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Texas Roadhouse, Inc. (NASDAQ:TXRH)

Q4 2008 Earnings Call

February 23, 2009 5:00 pm ET

Executives

Scott Colosi – Chief Financial Officer

G. J. Hart –Chief Executive Officer

Analysts

David Tarantino – Robert W. Baird

Jeffrey Farmer – Jefferies & Co.

John Glass – Morgan Stanley

Destin Tompkins – Morgan Keegan

Jason West – Duetsche Bank

Jeffrey Omohundro – Wachovia

Lawrence Miller – RBC Capital Markets

Christopher O'Cull – Suntrust

Keith Siegner – Credit Suisse

Steven Rees – J.P. Morgan

Paul Westra – Cohen & Company

Mathew Difrisco – Oppenheimer

Operator

Welcome to the Texas Roadhouse Incorporated fourth quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse Incorporated.

Scott Colosi

Good evening everybody. By now, everyone should have access to our earnings announcement released this afternoon for the fourth quarter and year ended December 30, 2008. It may also be found on our website at Texasroadhouse.com under the investor section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion will include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse.

Now I'd like to turn the call over to our Chief Executive Officer, G. J. Hart.

G. J. Hart

Good evening everyone. The fourth quarter was difficult for the entire casual dining industry and certainly tough for Texas Roadhouse. Diluted earnings per share $0.09 for the quarter led to $0.52 for the year which was basically flat with 2007, despite the benefit of an extra week.

During the quarter, we experienced weaker sales with comparable restaurant sales decreasing 4.7%. We also continued seeing margin contraction with restaurant margins decreasing 201 basis points. Like many in our industry, traffic continues to be our biggest challenge.

Despite the unprecedented economic environment, we remain focused on the long term and maintaining the foundation of our business which is providing legendary food and legendary service. Additionally, given an environment where liquidity is key our goal is to maintain a strong balance sheet and take a conservative approach towards capital allocation. I will talk to you more in detail about this in just a minute. But first, Scott would you walk us through the financials?

Scott Colosi

During our review of the fourth quarter and the year, please note that many of the numbers I will mention are listed in the schedule of supplemental financial and operating data that was included in the press release. Also note that the fourth quarter of 2008 was a 14 week quarter for us compared to our usual 13 week quarters, and the year contains 53 weeks as compared to 52 for 2007.

So when I'm talking about comparable sales or average unit volume declines for 2008, I'm comparing 14 to 14 or 53 to 53 weeks as that is the apples to apples comparison.

Starting at the top of our income statement for the fourth quarter of 2008 as compared to the same period in 2007, total revenue increased 26% with company restaurant sales increased 26% as well. The growth in company restaurant sales was driven entirely by operating week growth as both comparable restaurant sales and average unit volumes were down from the prior year.

During the quarter we opened six new company restaurants. In addition we acquired one franchise restaurant. So for the full year 2008 we opened 29 company restaurants and acquired 13 restaurants from franchisees. To date, we have already opened eight of our planned 15 new company restaurants for 2008.

G.J. mentioned earlier, comparable restaurant sales at company restaurants decreased 4.7% versus a decreased of .8% last year. For the quarter, our average check was flat and traffic was down 4.7%. Regarding comparable sales, I will mention this is on a 14 versus 14 week basis as it relates to the fourth quarter.

For the first seven weeks of 2009, comparable restaurant sales were down approximately 1%. I do want to point out that these results have been positively impacted by an estimated 2% to 2.5% due to the timing of New Year's Eve and day which benefited our 2009 results. So our trend thus far in 2009 have been more like down 3% to 3.5% in comparable restaurant sales.

From an average unit volume perspective, those restaurants in our average unit volume base but not in our same store sales base continue to perform a bit worse than our same stores. Our average unit volume decrease for the quarter was 6.4% compared to our same store sales decrease of 4.7%.

From a restaurant sales dollars perspective, as I've done in the past, I'll offer a little more color on average weekly sales. For the quarter, the 193 restaurants in our same store sales base averaged $69,500 a week in sales. These restaurants have been open 18 months as of the beginning of the fourth quarter 2008.

There were 30 restaurants that are in our average unit volume base that are not in the same store sales base and have been open six to 18 months as of the beginning of the quarter. These restaurants averaged $60,400 a week in sales.

Our newest 22 restaurants which have been opened some time over the last nine months and thus are in neither our same store nor average unit volume calculations averaged $72,000 a week in sales during the quarter.

Overall, I will tell you that we are achieving the necessary sales hurdles; however, we do have a few restaurants in each class here that are below where we would like to see them to be sales wise.

Franchise royalties and fees were $1.8 million which was $600,000 lower than last year, primarily due to the acquisition of 13 franchise restaurants purchased throughout the year. In addition, during the quarter, we reserved about $300,000 of royalty fees associated with two underperforming franchise restaurants.

In terms of margins, as a percent of sales restaurant level margins were 201 basis points lower than last year for the fourth quarter. Consequently, for the year, we were down 168 basis points versus 2007.

Let me touch briefly on the specific lines for the fourth quarter. Cost of sales was down 14 basis points for the quarter driven by beef costs being favorable year over year, partially offset by almost everything else including higher bread mix, shortening, oils, produce and dairy costs.

We continue to see pressure on the labor line which was up 66 basis points. Labor costs were impacted by the results of deleveraging associated with negative same store sales growth and continued pressure on the average hourly wage rates from increases in minimum tip wages.

Rent expense was up 30 basis points from the prior year, and as was the case last quarter, over 75% of the pressure resulted from the acquisition of franchise restaurants. The 13 restaurants acquired during 2008 as a group, have higher rent as a percentage of sales. These higher rents were reflected in lower purchase prices for the restaurants.

Other restaurant operating expenses were up 118 basis points versus last year. The big drivers were deleveraging associated with same store sales plus higher utilities, supplies, property taxes and general liability insurance costs. Utilities were impacted by higher gas and electric rates.

With the natural gas market falling substantially, we do expect to see some relief in the first quarter and hopefully for most of the year. The increase in property taxes is more of a laughing issue. Last year we had a pick up of around $500,000 relating to property taxes as we had accrued more in relation to our new restaurant openings than the state's actually billed.

The increase in general liability insurance costs related to the development of claims incurred in years prior to 2008. Nothing really unusual here and note that we do adjust our insurance reserve each quarter.

Pre-opening expenses were $800,000 lower than the prior year due to fewer restaurant openings during the quarter than in the prior year. I will point out that we do anticipate reopening costs for 2009 to be much lower than 2008 with approximately 15 versus 29 company restaurants opening as planned. I will tell you that all the 2009 planned openings are in what we would consider to be existing markets.

Depreciation and amortization costs as a percentage of restaurant sales were four basis points lower than last year driven primarily by the fact that 52 weeks of depreciation was spread over 53 weeks with the extra week in 2008.

On the next line, impairment and closure costs, you'll notice that we did incur $1.4 million in costs this quarter driven by the impairment charge incurred on one underperforming restaurant during the quarter, as we're now estimating its cash flow will not support the carrying value.

From a G&A perspective, although general and administrative expenses as a percentage of revenue were up 15 basis points for the quarter, we were able to achieve 21 basis points of leverage for the year. The leverage for the year was driven by a combination of lower bonus expense due to falling short of our original plan targets and lower costs associated with our annual managing partner conference.

Our effective tax rate for the quarter was 32.0% as our rate for the year at 33.7% came in a little lower than the 34% we had anticipated. This was primarily due to lower margins and thus various tax credits primarily the FICA tip credit represented a larger percentage of pre-tax income. For 2009 we're projecting our income tax rate to be approximately 34%.

Finally, our weighted average diluted share count was 70.9 million which was 2.4 million lower than where we were at the end of last quarter due to share repurchased during the third and fourth quarters. During the fourth quarter, we repurchased 808,000 shares of common stock at an average price of $5.42.

So for the full year 2008 we repurchased 6.5 million shares at an average price of $8.73. As of the end of the year, we had $18 million remaining on our $75 million share repurchase authorization.

Let me spend a few minutes touching on our capital structure, balance sheet and cash flow. We ended the year with a total book debt of $133 million of which $130 million was on our $250 million syndicated bank revolving credit facility. This facility is not set to expire until May 2012 or just over three years from now.

Our adjusted debt to EBITDA leverage ratio was just over two times as of the end of 2008 although I want to point out that this adjusted debt to EBITDA measure does include lease debt in arriving at total debt.

We're comfortable at two times leverage, and believe this could move down a bit since in 2009, we expect to generate a considerable amount of free cash flow based on total capital expenditures of $50 million to $60 million.

As you saw in our release, we were just slightly negative free cash flow for 2008 with 29 openings for the year, so the approximately 15 openings in 2009, we are anticipating a significant amount of free cash flow which comes at a good time for us given the current state of the economy.

As I mentioned, we do have $18 million still authorized in our share repurchase program, so we may look to be opportunistic there or we may stick the money in the bank, or pay down some debt given the current environment. However, what ever we do, we want to continue to maintain our conservative balance sheet and capital structure.

On the debt side of things, we have taken advantage of the low interest rate environment to get into a couple of interest rate swaps. During the fourth quarter of 2008 and first quarter of 2009, we've locked into two separate seven year, $25 million swaps that effectively fix the interest rate on our bank debt at just under 3.1%. So our current all in interest rate with our current spread on $50 million of our debt is just under 3.5% for six or seven years.

Now let me touch briefly on our plans for 2009 before I turn the call back over to G.J. As I'm sure you saw in our release, we're targeting approximately flat diluted earnings per share growth for 2009 as compared to our 53 week 2008. There are a couple of comments I would make as it relates to 2009.

First, our plans include approximately 15 company and two franchise openings this year and as of today, eight company restaurants have already been opened, so we're in really good shape on our development plan.

Second, we are estimating capital expenditures to be $50 million to $60 million of which approximately 75% relates to the development of new restaurants. I will mention that based on reduced CapEx, we are projecting generating significant free cash flow.

Third, we do anticipate food cost deflation of 2% to 3% driven by lower beef costs and we anticipate pre-opening expenses will be considerably less at approximately half the openings we had in 2008.

Fourth, as we talked about on the last call, we are anticipating an incremental estimated $1.5 million of additional costs due to changes we made surrounding our managing partner compensation structure.

And finally, with regard to pricing, while our original intention was to have some pricing in place by later February, with the ever changing economic environment, we made the call to postpone any final decision.

As we sit here today, we've not made any final decisions regarding whether we will or will not take pricing in 2009 and what that amount would be if any. I'll also mention that if we do pick up some pricing, there is no real way of knowing what if any amount would flow through based on our prior experience.

In conclusion, from a financial perspective, I will tell you that we're very focused on doing the right things for the long term success of the business and protecting our balance sheet. And with that said, I'd like to turn the call back over to G.J. to talk more about our plans going forward.

G. J. Hart

Well the environment certainly remains challenging and it is difficult to predict how long this will all last. So we are staying focused on what we can control versus what we can't. As I said before, I can tell you we are not looking to cut anything out of the guest experience be it smaller portions, reduced service in the name of efficiencies or any other so called efficiency measures. We look at this time more than ever as an opportunity to capture additional market share.

The biggest unknowns for us right now are traffic and check. On the traffic side of things, I can tell you that it's generally been trending down 4% to 4.5% for the last four to five months, once you work through the calendar mismatches. We do not know whether this will get better or worse.

What we do believe is that it will hinge at least partially on where unemployment goes. Partially offsetting that would be any benefit from competitors going out of business. Finally, we simply can't estimate what comps will be in the back half of 2009 given the potential favorable comparisons.

With regard to check, we understand the need to evaluate taking some pricing to offset inflation. As Scott mentioned, the bottom line is that we haven't seen the flow through from the other pricing actions and we do not want to risk our long term positioning for the potential short term rewards.

On the cost side of things we are fortunate in that we should be looking at food cost deflation and we will possibly get some help from lower utility costs this year. In addition, pre-openings costs should be down due to fewer openings. So we will see where this all shakes out as far as the bottom line.

Regardless of what we do, what we decide to do in the short term however, the longer term is still based on a three pronged approach to capital allocation I talked to you about last quarter; that is, getting returns on the new restaurants we develop, evaluation franchise acquisitions and returning a portion of capital to shareholder.

With regards to new restaurants, this is a year we are intensely focused on our return on investment. While we certainly do not wish to the worst on anyone, we do see the landscape changing, and with change comes opportunity.

Essentially, by moderating the development as we have done, we can take a step back and really re-evaluate the way we do things. We have had a solid 15 years and most recently, significant growth since going public in 2004. However, with fewer openings this year, we're really focused on how we can do things differently and generate returns well in excess of our cost of capital.

Over the last five years we have seen the growth rate in our investment costs rapidly outpace our rate of sales growth to where it now costs us around $4.1 million to open a Texas Roadhouse including $400,000 of pre-opening. This also includes 10 times the rent in the case of a lease site.

If you look back four years ago, this number was more like $3 million and our sales to investment ratio was more line 1.2 to 1 as opposed to a hopeful 1 to 1. We need to get back to the 1.2 to 1 sales to investment ratio to significantly grow the amount of restaurants going forward.

Can we make money at 1 to 1? Sure, but we won't be able to do nearly as many deals. So our operators and real estate team are spending a significant amount of time this year determining how we can get our investment costs down. Some costs are likely to come down with general economic softness, but we're also looking for much more than that.

In fact, we are looking for opportunities beyond our proto typical 7,200 square foot free standing restaurant on 1.5 to 2 acres. For instance, we are evaluating end cap and in line locations where we can go in strip centers. We're also evaluating conversions as we do believe we'll continue to see a lot of closings within our industry.

This year, we have only one end cap and one conversion planned both in the later part of the year. However, we are working on a few more for 2010 and we'll see how they pan out.

The second prong, acquisition of franchise restaurants is not high on the priority list right now as it is difficult enough for us to hold margins, so it seems rather counter intuitive to acquire additional restaurants. While not high on our list, you could see us do something here, but I wouldn't think it would be anything material.

As to the third prong of returning capital to shareholders, we have done this through repurchasing $57 million worth of stock during 2008. As Scott mentioned, we are looking to generate a large amount of free cash flow in 2009 which we will likely use to either pay down debt, put cash on our books and/or repurchase stock.

In an environment like this, we do believe that maintaining a conservatively capitalized balance sheet will be what helps us win. I've never known a company that had second thoughts about its balance sheet being too conservative over the long term.

One other thing I do want to comment on, and I'm sure several of you have seen news clippings is that our founder and Chairman, Kent Taylor has been working on a new restaurant which will open tomorrow. Aspen Creek is the name. It is a broad based menu, and like Texas Roadhouse, very much value and quality oriented.

Texas Roadhouse is the owner of the restaurant and at the present time, that's what it is, just one restaurant. While there certainly is a lot of excitement over it, we will continue to monitor it just like we would any other restaurant and see how things play out over time. Presently, there are no plans for any additional plans Aspen Creeks. Hopefully, there will be, but it's way too early for that right now.

Before opening the call for questions, I want to remind you that we understand that as leaders, we are custodians of the brand, the people and the capital. Texas Roadhouse is a tremendously strong brand, supported by a very talented group of team members in all functions.

Yes, the current environment is challenging, but if we maintain our commitment to providing legendary food and legendary service to each and every one of our guests, and do our part to maintain our historically strong balance sheet, we believe that we'll come through the economic downturn much stronger and with an increased proportion of market share.

With that, we'll open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Tarantino – Robert W. Baird.

David Tarantino – Robert W. Baird

Could you take us through the thought process on not taking any pricing in the February timeframe? I believe previously you indicated you might take it in that timeframe. Was there something about the test you're running that made you decide not to do it or could you just give us some color on that decision?

G. J. Hart

As we commented the last time we saw you, there's nothing in the test that would tell us not to at this point. We just decided that given all the conditions our there economically, we currently are delaying that decision. We continue to evaluate it, and you will hear from that soon.

Operator

Your next question comes from Jeffrey Farmer – Jefferies & Co.

Jeffrey Farmer – Jefferies & Co.

I'm trying to get a better handle on the model. Based on your guidance for a 2% to 3% commodity deflation, and your decision to hold off on pricing, do you expect your cogs number to potentially approach 35% or even fall below that?

Scott Colosi

I won't give a specific number on the cost of sales but we do expect cost of sales to be down somewhat this year given the 2% to 3% reduction in what we're paying for items.

Jeffrey Farmer – Jefferies & Co.

On labor, it looks like the last couple of years you're seeing about 60 basis points deleveraging each year. Withholding pricing, do you have any opportunities to eventually control or better control that potential sales deleveraging in '09? Any opportunities on the labor line?

Scott Colosi

We have opportunity, but it will be challenging on two fronts. One is like everybody else, we've got the minimum wage increases and the third federal increase coming up in the summer time, and we had a bunch of folks raise their tip and minimum wages here in January, so you're kind of battling that. And not having taken any price increase at this point in time, certainly that's a hurdle for us to cross over.

When and if we do take a price increase, it comes on how much flow through do we get on that. So there are quite a bit of variables on the labor piece. It's probably going to be a challenge for us to hold labor costs flat. I would suspect it would be up a little bit in 2009.

Operator

Your next question comes from John Glass – Morgan Stanley.

John Glass – Morgan Stanley

On the sales trends, the calendar notwithstanding, it still seems that sales are running at better rates than they were in the fourth quarter. I think you're not alone in January that sales in January and February have actually, I don't know if you want to call it bottomed out, planned out, whatever it is, what do you think is at work there? Has there been some weather benefits this year versus last year? And also can you talk about when does your current pricing lapse and when will you be X pricing entirely this year?

Scott Colosi

I will tell you that I would say that the sales trends I would say more similar to the fourth quarter when not when you look at the individual weeks. If they're better, it's marginally better and one could argue maybe it's weather related, but I would be hesitant to say that it's better now than it was back in the fourth quarter, especially when you're looking at week to week on numbers.

As far as the pricing stuff, the last increase we took was back in May, and that was about 1.5% increase and that was on top of that 1% that we took last January and February. So January, February we dropped about 1% and then in May, we'll drop another 1.5%.

John Glass – Morgan Stanley

The other side of the pricing question is if you've got food price inflation this year; why not reinvest that in lower pricing on items? Is that a possibility?

G. J. Hart

First of all, I just want to remind you we currently have 20 meals under $10 on our menus so we've continued to be in the value position and believe that's a pretty strong statement and a pretty strong menu.

We have as you probably noticed, I think a couple of conference calls ago, we did put some new items on our menu with a small onion, a third slab of ribs and the lowering of a couple of the combo entrees as well. So we believe that we're very well positioned as compared to our competitors.

Operator

Your next question comes from Destin Tompkins – Morgan Keegan.

Destin Tompkins – Morgan Keegan

Looking at this year it sounds like if you've already opened eight, that's going to be a pretty front end loaded schedule. Could you give us a little bit more guidance on the timing of that development, and then also, looking into your pipeline, we always talk about an 18 month lead time, it sounds like even if you wanted to reaccelerate growth, it probably wouldn't have much growth in 2010. Is that fair?

Scott Colosi

The remaining piece for 2009 is going to be pretty much spread out throughout the year so you'll see a couple of stores in Q2, Q3, Q4 to get us to the 15 overall. Our lead time on sites will be a little bit shorter in the case of an end cap potentially or remodel. We don't have too many of those right now, but we're pretty much working on 2010 today.

So I anticipate we'll be able to bring to the table in 2010 what we want to bring to the table, meaning if we want to do 15 stores, we'll be able to do that. If we want to do a few more, we could do that, a few less we could do that too. At this point we have a lot of flexibility in what we end up doing in 2010.

Destin Tompkins – Morgan Keegan

On G&A, how should we think about that in terms of do you expect to get any leverage in 2009 or the fact that you had a little bit lower bonus in 2008, should we look at it directionally flat, better? How should we think about G&A?

Scott Colosi

We're going to have a little bit more G&A because of the bonus accruing back to 100% and we've got, we opened 29 stores, we're opening 15 this year, so we're going to add a few people to help us keep up with the growth on that standpoint. From a percent of revenue perspective and how much might that change, I would suspect little change and it really depends on what sales growth is.

If I have a lot of sales growth or pretty good sales, I might have a little bit of reduction in G&A as a percentage of revenue. If I don't have such great sales growth, I'm probably going to be struggling to keep it flat, but I wouldn't see much of an increase.

Operator

Your next question comes from Jason West – Duetsche Bank.

Jason West – Duetsche Bank

I was wondering if you could give us actual sales dollar number and the pretax number on the extra week in the quarter. It did seem a little high at $0.02 to $0.03. I don't know if you get some leverage on some of the line items there.

Scott Colosi

Price is going to look up what the dollars are, so we'll come back to you on that one.

Jason West – Duetsche Bank

In terms of cash flow for '09, you had a fairly significant working capital other benefit in '08, do you expect that to continue to balance out in your favor or will that be more neutral, or will it swing the other way this year? I'm just wondering how to model that.

G. J. Hart

'08 was really a benefit of something that happened in '07, because '07, Christmas was on a Tuesday, our last day of the year, so we had a bunch of credit card receipts that ended up in accounts receivable which we got the money on day one of 2008. So that was really the big fliperoo if you will. I don't see much working capital if you will benefit or tip a deficit, benefit to us in 2009. I wouldn't be forecasting a lot of dollars from increasing accounts payable or income tax payable, that kind of thing.

The follow up on the sale impact for the 53rd week, it was $17.9 million in extra.

Jason West – Duetsche Bank

Do you have the pretax income number?

G. J. Hart

I do not have the free cash income number, but $0.02 to $0.03 in EPS.

Operator

Your next question comes from Jeffrey Omohundro – Wachovia.

Jeffrey Omohundro – Wachovia

I wonder if maybe you could share some of your thoughts around sales building initiatives for 2009 and maybe a little bit more on the seating expansion initiative and what you might be doing in areas of throughput improvement.

G. J. Hart

We continue to drive our business through local store marketing. A couple of things that we're doing on that front this year, we've actually developed a website for all of our local store marketers to be able to share best practices and be on a real time basis to make those kind of changes.

We continue to improve the quality of the folks. There's a lot of good talent and we continue to improve on that level. Thirdly, local store marketing representatives, it's almost a full time job now where as if you remember a few years ago when we really got after this program, it was more like 10 to 15 hours a week.

Our permission based marketing program that we talked about in the past continues to grow. We've increased that number by about 15% of folks that we have a data base on this year. We continue to have the lowest opt out rate on that permission based program as compared to many other restaurant companies that are involved with the same vendor that we use.

And then lastly, we are continuing to evaluate some technology initiatives around our call ahead program. It's a little too early to talk about too many of the specifics around that, but suffice it to say it's centered around PDA's and text messaging on cell phones.

Jeffrey Omohundro – Wachovia

How do you see the seating expansion in terms of the number of units this year?

G. J. Hart

We plan to do somewhere between 10 and 15 restaurants in the seat expansion in 2009 and we continue to get great results from that, and we think it's a great return on investment.

Operator

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

Lawrence Miller – RBC Capital Markets

In the past you've given us comps by month and the quarter, I was wondering if you could do that for the fourth quarter and January and February. Is there an Easter shift out of the quarter that we should be aware of in Q1?

Scott Colosi

The comps period 10, negative 43, period 11, negative 34, period 12 negative 59, and then January negative .3. But again, that has a favorable impact from the shift in New Year's Day and New Year's Eve. February is not over yet.

Lawrence Miller – RBC Capital Markets

Any impact this year?

Price

On Easter will occur in our second quarter this year as opposed to the first quarter last year, so any impact from that would be pretty immaterial.

Lawrence Miller – RBC Capital Markets

You said, I think G. J. said in the second half of the year, it's probably nearly impossible to predict comps and I think we'd all agree that there's no visibility at all, but what are you kind of assuming in your model for the year that get's you to flat EPS, and then you also mentioned you're expecting fall out in the industry, a lot of closing units? Are you seeing anything specifically with respect to your main competition Outback and others that is encouraging on that front?

Scott Colosi

I'll take the question on the comps guidance, which basically we're not going to give our comp guidance or discuss what's in our models. Suffice to say we do have to deal with the reality of where we are today and what our trends have been, but we do think while certainly there's some risk on the sales side, and therefore the margin piece because again, we haven't taken a price increase, we don't know what the flow through is going to be.

It's going to be a challenge for us on the labor side, and we are doing the extra $1.5 million for our managing partners. We also have the benefit going the other way, positive wise of more store weeks. We have all the stores we've opening, the lower pre-opening, and then of course much lower shares outstanding because of the 6.5 million shares we bought last year.

So there's a number of counter balancing forces which enables us to feel comfortable with going out with approximately flat earnings guidance.

G. J. Hart

In terms of what we're seeing out there, we have seen selected closures of almost all of our competitors, a few restaurants of all of our competitors, but probably the biggest thing we've seen is the closures of the mom and pops, and that we believe will continue to happen.

Lawrence Miller – RBC Capital Markets

Scott, did I hear correctly, you said $50 million for the debt fixed at 3.5%?

Scott Colosi

3.1% plus our current spread which is about 75 basis points over LIBOR. It changes a little bit depending upon our leverage.

Lawrence Miller – RBC Capital Markets

But $50 million was the initial amount?

Scott Colosi

That's right.

Operator

Your next question comes from Christopher O'Cull – Suntrust.

Christopher O'Cull – Suntrust

My question relates to the menu mix and I was hoping you could give us some color in terms of what you saw during the quarter and maybe if anything changed during the fourth relative to what you've been seeing?

Scott Colosi

Our menu mix or lack thereof I should say, has been quite consistent. We continue to see trade down mostly on the entree piece, so from the higher price entree to the lower price entree, lower priced steaks, sandwiches, that kind of thing. We also have a little bit of alcohol that we're selling less of.

And that's been pretty consistent throughout the year save for the fact that some of the items that we added on, the smaller size blossom is a contributor to that, as well as the third slab of ribs.

Christopher O'Cull – Suntrust

I opted into that marketing program that you mentioned earlier, and recently received a promotional offering and was wondering, have you increased discounting activity at all?

G. J. Hart

If you got that first time, you signed up, it was your first time?

Christopher O'Cull – Suntrust

Yes.

G. J. Hart

And that was a free appetizer. Is that what you got on that?

Christopher O'Cull – Suntrust

Yes.

G. J. Hart

That's just for the first time entry. We are not doing any additional discounting through that network.

Christopher O'Cull – Suntrust

Have you increased your FSI usage or any of your print usage?

G. J. Hart

No, we don't do any FSI's or print usage.

Operator

Your next question comes from Keith Siegner – Credit Suisse.

Keith Siegner – Credit Suisse

With our outlook for 2% to 3% commodity deflation in '09, can you give any detail on how much of that is locked in or any detail on the specific line items?

Scott Colosi

I can walk you through some of that. Most of that is locked in. Beef is about 90% locked it. We are floating a portion of our sirloin, and we may lock that in at any time. Last year we floated some of our beef for six months and locked it in, and beef is 45% of our food costs. Our pork products are locked in all year. Our chicken products are locked in for the first six months of this year, and that get's you about 60%.

We have a number of other items in our food cost piece that are locked in. Coca Cola, some of the alcohol products, our bread mixes are locked in most of the year. Some of our butters and oils are locked most of the year. So essentially, a very high percentage of our food costs are locked in.

That said, we do have some stuff that floats. Produce is the biggest piece that floats and can get kind of crazy throughout the year. Dairy is another piece. Cheese floats. Of course cheese has gotten much more favorable over the last few months, even more than we expected it to be, and hopefully that will remain the case for the rest of the year.

Operator

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

Steven Rees – J.P. Morgan

Are you expecting the 2% to 3% decline to be fairly steady throughout the year or would you expect that to accelerate as you move into the back half?

Scott Colosi

I would tell you I would probably expect it to be fairly uniform throughout the year. It's what we would probably plan for at this point except for the fact of produce side. We're probably going to be a little more favorable in the late third, most of the fourth quarter. We could see a pretty big spike like in potatoes. We paid 7% to 8% more for potatoes in the third and fourth quarter last year and in the prior year so we'll have a lap in that. In dairy, I think we'll have more favorable lap middle of the year.

Steven Rees – J.P. Morgan

I know in the past there's been a mismatch from the managing partner conferences. Is there anything special to that this year or is it still in the second quarter? Should we see a similar dollar spend for that?

Scott Colosi

Still second quarter. I would assume a pretty similar dollar spend for that at this point.

Steven Rees – J.P. Morgan

Can you talk about how the consumers are using your concept, perhaps your weekday dinner trends versus your weekend dinner trend if there's been any variances there.

Scott Colosi

There really hasn't been any material in sales changes on days of the week or day parts in our comps. They've been pretty uniform.

Operator

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

Paul Westra – Cohen & Company

Could you give us a little more color on the impact of the changes you made to the bonus system? Did it have the impact you were hoping for on the employee retention and satisfaction and customer impact and was the cost about what you expected?

G. J. Hart

We just started the program in January so it's really too early to tell from a retention and results standpoint, but essentially we just did a small modification in the way some of our restaurants are charged their occupancy costs and it sort of leveled the playing field with other restaurants in our system. That results in guys potentially earning more money depending upon if they continue to be as profitable in the prior year, it would cost us about $1.5 million But again, it's only been out for one complete quarter.

Paul Westra – Cohen & Company

So far there's nothing completely unexpected?

G. J. Hart

No. Everything's been pretty much within our expectations.

Paul Westra – Cohen & Company

On the menu side, you had a handful of additions mid year this year. Are you working on anything in particular this year? Should we expect a permanent addition in 2009?

G. J. Hart

We always continue to test things as I think you know, and we are continuing to evaluate items across the whole spectrum from appetizers to entrees. But it's too early to say when or if we will add anything to the menu.

Paul Westra – Cohen & Company

Your free cash flow, you mentioned would be pretty significant, you have a pretty reasonable to say the least rate on your debt. If you were to pick up your share repurchase and needed to ask the Board to extend the current repurchase plan, when would be the first opportunity they could do that?

G. J. Hart

I really don't have any comment on that.

Paul Westra – Cohen & Company

What's the expected cost for the Astin Creek location?

G. J. Hart

We're not prepared to comment on that as well given that its the first location and certainly in the first location, you're going to have a little bit more flexibility to change things within your menu and so forth as you see fit, so I wouldn't say that store number one would be the pro forma restaurant that we might go forward with. So I really don't want to give any numericals on that at this point.

Operator

Your next question comes from Mathew Difrisco – Oppenheimer.

Mathew Difrisco – Oppenheimer

Speaking on the comp, the first seven weeks I assume that also you captured Valentine's in there and was that an adverse impact having it fall on the weekend?

G. J. Hart

For us it was pretty neutral I would say overall and when you look at the whole Valentine's days, we look at it for three to four days of Valentine promotion, so when you combine all the three or four days it was pretty neutral day for us. I think it was Thursday to Saturday.

Mathew Difrisco – Oppenheimer

So that does include Valentine's within that first seven week down 1% number?

C. J. Hart

Yes.

Mathew Difrisco – Oppenheimer

I think last year you said in the first quarter you were impacted adversely for having the earlier Easter by almost 1%, so should we see since Easter is going to fall more in '09 where it fell more closer to where it fell in '07, does that 1% come back potentially in the back of March if all things are equal?

G. J. Hart

That could be close on a monthly basis. It would certainly be a lot less than that on a quarterly basis.

Mathew Difrisco – Oppenheimer

Is that embedded in your number as far your internal, without giving out what you're looking at as internal comp, are you conservative looking at this run rate of 3% to continue or are you also including a little bit of a calendar benefit in there?

G. J. Hart

We really haven't even addressed that whole how much is Easter going to impact? We're looking at our comps on a full year basis and we're not even considering if Easter is this or that because there's such a huge amount of challenge with predicting comp sales. Meaning, is it going to flat, is it going to be negative 4 or is it going to be negative 8. So we're more focused on that and those scenarios in looking at our numbers than sort of refining to that level of detail.

Mathew Difrisco – Oppenheimer

Just to fully understand the price, it seems as of May if you were to take no incremental price you would be with no incremental price increase in a year over year basis beyond May?

C. J. Hart

That's right.

Mathew Difrisco – Oppenheimer

And that still incorporates a deflationary commodity cost environment?

C. J. Hart

Yes. That's right.

Mathew Difrisco – Oppenheimer

I'm trying to look at your average weekly sales commentary. Initially it sounds like you were repeating what has happened the last couple of quarters where some disappointment or some smaller new store volumes but there does seem to be a glimmer of hope in the last 9 store openings, $72,000. Can you put that in historical context? Is that starting to floor out?

Do you feel better about the last nine months with the store openings versus the 16 to 18 month class. I'm just trying to understand without reading too much into that $72,000 number, but is that at least somewhat a sign of there's a controllable trend here or you're taking control of that AWS a little bit better in this environment?

G. J. Hart

I would say that we feel good about the sales of the stores we've opened overall. I think that the challenge for us is we feel a lot less good about what it's cost us to get these restaurants opened so from an average sales perspective, we do feel pretty good about the sales and we've had some stores open up with tremendous volumes.

I think just that with the margin environment we're in and having the margins be down, combine that with the higher cost of getting these stores open in the first place, that's been the bigger challenge for us.

Mathew Difrisco – Oppenheimer

Is the cost going up? There's less economic growth so you're footing the bill for more of this new stuff where you're not dividing it between three or four other people growing around you or just trying to understand why you're not seeing some of those pressures come down such as construction costs, labor cost. Are you footing more of the bill because you're not getting a specialty retailer to grow along side you and pay for the sewers and street lights with you?

G. J. Hart

We're starting to get more of that now and getting more opportunities where it's getting more competitive for rental rates and that kind of thing. But these sites we opened last year were permitted, leases were signed 12 months before that. So there's a long lead time in getting all these restaurants open, and a big reason why we changed our development plan mid stream to slow it down to15 this year, wasn't as much the economy as it was the development costs.

It got to a point where it was just getting prohibitively expensive and a lot of that was coming from site work. But we've looked at ways to reduce our building site a little bit, take a little bit of equipment out and if you combine that with an end cap opportunity or remodel opportunity, given other people's closures, that's where we're looking to take big chunks out of the development costs because I think there's a certain amount of realistic ability for us to generate sales given we're dinner only except for the weekends relative to other folks who do lunch and dinner every day.

Mathew Difrisco – Oppenheimer

Is it more leverageable, the new compensation structure where when we get do better times and you see the top line grow with profits also going up, is there going to be better flow through in this compensation structure from the store level to the corporation or is that not really part of restructuring the compensation.

Scott Colosi

I think through the restructured compensation we have managing partners who stay with us longer and are motivated. Then we're going to have higher sales, better flow through, better returns on our investments.

Operator

Your next question comes from David Tarantino – Robert W. Baird.

David Tarantino – Robert W. Baird

A follow up on some of the traffic and check questions. Could you clarify with the pricing rolling off in January what the quarter to date traffic versus check numbers look like?

Scott Colosi

The quarter to day check number of about $14.50, the average check which has been down a little bit, down about .5% from last year and our traffic has been pretty flat year over year, but again, that includes that about 3% benefit from the first week of the year for the New Year's Day, New Year's Eve movement. So we would say more of our trends in traffic are more of a down 3% to 3.5%.

David Tarantino – Robert W. Baird

When the pricing rolls off in May if you don't take pricing to replace that, would you expect an equivalent impact on the check or I know that's about the same time that you rolled out the menu that maybe had an impact last year. How do you see check playing out over the balance of the year if you don't take further pricing?

Scott Colosi

It depends on what we do in totality with our menu, meaning that do we take off an item like our third slab of ribs for example. Do we have as the selling of our smaller size blossom work out? Do we keep the same combos that we have on the menu? Do we get more aggressive on those or not? Those kinds of decisions will also impact what our average check might be for the remainder of the year, and those are all things that we're talking about in the midst of us looking at a potential price increase.

David Tarantino – Robert W. Baird

Have you assumed any impairment charges in your guidance for '09?

Scott Colosi

I'll just say this that we do evaluate or stores for impairment twice a year and we do have anytime you have a 300 restaurant system, you're always going to have a few restaurants that are probably candidates for looking very seriously at impairment and/or closure.

David Tarantino – Robert W. Baird

In the flat EPS guidance, have you assumed that you'll take some impairment in '09?

Scott Colosi

I can't assume impairment because if I assume it I have to take it so that's kind of the challenge with impairment from that standpoint.

Operator

There are no further questions. I would like to turn the conference back over to management for any additional comments.

G. J. Hart

We appreciate you all joining us tonight. We look forward to talking to you in about 90 days.

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