of us, and I believe we can create significant value for our shareholders for years to come.

I'm going to present a brief overview of our quarter and provide some insights into our decision to exit several of our non-core brands. Michael and Greg will provide a financial review and guidance outlook. Dan will provide an update on our marketing programs, and Kimberly will present an overview of our key operating plans. I will then wrap up the call with some closing comments before we take your questions.

We are pleased to report positive same-restaurant sales of 0.3%, our second consecutive quarter of positive sales. The casual dining environment remains intensely competitive, driven by the uncertain and volatile consumer spending environment, in addition to recent increases in overall advertising and promotional activity in our competitive set. These pressures are likely to continue at least for the near term, which makes the optimal allocation of marketing dollars, primarily in the areas of television, advertising and promotions, more critical than ever before. Based on the competitive intensity trends we've seen over the last several months, we are projecting approximately flat same-restaurant sales for the year.

For our second fiscal quarter, we recognize the net loss of $0.24 per share. However, after excluding onetime charges related to the restaurant closures and CEO transition expenses, our non-GAAP net loss per share of $0.07 came in slightly behind our expectations, primarily due to lower-than-anticipated sales in the back part of the quarter as a result of the competitive pressures I just mentioned, in addition to higher repair and maintenance expenses.

My first month here has been filled with a number of meetings with our senior management team and communication with our Board of Directors regarding our long-term vision as a company. Based on a significant amount of discussion, careful analysis and longer-term planning, we have decided to close our 13 Marlin & Ray's restaurants immediately. While this was a difficult decision, the Marlin & Ray's brand does not represent a meaningful conversion opportunity for us going forward. For similar reasons, we have decided to close our 1 Wok Hay restaurant and seek a buyer for our 2 licensed Truffles Grill restaurants. Additionally, based on experience gains since our initial involvement in Lime Fresh, we have decided to close 2 company-developed Lime Fresh restaurants that we've determined to be outside our updated site selection criteria for the concept. Our immediate top priority is to ensure a smooth transition for our teams in the field who are impacted by these decisions. Those team members affected by our planned closures will be given opportunities to transfer to other Ruby Tuesday or Lime restaurant locations. We have incurred and will incur additional charges relating to the decision, which Michael will walk through when he discusses our second quarter results shortly. Exiting these concepts will allow us to optimally allocate our time, capital and resources to focus on the sales turnaround at Ruby Tuesday restaurants, in addition to creating value with our Lime Fresh fast casual concept going forward. We believe these are the key brands for our future, and we want to ensure that they are getting our full and undivided attention as a company.

Now, looking to our Lime Fresh concept. After our 2 planned closures, we will have 15 company-owned restaurants and 5 franchised restaurants. We remain very excited about the growth potential of this brand, and our focus for Lime Fresh over the next year or so will be to utilize the experience gained during the past 12 months of involvement with the concept to expand momentum in the brand, primarily in the Eastern U.S., including the Florida market.

With that, I will now turn the call over to Michael to discuss our financial performance.

Michael O. Moore

Thank you, J.J. I'll review the quarter in detail, give an update on our balance sheet and sale-leaseback program, and then Greg will review our updated guidance for fiscal 2013.

We reported a fiscal second quarter diluted loss per share of $0.24 compared to a prior year diluted loss per share of $0.03. Included in our second quarter results were the following: one, pretax charges of $16.9 million incurred due to our decision to close and exit the Marlin & Ray's and Wok Hay concepts, close 2 company-developed Lime Fresh restaurants and seek a buyer for our Truffles Grill concept. Also included is a CEO transition expenses of $400,000, primarily related to search fees. Excluding these 2 items, our diluted loss per share would have been roughly $0.07, roughly in line with the consensus. We have included a reconciliation of these items and the related loss per share impact on the Investor Relations page of the Ruby Tuesday website at rubytuesday.com.

In addition to the pretax impairment charges noted earlier, we will also incur additional pretax lease and other charges estimated in the range of $2 million to $5 million in the third quarter. It is important to note that of the $19 million to $22 million in total charges associated with exiting the non-core concepts and closing the 2 Lime Fresh locations, only about $2 million to $5 million represents actual cash charges related to lease settlements and other restaurant closing costs.

During the quarter, total revenue decreased 1% from the prior year, primarily due to the permanent closure of 29 company-owned Ruby Tuesday concept restaurants over the prior year, slightly offset by a same-restaurant sales increase at Ruby Tuesday concept and unit growth at Lime Fresh and Marlin & Ray's concept. During the quarter, we opened 2 company-owned Lime Fresh restaurants and at quarter end had 17 company-owned and 5 franchised Lime Fresh restaurants. As J.J. noted earlier, we will be closing 2 underperforming Lime Fresh locations that are not in line with updated site selection criteria that we have implemented based on experience gains since acquiring the concept. Also during the quarter, we permanently closed 2 company-owned Ruby Tuesday restaurants.

Subsequent to quarter end, our RT Midwest franchise successfully emerged from its Chapter 11 bankruptcy restructuring and is now operating 11 remaining Ruby Tuesday franchise restaurants. The franchise owner-operator devoted a significant amount of time to this successful turnaround effort, and we look forward to that franchise business stabilizing and growing sales going forward.

During the second quarter, as we did in the first quarter, we made several reporting reclassifications to our prior year statements of operations for the 13-week period ended November 29, 2011 to better align our financial statement presentation with our peer group. These reclassifications, which had no effect on pretax or net loss, were primarily in 2 key areas: amortization of deferred debt issuance costs and revolving credit facility commitment fees of $500,000 were reclassified from other restaurant operating costs to interest expense; and two, corporate and field executive fringe benefits and payroll taxes of $2.0 million were reclassified from payroll and related costs to selling, general and administrative costs, where the corresponding salary expenses are reported. In the current year quarter, these amounts were $800,000 and $2.1 million, respectively. We will make similar reclassification changes to the corresponding prior year amounts throughout the remainder of this fiscal year.

Restaurant level operating margin was 16.1% for the quarter compared to 14.4% a year earlier or an improvement of 170 basis points due to cost savings initiatives and good control over restaurant labor costs. These cost savings, in addition to lower coupon expense, are largely funding our television marketing programs. We have a lean cost structure with a very low breakeven point, and as a result, we are well-positioned for continued margin improvement as we grow our traffic and same-restaurant sales going forward.

Cost of goods sold was 27.8% of sales versus 29.9% in the prior year or an improvement of 210 basis points. This decrease was primarily driven by lower food and beverage costs as a result of our negotiated savings with our primary food distributor and various other vendors, in addition to lower promotional spending during the quarter. Labor costs decreased 60 basis points to 34.0% of sales versus 34.6% last year, primarily due to labor productivity initiatives at some lower volume locations, in addition to lower medical and workers' compensation claims. Other restaurant operating costs were 90 basis points unfavorable, primarily due to higher repairs and maintenance expense and to higher rent from our sale-leaseback transactions, partially offset by lower utility expenses. SG&A expenses were 12.8% of sales versus 8.3% in the prior year due to higher television advertising costs, a majority of which has been funded by our cost savings initiatives.

Interest expense in the quarter was $7.2 million compared to $4.5 million last year or an increase of $2.7 million, primarily due to interest expense on our high-yield bonds. Taxes for the quarter were a credit of $13.7 million compared to a charge of $0.3 million last year, primarily due to lower pretax income, coupled with increased FICA Tip and Work Opportunity Tax Credits.

Turning to the balance sheet. Our book debt was $309 million, down from $342 million last year, a reduction of $33 million related to the repurchase of $11.5 million of our high-yield bonds during the quarter, in addition to the pay-down of some of our mortgage debt in fiscal 2012. Additionally, we had $26 million in cash on our balance sheet at the end of the quarter, primarily due to our bond offering proceeds and sale-leaseback transactions.

From a loan covenant standpoint, we have significant cushion on both our revolving credit facility covenants, which is a result of our revolving credit facility amendment that closed in tandem with our high-yield bond deal in the fourth quarter of fiscal 2012. During the quarter, we repurchased $11.5 million of our high-yield bonds at a 5% discount to par, resulting in a pretax gain of $600,000. For our revolving credit facility agreement, we can repurchase up to an additional $3.5 million of high-yield bonds over the remainder of fiscal 2013, given the $15 million bond repurchase cap, which exists for each fiscal year.

During the quarter, we repurchased 2.4 million shares of our common stock at an average price of $7.33 per share. Subsequent to quarter end, we repurchased an additional 400,000 shares at an average price of $7.91 per share. Yesterday, our board increased the share authorization by 10 million shares, bringing the total shares authorized for repurchase under our share repurchase program to 12.7 million shares.

We continue to make good progress on our sale-leaseback program. In the second quarter, we closed on sale-leaseback transactions on 5 restaurants, resulting in $11.7 million of gross proceeds. Subsequent to the end of the quarter, we closed sale-leaseback transactions on an additional 2 restaurants, resulting in $4.7 million of gross proceeds. Since the third quarter of fiscal 2012, we have completed sale-leaseback transactions on 26 restaurants, resulting in $58.9 million of gross proceeds at an average cap rate slightly under 7%. Given the compression we continue to see in cap rates, we are currently pursuing sale-leaseback transactions on up to another 20 restaurants over the next 5 to 6 quarters if cap rates remain at these low levels.

From a capital structure standpoint, we are in good shape. Our recapitalization through our high-yield transaction has provided us with significant financial flexibility, which will enable us to continue to invest on our Ruby Tuesday brand and grow our Lime Fresh brand. The excess cash that we currently have on hand, in addition to proceeds raised from future sale-leaseback transactions, will be invested in our Ruby Tuesday and Lime Fresh brands and utilized to further reduce our debt through opportunistic bond repurchases and normal debt maturities, in addition to opportunistically repurchasing our shares.

I will now turn the call over to Greg to go over our guidance for the year.

Greg Ashley

Thanks, Michael. Our guidance for the year is as follows: we estimate same-restaurant sales for company-owned restaurants to be approximately flat for the year. For the year, we expect to open 10 to 12 Lime Fresh restaurants, close 2 Lime Fresh restaurants, close 13 Marlin & Ray's restaurants, close 1 Wok Hay restaurant, sell 2 Truffles Grill restaurants and close 6 to 8 company-owned Ruby Tuesday restaurants. For the year, our franchisees expect to open 12 to 14 restaurants, up to 10 of which will be international, and close 4 to 5 restaurants. We expect our restaurant operating margins to improve approximately 150 to 175 basis points due to our cost savings initiatives. We are in good shape on the commodities front, as approximately 85% to 90% of our proteins are locked in for the remainder of the fiscal year. Our depreciation is estimated to be in the range of $60 million to $62 million. Our advertising expense is estimated to be in the range of $78 million to $82 million for the year compared to $47.9 million in fiscal 2012, primarily due to incremental television advertising, which is largely funded by our cost savings initiatives and reductions in promotions expense. Excluding our advertising expense, our SG&A expenses are estimated to be slightly lower, primarily due to lower consulting fees and other cost savings initiatives being partially offset by the projected fourth quarter pension settlement expense attributable to the upcoming payout to our former CEO, Sandy Beall. Our interest expense is estimated to be in the $26 million to $27 million range. Based on our lower pretax income, coupled with our FICA Tip and other employment-related tax credits, we anticipate a net tax benefit of $15 million to $20 million for the year. Our GAAP diluted earnings per share for the year are estimated to be in the $0.03 loss to positive $0.03 range. Excluding the impairment, lease and other charges related to exiting the Marlin & Ray's, Truffles Grill and Wok Hay concepts and closing the 2 Lime Fresh restaurants, in addition to the CEO pension settlement expense and new CEO transition expenses, our diluted earnings per share on a non-GAAP basis for the year are estimated to be in the $0.24 to $0.30 range. On a go-forward basis, exiting these non-core brands should result in an annual earnings improvement of approximately $0.03 per share. Our fully diluted weighted average shares outstanding are estimated to be approximately $60 million to $61 million for the year. Our capital expenditures are expected to be $38 million to $42 million for the year, and we estimate we would generate $10 million to $20 million of free cash flow during the year. On an adjusted basis, our free cash flow is estimated to be $22 million to $32 million after excluding the impact of our former CEO's pension payout, which is approximately $8 million, and the estimated lease reserve settlements from restaurants closed in the fourth quarter of fiscal 2012, as well as the aforementioned planned restaurant closures in the third quarter of fiscal 2013 of approximately $4 million, as we view both of these items as infrequent in nature. We plan to pursue sale-leaseback transactions on up to 20 additional properties, represent an estimated gross proceeds of approximately $40 million to $45 million, which we anticipate will take another 5 to 6 quarters to complete.

I will now turn the call over to Dan to give an update on our sales and brand building programs.

Daniel P. Dillon

Thank you, Greg. Our same-restaurant sales of 0.3% for the quarter, our second quarter in a row of positive sales, outperformed KNAPP-TRACK's down 0.5% for the quarter. This quarter represents our second full quarter on our integrated marketing plan leveraging national cable and local spot television advertising and a balance of incentives. We're on television for a total of 11 weeks during the quarter, and we're pleased with the positive same-restaurant sales, especially when you consider these sales were -- results were achieved while reducing our coupon expense during the quarter versus the prior year.

In September, we promoted our Steak and Lobster Perfect Pair Limited Time Offer, which included our endless Garden Bar at a value price of $14.99. This promotion, which resulted in base guest traffic increases of about 2% versus the prior year, was supported by television advertising, digital media, social media and direct mail.

Beginning in late October, we introduced our new Mixed Grill Specials starting at $11.99, which featured a number of our new entrées created around bold flavors and unique recipes, including our South Tropic Trio, featuring our Black Fire Sirloin, our Grilled Chicken Topped with Fresh Mango Salsa and Jumbo Coconut-Crusted Shrimp. We also introduced a combo entrées that included a half rack of rib paired with bacon-wrapped shrimp and brushed with a peach bourbon barbecue sauce. All of our Mixed Grill Specials include our endless fresh Garden Bar and one side.

Our latest quarterly brand tracker analysis shows that our brand building efforts are working. Our data indicates that from an experience standpoint, guests clearly appreciate our new menu additions, our value-oriented pricing and the enhanced service elements and ambience changes we've made over the last several years. Our goal now is to continue the momentum we have on Ruby Tuesday, create top-of-mind awareness with our existing guests and entice new guests with our advertising offers. The overriding goal is to provide a great experience from both the service and food standpoint to every guest, and we believe our research supports that we are delivering on this goal.

As J.J. mentioned, we've recently seen an increase in competitors' advertising, which was much stronger in the second quarter compared to the first quarter and compared to a year ago.

In order to successfully drive both traffic and same-restaurant sales in this increasingly competitive environment, our marketing programs for the remainder of the fiscal year will be centered on 2 key strategies. First, we'll be focused on optimizing our mix of television and promotional offers to drive traffic, continue to believe that a good balance of national cable television and local spot weights in key markets, along with a base level of coupon incentives, will enable us to drive traffic in this environment. But we do need to make sure that our media weights, our share of voice is high enough to be relevant to our guests. Second, we'll continue to test new programs and products that can be leveraged to drive consumer preference, including new menu items that deliver on everyday value and affordability and market tactics to drive traffic.

Now, I'll turn it over to Kimberly to provide you with an update on our key operational initiatives.

Kimberly S. Grant

Thank you, Dan. From an operation standpoint, we continue to gain momentum towards achieving our goal of consistently delivering a high-quality casual dining experience with compelling value. We believe the culinary and service initiatives implemented almost a year ago, in addition to our recent efforts to dramatically decrease the turnover rates of our service team, are allowing us to deliver a more consistent experience across the brand.

On our last earnings call, I discussed our progress around our store initiatives, an acronym which stands for selecting, training and retaining and refers to our goal of building the best service, culinary and leadership teams in the industry. Some of the key components of this program are: leveraging technology to track applicant quantity and quality through the entire selection process; increase diligence in the screening process in order to select the best candidates available; ensuring new team members are completing all training in a timely and high-quality manner; and giving special attention to those team members who need follow-up training and development in order to be more confident and effective in their job. The results we are seeing from this program are truly remarkable, including double-digit reductions in hourly turnover levels for the first 6 months of our fiscal year, with lower turnover achieved in every one of our geographic regions. These are the lowest hourly team turnover numbers that we have ever realized at Ruby Tuesday, and we are working very hard towards our aspirational goal of achieving less than 80% hourly turnover for the year.

From a management perspective, our retention trends continue to be very stable, with our management turnover running approximately 21% for the year, while we continue to attract great talent from other high-quality casual dining competitors. We believe the stability of our teams is one factor allowing us to continue experiencing improvements in our external brand tracker guest satisfaction scores, which compare our absolute and trend top-box guest experience scores against key competitors in both the bar and grill and specialty segments.

Our experience scores improved in a number of key areas, including likely to recommend, up 14 points; likely to revisit in the next 30 days, up 13 points; and overall satisfaction, up 11 points. One key measure we watch very closely, consistent experience across location, continues to score at record high levels and above most all competitors that we track. All of these scores are up versus the prior year scores and in line with the last quarter's all-time record highs for the brand.

Additionally, as I noted on our last earnings call, in lieu of our historical internal guest satisfaction survey, we have migrated to a new social media aggregation tool that enables our leadership team to monitor not only our performance at both the restaurant and brand level but also monitor the key competitors of each of our brands. We are very excited about this new tool as it provides significantly more in-depth actionable insights into our brands at a restaurant-by-restaurant and market-by-market level than our previous in-store point-of-sale surveys and will enable us to quickly assess the success or failure of any new service and culinary initiatives that we deploy. We are encouraged that the positive momentum we have seen in our brand tracker scores is also being realized in this consumer sentiment being tracked by this new tool.

From a sales perspective, at the local level, our teams have been building stronger ties within their communities. Several quarters ago, we created the Ruby Tuesday Community GiveBack Program as a way to help local organizations raise money by hosting dining events in any of our restaurants. These organizations, in turn, receive a percentage of net sales from guest meals at a scheduled event. In the second quarter, we set new sales records as a company related to these GiveBack events, which, in turn, resulted in record contributions to local communities of approximately $290,000 to over 1,800 organizations around the country. Additionally, through GiveBack events hosted in our New Jersey, Delaware and Long Island area restaurants, in tandem with donations from Ruby Tuesday employees, we were able to make a total donation of $80,000 to the Red Cross in order to help those in the Northeast who were impacted by Superstorm Sandy and the nor'easter snowfall. I would like to say a special thanks to all of our teams in the Northeast that went above and beyond to work as a team and quickly get our restaurants open after the storm.

And lastly, I'd like to do a quick update for you on our Lime Fresh brand and initiatives underway to strengthen the brand for future growth. We are especially excited about the Lime Fresh brand, given its unique positioning in the premium fast casual segment. Since acquiring the concept last April, we have been primarily focused on integrating the restaurant teams into our company and studying the overall fast casual business model. We have also taken the time to conduct thorough research so we can better understand the Lime Fresh consumer and how the brand is perceived versus the competitive set from a food, service and atmosphere perspective. Over the remainder of this year, our focus will be on optimizing the operating model based upon all of this research as we focus our growth in the D.C., North Carolina and Ohio markets, in addition to further development in the State of Florida, where the brands have high awareness and very strong appeal.

I'll now turn the call back over to J.J. for a quick wrap-up.

James J. Buettgen

Thank you, Kimberly. Prior to opening of the call to questions, I want to provide a quick summary of the key themes that are top-of-mind as I am 1.5 months into my role as a CEO of the company. First of all, we believe that our decision to exit our non-core brands and focus our efforts and capital on Ruby Tuesday and Lime Fresh is the right thing to do. Ruby Tuesday is an iconic American brand with a 40-year history. It has a rich history, a loyal following and strong D&A. It also has a proud and strong culture and a legion of talented, seasoned and dedicated employees in our restaurants, in our multi-unit management ranks and in our restaurant support center. If we can consistently drive new and repeated trial at Ruby Tuesday, we can profitably grow same-restaurant sales, grow our AUVs, EBITDA and cash flow.

Additionally, our Lime Fresh concept represents an attractive growth vehicle for us going forward. It's an exciting concept with a vibrant culture, and we're excited to build upon the early success that John Kunkel, its founder, and its original team have transferred over to us. We feel it's an attractive growth vehicle for us going forward, given the strength of the concept, its lower capital requirements and high cash-on-cash return potential. Our development focus will be on identifying new sites with the right mix of accessibility, visibility and density of foot traffic.

Secondly, we have great teams in place, both in the field and in our restaurant support center, and these individuals will all be an integral part of our success going forward. Our focus on retention and growth opportunities for our leaders is a high priority for me, as this will provide good continuity for us as a company as we grow.

The third point is that we have a very strong balance sheet with good flexibility, and this will enable us to allocate capital appropriately to the highest and best uses.

In addition to investing the appropriate amounts of capital into our Ruby Tuesday and Lime Fresh restaurants, we will also seek opportunities to deploy excess cash towards opportunistic stock and bond repurchases. While we do have a lot of work ahead of us, I think our focus is on the right priority, and over time, this will enable us to build significant shareholder value.

With that, we will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Joe Buckley with Bank of America.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

I was wondering if you could share some thoughts. I know you're only 45 days into this, but just on the Ruby Tuesday brand positioning, where do you think the brand fits within the casual dining landscape?

James J. Buettgen

A couple of things. As you said, it is still pretty early, 1.5 months in. And the first priority was really getting a clear idea of what our focus should be, and that's what led to the announcement today that we're going to exit -- be exiting the non-core brands. As we talked about a little bit in our call, we do think we have some great momentum that we've been building on with Ruby Tuesday. And I think both within our restaurants, whether it's our menu changes, our service changes, the feedback we're getting from our guests, through our tracker and our guest satisfaction tells us that the improvements we're making are on the right track. As it relates to our marketing and positioning, as Dan noted, we're only 1.5 years or so or a year into our integrated marketing effort, and we continue to learn and get smarter on everything, from the effectiveness of our advertising to the nature of our media plans. So as I think about evolution going forward, I think the first priority is to make sure that in the short term, we continue to focus on an effective mix in our marketing spend, that we continue to offer solid value, given the competitive nature of the environment. And then when we look beyond that, I think it's really about figuring out how to more clearly communicate the improvements we've made to the brand over time and the occasion relevance that Ruby Tuesday offers. As we start to think in the future, if we look to evolve positioning, as we get a chance to talk more about that as a team, we'll get into that in future calls. But we're really not at a point where we made any big decisions in terms of changing direction.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then just a couple of additional quick questions. The 2 Lime Fresh closures, were those units that you acquired? Or were those units that Ruby Tuesday had opened?

James J. Buettgen

Those are units that Ruby Tuesday opened. We committed to the sites before we took control of the concept. And as you probably know, we had tested a number of different markets, as well as locations. And in the 2 locations that we chose, in hindsight, frankly, they are sites we probably wouldn't have taken again. And it's not about market acceptance as much as it is about the dynamics of the individual sites: accessibility, foot traffic, access. So it's really a couple of individual real estate decisions.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then just one more quick one on same-store sales. Can you give us a sense of traffic in check? And it seemed like you opened much more extensively in Thanksgiving Day. What kind of impact did that have on the same-store sales?

Michael O. Moore

Well, our -- we had an SRS of about 0.3%. Traffic was slightly down due to less coupon users during the quarter, and average check was slightly up due to less coupons.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And Thanksgiving Day?

Kimberly S. Grant

Thanksgiving Day, it was a very good day. We were up double-digit. With all the retailers opening earlier and earlier, that was positive. We believe we had nearly 600 restaurants open that day.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. I mean, is that why -- I mean, it's not that [indiscernible] comp was up or down a little, but with Thanksgiving Day, [indiscernible] up 0.3% comp?

James J. Buettgen

Joe, I think what you're getting at is kind of post-Thanksgiving or post-Black Friday, what kind of trends did we see. Similar to some other retailers, there was a lot of volatility through the holiday season. There was some strength running up to Thanksgiving, there was some falloff after Black Friday and it came back as we got closer to Christmas.

Kimberly S. Grant

And post-Christmas as well.

Operator

Our next question comes from the line of Robert Derrington with Northcoast Research.

Robert M. Derrington - Northcoast Research

As you come in, and I know it's difficult very early on, but you obviously have perspective from your prior employer around the industry and around the competitive set. Trying to think through Ruby Tuesday versus its peers, I can't remember a time it seems when the segment's been more competitive. What are some of the kind of key aspects that you look around the Ruby Tuesday brand that you can really kind of differentiate and somewhat try and call your own? Or is there anything?

James J. Buettgen

A couple of things, one which is, part of the reason I'm here is I do think Ruby Tuesday is -- as I said earlier, it's a strong brand with a rich history, and we've got a loyal following. As we talked about in our discussion of comp sales, as an example, as tough as the environment has been, it's the second consecutive quarter of being able to drive positive same-restaurant sales. I think there are a lot of things that are unique about the brand and its history, for example, even the Garden Bar. I think part of the opportunity for us going forward, as I mentioned before, is to continue to tell the story of how much has changed in the group and the brand over time and continue -- as most of our competitors are wrestling with, to continue to balance between innovation and value and continue to refine things like advertising effectiveness and our spending mix. But I think the brand has a lot of opportunity. And as I said earlier, it's a little early for us to be making calls in terms of a change in direction.

Robert M. Derrington - Northcoast Research

That's fair. We've all heard the largest player within the segment intends to get pretty aggressive with essentially deals and giveaways and discounts, et cetera. And I guess we're all just kind of wondering how you withstand the storm, so to speak. But I won't push any further on that.

James J. Buettgen

No, it's okay. I'll answer your question in 2 ways at a high level. No, but in fairness, the intensity of competition is not new. While it's dialed up, the casual dining industry has been intensely competitive in promotion -- promotional for quite some time, and we have been continuing to kind of hold our own in that context. At the end of the day, I think there's a couple of things that we look at. One of which is, promotions aside, a big part of what's going to drive success of concepts within casual dining is our ability to execute. And I'm confident in the team we have and the level of service quality and food quality that we can deliver, which I think will help us. The other thing that I think we have going for us is we are -- as I said earlier, we are only a year into our integrated marketing efforts. We have a lot to learn in terms of improving the attractiveness and accessibility of our LTOs, we've got upside in terms of our advertising effectiveness and I think we'll continue to get better. So I'm confident we can figure out a way to continue to be competitive.

Robert M. Derrington - Northcoast Research

If I could follow on with one other one. Mike, could you give us a little bit of perspective on -- I'm sure you've been tortured by questions around the Affordable Care Act and essentially the way the company will kind of position itself about that. As Kimberly talked about low turnover, turnover is the lower it gets, it's pretty positive for service. But on the other hand, does that have an effect on what the Affordable Care Act, how it would affect your business?

Michael O. Moore

Well, certainly, there will be some impact on it, but we've been involved in studying this and thinking forward through to our planned design. So we feel pretty confident that we're comfortable that the Affordable Care Act may increase some costs but not to a significant degree.

Operator

Our next question comes from the line of Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

Since a lot of the news today relates to portfolio actions, just a couple of questions along that front, and I'll ask them one at a time because it's easier to follow. First, in terms of the CapEx reduction today, how much of the CapEx reduction comes from, say, exiting your non-core concepts? How much comes from other changes to Ruby Tuesday? I'll start with that.

Michael O. Moore

Yes, we reduced our CapEx guidance by about $6 million. A couple million dollars comes from Marlin & Ray's conversions that we have planned. Also, we lowered our guidance by 2 or 3 Lime Fresh new store openings, and that added a couple million dollars more. The balance is just CapEx spending, primarily maintenance in the Ruby Tuesday brand.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. And then -- so taking that onto another angle, thinking about the cost saves, and I understand especially with J.J. coming in, there might be changes to this, but is there an update to the targeted cost saves, especially given these portfolio rationalizations that you can give us today?

Michael O. Moore

Well, we've said that we have cost saves targeted of $40 million to $45 million. Last year, we saved about $8 million in fiscal '12. In fiscal '13, we are on track to save an incremental $32 million. And there's additional cost saves that we are working on that will impact the balance of '13 and into fiscal '14.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. And then J.J., one question I have, and I understand you've got a very, very busy first 45 days in all of this. But one thing that's been an interesting topic of discussion here at this company for, say, the last 1.5 years or so has been kind of this move away from couponing, almost a discussion of coupons as if they were unhealthy. And it's interesting because like if you go to the website now today, the first thing you get is a pop-up coupon. And a lot of the competition and even some of your old concepts are seeming to be using even more coupons than before. What's your thought about coupons and its role in this integrated marketing campaign?

James J. Buettgen

My opinion is coupons are an integral mix or a part component of the mix. I would say that on the extreme, if we were 100% reliant upon coupons, that would be dangerous. On the other hand, to totally walk away from price incentives like coupons in such a competitive environment, in such a challenging consumer environment, would be a foolish decision. So one of the things that we continue to work on is what's the right balance between couponing and the other tools we have in our marketing arsenal. So as Dan mentioned earlier, and I think as Michael alluded to even in the difference in our check, we continue to work on that balance, and we test different combinations in various markets. And for us, it's not about kind of which vehicle is better than the other as much as how can we drive the most effectiveness with our combined marketing efforts.

Keith Siegner - Crédit Suisse AG, Research Division

Okay, that's very helpful. One last question for Greg or Michael, just a technical one. We know the full year target for advertising spend. Could you possibly tell us roughly what was spent in this quarter? So we can judge the cadence.

Greg Ashley

Yes, total ad spend, Keith, was about $22-ish million, $23-ish million in Q2 and down slightly from Q1.

Operator

Our next question comes from the line of Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

And I just wanted to ask, while it's only been 1.5 months or so, what has surprised you the most in your time at Ruby Tuesday? And where, I guess, do you see the most near- and long-term opportunity?

James J. Buettgen

I would say the thing that surprised me the most going through a combination of the discussions with the board that led to us taking the position, as well as entering the company, is how much positive change the team has made to the brand and the experience in-restaurant over time, specifically, the level of food quality. I think Ruby Tuesday does a great job with the quality of ingredients, the freshness of preparation, the range of menu items that we offer, as well as the service we deliver in restaurant. And that's part of why I mentioned earlier, I think, one of our biggest opportunities is to better tell the story of what we have to offer. And even as an industry insider, I was surprised by how much progress had been made, which leads me to believe one of our biggest opportunities is to continue to communicate that to a broader audience.

Peter Saleh - Telsey Advisory Group LLC

And then on the value side, how are you thinking about, I guess, value on a go-forward basis and pricing? I know you've kind of alluded that commodity inflation would be nominal this year, probably in that 1% range. So how are you thinking about pricing and your value proposition on a go-forward basis?

Daniel P. Dillon

I think that the value and affordability efforts that we've had in the first 2 quarters have shown us that the balance of incentives and the balance of the right products, the right price, is the right combination of affordability and value for us to drive same-restaurant sales. So I don't think there's a huge change in thinking related to that going forward.

James J. Buettgen

The other thing I would add is, we continue like a lot of our competitors to have to work on the balance between affordability and innovation because we've got to continue to come up with new and compelling food items and offers. They have to be at an approachable value in this kind of environment. But if you only have one and not the other, that's a problem, because if you're going to offer great value, you've got to be able to bring in new guests or drive some incremental visitation. So the focus continues to be on a combination of being -- offering great value but also driving innovation to our menu.

Peter Saleh - Telsey Advisory Group LLC

Great. And then just my last question is on the Social Security tax holiday that expired. If you went back a couple of years ago, were you ever able to, I guess, measure the benefit that you may have gotten from the Social Security tax holiday? And if so, could you share that with us? And maybe do you believe that, that will be a detriment on a go-forward basis this year?

Greg Ashley

Yes, Peter, this is Greg. I don't know that we've measured that in the past. We can take that off-line and chat it out later tonight, if you want to. I mean, certain pundits in the sector have opined on the impact that it may or may not have on comps, but that's certainly not a stance for us to take right now.

Operator

Our next question comes from the line of Bryan Hunt with Wells Fargo Securities.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

I was wondering if you could just explore how the site selection characteristics have changed for Lime Fresh versus those 2 locations that you did open.

James J. Buettgen

Well, it's a combination -- I guess you could argue it's not so much that the criteria has changed, as much as we have learned what's important in driving a successful Lime site. In the 2 locations that we had closed, we've run -- there are a couple of challenges in hindsight. In one, the site is in the middle of the block. On both ends of the block, they're pretty heavily trafficked thoroughfares, but the street we're on doesn't get as much cross-traffic as we had thought. Also in hindsight, if we look at the co-tenancy mix, the tenants there were in and around, do not drive as much foot traffic as we would have expected or that we see in our successful locations. In the other site, we share the same challenge in terms of co-tenancy. It's not the type of place that tends to drive a fair amount of traffic, and there are also some challenges with parking and access. And in that location, it's actually within, I think, 1.5 miles or 2 miles of another Lime Fresh location -- 2 other Lime Fresh locations. So we might have put them too close to each other.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Got you. If you look at the performance of Lime Fresh, is it -- from a sales perspective, is it maintaining its sales momentum in line with other fast casual concepts?

Kimberly S. Grant

The restaurants that are over 18 months old, yes.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Okay. And the next, just a couple of housekeeping items. One, could you tell us how many units you still own on land and building fee simple?

Daniel P. Dillon

It's 290-ish roughly, plus or minus, Bryan.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Okay. And the comments you made about taxes earlier, I imagine that's book taxes and not cash taxes. Is there any idea you can give us what your expectations are for cash taxes for the year?

Daniel P. Dillon

It's, I think, only a few million dollars, $5 million roughly.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

And maybe I lied there, fibbed a little bit or stretched the truth even. When you talked about how the environment has changed, it's become more promotional. If you look at how you're allocating promotional dollars and advertising dollars coming into the year in sum, what's the expectations for maybe tweaking that mix in the back half of the year, given how the environment has changed? Do you feel like you're going to put more money in the promotional bucket versus advertising today? I was just wondering if you could talk about that qualitatively.

Daniel P. Dillon

Yes, high-level work, there's not a dramatic shift from what we've seen work in the first and second quarters. We're continuing to refine the marketing mix overall in terms of where we provide incentives, what distribution channels we use, as well as our spot market and cable really weights. But it's not a dramatic shift out of where we saw success in the first and second quarter.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

And was there any dramatic difference in performance of your stores geographically?

Kimberly S. Grant

No, not overall, although we are ahead of KNAPP predominantly in the North and mid-Atlantic areas.

Operator

Our next question comes from the line of Rosemary Sisson with Lazard Capital.

Rosemary Sisson

I wanted to ask a couple of questions more about advertising and, obviously, the biggest issue that everyone is looking at, yourself included, of course. But I'm just wondering if you can assess how the advertisers are working to generate new guest visits, people who haven't been there in a long time. Is there any way to do that? Or is there -- was there any plans in the future to do loyalty cards or something where you could kind of determine who was actually coming in and whether they came back in another month and sort of how your experience was working?

Daniel P. Dillon

We've seen our traffic trends change to the positive, so we know that we're having an effect on driving traffic. We have started assessing whether that is current consumers coming more frequently, new users coming in, last users coming back. So I can't answer the question specifically on what percent of our traffic trend change is associated with each of those, but we have seen base traffic, non-couponing traffic trends improve that we know is associated with the couponing efforts. And when we go on off-weeks, we see those go down. And when we come back on, we see them go up. So we know our TV advertising is having an effect on traffic trends. We don't know specifically what percentage is going to which user group yet, but we're going to get that to you shortly.

Rosemary Sisson

Have you thought about doing a loyalty card?

Daniel P. Dillon

Loyalty cards and loyalty programs are kind of 2 different scenarios. We've definitely looked into it and have a pilot test going on loyalty right now. But loyalty in this category versus fast casual or high-moving casual consumer goods is just a different beast. So we haven't seen any significant results that we have to dive into it quickly, but we are looking at it.

James J. Buettgen

The other thing I would add on the new users is, to Dan's point, it's difficult to tell exactly how many or what percentage of guests are new or repeat. But in the markets where we are advertising, we are seeing consistent improvements and awareness, which we -- you would expect, but also, we're seeing really positive impact in our tracker scores around intent to visit and perception of the brand. So we do feel it's having an impact. And to Dan's point, we are seeing it in our non-coupon guest trends.

Rosemary Sisson

Okay. And how do you measure -- I mean, I guess this is, again, sort of the big question. How do you measure whether you're spending enough, not enough, too much? I mean, when do you decide how your effectiveness is or how effective the dollars that you're spending in advertising are? I mean, is it going to take you another year to kind of look back and evaluate that? It's just sort of one of those numbers that you wonder how does it really translate into improvements.

Daniel P. Dillon

I mean, the technical answer to your question is that there's a marketing mix analysis that's conducted periodically throughout the year that enabled us to see the part -- which part of our marketing mix is providing what effect on our overall sales in traffic so that we can then do an ROI analysis on each of those tactics. The longer-winded answer to your question is, it's going to take us time to get enough data in our business to be able to accurately predict and assess what is working and what's not. And we haven't had enough variation in our marketing mix to really be confident that the model is accurate, as it's been at other places that I've worked where we've had a long history of advertising promotion and other marketing tactics to help see the part, what's driving the sales in the market. But there are ways to answer your question, there are ways to get at that we'll need more time to make sure that it's stable in our models.

James J. Buettgen

Yes. In addition to needing more time, the other challenge is it does tend to be a little bit of an ongoing analysis, because once you get your formula down and you feel good about it, either competitive pressure changes, the economy changes, and it's oftentimes you've got to equate not only the effectiveness of the tools you're using but the effectiveness of the promotions or the advertising you're running, so it tends to be a little bit of a never-ending journey to improve effectiveness to your marketing efforts. We'll get better at it, but I doubt we'll ever get to a place where we'll say we're done and we understand.

Rosemary Sisson

Right. Okay. And one more quick question for Michael or Greg. Just looking for an EBITDA number, do you have that from the check, what I calculated?

Greg Ashley

Yes, the TTM debt bank and essence bond is about $108-ish million, $109 million. And we can walk through any differential you have on that later tonight or tomorrow.

Operator

That is all the time we have today for questions. I would now like to turn the floor back over to Mr. Ashley for closing comments.

James J. Buettgen

Great. This is J.J., and I would like to thank all of you for taking your time to join us on the call tonight. If we were unable to get to any of your questions that were in the queue, please either call or e-mail Greg Ashley for a follow-up call tomorrow or Friday. Thank you again for joining us. We really appreciate your time.

Operator

This concludes today's teleconference. You may now disconnect your lines. Thank you for your participation.

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Source: Ruby Tuesday Management Discusses Q2 2013 Results - Earnings Call Transcript
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