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Executives

Stephen E. Carley - Chief Executive Officer and Director

Stuart B. Brown - Chief Financial Officer and Senior Vice President

Denny Marie Post - Chief Marketing Officer and Senior Vice President

Analysts

Will Slabaugh - Stephens Inc., Research Division

Alexander Slagle - Jefferies LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

John S. Glass - Morgan Stanley, Research Division

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Alton K. Stump - Longbow Research LLC

Peter Saleh - Telsey Advisory Group LLC

Robert M. Derrington - Wunderlich Securities Inc., Research Division

Red Robin Gourmet Burgers (RRGB) Q4 2013 Earnings Call February 14, 2014 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Red Robin Gourmet Burgers Incorporated Fourth Quarter 2013 Earnings Call. [Operator Instructions]

As a reminder, part of today's discussion will include forward-looking statements within the meaning of federal securities laws. These statements are commonly identified by words such as continue, plan, expect, believe, intend, should and other terms with similar meaning. These statements will include, but will not be limited to, statements that reflect the company's current expectations with respect to the financial condition of the company, results of operations, plans, objectives, future performance and business, including the company's traffic and revenue-driving initiatives, sales growth expectations, expected operating margins, anticipated costs and expenses, intentions with respect to expense management, plans for development of capital, new stores and other expectations discussed during the course of the call.

Although the company believes the assumptions upon which preliminary or initial results, financial information and forward-looking statements are based are reasonable as of today's date, these forward-looking statements are not guarantees of future performance and therefore, investors should not place undue reliance on them. Also, these statements are based on facts known and expected as of the date of this conference call, and the company undertakes no obligation to update these statements to reflect events or circumstances that might arise after this call.

Participants on the call today should refer to the company's Form 10-K and other filings with the SEC for a more detailed discussion of the risks, uncertainties and other factors that could impact the company's future operating results and financial conditions. The company has posted its fiscal fourth quarter 2013 press release and supplemental financial information related to the quarter's results on its website, www.redrobin.com, in the Investors Section.

I'd now like to turn the call over to Mr. Steve Carley, Chief Executive Officer of Red Robin. Please go ahead, sir.

Stephen E. Carley

Thank you, Allan, and thank you, all, for joining us on our call this morning. With me is Eric Houseman, our President; Stuart Brown, our Chief Financial Officer; and Denny Post, our Chief Marketing Officer. After Stuart and I deliver our prepared remarks, we will be available to answer your questions.

If you turn to Slide 2 of the supplemental financials, you can see that we finished the year with operating results that included a 3.7% same-store sales gain, 110-basis-point restaurant level margin expansion and EBITDA and earnings per share growth in Q4. While we're not immune to the industry headwinds in this intense competitive environment, we believe our success relative to others is the result of remaining true to our brand, staying focused on our key strategic initiatives, and executing improvements our guests are continuing to give us credit for.

While proud of the progress we've made, we remain mindful that there is still much to be done. We're in the early innings of building a better Red Robin and the many changes we've made are still new to our team members, so we have a lot of opportunity to improve our execution.

Compared to fourth quarter 2012, comparable sales rose 3.7%, despite fewer holiday shopping days and December weather challenges. Same-store sales growth came from a strong 5.1% increase in average check, due primarily to menu initiatives offset somewhat by a 1.4% decrease in guest counts. Despite the disappointing decrease in guest counts we gained market share for the seventh consecutive quarter, exceeding industry traffic trends by 140 basis points, according to Black Box Intelligence. For the full year, we outpaced the category by 240 basis points.

We attribute some of our progress to our focus on our 3 Es of our strategic roadmap, guest engagement, operational efficiency and footprint expansion. I will briefly address how we executed on engagement in Q4, and Stuart will address progress on efficiency and expansion.

During the fourth quarter we introduced the first burger in our new Finest line. The Smoke & Pepper burger was priced at $13.49, and served with our famous Bottomless Steak Fries. The guest response exceeded our expectations. Our Finest burgers are the most recent example of a long tradition of serving the best in burgers, reinforcing our Burger Authority and providing our guests with great value. The Finest line bookends our best-selling gourmet burgers and is complemented on the other side with our everyday value, Tavern Double, starting at just $6.99, again, with our famous Bottomless Fries. We will continue to build out our barbell of burgers going forward.

Together with our $3, $5, $7 and $9 appetizers, updated dessert offerings and innovative adult beverages, the Smoke & Pepper burger contributed significantly to a positive mix shift in Q4 overall, despite not launching until mid-November.

The fourth quarter also marked the first full quarter we had our new plating and presentation executed in the restaurant. These changes are resonating with our guests, as evidenced by improvements in our guest voice and brand tracking scores. We continue to reinforce our recently introduced RRR service model, which stands for recognize, recommend and reinsure -- reassure, and links directly to our brand transformation learnings.

The RRR service guides our team members to anticipate guest needs, educate them about our various offerings and ensure that we provide them with the unique dining experience they desire. It's one step to evolving the Red Robin brand, and like any significant behavioral change, it will take time, repetition, and relentless focus to ingrain into the system. We've taken the first steps in a long journey towards consistently excellent execution.

In the fourth quarter, we successfully deployed our new labor management system. This new tool is designed to enhance our service by assuring that each restaurant has a labor schedule unique to that restaurant's guest traffic pattern and product mix. It will help our managers to put the right people at the right time, in the right places to enhance our guest service. The national deployment has gone smoothly and the adoption of this tool is ahead of expectation.

Regarding our brand transformation locations, we initiated 19 remodels in the second half of 2013, on top of the 13 initial pilot locations in 2012. The sales lift in our 2012 restaurants have remained near 6%, driven primarily by traffic increases. And we are encouraged with the initial results of our most recently remodeled locations. We're planning to transform 50 more of our restaurants in 2014. You'll recall that our new brand standard design better accommodates guests of all ages in space attuned to their dining expectations on that occasion. Again, we're in the early innings but remain on track, as market research shows our guests appreciate this new approach.

We continue to use Red Robin Royalty to uniquely engage our guests. Registered members now total more than 3 million, up 50% from 2012. And we continue to get smarter about how best to profitably reward our guests for their loyal engagement. Red Robin gift card sales were also up significantly in Q4, up 15.7% to $28.4 million, as our resurgent brand story drew greater interest from B2B and third-party channels.

Lastly, you may recall we announced promotional partnerships last fall with the Denver Broncos, Chicago Bears and Seattle Seahawks. Well, we got 2 out of 3 right, and we're elated that the Broncos and the Seahawks made it to the Super Bowl. Many of our team members thoroughly enjoyed the Seahawks' win, while others not so much. Fans rooted for the Tavern Double Tuesdays all season long, and their teams delivered.

Before handing off to Stuart, let me briefly discuss our progress with Burger Works. Based on learning from our 5 pilot locations, we have evolved the concept to bring it much more closely aligned with the Red Robin brand. We're dialing up our speed of service, and we're focusing our future development on downtown business locations with heavy daytime and good residential. We're focused on differentiating Burger Works by offering our legendary burger quality at competitively superior speed, with a high-touch service level for the fast, casual environment. Our newest location in Fort Collins opened during the fourth quarter, and is the first example of our Burger Works 2.0. We're excited to announce that we've signed LOIs to roll Burger Works out with this updated look into Chicago and Washington, D.C. over the coming months.

With that, I'll pass it over to Stuart.

Stuart B. Brown

Thank you, Steve, and good morning, everyone. While Steve covered the highlights, we are pleased with our fourth quarter performance, which capped off an outstanding 2013 for Red Robin. Despite a more challenging environment that we'd anticipated, our initiatives continue to engage our guests and strengthen our brand.

In 2013, our annual revenues exceeded $1 billion for the first time and increased 4.1% over 2012. While on a GAAP basis, net income rose 13.8% to $32.2 million. Note that fiscal year 2013 consisted of 52 weeks, while fiscal year 2012 had 53 weeks. The extra week in 2012 generated revenue of $21 million and approximately $0.21 of earnings per diluted share.

On an adjusted basis, net income also increased 13.8% in 2013 to $34.4 million or $2.37 per diluted share. We recorded a onetime refinancing charge in 2012 of $2.9 million, and in 2013 had impairment charges in a nonrecurring special bonus totaling $3.1 million. Excluding these onetime items, and the results of the extra week in 2012, net income increased 27% in 2013 compared to the prior year.

The board granted a nonrecurring special bonus in the fourth quarter based on our exceptional 2013 results. We consider this payment to be an appropriate adjustment to earnings, as it was not expected, and therefore not considered in guidance. Nor was it part of our standard management incentive compensation plan. We provided a reconciliation table of adjustments, which we believe makes for a more meaningful comparison to last year, as well as our original 2013 outlook. We realize that some of you will similarly exclude it from Q4 performance, though some may not, and we understand that.

Now moving on to revenues. As you see on Slide 10 of our supplemental, our fourth quarter comparable restaurant sales growth rose 3.7%, which brought the full year comp growth to 4%. The 4% annual growth exceeded our initial guidance of 2.5% to 3% with less menu pricing than anticipated, and was in line with our most recent expectations as communicated on our third quarter earnings call. Fourth quarter sales composition though was a little different than we had expected, with weaker industry traffic but improved mix, providing a higher average check.

As Steve mentioned, our comparable guest counts decreased to 1.4% during the quarter, resulting in a guest count decline of 0.3% for the year. Though we are disappointed traffic growth wasn't stronger, our traffic exceeded Black Box Casual Dining Index by 140 basis points in the fourth quarter and by 240 basis points for 2013.

Our average guest check increased 5.1% in the fourth quarter and 4.3% for the full fiscal year. Of this, price flow-through was about 1.7% in the fourth quarter and 2.1% for the year. During the quarter, average check benefited from mix, including guests trading up to our new Smoke & Pepper Burger, as well as more guests choosing to enjoy our appetizers and beverages. Our alcoholic beverage mix increased 40 basis points year-over-year to 8% in the quarter.

Our restaurant level operating margins increased to 21.7% in the fourth quarter, up 110 basis points from a year ago and in line with our guidance last quarter. This improvement is due mainly to the leverage of the higher sales and fixed expenses, as well as lower local marketing expense and lower supply costs.

As previously mentioned, our fourth quarter general and administrative costs of $22.8 million, include the $1.6 million nonrecurring special bonus. Excluding this item, G&A costs were in line with our expectations, as were selling and depreciation expenses. Pre-opening costs were $1.9 million in the quarter, as we opened 10 new Red Robins and 1 Burger Works, bringing our total openings this year to 22 new units.

The $1.5 million noncash impairment charge in the quarter resulted from the write-downs of 4 restaurants, including one older location which we plan to close in 2014. The impairment charges, as well as the non-recurring special bonus, reduced our fiscal 2013 tax rate to 21.8%, which would have been 23.1% without these 2 items.

To briefly discuss our 2013 investment activity, we invested $78.9 million, including $50.7 million in new stores, $10.3 million in maintenance capital and $6.6 million in IT systems and projects. We also invested $11.3 million for remodeling or adding capacity to 19 restaurants under our brand transformation initiative. We continue to be very pleased with the initial results, as Steve discussed and we covered it at our November Investor Day, with returns expected to well exceed our 12% IRR hurdle rate.

Further, our adjusted EBITDA was $109 million for the year, an increase of almost $4.6 million over 2012, and over 2011 an increase of $16.4 million. We strengthened our capital structure during the year by paying down $47.3 million of debt, and returning $5 million to shareholders in the form of buybacks. Our debt-to-EBITDA, as defined in our debt credit agreement, improved to 0.8x at the end of 2013 from 1.3x at the end of 2012.

Now moving on to 2014. With the consensus outlook calling for continued weakness in consumer spending and casual dining, and the continued oversupply of restaurants, we believe that our focus on delivering innovative burgers and beverages in a fun environment with great everyday value will allow us to continue taking market share.

Regarding sales, we expect 2014 total revenues to grow in the high-single digits. This is comprised of comparable restaurant sales growth in the low-single digits and an increase in operating weeks of 6% to 7% from new openings. The drivers of comparable sales growth will continue to be mix improvement, with more consistent media throughout the year and higher sales from our brand transformation remodels.

Restaurant level operating margins are expected to be slightly north of 21% in 2014, down from 2013. Everyone is seeing many casual dining chains relying even more heavily on discounts and coupons. We are on a different path where we reward our most loyal guests by giving them the ability to manage their occasion and their check, from everyday value to our Finest line. We believe this is a key differentiator and supports our continued taking of market share.

In an environment with weak consumer confidence and disposable income, our sales guidance includes only about 1% of price in 2014. We will be sacrificing some margin in the short term to continue providing great value to our guests. And after several years of investing more in talent to support our strategic initiatives, our general and administrative costs are expected to be approximately $93 million in 2014, allowing us to leverage sales growth. About 1/3 of that expense should hit in the fiscal first quarter, with the remainder spread over the year.

Selling expense is expected to increase to 3.1% of total revenue from 2.9% in 2013. While our media budget is modest compared to many of our competitors, the success of our new media approach has encouraged us to invest in keeping our message on air more consistently to drive top-of-mind awareness.

Depreciation expense is expected to be between $59 million to $60 million in 2014, while interest expense should be near $2.5 million. Our effective tax rate should be about 26.5% on the increase in net income, and assumes the renewal of the work opportunity tax credit. Well quarter-over-quarter earnings growth will be a little bumpy, with limited growth in the first quarter. Compared to 2013, our restaurant-level bonuses and benefits, as well as G&A, will be seasonably higher in the first quarter.

We expect capital investments of $85 million to $90 million in 2014, with $40 million to $45 million to build 20 new Red Robin locations and 5 new Burger Works. Further, our guidance assumes that we will remodel 50 restaurants to our new brand standards. Total investments in remodels and maintenance capital will be about $35 million, while investments in IT systems and other projects will total $8 million to $10 million. Following our successful 2013, we will continue to focus on those same strategic initiatives that have been working for our guests and our shareholders.

Let me turn the call back over to Steve for some final comments before Q&A.

Stephen E. Carley

Thanks, Stuart. In closing, I'd like to reiterate how pleased we were with the progress we made in 2013 in transforming the Red Robin brand. While we made considerable headway, there is still a lot more to do to deliver on our mission of serving more guests more often and leaving them even more delighted with their experience each and every time.

Before we take questions, let me thank our team members in the field and here at the home office for all that they have and continue to do. Their positive attitude about all the changes we're making and their willingness to go beyond the call of duty are what make Red Robin such a special place to work and such a wonderful place to enjoy a great meal with friends and family.

We look forward to 2014 as another year to build upon the foundation we've laid and to execute as a team against engagement, efficiency and our expansion initiatives.

With that, operator, we'd be happy to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Will Slabaugh with Stephens Incorporated.

Will Slabaugh - Stephens Inc., Research Division

A quick question on the Finest line introduction. Just wondering if you could talk a little bit more about how that performed. If you'd speak to the mix at all, and then at the same time, if that impacted the Tavern's platform mix at all?

Denny Marie Post

This is Denny. The mix exceeded our expectations, but we did not see it impact the lower end of the menu at all. I think people traded up from our Gourmet line to the Smoke & Pepper. We are mixing it on Smoke & Pepper at about 5% at this point, and very pleased with the trial that we've driven out of the blocks.

Will Slabaugh - Stephens Inc., Research Division

Great. And if I can hit on appetizers or desserts, anything outside of the entrées that you guys have added on in the past year. Any significant changes or are you seeing much of the same as far as that mix, just slightly improving quarter-to-quarter?

Denny Marie Post

Continuing to see it improve. And appetizers and alcohol, overall, contributed about half of the lift, and the Finest, the other half.

Operator

Next we'll go to Alex Slagle with Jefferies.

Alexander Slagle - Jefferies LLC, Research Division

Stuart, a question. Wonder if you could provide a little bit more granularity on the expectations for restaurant margins in '14. I understand the higher cost of goods and labor, that makes sense. But any color you can provide on the operating and occupancy costs for this year? It looks like you've been getting good leverage on operating costs in recent quarters and wonder why or why not that might continue.

Stuart B. Brown

Yes. If you sort of -- up and down the key drivers of the restaurant-level operating margins, I mean I think you'll see COGS and labor will both -- each increased sort of 20 to 30 basis points. We've got some initiatives in place to help offset some of that. Also concerns given the -- what everybody is seeing with the weather, about utility cost, both for our own cost in the fiscal first quarter, as well as the impact that's going to have on consumers, right, when they get their utility bills and open those up. So labor is going to be driven with the minimum wage increases. We do -- are going to be putting in place a program this year also to improve our team member and manager retention. We've been in line with the rest of the industry, but we think we've got some very opportunity there, and that's what's going to be driving a little bit of the benefit increases. And occupancy increase, as a percentage of sales, we'll get a little bit of leverage of that. But again, with the 20-plus openings in '13 and '14, you won't get a lot of leverage on that line.

Operator

Next we'll go to Joe Buckley with Bank of America, Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Just a few clarifications. The $1.6 million special bonus, how broad was that within the company?

Stuart B. Brown

The details of that will be in the proxy, but that was largely given to the executive team.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then Stuart, did you say the G&A was -- about 1/3 of that will be in the first quarter? I know it's a 16-week period, but I think you mentioned maybe bonus accruals being part of that, the reason why it might be that high, but is there anything else that we should be thinking about?

Stuart B. Brown

No. Normally, our first quarter is a little bit higher. We also do our annual general managers conference and we do that with vendors and franchisees, so our first quarter is typically about 30% to 31% of our overall G&A spend. It will be a little bit higher this year due to some timing, actually, really, of the way we expect insurance cost to hit this year versus last year regarding overall benefit costs. So it's just a little bit of a timing issue, and I just want to highlight that in terms that it will -- because you'll get the benefit of that later in the year.

Operator

[Operator Instructions] We'll next go to Bryan Elliott with Raymond James.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

A quick clarification from me as well. I missed the -- I got the part on the advertising, that you're going to spread it more evenly through the year. I'd like elaboration on that. And what was the percentage of sales that you forecast?

Stuart B. Brown

As a percentage of sales, we forecast about 3.1% for the year, which is up about 20 basis points over a year ago in terms of timing. I'll hand it over to Denny.

Denny Marie Post

Yes. And we will have more weeks on air this year. I'm not inclined to say exactly where and when, but our entire intent is to, again, continue the strategy that was working for us last year of maintaining the pulsing strategy at lower levels.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

All right. And also if I could ask about the Finest line. So as you look at that -- kind of that maturity or end of '14 or something, can you give us a little description about what we might see on the menu at that time, in that category?

Denny Marie Post

I can certainly let you know, as we've been out there with at least 3 others in test, that we do have others in the pipeline. And we'll continue our relationship with the South Beach Food and Wine Festival Burger Bash to continue to use that to drive LTOs around this. So we're very encouraged, again, by having now 3 platforms, the Tavern platform, the Gourmet platform and the Finest to work with. And we'll look for opportunities to build all 3 out.

Operator

Next we'll go to John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

I wanted to step back and just ask about the average check increases in a broader context. Over the last 3 years, it's increased by about 10% cumulatively. And I understand that's been willful and you've done that and consumers have traded up on their own volition. But at the same time, it probably, at some point, creates a value question in their minds. I'm spending a lot more at Red Robin than I used to. How do you think about that? And then how do you think about the context of '14, you're being lighter on pricing? Do you expect -- I think you had an average check lift this year about 4%. Could it be that high in '14 as well, as these plans play out?

Denny Marie Post

I'll take the last question first. Yes, and we're certainly planning on that. Even though we are taking modest price increases this year, we believe we have pricing power in the brand. We're just not choosing to take it right now, because we don't need to, frankly. I think from a standpoint of mix, we watch very carefully the impact on value. We track with our guests on an ongoing basis to measure value. And our value scores are at or above historic highs. I think what's happening is the guest is opting in and again, they're seeing a range of prices on our menu, from $6.99 now up to $13.49 within our burger platform, $3, $5, $7, $9 -- a $3.50 starting price now on our new beverage pricing menu. And it's all adding up to great value. And great value is not just price, obviously, it's the combination of our great service, our new plating and presentation, the quality of the food. And all of that is keeping us in a very good place on value.

John S. Glass - Morgan Stanley, Research Division

Good. And, Stuart, can you just clarify the fourth quarter tax rate? I think you said -- you gave the full year, I think x items, it was like somewhere still in the mid-teens. If that's right, why was it lower than your expectations, initially?

Stuart B. Brown

Yes. It was lower than our initial expectations really because of the special items which are tax deductible, the impairment, as well as the special bonus. And so that's what really brought the net income expectation down and the tax rate down as well for the fourth quarter, because you're truing up the full year.

John S. Glass - Morgan Stanley, Research Division

But x items, isn't there a lower tax rate still or was that not the case?

Stuart B. Brown

Yes. It was slightly lower, but not meaningful.

Operator

[Operator Instructions] We'll now go to Jeff Farmer with Wells Fargo.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Just going back to the menu and mix and things like that. Over the last 3 springs, you guys have introduced a new menu. It's proven to be a pretty meaningful traffic and mix driver for you, I think, in each of the last springs, '11, '12, '13. As we look at the spring menu release for '14, do you think you still have some low-hanging fruit there? Are there still some meaningful opportunities on the menu?

Denny Marie Post

I think we still have meaningful opportunities. We continue to work this carefully. And again, as I referenced, we now have 3 platforms in our burger line-up to work against. So we have news opportunities and continue to work very hard to make the menu work hard for us.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. Then on a dollar basis, it looks like your total ad spending was up roughly 25%, again, in dollars, in the back half of '13 versus the back half of '12. Just curious how you allocated those incremental dollars. I know you talked about pulsing a lot, but just elaborate on that a little bit and if you think your customers -- how do they respond to that increased media? What have you be seen?

Stuart B. Brown

Jeff, this is Stuart. You've got to remember one of the things, because we've got a national advertising fund with our franchisees, the way the expense actually hits and the timing of media don't always align. So we had a little bit of extra media in the fourth quarter, but very small and at very low weights. So the actual media we ran in the fourth quarter was down significantly from the third quarter, although up a tiny bit from last year. And so the expense is really a function of our contributions into the fund.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. That makes sense, you're reminding me of that. So that -- was it the third quarter that you essentially spent twice what you spent in the third quarter of '12?

Denny Marie Post

We were much heavier in third quarter, yes. Last year, we were...

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

I've got a same question there. How have your consumers responded to that incremental media? Did you get what you wanted to see?

Denny Marie Post

Well, certainly, as we shared in our last earnings release, we were very pleased with the third quarter results and the traffic results.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. And then just final question for you Stuart. A lot of moving pieces on the margin front, in terms of restaurant-level margin down, looks like -- again, a lot of G&A leverage, at least based on my model. Are you willing to sort of cut to the chase from an operating income margin perspective, flat, sideways, up, down? How should we think about that?

Stuart B. Brown

Yes. I think -- and let me refer back to the Investor Day and go down even a line further. I mean, one of the questions we got in the Investor Day, we put up our guidance for sort of the mid-teens EPS growth. I think when you run these numbers, compared to the $2.37 adjusted earnings of 2013, you should probably come out sort of in the mid-teens EPS growth.

Operator

Next we'll go to Chris O'Cull with KeyBanc.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Denny, the brand has seen or made some significant improvements the past several quarters. Do you have any research to suggest it is being used differently or by a broader demographic or maybe the competitive set's changing at all?

Denny Marie Post

We certainly are seeing, I think, more guests open to the Red Robin brand. Again, as we track, we track not only our actual guests, as well as general perception of the brand. So we are seeing an improvement in interest in the brand, that certainly translates. And then, again, I think the mix shift would tell us that we're starting to see some occasion lift, as well as the activity that we've gone to at around over-21 in the bar, et cetera. I think we're starting to accommodate, as our long-term goal, all ages -- an all-age environment in the occasion they most want to enjoy. So for example, 2 adults can come in, be seated in our bar and enjoy a meal and a beverage. Families are more than welcome in our restaurant any time. So we've got a lot of good activity going on from that standpoint.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

When you look at or when -- I'm sure you do customer segmentation work. I mean when you look at some of the increased spending you've seen, is there a new customer group that's forming at Red Robin or are you seeing just across-the-board add-ons and trial of this new Finest line?

Denny Marie Post

You know we started with fundamental occasion segmentation we researched a few years ago. So we focused more on the occasion segmentation and the strength that we had at unplanned dinner occasion, as well as around the unplanned adult dinner occasion. So we're seeing a lift there. So from a segmentation standpoint, more focused on adding occasions. We've always been a broadly appealing brand.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Okay. And then lastly, the Smoke & Pepper, I think, you said it's mixing at 5%. What do you think the mix will be when it's not being advertised?

Denny Marie Post

We've seen with a promotion when we were off -- when we've come off air here in the last quarter, we've only dropped off about 0.6%, so we're about 4.5% on Smoke & Pepper alone. Again, the trial has been so strong and the guest response to the quality of the burger so high, that I'm confident we're going to be able to maintain a pretty healthy mix on this end of the barbell.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

One last -- I'm sorry. Do you think that this segment or this section of the menu can mix over 10%, eventually?

Denny Marie Post

I don't know. I don't know yet.

Operator

Next we'll go to Alton Stump with Longbow Research.

Alton K. Stump - Longbow Research LLC

If you could talk a little bit -- obviously, you mentioned that you won't expect to have 1% higher pricing in the current year. Any outlook, any color on the mix front? How much do you think that could add to same-store sales in '14?

Stuart B. Brown

We certainly talked about same-store sales being sort of in the low-single digits. Obviously, industry traffic is going to continue be tough to come by, so we will continue to use our media programs and things like that to try to make sure we're taking market share and outperforming the industry. And in terms of mix, you've seen the good benefit already from the $3, $5, $7, $9 appetizer rollout. And we rolled that in May of last year, so we'll start cycling against that. And we are trying to build a menu and structure that lets our guests pull items through our system. So dependent upon the occasion, the economy where it is, that we're sort of touching all the different price points. So when somebody wants to come in and celebrate an occasion, they can trade up to our great Finest line. The different occasions, they feel like, wait, I've got less to spend, we've got great items on the menu. So we are building a program to let the guests really drive the average check. But we want to be sure we're providing great items on there for that. So we think we've got upside and continued upside in mix. Also, compared to our peer group, our alcohol mix again, in the quarter was 8%. Many of our peers are in lower-teen percent. It's going to take us years to get that back. Our target is sort of 40 to 50 basis points a year clawing that back. So we think we've got some upside. But we'll let our guests decide.

Alton K. Stump - Longbow Research LLC

Okay. That's helpful. And then just a quick follow-up. I think someone already answered it, but just on the alcohol side, how far away do you think we are? I've seen[ph] that get it back up to 10% of your sales. Is it 2 years, 3 years, more than that?

Stuart B. Brown

I think, again, our target is 40 to 50 basis points a year. And we've got some really interesting programs sort of in place that we're starting to roll out this year to really try to catch up with our peers on that.

Operator

Next we'll go to Peter Saleh with Telsey Advisory.

Peter Saleh - Telsey Advisory Group LLC

I just wanted to ask about -- and I didn't hear you guys mention weather at all. Any thoughts on how much that impacted your traffic in the quarter?

Stuart B. Brown

I think we are obviously impacted, as everybody, as we try not to use weather as an excuse. Again, we're a little more weighted to the West Coast than maybe some of our peers are, so you may get less weather impact in the California, Washington or in Oregon. And our -- generally, when we see a big storm like this happen, there'll be some sort of cabin fever afterwards where you pick some of this back up. And so we try not to let weather be an excuse. There are -- we do have some seasonality, so that if we had a big snowstorm during Christmas break or New Year's break or something like that, that could impact us. But overall, we try not to talk much about weather.

Peter Saleh - Telsey Advisory Group LLC

Okay. And then just on the commodity outlook for 2014, what are your expectations and what are sort of the moving parts there?

Stuart B. Brown

I think sort of consistent with our answer earlier. We expect COGS to be up sort of probably like 20 basis points. Sort of a 2.5% -- 2.5% to 3%, commodity inflation, plus a little bit of mix in there as well. As we sell more of the Finest line, that mix impacts our margins as well. And again, it's really, I think, driven largely by increases in ground beef. We've seen a pretty big spike here in the first quarter. We don't think it's going to stay spiked up there that high. Again, if it does, you see trade-off at the retail level, where our consumers buy less ground beef and switching to chicken and pork. And that helps them create the sort of "an oversupply". The droughts in California, obviously, is hurting dairy prices. Right now, in our supplemental, you can see how we are contracted out for that. So I think the 2.5% to 3% is probably a pretty good number.

Peter Saleh - Telsey Advisory Group LLC

And Denny, I just wanted to ask about the Integer partnership. Can you talk a little bit about that and how you see that benefiting you in 2014?

Denny Marie Post

Sure. We've just consolidated a number of individual relationships with small agencies here in Denver into one single local relationship with Integer. And they will be complementing our national relationship with Vitro, an initiative who do our national creative in buying. There are some efficiency there, certainly, from a spending standpoint. And we think also the opportunity to work very closely with them to continue to better integrate all of our efforts, all the way through our calendar, be it mass media, down through one-to-one media in Red Robin royalty. So that was the goal. There's some good upside for us in just having one strong partner rather than multiple.

Operator

Next we'll go to Bob Derrington with Wunderlich Securities.

Robert M. Derrington - Wunderlich Securities Inc., Research Division

Could you give us a little bit of color, Stephen, about how the new stores are performing? Some good, the bad. What range of expectations you're seeing? You've opened more stores this past year than you have in quite some time.

Stephen E. Carley

Our target for our new stores is to get a 30% cash-on-cash return. We are continuing to see the most recent classes in that area. We are continuing to build stores out, in many cases, in markets where we don't have a lot of penetration like Florida and New York, New Jersey. That's going to take us a little more time as the brand gets traction and folks understand who we are and what we do. But that's how it's looking going forward.

Stuart B. Brown

One point I'd add, too, is just going back to our Investor Day presentation, our midsize units, 4,000 square-foot units that we're using a different markets also continue to perform well, and again, allow us to use this fill-in for markets that were heavily penetrated, which have a maybe a trade area that's missing, that we can use a 4,000 square-foot unit to go in and not cannibalize.

Robert M. Derrington - Wunderlich Securities Inc., Research Division

Got you. That's good color. If could follow-up with one. As you look into your business and obviously, there's a lot of other brands looking at tablets and order devices inside the restaurants. Can you give us a little bit of perspective on kind of where you stand and what your thoughts are around the opportunity there?

Denny Marie Post

It's certainly a very hot topic across the industry. We're watching it, looking at some experiments ourselves in a few markets. And it will work for us if it deepens the connection between our guests and our team member, really frees up the team member to focus on great service. That's where we see the greatest opportunity because that's always been our strength. But again, aware of it, and we'll follow it as we see upside opportunity for us. But primarily, is it will benefit the team member.

Operator

And now we'll go to Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Just wondering if we could get an update on the IT initiatives, like where you are, what benefits you might be realizing at this point and what you might pick up in terms of benefits in 2014?

Stuart B. Brown

Joe, this is Stuart. As you -- just to bring everybody up to speed on our rollout of Oracle Fusion. We went live on the financial systems in January of 2013, so we've been on that for a full year already. And that's been working quite well. The rollout of the supply chain systems, we have been piloting now in about 35 restaurants. We've got some restaurants where it's working really well, some other restaurants where I think it's working less than we'd like it to. We are in the process of working closely with Oracle and our own IT team to get to -- actually, sort of to work some of the system issues out that makes it more complicated for our general managers to operate the system than it should. We're in the process of sort of working through that now with the 30 that we have, before we go live with more. That said, the results that we've seen from the ones that are operating it well, we're really pleased with in terms of inventory levels, the automated ordering that they're getting out of it, the automated prep schedules. So with that said, we expect to have it rolled out to the whole team, really, by the end of this year. And then once that's rolled, we'll start to then build up data, put the business intelligence pieces in place and that will take us a few months as well to really start to get some more corporate-level information and leverage out of it. And the other piece of it that we've rolled out already, some of the training pieces as well that come with that. We've rolled out a new team member foundation's training platform, iPad based. And that's also sort of one of our IT initiatives that we've rolled out. And Steve -- on the other big IT initiatives, Steve covered the labor management system that we rolled out last year in the fourth quarter, and that's gone more smoothly than expected.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. What is left beyond 2014, Stuart?

Stuart B. Brown

One more time.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

What would be...

Stuart B. Brown

Other initiatives beyond it?

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Yes, like unaddressed...

Stuart B. Brown

The biggest piece is around HR, upgrading our HR systems, and payroll would be the next big pieces of it.

Operator

And now we'll go to Bryan Elliott with Raymond James.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

A question on free cash flow and how we should think about our -- what you're thinking about rather on the use of that as we look forward, debt pay down versus stock repo, I guess? And also, was there anything unusual in interest expense in the fourth quarter? It looked low.

Stuart B. Brown

Yes, there is. Very astute, Bryan. Yes, there was a -- we've put in place a new deferred compensation program in the fourth quarter, touching on your last question. The new deferred composition program, we've got to recognize -- we consolidate, so we recognize a little bit the higher G&A expense from that. And then the income that's earned on that plan gets grossed up in interest. So net-net to the bottom line, it's a wash. But it was about $250,000 of higher G&A expense in the fourth quarter and about $250,000 of less interest expense, if you will, investment income that goes against the interest expense. Coming back to your free cash flow question, if you look at sort of the EBITDA that we generated in 2013, call it $109 million adjusted, we will obviously be investing a significant portion of that in new stores, in the BTI remodels in 2014, maintenance CapEx. And sort of consistent with our past plans, excess cash flow that we generate will continue to pay down debt. And we've got $45 million remaining under our board authorization for share repurchases.

Operator

And next we'll go to Chris O'Cull with KeyBanc.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Just one follow-up regarding the new premium burger. Did you see a lower or higher attachment rate of alcohol or appetizers with the new line?

Stuart B. Brown

Chris, love to be able to answer that. Some of the -- this just goes back to the systems question that Joe answered earlier. Our ability to look at item attachment in our current systems are a little more cumbersome than we'd like them to be. So we did see overall beverage attachment go up, but we've got initiatives against both those, including some great new beverage -- adult beverage menu items we rolled out on that same promo card.

Denny Marie Post

Yes.

Operator

Now I'd like to turn it over back to Mr. Carley for any additional remarks.

Stephen E. Carley

Thanks, everybody, for your time and attention. And we look forward to the bringing you up to speed at the end of the first quarter in May. Have a great day.

Operator

And that does conclude today's call. We thank everyone again for their participation.

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