Sonic Corporation F4Q09 (Qtr End 08/31/09) Earnings Call Transcript

Oct.21.09 | About: Sonic Corp. (SONC)

Sonic Corporation (NASDAQ:SONC)

F4Q09 Earnings Call

October 20, 2009 5:00 pm ET

Executives

Pat Watson – Corporate Communications

J. Clifford Hudson – Chairman and Chief Executive Officer

W. Scott McLain – President

Stephen C. Vaughan – Chief Financial Officer

Analysts

Jeffrey Bernstein - Barclays Capital

Matthew Difrisco - Oppenheimer & Co.

John Glass - Morgan Stanley

Brad Ludington - Keybanc Capital Markets

Nicole Miller Regan - Piper Jaffray

Greg Ruedy - Stephens, Inc.

Steven Kron - Goldman Sachs

Steve West - Stifel Nicolaus & Company, Inc.

Keith Siegner - Credit Suisse

Larry Miller - RBC Capital Markets

Sharon Zackfia - William Blair & Company

Joseph Buckley - BAS-ML

Tom Forte - Telsey Advisory Group

[Jonathan Wait – Precipio Research]

Howard Penney - Research Edge LLC

Christopher O'Cull - Suntrust Robinson Humphrey

Bill Baldwin - Baldwin Anthony Securities

Operator

Good day and welcome to the Sonic Corp. year end conference call. Today’s call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Mr. Pat Watson. Please go ahead sir.

Pat Watson

Thank you, [Lena]. Good afternoon everyone. This is Pat Watson with Corporate Communications. Sonic is pleased to host this conference call regarding results issued this afternoon for the fourth quarter of its fiscal year 2009, which ended on August 31, 2009.

Today’s audio and video presentation may be accessed at the Investors section of the company’s website, www.sonicdrivein.com.

Before we begin I would like to remind everyone that management’s comments in this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company’s future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this afternoon, in the company’s annual report on Form 10-K, quarterly reports on Form 10-Q and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Lastly, I would like to point out that management’s remarks during this conference call are based on time sensitive information that is accurate only as of today’s date, October 20, 2009. For this reason and as a matter of policy, Sonic limits the archived replay of this conference call webcast to a period of 30 days. This call is the property of Sonic Corp. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the express written consent of the company is prohibited.

With those announcements I’ll turn the call over to Cliff Hudson, the company’s Chairman and Chief Executive Officer. Good afternoon Cliff.

J. Clifford Hudson

Good afternoon Pat and thank you. Good afternoon everyone else on the line. We appreciate you participating today in our conference call and our release of information for the fourth quarter of our fiscal year 2009.

The past year and the past quarter has been a challenging one for Sonic. One of the most challenging things is after 22 consecutive years of same-store sales we ended fiscal year 2009 with a decrease in system wide same-store sales, so it’s kind of a painful transition for us but one where our brand has gone through an enormous transition over a sustained period of time. And while the sales were not what we had hoped for, the year also presented an opportunity for us to renew and rebuild our focus on a number of aspects of our company and its business as well as our brand, and continue to move to another level the core elements of our business including the focus on our distinctive food that we’ve had historically, the unique service concept that our business has had and still has, the strong franchising aspect of our business and the solid consistent cash flow that we have built and sustained over a long period of time.

I think its fair to say that the operations and customer service initiatives that we focused on in the past year have begun making a difference both at our partnership drive-ins and also on a system wide level, meaning with our franchise drive-ins as well. And as this year progresses, though it may be more in the latter part of the year, as this year progresses we should start seeing some improved performance in fiscal year 2010.

Over that time, we’ll continue to supplement our core brand strengths and the base business model that we have to improve our sales and earnings performance. Related to that in this call, we’re going to cover a number of topics including an overview of the sales and company performance, the progress that we’ve experienced on a number of initiatives that we have in place to improve sales performance, operational performance, overall financial performance of our company in the near and the long term. We’ll also talk about a review of development within the Sonic system, including some discussion about the impact of the current credit markets and general business outlook and what impact that’s having on development, and finally just a general review of the financial performance and expectations of the company.

There are a number of things I’d like to talk about that I think are good achievements of our company and our system in the last year. As I talked about earlier they’re kind of the refocus and the renewal of effort to continue to build our business and build our brand. One of the first things I’d like to talk about is the implementation of additional customer service tools such as [Sandtrak] that we implemented in the last year. Sandtrak as you’ll probably recall, we’ve talked about in the past, is an interactive voice response tool that provides to us direct customer feedback. Its helped us narrow our focus on aspects of customer service that really matter the most and be able to get that data in a pretty concrete manner, drive-in to drive-in by day part, by day of the week, etc.

The franchise drive-ins for a long time in various measurements have outperformed partner drive-ins including what we were seeing early on with Sandtrak. The nice thing is that as we’ve implemented this over this fiscal year we’ve begun to see our partnership drive-ins close the gap with franchise drive-ins in terms of these service scores. So its been a very positive tool, not something that guarantees sales and profitability but as stated in a reverse sort of way, the implementation of it, the use of it, if you’re not performing these aspects in terms of the measurement there is that it relates to customer service stores, the likelihood of building sales and profitability is greatly diminished. So I think it’s a very good tool for our entire system and probably early on has had just disproportionately positive impact on our own drive-ins, the partnership drive-ins.

In addition to that we’ve also implemented this year’s strategic pricing tool that allows us to have more effective pricing on a broad basis but also at the store level, the drive-in level. And our belief is that this is a good long term piece that allows us to have a good pricing strategy not just by market or by store but a good pricing strategy within an individual store’s menu so that individual items versus combos, etc. have a good weight, one versus the other, in a way that will improve the sales and operating performance of that restaurant over time. So we’ll look forward to the sustained benefit of that. But that is something, too, we’ve implemented in the last year.

A year ago about this time or a little earlier we had announced a re-franchising effort, our intention to re-franchise a portion of our partnership drive-ins. We had announced a year ago that we’d probably be doing a couple hundred of those. We originally thought this would take us several years because of the magnitude of the initiative, but in fact we did that roughly in one year. So the nice thing about that, both new and existing franchisees participated in the acquisition of those drive-ins. So I think it’s a good statement about the brand, a good statement about the system, a good statement about folks wanting to be in the system.

The effect of this of course is it has served to reduce the operational risk of the company and it brings in a diverse human resource base to focus on those operations. And as the performance of those re-franchised drive-ins improves, one of the benefits to us in our franchising model is we’ll see the positive impact of our ascending royalty rate. In addition to that for the drive-ins where we kept a minority interest in the drive-ins, we’ll also get the benefit of not just increased royalty but increased revenue from the drive-ins distributions as well.

And finally as it relates to the re-franchising effort, we would expect to see improved operating margins at the remaining partner drive-ins, those that we continue to own and operate. So we think this has been not only a successful initiative versus a year ago with what our expectations were, but in terms of their import for the income statement and the condition of the company over time it will be very positive.

During the last fiscal year we also set out to focus on the credit strength of our company by improving and enhancing our cash position and paying down debt. Between regularly scheduled principal payments and open market debt purchases, we reduced our outstanding fixed rate note balance by over $60 million. The great obvious thing about this is it has resulted in the reduction in our debt, lowered interest expense and given us more favorable credit statistics, but in addition to that as we’ve gone through all of this and with our re-franchise initiative as well we currently have a cash yield position of more than $125 million. So it really put us in a different position versus a year ago and one which we’re very pleased to report.

In a broader context, as it relates to the brand and the system we continued to generate solid growth as well. With respect to the restaurant development in our system, there were 141 new drive-in openings across the country this past year. There were several new states that we went into that we’re glad to see the brand continuing to expand and for customers to be able to enjoy the pleasure of visiting a Sonic Drive-In in Maryland, Massachusetts, Montana. We’re opening in states that don’t begin with M also but Maryland, Massachusetts, Montana, but in addition to that New York and Wisconsin. And it brings to 13 states the number of states we’ve entered into with new business in the last four years. It’s a good expansion of our brand in the past year as well.

As we look to 2010, our current fiscal year, clearly with the brand and the company and the system operating where it is there’s a lot of work still to be done, and there will be for a good while. Of course focus and part of the initiatives we implemented in 2009 but it also to do with building on those and continue to move. So in 2010 we’ll continue to focus on things like in our marketing area the renewed emphasis on product and service differentiation. We’ve had a good building and response to more challenging economic circumstances in the last year but we’ll have renewed emphasis on product and service differentiation, including the promotions that accentuate why and from our view our brand is the compelling choice for consumers. You will see these initiatives continue to work to elevate product, quality, as well as elevating the personalized service that we offer, made-to-order food and carhop service.

In addition to that into this year we’ll also be reallocating some resources through if you look at the re-franchising we’ve had some SG&A savings we would not have experienced otherwise. And so as we move into the fiscal year we will look at restructuring our field staff to be more market driven by reducing spans and deepening the marketing and operation and development oversight in each market. And that will be reallocating those resources that may have been in one area of our business before the re-franchising and now being put into focusing more intentionally market by market to develop the brand.

As it relates to our development activities, while the credit markets and the uncertainty created by the current business climate will continue to pose a challenge for all of us, including those in our business, we have continued to expand our business across the country. And I think this aspect of our business compares quite favorably versus virtually all of our competitors of any scale. For fiscal year 2010 we would expect that we’ll have further domestic expansion in core, our core developing and new markets that will both increase the reach across the markets as well as the depth of the brand, market by market.

As I mentioned a few minutes ago regarding our financial circumstance, with over $125 million in cash we’ll continue to evaluate a variety of options that can insure that we will increase shareholder value with that cash. And we’ll talk more about that over time.

Shifting to focusing more specifically on the recent quarter, the comments that I would offer for you as to traffic and sales for the fourth quarter, the system wide traffic in the fourth quarter was basically flat. There was a decline of about 0.1%. And the decline in same-store sales was largely driven by average check decline.

Our perspective about that is that from a traffic standpoint is pretty solid given what’s going on in the industry and it pretty significantly outperformed QSR segment of the industry according to [Kreff], due in no small part because some very specific and more aggressive summer promotional activities that we conducted to maintain and grow traffic. You may have heard us talk along the way or seen on national television ads the Route 44 upgrade when you purchased the Combo Meal. So a larger drink, the 44 ounce drink put in place of a medium drink when anyone purchased a Combo Meal. The benefit of this or the effect of this not only benefited growth in traffic or the improvement in traffic but it also helped recapture some of the losses we’d experienced with what had been some over early aggressive Combo Meal pricing prior to that time. So it had more than one positive effect in the summer.

Our view is on the traffic piece, if we continue to stabilize that or continue to retain that traffic it really puts us in some pretty good stead as we come out of the recession over time. Later this summer we also introduced a new line of Limeade Chillers and we did this in July and promoted our burger and shake for $2.99 in August so some new product news moving through the summer. And in some ways if you look at the burger and shake it had a pretty large discount associated with it but it also appealed to customers looking for regular menu items as a special price. And the very purpose of doing that was that’s so much of what consumers are looking for right now in order to continue to build the traffic of restaurants like ours.

For the fiscal year, system wide traffic decreased slightly as you’ve seen already by seven-tenths of a point. Average check on the other hand declined 3.6%. The introduction earlier in the calendar year of our everyday Value Menu, our view of it was successful in terms of helping to maintain traffic, avoid greater declines in traffic as the year went on but avoid that decline in this difficult environment. And the Kreff data that we’ve seen indicated that we have fared better from that standpoint as I mentioned earlier than many of our competitors. The everyday Value Menu has been about 6 or 7% of our sales. It started out 10 to 12% when it was initially introduced and our view is we’ve seen kind of minimal cannibalization across our menu, and a small impact on food and packaging costs. And yet the awareness of that everyday Value Menu far exceeds the use of it when our customers come online.

The decline in check that I was talking about was due in part to consumers figuring out how to use the menu, a concept like ours and others. I mean the consumer is very budget driven these days. They’re buying fewer items when they go out. But in addition to that we’ve also pursued some strategies to build our traffic like Happy Hour that have been quite successful and have driven traffic, but they’re doing so with a smaller check. So this affects us as it relates to the growth of our business.

The main message I’d want to pass along to you is that we are pleased with the fact that we’ve been able to maintain traffic at a relatively flat level throughout the year, particularly in the summer, in a very difficult environment. And we believe that this leaves us pretty well positioned to recapture customers and recapture growth in business when the economy improves and when our customers and the citizens across our country are more fully employed and feeling more confident.

The portion of this that I’d like to talk about I would summarize by saying we think our operating financial incentives that we put in place will continue to help us from an earnings standpoint, improvement in margins as the year progresses. The new product news and promotions that historically have resonated with our customers will continue to do that going forward and complement the service and price initiatives that we’ve put in place in the past fiscal year.

Our perspective on the economic model of our business, our partner and franchisees that are very critical to our success all the more important as we try to build profits over the next year. We will continue to focus in on the franchise business just as we have in the past year and more and that provides more consistent, stable cash flow to our stockholders. And we’ll continue to do that in this fiscal year, 2010 and beyond. We know there’s a lot of work yet to be done and we continue to focus on that quite feverishly, but we also believe that the initiatives we put in place will be effective in continuing to build a long term, sustainable, positive performance for our customers, our franchisees and our stockholders. So we appreciate you participating with us on a sustained basis but also being with us today.

I’d now like to turn it over to Scott McLain, the President of our company and he’s going to talk about some development activity in the most recent fiscal year.

W. Scott McLain

Thanks Cliff. Our overall franchise development activity remains relatively solid despite the challenging conditions faced by our operators.

Last year our franchisees opened 130 new drive-ins, relocated or rebuilt 46 drive-ins and completed 338 retrofits. While that was down somewhat versus the previous year, it’s nice to see our franchisees continue to solidly demonstrate their willingness to invest new capital in the brand.

Our pipeline for future development also remains strong with almost 1,000 drive-ins scheduled to open over the next several years, almost 50% more than we had three years ago. We do however face a number of issues which are constraining our near term development, including the difficult sales and profit environment as well as ongoing credit market challenges.

High credit markets continue to cause significant delays in many projects and will continue to affect the pace of our openings in fiscal 2010. Because of these issues we’re offering an incentive program for franchisees to develop in under penetrated markets and for those franchisees opening multiple stores during fiscal 2010. The incentive package for under penetrated markets provides for free franchisees fees and multiple year royalty relief for drive-ins built by March, 2011.

Franchisees who build multiple stores during fiscal 2010 will pay a reduced franchisee fee on the second store opening and no franchisee fees beginning with the third drive-in. This program is time limited and targeted for fiscal 2010 only. While we anticipate that this program may have a dampening impact on franchise fees and royalty revenues in the short term, we believe that it will have a positive impact to our development and the brand over the longer term.

On the positive side, we continue to see construction and real estate prices fall in most areas. These factors together with lower rent restraint should be very good for us over the long term, as they’ll only serve to increase our franchisees return on investment. And nothing is more important to our long term development prospects than new store ROI.

However, in such an environment franchisees will often take more time than usual to make sure that they’ve negotiated the best deal which may further constrain near term openings. Based on the current projects we have in the pipeline, we anticipate opening roughly 100 to 110 franchise drive-ins in the coming fiscal year.

Another positive factor is the continued strong performance of new drive-ins. For fiscal 2009, overall average opening volumes increased to approximately $1.5 million, roughly 35% ahead of what they were just three to four years ago. Specifically, new stores in new markets such as San Diego, California, which achieved sales of $1 million in 70 days; Wyoming, Michigan, which hit $1 million in 67 days; Seattle, Washington, which took only 55 days to reach its first $1 million and the new record holder, our first drive-in in [Peabody], Massachusetts which hit the $1 million mark in the first 51 days.

We ended the quarter with 3,544 total drive-ins and we’re now operating in 42 states, making continued progress on our way to becoming a truly national brand.

As Cliff mentioned, during fiscal 2009 we entered Maryland, Massachusetts, Montana, New York and Wisconsin. In total we’ve added 13 new states in just the last four years.

Now I’ll turn the call over to Steve Vaughan, our Chief Financial Officer.

Stephen C. Vaughan

Thank you Scott. While our same-store sales and earnings performance reflected the challenging environment in the fourth quarter, it is important to note a number of positive accomplishments that position us well for improved performance in the future.

Most notable among these was the re-franchising of another 11 drive-ins, bringing the total number of drive-ins re-franchised in the fiscal year to 205. This strategic change in the mix of our operations has begun to translate into increased franchise royalties, additional investment income from 88 drive-ins re-franchised this year where we’ve retained a minority ownership interest, and increased rental revenue from the re-franchised drive-ins.

As the performance of these drive-ins continues to improve, we expect to see ongoing upside to royalty and other revenue. Fourth quarter restaurant level margins, while still below the year earlier quarter, continued to stabilize. The most significant factor in this reversing trend was lower labor [inventitives] due primarily to the re-franchising of lower performing, partner drive-ins.

Interest expense continued to decline in the fourth quarter as a result of the reduction of over $60 million in debt during the year. Our cash position increased significantly during the year. Re-franchising proceeds totaled more than $80 million, providing a significant boost to our excess cash position, which totaled more than $125 million at year end.

All of these factors will work together to improve financial performance in FY 2010 and lay a solid foundation for consistent earnings growth over time. We expect to achieve earnings growth during 2010 in the range of 10% to 12% due to the following components, moderate new drive-in development; improved same-store sales trends which we believe are likely to occur toward the latter half of the year; the positive impact of re-franchising on drive-in level margins; reduced interest expense from the continued repayment of debt; and the opportunistic use of our excess cash.

For the fourth quarter, three components comprised our earnings per share of $0.28, which were down $0.05 from the same period last year. First, we earned $0.29 per share from the operating portion of our business which reflected the decline in same-store sales compounded by its de-leveraging impact on restaurant level margins. Second, we recorded a gain of $2.2 million or $0.02 per share from the sale of the operating interest in 11 partner drive-ins during the quarter. And third, we recorded an impairment charge of $3.3 million or $0.03 per share related to several partner drive-ins whose performance indicated their book value had become impaired.

For the full year, earnings per share totaled $0.81 and included similar components. We are at $0.72 per share from the operating portion of our business. We recorded gains totaling $13.2 million or $0.13 per share from the re-franchising of partner drive-ins during the year. We also recorded impairment charges totaling $11.2 million or $0.11 per share related to the impairment of several partner drive-ins during the year. And then in the second quarter we recorded a gain of $6.4 million or $0.06 per share on the early extinguishment of debt at a discount from its PAR value.

Our franchising income, including franchise fees and royalties, increased $2.9 million in the fourth quarter versus the comparable period last year and were up $4.6 million for the year. The net increase in franchising income was comprised of increased royalty revenue from new drive-in development and re-franchised drive-ins, which more than offset the decline in franchisee same-store sales.

The effective royalty rate for the quarter was 3.99%, slightly higher versus the same period in the prior year, but relatively flat for the entire year.

Our restaurant operating margins continued to stabilize in the fourth quarter. A number of factors contributed to the improving trend. The re-franchising of under performing partner drive-ins during the year was augmented by improving commodity costs as the year progressed. These improvements resulted in fourth quarter margin deterioration of approximately 100 basis points, a substantial improvement from the 280 basis points experienced for the full year.

Looking at each individual line item, our food and packaging costs are largely locked in on all major categories through the end of the calendar year. We continue to negotiate renewals of calendar year contracts for a number of items. However, we expect that commodity costs will be slightly lower in fiscal year 2010 based upon current projections. This improvement will likely be somewhat offset by increased discounting, particularly as long as consumer sentiment remains weak. Including the positive impact of recent pricing changes, which I will discuss further in a moment, we feel confident that we will see relatively flat food and packaging costs in fiscal 2010, depending upon the level of discounting associated with promotions.

We completed our first round of pricing adjustments at partner drive-ins, utilizing the new strategic pricing model last November and again over the summer months, completing the implementation of our second round of adjustments utilizing this tool. These adjustments took our cumulative menu price increases at partner drive-ins up by approximately 2.5% on a year-over-year basis. This amount represents an average in actual price increases at individual drive-ins will vary, in line with our new pricing strategy, to customize price increases by trade area and take smaller, targeted increases throughout the year. These percentages do not take into consideration the impact of the everyday Value Menu which has an offsetting impact on pricing.

On the labor line, we faced another increase in the federal minimum wage that went into effect at the end of July. This increase will keep our labor and benefits costs under pressure going forward. However, for the first half of 2010, we will continue to see an offsetting benefit from the re-franchising of under performing partner drive-ins.

We also expect some benefit in other operating expenses from our re-franchising efforts. However, a large portion of other operating expenses are fixed, so improvement in this line item will be largely dependent upon improvement in our overall same-store sales trends.

I also want to point out a change in the accounting rules that will require us to report minority interest in earnings of partnership drive-ins as a separate line item below net income, beginning with our current quarter. This number will be reported net of tax. We will continue to report diluted earnings per share attributable to Sonic Corp. after minority interest, which will be comparable to our currently reported diluted earnings per share.

Overall, we were encouraged by the improving trend in our restaurant operating margins. We believe the re-franchising initiative and renewed focus on operating a smaller number of drive-ins is having some positive effects.

Looking to fiscal 2010, we expect to see some improvement in restaurant level margins as commodity costs decline further and the full year benefits of our re-franchising programs take effect. However, our same-store sales will continue to have a major impact on the magnitude of any improvement.

During the fourth quarter, SG&A declined 4% while depreciation and amortization declined by 13%, reflecting the disposition of a total of 205 drive-ins in fiscal 2009 and the moderation of partner drive-in development. We would expect SG&A growth to increase slightly in 2010 while depreciation and amortization will decline at a rate in the low to mid teens due to dispositions.

One of the great features of our franchising business model is strong operating cash flow. This feature allows us to maintain our capital expenditures at a reasonable level while also servicing our debt requirements comfortably. As of the end of the fourth quarter we had $187 million outstanding under our variable funding notes, with interest expense on these notes currently averaging approximately 1.5%. Interest expense for fiscal 2010 for this portion of our debt will depend on changes in LIBOR and commercial paper rates.

We are carrying more than $125 million in excess cash investments over and above our normal operating needs. We do not anticipate needing to utilize any of our cash investments from normal course of business needs as our free cash flow, after planned capital expenditures of approximately $30 to $40 million and $55 million of mandatory principal payment is expected to be positive.

We continue to exceed our debt compliance covenants and we anticipate this compliance will continue in the foreseeable future. During the fourth quarter, our effective tax rate was 38.2% and was 38.4% for the year. We continue to expect our tax rates to range from 37.5% to 38.5% next year, although new developments could impact that rate in any given quarter.

In summary, while sales and earnings performance have declined over the past year, the initiatives we have outlined and implemented these past few quarters provide a solid foundation and position us for earnings growth over the longer term. Improved sales and earnings performance will likely take time, but we believe our corporate strategic focus, same-store sales growth, the re-franchising initiative, new store development and moving our business model toward a more predictable and stable cash flow model will increase shareholder value over the long term.

As evidence of our financial strength, we continue to expect positive free cash flow after capital expenditures and debt payments now and in the longer term which provides us with ample flexibility in utilizing our excess cash for shareholder value driving initiatives going forward.

This concludes our prepared remarks and we would be happy to accept your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeffrey Bernstein - Barclays Capital.

Jeffrey Bernstein - Barclays Capital

A couple of questions. One, just as it regards to kind of the bigger picture, long term unit growth, you talk about the new markets you’re entering into and I believe in the past you’ve talked about by what degree they’re outperforming the system. I’m just wondering in terms of the confidence over the long term that they can at least sustain system averages. I know initially I would see your marketing efforts drive sales above the average but I’m just wondering if you have examples of markets that have been around long enough to see you know that these markets can sustain at least system average volumes. Is there any color in terms of markets at different stages, new markets at different stages of growth that would give comfort to that?

W. Scott McLain

Right. Jeffrey, this is Scott McLain. A couple of things. When we started going into the new states, which was around March of 2006, we really did that in a way that was markedly different than the way we had developed historically. First we had a significant amount of national cable advertising which drove brand awareness that we had not had historically as we tried to penetrate new markets. And we also increased the financial requirements and operator requirements for new franchisees that we brought in a lot of really good, new franchisees. And really as we’ve opened across the country we’ve given numbers over the last several quarters. You know we have yet to find a place where the brand has not worked well. Some of those initial openings continue to perform at very high levels. We don’t have very many that have been open more than I guess three years would be the longest. We’ve only got a handful that have been open for three years.

But overall you know we continue to perform well across all of our new markets. Not only our new stores but stores that have been open for a while also. I think Spokane, Washington, for example was one of the early stores that we opened and I think its first year it did over $3 million in sales. It’s been open three years now and I think its still doing over $2 million in sales today.

Jeffrey Bernstein - Barclays Capital

The stores that were opened three years ago have seen a fall off but are still running at or above the system average in terms of sales?

W. Scott McLain

Yes. Oh, yes. Definitely.

Jeffrey Bernstein - Barclays Capital

And then just more drilling down on the quarter. You know in terms of sequential comp trends and any color you might give on October, was there anything of note throughout the quarter and into October or what are we running at this point?

Stephen C. Vaughan

Well, we commented briefly on the fact that we have seen a little more challenging weather as this fiscal year has gotten off to a start. So we, you know we’re not going to go into a week by week detail of that but I think you know clearly there’s been some issues from a colder than normal and wetter than normal start to the fiscal year.

Jeffrey Bernstein - Barclays Capital

So thus far I guess running below the run rate you were running to close the fiscal fourth quarter?

Stephen C. Vaughan

We’re not going to get into that level of detail. I think you know Cliff’s comment was we had not seen an improvement in our trends.

Jeffrey Bernstein - Barclays Capital

And then just throughout the fiscal fourth quarter was there any big directional move, better or worse, throughout the quarter?

Stephen C. Vaughan

I would say that our traffic picked up somewhat as the quarter progressed. We have seen kind of an inverse relationship between traffic and check. Cliff described that we had a more aggressive promotion in the month of August, our burger and shake at $2.99 which was a nice traffic driver. We also were into our third month of this Route 44 promotion.

J. Clifford Hudson

And our traffic throughout the year also, the fourth quarter was our best quarter in terms of traffic. So I’m saying that in part because if you’re looking, if you’re asking the question was there a downward trend as the year progressed or as the quarter progressed. The quarter from a traffic standpoint was probably our best quarter of the year.

Jeffrey Bernstein - Barclays Capital

In terms of the commodity cost basket and you gave some metrics and I think you openly said you thought it would be relatively flat. You’re talking about flat as a percentage of revenue is that the cause line could be flat? Or are you talking about as a basket? I’m just trying to figure out fiscal 2010 commodity, perhaps what you’ve locked in, what’s still fluent.

Stephen C. Vaughan

Yes, the comment related to food and packaging costs we expect to be relatively flat. The current quarter we are expecting commodity costs to actually be down year-over-year. However, we are doing a little more aggressive promotions, so there will be some offset there. But for the fiscal year we expect to have food and packaging costs at this point at least, the outlook is for those to be relatively flat.

Jeffrey Bernstein - Barclays Capital

And that’s if the percentages fails, you’re referring to.

Stephen C. Vaughan

That is correct.

Operator

Your next question comes from Matthew Difrisco - Oppenheimer & Co.

Matthew Difrisco - Oppenheimer & Co.

I was wondering about the royalty rate. It looks like you got back to the year-over-year gains in that as a percentage of overall system sales from the franchise side. Can you just give us a little detail on that? Was that a byproduct of organic growth in that you are seeing an ascension back to the royalties in the overall mix? Or I would think with the negative comp that the franchisees also had that that would be hard to do and its more so a mix of the going forward population of stores that you have now, given the stores that you’ve added to the base from your company and the post effect of re-franchising.

Stephen C. Vaughan

Yes, Matt, that was really driven by a mix shift. So our newer drive-ins opening up under the newest form of agreement are opening up at much higher volumes, so that’s driving that rate up. The existing comp store base would have seen a slight decline in their average royalty rate. But overall we more than offset that.

Matthew Difrisco - Oppenheimer & Co.

And then as far as your expansion that you give detail on, I’m assuming these are all gross numbers, gross openings. You’ve closed the system on the franchise side. It’s closed about 2% of the store base, upwards of the mid-50’s it looks like. Looking ahead what do you expect your pipeline of closures to be for fiscal 2010 so we could model and grow that out, since that is somewhat meaningful 2%.

Stephen C. Vaughan

Well, the composition of the stores that were closed in fiscal year 2009, well if you look at the core markets which made up about half of those closing, the average age was 18 years. So those were older drive-ins, tended to be older drive-ins where maybe the franchisee was facing whether to retrofit or close the store or had a lease expiring. So those as they come along you can’t necessarily predict those. The other half of those were more stores in developing markets that may have had some sales challenges. But I don’t think at this point in time there’s no reason to think that that number will get larger in FY 2010.

Matthew Difrisco - Oppenheimer & Co.

So I’m wondering, basically has the stores that might be affected by the economy or the situation the weaker markets, has the herd been culled enough in that it will revert back maybe to less than a percent of store closures like was seen in ’07 and ’08?

J. Clifford Hudson

Yes, I think it’s a little bit difficult to predict but I think that you know as we look forward, a lot of the store closings as Steve mentioned were precipitated in core markets. And some of that was a byproduct of the retrofit effort, a lot of emphasis on rebuilds and relocations with a lot of older stores. Franchisees making decisions on those. And then I think you know in several of our developing markets we had some closings. So I don’t really know how to give you a solid estimate for what we’re going to be other than to say what Steve said that we don’t have any reason to believe that we would see that number continue to grow.

Matthew Difrisco - Oppenheimer & Co.

And then just as a follow up to Jeff’s question about the trends, you guys inferred that you haven’t seen really a change from the pace that you just reported but you were citing weather which typically makes me think traffic. And traffic was flat. So I’m wondering are you seeing then the same overall number and you’re actually getting a little bit of tailwind here on the average check improving a little bit? And that the composites maybe a little bit more traffic as you inferred that the weather seems to be the thing that slowed you down maybe a little bit in the first quarter?

Stephen C. Vaughan

Jeff, we’re just not going to speak specifically to sales and traffic trends on the first quarter. We talked about that generally and that’s all we care to say.

Operator

Your next question comes from John Glass - Morgan Stanley.

John Glass - Morgan Stanley

First of all just following up, do you still stick with the flat same-store sales for the year or have you changed that view given what you’re experiencing in the first quarter?

Stephen C. Vaughan

Well we’re about 45 days into the fiscal year so maybe we’ll talk about that at the end of the first quarter as to how things look at the end of the first quarter, how things look on the fiscal year.

John Glass - Morgan Stanley

If traffic was flat in the fourth quarter and I guess there was about 2.5% pricing, so is your check still running down about 7.5% then? Is that a fair way to look at it?

Stephen C. Vaughan

No. That’s not. The check you know as I mentioned we’ve got the everyday Value Menu that’s really an offsetting portion to the check or the price increase that we’ve been running at partner drive-ins. And so our average check is running down you know basically the decrease we saw in the fourth quarter was all driven or virtually driven by average check.

John Glass - Morgan Stanley

Would you remind us when you really started to see the decline in check over fiscal ’09?

Stephen C. Vaughan

Probably the greatest portion of it started in the second quarter. We really saw that start to pick up in the January, February timeframe.

John Glass - Morgan Stanley

And then just lastly your SG&A was down I guess sequentially $2 million but next year you’re talking about it going back up on a run rate. So is there anything unusual about this SG&A number, down $2 million versus the prior quarters? Or is that just a result of re-franchising?

Stephen C. Vaughan

It was a combination of re-franchising and then also we did not accrue an officer bonus accrual in the fourth quarter this year, so year-over-year there was a decline there as well. So that was a contributing factor.

John Glass - Morgan Stanley

How much was that?

Stephen C. Vaughan

I don’t have an exact figure for you, John, but that was a portion of that decline. I can tell you it was fairly significant. It might have been $1 million of that decline.

Operator

Your next question comes from Brad Ludington - Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

Steve, I wanted to ask a question on the timing of the required $55 million in interest payments. When do those fall in? And should we expect that excess cash may be used for, or I’m sorry debt repayments. And then that excess cash may be used for additional debt repayments?

Stephen C. Vaughan

Yes, Brad. The $55 million is mandatory principal payments. We make those on a monthly basis. They are seasonalized with our business so they are a little bit loaded toward the back end. As Cliff mentioned, the $125 million of excess cash that we have we are looking to invest that in a way that we think will generate shareholder value. We’re currently investing it at about 1% or less, so it’s not generating a real good return for us. But we’ll continue to look at alternatives that we feel like will generate shareholder value, whether it’s additional debt buybacks, whether its share buybacks or you know just continuing to keep that cash available for opportunities that come along.

Brad Ludington - Keybanc Capital Markets

And then just on your guidance excluding the same-store sales, I was trying to keep up with it. Is that all basically in line with your September 17 release?

Stephen C. Vaughan

Yes. We have not changed that outlook that we issued in September.

Operator

Your next question comes from Nicole Miller Regan - Piper Jaffray.

Nicole Miller Regan - Piper Jaffray

I’m sorry I didn’t understand again, so for the fourth quarter, so if traffic was flat and was the third party pricing tool you’re talking about got you to cumulative pricing of 2.5, was that for the full fourth quarter?

Stephen C. Vaughan

That actually was rolled out during the quarter. It was probably in place for the majority of the quarter but the new menus went in throughout June and July.

Nicole Miller Regan - Piper Jaffray

Was the price just a little bit higher than that? If I recall June might have been higher. Is that right?

Stephen C. Vaughan

No, the effective price increase for the quarter would have been a little bit lower than that. So probably around 2%.

Nicole Miller Regan - Piper Jaffray

And then mix makes up the difference to get to the down. I guess I think a question was asked that way earlier but so then mix is down like 7% or so.

Stephen C. Vaughan

That’s right.

Nicole Miller Regan - Piper Jaffray

So if you can talk about what’s driving traffic then in that context, the mix shift being down like that makes it seem like it might only be discounts. But are there other things that are working like in terms of the borrowed off strategy that are also driving traffic?

Stephen C. Vaughan

Well the primary factor is the shift in our day parts. We have seen our evening business be relatively weak which has the highest average check of our five day parts. And then our strongest day part where you know we introduced Happy Hour, that’s continued to be a really strong driver of our business is the afternoon. But it also has the lowest average check. So that’s really probably the biggest driver of that unfavorable mix shift you described.

Nicole Miller Regan - Piper Jaffray

And then just regionally what can you tell us? What regions were good and which ones were challenged?

Stephen C. Vaughan

You know I don’t know that there’s a huge difference in our regional performance. We have actually seen in the last couple of months some improvement in some of the markets that had earlier challenges. So for example in the Florida market, maybe there’s some signs of that market showing some improvement. But we have seen you know the unemployment rate has continued to go up and especially in some of our core markets. So that does remain a challenge, especially in core markets.

Operator

Your next question comes from Greg Ruedy - Stephens, Inc.

Greg Ruedy - Stephens, Inc.

With the pressures on the consumer, the deals that are out there, how should we think about your barbell? Does the everyday Value Menu ends at $3.99 price point longer term, or is it a return back to the everyday Value Menu and maybe the full price combo above $5?

J. Clifford Hudson

Well we’ve tried to do this a couple of different ways. In the last 12 and 18 months we have moved to try to address both the stronger value orientation to the customer as well as shore up some competitive concerns, particularly with approaches of competitors toward our drink business. So you’ve seen our Happy Hour piece. You’ve seen the everyday Value Menu piece. I think what you so from an advertiser or marketing standpoint, what you would have seen if you looked at the various things that we’re pursuing is something more of a layered strategy but two of the layers that are there do focus on the value and then the other end of the barbell. I wouldn’t necessarily, I mean clearly $3.99 is not a Value Menu thing but it is a deal, and a pretty serious deal given the Chicken Strip Dinner that we were recently offering it or are now offering it at $3.99.

But what you should see going forward is continuing refinement of that layering, continuing refinement of that barbell strategy so that we’ll be focusing even more on some quality items that are a little bit more full priced as the fiscal year progresses.

Greg Ruedy - Stephens, Inc.

Any thoughts to running volume discounts like a 5 burgers for $6 promotion?

J. Clifford Hudson

Well as to prospective offerings, you’ll see those as we roll them out. And I guess that’s pretty much the answer. You’ll see those as we roll them out.

Operator

Your next question comes from Steven Kron - Goldman Sachs.

Steven Kron - Goldman Sachs

I want us to go back to that dynamic between the traffic trends and the check erosion that we’re seeing, the universe relationship that you refer to. It seems as though as we move throughout the year, traffic may have improved and ultimately ended up flat as you indicated. The check erosion however seemed to have picked up a bit. Now you introduced the $1 menu in the February timeframe and that seemed to be the initial source of check pressure. But it seems as though that has now maybe half of the contribution to total sales as it once was. And perhaps the economy is driving greater pressure these days. So I guess what I’m trying to get at, are we thinking about that right there and the simple lapping of that February timeframe when you introduced the $1 menu does not necessarily translate into you know check improvement based on what you’re seeing out there.

Stephen C. Vaughan

I don’t think it necessarily translates into it, Steven. I do think that over the summer months where evening business is a greater proportion of our business and seeing the decline in that area of the business definitely put additional pressure on our average check. But I do think next January as we roll over the introduction of the everyday Value Menu that will relieve some of the downward pressure on our check. It doesn’t necessarily mean its going to go back to flat or positive.

Steven Kron - Goldman Sachs

But am I accurate in thinking that today you know the contribution to the check pressure is a little bit more from economic reasons and maybe the discounting activity as opposed to the $1 menu which may have been the initial cause of traffic degradation earlier in the year?

Stephen C. Vaughan

Well I’m not sure how to respond to that. There are a number of components of that. We do get Kreff’s data that indicates that people are buying fewer items per transaction. We have no doubt that that trend is impacting our business.

J. Clifford Hudson

In our case not only the everyday Value Menu, the element that Steve just mentioned, and a big part of the growth in our traffic over the last couple of years has been our Happy Hour so we’ve got a lot of customers coming in. The biggest growth part of our day has been that afternoon day part. But it’s a lower check day part. So one of the things that’s an opportunity for us is to attempt to grow that day part, meaning grow check in that day part given the strong traffic there has been.

But that’s something that would set us apart versus a lot of the competition, because nobody else has that kind of extraordinary mix with the drink business.

Steven Kron - Goldman Sachs

And can you just review, and apologies if you already mentioned this, the percentage of sales that you’re getting from the combo meals since you made the price adjustments on the a la carte items? And how that compares to what your expectations were?

J. Clifford Hudson

I’ll just say that year-over-year we’ve seen our trends improve to where we are almost flat. We had over a two year period as a percentage of our overall sales, combo meals had gone from being in the high 20’s to the low 20’s. But we’ve now seen that year-over-year trend stabilize, which we think was a combination of the Route 44 upgrade promotion, getting people back into buying those combo meals, the adjustment of the a la carte pricing which made those a better value on a relative basis for our consumers. We also added a couple of additional combo options to the menu. So those three things as the summer went along we saw some significant improvement in the trend.

Operator

Your next question comes from Steve West - Stifel Nicolaus & Company, Inc.

Steve West - Stifel Nicolaus & Company, Inc.

As you’ve seen the kind of the average check decline over almost two years now with the Happy Hour and the $1 menu, you’ve got traffic stabilized now. How do you think about going forward getting that average check back up? Now is it more these combo meals that you just mentioned? And then if you think about you know increased competition next year, you know McDonald’s rolling out the second piece of their McCafe, how are you guys thinking about that and the whole dynamic of increased competition right in your sweet spot there?

J. Clifford Hudson

Yes, we think about it from the ways pretty much we’ve already mentioned, but some refinement of it as it relates to meal day parts, we think about it from the standpoint of refinement of offerings. More on that higher end. We’ve got to keep the Value Menu in place and keep the deals in place to make sure the traffic stays there. And yet at the same time offering some more premium items that are more likely to increase average check. And we also think about that then from the non-meal day part, how can we drive check in the afternoon, an area on which we’re focusing as well. So its different by day part but there is the focus, I mean I have to say through this economy our number one focus is on driving traffic. But simultaneously we’re also putting in place initiatives to work to drive check.

Operator

Your next question comes from Keith Siegner - Credit Suisse.

Keith Siegner - Credit Suisse

I have a question to follow up on the G&A and we talked a little about fourth quarter but I just wanted to talk more about the guidance for this year. You know a flat to slightly up SG&A in dollars, you know given that there’s pretty massive re-franchising in terms of partner stores on a year-on-year basis like average units F’10 versus average units F’09. I just wondered if you could a little bit about the moving pieces from F’09 to F’10 to get to that guidance, you know in light of a pretty massive decline and in the average partner units.

Stephen C. Vaughan

Well Keith a couple of things. One we did see some of those savings were in fiscal year 2009 so we got some benefit from that. The year-over-year increase was low single digits. I think the other thing that we talked about when we did the re-franchising was that we were going to reinvest some of those savings back into our business and add some resources to be more out of market specific. And so we’re continuing forward on that path. So there’s been some investment of additional you know resources that have been added on the franchise side. So between those two, we’re pretty comfortable that we will see a slight increase in our SG&A in FY 2010.

Operator

Your next question comes from Larry Miller - RBC Capital Markets.

Larry Miller - RBC Capital Markets

I just want to circle back, I guess there’s a lot of questions on the average check and maybe you could talk about it from the top of the menu, the combo, rates of sales. I think they were declining in the last couple of quarters. And that change that you made, I think what you tried to do is encourage people to go from a la carte items to combo meals and how did that turn out?

J. Clifford Hudson

Well you are correct that we did that a couple of ways. One, as the quarter progressed, from a pricing standpoint how we priced the individual items versus the combo meal. Implemented that to try to influence the customer to go to the combo meal. And then in addition to that we did the offering which is the Route 44 promotion. And as we said earlier that was to induce the customer to go that way, to pay the full price of the combo but they’d get a large drink or they’d get the Route 44 drink, 44 ounces instead of the medium size. And as to how it went, it did reverse the trend in terms of what we’ve been seeing year-to-date, a decline of combo meals, and by the end of the summer pretty much erased that decline.

Larry Miller - RBC Capital Markets

And then can you share with us some of the unit economics of the new stores? I guess the underlying investment costs and margins, just generally speaking. You’ve shared with us the higher average unit volumes but.

Stephen C. Vaughan

Yes, the investment has come back down a little bit with some of the softening in the economy. We’ve seen land costs come back down and construction costs. So we’re right around $1.5 million in investment. That’s a little higher in these newer markets where it may be a little bit more expensive for land. But as you can imagine, with a $1.5 million first year sales or in excess of $1.5 million, we have very good return on investment results. I think that as Scott mentioned, under this newer model that we’ve been developing in the last two or three years, we don’t have a lot of history on these drive-ins in terms of two, three and four years of history. But certainly just seeing what our franchisees are doing in terms of continuing to move forward in new markets in particular, we feel good about the return on investment. I think their continued growth kind of reinforces that.

Larry Miller - RBC Capital Markets

And Steve can you just remind me how the sales investment ratio in the core market looks?

Stephen C. Vaughan

Yes. In core markets a new store typically opens up just slightly above our system average, so around $1.15 million is the average sales. And then you know the investment’s usually a little bit lower than $1.5 million so probably $1.450 million.

Operator

Your next question comes from Sharon Zackfia - William Blair & Company.

Sharon Zackfia - William Blair & Company

I was wondering you know this is probably the first quarter you’ve leveraged labor since you had positive comps. So can you talk about what’s happening in the company owned stores and whether or not that’s something that you can continue as we go into 2010?

Stephen C. Vaughan

I’m sorry. Repeat your question?

Sharon Zackfia - William Blair & Company

This is the first time you’ve actually leveraged labor since you had positive comps. So I was just wondering what you’re seeing at the company owned stores, what’s happened differently this quarter and whether we can see sustained flat to leverage on labor on these kind of comps, if they continue going forward?

Stephen C. Vaughan

Well I think the majority of that benefit, Sharon came from the re-franchising effort. We did focus on under performing drive-ins when we initiated that effort. And so you’ll see the benefit continue at least for the first half of the year. You know as we get to the second half of the year when we start lapping over the re-franchising, that would be when our same-store sales would be more of a driver of the improvement year-over-year.

Operator

Your next question comes from Joseph Buckley - BAS-ML.

Joseph Buckley - BAS-ML

Scott you talked about a reduced fee in royalty program if a multi-unit opening, openers in fiscal 2010. Do you have a sense of how that’s lining up with your planned development? You know specifically you’ve got $5 million in fees in fiscal ’09, are we going to be significantly lower do you think in 2010?

W. Scott McLain

Well we just kind of put this program in place during the summer. I just announced it during the summer so I don’t have a real good feel yet for exactly how its going to work its way through the income statement. However, you know we may have some impact on franchise fees in particular in the next year. But I think it should help our store openings, not only in core markets but particularly in some of our under penetrated markets where we really need to have some more stores.

J. Clifford Hudson

And Joe if I could piggyback onto that I’d say it isn’t contingent to induce behavior that might not occur otherwise. And as a result, its not intended to negatively impact our short term income. It is intended to positively impact the presence of the brand in a market. And then we would benefit at some point more in the long run. But theoretically not suffer so much in the short term because it isn’t intended to induce people to open stores they might not have otherwise.

W. Scott McLain

That’s right. That store was not going to open, we weren’t going to get a fee anyway.

Joseph Buckley - BAS-ML

And then is there also a reduced royalty on the openings or is it just the fees?

J. Clifford Hudson

In some of our under penetrated markets there is the opportunity for some royalty relief for a period of time as a further inducement to build in those markets, some of which are you know a little more challenged.

Stephen C. Vaughan

To add to that Joe I would tell you that in those markets, this kind of goes back to Cliff’s point, but in those markets that Scott’s referring to we did not get much development in 2009. And so we don’t anticipate that this would have a significant impact from a negative standpoint. If anything, we think it will help the brand from a positive standpoint but may not be accretive to the extent you would expect from a new store opening.

W. Scott McLain

The objective in some of those markets that are a lot more stagnant is to get the brand presence to contribute to local marketing, etc., and get the brand moving more positively. So to Steve’s point, if those additional stores open they should help the local marketing effort, help brand presence in the marketplace and help those stores that are not operating under that newer license agreement with deferred royalties.

Joseph Buckley - BAS-ML

Just one more question. The flat same-store sales guidance you issued for the full fiscal year, as you issued it how were you envisioning it playing out? Are you thinking you’ll recapture check as the year goes on or build traffic or? How do you see the components of getting back to flat?

Stephen C. Vaughan

I think check is a big part of that, particularly as we lap over the introduction of the everyday Value Menu as we move into calendar 2010. And then I think we also believe that hopefully as the economy rebounds we start to see employment look better, that the dynamics will improve and should maybe set the stage for increased traffic. So there is a traffic component to that. But certainly check is a big component of that.

Operator

Your next question comes from Tom Forte - Telsey Advisory Group.

Tom Forte - Telsey Advisory Group

I wanted to know your thoughts on fiscal 2010 as far as the gap between partner locations and franchise locations, same-store sales was only 90 basis points at the end of the year. Do you think that the initiative that you put in place to improve the performance of partner locations will enable you to either shrink that gap further in 2010 or maintain that level of performance versus franchise stores?

J. Clifford Hudson

Well one of the things I didn’t say in my introductory comments and perhaps should have, but something that was made public last month was a new senior officer joining our company, Omar Janjua joining us in the month of September and we’re very pleased to have him on board. Omar is a fellow with 25 years and more of industry experience and with major brands in the United States and extensive operations background, both in owned operations and franchised operations. And so we’re very glad to have him on board. Omar is putting in place a number of initiatives to complement the initiatives we’ve already put in place that we have discussed earlier that are operations focused and then the product focused initiatives to once again get back on that track as a complement to the value things we’ve done in the last 12 to 18 months.

Omar is also implementing a number of initiatives that within our partner drive-ins store focused, human resource focused, and I think a level of accountability with management that should bode well for our owned operations, for our partnership operations. And as the year progresses, perhaps more in the latter part of the year, let’s put it this way. We definitely have the opportunity to have a benefit that is disproportionate to our franchisees because of the under performance of those drive-ins, that is our partnership drive-ins. So the opportunity is there. The negative performance in the more recent past, 12 to 24 months, has created a greater opportunity than franchisees would have seen.

So I would hope and expect that in the latter part of the year we would start seeing some benefit from the nature of his management focus. In terms of your next question is going to be can I quantify that and the answer is no, I’m not going to quantify it. But from a directional standpoint, that is why we brought him in and what we expect to see.

Operator

Your next question comes from [Jonathan Wait – Precipio Research].

[Jonathan Wait – Precipio Research]

Can you talk a little bit about the discounting level that you expect in the fiscal year as we lap over the introduction of the Value Menu, kind of what your thoughts are there on the category for you and kind of your promotional level and then kind of the profit level of your franchisees.

Stephen C. Vaughan

I think Jonathan a lot of it will depend upon what happens in the consumer environment. Clearly at this point we still feel like discounting is something that’s almost a requirement, based on the consumer’s desires. We have done some discounting in this first quarter. Our promotions that have been made public at this point involve the price point at CroisSONIC and Tots for $2.99 in the month of September. And then this month we’ve been running a Chicken Strip Dinner and a drink for $3.99. So again focusing on price points.

You know I think our expectation is that as we move into calendar year 2010, that the external environment will improve. And we also expect that we’ll have some promotions that focus more on the upper end of the barbell and can balance those with our everyday Value Menu. And should be able to see less discounting as we move into the back half of the fiscal year.

Operator

Your next question comes from Howard Penney - Research Edge LLC.

Howard Penney - Research Edge LLC

Hi. Thanks very much. I’m good with my questions.

Stephen C. Vaughan

Thanks Howard.

Operator

Your next question comes from Christopher O'Cull - Suntrust Robinson Humphrey.

Christopher O'Cull - Suntrust Robinson Humphrey

Steve, my question relates to the [inaudible] question. It looks like the average profit fell at a faster rate than comps during the quarter and I would think that would imply that the improved traffic you had did not really offset the combo discount that you ran during the quarter. Is this correct?

Stephen C. Vaughan

Well I think your first part of your statement is correct, that we did see profits fall at a greater rate than sales. But that’s pretty much always the case. We see a greater flow through on our bottom line profits versus our sales.

Christopher O'Cull - Suntrust Robinson Humphrey

Do you think you generated sufficient traffic to offset the discount though from the combos?

Stephen C. Vaughan

Well, you know the part that’s difficult to quantify is what would our traffic have looked like had we not done that promotion. If you make the assumption that it would have been flat and that you know this was just discounting you know done in a normal environment, I’d say the answer is it probably wouldn’t look good. However we do feel like we’re in an extraordinary environment right now and so you can’t just assume that you’re going to stay flat if you don’t do some discounting or something to draw the customers in.

Operator

Your last question comes from Bill Baldwin - Baldwin Anthony Securities.

Bill Baldwin - Baldwin Anthony Securities

Just quickly, do you plan to continue your re-franchising activities in fiscal 2010? Have you reached your goals that you set out when you started the program?

J. Clifford Hudson

I think its fair to say we’ve substantially reached the goals. That doesn’t mean that none of that would occur prospectively, but in terms of this scale and approach we have attained our goal. And if we do add to the extent we do that prospectively, it’ll be smaller, it’ll be more surgical, it’ll be more because of the specific goals that we have in the marketplace rather than the more aggressive activities taking place in the last year.

Bill Baldwin - Baldwin Anthony Securities

Thank you very much.

J. Clifford Hudson

Thank you. Do we have any more questions? It doesn’t sound like we do so hearing none from our conference sponsor there I’ll just say I appreciate your participation today. And we appreciate your engagement with our brand. As the fiscal year progresses we’ll continue with some initiatives that I think will complement the more value driven initiatives the last 12 or 18 months and we’ll look forward to sharing those with you and the effect of them as the year progresses. So thanks for your participation and we’ll see you over time.

Operator

And that concludes today’s conference. Thank you for your participation.

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