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Ruby Tuesday, Inc. (NYSE:RT)

F4Q09 Earnings Call

July 7, 2009 5:00 pm ET

Executives

Steve Rockwell - Vice President, Finance

Samuel E. Beall - Chairman of the Board, President, Chief Executive Officer

Marguerite N. Duffy - Chief Financial Officer, Senior Vice President

Mark Young - Senior Vice President, Marketing

Kimberly M. Grant - Executive Vice President

Analysts

Jeffrey Omohundro - Wells Fargo

Keith Siegner - Credit Suisse

Christopher O’Cull - Suntrust Robinson Humphrey

Joseph Buckley - Banc of America

Bryan Elliott - Raymond James

Brad Ludington - Keybanc Capital Markets

Thomas Forte - Telsey Advisory Group

Anthony Visono - Trapeze Asset Management

Paul Lester - Cowen & Company

Operator

Greetings and welcome to the Ruby Tuesday Incorporated fourth quarter earnings call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Steve Rockwell, Vice President of Finance for Ruby Tuesday. Thank you, Mr. Rockwell, you may begin.

Steve Rockwell

Thank you, Manny and thanks to all of you for joining us this evening. With me today are Sandy Beall, our Chairman and CEO; Margie Duffy, our Chief Financial Officer; Mark Young, our Senior VP of Marketing; and Kimberly Grant, our Executive VP of Operations.

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

We plan to release first quarter fiscal year 2010 earnings in early October. Our fourth quarter earnings were released today after the market closed and a copy of our press release can be found on the investor relations section of our website at rubytuesday.com and is also available on Business Wire, First Call, and other wire services.

Our format today includes an overview of our fourth quarter and fiscal 2009 financial results, our fiscal 2010 outlook, and a review of our plans and strategies. At the conclusion of our prepared remarks, we will open up the lines for questions.

I will now turn the call over to Sandy.

Samuel E. Beall

Thank you for listening in this afternoon. This last year was definitely the most challenging year for Ruby Tuesday. I am very proud of the way our team responded to meet the challenges that existed and we were able to stabilize our trends during the year. We still have major challenges ahead but we have accomplished a lot and we enter our new fiscal year with the best momentum we’ve had in several years.

Our major accomplishments during the year were most important slowing the rate of decline in same-restaurant sales to 3.2% in the fourth quarter from 6.8% in the third and from 10.8% in the first half of the year. Second is really reversing our traffic to actually positive traffic in the fourth quarter from negative in the first three quarters. Number three, improving our sales and traffic performance relative to our peers and outperforming them by the end of the year in the month of May. Fourth, substantially reducing our cost structure, stabilizing our cash flow, and paying down a huge amount of debt, $112 million, during the year. And probably the most critical for us for the long-term is maintaining just excellent restaurant operations, achieving high guest satisfaction and value scores, especially value scores -- big improvement there.

Our performance started to stabilize in the third quarter as a result of improved sales from our marketing initiatives that better communicated our compelling value proposition to our guests, as well as the implementation of $45 million to $50 million in annualized cost savings that more than offset investments in value for our menu upgrades and marketing initiatives, as well as inflationary and other cost increases, and the closing of 43 restaurants. The fourth quarter continued to benefit from these actions and we continue as a company to get more and more efficient in the way we run our business.

Our same-restaurant sales were down 3.2 in the fourth quarter, as I mentioned, which is definitely an improvement. On a monthly basis, our sales were down 1.3% in March, 6% in April, and 2.8% in May.

As in the third quarter, we believe our guests are responding to our value message as being delivered through a combination of TV, Internet, print, and community-based programs.

Same-restaurant sales for our franchisees were down 6.9%. We attribute the softer sales by our franchisees to their slower adoption of our system marketing programs. We always test our marketing programs first. But starting in the first quarter of this fiscal year, our franchisees are on the exact same programs and their sales are basically within a point of the company’s for the month of June.

Most encouraging was our performance relative to Knapp-Track in the quarter. Our same-restaurant sales outperformed Knapp by approximately 2.4% and our customer traffic outperformed it by 8% to 9%. This is our best relative performance in well over a year and we believe not only reflects the success of our new marketing focus but also indicates our repositioning is beginning to resonate as we get guests in to see the difference in our food, the way our people look, and the way the restaurants look.

Our debt pay-down in the quarter definitely exceeded our expectation. We paid down $32 million of debt, well above our guided range of $10 million to $20 million from running our business in excellent fashion. Our cost-savings enabled us to stabilize our cash flow. In addition, we sold a few more of our excess properties sooner than anticipated. These factors, along with improving sales trends in the second half of the year, enabled us to pay down $112 million for the year, which far exceeded the 80 to 90 projection we told you about earlier in the year, and the most recent forecast I think at the end of third quarter of $90 million to $100 million.

We remained in good shape relative to our debt covenants, reflecting our debt pay-down, improved profits, and more stabilized cash flow. Our debt-to-EBITDAR ratio, the key one for us, continued to improve. It was 3.75. Great progress in this area compared to the maximum allowed on our covenants of 4.25. That’s a full half-point turn gap, which is outstanding. Our fixed charge coverage ratio was 2.56 versus a minimum of 2.25.

Based on our current trends, we believe we will remain in compliance with our covenants. Although the current environment continues to be challenging, we believe our business has stabilized. Going forward, we need to continue to strengthen operations -- never let up there -- figure out how to increase sales, hopefully get check up some, increase earnings, and of course with all the cash flow we’re generating since we’re cost control freaks and run the business very efficiently, produce a lot of cash and reduce debt and thus leverage --

I would now like to turn the call over to Margie to discuss our financial performance in a little more detail. Margie.

Marguerite N. Duffy

Thank you, Sandy. As Sandy said, we continue to be encouraged by our sales and traffic trends that flow through to cash flow and earnings, and our debt pay-down in the quarter. I’ll review the quarter, provide a high level summary of the year, as well as our year-end balance sheet, and give our outlook for fiscal 2010.

We reported fourth quarter earnings per share of $0.28 versus $0.27 last year. This quarter’s earnings reflected a tax rate of 33.2% compared with an income tax benefit last year. Our pretax earnings were up nearly 60%. Total revenue decreased 7.1% during the quarter, reflecting the 3.2% decline in same-restaurant sales and a net decrease of 49 company-owned restaurants from the same quarter of the prior year, primarily reflecting the 43 restaurants we closed in the third quarter. We did not close any restaurants in the fourth quarter and acquired one from a franchisee in Texas.

Same-restaurant sales for our franchisees were down 6.9%. We believe our franchisee same-restaurant sales were weaker than company primarily because they weren’t fully immersed in the promotional activity of our marketing program until the June period.

The restaurant level operating margin was 18.9% for the quarter, compared with 20% a year earlier.

Food costs of 29.5% of sales versus 27.1% were higher primarily because of our value initiatives related to marketing and our menu. For example, some enhancements to our menu, such as the introduction of lobster and steak and lobster, and increasing the triple prime burger to eight ounces from seven while offering endless fries with all burgers had an impact on our food costs and underscores our value message. In general, we continue to experience favorable commodity costs.

We were especially pleased with the decline in labor as a percent of sales to 32.3% from 33.2%, reflecting the impact of our cost-saving initiative and the new labor scheduling process. Our health insurance costs were also lower based on favorable claims experience.

Other restaurant operating costs were down 40 basis points, reflecting good cost controls across the board. Depreciation was down 60 basis points as a percent of sales, primarily because of savings from our third quarter restaurant closings and second quarter impairments.

SG&A expenses declined 310 basis points as a percent of revenue. Contributing to the decline were reduced advertising costs, lower supervisory labor as we increased [banner] control for both regional and area supervisors, and lower stock-based compensation. Effective at the beginning of fiscal 2009, we changed the date of our equity grants to the first quarter from the fourth quarter in the previous year. Equity and earnings of our franchise partners increased due in part to our providing fee release as we continue to work closely with them to improve their profitability during these difficult times.

Interest expense in the quarter declined compared with the prior year, reflecting both a decline in our average debt balances and a lower interest rate on our bank debt because of the low level of LIBOR and a lower spread to LIBOR because our leverage ratio is below four.

Closure and impairment expenses were down year over year reflecting lower restaurant impairments and gains on sales of surplus properties. Our tax rate was 33.2% as tax credits were a smaller percentage of pretax income, reflecting the recovery in our pretax earnings.

For the full year, revenues were down 8.2% largely reflecting the 7.9% decline in same-restaurant sales. We recorded a loss per share of $0.35 in contrast to earnings per share of $0.51 a year earlier. Fiscal 2009’s loss included charges for closure and impairment and good will that after tax totaled $0.92 a share. The restaurant operating margin was 17.1% compared with 19.3%.

Food costs were higher for the same reason as in the fourth quarter while payroll and other operating costs were also higher because of negative leverage from the decline in same-restaurant sales and because our cost savings did not kick in in full force until the second half of the year.

Turning to the balance sheet, our book debt including current maturities was $493 million, down from $525 million at the end of the prior quarter and $605 million a year earlier. We paid down $32 million of debt in the fourth quarter and $112 million for the year. Our debt paydown for the year reflects operating cash flow defined as cash from operating activities less capital expenditures of $85 million, proceeds from asset sales of $12 million, and other of $15 million, including a $6 million reduction in our cash balance.

Our fiscal ’10 guidance is as follows -- we do not expect to open any new Ruby Tuesday restaurants and anticipate closing 14, consistent with our previously announced plan to close 30 restaurants over the next several years when the releases expire. There are currently six franchise restaurants, five of which are international that are expected to open in fiscal 2010. We project same-restaurant sales to be down 2.5% to 3.5% for the year. We expect the restaurant operating margin will be down in the 50 to 150 basis point range, primarily reflecting the impact of our compelling value strategy on food costs. Depreciation and amortization is projected to be $62 million to $65 million. SG&A is targeted to be down in the low- to mid-teens year over year with most of the decline in the first half of the year because we will begin to lap our cost reductions in the second half. Also, stock-based compensation will be a negative comparison in the first quarter reflecting the change in the timing of the grants I mentioned earlier.

Interest expense is expected to be in the $23 million to $25 million range. The tax rate is projected to be 10% to 20%, below the full rate because we continue to benefit from FICA and other employment related tax credits.

Earnings per share in fiscal 2010 are estimated to be in the range of $0.50 to $0.65. Capital expenditures are expected to be $17 million to $20 million and we estimate we will pay down $80 million to $100 million of debt during the year, including our series A private placement notes that are due in April 2010.

We are encouraged by the progress we have made in the last year and we believe we will remain in compliance with our debt covenants this year even as the leverage ratio steps down to four times in the second quarter and 3.75 in the fourth.

Our principal financial goals are to maximize our cash flows, strengthen our balance sheet by paying down debt as rapidly as we can, and achieve a book debt-to-EBITDA ratio of under three times.

Now I’ll turn the call back over to Sandy.

Samuel E. Beall

Thank you, Margie. [inaudible] to guidance and all, we should also mention that on a going forward basis, we will give same-store sales information on a quarterly versus a monthly basis at quarter end. We think this is most appropriate for the times.

All right, let’s see -- our mission is to be the best in bar grill by delivering a high quality casual dining experience with compelling value to every guest. You’ve heard that many, many times before. Our brand strategies have been consistent and we’ve been dedicated to them for the last four years. Our brand strategies are uncompromising freshness and quality, gracious hospitality, a fresh new look, and compelling value. We believe we are executing on these strategies and we think they are more appropriate than ever before, causing differentiation for our brand and we hope an excellent future for it.

Over the last year, we have focused primarily on three things. First, get bodies in seats; second, maximize cash flow, resulting in reduced debt; and third, maintain the quality and improve the quality of our operations. Executing on those strategies has quite an accomplishment given the economic backdrop of the last year, as well as just the cost-cutting that’s gone on.

Mark Young will first discuss our sales building strategies in more detail and then Kimberly Grant will discuss our operations and I’ll wrap things up very briefly. Mark.

Mark Young

Thank you, Sandy. Early in the year, we reviewed our marketing -- overall marketing strategy, began testing several new ideas, clarified our message, and developed a more effective method of communicating with our existing and potential guests. Prior to this, our marketing efforts had been concentrated on a traditional media strategy, primarily television. We made a shift to a much broader strategy encompassing four pillars -- traditional media, print and menu promotions, interactive, and community based programs. We also placed greater emphasis on value.

With this strategy, we saw an immediate positive impact on sales and traffic as we discussed in the third quarter and as positive momentum continued through the fourth quarter.

Let me go into a little more detail. Our television strategy was not successful in driving traffic to acceptable levels, primarily because our spending was less than 10% of the combined spending of our three largest bar and grill competitors. We have redirected many of our media dollars to the other three pillars in a way that accomplishes two objectives -- first, it allows us to communicate the quality of our restaurants and second, it provides guests an incentive to visit them. We don’t think the message is much different from that of many of our competitors who are advertising heavy, heavy value on television. The delivery through high quality, full color newspaper food features, the use of the Internet, and cost efficient direct mail methods is different and these delivery methods have been very effective for us.

We are drilling down to the local market and individual restaurants to determine the best way to communicate our value proposition. In some cases, a restaurant may benefit from more local initiatives, such as specific happy hours, or having the manager approach local businesses. In others, the local newspaper is sufficient.

The key point is that we are evaluating worth at the individual restaurant level in contrast to our prior strategy that was more one size fits all.

Menu innovation is also important to increase traffic, drive check, and maximize the appeal of our brand to a slightly higher household income demographic. [Through our] in-restaurant features and menu evolution, we offer a great variety of craveable and differentiated menu items. For example, some of you may have seen that we added lobster tails to our seafood feature, a great addition to our popular premium seafood selections. Currently this is a limited time offer that serves to further differentiate us from the typical bar and grill competitor and allows us to attract some customers from the high quality casual dining segment.

Our price points for the lobster dinners or add-on lobster tails are very attractive relative to competitive offerings. This example demonstrates the flexibility our reimaging gives us to offer high quality items that are very much in keeping with our new brand image and would be difficult for our competitors to copy. It also shows how we are able to leverage the rebranding investments in order to improve our returns.

Now Kimberly will give you a little more information on sales, teams, and guest satisfaction.

Kimberly M. Grant

Thank you, Mark. As Sandy mentioned earlier, we are very encouraged by our sales trends relative to our competitors, as measured by the Knapp-Track. We are currently outperforming our peers on both sales and customer traffic. Our value message is driving guests into our restaurants, resulting in an increase in guest traffic for the first time in over two years.

We also continue to perform well on a regional basis according to the latest regional Knapp data, with same-restaurant sales outperforming in five of the six Knapp regions where we currently -- where we have company restaurants and more importantly, guest counts are outperforming in all six Knapp regions.

One of the markets we’ve spoken about in the past, one of our weaker areas, the east south central region, which includes company restaurants in Alabama, Tennessee, Mississippi, and Louisiana, we have successfully cut our gap versus the Knapp in half -- essentially in half over the last quarter through effective execution of our market-by-market restaurant-by-restaurant marketing strategies.

Our operations are very strong. Our management turnover for the year was slightly under 20% and our hourly turnover was barely over 100%. Both represent very low levels. In fact, our hourly turnover was down over 10 percentage points from the prior year and represents a record low level in our 37 year history. Although we are very proud of these turnover accomplishments, we believe we still can achieve our goal of getting hourly turnover below 100%, so we still have more to do.

The impact of this low turnover is two-fold -- first, the quality of our operations benefits because of the greater experience our team members have, and this results in a better guest experience. And second, our training costs are significantly reduced.

Our record low turnover levels and our ability to attract the very best talent in the industry allows us to hire based upon the quality of the applicant versus simply needing to fill a spot. Our teams are very strong and very solid and they are getting stronger every day.

We also continue to experience exceptionally high levels of guest satisfaction with our top two box scores for our four key attributes, which are overall experience, value, intent to revisit, and intent to recommend. All of these attributes are well over 90% top two box.

It is important to note that each of these have experienced incremental improvement in guest satisfaction even as we have continued to integrate many of the cost savings initiatives into our business model over the last year.

Our goal is to maintain these top two box scores at over 90% and we will continue to actively monitor these scores on an ongoing basis.

Now I’ll turn it back over to Sandy for a wrap-up.

Samuel E. Beall

Thanks. Our corporate strategies for fiscal 2010 are to maintain a continued focus and execution within our existing restaurants and carry the momentum generated by our marketing and cost-savings initiatives and strategies in the second half of fiscal 2009 through the new year.

First, get customers in seats, increase traffic and sales, which we’ve talked about. While pleased with our sales trends, rest assured we won’t be completely satisfied until same-store sales are up year over year. Our marketing strategies have been effective. They have positively communicated news, excitement, and quality about our brand, as well as a very strong value message, which is driving traffic. We will remain focused on these strategies for the long-term.

Second, maximize cash flow and use that cash to reduce as much debt as possible. We continue to be hyper vigilant regarding cost and cost control and question every expenditure. This is a discipline we will not forget when sales improve. In fact, we believe we have the potential to find additional cost savings without having a negative impact on the guest experience.

We don’t plan on opening any company-owned Ruby’s this year. We don’t need to increase earnings and increase returns. We will continue to limit our CapEx spending, principally to maintain our existing restaurants and investments in technology, which will improve our ability to market more effectively and offer even better service.

Consequently, our free cash flow will primarily go to paying down debt.

Our third strategy is to further strengthen our brand through outstanding restaurant operations serving high quality food and offering superior value. Our goal of maintaining 90% score on our top box ratings, combined with our strong restaurant level talent base should enable us to further build our brand strengths. Our very low management turnover and team turnover also contributes to a very low risk restaurant operations scenario.

We will stay laser-focused on these strategies. We will maximize cash flow, [inaudible] a lot of cash flow, pay off a lot of debt, and strengthen our brand.

Without a doubt, the environment remains difficult and very uncertain but I am highly confident our strategies, our team, and its execution of our operating standards, maintaining those standards and adhering to our brand strategies of uncompromising freshness and quality, gracious hospitality and fresh new look and compelling value are the foundation of Ruby Tuesday of now and tomorrow. These strategies support our corporate operating principles, position us for the future, and will help us to rebuild shareholder value in the future.

With that, we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Jeffrey Omohundro with Wells Fargo.

Jeffrey Omohundro - Wells Fargo

Thanks. My question really goes to the challenge of balancing traffic without average check in this environment and establishing enhanced value. I’m curious if you could let us know how you see the usage of coupons and SSIs in this effort versus in-store menu enhancements, such as the lobster tail.

Samuel E. Beall

Well, I think it’s all important. I don’t think it’s one thing and I don’t think we’ll ever lock into one. It is menu promotion, as you mentioned, in the unit. I think lobster is also a great example of -- actually, the entire promotion is really seafood that we have in right now. We sell more seafood than anybody but Red Lobster. We’ve always been very strong in that. We sell over 20% of our menu mix in seafood, if I remember right. So that’s very, very important to us and I think as time goes on, our promotions, our dinner focus on our menu will allow us to get the check goals that we laid out a couple of years ago before this recession and that’s the $12.50 to $14.50 mark. That’s still what we are shooting for.

You know, a high quality promotion at different levels, whether it’s -- I mean, there are all kinds of different promotion tests we’ve done that are incentives to get people to come in and eat that delicious food that they are seeing in that full color picture I think in some ways is more lasting and more memorable than even television. It certainly is working for us but I don’t think it’s that much different than two for 20 or any lunch for $5 or $7.95 or whatever. You know, we’re not discounting our lower items; we’re only discounting our dinner items when we discount. But it all goes into a package combined with in-unit promotion, Internet and digital promotion, or digital advertising, et cetera. So it’s an important piece of the puzzle.

Jeffrey Omohundro - Wells Fargo

One follow-up to that -- it sounds like you are pleased with channels around the marketing spending that you’ve settle into. What about the dollar spending rate as we look into fiscal ’10? Thanks.

Samuel E. Beall

I think the dollar spending on -- when you promote, of course, that comes off of sales so it doesn’t count in advertising. If you really take the net cost of what you are promoting, I guess, and combine it with advertising, it’s probably similar to what we had year before last in expense. But I think what’s reflected -- did we give guidance on advertising? We didn’t, did we? SG&A? But it’s -- since it’s advertising only, we’re not doing that much, it’s -- well, I shouldn’t say we didn’t give guidance on that.

Marguerite N. Duffy

It was in our SG&A guidance.

Samuel E. Beall

It was? Yeah, okay.

Jeffrey Omohundro - Wells Fargo

Thanks.

Operator

Your next question comes from the line of Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

Sure thing, thanks. Just one quick follow-up on that, and then I have another question -- when you think about the same-store sales guidance for the year, the down 3.5 to down 2.5, and you know, these longer term goals to get the check back up and I know, Sandy, you mentioned that a couple of times -- how do you think about this year in terms of the pricing versus mix, traffic -- just loosely, maybe in terms of where we’ve been recently? Just any color commentary along those lines.

Samuel E. Beall

Keith, I think in this year with what we are all seeing out there, I guess any -- well first of all, in same-store sales, anybody who says what same-store sales are, they are really guessing and hoping. You know, I don’t think anybody really knows what they are going to be.

Keith Siegner - Credit Suisse

Well, of course.

Samuel E. Beall

We think it’s going to be in that range. But for this year, I mean, it is about people in seats more so than check. People aren’t spending out there. They want value, if they are going to spend their money. As long as that’s what drives them, that’s what we will do. The check that I mentioned is important for the long-term. Do we expect it [inaudible] this year? No way -- I mean, I won’t even attempt that. But I think over time we can start having a check increase.

I don’t think we’ve had a check increase in 2.5 or three years with our compelling value strategy, but it’s the right one right now, as proven by the fact that we have more traffic. And right now, we want more people in our restaurants for our employees [and just for feeling good]. And we will keep pushing value for some time to come until the consumer changes.

Keith Siegner - Credit Suisse

Okay, one other question then -- one thing you mentioned, Margie, was the fee release and when I look at the royalty rate, on the royalty sales, you know, you’ve been in the low twos for the last three quarters, below historical norms. Can you remind us of what programs are in place for that, maybe how we should think about the royalty rate going forward, maybe when it starts to creep back up -- just anything along those lines would also be helpful.

Marguerite N. Duffy

I think going forward, fiscal year ’10 will probably look similar to fiscal year ’09. But it’s just because we don’t see it letting up yet, so --

Samuel E. Beall

I think once you see their same-store sales turn positive, that’s when we’ll start seeing our royalties probably go up.

Keith Siegner - Credit Suisse

And it’s fee release that’s leading to the lower rates, is that right? Is any of that contractual or can you turn that off at any time?

Marguerite N. Duffy

Can turn it off at any time -- it’s just temporary.

Keith Siegner - Credit Suisse

Okay.

Samuel E. Beall

It’s just supporting our partners.

Keith Siegner - Credit Suisse

Okay. Thank you.

Operator

Your next question comes from the line of Christopher O’Cull with Suntrust.

Christopher O’Cull - Suntrust Robinson Humphrey

Thanks, guys. Given the competition’s focus on burgers right now, Sandy, it makes sense obviously that you guys are encouraging trials on some of the specialty entrees. Can you give any color on how the mix of these specialty entrees has improved over the past couple of quarters? And maybe also how your dinner day part mix has changed?

Samuel E. Beall

Kimberly, why don’t you answer that?

Kimberly M. Grant

Yes, we’ve seen with the different value strategies we’ve had, we’ve had an increase in specialties of about 10%, so that’s on the ribs, the steaks, the chicken, the entrees and what have you versus the prior year.

Samuel E. Beall

I think what’s important there also, Chris, I mean, Ruby’s looks different than it used to and our customer base is a little bit different. It’s more aligned -- if you look at average household income demographics, it’s more aligned with Outback and Olive Garden now, and I think people are more apt to -- they are more wiling to try the dinner items. We had to sell them on quality through the burger but I think we’ve graduated past that and now it is working very definitely on our fish and on our steaks and on our fresh chicken and salmon and things like that. So I think it’s right on strategy and it’s working, evidenced by the fact that, you know, [inaudible] up about 10 points.

Christopher O’Cull - Suntrust Robinson Humphrey

And Mark, I don’t know if this is possible, is there any way to measure the repeat usage of the brand once someone has used some of the trial incentives?

Samuel E. Beall

Not right now but we do have the technology we’d be putting in by the end of this fiscal year where we think we’ll be able to track a lot more of that.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. And one last question -- has the shift to a more local base marketing approach altered your pricing at all? You would think you would have maybe more opportunities to kind of take pricing on some of your specialty entrée items, given the trail incentives.

Samuel E. Beall

It hasn’t yet, but I do agree that that is a real opportunity that we have discussed and we have plans to look at that and test that this year.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, great. Thanks, guys.

Samuel E. Beall

And the main thing we’ve learned through a lot of this is yes, we are the third-largest casual dining chain in number of units but -- but our success is based off really unit-by-unit and it’s a different way of running our company, I think, and I think it’s a very healthy way to run it too. It’s much more personal, it’s much more meaningful and I think -- we think it can be much more impactful and more efficient.

Operator

Your next question comes from the line of Joseph Buckley with Banc of America.

Joseph Buckley - Banc of America

Thank you. Could you fill out a little bit the traffic versus check, behind the 3.2% same-store sales decline in the quarter?

Marguerite N. Duffy

-- positive, check was down.

Joseph Buckley - Banc of America

Well, obviously but could you tell us how much traffic was up?

Samuel E. Beall

What was it, Margie?

Marguerite N. Duffy

About two points.

Samuel E. Beall

About two points.

Joseph Buckley - Banc of America

Okay.

Samuel E. Beall

I think check was actually off, wasn’t it, Margie, like four, 4.5, four -- something like that?

Joseph Buckley - Banc of America

Okay. And then the month of April considerably slower than March or May, did you do anything --

Samuel E. Beall

That’s holiday flip-flop. You really have to look at those two combined.

Joseph Buckley - Banc of America

Oh, okay. Okay, that’s the Easter shift playing havoc.

Samuel E. Beall

Yes.

Joseph Buckley - Banc of America

Okay. And then Margie, your SG&A guidance suggests something in the $70 million area for fiscal 2010, where if you look at the fourth quarter or even the second half, your run-rate was more like $60 million. Is there a reason at all to ratchet back up again?

Marguerite N. Duffy

Let’s see if there’s anything in particular -- no, I mean, it’s year over year, still down. I think as indicated, just as we’d lapsed some of the savings in this year, then you’ll just have your normal inflationary cost after that but --

Samuel E. Beall

Nothing in bonuses or stock comp or --

Marguerite N. Duffy

Nothing major there.

Joseph Buckley - Banc of America

Okay. And the stock comp expense, how much will that swing the first quarter by?

Marguerite N. Duffy

That will be substantial. The -- it’s about a $4 million swing there.

Joseph Buckley - Banc of America

Okay. Were the bonuses paid this year? Are there bonuses in the SG&A numbers for the fourth quarter?

Marguerite N. Duffy

They are. They are in there for all year.

Joseph Buckley - Banc of America

Accrued over the course of the year?

Marguerite N. Duffy

That’s correct.

Joseph Buckley - Banc of America

Okay. Thank you.

Samuel E. Beall

Not huge, but there was some in there.

Joseph Buckley - Banc of America

Okay, thanks.

Operator

Your next question comes from the line of Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James

Good afternoon. A couple of clarifications as well -- the depreciation guidance implies a pretty big drop in the run-rate as well. We’ve already closed I think most of the stores we’re going to close. Are there some assets that are -- have hit their lives or something else going on there?

Marguerite N. Duffy

No, you’ll have the declines that you’ve seen in fourth quarter as depreciation came down and then it will be another year falling off as assets are fully matured.

Bryan Elliott - Raymond James

Okay, all right. And I guess I was going to ask about G&A, but you just went through that with Joe. I just wanted to also clarify the mix shift comment -- specialty items are up about 10 points, if I heard correctly.

Samuel E. Beall

That’s the dinner items, yes. It’s dinner ribs, steaks, and seafood.

Bryan Elliott - Raymond James

All right, and I guess I’m trying to square that with 4.5% ticket decline if we’re getting good mix shift in the higher ticket items.

Samuel E. Beall

Well, they run -- we have some incentives to buy those and you have a lot of your dinner items that, you have a lot of your specialty items probably average check is only $11.95, not a whole lot different than a burger and our salad bar. But we think we want people to buy the specialty items because they are more differentiated than our competition and it’s more like a dinner house. Even though you don’t get a lot of check yet, maybe, we are on the lobster but we’re not on the specialty items, we want to train people into that category and we think that’s long-term where we want them to be.

Bryan Elliott - Raymond James

Okay. And on the stock comp, do you have Q4 stock comp accrual?

Samuel E. Beall

I’m sorry, what now?

Bryan Elliott - Raymond James

The stock compensation expense accrual in Q4, actual?

Marguerite N. Duffy

Approximately $1 million.

Bryan Elliott - Raymond James

Okay. And what’s the budget? We got a $4 million swing in the first quarter. What’s the sort of estimate in the SG&A guidance for 2010?

Marguerite N. Duffy

It will be about $1 million higher than the prior year. I’m sorry, the $4 million was an expected amount for the first quarter, not the swing. I apologize.

Bryan Elliott - Raymond James

Oh, okay, that’s the gross. And then for the full year, you’d expect that to be up about $1 million?

Marguerite N. Duffy

About $1 million versus prior year, right.

Bryan Elliott - Raymond James

Okay, got it. Thank you.

Operator

Your next question comes from the line of Brad Ludington with Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

Thank you. Good afternoon. I wanted to ask first off, the impairment line that’s in there that wasn’t necessarily -- and we have $1.5 million this quarter, that’s kind of just going to be just something ongoing now, is the way it looks, not anything extraordinary?

Marguerite N. Duffy

That’s right. You will have your ongoing impairments in that line.

Brad Ludington - Keybanc Capital Markets

Okay. And then when you talk about all of the cost savings initiatives, I think looking at it, I kind of put together about $40 million or so year over year that you might have in fiscal ’10? It seems that maybe some more of that hit in the fourth quarter of ’09 than I would have expected. Is that still -- do you still have room for $40 million more in cost savings year over year?

Marguerite N. Duffy

Probably not. I would say out of the $45 million to $50 million, a fair amount, about maybe 40% of that has been in ’09, so a little less, maybe more in the $30 million range towards fiscal year ’010.

Brad Ludington - Keybanc Capital Markets

Okay. And then I want to clarify a point too on cost of sales in spite of the discounting and the impact that has on cost of sales -- we still expected for the full year that COGS will benefit, will go down year over year versus fiscal ’09?

Marguerite N. Duffy

That costs will be [higher]?

Samuel E. Beall

No, higher, not lower.

Brad Ludington - Keybanc Capital Markets

Higher, I’m sorry. I thought I read lower in the release but I was kind of in a rush, so I probably read that wrong.

Samuel E. Beall

-- on that, Margie?

Marguerite N. Duffy

Higher.

Samuel E. Beall

Did we say how much?

Brad Ludington - Keybanc Capital Markets

Okay, well, that covers my questions. Thank you very much.

Steve Rockwell

Okay, we’ve got two more questions.

Operator

(Operator Instructions) Our next question will be from the line of Thomas Forte with Telsey Advisory Group.

Thomas Forte - Telsey Advisory Group

Two questions -- one, I was hoping you could give a few more details on, you had made a comment about your customers and changeover time and now you thought you were attracting the same group as Outback and Olive Garden. To what extent do you think that is driven by some of the more value-focused promotional activity and then to what extent do you think you are bringing your old customer back, looking for a promotion? And are you going -- you know, what’s your ability to keep that customer over time?

And then a second question after that on stimulus and geography.

Samuel E. Beall

First of all, our customer makeup is a bit different today than it was three years ago when we started on this journey. The incomes are reflective of that and they are really different. The incomes are more of say the Outback guests versus the Applebee’s guest. I am sure we still overlap some but it’s probably overlapped more maybe at the lower end, I guess, just based on the income information, and overlapped more with Outback maybe at the mid and higher level. And I think that’s really just right on strategy for us.

The other part of your question was what again that was tied to that?

Thomas Forte - Telsey Advisory Group

Sure, it was your ability to keep that customer in the future when you --

Samuel E. Beall

I think our ability to keep that customer is no more difficult than it is for anybody spending $100 million on television to keep their customers. I think it’s the same issues, just a different medium to get to them.

Thomas Forte - Telsey Advisory Group

Great, and then now that you are on the other side of the stimulus checks from last year, what’s your thought on what the benefit was last year, if there was any? And then to what extent would you say that some of the performance this year may be attributable to lower gas prices, especially in the Southeast part of the country?

Samuel E. Beall

Gosh, I don’t know. I mean, I don’t think we got a whole lot from stimulus but -- I don’t know. And we were doing so poorly last year, I’m not sure I could tell.

Thomas Forte - Telsey Advisory Group

Can you gauge the level of performance in the Northeast locations versus Southeast?

Samuel E. Beall

Sure we can. I mean, I think Kimberly mentioned we are on parity with Knapp or better than Knapp, actually in all but one region on sales and last year I think at this time, or at least in October we told you we were down running 10% or 12% and way off in that in the southern markets. The northern markets were stronger for us back then. So they have improved and maybe that’s partially because of gas. I think it’s probably more of the unit by unit, market by market type promotion, street fighting warfare kind of stuff. But it’s probably a combination of everything.

Kimberly M. Grant

We’ve also experienced a closer sales experience between the north and the south, you know, with the market by market strategies, we’ve been able to close the gap in the southern markets that we’ve spoken about in past conference calls.

Thomas Forte - Telsey Advisory Group

Great. Thank you very much.

Operator

Your next question comes from the line of Joseph Buckley.

Joseph Buckley - Banc of America

Thank you. I just have two quick ones, I think -- Margie, do you have the all-in debt number available, the [inaudible] suggested debt number?

Marguerite N. Duffy

I believe it was about 752 -- let me look. Just a second.

Samuel E. Beall

Joe, what’s your second one?

Joseph Buckley - Banc of America

The second one is just to clarify the stock compensation expense. What did it look like year over year in the fourth quarter and what is it going to look like year over year in the first quarter?

Marguerite N. Duffy

For the year, it should be approximately $1 million higher than the prior year. And for the first quarter, the total is $4 million to $5 million, so that would be $1.5 million to $2 million higher than the prior year.

Joseph Buckley - Banc of America

Okay, and in the fourth quarter, would it have been $1.5 million to $2 million lower year over year?

Marguerite N. Duffy

Oh, in ’08 versus -- 8 versus 9?

Joseph Buckley - Banc of America

Yeah.

Marguerite N. Duffy

Okay, I’m sorry. I was giving you 9 versus 10, and that --

Joseph Buckley - Banc of America

Yeah, no, I wanted that as well.

Steve Rockwell

Joe, why don’t you give me a call and we can go through the numbers on this, rather than just --

Joseph Buckley - Banc of America

Okay, will do.

Samuel E. Beall

The other question?

Joseph Buckley - Banc of America

It’s just me. Thank you.

Samuel E. Beall

The all-in debt number?

Steve Rockwell

752.

Samuel E. Beall

752? Okay. And do we have one more, Steve, or is that it?

Steve Rockwell

Yeah, we have time for two more, I think.

Samuel E. Beall

Okay, two more.

Operator

Your next question comes from the line of Anthony [Visono] with Trapeze Asset Management.

Anthony Visono - Trapeze Asset Management

Good evening, guys. Congratulations on a good quarter. I have a couple of questions, just housekeeping mostly, but can we walk through what’s assumed for commodity costs for ’10, how much is hedged or where are we in the process of hedging that?

Samuel E. Beall

Our commodity costs are solid. We don’t anticipate really any increases there for this year. Again, all of it -- it’s not hedged but we have contracts on 95% plus of everything. I mean, everything we buy, we have contracted out. It all comes due throughout the year.

Anthony Visono - Trapeze Asset Management

Okay, so that’s looked after for ’10?

Samuel E. Beall

Pardon?

Anthony Visono - Trapeze Asset Management

That’s already been looked after for 2010?

Samuel E. Beall

Yes.

Anthony Visono - Trapeze Asset Management

Okay, and just on the --

Samuel E. Beall

I mean, we have some things, like hamburger -- or steak is locked through December, so we’ve got another six months on that and here in the next few months, we’ll extend it out further but it’s all locked in advance, well enough in advance of any menu printing before you could adjust and compensate.

Anthony Visono - Trapeze Asset Management

Perfect. Just to switch gears on the real estate side, you noted something during the script that you’ve sold some units this quarter. How many units still remain in terms of what’s earmarked for sale?

Samuel E. Beall

Earmarked for sale, excess properties --

Marguerite N. Duffy

Surplus properties, approximately 30 to 35 properties.

Anthony Visono - Trapeze Asset Management

Okay, and this quarter, do you have any in the portfolio that fall outside that number that are negative cash flow?

Samuel E. Beall

Well, sure, we always have a few that are negative cash flow.

Marguerite N. Duffy

Yes, approximately 11.

Anthony Visono - Trapeze Asset Management

Okay.

Samuel E. Beall

But it’s very small dollars -- I was looking at that list the other day, Sunday, and I think we have the two largest ones are brand new, or units that are emerging markets and then the bulk of those, probably eight of those are probably $16,000 a year or something. I mean, they are very low amounts.

Anthony Visono - Trapeze Asset Management

Perfect. The franchisees that are catching up to you guys in terms of just the marketing initiatives, and you noted that June has already captured some of that discrepancy, if you would, for Q4, could we talk about traffic for June and what we are seeing? Was it consistent with Q4?

Samuel E. Beall

We’re not -- no, I mean, -- we’re not commenting on the first quarter. I don’t want to do that. We are trying to go to a quarterly system like a lot of other people. I just don’t want to get into that.

Anthony Visono - Trapeze Asset Management

And you noted that the CapEx budget is mostly IT. I guess --

Samuel E. Beall

No, we said it’s mostly -- it’s maintaining units, of course. You’ve got 600, 700 units, you know, company-owned units out there. We do have more technology in it than last year, yes.

Anthony Visono - Trapeze Asset Management

Can you break that down for us in terms of what’s IT and what’s maintenance?

Marguerite N. Duffy

It’s primarily, of the $17 million to $20 million, the IT portion of it is no more than $2 million.

Anthony Visono - Trapeze Asset Management

Okay. And just on the D&A, just conceptually, just big picture here, 10 still captures I assume some of the accelerated depreciation from the maintenance or the refresh -- when do we start to get to a normal level where your D&A starts to mirror what your CapEx on a go-forward basis is?

Marguerite N. Duffy

Fiscal year ’10 is a normal level. That’s anything that was written off and anything that was added is now buried in those projections.

Anthony Visono - Trapeze Asset Management

Okay, so we can expect that number as a percentage of sales, or as a ratio to go forward to remain relatively constant?

Marguerite N. Duffy

That’s right. Well, as you’re not opening restaurants now, it’s going to continue to decline because you have another year of fully depreciated assets -- your equipment has a shorter life, so you’ll have another year of that [in time].

Samuel E. Beall

-- what, $5 million to $8 million a year probably, something like that.

Marguerite N. Duffy

That’s right.

Anthony Visono - Trapeze Asset Management

And just one more to hog up the line -- and just again conceptually big picture here in terms of sale leaseback, are we seeing any improvement there in terms of discussions, or if we are having discussions at all in terms of the cap rates or in terms of appetite?

Marguerite N. Duffy

[inaudible]

Samuel E. Beall

But we really don’t have any discussions going, regardless what the rates are right now.

Anthony Visono - Trapeze Asset Management

Okay. Appreciate it and congratulations again. Thank you.

Samuel E. Beall

Okay, last question, please, if there is one -- if not -- is there another question?

Operator

Yes, thank you. Our final question is from the line of Paul Lester with Cowen.

Paul Lester - Cowen & Company

Okay, thanks. If I could just have a little more commentary, if you don’t mind -- it looks like your fiscal 2010 outlook for your payroll and other expense line items is generally flat and most of the margin decline is going to come from food. I was wondering if you could just give a little more color on some moving parts and why you expect to hold those line items flat with a down 3% comp outlook.

Marguerite N. Duffy

That’s when we continue to see some of our cost-savings come into play and with food though, a lot of that has been reinvested as we invest in our lobster, our portion sizes that we mentioned. But on the labor lines, for instance, we’re still -- we will still lap that in the first half of the year as we continue on those new processes.

Paul Lester - Cowen & Company

And other expense line items, is there anything positive or negative moving that line item one way or the other?

Marguerite N. Duffy

Yes, absolutely -- we continue to see lower supply cost and our cost savings will continue to lap that in the first half of the year as well. Lower maintenance costs, all of the programs we’ve put in place will continue to benefit from that in the first half.

Paul Lester - Cowen & Company

And I am right to assume that those two line items are roughly going to look to be flat year over year in 2010?

Marguerite N. Duffy

Roughly.

Paul Lester - Cowen & Company

Great, thanks.

Samuel E. Beall

All right. We want to thank all of you for joining us and please give Steve a call if you have any follow-up questions, and thanks for listening in. Have a great day. Bye.

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