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Ruby Tuesday, Inc. (NYSE:RT)

F3Q 2014 Earnings Conference Call

April 9, 2014 5:00 PM ET

Executives

Jill Golder – SVP, Finance

James J. Buettgen – Chairman, President and CEO

Michael O. Moore – EVP, CFO and Assistant Secretary

Analysts

Jeffrey Farmer – Wells Fargo Securities, LLC

Alton Stump – Longbow Research LLC

Peter Saleh – Telsey Advisory Group LLC

Robert Derrington – Wunderlich Securities, Inc.

Andrew Charles – Bank of America Merrill Lynch

Rosemary Sisson – Guggenheim Securities LLC

Alex Sarver – Bank of America Merrill Lynch

Bryan Hunt – Wells Fargo Securities, LLC

Bryan Elliott – Raymond James & Associates, Inc.

Ben Mackovak – Cavalier Capital

David Hargreaves – Sterne Agee & Leach Inc.

Operator

Greetings and welcome to the Ruby Tuesday Third Quarter Fiscal Year 2014 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jill Golder, Senior Vice President of Finance. Thank you. You may begin.

Jill Golder

Thank you, Gloria, and good evening everyone. Welcome to the Ruby Tuesday’s Third Quarter Fiscal 2014 Earnings Call. As we get started, let me 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 most recently filed Form 10-Q.

Our third 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, FirstCall and other financial media outlets. We plan to release fourth quarter fiscal year 2014 earnings in late July.

On our call this evening are, J.J. Buettgen, Ruby Tuesday's Chairman, President and Chief Executive Officer; Michael Moore, Executive Vice President and Chief Financial Officer; and Todd Burrowes, Ruby Tuesday Concept President and Chief Operations Officer. Following JJ and Michael’s prepared remarks, we will take your questions.

And now I’ll turn it over to JJ.

James J. Buettgen

Thank you, Jill, and welcome, everyone on our call. We appreciate you joining us this evening. I will start with a brief overview of our quarter then I will give you a progress update on our ongoing effort to bring our brand transformation strategy to life in our restaurants.

As you saw on our earnings release, we reported a third quarter diluted loss per share from continuing operations of $0.12. Excluding special items, our loss per share from continuing operations was $0.07. Our same restaurant sales and guest count trends showed improvement over both the first and second quarters. While our company owned same restaurant sales were down 1.9% and guest counts were down 1.7% we are encouraged with the directional trend of both these metrics as our momentum was broad-based across our system.

We made solid progress over the past eight months in key areas of our brand transformation. We have introduced several new culinary platforms, adding new and improved menu items that have broad appeal and high guest satisfaction scores amongst our guests. These new platforms have enabled us to increase variety, affordability and appeal of our menu. We introduced new items across a range of price points with an emphasis on affordable entry level options. We also introduced a number of new higher price combinations for those guests who choose to spend a little more.

Transforming our menu was the initial focus of our brand transformation strategy and it is an area that we have attacked aggressively. We remain intently focused on reengineering our core menu, continuing to add innovative new products, simplifying recipes and procedures while ensuring we have meaningful variety and strong value across a wide range of price points.

We’ve also developed a more effective and efficient media and promotion strategy, a great example of this is our 20 meals under $10 campaign, which began in early January. This promotion which was supported by five weeks of national television advertising showcased the wide variety of menu items under $10 that are available every Tuesday. Like burgers, tacos, flatbreads, our new southern style chicken tenders and of course our iconic Garden Bar. This promotion was popular with our guests and demonstrates the depth of affordable variety in our menu with menu items to suit the appetites of guests looking for something indulgent to those that are more health conscious.

In mid-February we launched a new winter feature menu which included three new flatbread choices and a combination entree of ribs and southern style chicken tenders. We also enhanced our core menu introducing two popular new entrees, Low Country Shrimp & Grits and Baked Ravioli. We have focused intently on improving our innovation process and building a more robust pipeline of new products. While we are still working hard to evolve and improve our menu, I am very proud of the progress that our team has made to date. As a result of their focus and hard work, new and improved menu offerings are currently driving 25% preference amongst our guests.

The creative for a television advertising showcases our new food and conveys the casual, approachable and energetic personality of our brand and guest experience. Our newer commercials continue to score significantly above the industry norms in terms of watchability, relevance, and persuasion indicating strong consumer response. Over time, our newer more effective advertizing should help change consumer perceptions above Ruby Tuesday, help win back lapsed guests and help attract new guests to our brand.

In addition to the work we’ve done to improve our new menu offerings and our advertising, our culinary and operations teams have partnered to make sure that the new food offerings are easier to execute. Our operations leaders have also worked on initiatives to elevate our in-restaurant execution and deliver an in restaurant guest experience that delivers on our new positioning, improving service levels and creating a more energetic and fun dining atmosphere. We are very fortunate to have such a talented, motivated and loyal team. We want to thank all our team members for the hard work they do every day.

As I mentioned last quarter, we continue to work on business tools that will enable us to operate more efficiently while supporting improved restaurant operations and providing a better guest experience. During the third quarter we expanded the pilot of our enhanced guest count and labor forecaster and will complete the roll out in the fourth quarter. These tools are designed to strengthen our managers knowledge of the business trends and improve efficiencies during non-business hours, allowing our managers and our servers to spend more time with our guests.

As noted on our last call, we also plan to rollout a food waste management system, together these tools should help us achieve cost savings in terms of labor and cost to sales. We’ve made solid progress in a number of areas over the past eight months and this is reflected in our improved same restaurant sales and guest count trends.

Our management team, our team at the restaurant support center, our operations leaders, restaurant tours and all of our team members are committed to our top priority, or else we talk about it here at Ruby Tuesday keeping the main thing to main thing, driving profitable same restaurant guest count growth at Ruby Tuesday.

We are very focused on our brand transformation efforts. We believe in and are committed to our strategic direction and what we believe is the right combination of brand positioning, marketing and restaurant operations that will help us continue to build momentum that we gained during the third quarter. Before I turn the call over to Michael, I would like to take this opportunity to welcome two new individuals to our Board.

As you may have seen in the separate news release this afternoon, Mark Addicks and Donald Hess have been appointed to the Ruby Tuesday Board of Directors. Mark is currently the Senior Vice President, Chief Marketing Officer for General Mills and Donald has served as the President and CEO of Parisian, Inc. as well as on the Board of Directors of Proffitts and Saks, where he also served as Lead Director.

Mark and Donald bring extensive retail, marketing, and leadership experience to our Board. We have a strong and experienced Board and we appreciate our Board’s expertise, council and support, as we execute on our strategic plans to build a stronger more successful company.

I will now turn the call over to Michael for a more detailed financial review of the quarter.

Michael O. Moore

Thank you, JJ. Since we exited three non-core concepts in our last fiscal year, we have been treating their current and historical results as discontinued operations. All of my comments regarding financial results will pertain to continuing operations.

Total revenue for the quarter was $295.6 million, a decrease of $11.8 million from the prior year. This decrease was due to a reduction of 30 company-owned restaurant since third quarter last year and lower same restaurant sales of company-owned Ruby Tuesday restaurants. For the quarter, same restaurant sales at Ruby – company-owned Ruby Tuesday restaurants decreased 1.9%. This decrease represented an improvement in trend over the second quarter same restaurants sales decline of 7.8%.

We estimate that severe winter weather unfavorably impacted our results by approximately 150 basis points. The 1.9% same restaurant sales decline was comprised of a 1.7% decrease in guest counts and a 0.2% decrease in net check. Both guest count and net check trends improved compared to the second quarter.

The 1.7% decline in guest counts compared to a 6.3% decline in the second quarter. The net check decrease of 0.2% compares to a 1.5% decrease in second quarter. This improvement in check is due to a favorable menu mix and the implementation of tier pricing in November. Both our sales and guest counts showed sequential monthly improvement during the third quarter.

For the quarter, we reported a net loss of $7.4 million compared to a prior year net income of $4.7 million. Excluding special items we realized a net loss of $4.5 million compared to a net income of $6.3 million in the prior year.

The special items identified totaled $3.2 million pretax and $2.9 million net of tax. On a pretax basis, these items included $1.7 million for closure and impairment expense related to the 24 restaurant we closed in the third quarter and additional restaurants that we plan to close in the fourth quarter. $0.9 million non-cash partial impairment charge for the Lime Fresh trademark and $0.6 million for severance and other costs related to our recent corporate restructuring initiative and executive transition costs.

For the quarter, we reported diluted loss per share of $0.12 compared to a diluted earnings per share of $0.08 in the prior year. Excluding special items, earnings per share were a loss of $0.07 compared to a earnings per share of $0.10 in the prior year. The company closed 24 Ruby Tuesday restaurants during the quarter in connection with the planned closures announced in our second quarter earnings release. Domestic and international franchisees open two and closed two Ruby Tuesday restaurants. One company owned Lime Fresh restaurant was closed during the quarter. There were no Lime Fresh franchise openings or closings.

Restaurant-level operating margin was 16.1% for the quarter compared to 17.9%, a year earlier or a decline of 180 basis points. Cost of goods sold was 27.5% of sales versus 27.4% in the prior year were slightly unfavorable by 10 basis points. This increase was driven by menu mix and inflation in some commodities.

Payroll and related was flat for last year at 34.5%. Improved labor management and lower bonus offset sales deleveraging and state minimum wage increases. Other restaurant operating costs were 21.8% of sales compared to 20.3% in the prior year, or 150 basis points unfavorable due to sales leveraging and an increase in legal reserves primarily related to outstanding litigation that we have previously disclosed on reports filed with the SEC.

SG&A expenses were $33.3 million compared to $30.2 million last year, or an increase of $3.1 million. Total marketing and advertising expense increased $3.3 million versus last year while all other SG&A decreased by $0.2 million.

As we have indicated in prior calls, our television marketing spent was frontloaded in fiscal 2013. During fiscal 2014 we spread our television and other marketing dollars more evenly by quarter to provide for a more consistent communication strategy. For the fourth quarter we expect that both media and other marketing spend will be above year-ago levels.

All other SG&A decreased by $0.2 million, but was unfavorably impacted by the special items of $0.06 million that I previously mentioned and $1.1 million in outside consulting fees incurred on behalf of our cost reduction efforts. Excluding these two items, all other SG&A was down $1.9 million, primarily due to our recent corporate staff reductions. Interest expense was $6.0 million for the quarter compared to $6.6 million in the prior year due to a reduction in debt of $39 million in the third quarter of the prior year.

In the quarter, we reported a tax benefit of $0.8 million compared to a tax benefit of $2.0 million last year. Although pretax income was a loss of $8.2 million this year compared to a pretax income of $2.7 million last year, during the third quarter, we recorded in a tax valuation allowance charge of $5.6 million versus $0.3 million in last year's third quarter. Our tax valuation allowance reserve currently totals $50.6 million. We expect to eventually reverse this reserve when we generate sufficient levels of pretax income in the future.

Turning to the balance sheet, our book debt was $267 million at the end of the third quarter compared to $306 million for the prior year quarter or a reduction of $39 million. We had $44.5 million in cash on our balance sheet at the end of the quarter compared to $31.8 million in the prior-year quarter. During the quarter we prepay $5.4 million of mortgage debt. Going forward, we will continue to consider utilizing excess cash to reduce debt in order to lower our financial leverage.

As announced earlier in this year, we have undertaken a comprehensive review of the company's cost structure. In which we have previously identified opportunities to reduce cost of good sold by $6 million annually and to reduce SG&A expense by $7 million annually. All initiatives have been implemented and are delivering the projected savings.

These initiatives are expected to save $3.0 million in the fourth quarter and delivered a targeted annual savings in fiscal 2015. We continue to review all aspects of our business for additional opportunities to operate more efficiently and cost effectively. Here is that we are focusing on including supply chain, restaurant operations and marketing.

In our second quarter earnings release we announced the planned closure of 30 restaurants. In the third quarter we closed 24 restaurants and now expect to close an additional 6 restaurants to 9 restaurants in the fourth quarter for a total of 30 closures to 33 closures in the second half of this year. These are the locations that were closed in the third quarter, our own properties that were marketed for sale following the closure of those restaurants. Four of the eight are currently under contract to be sold.

In conjunction with the closing of 6 restaurants to 9 restaurants in fourth quarter, we expect to incur a charge in the range of $2.5 million to $3.5 million in the fourth quarter for lease reserves and other closing costs, the majority of which will initially be non-cash.

Now, moving to our outlook for the reminder of the fiscal year, as announced at the beginning of this fiscal year, we are not providing earnings guidance. There are however certain items which we would like to highlight, including the following. We anticipate fourth quarter same restaurant sales to be in the range of down 1% to up 1%. We do not anticipate recognizing a benefit from the FICA Tip and Work Opportunity Tax Credits generated during fiscal 2014. The historical income tax benefit of these tax credits has been $2.2 million to $2.4 million per quarter.

Capital expenditures are estimated to be $7 million to $10 million in the fourth quarter against $30 million to $33 million for the full year. In fourth quarter we expect to generate an additional $2 million to $4 million of cash proceeds from the disposition of excess real estate worth $13 million to $15 million for the year.

I will now turn the call back to JJ for closing remarks.

James J. Buettgen

Thank you Michael. We appreciate you joining us tonight and your interest in Ruby Tuesday. As I said earlier, we are making progress in our brand transformation and that progress is reflected in our improving same restaurant sales and guest count trends. We successfully introduced a range of affordable new menu items with high guest appeal driving increased variety and affordability. We’ve developed a more effective and efficient media and promotional strategy while also greatly improving our television advertising.

We’ve initiated a successful cost savings action and continue to review all aspects of our business to look for additional opportunities, operate more effectively or efficiently and in fact cost effectively. We believe that all these elements will work together to achieve our ultimate goal, driving increased guest counts, improve same restaurant sales and increase shareholder value. We’re pleased with our progress this quarter, but we realize we still have a lot of work to do. We look forward to building our momentum and as we close the final quarter of fiscal year 2014 and updating you again on our progress in July.

We will now turn it over to the operator for questions.

Question-and-Answer Session

Operator

We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Jeff Farmer. Please proceed with your question.

Jeffrey Farmer – Wells Fargo Securities, LLC

Hi, good afternoon. You guys just touched on it, but just looking at the new menu items, as well as some of the value messages that you’ve been promoting this past quarter into this quarter. What do you seem to think is resonating the most with consumers? Are they jumping at the opportunity to get some value or is it the new product that is getting them into these restaurants?

James J. Buettgen

Thanks for your question. I actually think it’s a combination of both prior to August when we rolled out our pretzel burgers and flatbreads, it had been a number of years since Ruby Tuesday had had a meaningful amount of new product news and we have done a lot of work both conceptually as well as from a recipe development perspective of coming up with concepts and menu items that were inherently appealing to consumers and scored high on special visit intent and we’ve done a lot of work to make sure that we’ve done a great job translating those items into recipes and procedures we can execute well across the system, which our team has done a great job on. And everything we’ve introduced by and large has been at or below average check in margin.

So part of it is about value, but low price without concept appeal or good satisfaction won’t sustain over time and what we’ve found is in addition to the new trial that spike pretty quickly with most of the new products we’ve launched the preference is sustained and satisfaction has stayed high. So I think it’s a combination of value, news and great execution of the menu items themselves.

Jeffrey Farmer – Wells Fargo Securities, LLC

Okay. That’s helpful. Just one other quick modeling question, with the closure of it looks like 30 plus restaurants by the end of this fiscal year, as we head into FY 2014 for modeling purposes, I am expecting to see a pretty nice sized average weekly sales tailwind from this. But can you may be give us some order of magnitude, how should we be thinking about the average weekly sales [line] [ph] for the entire system, now that you’ve probably closed a lot of pretty materially underperforming restaurants?

Michael O. Moore

The average sales will obviously increase because generally these are underperforming restaurants. So yeah, I would say somewhere in the $30,000 per year range, $30,000 to $50,000 average annual increase.

Jeffrey Farmer – Wells Fargo Securities, LLC

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Alton Stump with Longbow Research. Please proceed with your question.

Alton Stump – Longbow Research LLC

Yes, thank you. Good afternoon and good job on the quarter.

James J. Buettgen

Thank you.

Alton Stump – Longbow Research LLC

I just have two quick questions. First off, I was surprised to see the - actually pricing was only down very - in a [very minor] [ph] amount and as you just mentioned for new products targeting the value add and [asset] [ph] couponing I was just hoping you guys [inaudible] it in the quarter that helped drive that more or less flattish pricing number?

James J. Buettgen

There were a couple of things that – one of which is while we did introduce a number of new products, most of which were at or below average check-in margin, some were appetizer. As an example some of the flatbreads that we introduced while at lower price added to our appetizer preference. The other thing is we did a lot of work on our couponing strategy through the quarter to refine the offers to drive redemption without giving away an inordinate discount.

And then lastly in addition to some of the lower pricing products as an example the ribs and chicken tenders combination that we introduced is on the higher end in terms of not only price but margin and that was a very popular item that got strong preference from our guests. And then the last piece is we did implement tiered pricing over the last couple of quarters. So we did take pricing on select items, in most cases, less than the industry average, but still trying to account for some level of inflation and to compensate for some of the investment we put into other places on the menu.

Alton Stump – Longbow Research LLC

Okay, I think that’s helpful. And then just as a quick follow-up to that, new products had a successful [indiscernible] couple of quarters. As you look forward and would guess that you’re probably going to come out with some more new products this summer, I’m sure you don’t want to talk what they are. But is there any certain category that you guys are looking at that you like to [baulk] [ph] of in particular or vice versa those categories [indiscernible] you may like to take out some [SKUs] [ph]?

James J. Buettgen

No, we’re not focused on necessarily trying to build up a category. We are doing work on a number of different areas of the menu and where there are a couple of different things that drive it, one of which is we’re looking at which concepts are more appealing to both current guest and potential guests.

We look at areas where guest give us some credit to be able to deliver good product there, but then also as continuing to just innovate and bring new news to the menu over time, it’s not about a specific section of the menu, I would say the overarching objective is to add consistent new news to bring news to different categories more by price points. So we’ve got news if you were to cut the menu in third the upper end, the middle end and the lower end. So there are more affordable options and higher value items - value offers across the menu.

Alton Stump – Longbow Research LLC

Okay, great. That’s helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Peter Saleh with Telsey Advisory Group. Please proceed with your question.

Peter Saleh – Telsey Advisory Group LLC

Great, thank you. I just want to ask about the trend on same-store sales throughout the quarter. I think the last quarter you had given us some detail on how it trended, how the same-store sales trended and traffic tended. Can you give us a little bit color on how your comps kind of progressed throughout the quarter?

Michael O. Moore

Yes, certainly. So in the quarter we ended up 1.9 negative and we trended lower than that early in the quarter. I would say low mid single negative and we trended better, still negative throughout the quarter, but we were much better than the 1.9 negative later.

Peter Saleh – Telsey Advisory Group LLC

All right. And is it fair to say that once you saw maybe some of the weather starts to improve, I guess you start to see the customer come back out to the stores.

Michael O. Moore

Well, certainly as I mentioned weather had 150 basis points and it did affect the first month of the quarter, but it also affected the last month of the quarter also.

Peter Saleh – Telsey Advisory Group LLC

All right. And then can you just remind us on the marketing side or on the advertising side in the fourth quarter, how many weeks of TV you plan to be on this year versus last year?

James J. Buettgen

When we look at the marketing spend across the quarters, the fourth quarter would be relatively consistent with what we spend in the third quarter. The big difference isn’t so much about increasing spend this year as much as we are rolling across the fourth quarter last year that had very little medium. So we're not up in the spend but we’ve got a relatively consistent level of pressure throughout the rest of the year.

Michael O. Moore

Yes, we’ll spend comparable third quarter this year, but over last year, as I mentioned earlier.

Peter Saleh – Telsey Advisory Group LLC

Got it. Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Robert Derrington with Wunderlich Securities. Please proceed with your question.

Robert Derrington – Wunderlich Securities, Inc.

I think it’s me. Just Bob Derrington.

James J. Buettgen

Hello, Bob.

Robert Derrington – Wunderlich Securities, Inc.

Congratulations on a great quarter. It is very surprising, very nice pleasant surprise. If you could help us for a minute, Michael. Within the press release, you talked about cost of sales savings of about $6 million directionally, and I'm just trying to understand where is that coming from? Is that coming from a change in spec, or is it from better purchasing or portion sizes or what should we think about that?

Michael O. Moore

Well, with the help of our outside partners we went through an enterprise level cost to review of most of our big spend items. Really, the savings came from areas of packaging, processing efficiency and freight optimizations. That was a lot of little things that added up to pretty big dollars.

Robert Derrington – Wunderlich Securities, Inc.

Okay. Can you give us some kind of color directionally around what your core food cost inflation looks like, Michael?

Michael O. Moore

Yes. For the third quarter it’s about 0.5%, and we expect about 0.5% in the fourth quarter of this year and that's to continue through the first half of FY 2015.

Robert Derrington – Wunderlich Securities, Inc.

Great. Okay. And then, one last question JJ. If you could help us for a second on your thoughts around pricing, for example would you introduce flatbreads, I believe it was last quarter. They were priced generally, at least locally here. You’re priced generally in about the $8 range. Now, some of the newer ones that you've added recently are priced at about $11.59, which is a pretty sizable increase. Is there a – how do you gauge when you get to a point where there's too much pricing or what the consumer sensitivity to some of that is?

James J. Buettgen

It’s a great question and it’s one that kind of parts our science, but with the flatbreads in particular there are a couple of things that happened, one of which is, as we mentioned earlier, we did implement some pricing, but we also changed some of the products. So the flatbreads that are out currently, the black and blue flatbread with the steak and blue cheeses as well as the shrimp and Po' Boy Flatbread is a different product.

So part of the price difference is the fact that we’ve added some new products to the menu to that section of the menu. So that's part of it, but there is really not a magic formula to how much is too much, what I would say is, in general we are being very cautious with pricing that we take, but we are what we feel that we have an opportunity to do that. It allows us to invest more into other areas of the menu, or other areas of the business.

So the majority of the new products that we’ve brought to the table so far whether that’s the pretzel burgers, the flatbreads, chicken tenders, as well as some of the promotions that we featured whether it was 20 Under 10 or the Garden Bar and flatbread combination have largely emphasized the bottom third to bottom 40% of the price range on our menu.

Robert Derrington – Wunderlich Securities, Inc.

Got you. Again congrats JJ really happy for that.

James J. Buettgen

Thank you very much. Teams put a lot of hard work into the business over the past couple of quarters. Glad to see it’s starting to get traction.

Operator

Thank you. Our next question comes from the line of Joe Buckley with Bank of America Merrill Lynch. Please proceed with your question.

Andrew Charles – Bank of America Merrill Lynch

Hi, it’s Andrew Charles on for Joe. Just one quick clarification, was marketing expense higher year-over-year in the third quarter?

Michael O. Moore

Yes it was.

Andrew Charles – Bank of America Merrill Lynch

Okay.

Michael O. Moore

We have guided for that in the second quarter.

Andrew Charles – Bank of America Merrill Lynch

Okay. And it seems like marketing was a nice driver of comps, but you also mentioned a scenario you’re looking to cut costs, so may be to clarify are you looking to become more efficient rather than pull back on this initiative?

Michael O. Moore

Yes, it’s really more about making the spend that we do put into the market more effective and more efficient. So one of the things that we’ve been working on over the past basically at least in my tenure the whole time is trying to understand which elements of our marketing mix whether it’s the way we go to market from a media perspective, promotional strategy or coupon strategy are working and driving the most return.

I took a while to dial in because historically we had had some pretty wide swings either in absolute level of marketing spend, high level composition of that spend, for example, there were years that was 100% coupon and there were years there was 100% media. But then within each of those vehicles there was very little consistency of strategies. So we have historically have bounced back and forth between national cable and spot, which markets had spot on the coupon side, numerous vehicles with different levels of discount which made it little tough to use history as a gauge.

So what we’ve been working on is really trying to understand each time we put a promotion in market, put a fighter media on the air, put a coupon out in the market, what we’re getting in terms of guest count and sales lift versus how much it cost us. So as an example, in the past couple of quarters we focused more and more on 15s on television, because we’re getting effective creative in 1.

We’ve moved away from spot to national cable, because it’s more efficient and allows us to be on air for a longer and more consistent period for the same dollar. And we’ve also tweaked the coupon vehicles that we use to deliver our coupons, as well as the offer. So we’ve been able to keep the same level of pressure, while being a little bit more efficient with the money. It’s not that we’re looking to reduce our support, it’s we’re looking to make our marketing spend more effective.

Andrew Charles – Bank of America Merrill Lynch

That’s very helpful and Michael last one, is there opportunity close more stores beyond the 30 to 33 this, during this year. Their EBITDA neutral or EBIDTA negative we [indiscernible] or lease biggest cost make this unfeasible?

Michael O. Moore

Yes, there is a couple of things in that question. Yes, there’s always leases that comes – there is always restaurant that come to end of their term, decided to exercise the option or not, so any year we typically close probably six to 10 restaurant, and FY15, probably won’t be any different. This was sort of a focused effort to go through our entire fleet to see where we had an opportunity to maybe close a little more than normal for a variety of reasons, but lease reserves is one factor in deciding what to close.

We really look at performance of restaurants, we look at the trade areas, the trade that we want to continue in. Do we feel good about the trade area? Is this a restaurant that might be losing EBITDA, but with the brand transformation we think it can do better in the future. So there is a lot of factors that go into that decision, but looking at your entire fleet, I think it’s just an annual process to always review.

Andrew Charles – Bank of America Merrill Lynch

Great. That’s helpful. Thank you.

Operator

Thank you. (Operator Instructions) Thank you. Our next question comes from the line of Rosemary Sisson with Guggenheim. Please proceed with your question.

Rosemary Sisson – Guggenheim Securities LLC

Good afternoon. Just a couple of quick ones. You mentioned, Michael, the $1.1 million of outside consulting expense, but I missed what line that was in?

Michael O. Moore

That’s in SG&A.

Rosemary Sisson – Guggenheim Securities LLC

In SG&A, okay. So would that be a recurring cost or no?

Michael O. Moore

No.

Rosemary Sisson – Guggenheim Securities LLC

Okay. And you also mentioned legal reserve in the other expense line and you didn’t say exactly how that much was. Could you tell us?

Michael O. Moore

Well, I think that the other restaurant’s operating cost was up a couple of million dollars and so that contributed most of that variance.

Rosemary Sisson – Guggenheim Securities LLC

Okay. And then, how much do you have left in your bond buyback basket at this point? It’s $20 million or so that you have.

Michael O. Moore

Yes, we have $7.1 million left to repurchase.

Rosemary Sisson – Guggenheim Securities LLC

Okay. Thanks. That’s it for me. Thanks a lot. Nice quarter.

James J. Buettgen

Thank you.

Michael O. Moore

Thank you.

Operator

Thank you. Our next question comes from the line of Greg Hessler with Bank of America. Please proceed with your question.

Alex Sarver – Bank of America Merrill Lynch

Hi. It’s Alex Sarver on for Greg. Thanks for taking the question. Very quick one for you. Can you give us an idea of what LTM adjusted EBITDA is for the bond map [ph] or the color?

Michael O. Moore

$65 million.

Alex Sarver – Bank of America Merrill Lynch

$65 million. And then can you also show at what level your monetizing the four restaurants?

Michael O. Moore

Yes, it’s an average. Those 400 contractor on average were about $1.6 billion, varies anywhere from $1 million to $2 million depending on how valuable the property is.

Alex Sarver – Bank of America Merrill Lynch

Got you. Thank you.

Michael O. Moore

Thank you.

Operator

Thank you. Our next question comes from the line of Bryan Hunt with Wells Fargo. Please proceed with your question.

Bryan Hunt – Wells Fargo Securities, LLC

Thanks for taking my question. I appreciate it. Just a few. When I look at the benefit from your food waste systems initiative, maybe you can talk about JJ what you’ve seen at your past employer from using that tool and maybe what you anticipate the benefit being at Ruby’s?

James J. Buettgen

I’ll focus more on what we’re trying to accomplish here at Ruby’s. I’d say at a high level it’s part of an effort that we’re undergoing to try and make sure that we bring the tools that we gave to our operations leaders to kind of manage and support their business up to a level that take we think it needs to be. So as we mentioned earlier, we’re in the middle of rolling out a guest count forecast to help and better kind of forecast and set up staffing.

On the average key system, it’s really more about giving them better visibility and more accuracy and more readily available data to help them manage waste. In terms of exactly how much we’ll get we’ll know more about that when we implement the pilot and it’s different in every concept. It’s different with every menu. But with all what I can tell you is where we are now is not as precise or as useful to our operators as the tool that we’re working to put in place. So we’ll update you more in the future once we get some learning from the test about how much that will impact our food cost, our food waste.

Bryan Hunt – Wells Fargo Securities, LLC

And those tests will begin in the current quarter or is this next fiscal year event?

James J. Buettgen

Tests are likely to begin late first, sometime second quarter.

Bryan Hunt – Wells Fargo Securities, LLC

Great. And you all sounded pretty confident about your food cost at least going the first half of the year. It sounds like you’ve secured like all your proteins and as much commodities as you had to that period. Is that a safe assessment?

James J. Buettgen

Yes. For Q4 this year we have about 80% locked in and for the first half of next year we have about 70% locked in and deep in poultry we have almost 100% locked in on the first half.

Bryan Hunt – Wells Fargo Securities, LLC

Thank you very much. That was all from me. All my questions have been answered. Thank you.

James J. Buettgen

Thank you.

Michael O. Moore

Thank you.

Operator

Thank you. Our next question comes from the line of Bryan Elliott with Raymond James. Please proceed with your question.

Bryan Elliott – Raymond James & Associates, Inc.

Thanks. Just a couple of clarifications. On your supply chain, it sounds like that kind of kicked in here in this February quarter. So is that something that you expect to sustain obviously or is expected to sustain for at least four more quarters. Do you think there is a lot more to get? How quickly do you think you can get it and is that factored into your bps of food inflation or is that incremental through that 50 bps in food inflation?

James J. Buettgen

Yes, we said that we identified $6 million on an annual run rate of savings and cost of goods sold. And we had previously – we expected that, say, $2 million in the second half, which we expect to deliver and a piece of it was delivered in Q3. The inflation is independent of these savings.

And as far as getting more, we’re always looking for opportunities where we can find additional savings. As I said earlier, we’re always looking for ways to be a more cost effective and more efficient.

Bryan Elliott – Raymond James & Associates, Inc.

Okay. And then the bulk of the margin contraction this quarter was litigation, one-time litigation. I think it’s one-time. With your guidance of flattish comp in the current quarter, was it fair to be looking and expecting a flattish margin as well on that flattish comp?

James J. Buettgen

Well, I’d start up one of my remarks by saying we’re not providing any guidance above and beyond the sales guidance that we gave. Back to your other question, there’s always legal reserves, but obviously that was a very material increase in our legal reserve in the quarter.

Bryan Elliott – Raymond James & Associates, Inc.

Let me ask you in another way. Are there any issues [indiscernible] adjusted for those legal costs and then we had a flattish slow margin here in this quarter, is there anything that’s going to change between now and the current quarter from a cost structure standpoint that would make it look different than what we just saw.

Michael O. Moore

Yes, so, if you combine it – look at total operating margin, if you take the COGS in an order of $6 million and the SG&A that we talked about before $7 million annually that's $13 million annually. There is probably about $3 million in the fourth quarter that we expect to achieve.

Bryan Elliott – Raymond James & Associates, Inc.

Okay. All right, great, thanks and congrats on the success.

James J. Buettgen

Thank you, Brian.

Operator

Thank you. Our next question comes from the line of Ben Mackovak with Cavalier Capital. Please proceed with your question.

Ben Mackovak – Cavalier Capital

Hi, guys. Congrats on a great quarter. The $1.1 million in consulting fees, will that disappear in Q4?

Michael O. Moore

There is a little bit [indiscernible] in that, but it’s a couple hundred thousand dollars in Q4. And I think that we’re done.

Ben Mackovak – Cavalier Capital

Okay. So you’ll be done in 2015?

Michael O. Moore

We’re actually already done. That’s just a couple of hundred thousand dollars of expense incurred in the fourth quarter.

Ben Mackovak – Cavalier Capital

Okay. And if I look at the payroll line, it would show a sequentially drop. Can we expect this level in Q4?

Michael O. Moore

We haven't disclosed that, but I will say, we’re weak and here we worked out a one night comp in Q3 and we had a flat percentage, okay. If we deliver our guidance of down 1 to up 1, we should be able to leverage payroll in the fourth quarter.

Ben Mackovak – Cavalier Capital

Okay. And just as a side, JJ as an equity holder we love to see you step up in January by the stock. So best of luck and thanks

James J. Buettgen

Thank you. I believe in what we’re doing. I believe in our team and I think it’s going to be good investment.

Operator

Thank you. Our next question comes from the line of David Hargreaves with Sterne Agee. Please proceed with your question.

David Hargreaves – Sterne Agee & Leach Inc.

Hi. I definitely want to reiterate how nice it was to see the improvement in trends, and I wanted to zero in a little bit on the EBITDA. The $65 million LTM that you guys are giving doesn’t appear to reflect, add back of all sort of one-time or non-recruiting items. I'm just wondering what that might be adjusted for nonrecurring items?

James J. Buettgen

That reconciliation we will post on our website I think in the next 24 hours. So you can review that and then give us a call if you have any questions.

David Hargreaves – Sterne Agee & Leach Inc.

Okay. And where do you stand right now in terms of total owned sites by the company?

James J. Buettgen

Well, we have three, up here we closed eight stores that were announced and we had 316, we have 400 contracts of at least 612 owned sites, four of which are for sale. So once we sell those additional four, we’ll have 308 sites.

David Hargreaves – Sterne Agee & Leach Inc.

Thank you very much.

Operator

Our next question comes from the line of Rosemary Sisson with Guggenheim. Please proceed with your question.

Rosemary Sisson – Guggenheim Securities LLC

My apologies, everything has been asked. Thank you.

James J. Buettgen

Thank you, Rosemary.

Operator

Thank you. It appears we have no further questions at this time. I would like to return the floor back over to management for closing comments.

Michael O. Moore

Thank you JJ. Well, thank you all again for joining us this evening and for your questions and for your interest in Ruby Tuesday. I’d also like to thank our leadership team, our restaurant support team, our operation leaders, restaurant tours and all our team members. It's been a productive couple of quarters. We feel really great about some of the progress we've made so far and we're happy to see the improvement in trends. As we stated earlier, we have a lot of work to do, but we are committed to our brand transformation strategy and we look forward to getting back with you after the fourth quarter to deliver another update on the progress we will make between now and then.

Thank you again for your time. Look forward to talking to you soon.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines this time. And thank you for your participation.

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