Red Robin Gourmet Burgers, Inc. Q4 2008 Earnings Call Transcript

Feb.19.09 | About: Red Robin (RRGB)

Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB)

Q4 2008 Earnings Call

February 19, 2009 5:00 pm ET

Executives

Katherine L. Scherping – Chief Financial Officer & Senior Vice President

Dennis B. Mullen – Chairman of the Board & Chief Executive Officer

Eric C. Houseman – President & Chief Operating Officer

Susan Lintonsmith – Senior Vice President & Chief Marketing Officer

Analysts

Matthew DiFrisco – Oppenheimer & Co.

Jeffrey D. Farmer – Jefferies & Company

[Brad Lettington – Keybanc Capital Markets]

Joseph Buckley – Bank of America

John S. Glass – Morgan Stanley

Bryan C. Elliott – Raymond James & Associates

Jeffrey F. Omohundro – Wachovia Securities

Destin M. Tompkins – Morgan, Keegan & Co.

Steven B. Rees – JP Morgan

Operator

Welcome to the Red Robin Gourmet Burgers Incorporated fourth quarter 2008 financial results conference call. At this time all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to your host Katie Scherping, Chief Financial Officer of Red Robin.

Katherine L. Scherping

Before I get started I need to remind everyone that part of today’s discussion particularly but not limited to our outlook and development expectations will include forward-looking statements. These statements will include but not be limited to references to our margins, new restaurant openings or NROs, trends, costs and administrative expenses and other expectations. Also these statements are based on what we expect as of this conference call and we undertake no obligation to update these statements to reflect events or circumstances that might arise after this call.

These forward-looking statements are not guarantees of future performance and therefore investors should not place undue reliance on them. We refer all of you to our 10K and our 10Q filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

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

Dennis B. Mullen

We also have with us Eric Houseman, our President and Chief Operating Officer and Susan Lintonsmith, our Chief Marketing Officer. Eric will provide some details on fourth quarter results as well as an update on our operations initiatives and Susan will talk about what we are doing on the marketing front to drive guest traffic in the current business environment which continues to be very challenging. Then Katie will review in detail the most recent financial statements and discuss our business outlook.

But first, let’s start off with a quick review of the fiscal 2008 results compared to fiscal 2007. Total revenues increased almost 14% to $869.2 million while company owned comparable restaurant sales decreased 1.4% for the full fiscal year. Restaurant level operating profit increased 2.8% to $157.2 million or 18.4% of revenue compared to 20.5% a year ago.

GAAP basis diluted earnings per share for the fiscal year 2008 were $1.69 compared to $1.82 last year and $0.38 for the 2008 fiscal fourth quarter compared to $0.60 in the fourth quarter 2007. Adjusted or non-GAAP diluted EPS for the 2008 fiscal year were $1.81 compared to $1.98 in 2007 and $0.43 in the 2008 fourth quarter compared to $0.60 in the fourth quarter a year ago.

In 2008 we acquired the assets of an additional 15 existing franchise Red Robin restaurants in four states which added more than $25 million in sales and $0.06 per diluted share to our results. Finally, in 2008 we opened a total of 41 new Red Robin restaurants, 31 company owned and 10 franchise locations ending the year with 294 company owned restaurants and 129 franchise locations for a total of 423 Red Robin locations in North America.

We are proud of what we were able to accomplish in 2008 despite all the macroeconomic challenges. We have again updated our development plans and are on target to open 13 to 14 new company owned restaurants in 2009. Almost all of these openings will be in the first half of this year. Three company owned restaurants have opened already and 10 are under construction. We will continue to fund new restaurant development this year from our operating cash flow. We expect our franchises to open a total of seven to eight new restaurants in 2009. Two of these have already opened and one is under construction.

We have not made any development decisions for 2010 at this time. We will maintain broad flexibility and strong discipline on any commitments we make to enable us to alter our plans depending on our performance, the macroeconomic environment and the status of individual development projects. We expect to have many options available to us ranging from conversions of former restaurants and shopping center end caps to freestanding units.

Last week we completed a cash tender offer for certain stock options held by 514 current team members and officers. Approximately 96% of the eligible stock options were tendered. Granting stock options and other equity incentives is a material component of our long term compensation philosophy. After a comprehensive review of our compensation program and the impact of the decline on our common stock price on incentive awards we determined that the tender offering was consistent with restoring the incentive value of our long term awards as many of our team member’s stock options were substantially underwater.

Also as a result of this tender offer, future compensation expense associated with tendered unvested options will be eliminated as well the overhang associated with outstanding options that are no longer an effective incentive. Any options that were tendered under the 2007 performance incentive plan will also provide additional capacity for future incentive grants under that plan. We expect that the majority of after tax proceeds received by our senior officers from the tender offer will be used to purchase Red Robin common shares in the open market during the open trading window.

So, those are the headlines. Obviously, we are in the midst of a very difficult economic environment for restaurant operators and customers alike. We are working through the challenges we face with focus on the factors we can control. It is difficult to predict the business impact of current macroeconomic environment along with the elimination of our national cable advertising which led to our decision not to provide earnings or revenue guidance at this time.

We are continuing to take action to drive efficiencies across all levels of our organization to overcome these challenges and we’re proud of our talented team members for their contributions to these efforts. For 2009 our focus will remain on driving guest traffic, reducing costs and generated free cash flow. With that, I’d like to turn the call over to Eric.

Eric C. Houseman

In the fourth quarter of 2008 our comp store sales decrease of 7.4% was driven by a 9.6% decrease in guest counts partially offset by a 2.2% increase in average check. Please note that the extremely poor weather in December in the Pacific Northwest where nearly one fifth of our company owned restaurants are located negatively impacted our total comp store sales by about 1% during Q4.

For comparison we reported a 2.7% comp store sales increase in the fourth quarter of 2007 driven by a 1.5% decrease in guest counts that was more than offset by a 4.2% higher price in mix. Clearly, we’re facing challenges in guest counts in this difficult environment. During the first seven weeks of the 16 week first quarter our comp store sales were down 4.6%.

Week expect the first quarter 2009 to be the most difficult comparison of the year as we go up against our most successful quarter of 2008 in which comps were up 3.8%. We are just now going up against our advertising that begin on February 4th of last year so for those next few weeks we expect to see our comp store sales comparisons get even more challenging.

You will recall that a restaurant enters our comparable base five full quarters after it opens. Our fourth quarter had 241 company owned comparable restaurants out of the 294 total company owned restaurants. Average weekly sales for the restaurants in our comparable base was $57,073 during the fourth quarter of 2008 compared to $61,635 for the same restaurants in the fourth quarter of last year.

Average weekly sales for our 39 non-comparable restaurants was 55,188 during the fourth quarter of 2000 compared with $54,022 for the 41 non-comparable restaurants a year earlier. The 15 franchise restaurants that we acquired in the first half of 2008 will be included in the comparable base beginning in the third quarter of 2009. These 15 restaurants AWS were $50,228 during the fourth quarter of 2008.

Our fourth quarter 2008 restaurant level operating margins of 17.1% were well below the 21.4% margins in the fourth quarter of 2007. While our 2008 margins included an incremental 50 basis point contribution to our national amortizing fund they were also impacted by higher cost of sales and overall fixed cost deleverage.

Despite these challenges our restaurant teams continue to manage controllable costs. For example, the great job our teams are doing to manage controllable labor costs helped offset our minimum wage increase in 2008. We’re continuing to make progress on NRO initiatives that are helping us normalize profit margins in our new restaurants at a faster rate than ever before. Our teams both within and outside the restaurants are making great progress on the cost reduction front identifying ways that we can reduce costs related to food and beverage, energy consumptions, development, occupancy and elsewhere.

In addition, last month we launched a new leadership program at our annual leadership summit that supports the development and growth of our operation leaders by adding techniques and training that helps our team members to deliver a consistently outstanding great Red Robin guest experience. We’re calling it making the connection in order to great loyal guests and increase our frequency.

We believe that this type of training is critical during tough economic times on a number of fronts. First, typically during these times training and service are the two areas that often erode at restaurants but we refuse to let that happen at Red Robin because we believe we can take market share by out executing our competition and increase frequency by providing legendary service.

Second, this training sends the right message to our internal team members that we are investing in their personal development. Finally, during uncertain times people want a common vision to rally around and focus on and this program is already accomplishing that during the national roll out which is underway next week.

So, with the overview of operations, let me turn it over to Susan to talk about some of our current traffic driving initiatives.

Susan Lintonsmith

Our main driver of brand awareness in 2007 and 2008 was our department of deliciousness advertising campaign on national cable television. The intent of this national campaign was to drive brand awareness and understanding especially in our newer markets and based on our latest third party research we achieved this goal.

We drove higher brand awareness in all markets with significant gains in our less established Red Robin markets. Also, the campaign drove strong gains in trial as new guests saw our ads and they came in to try us. In the second half of 2008 while we continued our brand building campaign on national cable TV we began to see a slowdown in incremental traffic so to help inform our 2009 plan we tested both pricing and product news on TV in two markets in Q4.

Based on this test and the overall results of our advertising in the second half of 2008, we concluded that in this current economic environment it would be more prudent to capitalize on the awareness gains and focus our marketing dollars on more targeted traffic driving and retention initiatives in 2009. Therefore, we made the decision to reduce our contribution to the national advertising fund to .25% of revenue in 2009 down from 1.5% in 2008.

We believe awareness and purchase intent for Red Robin remain strong at this current environment even without national television. We feel that TV momentum has helped us in recent new restaurant openings. Two of our new restaurants last month broke company records in their opening weeks.

In 2009 we’re investing significantly more in our national online plan which continues to work really well for us as well as targeted direct mail campaigns and local initiatives which all support product news. We’ll focus our marketing communication on our innovative gourmet burgers, variety, honest to goodness quality and our bottomless value.

We’re also directing more resources in 2009 to loyalty and retention efforts. Our eClub continues to be a key marketing vehicle for us having grown more than 40% annually for the past several years and more than 1.7 million members at the end of 2008. In addition to launching the new program to encourage loyalty and repeat traffic we’re also focusing on driving incremental traffic through a strong emphasis on gift cards.

We’ll have more card options available in our restaurants and online where our consumers are shopping for gifts. And, we’ll continue to expand in third party retailer locations across our markets. Our gift cards sales were up 15% in 2008 versus prior year driven in part by expanding in to third party retailer locations starting in mid August of 2008. We now have our branded cards available in nearly 22,000 retailer locations will plans to expand to at least 1,000 more locations in 2009.

Public relations and local restaurant marketing also remain key components of our marketing plan. We remain heavily involved with schools and organizations in our local communities. We support programs that help build traffic and brand relevance at the grassroots level and we generate media coverage with many of these events, charity partnerships, new restaurant openings and community activities such as our special Olympics tip a cup program and of course our annual gourmet burger kids cook off which supports the National Center for Missing and Exploited Children.

Also for the last three years we’ve conducted ongoing independent research studies to monitor our brand equity scores and business drivers among both current and potential guests. The results continue to show that we have high guest retention and our guest recognize and appreciate what sets us apart including our gourmet burgers, our great quality, our family friendly environment and of course our gift of time.

So again, we’ll continue to reinforce these strengths in all of our communications. One last note, we piloted a new restaurant level web and telephone survey that asks for feedback from guests at the end of their visit. We’ve been getting strong participation in these surveys and are really encouraged by the actionable results and value that this is adding to our brand. We plan to launch this guest satisfaction survey in all company and several franchise restaurants by the end of this quarter.

So, those are some of the marketing headlines. Now, I’ll turn the call back over to Katie to review the financial results.

Katherine L. Scherping

First of all if you haven’t already seen our news release for this quarter’s results you can find it on our website at www.RedRobin.com in the investor relations section. Our fourth quarter 2008 was a 12 week period ending December 28th. Total revenues for the quarter which consist of restaurant sales and franchise royalties increased 8% to $198.6 million from $183.8 million last year.

Restaurant sales grew 8.4% to $195.6 million from $180.4 million and consisted of $151.4 million in sales from our 241 comp restaurants, $9.2 million from the 2008 acquired restaurants and $25 million in sales from our 39 non-comparable restaurants. As Eric mentioned the 15 franchise restaurants acquired in 2008 have not been included in our comp stores sales metric yet.

Franchise royalties and fees decreased 14.1% in the fourth quarter to $3 million and exclude the royalty contributions from these 2008 acquired restaurants from which we recognized $355,000 in royalty revenue in the fourth quarter of 2007. The 96 comp restaurants in the US franchise system reported a 5.3% decrease in same store sales while the 18 comp restaurants in the Canadian franchise system reported a 0.5% increase in the same store sales for the fourth quarter.

Our restaurant level operating profit margin was 17.1% which compared to 21.4% reported in the fourth quarter of 2007. The decreases attributed to commodity cost pressures that we’ve experienced throughout 2008 and also the deleveraging of fixed costs as we saw declines in average restaurant sales volumes from the fourth quarter of 2007.

For the full year our restaurant level operating profit margin declined to 18.4% from 20.5% in 2007 or 210 basis points which is about what we expected. Depreciation and amortization expense during the fourth quarter was 6.5% of total revenues, about 50 basis points higher than a year ago. For the full year depreciation and amortization was about 20 basis points higher year-over-year primarily due to revenue deleverage and the increase in the assets we acquired in 2007 and 2008.

General and administrative expenses were 5.9% of total revenues in the fourth quarter of 2008 compared to 7.6% of total revenues in the fourth quarter 2007. G&A expenses were lower in the fourth quarter of 2008 by about 1.3% as a percentage of revenue due to lower performance based in acquisition bonus expenses. In 2008 we reversed $1.2 million of bonuses in the fourth quarter compared to $2.4 million in bonuses which were accrued in the fourth quarter 2007.

Also in the fourth quarter $1.5 million of G&A expenses was reversed as the last of our 2008 media flights ran in mid November and contributions to the advertising fund continued through the remainder of the quarter. This was similar to the $1.4 million reversed in the fourth quarter of 2007.

For the full fiscal year, general and administrative expense was $64.4 million or 7.4% of revenue compared to $51.8 million or 8.1% of revenue for the same period in 2007 or about 70 basis points of leverage, close to what we expected to see. Included in the general and administrative expenses for fiscal year 2007 was $6.4 million of performance based in acquisition bonus expense for which we did not accrue any expense in fiscal 2008.

Our pre-opening expense in the fourth quarter was about $435,000 lower than a year ago. Our pre-opening cost per unit was $264,000 for the fiscal year 2008 compared to $280,000 per unit in 2007. We are currently budgeting about $285,000 per unit for pre-opening expenses for our 2009 NRO.

We plan to close four underperforming restaurants during the first quarter of 2009. This decision which was reached during the fourth quarter of 2008 was the result of an initiative to identify those restaurants new or old that are performing under acceptable profitability level and are in declining trade areas and/or require significant capital expenditures.

As a result of the decision to close these locations during the fourth quarter of 2008 we recognized non-cash asset impairment charges of $978,000 related to the write down of the carrying value of the long lived assets associated with two of these restaurants. We’re currently anticipating that additional charges of up to $800,000 will be recognized during the first quarter of 2009 related to lease terminations and other closing related costs.

Net interest expense was $2.1 million in fiscal fourth quarter 2008 compared to $2.5 million in the same period in 2007. The decrease is due to a lower average quarterly interest rate of 4% compared to 7.2% in 2007 partially offset by additional borrowing under our credit facilities related to the franchise acquisitions and share repurchases during the second quarter 2008.

Our effective tax rate for the fourth quarter was 24.9% compared to 25.3% in the fourth quarter 2007. The decrease from 2007 is attributed primarily to lower net taxable income and increased tax credits. We are currently forecasting our full year 2009 effective tax rate to be approximately 27%.

Net income for the fourth quarter 2008 was $5.8 million or $0.38 per diluted share compared to net income of $10.1 million or $0.60 per diluted share in the fourth quarter 2007. Excluding the impact of the asset impairment charge our non-GAAP fourth quarter 2008 earnings per diluted share was $0.43. Schedule two of our earnings press release provides the detail on those GAAP to non-GAAP reconciliations.

Looking at the cash flow statement, our cash from operations of $91.1 million in fiscal 2008 exceeded our development capital expenditures of $83.2 million. At December 28, 2008 we had $11.2 million in cash and cash equivalents and we had a total outstanding debt balance of $222.6 million including $133 million in borrowings under our $150 million term loan, $82 million of borrowing and $4.1 million of letter of credit outstanding under our $150 million revolving credit facility.

We will make scheduled payments of $15 million required by the term loan portion of our existing credit facility in 2009. We are subject to a number of covenants under our credit agreement and as of December 28, 2008 we were in compliance with all debt covenants and we expect to remain in compliance through fiscal year 2009 which I will elaborate on in a moment.

Now, let’s talk about our outlook for 2009. For the first quarter of 2009 which is a 16 week quarter we expect to open seven new company owned and three new franchise restaurants. Three new company own and two franchise restaurants have already opened during the first quarter of 2009 and 10 company owned and one franchise restaurant are currently under construction. As we said earlier, during fiscal 2009 we now expect to open 13 to 14 new company owned units and franchisees are expected to open seven to eight new restaurants.

As Susan mentioned for fiscal 2009 we have reduced the amount of all company owned and franchise restaurants in our system will contribute to the national advertising fund to 0.25% of the restaurant revenue which is down from the contribution of 1.5% of revenue in 2008. Now, depending on actual revenue performance in 2009, this contribution change could result in approximately $11 million less in the company’s advertising expenditures in 2009 or about $15 million less on a system wide basis.

We will not be providing full year EPS or revenue guidance at this time. For fiscal 2009 which is a 52 week period we expect comparable restaurant sales to decline based on the current macroeconomic environment and the elimination of our national cable television advertising which will create more difficult comparisons during certain periods. We are not currently planning any menu price increase for 2009 but we will carry 2.2% price mix in to 2009. We will roll out .3% in April and the remainder will roll off the last week of June.

Regarding commodities our cost of ground beef during 2008 was locked at favorable pricing compared to spot market. In 2009 we expect an increase in ground beef price above our 2008 contract as we have only locked less than half of our ground beef at prices above last year’s contract. We have chicken costs contracted to the end of 2009 at the same price as 2008 and the cost of our steak fries will increase during 2009 as many farmers planted higher profit grains during the 2008 planting season and in turn reduced the potato crops planted.

In addition, we expect certain costs such as minimum wage increases to continue to put pressure on our restaurant level profitability. Therefore, we currently anticipate that without any additional menu price increases our restaurant level operating margins could decline by 50 to 100 basis points during 2009 even after considering the benefit from reduced national advertising contributions and other cost reduction activity. For every 10 basis point change in restaurant level operating profit during the full year 2009 diluted EPS is estimated to be impacted by approximately $0.04.

During the first quarter of 2009 we completed a cash tender offer for certain stock options held by employees and officers including restaurant general managers. As a result, of the tender offer we incurred a one-time non-cash pre-tax charge of $4 million or $0.19 per diluted share which will be reflected in the first quarter 2009 results and represents the compensation expense related to the acceleration of vesting on the unvested options that were tendered in the offer which would have otherwise been expensed over their vesting period in the future if they had not been tendered.

Approximately 23% of this one-time expense will be at the restaurant level and 77% will impact corporate general and administrative expense. The growth cash proceeds to be paid for the tendered options will be $3.5 million. as a result of the completion of the cash tender offer, future compensation expenses associated with tendered unvested options have been eliminated.

We expect to record $2.5 million in stock compensation expense for options as they continue to vest during the fiscal year 2009 excluding the $4 million one-time charge in the fourth quarter related to the tender offer. For comparison we recognized $6.8 million in stock compensation expense for the fiscal year 2008. Approximately 18% of this expense was at the restaurant level and 82% impacted G&A expense in fiscal 2008.

For the full year we expect G&A expense to increase by approximately $6 million to reflect the assumption that we’ll accrue bonus expense in 2009. Depreciation and amortization expense should increase approximately 11% year-over-year in 2009 and interest expense will be lower than 2008 assuming average interest rates are lower than 2008 and we pay down our debt balance during 2009.

As we said earlier, we expect to fund our new restaurant development during 2009 using our operating cash flow. Taking in to consideration our full fiscal year 2009 capital expenditure estimate of around $45 million, we expect to use our remaining cash flow to pay down our outstanding debt during 2009 and may make opportunistic purchases of our common stock.

Now, let me clarify for everyone our debt leverage calculation works. The total outstanding debt which was $22.6 million at December 28, 2008 plus our outstanding letter of credit of $4.1 million is the debt balance we use to compute the ratio on. Our debt does not include operating leases. Our last 12 months of EBITDA excludes the non-cash charges for stock compensation expense, acquisition related reacquired franchise costs and any asset impairment charges.

Therefore, our debt to EBITDA ratio for purposes of our covenant was 2.14 to 1 at December 28, 2008. Assuming we use our expected free cash flow to pay down debt in 2009 including $15 million in scheduled term loan payments we will stay well below our maximum debt leverage ratio of 2.5 to 1 allowed by our credit agreement for all of 2009.

I’d like to remind everyone that $211,000 of pre-tax earnings or expense for us equals $0.01 per diluted share for the full year 2009 which is equivalent to less than 3 basis points as a percent of revenue. Now, this illustrates the sensitivity of our business from a sales and EPS standpoint which in this uncertain business climate makes accurate forecast extremely challenging.

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

Dennis B. Mullen

Without a doubt it continues to be a tough operating environment. We have aggressive plans to drive traffic, we have a strong brand and we will continue to manage costs and our capital expenditures carefully to maximize cash flow and strengthen our balance sheet.

We also believe that we have an opportunity to take market share as the number of casual dining seats shrink. Most importantly we know we have the best team members in the casual dining business to make that happen. With that I’ll be ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matthew DiFrisco – Oppenheimer & Co.

Matthew DiFrisco – Oppenheimer & Co.

Denny, I guess just following up on the last comment there with respect to gaining share. I guess you’re not going to be advertising as much as you did the year before and you’re going to be slowing your growth. How, do you expect to gain share I guess is just the question? And, do you expect then overall that you’re going to see continuation of contraction throughout ’09 as it appears in your traffic guidance number in your press release?

Dennis B. Mullen

I think it’s going to be individual location by individual location where we have a number of instances where both our chain competitors and private operators have closed and we would expect we would clearly gain share in those markets so I think it is a building process. It isn’t going to happen next week and next month but it will happen as we go forward and as we make decisions about continuing development. Also, we haven’t given guidance so we will see how our marketing efforts work as they can help us drive share as we go forward.

Matthew DiFrisco – Oppenheimer & Co.

Well, if I’m not mistaken there’s 25 basis points less than what you also spent in ’07?

Katherine L. Scherping

Yes. We spent about $11 million system wide in 2007.

Matthew DiFrisco – Oppenheimer & Co.

To clarify, I think when you were helping us calculate the credit covenant, the debt covenant you then do not have to capitalize your operating leases?

Katherine L. Scherping

No, we do not.

Dennis B. Mullen

We do not.

Operator

Your next question comes from Jeffrey D. Farmer – Jefferies & Company.

Jeffrey D. Farmer – Jefferies & Company

If you look at the 28 weeks in ’08 that you were not running national cable versus the 24 weeks or so that you were running cable, was there a meaningful difference in same store sales and traffic especially as you got towards the back half of ’08? All of ’08 in general but in terms of when the macroeconomic situation got sort of far worse?

Dennis B. Mullen

If I think I understand your question, in the first quarter of ’08 we were up 3.8% and we started TV in the earlier ’08 than we did in ’07, we started it the Monday after Super Bowl so that’s why we said the first quarter our comparisons would be much more difficult and we weren’t impacted at that point we didn’t feel we were impacted by the macroeconomic environment.

The second flights and the third flights were kind of pretty much lined up until the very end when we had three weeks that were standalone that weren’t there in ’07 and we saw as we reported in the quarterly calls continued declines throughout the back half of last year.

Jeffrey D. Farmer – Jefferies & Company

When you finally pull your advertising in ’09 which you already have a lot of your franchisees believe that because it was more of a brand based advertising campaign that it won’t have as great of an impact as some have feared. I was just curious if you agreed with that?

Dennis B. Mullen

Only if you tell me which franchisees you’re talking about. I don’t have any comment on that. That’s why we’re not making projections. We’ll find out pretty quickly.

Operator

Your next question comes from [Brad Lettington – Keybanc Capital Markets].

[Brad Lettington – Keybanc Capital Markets]

I wanted to start of talking about on the G&A line if you include I guess roughly $3.1 million that will be the one-time non-cash charge is there opportunity on an absolute dollar basis and again, including that non-cash charge to be relatively flat year-over-year or is that still going to go up?

Katherine L. Scherping

The charge that we’re talking about related to the tender offer is that what you’re asking?

[Brad Lettington – Keybanc Capital Markets]

Yes.

Katherine L. Scherping

It’s $4 million.

[Brad Lettington – Keybanc Capital Markets]

But I thought 23% of that went in to the restaurant level?

Katherine L. Scherping

You’re right, so that component it’s the same percentage roughly as we’ve incurred over the years G&A split so our total spend including the one-time charge is going to be 6.5 very comparable to the 6.1 we’ve taken in the past so that won’t really [inaudible] your G&A. So, year-over-year we’ll see about $6 million more related to performance based bonus assumptions. So, if you just take 2008 and add $6 million to it that’s about where we think we’ll land in 2009.

[Brad Lettington – Keybanc Capital Markets]

So then probably close, it’s an absolute dollar over that $64.2 million, $5 to $7 million more?

Katherine L. Scherping

That’s about right?

[Brad Lettington – Keybanc Capital Markets]

Then looking at your guidance, it says if no price increase were taken this is where margins would go potentially. Now, that’s not saying that you definitely won’t take a price it’s just that there’s not one planned at this point in time, is that correct?

Dennis B. Mullen

That’s correct.

[Brad Lettington – Keybanc Capital Markets]

Also, should we expect any additional closures in ’09 or are you still evaluating other stores at this point?

Katherine L. Scherping

Brad, this is a continuous process. Based on the evaluation that we did in the fourth quarter the decision was made on these four. We’ll continue to evaluate as we move forward. We don’t have any decisions at this time for any more than four.

Operator

Your next question comes from Joseph Buckley – Bank of America.

Joseph Buckley – Bank of America

You shared the 4.6% comp decline for the first seven weeks of ’08 but you mentioned the advertising in ’08 started February 4th so I guess I’m curious what that down 4.6% compares against for the first seven weeks just to kind of gage how we should think about the full quarter?

Katherine L. Scherping

The rest of the quarter gets much more difficult.

Dennis B. Mullen

As we said the TV started so obviously it gets more difficult. We’re not going to get granular by week. We gave you the first seven weeks to give you some indication of where we were since we weren’t getting guidance so we didn’t get too far of track there. It will be more difficult as we go forward offset by the fact that we don’t have the media expense along with it.

Katherine L. Scherping

Keep in mind last year that for the first quarter 2008 we did 3.9, we had 4.3% running in price.

Joseph Buckley – Bank of America

What I’m trying to figure is it 200 or 300 basis points difference in the back nine weeks in terms of the compare?

Katherine L. Scherping

It gets more difficult. We’re not going to say which is why we’re not giving out guidance.

Dennis B. Mullen

We’re not sitting here waiting for it. We’ve obviously rolled out some marketing programs, etc. so we don’t know what the offsets are. We just don’t know at this point.

Joseph Buckley – Bank of America

Then Katie, I think you did clarify this already but so the stock compensation expense is split between G&A and operating expenses, the marketing expenses is all in the restaurant operating expenses?

Katherine L. Scherping

Yes. It was lumpy in 2008 based on when we did our media flights. It neutralized for the full year so there really wasn’t an impact for the full year but in 2009 it will be fairly smooth throughout the year we won’t see that lumpiness hitting the G&A like we saw in 2007 and 2008.

Joseph Buckley – Bank of America

What are bonuses based on for 2009?

Katherine L. Scherping

An internal plan.

Joseph Buckley – Bank of America

Based on what metrics?

Katherine L. Scherping

Various metrics.

Dennis B. Mullen

Including EBTIDA.

Operator

Your next question comes from John S. Glass – Morgan Stanley.

John S. Glass – Morgan Stanley

In your 50 to 100 basis point decline in restaurant margins, I know you’re not giving comp guidance but the biggest driver of that would be comp store sales so can you give a range of what you embedded in that guidance for comps?

Katherine L. Scherping

We’re not going to give you a specific range but you’re right it is within a band. We have some internal sensitivities that we’ve done to look at that. We think kind of a likely scenario is that 50 to 100 basis points but we’re not going to get specific because there are just so many variables that impact those models.

John S. Glass – Morgan Stanley

Then just going to the G&A question again I just want to understand this or make sure I understand this, it’s going to be up $6 million in absolute year-over-year. You’re going to have $4 million less stock-based compensation charge so $3 million and change that flows to the G&A line, correct?

Katherine L. Scherping

Actually we will have a one-time charge of $4 million in Q1.

Dennis B. Mullen

Of ’09.

John S. Glass – Morgan Stanley

Are you including that in up $6 million for the year?

Katherine L. Scherping

Yes.

John S. Glass – Morgan Stanley

So after the first quarter G&A ought to decline year-over-year?

Katherine L. Scherping

Yes.

John S. Glass – Morgan Stanley

So actually G&A probably does end up – excluding that charge it actually declines year-over-year?

Katherine L. Scherping

Because the first quarter has a $1 million hit so it’s weighted in the first quarter where last year it was more evenly spread throughout the year. That stock comp charge was getting spread evenly quarter-to-quarter, you just get loaded up in Q1 2009 with that $4 million this year and then the bonus gets spread out evenly throughout ’09 as we earn it.

Eric C. Houseman

Because we didn’t pay out bonus John in ’08.

John S. Glass – Morgan Stanley

Then does the tender offer impact the share count in any way in 2009?

Katherine L. Scherping

No because those were all options that were anti dilutive so those don’t count in your share count because they were all under water or most of them were under water. There was only an insignificant number that were added to the share count.

John S. Glass – Morgan Stanley

Then I guess non-comp AWS got better year-over-year in the fourth quarter, maybe sequentially you weren’t that much different than the prior quarters. But, was there any specific reason for that? Were there openings that were better later in the year or did you see improved performance.

Katherine L. Scherping

We talked about the fourth quarter impact from weather and those are all in comp stores so that did impact the comp stores where it wouldn’t have impacted it significantly on the non comp base.

John S. Glass – Morgan Stanley

Because you didn’t open any new stores in the weather impacted areas?

Katherine L. Scherping

Right.

Operator

Your next question comes from Bryan C. Elliott – Raymond James & Associates.

Bryan C. Elliott – Raymond James & Associates

I wanted to make sure I understood the hamburger contract properly so I believe Katie you said that you’re 50% contracted for the year?

Katherine L. Scherping

A little less than that, yes.

Bryan C. Elliott – Raymond James & Associates

And it’s up year-on-year because you had a favorable below spot last year?

Katherine L. Scherping

That’s correct.

Bryan C. Elliott – Raymond James & Associates

But spot hamburger prices are in freefall and so the portion that you’re buying spot would that more than offset and would your hamburger prices right now sort of 50% spot 50% contract not be down?

Katherine L. Scherping

No, it’s not down.

Bryan C. Elliott – Raymond James & Associates

Is the 50% spread through the year or are you 100% contracted for the first half or something like that?

Katherine L. Scherping

We’re 50% of our volume is contracted for the full year, or less than 50% it’s about 40% roughly of our volume.

Operator

Your next question comes from Jeffrey F. Omohundro – Wachovia Securities.

Jeffrey F. Omohundro – Wachovia Securities

I wonder if you could talk a little bit about your in store activities, the next menu update? And, what your thoughts might be around LTOs, the table tops, should we expect perhaps more frequency and intensity around those efforts to provide new news to your regular customers? Really, just what you’re thinking around the menu.

Susan Lintonsmith

First off, to answer your menu question, yes we are planning to launch a new menu in our company restaurants in June and there’s going to be quite a bit of new news on that menu. At the same time within our restaurant we are going to continue to do the limited time offers on our cubes. And as I mentioned, we’re supporting that news outside of our restaurants as well with the direct mail, continuing with our email, talking to our eClub and then making sure that people know about that news as well as the strengths we talked about earlier, reinforcing those, our bottomless value, etc. So, yes definitely continuing with the news both inside but promoting it outside as well.

Jeffrey F. Omohundro – Wachovia Securities

Is it a meaningful change from what we saw in ’08 just in terms of the intensity of these efforts?

Susan Lintonsmith

The two places where it’s a little bit bigger, we have a bigger [inaudible], we have even more news that we are testing and that we are launching but the places where we are promoting it even more is online. I mentioned that we’re significantly investing more in online throughout the year as well we’re doing it with targeted direct mail around all of our locations. So, making sure we are communicating very well with our product initiatives.

Dennis B. Mullen

The largest areas as Susan said [inaudible] pipeline of limited time offers which are supported by the promotions last year the television didn’t support, the television was branding only.

Eric C. Houseman

We have five promotional windows this year and we’re bringing back our popular sliders which I know you loved.

Operator

Your next question comes from Destin M. Tompkins – Morgan, Keegan & Co.

Destin M. Tompkins – Morgan, Keegan & Co.

Given how aggressive the competition is for traffic right now and the fact that you’re saving some on advertising do any of the traffic initiatives that you have look to get more aggressive with your price points? Are any of the LTOs focused on price points or is there not an opportunity to give something back to the consumer from what you’re saving on the advertising?

Susan Lintonsmith

Well, first off we are providing our value message through the bottomless proposition and we’re communicating that even more in all of our marketing communications but we are not discounting within the restaurants. We are supporting the new product news as Eric and Denny mentioned outside in a very targeted way so we are via our direct mail incenting guests. We’re telling them about the promotions and giving them some kind of incentive to come in and try the product.

But, we’re doing it targeted, we’re not just doing it full market. We are using the company that we feel has some very strong targeting metrics and so we’re making sure that as much as possible whatever incentives we’re using are targeting is driving incremental traffic.

Destin M. Tompkins – Morgan, Keegan & Co.

Are any of the new products maybe lower price point products? Or maybe, offer or support that more compelling value message?

Susan Lintonsmith

We have a mix. We have a mix from bringing back our sliders that Eric mentioned to some slightly lower priced burgers. So, yes it’s a mix.

Operator

Our next question comes from Steven B. Rees – JP Morgan.

Steven B. Rees – JP Morgan

I guess I was just looking for a little bit more color on the comps, you know with the deceleration you saw in the fourth quarter and so far in the first quarter. Maybe you can just comment on your traffic trend on lunch versus dinner, perhaps weekday versus weekend and if you’ve seen any change in any major geographies for you?

Katherine L. Scherping

We’re still 50/50 lunch/dinner. We have been for years, no changes there. Geographies the only comment we have is on the weather in the Northwest in the fourth quarter that impacted us so we felt that did have – we wanted to call that out but geographically there’s no commentary in any other particular area that we would call out at this time.

Steven B. Rees – JP Morgan

Then just do you have an estimate Katie of your overall commodity inflation that you expect in 2009 versus what you saw in 2008?

Katherine L. Scherping

Probably somewhere in the 6% range.

Steven B. Rees – JP Morgan

Of the $45 million of cap ex, about how much of that would be for maintenance or remodel cap ex?

Katherine L. Scherping

About $11 to $12 million roughly.

Operator

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

Matthew DiFrisco – Oppenheimer & Co.

I had a question on the four stores that you closed, where were they closed?

Katherine L. Scherping

We’re not going to comment on that. There are four stores, a couple in declining trade areas. We have not necessarily notified all of our team members at this point so we’re going to be quite on that.

Matthew DiFrisco – Oppenheimer & Co.

It looks like you closed a store in the fourth quarter, is that true?

Katherine L. Scherping

Yes, it was a store that came off its lease. It was a lease termination. It was in Colorado Springs.

Matthew DiFrisco – Oppenheimer & Co.

Could you comment on how much the national advertising campaign diluted restaurant level margins in 2008 given the lift you saw on comps and how much it cost you?

Katherine L. Scherping

It was 50 basis points increase year-over-year. We were at 1% in 2007, we went to 1.5% and then I think with declining store comps it’s hard to know where we would have been otherwise without is so we don’t comment on that.

Operator

There are no further question at this time. I’d like to turn the call back over to Denny Mullen for any closing or additional remarks.

Dennis B. Mullen

With all our fellow team members as always I want to express our deep gratitude for your continued focus and hard work. In good times and tough times we’ll always recognize and take care of our team members who in term will make the connection with our guests and we’ll continue to grow our company for the benefit of team members, guests and shareholders alike. With that I bid you goodnight. Thank you very much.

Operator

Ladies and gentlemen this does conclude today’s conference. We thank you for your participation. Have a wonderful day. You may now disconnect.

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