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Executives

Katie Scherping - Chief Financial Officer

Dennis B. Mullen - Chairman and Chief Executive Officer

Eric C. Houseman – President and Chief Operating Officer

Susan Lintonsmith - Chief Marketing Officer

Analysts

[Andrew Chiles] - BAS-ML

[Rachel Schechter] - Oppenheimer & Co.

Jeffrey Omohundro - Wells Fargo Securities

Brad Ludington - KeyBanc Capital Markets

Greg Ruedy - Stephens Inc.

Tommy Halloran - Courage Capital Management

[Amal Duci] - Johnson Rice

Red Robin Gourmet Burgers, Inc. (RRGB) F3Q09 Earnings Call November 5, 2009 5:00 PM ET

Operator

Ladies and gentlemen, thanks very much for standing by. Good day and welcome to the Red Robin Gourmet Burgers, Inc. third quarter 2009 financial results conference call. (Operator Instructions)

It's now my pleasure to turn the floor over to your host, Katie Scherping, Chief Financial Officer of Red Robin.

Katie Scherping

Thanks, Kevin.

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

These forward-looking statements are not guarantees of future performance and therefore investors should not place undue reliance on them. We refer all of you to our 10-K and our 10-Q filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition. We plan to file our 10-Q for the fiscal third quarter of 2009 by close of business tomorrow.

And I want to inform our listeners that we will be making some references to non-GAAP financial measures today during our call. You'll find supplemental data in our press release on Schedules 1 and 2, which reconcile our non-GAAP measures to our GAAP results.

Now I'll turn the call over to Denny Mullen, Chairman and Chief Executive Officer. Denny?

Dennis B. Mullen

Thanks Katie, and thanks everyone for joining us today.

We also have with us Eric Houseman, our President and Chief Operating officer, and Susan Lintonsmith, our Chief Marketing Officer. Eric will provide detail on the third quarter results and an update on our operations initiatives, and Susan will update you on our traffic, building and loyalty efforts. Then Katie will review in detail our most recent financial performance and our business outlook, but first I want to share with you some of the recent developments on the marketing front.

As you have seen from our earnings press release, our comp store sales decreased 14.9% in the third quarter. In our call last August we told you that our comps were down 15.3% for the first four weeks of Q3 as we lapped our third-best comps in the first four weeks of Q3 '08.

In response to the very challenging business environment, we've implemented a variety of marketing and promotional tactics to support our overall marketing strategy of product news, which has been our strategy since the beginning of 2009. Specifically, we recently introduced our most recent product news and our fall promotion, the Wise Guy Burger and Chicken Caprese Sandwich, with three weeks of local, network and cable TV in 10 markets covering about 100 of our restaurants. These great products were featured with bottomless steak fries at a $5.99 price point as part of a limited time offer. Since the ads began the last week of Q3 and ran through the first two weeks of Q4, the impact on the third quarter results was nominal; however, we are pleased with the campaign's results, and Susan will cover those in greater detail in a few minutes.

On the restaurant development side, we did not have any company opening restaurants in the third quarter; however, more recently in the fourth quarter we opened the last two of the 15 new company owned restaurants planned for this year, all funded from operating cash flow. Together with the four new franchise restaurants that have opened so far this year, a total of 19 new Red Robin restaurants have been opened year-to-date 2009. While company-owned NROs are now complete for the year, one more franchise NRO is scheduled to open in mid-December, and we currently have three company-owned restaurants under construction. We plan to open these three restaurants late in the first quarter of 2010.

As we previously announced, our Board of Directors approved the development of up to 15 new company-owned Red Robin restaurants next year, which we expect to open fairly evenly throughout 2010. Similar to 2009 development, we will fund new company-owned restaurant development in 2010 with operating cash flow. Also, our teams have done a terrific job reducing investment costs for new restaurant development as we expand our base of company-owned restaurants.

Our average cash investment in new company-owned restaurants has been reduced about 24% from roughly $2.5 million per restaurant in 2007 to less than $1.9 million per restaurant estimated for our 2010 development.

So with that as an overview, I'll turn it over to Eric.

Eric C. Houseman

Thanks, Denny, and good afternoon, everyone.

In the third quarter of 2009 our comp store sales decrease of 14.9% was driven by a 13.8% decrease guest counts and a 1.1% decrease in average check. This compares to being down 2.2% in the third quarter last year.

As Denny mentioned, we did not realize a significant impact from television advertising in the third quarter of this year since only one of the three weeks of TV advertising to support our Wise Guy Burger and Chicken Caprese Sandwich LTO was in the third quarter. For the first four weeks of the fourth quarter of this year, which include the last two of the three-week LTO TV ads in our 10 TV markets, our comp store sales trended better on a sequential basis as they were down 11.6%. This compares to down 8% in the first four-week period of the fourth quarter of 2008, which did include two weeks of national cable television advertising.

Average weekly sales for the restaurants in our comparable base were $51,964 during the third quarter of 2009 compared to $62,182 for a comparable base in the third quarter of '08. Average weekly sales for our 35 non-comparable restaurants were $49,385 during the third quarter of 2009. This compared to $56,111 for our non-comp restaurants a year earlier.

Continuing along with the operations update, you'll recall that a restaurant enters our comparable base five full quarters after it opens. The 15 franchise restaurants that we acquired early in the second quarter of 2008 did join our comparable base beginning in the third quarter this year, so our third quarter had 269 company-owned comparable restaurants out of the 304 total company-owned restaurants.

For all company-owned restaurants, average weekly sales were $51,667 from 3,648 operating weeks in the third quarter of 2009 compared to $60,974 from 3,433 operating weeks in the fiscal third quarter of '08.

Our third quarter 2009 restaurant-level operating margins of 16.5% were below the 18.5% margins in the third quarter of 2008. Katie will talk about the key drivers of the 200 basis point decrease in operating margins in just a few moments.

Although the operating environment is still challenging, we do remain laser focused on managing our labor and other controllable costs, strengthening our restaurant leaders and their teams and continuing our making a connection training initiatives.

One important step that we took since our last earnings call involved the strengthening of our field operations structure to make sure our teams are more agile and more responsive to our business and growth opportunities. A couple of weeks ago we completed this restructuring of our Regional Vice President responsibilities and promoted six individuals to Regional VP of Operations for a total of eight RVPs that will help oversee operations across the country and report directly to me. This allowed us to remove a layer in our field operations structure, and while the elimination of some positions were a tough decision, this reorganization will improve our operational effectiveness and provide the right structure for future growth by placing decision-making power closer to our restaurant teams and our guests.

In addition, during our last call we told you that late in the second quarter we completed the rollout of our initiative to streamline operations in our kitchens by improving the schematics and efficiencies in the heart of the house and give our restaurant leaders more time to lead and develop their people. Since then we've begun to see the benefits of these efforts, including the elimination of more than two dozen one-items SKUs and reduction of daily prep items by about 20%, which is helping us reduce our heart of the house labor hours by an average of two hours per restaurant per day.

On the NRO front, while we did not open any new company-owned restaurants in the third quarter, our teams continue to strengthen the process for future new restaurant openings. This includes our strategic and scalable NRO training and our ability to now select and prepare new restaurant TMs up to a year before opening as well as fully hiring and training out of a new restaurant building five weeks prior to opening. We believe that these efforts will continue to pay off as we prepare for the NROs that we plan for next year.

Finally, we're making great progress on our leadership development for GMs and multi-unit managers and our Make a Connection training initiative to help our restaurant teams focus on our key loyalty drivers and engage our guests in unbridled ways that make Red Robin fans for life continue to get great results.

So with that overview of operations, let me turn it over to Susan to talk about our recent results and future plans related to marketing.

Susan Lintonsmith

Thanks, Eric.

Our marketing strategy continues to be focused on supporting product news with targeted tactics to drive incremental traffic and retention. Our focus is greater emphasis on product news, quality, value and variety versus pure brand-building initiatives that in prior years were successful in strengthening awareness for Red Robin.

We used the results of our Steak Slider TV advertising in Q2 of this year to determine how to best use TV to support product news going forward. We called out we supported Steak Sliders without a price point for three weeks on national cable TV in June. While we saw a slight shift or lift in sales from the TV ads, we learned several things that we've applied to the latest round of television that Denny described earlier.

In our last call we mentioned that we were exploring local TV advertising as an additional tactic to support our limited time offer or LTO product news - the Wise Guy Burger and the Chicken Caprese Sandwich. Both products are craveable and represent the quality, value and variety that are core to our Red Robin menu.

We decided in early September to make a $1.1 million investment to run local TV advertising in 10 company markets to promote the two LTO products for a value price point of $5.99 each. We were pleased with the TV creative that blended product news with messages of quality, value and variety and with media weights that were significantly higher than our weights with the Steak Sliders in 2Q.

The TV media ran for three weeks, ending on October 18th, in 10 markets, covering about 100 of our restaurants or a third of our company base. We were pleased by the positive traffic and sales results, which I will share with you now.

In the four weeks prior to running the TV ads that supported our LTO, guest count in the 10 TV markets were down 11.4% versus prior year. During the three weeks of TV media guest counts improved more than 1200 basis points, bringing our guest counts in these 10 markets into positive territory.

Sales in the 10 TV markets in the four weeks prior to the TV running we were down 12.4%. During the three weeks of TV media same-store sales in these 10 markets improved more than 900 basis points.

Based on the results from the TV media to date, we believe the TV ads have paid for themselves. The fall LTO promotion continues in restaurants through November 8th, so we will continue to measure and monitor the full impact of the promotion. Since we do not have additional new product news until February 2010, we do not have any more TV scheduled during the remainder of 2009. We will share more details on the full impact of the fall TV and the LTO promotion on our Q4 results in our February earnings call.

In the TV markets both the Wise Guy Burger and the Chicken Caprese Sandwich were very well accepted by our guests, ranking among the top three Red Robin burgers sold in the TV markets. We also added a bounce-back program in the TV markets which was designed to capitalize on the new traffic that the TV media drove into our restaurants with an incentive offer to bring the guests back by mid-December.

We also supported the fall LTO promotion in all markets - TV and non-TV - with an incremental online campaign, an expanded direct mail program, and endorsement radio in several markets. In markets that were not covered by TV media and did not have the $5.99 value offer we provided a $3 off incentive in a direct mail postcard to try either of the two promotional items. We're also testing additional initiatives that include some menu engineering as well as other programs to drive incremental traffic in select trade areas and also during opportunistic day parts.

We'll continue to measure the results of all of our initiatives, including our digital, loyalty and retention, direct mail and endorsement radio as we plan for 2010. We'll share more about our future plans for these tactics and our media plans for 2010 in our February call. We have concluded, however, that our TV media will be an important part of our marketing tactics to support product news LTO strategy during the 2010 promotional windows. There's more to come as we develop our plans in collaboration with our new strategic marketing partner, Minneapolis-based Periscope, which we recently brought onboard as our lead agency.

Our major marketing focus for the next two months is promoting our gift cards. As you know, the holidays are a big time for gift card sales. Again this year we're incenting gift card sales with $5 in Bonus Bucks for $25 gift card purchases. We are supporting the holiday gift cards with a strong digital plan and targeted direct mail to both businesses and consumers. In preparation for this focus on holiday gift card sales, in early October we rolled out our nearly 7-foot-tall gift card kiosk to all of our company-owned restaurants and more than a third of our franchised restaurants.

Third-party gift card sales also continue to grow. Since last quarter we increased nationwide distribution of our gift cards by another 900 retail locations, for a total of nearly 4,000 third-party locations, and we're on target to be in 7,400 by the end of 2009. This program has generated more than $1.5 million in gift card sales so far this year.

We've also shared with you our focus on strengthening guest retention through our Red Royalty program. In July we launched a pilot for this program in four markets. This program is designed to build a robust guest database with the intent to provide personalized incentives to our guests to improve frequency and retention. So far we've seen positive results in driving incremental visits, while we're also gaining visibility into the purchase behavior of our guests. This is helping us develop smart rewards that should strengthen our ability to drive incremental visits from guests who are in the program. We'll continue to share details as we move from pilot to rollout in 2010.

And on December 3rd we're holding our fourth annual Kids' Cook-Off Burger Recipe Contest Championship here in Denver. We're excited to have the Food Network celebrity Robin Miller as one of our judges this year. The Kids' Cook-Off continues to be one of our most successful family-oriented marketing and public relations programs.

The Holy-Peno Burger, created by last year's winner, was one of our most successful kid-invented burgers yet. During Q3, when it was available in our restaurants, we sold about 135,000 Holy-Peno Burgers, which raised more than $60,000 to support the National Center for Missing and Exploited Children. This program reinforces our unbridled culture and also generates a significant amount of positive coverage promoting our family-friendly brand positioning and gourmet burger expertise.

Those are some of the marketing headlines. Now I'll turn it over to Katie to review our financial results in greater detail.

Katie Scherping

Thanks, Susan.

First of all, if you haven't already seen our news release on the quarter's results, you can find it on our website at RedRobin.com in the Investor Relations section.

The fiscal third quarter of 2009 was the 12-week period ending October 4, 2009. Compared to the fiscal third quarter last year, total revenue, including restaurant sales and franchise royalties, decreased 10.4% to $187 million. Restaurant sales decreased 10.4% to $183.9 million and consisted of $163.5 million in sales from our comp restaurants, which include the 2008 acquired restaurants since they're now part of our comp base, and $20.4 million in sales from our non-comparable restaurants. Franchise royalties and fees decreased 8% in the third quarter to $3 million.

The 101 comp restaurants in the U.S. franchise system reported a 4.4% decrease in same-store sales, while the 18 comp restaurants in the Canadian franchise system reported a 0.2% decrease in same-store sales for the third quarter.

As Eric said, our restaurant-level operating profit margin was 16.5% in Q3 2009. The 200 basis point decrease from the third quarter last year was driven by a 160 basis point increase in labor costs and about 100 basis points of higher occupancy costs due mainly to deleveraging from lower average restaurant volumes year-over-year. These higher costs were partially offset by 30 basis points of lower food and beverage costs and 30 basis points of lower operating costs.

From a cost of goods standpoint, we did see some relief in a good portion of our commodity basket in the quarter in addition to receiving some benefit from a true-up of food and beverage rebates.

Our hamburger pricing, which had been running above our contract at 2008 pricing through the first half of the year, saw a reduction in the third quarter that averaged the price we incurred for our fresh ground beef slightly below the 2008 contract for the first time this year. We are expecting the price of ground beef for the remainder of 2009 to continue to stay below our 2008 contract, and therefore we will see some continued benefit year-over-year in our food cost in Q4 from hamburger. Somewhat offsetting the pricing benefit from ground been has been an increase in our sales mix to our beef burger category as our promotions are heavily focused on our core gourmet burger offering.

Another commodity that has seen prices fall below the 2008 level is cheese, which we also expect to stay below 2008 pricing for the remainder of the year even though recent prices have begun to increase slightly for cheese.

As we have mentioned in prior calls, our cost of steak fries have been higher in 2009 than 2008 as our contract that we entered into late in 2008 was at higher prices than the expiring contract. In addition, we have seen a mix shift over the last year to more items that include our bottomless steak fries, which has also increased our cost over 2008. And we'll spend some more time in a few minutes discussing an update on commodities when I talk about our outlook for the balance of 2009 and into 2010.

Our total labor cost increase of 160 basis points is attributed primarily to the impact of sales deleverage on fixed labor costs like management wages, taxes, benefits and insurance, as well as increased minimum hourly wages. As Eric mentioned, we are beginning to see the benefits from our efforts to reduce labor and our continued progress on managing overall controllable hours.

As they have throughout this period of macroeconomic challenges and lower sales volumes, our restaurant teams have managed the controllable costs extremely well, but we continue to feel the sales deleverage impact on our fixed costs. Our occupancy cost is largely a fixed cost, representing primarily base rent as well as common area maintenance charges and real property taxes and insurance. The primary driver of the 100 basis point increase continues to be sales deleverage.

Other operating costs decreased by 30 basis points. The reduction in our national advertising fund contribution of 125 basis points this year has been partially offset in the third quarter by the increase in the advertising and marketing costs that we incurred late in the quarter for all of the tactics supporting the LTO, including the TV media campaign that Susan covered earlier. This increase in costs for Q3 2009 marketing efforts represented about 55 basis points of additional operating expense in the quarter. In the fourth quarter we will incur about $1 million in operating expense for additional advertising and marketing costs for the continuation of this campaign into Q4.

Depreciation and amortization expense during the third quarter was 7% of total revenue, about 110 basis points higher than a year ago primarily due to revenue deleverage.

G&A expense decreased nearly 23% to $12.1 million compared to $15.7 million last year. The decrease was primarily attributed to $1.5 million in marketing expense last year related to the National Advertising Fund versus no NAF-related expense this year, about $1 million in lower operations training costs from lower turnover and reduced new manager hires for fewer NROs versus last year, and about $1.3 million in lower stock compensation expense. We also reversed about $1.7 million in performance-based bonus accruals in Q3 2009, but that was similar to the amount that was reversed in Q3 of 2008.

Our pre-opening expense of $125,000 in the third quarter of 2009 was significantly lower than the $2.7 million in the third quarter last year. Our only pre-opening expense in Q3 this year was related to the two NROs we just opened in early Q4 compared to pre-opening expense a year ago related to 10 new company-owned restaurants that opened in Q3 of 2008.

Net interest expense was $1.3 million in the fiscal third quarter of 2009 compared to $2.1 million during the same period in 2008. Our interest expense in the third quarter of 2009 decreased from the prior year due to a lower average interest rate of 3.1% versus 4.2% in 2008 in addition to a lower average debt balance.

Our effective income tax rate for the third quarter of 2009 was 16.3% compared to 21.6% for the third quarter of 2008. This decrease from 2008 is primarily due to the amount of federal income tax credits for 2009 being applied against lower pre-tax income. We anticipate that our full year 2009 effective tax rate will be approximately 21%.

Net income for the third quarter of 2009 was $5.7 million or $0.37 per diluted share compared to net income of $6.2 million or $0.40 per diluted share in the third quarter of 2008. Included in third quarter 2008 results were asset impairment charges of $0.05 per diluted share after tax.

Looking at the cash flow statement, our cash from operations of $66.5 million for the year-to-date 2009 has exceeded our capital expenditures of $42 million. We have paid down debt of $23.9 million year-to-date through the end of Q3. On October 4, 2009 we have $8.9 million in cash and cash equivalents and a total outstanding debt balance of $197.6 million, including $122.7 million of borrowings under our $150 million term loan along with $58.5 million of borrowings and $5.1 million of letters of credit outstanding under our $150 million revolving credit facility.

Year-to-date through the third quarter, we have made $10.3 million of the scheduled $15 million in payments required by the term loan portion of our existing credit facility in 2009. Since the end of the third quarter we've made additional debt repayments of $5 million on our revolving facility, bringing our total debt payments to $28.9 million so far this year to date. We are subject to a number of customary covenants under our credit agreement, and as of October 4, 2009 we were in compliance with all debt covenants and we expect to remain in compliance through fiscal year 2009, which I'll elaborate on in just a moment.

Now let's talk about our outlook for the remaining quarter of 2009 and 2010.

We have completed our new restaurant development for 2009. The three new company-owned restaurants that are under construction now are scheduled to open late in the first quarter of next year. The last of five franchise NROs for 2009 is expected to open in mid-December. As Denny mentioned, we expect to open up to 15 new company-owned restaurants in 2010 fairly evenly spread throughout the year.

Once again, we will not be providing full year EPS or revenue guidance at this time.

For full year 2009, which is a 52-week period, we expect comparable restaurant sales to continue to decline based on the current macroeconomic environment and the significant reduction in our national cable television advertising. In the fourth quarter of 2008, we were on television for three of the first six weeks of the quarter, ending in mid-November. The two weeks of our recent local TV campaign in just 10 markets in the fourth quarter of 2009 overlapped one week of systemwide national cable advertising in 2008.

On the commodity front, we have entered into several new contracts recently, most notably for our poultry and steak fries, beginning in October, both at prices favorable to the expiring contracts. The poultry contract is for two years, ending in December of 2011, and our steak fry contract expires in October of 2010. We are currently under contract for about 55% of our 2010 commodity basket excluding ground beef and cheese, which we will continue to monitor into early 2010 for contracting opportunities as appropriate. Considering all of our most recent pricing visibility, we currently expect a reduction in our cost of goods basket of 2% to 2.5% for fiscal 2010.

We expect certain costs, including our recent increased marketing efforts and promotional pricing as well as revenue deleverage, will continue to put pressure on restaurant-level profitability for the remainder of 2009; therefore, we are anticipating that without any additional menu price increases and the addition of $1 million of advertising and promotional expense in Q4, restaurant-level operating margins could decline by 150 to 160 basis points for the full year 2009 even after considering the benefit from other cost reduction activity.

It is worth noting that all of the marketing and advertising expense related to the cost of the most recent fall LTO promotion have been included in our operating costs and restaurant operations, about $1.2 million in the third quarter and about $1 million which has been incurred in the fourth quarter. The costs are allocated between quarters depending on the timing of the efforts in each period. For every 10 basis point change in the restaurant-level operating profit during the full year of 2009, diluted EPS is estimated to be impacted by approximately $0.04. We are not currently planning any more menu price increases for the balance of 2009.

Our annual stock compensation expense for outstanding equity grants in 2009 is expected to be about $2.9 million, of which 17% will be charged to restaurant labor and 83% will be expensed in G&A. In addition, the one-time charge for the tender offer for stock options incurred in the first quarter of $3.1 million is also included in G&A expense and $886,000 is included in restaurant labor. We expect our fiscal 2009 G&A excluding the stock option expense of $3.1 million related to the tender offer to decrease by about $4 to $4.5 million from full year 2008 G&A expense levels.

Depreciation and amortization expense on an absolutely dollar basis should increase approximately 12% year-over-year in 2009, and interest expense will be lower than 2008 given average interest rates that are lower than 2008 combined with our significant debt paydown during 2009.

As we said earlier, we funded our new restaurant development during 2009 using our operating cash flow. Taking into consideration our full fiscal 2009 capital expenditure estimate of around $45 million, we expect to use our remaining cash flow primarily to pay down our outstanding during 2009.

Let me remind everyone how our debt leverage calculation works. The total debt outstanding was $197.6 million at October 4, 2009 plus our outstanding letters of credit of $5.1 million, and that's the debt we use to compute the ratio on. Our debt does not include operating leases.

Our last 12 months of EBITDA excludes the non-cash charges for stock compensation expense, acquisition-related reacquired franchise costs, and any asset impairment charges or restaurant closing costs.

Our debt-to-EBITDA ratio for purposes of our covenant was 2.02 to 1 at October 4, 2009.

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

I also want to remind everyone that $196,000 of pre-tax earnings or expense for us equals $0.01 per diluted share for the full year of 2009, which is equivalent to about 2 basis points as a percentage of revenue. This illustrates the sensitivity level of our business from sales, costs and EPS, which in this uncertain business climate makes accurate forecasts extremely challenging.

With that, I'll turn the call back over to Denny.

Dennis B. Mullen

Thanks, Katie.

In closing, as we've seen from last quarter's results, the operating environment remains difficult, but our teams continue to focus on the right things to strengthen our business and build the Red Robin brand.

We've cited many examples, such as the progress our restaurant teams continue to make in growing our leadership talent, managing controllable costs, delivering great gourmet burgers and making a connection with our guests. Our marketing strategies and tactics are now even more focused on driving traffic and loyalty and at the same time communicating quality, variety and value that Red Robin offers our guests. And our development teams are on track to complete the first of our new locations in 2010 that represent continued and prudent new restaurant expansion at average investment costs that are lower than we've seen in several years.

Across the company our team members are contributing to the continued growth and strength of our brand, and I want to thank them for all their hard work and dedication to each other and to our guests.

With that, we welcome your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Andrew Chiles] - BAS-ML.

Andrew Chiles - BAS-ML

Could you talk a little bit about the pressure that you're seeing from double cheeseburger competition at the QSR level?

Dennis B. Mullen

Well, there's competition across all levels, so we have nothing specific to respond to on any particular double cheeseburger promotion.

Andrew Chiles - BAS-ML

And also the first four weeks of the quarter in October same-store sales, what are you guys lapping for the November and December of 2008?

Katie Scherping

We don't disclose period to period. Our first quarter of 2008 was down 7.4% for the full quarter, so we began with a negative 8 in the first four weeks.

Operator

Your next question comes from [Rachel Schechter] - Oppenheimer & Co.

Rachel Schechter - Oppenheimer & Co.

Just regarding your comps, if you could comment on your traffic trend at lunch versus dinner and weekday versus weekend, and also if you see any change in major geographies?

Katie Scherping

The lunch versus dinner mix has not changed, Rachel. It's been the same that we've seen for several years, and we've kept our eye on that after the competition question. We've watched that very carefully, and we haven't seen any degradation there. And the weekday trends haven't really changed, so that's still about the same. They're pretty consistent all the way across the week.

Rachel Schechter - Oppenheimer & Co.

And then any major geography changes?

Katie Scherping

Not really. We called out California, Arizona, Nevada awhile ago when they first starting impacting us significantly early in 2008, and we haven't seen any material changes in any region since then.

Rachel Schechter - Oppenheimer & Co.

And then some of the other calls we've been listening to have mentioned that they expect a negative impact on same-store sales from the Halloween and Christmas weekend shift this year. Are you expecting to see the same?

Katie Scherping

We looked at our past history when Halloween and Christmas fell on the same days, and we really didn't see a significant impact. So maybe 10 basis points in a quarter, but it's not significant.

Eric C. Houseman

Halloween was Friday last year and Saturday this, so they're both big nights for us, so we wouldn't have seen a material change there.

Rachel Schechter - Oppenheimer & Co.

And then also I know recently there was some snowfall in Denver. Did that affect your October comp at all?

Eric C. Houseman

No, I don't think materially. We didn't close any restaurants. We actually had a Board meeting and went out to dinner at the Red Robin that evening. It had some effect, but we always have snow in Colorado.

Rachel Schechter - Oppenheimer & Co.

And just a last question. Given your guidance of 150 to 160 basis points decline restaurant margins, does that mean you're expecting Q4 restaurant margins to be sub-15%?

Katie Scherping

Well, it depends on what you expect the top line to be, and I'm not going to guide you there. So, yes, for the full year we gave you 150 to 160, and you can do the math on whatever you think your top line's going to be.

Operator

Your next question comes from Jeffrey Omohundro - Wells Fargo Securities.

Jeffrey Omohundro - Wells Fargo Securities

My question relates to average check and the decline in the period, pricing versus mix. What kind of activity are you seeing among your guests in terms of their search for value? It sounds like from the LTO there's significant pent-up demand there. Just in general what your thinking is around that; a little more elaboration would be helpful.

Katie Scherping

From a price mix standpoint, our price mix has been declining a bit since obviously prices rolled off. We've seen a little bit of a mix shift headed away from some of the entrees into the burger category, but it's hard to tell if that's coming from more restaurants opening, people trying the burgers and shifting promotion to the burger category like we were talking about. We've seen a lot bigger increase in that, so we have lost some mix shift from that. But that's really about it.

And then as far as value, etc., I'll let Susan comment on that.

Susan Lintonsmith

What I can say is that we did see quite a few people capitalize on the $5.99 Chicken Caprese Sandwich and the Wise Guy Burger. That didn't materially impact our guest check average. We did see about $0.40.

Katie Scherping

In those 10 markets.

Susan Lintonsmith

In those 10 markets.

Eric C. Houseman

$0.40 in those 10 markets where the two products that we promoted represented around 10% of sales.

Susan Lintonsmith

Correct.

Jeffrey Omohundro - Wells Fargo Securities

That's really remarkable. Did you happen to do any testing around guest satisfaction in those markets?

Susan Lintonsmith

Well, we're continuing to test that or to monitor that with our Guest Voice program. And we have been seeing some gradual improvements period-over-period in our guest satisfaction rating, and we started off at higher than the industry average on those anyway, so we've been really pleased to see guest satisfaction increase overall in TV and non-TV markets.

Jeffrey Omohundro - Wells Fargo Securities

So that's overall, not specific to these 10 markets where I would assume they're probably spiking?

Eric C. Houseman

We will be getting that data as we roll forward here as it gets sent in or put in through the Internet. And we talked to team members, etc., and general managers, etc., while the promotion was going on in all the markets to try to gauge guest reaction. It certainly increased the traffic big time.

Operator

(Operator Instructions) Your next question comes from Brad Ludington - KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets

I wanted to ask, one thing I might have missed a little bit trying to keep up with the commentary on marketing was obviously it sounds like you're going to have some more television advertisements in 2010, but what kind of focus will you have on the direct mail and loyalty program going forward?

Susan Lintonsmith

Well, we plan at this point to continue with both. The loyalty, first off, is in the pilot right now and we do plan to roll that out in 2010. And direct mail, we've been very pleased with the results of that to date, and so just currently we are looking at having that as part of our tactics for 2010. But all of it is, again, to support our LTO product news.

Brad Ludington - KeyBanc Capital Markets

And then in those markets, when you ran the $5.99 for the rollout of the Chicken Caprese and the Wise Guy, as that $5.99 price point rolled off, did you see a big drop off in traffic or did traffic still at least maintain to some level?

Susan Lintonsmith

Well, we actually have continued that price point through the entire promotion in those 10 TV markets, so it continued past those three weeks.

Eric C. Houseman

It actually goes to Sunday.

Susan Lintonsmith

Yes, it goes until Sunday, November 8th.

Dennis B. Mullen

And then the product will be out of the restaurants, so it's not a discount of anything that's currently on the menu.

Brad Ludington - KeyBanc Capital Markets

And do you have a schedule for LTOs going forward? Should we expect one a quarter or is that still kind of being decided?

Susan Lintonsmith

It's still being decided right now, but we definitely are looking at having a couple of pulses similar to what we had this year with product news in 2010, and this time probably supported with television in whatever markets we think make sense.

Katie Scherping

We have a good pipeline of products to choose from going forward, so we'll make those decisions as we move forward into the 2010 planning phase.

Brad Ludington - KeyBanc Capital Markets

And then just given a similar number of store openings, should we expect similar CapEx, $40 to $45 million, in 2010?

Katie Scherping

Yes, that's how we're modeling it.

Operator

Your next question comes from Greg Ruedy - Stephens Inc.

Greg Ruedy - Stephens Inc.

Following up on the price points on the Wise Guy and the Caprese, is that $5.99 an average? Were you scaling different price points across those 10 markets? Or was it just $5.99 across the board?

Katie Scherping

We did $5.99 in all 10 markets.

Greg Ruedy - Stephens Inc.

A question for Eric. The heart of the house efficiencies, I appreciate the color on the two hours of prep that you've been able to pull. Can you talk about further opportunities to get more efficiencies out of the back of the house or are we at the point where really the easiest labor saves are out of the four walls?

Eric C. Houseman

No, Greg, great question. We actually were able to pull more than the two hours. That's the net-net. We were actually able to pull closer to five but reinvested another three hours in the business.

We'll continue to examine the heart of the house efficiencies. There is some opportunity there. We don't have major initiatives right now. We're focusing more of our attention in the front of the house.

So just more to come on that, but too early in the analysis to quantify any savings there.

Operator

Your next question comes from Tommy Halloran - Courage Capital Management.

Tommy Halloran - Courage Capital Management

I have two questions. The first is: On the burgers that you are discounting, I mean, excuse me, limited time offering, are they the same size as the burgers that are currently on the menu?

Katie Scherping

Yes, they are. Yes.

Tommy Halloran - Courage Capital Management

And then secondly, when you all are talking about looking for cost savings on the labor side in the front of the house, where do you begin to feel like you're getting into territory that begins to impair the guest experience?

Eric C. Houseman

Yes, there's a balance, Tommy. We'd never sacrifice labor in terms of eroding the guest experience; however, we would look at how to utilize technology in different areas of the business to effectively improve our efficiencies as well as managing the shoulders of our business better.

Operator

Your next question comes from [Amal Duci] - Johnson Rice.

Amal Duci - Johnson Rice

The 10 markets you're referring to, what is that as a percentage of your total system?

Katie Scherping

Of our company restaurants it's about a third of our restaurants.

Amal Duci - Johnson Rice

In terms of the two-year poultry contract that you signed, how much of a premium did you have to pay over spot to lock in a longer timeframe?

Katie Scherping

We don't disclose the terms of our contract. Just suffice it to say it's a contract that's more favorable than the two-year contract that just expired, so we are looking forward to some relief on poultry pricing going forward.

Amal Duci - Johnson Rice

Regarding the sequential decline in G&A, how much of that is the result of the headcount reduction and is there anything else in that number?

Katie Scherping

For the overall full year we don't expect that to be material at all. There's some severance expense that'll hit us in Q4, but it won't be material for the year.

Amal Duci - Johnson Rice

So how should I think about a G&A number of 2010? Can you help with that, please?

Katie Scherping

We're not going to give guidance on that yet. We need to fully make our G&A plans and we're in the process of doing that right now.

Operator

With that, ladies and gentlemen, there are no other questions. We'll conclude the question-and-answer session. I'll turn things back over to our speakers for any additional or closing remarks today.

Dennis B. Mullen

Well, thank you all for your questions, and certainly thanks to our great team members out there at Red Robins. We appreciate it. Thank you.

Operator

Thanks again for joining us everyone. That will conclude today's call. Have a good afternoon.

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Source: Red Robin Gourmet Burgers, Inc. F3Q09 (Qtr End 10/04/09) Earnings Call Transcript
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