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Ruby Tuesday, Inc. (NYSE:RT)

F2Q10 Earnings Call

January 6, 2010 5:00 pm ET

Executives

Steve Rockwell - Vice President, Finance

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

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

Mark Young - Senior Vice President, Marketing

Kimberly M. Grant - Executive Vice President

Analysts

Joseph Buckley - Banc of America Merrill Lynch

Keith Siegner - Credit Suisse

Jeffrey Omohundro - Wells Fargo

Thomas Forte - Telsey Advisory Group

Brad Ludington - Keybanc Capital Markets

Jonathan Waite - Precipia Research

Robert Derrington - Morgan Keegan

Chris O’Cull – Suntrust Robinson Humphrey

Operator

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

Steve Rockwell

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

I would like to remind you that there are likely to be forward-looking statements in our comments and I refer you to the note regarding forward-looking information in our press release and the most recently filed Form 10-K. We plan to release third quarter fiscal 2010 earnings in early April.

Our second quarter earnings were released today after the market closed. A copy of our press release can be found on the investor relations section of our website at rubytuesday.com and is also available on Business Wire, First Call and other wire services.

Our format today includes a review of our second quarter results, an update of our fiscal 2010 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks, we will open up the lines for questions. I will now turn the call over to Sandy.

Samuel Beall

Thanks Steve and thanks everyone for listening in this afternoon. We remain very encouraged about how guests are responding to our menu innovations and our marketing programs. The momentum in our business that started about a year ago continued in our second quarter and we made further progress towards all of our key objectives for the year.

Those objectives are: First and foremost get customers in seats to increase traffic and sales. Second, to maximize cash flow and debt repayment. Third, to further strengthen our brand through high quality casual dining efforts on food and service and compelling value.

First, our primary objective as we mentioned is to get guests in seats and drive traffic and sales. Our same restaurant sales were down 1.7 as you saw in the release compared with a 3.1% decline in the first quarter and a 10.8% drop in the second quarter of last year. Our restaurant sales decline consisted of an increase in guest count of 1.8% and a 3.5% decline in net check.

While we won’t be completely satisfied until our same restaurant sales are positive we are pleased that we outperformed Knapp-Track by about 3.5 percentage points, the third consecutive quarter of same restaurant sales performance. Our same restaurant traffic was stronger than our sales, up approximately 1.8% outperforming Knapp by 6-7 percentage points for the period of time. We have now beaten Knapp on traffic for the last four quarters and have had an absolute increase in traffic in each of the last three so solid momentum there.

As a result of our strength this year on a 2-year basis we are underperforming Knapp by a little more than 2% in sales and less than 1% of traffic and this was after of course the disaster here year before last. The quarter continued to benefit from our marketing programs and guest response in particular and the increase in our traffic indicates that our brand repositioning is being recognized and appreciated and our research says the same thing; brand repositioning of the new Ruby Tuesday is good. Keep in mind that our brand reimaging was completed only about a year and a half ago so awareness is still building. Our brand is well positioned and performing well versus other Bar/Grill brands.

There were several other important developments during the quarter that contributed to our results including a new menu introduction in early November that included an innovative beverage program and the rollout of our expanded brunch program system wide. These initiatives resulted in a net positive impact on check. Our check was down 3.5% this quarter compared with 6.2% last quarter and has further contributed to our quality positioning concept of differentiation and marketing. Kimberly will go over these points in a few minutes.

Right now though let’s talk about some of the financial performance and I will turn it over to Margie to do so.

Marguerite Duffy

Thank you Sandy. Happy New Year everyone. We continue to be encouraged by our sales and traffic trends in the second quarter that flow through the cash flow and earnings and the strengthening of our balance sheet as we were able to further pay down debt.

I will review the second quarter and update our guidance for fiscal 2010. We reported fiscal second quarter fully diluted earnings per share of $0.01 versus a reported loss of $0.73 per diluted share last year. Our loss last year includes charges relating to the restructuring of our property portfolio and the write off of goodwill that totaled $0.71 per diluted share.

The revenue decrease of 5.6% during the quarter was primarily reflecting the 1.7% decline in same restaurant sales and the net decrease of 43 company-owned restaurants from the second quarter to prior year reflecting the full 43 restaurants we closed during the third quarter of fiscal 2009. We didn’t open or close any company-operated restaurants in the second quarter. The same restaurant sales change was comprised of 1.8% increase in traffic and a 3.5% decline in average check.

Franchise revenue declined 24% primarily reflecting our [branding] temporarily reduced with deferred royalties for some franchisees and a decline in same restaurant sales of 4.7%. We are continuing to work with our franchisees to help them through this period of economic weakness.

The restaurant level operating margin was 13.7% for the quarter compared with 13.5% a year earlier. Food costs increased to 28.9% of sales versus 27.4% primarily reflecting our value initiative. A portion of the increase in food cost was also attributable to expanding our lobster offerings. They have higher food costs as well as the impact of our $5 cocktail program. In general we continue to experience favorable commodity costs on similar items which allow us to invest in higher quality menu items.

We are pleased with the decline of labor costs as a percent of sales at 35.2% from 36.6% reflecting the impact of our cost saving initiatives and a new labor scheduling process. We are extremely pleased with labor costs. Other restaurant operating costs were down 30 basis points including the benefit of a $900,000 credit card class action suit settlement, higher general liability insurance costs and increased repair and maintenance in part reflecting repairing flood damage to one of our restaurants in the Atlanta flood, offset lower utilities and other expenses.

Depreciation was down 70 basis points as a percent of sales primarily because of savings from our restaurant closings in the third quarter of last year. Last year’s second quarter impairment and assets becoming fully depreciated since the prior year. SG&A expenses declined 260 basis points as a percent of revenue. Contributing to the decline were reduced advertising costs as marketing dollars were shifted from television to promotions and lower management labor as we increased and expanded control of both the regional and supervisory levels. These items outweighed the higher bonus accrual.

The equity and losses of our franchise partners increased principally due to their soft same restaurant sales. Interest expense in the quarter declined to $4.6 million from $9.9 million reflecting both a decline in our average debt balances and the lower interest rate on our bank debt because of the low level of LIBOR and a lower spread to LIBOR. Closure and impairment expenses were a small credit this year because of a favorable lease reserve adjustment. Last year we incurred charges related to our restructuring. We also wrote off our goodwill.

Our tax rate 47.4%, higher in the first half of the year under FIN48 and second quarter’s traditionally lower level of income.

Turning to the balance sheet, our book debt including current maturities was $365.5 million, down approximately $21 million in the quarter including a $19 million tax refund. Year-to-date we have paid down nearly $128 million of debt. A year ago our book debt was $565 million so we have paid off $200 million in the last 12 months. Our book debt to total capital was 42% and in line with many of our casual dining peers. We were very pleased with our book debt to EBITDA which was below 2.5 times. We clearly have made a lot of progress in reducing debt and strengthening our balance sheet.

Our guidance is as follows: We do not expect to open any new Ruby Tuesday company operated restaurants in fiscal 2010 and anticipate closing 12-13 in the second half of the year. These closings are consistent with our previously announced plan to close 30 restaurants over the next several years when their leases expire. There are currently three franchise restaurants, one of which is international, that are expected to open in the second half of fiscal 2010.

We estimate same restaurant sales for company operated restaurants will be down 1-3% for the year. At this time in part because of the impact of severe weather in December we favor the lower end of close to the 3% range. We expect the restaurant operating margin will be down 50-150 basis points primarily reflecting the impact of our compelling value strategy for food costs.

Depreciation and amortization is projected to be $62-65 million. SG&A is targeted to be down approximately 10% year-over-year with the entire decline in the first half of the year because we will begin to lap our cost reductions in the second half. Interest expense is expected to be in the $16-18 million range. The tax rate is projected to be 10-20% which is below the full rate because we continue to benefit from [inaudible] and other employment related tax credits.

Diluted earnings per share for fiscal 2010 are estimated to be in a range of $0.50 to $0.60, unchanged from prior guidance. Capital expenditures are expected to be $18-20 million and we estimate we will pay down $50-60 million of additional debt this year bringing the total debt pay down for the fiscal year to $178-188 million. We are encouraged by the progress we have made in the last year to improve our operating results and strengthen our balance sheet.

Our principal financial goals remain unchanged. To maximize our cash flow and further strengthen our balance sheet by paying down our debt as rapidly as we can. Now I would like to turn the call over to Mark to go over some of our sales goals and progress.

Mark Young

Thank you Margie. About a year ago as we discussed on our prior calls we broadened our overall marketing strategy to one encompassing four pillars; Brand promotions, Internet activities, traditional media and unit level or community based programs. This shift from a one dimensional strategy based on traditional media created visibility for the brand and encouraged guests to visit us.

Along with our continued improvements in operations the change in our marketing strategy has been the primary driver in our improving same restaurant sales trends relative to Knapp-Track and our increased guest traffic. As we began to lap the improvement in sales and guest counts in the third quarter a key will be maintaining our momentum and ultimately generating higher same restaurant sales.

We have programs in place and under development to do just that. I will review some of the generally but for competitive reasons I won’t go into a lot of detail. We continue to focus on menu innovation in our effort to drive more traffic. Our goal is to develop a series of menu items and product extensions that support our high quality casual dining position, lead to increased guest frequency over time and broaden our appeal. We are focused on creating more variety, craveability and constantly improving our existing menu items.

As Sandy mentioned earlier we introduced a new menu in the beginning of November which is the latest effort in this culinary objective. In response to guest feedback this menu enhanced our variety in several menu categories with additions to our appetizer line, an expanded line up of quesadillas and several great new dinner entrees including a variety of lobster combinations and products one of which is a unique Lobster Mac n Cheese. We strengthened our position of garden freshness with four new entrée salads and four new mini combinations with our soup or signature garden bar.

With these new products and a different layout this menu has resulted in a higher average check with minimum menu price increases. We are very pleased with the response to this menu. Along with our new menu we introduced an innovative liquor program. All cocktails made with our premium well liquors are $5 all day, every day. This highlights our focus on quality ingredients and underscores our efforts to create more everyday value. Our intent is to provide a high quality cocktail at a great price that entices the regular dining guest to trade up from non-alcoholic beverages.

During our last call we discussed the introduction of our four course Sunday brunch. We are very pleased with the response to this new program and the incremental sales and traffic it is generating for the brand. We know it will be a slow build over time as we are only promoting it within our restaurants. We recently made some enhancements to it by extending the hours to 9-3 from 9-12 and adding several new entrée choices such as omelets, crepes and steak and eggs.

We continue to analyze our business by specific periods to see if there are additional opportunities to get more sales out of existing assets like we have done with brunch. For example, we launched a new late night bar program on January 1 with free menus at the bar after 9 p.m. with the purchase of a $3 beverage.

Finally, we will continue to devote considerable resources to customize our marketing to specific markets and even down to the individual restaurant. This has enabled us to respond quickly with a different program if a market or restaurant is not achieving expected results. We remain focused on those markets and restaurants that are under-achieving.

As we have discussed before, our long-term goal is to increase our average check to the $12.50 to $14.50 range from the $11.50 to $12 range. The first step to accomplishing this goal is increasing our customer traffic since it is easier to manage the check when demand is increasing. With our customer traffic up, as was mentioned earlier, we can work on increasing our average check and our new menu is a step in that process.

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

Kimberly Grant

Thank you Mark. As Sandy mentioned earlier our same restaurant sales continued to outperform our peer group as measured by the Knapp-Track. We believe our ability to drive positive guest traffic through the last three quarters during a very challenging sales environment is the culmination of many sales building programs we have tested over the last year and implemented over the last 6-9 months.

As noted in Mark’s comments, we are very focused on a lot of different programs that together we believe will strengthen our brand and provide us a strong foundation for long-term sales growth. A key element of these programs includes the creation of new day parts for our brand such as the Sunday brunch, happy hour and late night bar and food programs.

During the last six months we invested heavily in these new programs including training sessions for our general managers at our Center for Leadership Excellence in Tennessee as well as hands on beverage training for all of our bartenders across the country. We have over 3,000 bartenders throughout the country. Installed high definition, flat screen televisions in our company-owned bar areas to try to create a more modern, fun and active bar atmosphere; a great place for you to watch a favorite basketball game during March Madness or enjoy a great $5 premium cocktail and now after 9 p.m. a free menu of your choice. Our guests and teams are extremely excited by these new programs and both our Sunday brunch and new beverage programs have positively contributed to our same restaurant sales trends.

Later this month our beverage program is going to be recognized by Cheers Magazine as the Best Overall Chain Beverage Program for 2009. We are very proud of this recognition and it is a testament to our team’s focus on driving overall beverage sales including our handcrafter beer selection, our premium well cocktails, our wide variety of wine list that you won’t find at any other bar/grill restaurant and our zero proof, non-alcoholic offerings like our famous strawberry lemonade.

Now our operational fundamentals remain very strong. We continue to experience exceptionally high levels of guest satisfaction with our top two box scores for our four key attributes, which are overall experience, value, intent to revisit and intent to recommend which is the most important, are all over 92%. These scores represent the experiences of approximately 120,000 guests each quarter and we have been tracking these scores for over two years. It is a very reliable piece of research we use to make a lot of our decisions.

Our top box scores continued to increase and 2/3 of our guests rate their overall experience as a five on a 1-5 scale. Our most dramatic increases have been in our service levels which has been our focus this entire year specifically on friendliness of service with our teams and the attentiveness of service for our guests. Our goal is to continue this improvement by integrating more service standards that ensure most guests are served by our very best servers.

Our team key measures have remained solid as well. Our year-to-date management turnover is approximately 20% and our hourly turnover is just under 100% year-to-date, both of which are very low levels for our industry and in line with our objectives for the year. We are very encouraged by this continued momentum in our sales team and operational performance.

However, like Sandy said earlier we remain focused on our ultimate goal which is consistently achieving positive same restaurant sales. I will now turn it back over to Sandy for a wrap up.

Samuel Beall

Thanks Kimberly. I think you all know our mission but our mission here at Ruby Tuesday and what we think about all the time is to be the very best in bar/grill by delivering a high quality casual dining experience like dinner house segment but with compelling value for every guest. We have consistently executed on these same brand strategies for the last four years to support this mission.

The strategies that support the mission are uncompromising freshness and quality, gracious hospitality, a fresh plate and compelling value. These strategies are central to our brand and are the foundation of our company.

To wrap up, we continue to be focused on three things; get guests in seats, generate cash and pay down debt and further strengthen the brand through quality. I think we are performing, doing a nice, consistent job and the teams are executing well in these areas. We have been successful in bringing guests into our restaurant to see the new Ruby Tuesday and every time we continue to hear “Gosh I didn’t know Ruby Tuesday was like this.” That will be our challenge also for the next 3-5 years.

Our guest traffic has outperformed the industry. It is a long-term opportunity but when we get people in they do love it and as we mentioned traffic has been up the last three quarters. Also significantly we paid down a ton of debt. Margie mentioned $200 million in the last 12 months and I think it is $240 million in the last 18 months and we continue to for a long time generate $80-100 million of free cash flow a year.

Our brand is well positioned based on feedback, based on what our teams think and based on a lot of research that we are doing. We are doing more research than we have in our entire brand history. We believe we are creating value with our strategies in these current challenging times through positive traffic, strong cash flow and the debt pay down that we mentioned. We believe that this debt pay down definitely accrues to the benefit of shareholders even without massive growth right now.

Longer term though we realize we have to significantly increase our return on assets and really maximize the shareholder value to get it where we would like to have it. Achieving positive sales is a critical first step towards increased returns which is getting more from existing assets. Maximizing average unit volumes and EBITDA significantly above where they are now is key to maximizing shareholder value, getting those higher returns, etc. over the long term.

With that, we think we had a good quarter. I want to thank the team and everybody listening. With that I will open it up to questions from you all.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Joseph Buckley - Banc of America Merrill Lynch.

Joseph Buckley - Banc of America Merrill Lynch

A question on the lower amount of check decline. Can you talk about the factors behind that? I know the new menu was just rolled out I guess the last month in the quarter but if you have some input on that or if the value programs and discounting couponing has been a little less aggressive and is that driving it? What do you see in the much smaller decline this quarter year-over-year than from the first?

Samuel Beall

I think it is a combination of what you said. We didn’t have much price increase. Our menu layout and the products we added and the food promotions added most of the check increase. I think we increased like four items or something. Those items where we increased we actually increased the portion also.

Mark Young

The biggest thing on the menu was the introduction of the new products and then we did adjust slightly the coupon strategy some. That had some impact.

Joseph Buckley - Banc of America Merrill Lynch

Does brunch help the check?

Samuel Beall

Yes. Everything we try to do is on strategy and that is to get us to drive traffic but also drive sales and part of driving sales is trial frequency but getting our check up.

Joseph Buckley - Banc of America Merrill Lynch

The SG&A decline, how much of that is the lower advertising expense?

Marguerite Duffy

I think in terms of dollars it is about $8.5 million in absolute dollars.

Samuel Beall

We can give you a number on G&A though, the one we gave the board earlier, our core G&A is down like $14 million over the last two years so after all the increases we still cut out $14 million.

Operator

The next question comes from the line of Keith Siegner - Credit Suisse.

Keith Siegner - Credit Suisse

I wanted to ask a question about the royalty rate and the deferred royalties or incentives offered. I was very encouraged to see a meaningful uptick in the royalty rate this quarter after the first quarter. At the same time, the franchise same store sales still are under a little bit of pressure but if you can just give me a quick update on what is going on with those incentives? Have there been any changes? Have some of them been scaled back? Is the second quarter higher rate of royalty more representative of what we might see going forward? Anything along those lines would be helpful.

Marguerite Duffy

I think it is a fair indication that we will have maybe a little higher the second half of the year only because volumes do pick up higher in the second half than the second quarter so I do think keeping it in line with second quarter but taking into account the higher volumes is a fair approach.

Keith Siegner - Credit Suisse

With the equity income line getting to be a little bit larger to the losses and with your debt levels having been reduced have there been any franchisees that have approached you about buyouts or something like that? Is this something we may see some, if at all, over the next six quarters?

Samuel Beall

We have one who is a small one that has approached us to see if we would be interested. I think he is talking to another franchisee also. I don’t know where that will end up. That is the only one that I know of. It is not a big issue at all.

Operator

The next question comes from the line of Jeffrey Omohundro - Wells Fargo.

Jeffrey Omohundro - Wells Fargo

I think Margie you commented perhaps the lower end of that minus 1-3% comp guidance range might be appropriate given some weather I think you said. Maybe you could elaborate on that a bit for us?

Samuel Beall

We said the higher end of the 1-3. Depending on how you look at it.

Marguerite Duffy

When you are talking negatives, I did mean the down 3 versus the down 1 but the weekend before Christmas our restaurants in particular were particularly impacted by the weather. So we lost the benefit of that weekend.

Samuel Beall

Still not bad. I think the main thing on sales, our guidance last quarter was 1-3%. It is the same thing for the whole year and the same thing right now. Sales, as you all know, are volatile out there. It is hard to figure out what the sales are. Hopefully they are at the low end, maybe at the high end. Just trying to be conservative.

Jeffrey Omohundro - Wells Fargo

The other thing I wanted to ask you about was now that you have had a few quarters with the lobster products on the menu which certainly seem to be in our view one of the more differentiating attributes of the brand emerging within a more upscale grill and bar positioning. I am just wondering if you can talk about feedback and scoring and the impact that the lobster specifically you think may be having on customer perception of the evolving Ruby Tuesday.

Mark Young

From a brand standpoint I think it has done what you said. I think it has enhanced and been a positive piece for the brand from an image standpoint. From a preference standpoint the appeal of the item has for sure been positively responding to that and I think from an operational perspective as well we have heard positive things from our guests on that. As we have talked about all along we are trying to find some of those items that we can add to the menu that continue to push our brand and supporting our brand as we become a high quality casual dining restaurant. The Lobster Mac n Cheese is just a perfect opportunity to take something that is mass America, twist it a little bit, and have something that is very unique in the marketplace and we are getting a lot of credit for it. I think it has enhanced our direction and our vision for what we are trying to do for the brand.

Samuel Beall

It really helps us with differentiation. It helps us with I think brand image. It really helps separate us from the rest of bar/grill because our goal is to be significantly better than the rest of our grill and they are really great products. I think if you try the Lobster Mac n Cheese it is outstanding. It is a craveable item. It also gives us a product we can run on promotion as we have right now with 5-6 lobster items listed which is something nobody else has, as you mentioned, and it also gives us a way to sell value. We are selling Lobster I think starting this month at $16.99 for steak and some decent sized lobster tails. Not some real small ones. We think that is a great, compelling value.

Mark Young

We will continue to push from a culinary perspective continue to push that type of production from a menu standpoint that has broad appeal and continues to reinforce what our strategy is for a high quality casual dining restaurant.

Samuel Beall

We are definitely not going to be a high [falooting] restaurants. We are trying to run a great, varied menu restaurant at high quality casual dining levels and with some differentiating points that would be more associated with dinner houses than bar/grill. A great place for couple’s night out is what we are going after. That is a great segment.

Operator

The next question comes from the line of Thomas Forte - Telsey Advisory Group.

Thomas Forte - Telsey Advisory Group

What are your thoughts on pricing for the remainder of fiscal 2010? Second, you do have a lot of company initiatives going on which are succeeding and driving traffic but what is your take on the state of the consumer right now independent of the activity you are doing to drive traffic? Do you feel like we have turned a corner and consumers are starting to feel a little bit better about dining out?

Samuel Beall

I will take a shot at pricing. We don’t want to have pricing. We had very little on the last menu. I think still in these times you need to add more and more value. This is not a time to take pricing really. The consumer, I haven’t seen anything in the world, it seems like the higher end consumer is coming back whether that is the Saks customer or some other high end places I am familiar with. It seems like they started coming back in November and December. I think that will trickle down to the $150,000 and $100,000 and less category. I think that will lag the higher income ones.

So really haven’t seen any dramatic changes. It is not getting worse. I am not planning on it getting a whole lot better which is okay. We are doing well in these times. We still have an oversupply of specialty casual dining and a lot of seasonal restaurants go out of business for awhile.

Operator

The next question comes from the line of Analyst for Brad Ludington - Keybanc Capital Markets.

Analyst for Brad Ludington - Keybanc Capital Markets

It looks like that franchisee store to company store gap is still pretty wide. Do you have any comments around that?

Samuel Beall

As far as same restaurant sales go?

Analyst for Brad Ludington - Keybanc Capital Markets

Yes.

Samuel Beall

What is it on a 2-year basis Margie?

Marguerite Duffy

We are comparable on a 2-year basis for the quarter.

Samuel Beall

Part of that is just year-over-year.

Analyst for Brad Ludington - Keybanc Capital Markets

So it is not a matter of them lagging any initiatives or taking on anything later. Could you discuss the current discounting or couponing marketing strategy especially in regards to the customized marketing approaches you said you were taking regionally?

Samuel Beall

You mean our incentive strategy?

Analyst for Brad Ludington - Keybanc Capital Markets

Yes.

Samuel Beall

Comment on it in what way? I mean, we just got some advertising research back. They said we see great food promotion. That was like three to one or two to one at least over any kind of value equation from the incentive offers because they are quality food promotions. We are just being consistent. We would love to incentivize less over time but this isn’t the time to stop advertising or to stop our strategy which is more from a great food promotions out there which is an incentive to come in and try the fresh, new Ruby Tuesday. I think 75% of people know what a Ruby Tuesday is but 25% has been in the last 90 days. When they come in they say, “This is Ruby Tuesday? This isn’t what I thought it was.” So we still have a long way to go on creating trial and incentives are a good way to do that directly to their homes.

Analyst for Brad Ludington - Keybanc Capital Markets

So would you say the incentives are still at similar levels to what we saw in the last quarter?

Samuel Beall

Well they bounce around each quarter. First was heavier than second actually. It is just different on seasonality. When we overlap third and fourth it will be very similar to the prior year.

Operator

The next question comes from the line of Jonathan Waite - Precipia Research.

Jonathan Waite - Precipia Research

A question again on the couponing. There have been some folks out there that say we might see a lessening of the couponing, the discounting and the promotions that we see in casual dining. Do you agree with that? Is that going to take some time? What are your views on that?

Samuel Beall

I think you are exactly right. Definitely you are going to see a lessening of discounting or deals on TV or incentives through our food promotions or whatever. It is just when we can all get away with it. I don’t think now is the right time. Hopefully in the next 3 to 6 to 9 months we will start lessening that. Right now I think Ruby Tuesday we want traffic. We want people in our restaurants to see the new Ruby Tuesday and I kind of think that is everybody’s strategy right now really.

Jonathan Waite - Precipia Research

Is this going to depend completely on the job market?

Samuel Beall

I think it is mostly driven by the job market. There are two things affecting the consumer. Fear of loss of job and not having a job and then also paying off debt is cool. They are feeling very good about that. That worries them a lot. So until they have the debt paid off or until that is not an issue hanging over their minds and until they feel better about their jobs regardless of those who are unemployed they aren’t going to spend any more. That is pretty clean research too.

Jonathan Waite - Precipia Research

Speaking of being cool and paying down debt you have done a great job in that regard. Walk me through the end game for you.

Samuel Beall

The end game?

Jonathan Waite - Precipia Research

Yes.

Samuel Beall

Which year? The next 2-3 years?

Jonathan Waite - Precipia Research

Just from a balance sheet perspective.

Samuel Beall

Balance sheet? We do believe in a permanent capital structure. We are not there yet. We still want to pay off debt for another year or two years. Then you have a lot of excess cash flow which you can use for other means; returning to the shareholder in some cases after you finish paying off debt down to where you want it. Then hopefully investing a little bit of money. We envision us always being heavy, free cash flow based with a nice sharing with the shareholder and then investing to create some modest growth we hope. That is a long ways off. Right now it is about filling seats. Cut costs. Create cash flow and pay down that debt.

Jonathan Waite - Precipia Research

So primary use of cash flow for the next two years then would be debt pay down?

Samuel Beall

Yes. We feel very comfortable with our CapEx in a range where we are in the range now for a long time to come. Our restaurants are in good shape. We don’t need any more CapEx than that.

Operator

The next question comes from the line of Robert Derrington - Morgan Keegan.

Robert Derrington - Morgan Keegan

We have talked a little bit about advertising and couponing and incentives and there is some belief out there ultimately it trains consumers to especially use the brand when they get one of these incentives in their hand. Is there a point at which you can wean your customers or some of your incremental customers off of those coupons without losing that?

Samuel Beall

I think you can when the economy comes back. Let’s put it in perspective. I think 8% or less of the tables that come into our restaurants even have a coupon. So the other 92% or 93% don’t. So it is not like it is the most dominant piece of business that we are buying business in. I just don’t see it as a big issue. I think in addition to that the latest research we got back here about two weeks ago on advertising which is just food promotions with incentive based offers, they see it as being food, not as cheapening of the brand which is deal, deal, deal. So I don’t think we are hurting brand image at all and I certainly don’t think we have too many offers out there. Yes I hope we can cut it back and that is what we would like to do because that is part of getting our check up.

Mark Young

I think with what we are doing with our incentive strategy is what Sandy alluded to earlier and that is we still have 80% of the customers out there not coming in and visiting Ruby Tuesday and we are in the process of communicating a change in a brand. That is the reason why we have taken the approach we have and we do take the approach of trying to create a brand image advertisement piece that has an incentive as part of that. So people do get an understanding of what really Ruby has to offer today versus what it was 5-6 years ago.

Samuel Beall

Over the next 3-5 years we have to have solid trial creation strategies. As Mark said a lot of people haven’t been in. We have to have some great frequency strategies, which we think we have. Then you have to have check strategies and we think we are in pretty good control of that too.

Operator

The next question comes from the line of Chris O’Cull – Suntrust Robinson Humphrey.

Chris O’Cull – Suntrust Robinson Humphrey

What is the dinner mix currently and how has that trended over the past few quarters?

Samuel Beall

Our dinner item mix because of our goal of 65%, we are at 45% dinner mix. That is approximately where we were last time I talked to you.

Chris O’Cull – Suntrust Robinson Humphrey

Shouldn’t we expect the check average just to improve by moving the guest behavior to be more in line with other dinner house chains in terms of that mix?

Samuel Beall

If we can take it from 45% to 65% I think that adds $0.89 we can take with regards to our moving it, we are getting great traction there, but I think it is another…

Marguerite Duffy

For every 2% in beverage it equals $0.40.

Chris O’Cull – Suntrust Robinson Humphrey

So you are really not raising the price value I guess or raising the price. You are just really trying to get behavior similar to other dinner house chains to get the check higher?

Samuel Beall

Yes closer to that. The way we do that is by having well priced dinner items but they start at $10.99 and other than lobster and one big steak it goes from $10.99 to $13.99 really or $14.99 at the most. So they are very reasonably priced. That is why 40% of all of our dinner items we sell at lunch time because it is kind of a semi-expensive lunch and an inexpensive dinner. That is why we think we can move it. Even if we can get it up to just 55% and get our liquor. I feel confident we are going to get our liquor up. We can get a closer dollar up check here over the next year. Maybe add some coupon to that. We think we have a good strategy to get to our $12-15 range.

Chris O’Cull – Suntrust Robinson Humphrey

Hasn’t the change in the advertising medium meaning these incentives hasn’t that helped get more dinner than lunch usage just by the nature of the offer?

Samuel Beall

Yes.

Operator

The next question comes from the line of Joseph Buckley - Banc of America Merrill Lynch.

Joseph Buckley - Banc of America Merrill Lynch

First, on the last round of questions that 45% mix, are you saying 45% of your sales are in the dinner hour?

Samuel Beall

No. 45% of our items that people order are in the dinner category on the menu. Fish, chicken, steaks, ribs and specialty items.

Joseph Buckley - Banc of America Merrill Lynch

What is the dinner sales mix?

Samuel Beall

P.M. sales mix after 4 p.m. is…

Marguerite Duffy

It is about 55/45. 55 dinner and 45 lunch.

Joseph Buckley - Banc of America Merrill Lynch

Just a clarification on December because that is what is going to be debated after this call is over, what you said or what you meant. What did you say and what did you mean. Was December a relatively soft month? Enough to skew that same store sales guidance down?

Steve Rockwell

December was a tough month to see a trend because of the weather. We had some good days and bad days. Good weeks and bad weeks.

Marguerite Duffy

You also had a varied with the holidays. Christmas and New Years both falling on a Friday and one less shopping week. That is a lot of variability to the market.

Steve Rockwell

What we are trying to say is if what we saw in December continues that we would probably be towards the lower end or higher or however you want to view it, the bottom end of our guidance of 1-3% and towards the higher end of the guidance. If it gets worse than December it could be worse. It could follow-up and if it gets better it could be towards the upper end.

Samuel Beall

If it gets better when you take the weather out or you take losing two weekends for Christmas and all of that, then it is pretty good. December was not a bad month. We are not trying to scare anybody at all and we are not trying to send any signal. We are not trying…it is not bad. I can’t say more than that I guess. It would be easier to give you the number but we are not going to.

Joseph Buckley - Banc of America Merrill Lynch

A question on gift cards. How did you make out through the holiday season on gift cards?

Steve Rockwell

Gift cards we were up for period seven about 3-4% in dollars but if you look at it on a per store basis it was closer to a 10% increase.

Samuel Beall

I think that is it. We appreciate you spending time with us today. If you have further questions call Steve and call Margie. Make a great day.

Operator

Ladies and gentlemen this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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