Red Robin Gourmet Burgers Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.19.13 | About: Red Robin (RRGB)

Red Robin Gourmet Burgers (NASDAQ:RRGB)

Q4 2012 Earnings Call

February 19, 2013 10:00 am ET

Executives

Stephen E. Carley - Chief Executive Officer and Director

Stuart B. Brown - Chief Financial Officer and Senior Vice President

Denny Marie Post - Chief Marketing Officer and Senior Vice President

Eric C. Houseman - President and Chief Operating Officer

Analysts

Will Slabaugh - Stephens Inc., Research Division

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Conrad Lyon - B. Riley & Co., LLC, Research Division

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Phillip Juhan - BMO Capital Markets U.S.

Peter Saleh - Telsey Advisory Group LLC

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

David Dorfman - Morgan Stanley, Research Division

Joshua C. Long - Piper Jaffray Companies, Research Division

John Barrett

Operator

Good morning, ladies and gentlemen, and welcome to the Red Robin Gourmet Burgers Inc. Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, part of today's discussion will include forward-looking statements within the meaning of federal security laws. These statements are commonly identified by words such as continue, plan, expect, will and other terms with similar meaning. These statements will include, but will not be limited to, statements that reflect the company's current expectations with respect to the financial condition of the company, results of operations, plans, objectives, future performance and business, including the company's traffic and revenue driving initiatives, intentions with respect to expense management and plans for deployment of capital and other expectations discussed during the course of this call. Although the company believes the assumptions upon which the preliminary or initial results, financial information and forward-looking statements are based, are reasonable as of today's date. These forward-looking statements are not guarantees of future performance and therefore, investors should not place undue reliance on them. Also, these statements are based on facts known and expected as of the date of this conference call and the company undertakes no obligation to update these statements to reflect events or circumstances that might arise after this call. Participants on the call today should refer to the company's Form 10-K and other filings with the SEC for a more detailed discussion of the risks, uncertainties and other factors that could impact the company's future operating results and financial conditions. The company has posted its fiscal fourth quarter 2012 press release and supplemental financial information related to the quarters results on its website www.redrobin.com in the Investor section. I will now turn the call over to Mr. Stephen Carley, Chief Executive Officer of Red Robin. Please go ahead, sir.

Stephen E. Carley

Thanks, Tiffany, and thanks, everyone for joining us on our call today. With me are Eric Houseman, our President and Chief Operating Officer; Denny Post, our Chief Marketing Officer; and Stuart Brown, our Chief Financial Officer. After Stuart and I deliver our prepared remarks, we will be available for Q&A.

First, let me express how pleased we are with our fourth quarter 2012 performance. As you saw in our earnings press release, and I would also refer you to Slides 3 of our supplemental financials deck, our results included a 1.4% same-store sales increase on a 13-week comparable basis. This marks our 10th consecutive quarter of same-store sales growth. We also achieved a 30 basis point increase in guest traffic, outpacing the industry for the second quarter in a row. Importantly, Red Robin significantly outperformed casual dining as a whole by almost 400 basis points, as measured by BlackBox. With those and other positive headlines from the fourth quarter, I'd like to share with you our priorities going forward and what we expect to accomplish in 2013 and beyond. Earlier, we made remarkable progress strengthening the fundamentals of our business and improving our performance. So now, we'd like to focus our remarks on what we're doing to accelerate the business, to position Red Robin for long-term sustainable growth and profitability. We're now turning our focus onto 3 fronts. We're going to call these engagement, efficiency and expansion, as shown on Slides 4 and 5. Engagement is about how we're engaging the guest experience and enhancing it to drive the top line. Efficiency is about increasing productivity and effectiveness to manage margins and expansion is our work to grow our operational footprint and effectively deploy our capital. We have a number of initiatives in each of these areas, some short-term and some long-term. Here's a really good way to think about it. Picture yourself on Friday afternoon at 5:30 at O'Hare Airport, not only are jets landing, but they're also queued up one after another out to the horizon. Sequenced to land in order for the foreseeable future. Red Robin, we're landing initiatives into our restaurants currently and we have a series of initiatives queued up on approach patterns and expected to land in the restaurants over the coming years. Let me give you some examples of what we're doing on each of these 3 fronts.

First, guest engagement, on Slide 6. To build and strengthen the Red Robin brand we're enhancing the guest experience and reinforcing our value and quality perceptions. Although we serve familiar favorites such as high-quality burgers and other classic American fare, what makes it Red Robin gourmet is how we do it in our own unique way. A style of food, service and atmosphere that elevates how people feel when they come through our doors. A great example of how we're elevating the guest experience is our brand transformation exercise. Remember that our brand transformation is not just new paint and wallpaper. It's enhancing our service, our menu, our food presentation and every single other guest touchpoint that cement Red Robin's position as the go-to-place for families and kids and additionally, places firmly in the consideration set for adults, spending a night out as a couple or with friends. We know through research and observation that this adult opportunity is big for us. Our goal is to serve more guests more often and leave them more delighted. These restaurants will serve as an environment for us to learn and assess initial returns for both our capital investments in terms of construction dollars and our investments in people, training and development. So far, we're very pleased with the results, but I need to tell you the paint is barely dry on the last remodel. So we expect it to be Q3 before we have conclusive findings. At that time we'll let you know our next steps, but this will almost certainly be a multiyear effort. Our guest engagement opportunity that's much closer in is our new format for our spiral menu currently in test. This new menu format not only helps us leverage the quality and creativity of our new culinary team and our master mixologist. It's more flexible, enabling regional menu items in regional pricing. It makes Red Robin more nimble and responsive to a changing marketplace. Our plan is to get this new spiral menu into all of our restaurants around midyear. In conjunction with the new menu, we're introducing new food presentations to enhance the quality perception of our burgers and fries and to highlight unique ingredients on our burgers. To further reinforce both quality and value for the money, we'll serve them on real plateware, replacing the wrap burgers and red baskets. And consistent with our ongoing efforts to take back the bar, we'll introduce entirely new glassware that leverage beverage innovation. We anticipate this will accelerate the momentum we're already enjoying as year-over-year beverage alcohol is up 70 basis points versus the '12 -- in '12 versus '11. As you know, our Tavern Double platform anchors the affordability side of our menu and has earned its place as the most successful new platform launch in our history. Our Tavern Double reinforces our everyday value proposition and it also reasserts our burger authority with a variety of ingredients that allow guests to style it up, with the value and affordability component of our platform now firmly in place, we're currently conducting market research on what a premium segment of our menu would look like. To clarify, we're currently testing concepts to learn more about what our guests would want in a premium burger and, most importantly, what they would be willing to pay for. Based on our findings, we'll determine our approach to this segment in the back half of this year. To better complement our core burgers and sandwiches, we're also developing new appetizers, desserts and drinks, both alcoholic and nonalcoholic, which represent a significant opportunity for us to drive average check relative to our casual dining peers. We're already encouraged by the results of testing. We've been doing in these categories on the menu. Another example of how we're driving the top line is, of course, Red Robin Royalty. We can now track, incent and reward our guest behavior to drive engagement, frequency and loyalty. Registrations recently surpassed the 2 million member mark. Red Robin Royalty is already an effective and profitable program and will continue our work to refine it. A key priority for Red Robin is engaging our team members. We're making investments in more efficient and effective training and initiatives to help us leverage our most important competitive advantage, our people. One example of this is our recent rollout of team member foundations. This is a leading edge iPad-based training program that elevates the capabilities of our training teams, increases the caliber of content, and uses state-of-the-art tools to deliver it. The objective is to enhance our team member's ability to engage with our guests and make connections that build visit frequency. Now, on our second front, which is operating efficiency on Slide 7. As we continue to grow the top line and strengthen our discipline around managing costs. We have greater flexibility to make investments that will support the business and improve performance, both today and in the long-term. We continue to work on the implementation of our technology infrastructure improvements like our IQ ERP effort, building supply chain efficiency, sales forecasting capabilities, realtime P&Ls and reducing administration for our restaurant teams. Returning some of those savings to shareholders and investing the balance back into the business, the improvements like new kitchen equipment to deliver hotter higher-quality burgers today, upgrading significantly improved flexibility to accommodate future innovations from our culinary team. Another example is the new labor management system that will help our restaurant teams put the right people in the right place at the right time to deliver a superior guest experience and meet our ideal systemwide labor targets. We expect to have the new system fully implemented in the second half of 2013. Our goal is to maximize profitability and productivity through improved labor forecasting and scheduling that ultimately leads to consistent, best-in-class field execution. And of course, project blueprint, our continuous improvement effort around margin improvement is becoming part of our DNA. And finally, our third front is footprint expansion. The initiatives in this area of focus and include the continued growth of our restaurant base through new company-owned restaurants. As I stated earlier, we added 14 new units to our company-base in 2012, including 3 restaurants in the fourth quarter itself, of which 2 are midsized or above 4,000 square-foot prototype. This year, we plan to open approximately 20 new restaurants, including up to 5 new Red Robin Burger Works. In addition, our existing franchisees are playing a bigger role here, because they plan to open up to 4 more new locations in 2013, more than they've opened in the last 4 years in total. When we process all the learnings from our brand transformation efforts, we'll use them to guide the development of a new Red Robin prototype restaurant that we can leverage with our franchisees to. Another example of our footprint expansion is Red Robin's Burger Works. We're already learning a tremendous amount from the 5 locations that we've opened so far. And we believe this vast casual prototype will allow us the flexibility to open in nontraditional locations, including airports, college campuses and urban areas where we would not be able to build a full-service restaurant. So again, while we're very pleased with our most recent financial results, we're even more excited to look ahead and focus on achieving our vision across these 3 major fronts: guest engagement, to deliver the top line; operating efficiency to offset cost pressures and enhance our margins; and a thoughtful deployment of capital via our footprint expansion. With that, I'll turn the call over to Stuart to give you more perspective on our results and the outlook for 2013. Stuart?

Stuart B. Brown

Thank you, Steve, and good morning, everyone. I will begin today with a brief overview of our 2012 results and then cover our outlook for 2013. We reported adjusted earnings-per-share of $0.59 for the fourth quarter of 2012, excluding the non-cash charge of our debt refinancing. If we were to also exclude the $0.21 per share impact we estimate for the 53rd week, earnings-per-share grew 36% to $0.38 in the quarter compared to an adjusted EPS of $0.28 a year ago. For the full fiscal year, adjusted EPS was $2.06, an increase of 30%. Excluding the 53rd week, we achieved EPS growth of 17% over 2011. Looking at Slide 13 of our supplemental, our total revenues were $240.7 million in the fourth quarter, an increase of almost $35 million or 16.8%. The extra week contributed about $21 million to the increase and the number of operating weeks increased 12%, of which 8% were due to the additional week and 4% from additional restaurants. Our comparable restaurant revenues increased 1.4% in the fourth quarter, lapping over 3.1% growth in the fourth quarter of 2011. Our average check increased 1.1%, reflecting a modest fourth quarter price increase and increased items per guest. Compared to the third quarter, sequential average check increased over 1% due to more guest enjoying beverages and appetizers as part of their meal. Guest traffic increased 0.3% a quarter and exceeded the casual dining sector by 390 basis points as reported by Blackbox. Even more impressively, traffic was favorable to the sector in nearly every region across the country. Our reported comparable revenue growth is calculated using 13 weeks and 53 weeks for the fourth quarter and full year respectively using the revenues of the matching calendar weeks. For 2013, comparable revenue growth calculations, we will compare actual results to the most closely aligned periods which will vary from our prior year fiscal quarter by 1 week. As shown on Slide 15 of the supplemental, cost of goods sold improved 20 basis points to 25.2% in the fourth quarter from the year-ago period due to an improved sales mix and lower cheese, prilo and rib prime costs. Higher potato and ground beef costs were offset by the price increase and higher profitability of our Limited Time Offers. Store labor and other operating cost together decreased 30 basis points as higher costs associated with our brand transformation pilot and restaurant bonuses were more than offset by lower utilities, supplies and maintenance costs. Overall, fourth quarter restaurant-level operating profits reached $48.7 million or 20.6% of restaurant revenue, a 70 basis point margin improvement over last year. For the full year, restaurant-level operating margins improved 90 basis points over 2011 and over the past 2 years have improved almost 300 basis points. Q4 general and administrative costs increased $1.4 million from a year ago to $20.5 million due mainly to the extra week in 2012. For the full year, G&A was $83.7 million, including $6.1 million of expenses related to our new finance and supply chain systems. We've just gone live with our new finance systems and are currently testing our new supply-chain systems before rolling out later this year. Selling cost in the fourth quarter were $6.4 million, an increase of $1.9 million due mainly to higher marketing fund contributions related to the increased sales and gift card expenses as we increased card sales 16% with new retail outlets carrying our cards. Our interest expense in the fourth quarter included a $2.9 million non-cash charge related to the refinancing of our credit facility, consisting of $1.7 million for the write-off of existing fees and $1.2 million related to the redesignation of our variable to fixed interest rates swap agreements. Our new credit facility has a 50 basis point lower borrowing rate and lower fees on the unused portion of our facility and also provides greater flexibility through the new covenant package. The new facility will lower interest expense by over $800,000 annually.

Turning to full year cash flow and investments, our 2012 adjusted EBITDA was $104.4 million, an increase of $11.8 million over 2011 and an increase of $27.7 million over the past 2 years. In 2012, we invested $29 million of the cash flow we generated in expanding our store base by net 12 restaurants. Our units continue to generate cash-on-cash returns in excess of 30%. Additionally, we spent about $10 million testing our brand transformation initiative in 21 restaurants, as well as upgrading our audiovisual in about 125 restaurants and spent $12 million on restaurant maintenance. Our capitalized investments in new IT systems and other infrastructure initiatives totaled $12 million during the year. Much of the excess cash generated this year was returned to shareholders in the form of share buybacks. We repurchased $24.3 million during the year, including $8.6 million during the fourth quarter itself. Over the past 2 years, we have repurchased over $57 million or 13% of shares outstanding. A new $50 million share repurchase authorization became effective at the beginning of 2013. With respect to our 2013 outlook, we remain cautious regarding consumer discretionary spending. Economic headwinds will continue to impact casual dining and we foresee this sector experiencing another year flat to negative traffic. That being said, we are confident that the strength of the Red Robin brand and the initiatives we have in our pipeline will allow us to profitably take market share. So, we anticipate 2013 comparable restaurant sales to increase 2.5% to 3% of which approximately 2% will be from price increases to offset commodity and wage inflation. Further, we expect 4% to 5% of more operating weeks considering 20 new restaurant openings and excluding the 53rd week in 2012. Our restaurant-level operating margin is expected to be flat to down 10 basis points compared to 2012 due to factors including higher commodity costs with inflation around 4%, higher minimum wages and onetime labor costs associated with the rolling out of our new Spiral Menu, labor management system, supply-chain system and other initiatives. We expect 2013 selling costs to remain fairly consistent as a percentage of sales with 2012 and our general and administrative costs to range from $83 million to $84 million. First quarter total selling, general and administrative costs are expected to be around $36 million, the same run rate as Q4 2012 plus our annual general manager conference and some initiative expenses. 2013 depreciation expense is expected to be around $58 million, interest expense to be in our $4.5 million and our effective tax rate to be between 23% and 24%. Also, I want to highlight a comment that I made on our last earnings call related to the impact of the shift of the strong holiday week. In fiscal 2012, we had the holiday week both at the beginning of the year and at the end of the year. From a baseline perspective, in addition to $0.21 lower EPS related to the extra week in 2012, we will also shift about $4 million of high-margin revenue from the first quarter into the fourth quarter. Our year-over-year comparability will also be impacted by our change in media timing. We expect that our media spending will increase slightly in fiscal 2013, but are not currently planning any media in the first quarter as we finalize our media strategy. The change in media timing will likely cause about $6 million of sales to shift from the first quarter into later parts of the year, which we plan to partly offset with Red Robin Royalty and other guest engagement initiatives. Our investment priorities, once again, consist of increased restaurant openings generating outstanding returns, as well as capital investments on efficiency improving initiatives. In total, we expect our capital expenditures to range from $50 million to $55 million. Our 2013 guidance however, does not include any capital costs or benefits related to further remodels. So we will update this later in the year as we finalize which parts of the brand transformation initiative are having the greatest impact on profitably engaging our guests. And then, determine our implementation strategy. Before turning the call back over to Steve who just outlined our 2013 roadmap, I want to reflect quickly on the goals we set for 2012. We were clearly successful in building our foundation and advancing our brand. With the launch of our everyday value Tavern Double platform, expanding our successful Royalty program, establishing Burger Works and testing everything from brand transformation to new creative culinary and talked about beverage innovations. We're very proud of what we've accomplished and it was a true Red Robin team effort. We're also incredibly excited about the opportunities that further engaging our guests, improving efficiencies and expanding our footprint, will create for our team members and our shareholders. Red Robin truly is an American classic. With that, I'll turn the call back over to Steve. Thank you.

Stephen E. Carley

Thanks, Stuart. I want to wrap up our prepared remarks by reiterating that while we're very pleased with our performance in 2012, a foundational year for Red Robin, we continue to look forward to the future. 2013 will be a year of testing and harvesting opportunities to accelerate growth and drive long-term performance, again focused around those 3Es of engagement, efficiency and expansion. Finally, I want to once again thank my fellow Red Robin team members across the entire enterprise for their continued hard work, passion and focus on results. Our success would not be possible without them. With that, operator, we'd be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Will Slabaugh, Stephens Incorporated.

Will Slabaugh - Stephens Inc., Research Division

As far as the guidance goes, I just wondered if you could talk a little bit more about the comments that you have, the 2.5% to 3% number on the same-store sales line. And then within that, could you speak at just little bit to traffic and check and how you expect those to play out throughout the next year?

Stuart B. Brown

This is Stuart. Really quickly, again, we're cautious on how the whole industry is going to do for the year. So our guidance is built on traffic being sort of flat to down 0.5%. So our confidence of sort of the same-store sales guidance is sort of built off of that. And combined with some pricing that we anticipate taking. So we feel pretty good about where we are. Again, if the industry under or over performs that, we'll probably go along with the tide going up or down. In terms of the seasonality of that, it's a little bit hard to predict. We've had a number of sales building initiatives that continue to sort of layer on each other as we've talked about in the third quarter and the fourth quarter and we've got to keep -- again, we'll start to cycle over some of those and if we've got a few -- hopefully, a few new ones in the bag that we'll continue to deliver.

Will Slabaugh - Stephens Inc., Research Division

And then just on the menu, can you talk a little bit more about what you expect to gain? I know you've mentioned add-ons in the past as being something where maybe under index with appetizers, dessert et cetera. So give a little more color around that and sort of what you expect as far as the menu evolution throughout this year.

Denny Marie Post

This is Denny. Glad to take that question. We definitely have upside as we started to experience late last year with the launch of our Pretzel Bites and the way that our guests responded to those in the area of appetizers and add-ons, both at the beginning of the meal and at the end of the meal. We have traditionally, of course, focused on our core offering of our burgers. But we think we have upside relative to the category on both appetizers and desserts. In terms of the overall menu, we're slotting in a nice pipeline and for the first time have some alternatives, go-to-alternatives so that we need not rush for. But anything we're not ready to rush forward with or go forward with. So I think we're going to have a good lineup this year and to balance out, obviously, the barbell strategies we've talked about it.

Operator

We'll take our next question from Jeff Omohundro with Davenport & Company.

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

Just another question on the comp outlook and understand the importance of pricing contributing to that outlook. Where does check fall in that guidance? And specifically, in thinking about the efforts on the premium side of the menu, is there an assumption of success there, in mix growth, on premium and check growth? And associated with that, given the success last year of connecting with guests on the Tavern Double and the value side, how are you thinking about introducing these products to avoid jeopardizing the traction you've gotten on the lower end of the barbell?

Denny Marie Post

Kind of building on that, Jeff, from my last comment is, we are not yet -- not had yet built in anything with regard to premium. We're still in the stages of developing those products. So that is not contemplated yet in our plan. However, add on to what I just spoke about, do have the opportunity to expand our check. And I think we have demonstrated through testing that there's upside there. As far as Tavern Double, it remains the anchor of our everyday value strategy and we'll continue on our menu, we'll continue to refresh it with new styles and opportunities. And again, I think there's room in this world for burgers priced at a wide range. So we're going to stick to what we do best, which is great burgers and I think we can pull that range out. But for right now, premium is not yet built-in.

Operator

Joe Buckley, Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

It sounds like a number of the major initiatives on the IT side and on the brand transformation side are sort of work-in-progress, but maybe come to a head a little bit later in the year. So could you maybe just bring us up to date on both -- on the brand transformation. Is it 21 restaurants that are in test and how many different formats are in -- spread among those 21 restaurants? And maybe on the IT efforts, just where are you in the scheme of things and the G&A guidance is relatively flat, how does that relate to the IT rollout?

Stuart B. Brown

This is Stuart. Quickly on brand transformation, I think we're really right on track, maybe a little bit ahead in terms of where we thought we'd be in terms of the testing of that. So as we said, we've tested 21 restaurants in the fourth quarter at various levels. One, full transformation, which included interior and exterior and those cost about $400,000 all the way down to bar only cost, just sort of $125,000 to $150,000. And those were largely completed in the fourth quarter, one here in the first of quarter 2013. And we've always anticipated that we would get a read on that for 6 months or so. Some of it you can get a pretty quick read on and operating expenses and labor, but really a lot of its about -- again guest engagement and frequency, and so we want to be very careful about how we're reading that and how that trends over time, make sure we're not just reading out immediate honeymoon results and that type of thing. So feel good about where we are on that. We'll do a read on that over the summer and then figure out, based on that, which restaurants are performing the best, which pieces of the brand transformation are adding the best of the guest experience and team member experience and lay the plan out from there. And we may be able to get some done later in 2013, but right now, there wasn't any sense just making a guess or a stab in guidance on that. On the IT front, yes, we're definitely behind where we anticipated being a year ago. The finance systems have rolled out a few months later than we thought and that's sort of one of the risks of being an early adopter of a new ERP system and we knew that going in upfront. The benefit of being an early adopter is we get lots and lots of attention and help and our providers and support companies have been great doing that with us. The supply-chain systems they're going to be rolling into the restaurants are also running a few months behind and I think if you asked us, compared to a year ago or Investor Day, we'll definitely have some higher run rate in 2013 than what we thought at that time and is probably an additional, I don't know what it is, $2 million to $3 million of G&A this year than we would have guessed otherwise. That said, terms of what the systems are going to deliver, still highly confident in that and it's not going to slow us down going back to the airplanes lining up to labor management and some of the other initiatives.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then just a question on the shift in media. So just remind us what you did in the first quarter a year ago, were you on air for 4 weeks and this year you basically would not be on air at all?

Denny Marie Post

We will not be on air at all in the fourth quarter with traditional media. First quarter, I'm sorry. Four weeks -- we were on air 4 weeks last year, we will not be on air with television this first quarter.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And do you know what the game plan is for the balance of the year or are you still adjusting and testing on that front?

Denny Marie Post

We're just on-boarding our new chosen creative agency and media buying firm and are locking that down over the next few weeks, but we are shifting our strategy and looking to spend our dollars more wisely, more impactfully over the course of the year.

Operator

Conrad Lyon, B. Riley Caris.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Let me just follow on the shifting of the advertise spend real quick, just want to clarify. So the push backwards and the lay in spend is merely just a reflection of the new firm and creating a new, if you will, strategy for advertising spend? Is it?

Denny Marie Post

Yes. Principally it's a reflection of a new media strategy and approach.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Question regarding the comps in Q4 12-week, 13-week basis, just wanted to clarify. It looks like there was a nice Delta in the average check from -- on a 12-week basis to 13-week basis and as well, from guest counts. Can you speak to what were the principal agents or what caused that?

Stuart B. Brown

Conrad, this is Stuart. Quickly, there wasn't -- there's no difference because of the timing of weeks. We've measured comp, average check and traffic over the same weekly period. Really, the biggest driver, and again if you look at it, and go to our comments in the third quarter, what hurt us on average check in the third quarter was we had some drop in appetizers as we had taken some items off the menu. We'd also indicated we're bringing some items back. So you saw that resonate in Q4. It's really increased beverages, alcoholic beverages and appetizers.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Could you speak to gift card sales and how they were in the fourth quarter compared to last year?

Stephen E. Carley

Sales were up 16% and the rest of the industry, I mean you see a lot of redemptions in the sort of the late December, January timeframe, but I feel very good we rolled out a couple of new retailers on block to rollout in 2013.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Just a little bit more clarification also in terms of trends. There's been some chatter about February being very difficult for just consumer spending in general. You guys have done better -- obviously performing better than the major industries out there. Are you seeing something similar? I know you don't want to get into too much detail, but just kind of directionally to help us guide and model going forward here?

Stephen E. Carley

Actually the good news is, I don't like to get in any detail, not just a little bit. So -- we just don't give interim updates. I means it's -- clearly what happens in the first inning indicate doesn't indicate the outcome of the game. So again, our guidance for the year is built off of a flat to 0.5% traffic for the year. And again, the consumer was volatile last quarter, it was volatile the quarter before, and it is going to continue to be volatile in 2013.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Final question here. Just in terms of the unit development program for the year. Any color on the distribution throughout the year and the size, if it's going to be skewed towards the 4,000 square foot box?

Stuart B. Brown

Yes, if you look on the sort of 20 units, well actually the midsize, the new 4,000 square-foot unit, we've got 2 of those opened. We're going to expand it to another 4 this year of the 20 around and Burger Works is going to be up to 5 and the balance will be filled out with the full size. We also expect franchisees to open 3 to 4 units. So we'll get a little bit of growth on that side as well. And it will be skewed probably a little bit more towards the back half.

Operator

Bryan Elliott, Raymond James.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

I can see clarifications, actually, Stuart. So if the first inning is 9 swings and misses versus 3 not outs till the warning track, pretty different setup for the next 8 innings, but I'll leave that one alone.

Stuart B. Brown

Let me give one response to that. The last couple of quarters we've been working really hard to try to hit some singles and doubles and get the people around base and we'll keep trying to do that. Let me put it that way.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Well you've certainly been successful with that. Just some clarifications on some things. So you talked about Q1 G&A with no advertising and I'm on a cellphone. Did you say therefore, Q1 G&A looks to be $26 million or $36 million?

Stuart B. Brown

Again SG&A and everything all together, one thing you've got to remember our selling cost just to jump in, is we make a contribution to a marketing fund. So the actual timing of media doesn't impact when the expense hits. So I think that's important to be sure everybody understands. But total SG&A is expected to be around $36 million.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Okay, because we're going to prefund the spending that comes later. And on that subject, then you said, I believe I heard correctly, to push -- think about the lack of spending in Q1 as something that will push, I believe the number was $4 million in sales into the next 3 quarters from the Q1?

Stuart B. Brown

$6 million of sales.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

$6 million, okay. And that's in addition to the calendar shift issue which you highlighted, which is the big holiday week was in Q1 last year and is not in Q1 this year because of the extra week in '12, correct?

Stuart B. Brown

Correct. And that's $4 million of sales and those are fairly high margin sales.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

So that's flat? That's why I got the $4 million. Okay. So the total impact then from advertise calendar shift is more like $10 million?

Stuart B. Brown

Correct.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

And also, you said I believe, that the comp sales will be on a fiscal rather than calendar basis this year?

Stuart B. Brown

The comp sales we always do on a fiscal basis, but what we'll do -- what we're going to do in terms of as we report comp sales, again because of the shift of holidays and the way the calendar works in the 53rd week, when we report comp sales we will try to align it as best we can to your point to the calendar, so it'll actually be, we'll compare basically off 1 week on the comp calculation, fiscal year.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

So in other words, are we going to drop -- we got to drop 1 week, right? So are we going to drop the first calendar week?

Stuart B. Brown

No, we're not dropping weeks. We'll have the same -- again, our first quarter will still be 16 weeks, but we'll compare to the most closely aligned 16 weeks in the calendar last year which technically will be last year's weeks 2 through 17, if you think about it that way.

Operator

Phillip Juhan, BMO Capital Markets.

Phillip Juhan - BMO Capital Markets U.S.

A couple of questions. First, Stuart, you indicated in your comments that there is no sort of budget baked in for remodels in the CapEx plan? And you're printing [ph] that out...

Stuart B. Brown

I'm sorry. There's a normal remodels in there, but no brand transformations. So nothing significant built-in at this point.

Phillip Juhan - BMO Capital Markets U.S.

Okay. And it sounds like you're just taking sort of a pause to measure and assess and we'll sort of tick the program back up at the end of the 6-month period. Is that a fair assessment?

Stephen E. Carley

This is Steve, Phil. The last one actually wasn't even completed till this past month and while we are going to spend 6 months in a very disciplined way reading the results, we're not really taking a pause in the sense that we continue to be in these restaurants on an ongoing basis, talking to guests, doing research, learning, testing and evolving, continuing to make it better. So we're not totally dead in the water on this. We continue to learn. And so with that, combined with the analytics that we'll get at the end of Q2, we're really informed the level and the velocity of how we approach the balance of the system on this.

Stuart B. Brown

One quick comment I'd add to that as well is, this one will inform our next-generation prototype as well, and so we're working on that and we'll get that open -- open that up in the second half of the year.

Phillip Juhan - BMO Capital Markets U.S.

And I appreciate very, very early in the program, but I guess, and in sense to determine if -- back in the Analyst Day you guys mentioned that if the remodels work, exceed the 2% to 3% sort of same-store sales hurdle, we could possibly see as many 75 to 100 units per year. Is there anything you're seeing at this point that might put that sort of assumption at risk in the future?

Stuart B. Brown

I think it's just too early to tell. I mean, again, we think that in engaging the guest in this way and making some of these service changes and plating the presentation, again if it justifies the cost then it's a great investment that I think the 75 to 100 unit per year still stands.

Phillip Juhan - BMO Capital Markets U.S.

Okay. And last question, Stuart, if I may. Back to the comp for a moment. So if we're thinking about the calendar shift, the $6 million of sales that pushes out to later in the year due to the timing of advertising. I mean if we just think about this in terms of comp store sales cadence throughout the year, if we push out $6 million -- it sounds like you're starting in the hole in the first quarter even with the realignment to weeks 2 through 17, maybe of 150 to 200 basis points negative that you have to overcome in the first quarter. And so is it fair to expect that net first quarter comp should be much lighter than quarters 2 through 4?

Stuart B. Brown

That's a great conclusion.

Operator

Peter Saleh, Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

I just wanted to ask about the health of the franchisees. I know you said they're going to be opening up a couple more units this year. Are we starting to see franchisees being able to find capital to accelerate growth and how should we think about that, I guess, as we go forward over the next maybe 18 months?

Eric C. Houseman

Peter, Eric here. I think it is easing up a little bit. Obviously, our franchise partners are getting better with local banks. I don't think -- I don't see really a material expansion above the 4, 5 units a year. So materially, it will continue to grow and that will be our largest growth.

Stephen E. Carley

Peter, this is Steve. To build on that for a little bit. As Stuart indicated, the brand transformation effort is really informing us on our new prototype. We haven't had a new Red Robin prototype for well in years, and so our franchises, like you guys, are anxiously awaiting what this looks like when it comes out. And I think the better job we do at that will correlate to their level of excitement and enthusiasm about going out, securing new capital and continuing to build alongside us.

Peter Saleh - Telsey Advisory Group LLC

And on the alcohol mix, did you guys give us where that was at the end of the fourth quarter and what that was up on a year-over-year? And then just lastly on that, where do you think you can go from here? Do you think you can get back to peak?

Stephen E. Carley

I'll answer that in reverse order while we get the data. The industry average on alcohol is in the low teens. I think even Olive Garden the last time I looked, don't hold me to it, is about 14% and Olive Garden is not a place where people typically go and say, hey, let's take a softball team after the game and have a beer. So we've got a terrific long runway to build this back up. Even 10 years ago, Red Robin was at 11% of that alcohol mix. And at the end of Q4, we were at 7.6%. As we've talked, I think it's reasonable to expect us to grow that about 50 basis points a year. It took us 10 years to lose it, it's going to take us a while to get it back. But we're very encouraged by what we've seen, our new master mixologist is doing a bang up job both on cocktails and beers and of course, you've read about our beer milkshakes, but also our new glassware and new presentations.

Operator

Steve Anderson, Miller Tabak.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

I just wanted to ask, there's a trade report about a test you're running regarding bundling of some of the appetizers, seems in the North Carolina. Is it too early for you to discuss what you found in that test?

Denny Marie Post

Yes. It's too early to discuss it. But I'm glad people are paying attention.

Operator

Chris O'Cull, KeyBanc.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Given the company's comp assumptions for the industry this year, I guess build a flattish traffic, what's the rationale behind introducing more premium burgers?

Denny Marie Post

One is, we believe as a burger authority, that we've got room to do everything from everyday value to the most premium burger you could possibly purchase. We've got a lot of credibility there. It reinforces our brand authority. Second, we have a wide range of guests and guest types and our locations and our target base support as economy recovers, et cetera, more premium burgers. The whole concept of providing small, medium and large or a low, medium and high-priced is a very tried and true marketing and menuing technique back to every place I've ever been. And well before me. This is not like it's a new discovery. So the more you offer the lower end, and the more that you offer higher end, you find that people support and gravitate off into the middle. So again, also most importantly, our testing shows that our guest gives us permission to go there, believes we can do it extremely well and is eager, at least conceptually at this point, for us to add these.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

How do you avoid losing mine share around affordability which you obviously created with a lot of success with the Tavern Double? How do you do both?

Denny Marie Post

I think with really smart media strategy and messaging strategy, more importantly. Not everything requires -- smart dimes beat dumb dollars every time and we have to be very careful about how we spend our dimes and where we use mass media and what we reinforce about our brand and where we use more targeted messaging. So I think there's a lots of ways through the media mix to balance this out.

Stephen E. Carley

Chris, this is Steve. This is about guest choice. We're not forcing anything on anybody and that's why we're taking such a deliberate and thoughtful pace around research and understanding exactly what the guest is looking for, what they, from a concept basis, believe is premium and what they're prepared to pay for. But again, this their choice. We're simply making it available as they go through the menu and we know they're going to make a different choice when they come in with their family at the end of the month, while they're stretching their dollars and that's a different choice when they come in after they just got promoted with the guys from the office.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Do you all expect that targeted media used to be around supporting the premium burgers rather than kind of the mass media?

Denny Marie Post

I don't know yet. Not certain yet what we're going to do that's part of the testing process and thinking this through. But I believe there's a lot of opportunities for us to make good choices of that.

Operator

David Dorfman, Morgan Stanley.

David Dorfman - Morgan Stanley, Research Division

I wanted to ask about the Royalty program. And specifically, you sort of brought it up as a potential offset to some of these headwinds you'll see in the first quarter with the comp, the 2% related to shifting media and maybe just the volume you'll lose through extra week. And now you're at sort of 2 million users and I think you sound like maybe if you're trying to replicate just the number of users that you had on your e-mail distribution, you could double that, can you give sort of like an example of how you use that and how you can predict how much you can offset?

Denny Marie Post

I'm sorry, go ahead. I was going to say this is where history is the best predictor of success. If you'll remember last quarter, quarter 3 last year, all of us were facing tremendous headwinds from the Olympics, elections, etc. We were able to tap into our Red Robin Royalty base and direct to that -- go direct to that community with an offer that made a huge difference for us in Q3. So that kind of activity is the kind of thing that we know we can choose to do very selectively and appropriately with the 2 million members that we currently have.

David Dorfman - Morgan Stanley, Research Division

And what was the magnitude of that Olympic example?

Denny Marie Post

You'd have to go back and look what we shared at the time. I'm not sure.

Stephen E. Carley

Also to it -- as it relates to Red Royalty, the other thing is this base of users gives us a real-life learning laboratory and we usually have a whole bunch of tactics that we're testing against different parts of this target markets simultaneously to optimize which ones work the best. And it runs the gamut, everything from like direct mail and sweepstakes and all the above.

David Dorfman - Morgan Stanley, Research Division

Okay. And one more question, just on -- with respect to the stability of sales, I mean have you seen -- it sounds like you have a lot of different things going on with menu test and introductions and is there now sort of a baseline change in the way people have used your menu in that Tavern burger and how people have used added apps and desserts and drinks? Has that sort of played out the way you wanted? Is that stable now or is there still a lot of shifting in how people are using the menu?

Denny Marie Post

I think there's a lot of shifting and a lot of evolution still to come.

David Dorfman - Morgan Stanley, Research Division

And it's in your ability to sort of optimize the bottom line while all that shifting's happening? How does that play out, just in terms of what comps are sort of volatile and that sore menus is volatile? What percent of margin do you think you may be losing just because there's a lot of volatility in the menu and in sales?

Stuart B. Brown

David, I think looking at sort of big picture. With some areas where we're getting the profit dollars drop to the bottom line as we add non-alcoholic beverages and appetizers, we've been continuing to reinvest that back. So the Spiral Menu and plating and presentation as Steve talked about, is reinvesting that -- some of those additional dollars back into the guest experience, some of the blueprints savings back into the guest experience. But over time, we think all of this will be additive in terms of what the individual items are driving it, again, we don't want to give our tactics away to competitors.

David Dorfman - Morgan Stanley, Research Division

Sorry, I was trying to get more at like whether there's labor scheduling or food management and efficiencies just to having all of this influx right now?

Stephen E. Carley

I mean there certainly will be 2013 as I talked about in our conference call in March. We will have some labor productivity hits as we roll these out. Again, we expect those mostly to be one-time, but there will be some training involved and things like that and as you make system changes like this, that will be coming.

Operator

Nicole Miller Reagan, Piper Jaffray.

Joshua C. Long - Piper Jaffray Companies, Research Division

This is Josh on for Nicole. As we look at the Red Robin Royalty program, how frequently do you communicate with the guest and how do you think about that holistically over the course of the year on the types of communication between maybe just brand building and a bit more traffic driving, specifically? And then also, as we think about the consumer research that you've done building that more value-centric-platform with Tavern Double, menu work towards -- looking to kind of elevate that Red Robin experience to the more premium, how does the Red Robin member bases at 2 million members, how does that play into your consumer research as well?

Denny Marie Post

So if I cut the -- kind of the first question, I guess. I reject the notion that brand building and traffic driving are impossible in the same proposition. So I would simply say we can do both. This is a very strong brand. There's a lot to discover about this brand that our guest does not yet know or potential guests don't yet know. And so I'm completely confident that we can do both at the same time. Specific to Red Robin Royalty, those 2 million members are a source for us which again, as Steve alluded to, we can tap into not only to test offers that are specific to that program, but also to get feedback back on initiatives that we're undertaking. So it's given us a much more efficient guest research method for some of our smaller propositions, but we don't limit our guest research by any means to that community because they tend to be our heaviest and our biggest fans, which we love. So when we're undertaking a larger initiative, we'll certainly go beyond the Red Robin Royalty base to sample. But we have invested a tremendous amount in guest insight and we'll continue to do so going forward.

Operator

John Barrett, Columbia Management.

John Barrett

Just a question on the transformation, Stuart or Steve. Is it safe to say, and I know it's early and you're still monitoring the remodels you've done, but on the $125,000 bar-only the partitioning off the bar investment, new TVs, etc. you're getting, either the 2% to 3% comp hurdle on that investment, as well as the $400,000 investment? So I just wanted to take a step back and say hey, if we can do $425,000 and get more than that comp lift than spending obviously the $400,000, the ROI equation is a lot different on $125,000 obviously. And you're seeing similar returns on a smaller upgrade?

Stuart B. Brown

This is Stuart. Obviously, we focus on the return on invested capital as much as anything else here as we make these decisions. So yes, what we're going to do to your point is we're going to maximize the profitability at this. So we're not going to go and do a $400,000 remodel for the same return, we could get a $300,000 remodel. That said, I think the reality of it is and if you look at a number of other dealers that are out there, is there are some restaurants where individually, if you get a 15-year-old restaurant in a great location, you may get your best return on $600,000 remodel and create a brand-new restaurant. In other restaurants, you may sit down and say hey, I can get a great comp at this as a newer restaurant $125,000. So there's not going to be a one-size-fits-all. We understand that. But I think it's probably right now sort of safe, from a cash flow assumption and things like that, we're assuming again sort of 75 to 100 units a year, $350,000 to $400,000. And you will know a lot more later in the year, we can talk about it more on our third quarter conference call.

John Barrett

Okay. Well I mean, you guys have a lot on your plate, no pun intended, with presentation. Desserts, apps, etc. I mean that's an expensive transformation when you're talking. You're talking ultimately potentially $32 million to $35 million in CapEx per year on the big remodels.

Stuart B. Brown

To Steve's point, this is definitely a multiyear endeavor and again, the ones that we've done is forming the new prototype as well. So as we build new restaurants, with the look and feel and service levels, service experiences. So we've got a lot on our plate, a lot of great things on our plate.

John Barrett

And just one other one. On the IT, the PoS delay etc., I think that's with Oracle, if I'm correct. Is there some refunding you're getting from them on this delay or are they more involved? Just give us an update on that relationship.

Stuart B. Brown

Just quickly, just a clarification is, we're not replacing our POS systems. We're keeping our POS systems. So this is -- as mentioned, this is data procurement store ordering, prop schedule, suggested ordering schedules, restaurant P&Ls. So again, in terms of what the agreement is, it is new Oracle Fusion ERP, we'll be one of the first retailers rolling this out. And it brings a lot of great things us in terms of what the agreements are with Oracle behind the scenes, we have not yet talked about.

Operator

At this time, there's no more time for questions. Mr. Carley, I would like to turn the conference back over to you for additional or closing remarks.

Stephen E. Carley

Very good. Well, I appreciate everyone's time and attention today. We've had a great quarter and we're looking forward to a challenging, but very positive '13. Thanks and have a great day.

Operator

That completes today's conference call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!