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Ruby Tuesday, Inc. (NYSE:RT)

F1Q10 Earnings Call

October 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

Joseph Buckley - Banc of America Merrill Lynch

Brad Ludington - Keybanc Capital Markets

Robert Derrington - Morgan Keegan

Thomas Forte - Telsey Advisory Group

Jonathan Waite - Precipia Research

Keith Siegner - Credit Suisse

Operator

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

Steve Rockwell

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

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

We plan to release second quarter fiscal 10 earnings in early January. Our first quarter earnings were released today after the market closed. 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 a review of our first quarter 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 Q&A.

I will now turn the call over to Sandy.

Samuel E. Beall

I want to thank everyone for joining us this afternoon. Our first quarter we think was a good one. We made progress towards all of our key objectives for the year. Those objectives are to get customers in seats, increase restaurant traffic and sales, to maximize cash flow and reduce our debt, and to further strengthen our brand quality for high quality casual dining food and service and by providing our guest with a compelling value. I will update each of these areas.

First, getting guests in the seats -- our same-restaurant sales were down 3.1% for the quarter, which for the times is pretty good, we think. That’s compared with 3.2% decline in the fourth quarter, I think 6.8% the quarter before that and then a 10.8% drop in the first quarter of last year. So we have positive trends, positive momentum.

We have budgeted sales at company restaurants -- we had budgeted sales at company restaurants to be softer than in the fourth quarter and in the context of weaker Knapp-Track sales in the quarter, we are very pleased with our performance. We outperformed Knapp-Track by nearly four percentage points.

Our traffic was stronger than our same-restaurant sales and was up approximately 3%. Traffic as reported by Knapp-Track also weakened in the first quarter relative to the fourth quarter and in contrast to our improved traffic, and we outperformed Knapp-Track by 9 to 10 percentage points.

Our marketing program, which is a combination of print, Internet, TV, and community-based promotions, continues to resonate with our guests. The response to our marketing also indicates, we believe, that the brand repositioning is being recognized and appreciated as our guests because they continue to come back and join us from our advertising efforts.

Keep in mind that our brand reimaging was completed only a little over a year ago and we think that the full impact of this will be realized over the next three to five years, as people come in and see the new Ruby Tuesday.

Margie will go over the specifics of our cash flow and debt pay-down. We continue to do a great job of controlling costs, maximizing cash flow and paying down debt, as evidenced by the $107 million of debt pay-down in the quarter.

Our third priority is to further strengthen the brand for quality. Although less quantifiable than same-restaurant sales or debt pay-down, many of the actions we have taken are consistent with high quality casual dining positioning. The introduction of lobster tails on our menu at the end of fourth quarter is a good example of this. At the end of this quarter, we began the rollout of our four course high quality casual dining Sunday brunch system-wide. This new day part and product offering has received strong favorable reviews by our guests and to use a baseball analogy, it’s a nice single in our arsenal of sales-building programs that we are implementing this year.

Our guest satisfaction index scores continue to improve with our top box score on a 1 to 5 scale increasing more than 5 percentage points from the first quarter of last year. It is now over 64% and still rising in September.

Our focus for the rest of the year will be the same as in the first quarter -- get guests in seats, maximize cash flow and reduce debt and strengthen our brand through quality programs.

I will now turn the call over to Margie to discuss our financial performance in more detail.

Marguerite N. Duffy

Thank you, Sandy. And as Sandy mentioned, we continue to be encouraged by our sales and especially by our traffic trends that flow through to cash flow and earnings, and the strengthening of our balance sheet through the pay-down of debt from both cash flow from internally generated and our equity offering in the quarter.

I’ll review the quarter and update our guidance for fiscal 2010.

We reported first fiscal quarter fully diluted earnings per share of $0.11 versus $0.01 last year. Total revenue decreased 7.2% during the quarter, primarily reflecting the 3.1% decline in same-restaurant sales and a net decrease of 45 company-owned restaurants from the same quarter of the prior year, largely reflecting the 43 restaurants we closed in the third quarter of fiscal 2009. We closed two restaurants and didn’t open any in the first quarter.

Franchise revenue declined 53%, primarily reflecting our branding temporarily reduced or deferred royalties for some franchisees and a decline in same-restaurant sales of 6.5% for domestic franchise restaurants in the first quarter.

The restaurant level operating margin was 15.9% for the quarter, compared with 17.1% a year earlier.

Food costs increased to 30.2% of sales versus 27.3%, primarily because of our value initiatives. A portion of the increase in food costs was also attributable to the introduction of lobster late in the fourth quarter which has a high food cost but great product, a shift in menu mix corresponding to our value promotion such that our guests are ordering higher cost menu items and we are seeing our dinner menu mix increase there, and value-enhancing programs such as offering endless fries with burgers and our $5 drink of the day.

In general, we continue to experience favorable commodity costs which allow us to continue to invest in higher quality.

We are pleased with the decline in labor costs as a percent of sales to 33.6% from 34.2%, reflecting the impact of our cost-saving initiative and the new labor scheduling process.

Other restaurant operating costs were down 110 basis points, reflecting good cost controls across the board and lower utility costs, reflecting a combination of lower rates and usage.

Depreciation was down 90 basis points as a percent of sales, primarily because of savings from our third quarter restaurant closings and second quarter impairments, as well as assets becoming fully depreciated since the prior year.

SG&A expenses declined 180 basis points as a percent of revenues. Contributing to the decline were reduced advertising costs as marketing dollars were shifted from television to promotions, and lower supervisory labor as we increased the span of control for both regional and area supervisors. These items outweighed higher stock-based compensation expense.

Effective at the beginning of fiscal 2009, we changed the date of our equity grants to the first quarter from the fourth quarter, resulting in only a small transitional aware granted in the first quarter of fiscal 2009. We have equity and losses of our franchise partners in contrast to equity and earnings due principally to their soft same-restaurant sales and providing more fee relief in the prior year.

Interest expense in the quarter declined $5.4 million from $9.8 million -- declined to $5.4 million from $9.8 million, 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. Our spread to LIBOR will reduce another 100 basis points in the second quarter because our leverage ratio is below 3.5 times.

Closure and impairment expenses were down year over year, reflecting lower restaurant impairments and gains on sales of surplus properties during the first quarter.

Our tax rate was 17.4%.

Turning to the balance sheet, our book debt including current maturities was $386 million, down from $493 million at the end of fiscal 2009 and $565 million a year earlier. We paid down $107 million of debt in the quarter, including approximately $73 million from the proceeds of our equity offering in July and $34 million from internal sources. We are especially pleased to have paid down $179 million of debt over the last 12 months, significantly improving our balance sheet and widening the cushion relative to our debt covenants. Our debt to total capital is now in line with many of our casual dining periods and our book debt to EBITDA is below three times, surpassing one of our near-term financial objectives.

Our guidance is as follows -- we do not expect to open any new Ruby Tuesday restaurants in fiscal 2010 and anticipate closing 15, consistent with our previously announced plan to close 30 restaurants over the next several years when their leases expire. There are currently six franchise restaurants, three of which are international, that are expected to open in fiscal 2010.

We project same-restaurant sales for company-operated restaurants to be down 1% to 3% for the year. We expect the restaurant operating margin to 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 expected to be $62 million to $65 million. SG&A is targeted to be down approximately 10% year-to-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.

Interest expense is expected to be in the $18 million to $20 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.

Diluted earnings per share in fiscal 2010 are estimated to be in the $0.50 to $0.60 range, taking into account the approximate $0.07 dilution from our recent equity raise. Capital expenditures are expected to be $18 million to $20 million and we estimate we will pay down $165 million to $175 million of debt during the year.

We are encouraged by the progress we have made in the last year to improve our operating results and strengthen our balance sheet. Our principal financial goals are to maximize our cash flow and further strengthen our balance sheet by paying down our debt as rapidly as we can.

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

Samuel E. Beall

Thank you, Margie. Our mission is to be the best in bar grill by delivering a high quality casual dining experience with compelling value to every guest. We have consistently executed on the same brand strategies for the last four years to support this mission. They are uncompromising freshness and quality of food, gracious hospitality, a fresh new look, and compelling value. These strategies are central to our brand and are the foundation of our company culture.

As I said earlier, we are focused on three things -- first, get guest in the seats; second, maximize cash flow and reduce debt; and third, continue to improve the quality of our operations.

Now I would like to introduce Mark Young who will discuss our sales building strategies in a little more detail, followed by Kimberly Grant, who will review our operations, and then I will wrap things up.

Mark Young

Thank you, Sandy. For the last two conference calls, we have discussed the change in our overall marketing strategy to a much broader one encompassing four pillars -- traditional media, print promotions, Internet activities, and community-based programs.

This shift from a one-dimensional strategy based on traditional media has been a primary driver behind our improving same-restaurant sales trends relative to Knapp-Track and our increased guest traffic. We have devoted considerable resources to customizing our marketing to specific markets and even down to the individual restaurant level. This has enabled us to respond quickly with a different program if a restaurant or a market is not achieving expected results. For example, we were not seeing a stronger response to our promotional activity in the Atlanta market. To address this, we adjusted our plans and modified our distribution method of incentives and are pleased with the response we have seen from this change.

We believe our market-to-market approach is a key factor in the strong response rates we continue to see with our print promotions. Typically, you see the response rate gradually weaken over time. However, that has not been the case since we initiated our new strategy nearly nine months ago.

We continue to emphasize menu innovation as a way to increase traffic. Our goal is to develop a series of menu items and product extensions that support our high quality casual dining position, leading to increased frequency over time and broaden our appeal.

We are focused on variety, [frameability], and improving what is already on our menu.

On our last call, we mentioned the addition of lobster tails to our menu as an example. Another example is our four-course Sunday brunch program that Sandy mentioned earlier, which was rolled out within the last month.

We are currently testing a new menu that highlights several new items with bold flavors and more variety that continues to broaden our appeal and should lead to increased frequency.

Just like with our food, we continue to test several beverage programs that support our position of high quality casual dining with great everyday value. We have a goal to increase our average check to the $12.50 to $14.50 range from the mid-$11 range we see today. The first step to accomplish this goal is to increase our customer traffic, since it is easier to manage check when demand is increasing.

With our customer traffic up, as Sandy mentioned, we can now work on increasing our average check. This can be accomplished in several ways. The most obvious is through the menu price increases. While we believe we have some ability to raise prices on selected items, in this economic environment we will be very cautious to do so.

A second way is through new product introductions. Both the brunch and lobster dishes are resulting in a positive impact on our check.

Shifting menu mix is a third way. The current test menu is designed in a way that initially is resulting in a higher check through more appetizers and dinner type items.

The last way to increase check is through reduced incentives as we overlap our promotional efforts in January. We are carefully monitoring our check building programs to ensure that an impact on traffic does not offset the positives of a higher check.

Now Kimberly will give you a little more information on the sales team and guest satisfaction.

Kimberly M. Grant

Thank you, Mark. As Sandy mentioned earlier, our same-restaurant sales have outperformed those of our peers for each of the last two quarters and same-restaurant guest counts have outperformed for the last three. More importantly, our same-restaurant guest traffic has been positive for the last two quarters, performance that stacks up well against any of our major competitors.

We do realize that some of this outperformance may be attributable to our softer prior year comparison. However, we firmly believe that our value message is effectively driving guests into our restaurants, where they are able to enjoy our upgraded menu, improved food quality, and the enhanced service experience.

Now keep in mind that we finished our reimaging just a little over a year ago and as Sandy mentioned, we expected to take up to three to five years to get the full impact from our efforts.

We also continue to perform well on a regional basis, with our same-restaurant sales and guest counts now outperforming in all six of the Knapp regions where we have company restaurants. Guest counts are positive in five of the six regions and down only slightly and fractionally in the sixth.

Our local approach to marketing has enabled us to effectively close the gap in sales between our northern and southern markets and turn what was once our weakest region, the east south central region, which includes company restaurants in Alabama, Tennessee, Mississippi, and Louisiana into one of the strongest in terms of guest count.

Our operational fundamentals remain very strong, our management turnover for the quarter was under 20%, and our hourly turnover was slightly over 100%, both of which are very low level.

Our first quarter is typically our seasonally highest hourly turnover quarter; however, our results improved by 20 percentage points from the first quarter of the prior year. We believe we are definitely on track to achieve a sub-100% hourly turnover for this fiscal year.

We also continue to experience exceptionally high levels of guest satisfaction with our top two box scores for our four key attributes, which include overall experience, value, intent to revisit, and intent to recommend. All of these scores for top two box are over 92%. These scores represent the experiences of approximately 120,000 of our guests each quarter and we have been tracking these scores for a little over two years.

Our top box scores, which are the key to driving loyalty and repeat visits, continue to increase and just under two-thirds of rate their overall experience a 5 on a 1 to 5 scale. We continue to experience incremental improvement in our guest satisfaction scores, even as we have integrated many cost-savings initiatives into our business model over the last year.

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

Samuel E. Beall

Before I get to the wrap-up, I want to add something to what Mark was saying about the marketing -- of course, we don’t tell you a whole lot about marketing because we don’t want to share everything with our competition. But I do want to say this -- we are very aggressively going after traffic and we are getting it. It’s our P1 -- we manage it every week. We sit around a table for about two hours every week deciding what we can do different to build sales. It's great intensity and focus is spent on this but it really comes down to really four real things that we are doing.

The print strategies, which are really all limited time food offers of big, wonderful dinner house food, it is working. It is getting people in but -- and also our local store marketing and Internet strategies are helping but what is key to this as I get right -- that we believe, anyway, is that it’s the brand, it’s that new brand, that fresh new look, the people, the food, the menus that they see when they go in and say gosh, I didn’t realize Ruby’s was like this. You know, and it’s such a wow to them, they are coming back. And when they see one of our incentives versus a TV ad, they want to use it because of the experience they’ve had.

And I think also in addition to that, we have -- we are very aggressive and I think creative in building some sales building tools like the brunch we mentioned we roll out or our happy hour, our beverage programs. And we have more of those coming, so it’s really the combination of four things, if not more, that are really driving our traffic results and we think that the intensity on all of them, on all of those will stay in place forever. So a little more information on that.

Okay, in conclusion, we’d like to leave you with the following key takeaways from the call -- one, we are building sales and especially traffic momentum. We are getting guests in seats. They like what they see and we are strengthening our brand. We continue to get closer and closer to being able to be positive hopefully soon or in the future.

We are laser focused on improving profitability, increasing cash flow and paying down debt, and further strengthening our brand, which we said two or three times. We have a well-thought out and proven marketing strategy that I just elaborated on in place to maintain our -- to build guest counts and to maintain our momentum there, which will eventually drive positive same-restaurant sales.

We have significantly improved our balance sheet through the aggressive pay-down of debt. You know, like when Margie reflected back, we were at $586 million and today we are in the $300 million range, et cetera. I think we’ve done a great job there. If you reflect back just a year ago, [weren’t very well thought of]. Today it’s a little bit -- it’s quite a bit different because we have managed things aggressively.

But with that, I will open it up for any questions that you may have for any of us.

Question-and-Answer Session

Operator

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

Jeffrey Omohundro - Wells Fargo

My first question is related to the franchise performance and the deferrals. I wonder if you could elaborate a little bit more regarding that situation and perhaps what else you are doing to assist them during these challenging times, and what else you might be considering doing?

Samuel E. Beall

Well, as far as the deferrals, I’ll let Margie touch on that in just a second. As far as what we are doing, you know, sales are tough out there and of course, they are more leveraged than we are so it’s even tougher on them. They went -- I think we mentioned this on the last conference call that they went on all of our marketing programs, efforts as of June 1 on a two-year basis. They are really about the same as the company. They had a better year last year. They are having a tougher year this year but I think actually in September, they are running the same as company, aren’t they now, after 90 days of that? Somebody? Isn’t that right?

Marguerite N. Duffy

Yeah, we’ve closed the gap.

Samuel E. Beall

Yeah. And then as far as --

Marguerite N. Duffy

As far as the financial impact, if we look year over year at the franchise revenue line, when we defer fees, we basically put those on the cash basis so we don’t recognize those until they are received. Looking year over year, we would anticipate about $1.5 million to $2.5 million less in the franchise revenue line from a conservative perspective, and we’ll see how the year pans out with regard to sales.

Samuel E. Beall

And on a two-year basis, Jeff, they are the same.

Jeffrey Omohundro - Wells Fargo

My other question was on the commodity outlook. I wonder if you could just give us a little more detail on that. Certainly it’s been helpful, the commodity trends, pretty good given the value strategies. How do you see it evolving through the year? Thanks.

Samuel E. Beall

Through this fiscal year?

Jeffrey Omohundro - Wells Fargo

Yes.

Samuel E. Beall

We don’t see anything changing at all. We are already locked in well beyond this fiscal year.

Marguerite N. Duffy

And as far as looking at food cost as a percent of sales, for instance, I think looking back at where we were fourth quarter last year, looking at that range for the full year is a fair way to look at it.

Samuel E. Beall

Our food costs are in line -- you know, if you didn’t have the promotional expense, our food costs are basically stable. We are making quite a few investments also. When you add something like a lobster, lobster is not cheap. When you are selling it for that $16.95 to $18.95 area, we continue to invest in our food quality.

Jeffrey Omohundro - Wells Fargo

Very good. Thank you.

Operator

Thank you. Our next question comes from the line of Joseph Buckley with Banc of America Merrill Lynch.

Joseph Buckley - Banc of America Merrill Lynch

Thank you. Could you talk a little bit more on the marketing -- what’s been the most effective incentive or the most effective way for you to drive traffic? What gets the most response?

Samuel E. Beall

I’m not going to tell you that. We won't talk about that. I mean, everybody else listens in and they don’t tell us their TV buys either, so --

Joseph Buckley - Banc of America Merrill Lynch

That’s fair. You mentioned the span of control expanding, I guess, for the multi-unit --

Samuel E. Beall

And that’s really what we did like six or nine months ago that we talked about. We are still just getting the benefit of that versus the previous year.

Joseph Buckley - Banc of America Merrill Lynch

Okay, so it’s --

Samuel E. Beall

Yes, it’s done.

Kimberly M. Grant

And Joe, also we didn’t do it across the board. What we did is we identified the best operators that we have in the company, which we call operating partners, and we expanded their span of control but there’s still a good bit of directors still running approximately five to six restaurants, which is similar to what we had in the past. It’s just we’ve taken the best of the best and expanded their [spans]. We didn’t do an across-the-board everyone operates more restaurants.

Joseph Buckley - Banc of America Merrill Lynch

Okay, and for those best operators, what would be the increase in terms of store responsibility, just roughly?

Samuel E. Beall

Ten-ish.

Kimberly M. Grant

It depends on their talent. We don’t have a set number of restaurants. You know, it averages about 10 but some, depending on the proximity, can run more than others. It depends upon the quality. That’s most important and then we determine the number of restaurants they oversee.

Joseph Buckley - Banc of America Merrill Lynch

Okay and then just a question on the franchisees and Sandy, you mentioned that they are more levered than you guys are, are many of them in trouble with their debt covenants currently and just maybe elaborate a little bit on what the company exposure to that might be and how you might react if a franchisee was facing serious bank issues.

Samuel E. Beall

We have -- I know we have four that are on our watch list and although we say four every quarter, it ends up being that. Some get out of trouble, some go on. We have -- if somebody needed to go file Chapter 11 or something, that wouldn’t bother us at all. We wouldn’t want them to but we are not going to be necessarily be the savior.

When we discount our fees, we generally have -- hopefully we have other people do that also to help them. And I think that’s a positive move and that we are not in our by ourselves. And of course, our maximum exposure is what you see on the Banc of America loan, but it will only have four out of 13 who are extremely tight, say. But they are not any tighter than they were a year ago, or two years ago either, Joe. So I mean, maybe you could have issues with one. I hope not. I don’t think so. But you could and so you -- you know, that’s a small amount of money but yeah, it could be $3 million or $4 million or $5 million, I guess, or something. But we don’t expect that right now.

Joseph Buckley - Banc of America Merrill Lynch

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Brad Ludington with Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

Thank you and congratulations on the continued performance. I wanted to start off asking about the comments on the potential to reduce, you know, pull back some on the discounting part of the promotions. Is that something that you maybe would consider before the calendar year ends or more than likely as you lap the rollout of this program in January?

Samuel E. Beall

Well, we are trying to be more efficient in many ways. One is I think the things that affect that are on our food promotion efforts, food promotions with an incentive to come in, and that incentive varies across the board, kind of. It will be different next year than it was this year and it’s different right now than it was last spring, you know, et cetera. So that will vary but as the economy gets a little bit better, or as we get more efficient, sure we’ll be able to reduce that expense. I mean, that was pretty heavy last year and I think we will be able to reduce that expense.

You know, it’s just changing but I think what is most important is we want to drive traffic, that is what is most important to us right now and we will continue to drive positive traffic at whatever cost that represents.

Brad Ludington - Keybanc Capital Markets

Okay. And then the rollout of the brunch menu, I think you said that it was system-wide now. Is that system-wide franchise as well or just system-wide on company stores?

Samuel E. Beall

Actually, Kimberly, is it franchise right now?

Kimberly M. Grant

Yeah, it’s only about 100 restaurants of the entire system are not offering brunch today and in most of those cases, it is because they may be in a location that doesn’t have access early in the morning or it just didn’t make sense.

Brad Ludington - Keybanc Capital Markets

Okay.

Kimberly M. Grant

-- company and franchise.

Samuel E. Beall

I will say, commenting further because what you are trying to get to is, you know, promotion check and all that, we expect, especially as we overlap our coupons, we still very much want to get to our $12.50 to $14.50 check and we think by the back part of the year, we’ll be on a positive slide on that instead of a negative slide. And that’s a combination of hopefully some efficiency of coupons, product offering, selling more dinners, the things we’ve talked about before, as well as some price when you can get it when the consumer will let you have some of it. So we think that’s closer to reality now than it has been for the last two years or so.

Brad Ludington - Keybanc Capital Markets

Okay, and then finally, do you have what the adjusted leverage ratio was, just more so we can kind of try to project out interest rates?

Marguerite N. Duffy

Where we ended the quarter?

Brad Ludington - Keybanc Capital Markets

Yeah.

Marguerite N. Duffy

It’s 3.25.

Samuel E. Beall

On debt-to-EBITDAR.

Marguerite N. Duffy

That’s right.

Samuel E. Beall

But on debt-to-EBITDA, it’s only -- it’s less than 3.

Marguerite N. Duffy

That’s right.

Brad Ludington - Keybanc Capital Markets

Thank you very much.

Operator

Thank you. Our next question comes from the line of Robert Derrington with Morgan Keegan.

Robert Derrington - Morgan Keegan

Thank you. Sandy, looking at the guidance you provided last time on your conference call, there is a lot of impressive trends, basically looking at same-store sales, you now expect comps of down 1 to 3 versus down 2.5 to 3.5 before. When you look at the -- I guess all the factors that are improving that, and especially as you go deeper into the fiscal year, the comparisons are much tougher. So it sounds like there’s a combination of these things that will help the check in the second half of the year. What of these different programs, Sandy, do you think will be the most impactful or most helpful at improving that trend in the second half?

Samuel E. Beall

I think -- really what I was talking -- I think you can have some price in the second half. I think you can have some benefit from if we execute on what we think, we’ll have less coupon or promotional expense. And then I think we’ll have some check from some of our newer, more dinner oriented items. So I think it’s a combination. The combinations -- nothing we are doing is one thing. Everything -- we’re just trying to have lots of singles that we are hitting out there. I think this is an example of it. We are not relying on one thing to get us the results we’re hedging our bets on.

You know, you commented on the guidance, et cetera. It was kind of funny because we lowered the -- we said we might be better but we could be a little bit worse too and I guess what we are saying is since we are feeling better about our business, but it’s also such a volatile, crazy world out there, we don’t know what bad could happen. So we are kind of saying we feel good, we think it could be better than what we gave you last time but then we also realize it could be worse and it sounds crazy, I guess, but it’s the new world.

Robert Derrington - Morgan Keegan

Well, along the line of that guidance, Sandy, looking at last quarter, your guidance for G&A was down in the low to mid-teens and now it’s down approximately 10%, implying you’re spending a little bit more within -- on that G&A line. Can you kind of give us some color of what is shifting there?

Samuel E. Beall

What is shifting on the G&A line?

Robert Derrington - Morgan Keegan

Yes, what is up higher -- what appears to be higher now than what it was last time you gave us guidance? Is it more bonus compensation expense? Is it more reinvestment within the system?

Samuel E. Beall

While they are pulling that out, I know we are -- I mean, we think we are out of the crisis mode and we are running the business a little more aggressively, I guess. It’s not about survival like it was last spring and so we are investing more in several areas and we think we have the money to do that. Steve, what are your comments on that?

Steve Rockwell

There are really probably two major things, Bob -- one is we did increase the bonus accrual or the bonus projection based on our first quarter results and --

Samuel E. Beall

How much was that? Was that the bulk of it or --

Steve Rockwell

It was a good -- yeah, the bulk of it.

Samuel E. Beall

The bulk of it?

Steve Rockwell

And then the other -- another is a related thing with that still a little bit higher stock-based comp.

Samuel E. Beall

So it’s really comp related and we’ll see how that pans out. You know, maybe it won't be the year we are hoping it will be but --

Robert Derrington - Morgan Keegan

And then one last thing, Sandy, if I could -- you’ve got a menu test. Typically the company always has tests going on. What have you learned from the recent round of testing and what -- anything you can share, you are comfortable sharing with us?

Samuel E. Beall

Well, we have our new menu and it rolls out -- actually, it’s been a very good test. It’s going to be a very good menu, our best ever. We’ve been working, as you know, Bob, on this for two or three years. I think this is by far the best menu ever and the only dings we really had is we were trying to get better and better, we were trying to focus more. We heard feedback that our variety, you know, some of our flavor profiles weren’t exactly right and I think we addressed all of those issues that we -- you know, where we’ve listened to the guests through research, et cetera.

The layout of it is better, more geography for promoting our strong beverage programs and our brunch and so forth, so we think it’s a win-win and it rolls out November 3rd.

Along with that, we have quite a few sales building programs between now and next January too that we are hoping will help us offset the volatility or the economy that is going on out there, or give us a break on the up-side.

Robert Derrington - Morgan Keegan

Kudos to your and your team, Sandy.

Samuel E. Beall

Thank you.

Operator

Thank you. Our next question comes from the line of Tom Forte with Telsey Advisory Group.

Thomas Forte - Telsey Advisory Group

I had three questions. The first one was regarding your advertising, your promotional activity, would you say that you think it’s driving more new customers to the restaurants or bringing old customers back?

Samuel E. Beall

To be honest with you, I couldn’t give you -- I don’t think we can give you the exact amount on that. We have what our estimates are but I really don’t know, sad to say.

Thomas Forte - Telsey Advisory Group

And then second, I’m trying to think of the best way to ask, when I think about your sales and adding some more premium items to the menu, can you quantify percent mix from premium products or just for way of comparison, are you seeing a difference in trend for percent mix from hamburgers, per se?

Samuel E. Beall

Sure. I mean, the easiest one, the most important one is that we moved our dinner entrees up from about 25% over the last years to about 45% of sales. That’s dramatic. Our goal is to get it up to 65% -- 65% of dinner mix would represent -- we sell gosh, probably 40% of all of our dinners at lunchtime, even, but that would represent about $0.89 check. That’s the last caveat that we would like to have to get us back in that $12.50 to $14.50 range, and that’s where we are focused on.

But we have moved -- our hamburgers, our beef burgers themselves haven’t really moved at all. I mean, they are about 8%. It’s amazing -- every Tuesday, we sell more seafood than we do anything. So it kind of blows your mind when you think of the old Ruby Tuesday but yes, we are getting good results and we are moving more and more people to dinner, which is what we are trying to do, high quality casual dining.

Thomas Forte - Telsey Advisory Group

Great, and then my last question was --

Samuel E. Beall

-- to that, lobster is over -- yeah, a premium item. We’re selling over 3% lobster.

Thomas Forte - Telsey Advisory Group

Great, and then my last question was could you quantify the impact of store closures on the same-store sales?

Samuel E. Beall

Somebody asked that last quarter and -- or maybe it was the quarter before last, on the ones that, the 43 we closed, and it didn’t have a real positive impact. They are just low volume. They weren’t running way down or one up -- it was no impact at all.

Thomas Forte - Telsey Advisory Group

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Jonathan Waite with Precipia Research.

Jonathan Waite - Precipia Research

Maybe kind of a follow-up to that last question, but if you each talk about the lobster, the brunch -- you know, again are these new guests, are these existing guests that are ordering these? Are you kind of broadening your demographic here?

Samuel E. Beall

We really don’t know right now. I mean --

Kimberly M. Grant

Well, [I can guess] on brunch, brunch is really existing guests because we really haven’t been aggressive about advertising the brunch program as its in its infancy stage, so at this point it’s our current guests there --

Samuel E. Beall

Or word of mouth, their friends.

Kimberly M. Grant

Exactly.

Jonathan Waite - Precipia Research

Okay, so are they coming in more frequently then? Or is this just kind of a --

Samuel E. Beall

We don’t -- you know, that’s only been about for five weeks and we haven’t had a food study since then, but we do a lot of local store marketing efforts on our brunch too, so we very well could be getting new guests in. But it is a positive impact on sales, so something is working.

Steve Rockwell

It’s incremental too, so we’re not --

Samuel E. Beall

It’s incremental, right.

Steve Rockwell

-- losing other day parts to it or anything.

Kimberly M. Grant

Higher check.

Samuel E. Beall

The other piece on it, just on the print incentive strategy out there, we know just from focus groups and different things that we’ve done out there, we do have some lapsed users out there from a brand standpoint so we know that they could have used the brand in the past or whatever it is but we are bringing them back in to the brand, so there are some new guests coming in, there are existing guests but I think there is a lapsed group of users out there that are once again engaged with the brand and realizing the fresh new brand that Ruby’s is going through over the last year to 36 months.

We understand how difficult it is to advertise against a $100 million, $200 million worth of television -- believe me, we get that one. But what we have is we’ve never had and some of the analysts who have been in our restaurants, you know the difference today in Ruby Tuesday and what it was three years ago, and that’s a huge difference. So when our consumers see that for four, five, six times, they really get it, I think. And that is what -- that is really what is driving the success we have but what’s exciting about it, we believe this, anyway -- whether it’s true or not, we believe that that is what can really drive some positive momentum because we are executing well and we are differentiated and it is significantly different than it used to be. It’s positive.

Jonathan Waite - Precipia Research

Okay, so Mark, would you say that then you are getting more on the -- kind of that very light to haven’t been there for a while, that that’s --

Samuel E. Beall

We don’t know. We don’t know. We don’t tell you things we don’t know. We just don’t know.

Jonathan Waite - Precipia Research

Okay.

Samuel E. Beall

I mean, we could guess for you but we don’t want to guess for you.

Jonathan Waite - Precipia Research

Okay. Thanks a lot, appreciate it.

Operator

Thank you. Our final question is coming from the line of Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

Thank you. I just want to ask another question about the franchisee base with the -- what I’ll call the effective royalty rate. I mean, a lot of what we talked about is really encouraging, the one-year trends are getting better, you’ve talked about how the franchisees are even getting better into September once they’ve joined on to some of these marketing programs. So it’s very encouraging, the same-store sales guidance is slightly better than it was, but the effective royalty rate -- in other words, factoring in the fee relief and deferrals was the most aggressive we’ve seen yet. What I’m trying to figure out, and hopefully you can help me with this, is what are the trigger points for reductions in that and have we passed kind of the peak of those programs and can we start to think about that effective royalty rate going back up? Because that’s basically 100% flow-through business. How do I think about that going forward?

Samuel E. Beall

I think the way you have to think about that is you have to be a guesser of -- a guess of what is going to happen out there on the sales. As soon as our sales turn, you know, it’s been going down, down, down for the last 18, 24 months, right? And we’ve taken it on the chin there. Once it turns, once that consumer turns or once the marketing efforts start paying off, et cetera, and they start having the same -- once we can just get our heads above water and get positive on the franchise side, it will be as you say, it’s all profit to us. And so that will be very positive. When that is going to be, we don’t know. I mean personally, I don’t think -- I think we are at the bottom right here, now how long it’s going to be at the bottom, I don’t know. So it may not improve for us for three months, six months, a year, two years -- I don’t know. But I don’t feel it’s going to get any worse so their situation shouldn’t get worse and it’s all upside once it turns.

Keith Siegner - Credit Suisse

Okay, and it doesn’t phase back in -- it’s kind of like once I get to positive, does it kind of shut off or --

Samuel E. Beall

Well, we’re discounting, we’ve told you before, anywhere from what, Margie, six to nine something million dollars in fees, so it won't shut off for a long time.

Marguerite N. Duffy

It would [inaudible] back in, in other words.

Keith Siegner - Credit Suisse

Okay. Thank you.

Samuel E. Beall

Okay. We want to thank you for joining us today. Of course, feel free to call Steve or Margie or whoever you want to around here, but we appreciate you listening in and we thank you for your support, or not, but make a great day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation. Have a wonderful evening.

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Source: Ruby Tuesday F1Q10 (Qtr End 9/1/09) Earnings Call Transcript
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