Ruby Tuesday's (RT) CEO James Buettgen on Q4 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Ruby Tuesday, (RT)

Ruby Tuesday, Inc. (NYSE:RT)

Q4 2014 Earnings Conference Call

July 29, 2014 4:15 PM ET

Executives

Jill Golder – Executive Vice President and Chief Financial Officer

James J. Buettgen – Chairman, President and Chief Executive Officer

Michael Moore – Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary

Analysts

Bryan Elliott – Raymond James & Associates

Robert Derrington – Wunderlich Securities, Inc.

Bryan Hunt – Wells Fargo Securities, Inc.

Hale Holden – Barclays Capital

Keith Siegner – UBS Securities

Operator

Greetings and welcome to the Ruby Tuesday Fourth Quarter Fiscal Year 2014 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-question answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jill Golder, EVP and CFO of Ruby Tuesday. Thank you Ms. Golder. You may begin.

Jill Golder

Thank you, Gloria. And welcome everyone to Ruby Tuesday’s fourth quarter fiscal year 2014 earnings call which is being broadcast live over the Internet. As we get started, let me quickly 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 fourth quarter earnings were released today after the market closed. A copy of the press release can be found on the Investor Relation section of our website at rubytuesday.com and is also available on Business Wire, FirstCall and other financial media outlets. We plan to release first quarter fiscal year 2015 earnings in early October.

On our call today are, J.J. Buettgen, Ruby Tuesday's Chairman, President and Chief Executive Officer; Todd Burrowes, Ruby Tuesday Concept President and Chief Operations Officer, and Michael Moore, EVP and retiring CFO. Following our prepared remarks, we will open the call for questions.

I’ll now turn the call over to JJ.

James J. Buettgen

Thank you, Jill. Welcome, everyone and thank you for joining us this afternoon. I will start with a brief review of our fourth quarter and fiscal year results and then update you on our brand transformation progress. Jill will then provide a detailed financial review and our outlook for fiscal 2015.

Before moving on with our discussion, I would like to congratulate Michael on the recent announcement of his retirement and thank him for his contribution and leadership over the past several years. We wish Michael and his family all the best in his retirement. I’d also like to take a minute to congratulate Jill on her promotion to CFO. We’ve been planning this transition and preparing Jill to assume the Chief Financial Officer role. As most of you probably know Jill joined us in April of last year as SVP of Finance initially leading our financial planning and analysis team.

Over the past year, we have increased the scope of her role, adding direct accountability for information technology and involving her in all of our finance functions, including Investor Relations. Jill is a talented financial executive with a wealth of experience and I look forward to partnering with her as our new CFO.

Moving on to our results, as you saw in our earnings release for the fourth quarter our same restaurant sales increased 0.4% and our same restaurant guest counts were up 0.2%. Both our same restaurant sales and our same restaurant guest count trends improved sequentially through the second, third and fourth quarter as our brand transformation efforts began to take hold. We did report a diluted loss per share from continuing operations for the year of $1.08 compared to a diluted loss per share from continuing operations up $0.38 in fiscal 2013.

For the fourth quarter, we reported a diluted loss per share from continuing operations of $0.01. Excluding special items, we earned $0.03 per share in the fourth quarter, while we were disappointed with our financial results for the year, we made meaningful progress in a number of areas that have strengthened our brand and prove the in-restaurant guest experience for our guests and should help improve our financial performance going forward. During fiscal 2014, we continued to lay the foundation for the new strategic direction of the company.

Executing our plan to transform Ruby Tuesday into a more energetic, affordable and casual brand, a brand that is more broadly appealing, and appropriate for a wider variety of dining occasions. As part of our brand transformation strategy, we have taken steps to improve our brand, our organizational capabilities and our business model.

We are encouraged by the improvement in same restaurant sales and restaurant level performance we achieved in the fourth quarter. While completing our brand transformation is a multiyear progress – process and we still have a lot of work to do, we believe that we made considerable progress building a stronger foundation during fiscal 2013.

Our brand transformation and menu transformation efforts meaningfully impacted our guest experience in brand perceptions in late August, with the introduction of our new pretzel burgers and flatbreads.

And new advertising that better communicates the fun approachable and family friendly personality of the Ruby Tuesday brand. Menu transformation and more effectively communicating the casual, affordable and family friendly personality of our brand positioning our critical components for the overall brand transformation strategy, and key to reshaping consumer perceptions of Ruby Tuesday. Over the five plus year’s leading into fiscal 2014, partially in response to the company’s effort to move to a more upscale positioning our guest pace had narrowed, and guest frequency had declined. These declines were more significant with younger adults and young families, who found the experience to be too dark, too quiet and formal, and the menu lacking new news and in relevant affordable choices.

We believe that the improvements we have made so far and our continuing brand transformation plans will help attract a broader audience, including young adults and young families back into our restaurants and give our existing guests reasons to visit us more often. Since August in 2013, we have introduced over 40 new or improved menu items like our hand-breaded fresh chicken tenders, low country shrimp & grits, fresh hand-cut salmon or our Parmesan Chicken Pasta, to name a few.

As a result of the intense focus on menu transformation our guest can choose from a wide variety of fun and flavorful new foods at a range of price points that fit their budgets. Since August, nearly 40% of overall menu preference came from new or improved new menu items. In the fourth quarter we completely recreated our Ruby Minis upgrading the buns, burger patties, sauces, and presentations, and reintroducing them as our new Mini Masterpieces.

Other new products we introduced in the fourth quarter include our new Thai Phoon Shrimp and Asian Spring Roll Appetizers, our new Hickory Bourbon Glazed Porkchop and our new Turkey BLT and pressed Cuban sandwiches. From a marketing and communication perspective our fourth quarter efforts remain focused on three communication priorities. One compelling new products, two reinforcing the freshness and variety of our iconic Garden Bar and three effectively communicating the strong value and affordability offered at Ruby Tuesday.

In March, we advertised our Flatbreads and Garden Bar combinations starting under $10. Our advertizing feature three new flatbreads, the shrimp and po'boy with crispy Louisiana shrimp; six cheese and tomato sauce and our black and blue as well as the endless choices and endless flavors available at our Garden Bar.

In the April, May period our advertizing highlighted the wide variety of choices offered on our menu at prices less than $10 with the 20 dishes under $10 campaign. Products featured in that advertising included the Loaded Smokehouse Burger, our Garden Bar, flatbread, tacos, chicken tenders and salads. Both of these campaigns were supported with five-week television flights.

I’ll now turn the call over to Jill to discuss our financial results for the quarter and the year.

Jill Golder

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.

For the fourth quarter, total revenue was $307.3 million a decrease of $8.8 million from the prior year. This decrease was primarily due to a net reduction of 36 company-owned restaurants in fiscal 2014 partially offset by same restaurant sales growth of 24% a company-owned Ruby Tuesday restaurants. This same restaurant sales growth was an improvement in trend versus the third quarter same restaurant sales decline of 1.9%. The growth of 24% was driven by guest count increase of 0.2% and net check increase of 0.2%. Both guest count and net check trends improved compared to the third quarter. Same restaurant guest count growth of 22% compares to a 1.7% decline in the third quarter.

The net check increase of 0.2% compared to 0.2% decrease in third quarter. This improvement in check is due to pricing and favorable menu mix. Both same restaurant sales and guest counts were positive in March and May, but negative in April. In addition to making progress in same restaurant sales performance, we also made progress on improving our restaurant level operating margins.

Restaurant-level operating margins of 18.5% for the quarter improved 80 basis points over prior year. This improvement was driven by cost of goods sold and payroll. Cost of goods sold was 27.1% of sales versus 27.7% in the prior year or favorable by 60 basis points. This improvement was driven by cost savings initiatives implemented in the second and third quarter partially offset by inflation in some commodities.

Payroll and related costs were 33.6% of sales versus 33.8% in the prior year or favorable by 20 basis points. Due to improved labor management partially offset by state minimum wage increases. Other restaurant operating costs were 20.8% of sales and flat to last year.

SG&A expenses of $29.8 million compared to $27 million last year, an increase of $2.8 million. Total marketing expense of $13.8 million increased $4 million versus last year while all other SG&A of $16 million decreased by $1.2 billion.

As we have indicated in prior calls, our television marketing spending was frontloaded in fiscal 2013. During fiscal 2014, we spread our marketing dollars more evenly by quarter to deliver a more consistent communication strategy. In the first half of the year, we spend less than the prior year, well in the second half we spend more than the prior year.

For the full year, total marketing spending of $67.2 million was below prior year by $4.2 million. The restaurant closure than the fourth quarter were primarily a result of our previously announced plans.

In the quarter, we closed 11 Ruby Tuesday restaurants, 9 were closed in connection with the plant closures announced in our second quarter earnings release. We recorded a charge of $2.7 million for lease reserves and other closing costs due to these closings, the majority of which will initially be non-cash.

Two additional restaurants were closed due to storm damage, one of which will be rebuilt. International franchises opened three Ruby Tuesday restaurants and closed two Lime Fresh restaurants.

We ended the year with 747 Ruby Tuesday restaurants, 668 of which are company owned and 26 Lime Fresh Mexican Grills, 20 of the Lime Fresh are company owned. For the quarter, we reported a net loss of $881,000 compared to a prior year net loss of $27.0 million. Excluding special items, we realized net income of $2 million compared to net income of $7 million in the prior year. The special items identified totaled $2.9 million and include closure and impairment expense of $2.7 million related to the nine closed restaurants discussed earlier.

For the quarter, we reported a diluted loss per share of $0.01 compared to a diluted loss per share of $0.44 in the prior year. Excluding special items, diluted earnings per share were $0.03 compared to diluted earnings per share of $0.12 in the prior year. Interest expense was $5.6 million for the quarter compared to $6.4 million in the prior year due to a reduction in debt of $40 million during the year.

In the quarter, we reported an income tax expense of $3.2 million compared to an expense of $12.1 million of last year. This year’s expense includes a non-cash charge of $3.7 million related to increases in the valuation allowance on the company’s deferred tax assets, bringing our total tax valuation allowance reserve to $54.6 million. We expect to eventually reverse a significant portion of this reserve when we generate sufficient levels of income in the future.

Turning to the balance sheet, our book debt was $259 million at the end of the quarter compared to $299 million the prior year quarter, representing a reduction of $40 million. During the quarter, we repurchased $7.1 million of high yield bonds at a slight discount to par. During the year, we repurchased $20 million of high yield bonds and paid down $20 million in mortgage debt.

We ended the quarter with $51.3 million in cash on our balance sheet compared to $52.9 million in the prior year quarter. Going forward, we will continue to consider utilizing excess cash to reduce debt in order to lower our financial leverage.

Now let’s turn to our outlook for fiscal 2015. Consistent with our fiscal 2014 policy, we are not providing quarterly or annual earnings guidance for fiscal 2015.

However, there are certain items that we would like to highlight. We anticipate first quarter same restaurant sales to be in the range of down 1% to up 1% for the quarter. For the year, we expect same restaurant sales to be flat to up 2%.

Restaurant-level operating margin is estimated to be between 15% and 16% of sales.

Improvement in cost of goods sold and other restaurant operating costs are expected to be partially offset by increased restaurant payroll costs due to a return to a more normalized incentive compensation levels.

During the year, we plan to open one new company-owned Ruby Tuesday restaurant, and one rebuilt Ruby Tuesday restaurant recently closed due to storm damage.

Our international franchisees expect to open five to eight Ruby Tuesday restaurants. Our domestic franchisees expect to open two Lime Fresh restaurants. Also in fiscal 2015, we expect to close 8 to 12 company-owned Ruby Tuesday restaurants, and our domestic franchises expect to close three Ruby Tuesday restaurants.

In fiscal 2015, total SG&A spending is estimated to be between $128 million and $132 million, which compares to $137.2 million in fiscal 2014. The reduction is due to $5.3 million in costs incurred in 2014 for corporate restructuring and executive transition costs, and $3.5 million in savings resulting from our 2014 cost reduction initiative. These savings are partially offset by a return to more normalized incentive compensation levels.

Capital expenditures are estimated to be $28 million to $32 million for the year, and we expect to generate $8 million to $12 million in cash proceeds from the sale of excess real estate.

We do not anticipate recognizing a benefit from general business tax credits generated in fiscal 2015 due to our deferred tax valuation allowance, which will remain until we generate sufficient levels of pretax income in the future.

Before turning the call back to JJ. I’d like to take a moment to thank Michael for his leadership and partnership. He has been a valuable mentor to me, and I wish Michael and his family all the best.

Now I’ll turn the call over to JJ to wrap up.

James J. Buettgen

Thank you, Jill. In closing out fiscal 2014, I’d like to take a minute to thank the dedicated team members and managers in our restaurants and in our restaurants support center as well as our operations leadership team, ROC leaders, and my partners on our executive team for their hard work, their loyalty, their commitment and their willingness to embrace change as required by our brand and company transformation plans. I’d also like to thank our Board of Directors for their guidance and partnership.

Finally, I’d like to thank our guests and our shareholders for their continued patronage and support.

As we look to the year ahead, we remain committed to our strategy, our brand transformation plans and our goal of driving profitable same-restaurant guest count growth by continuing to focus on five key priority areas.

Improving the quality, variety and affordability of our menu, improving the effectiveness of our marketing and communications. Working in partnership with our operations leaders to improve our in restaurant execution and overall guest experience.

Improving our business model through a continued focus on improving restaurant level returns and lowering our overall cost structure and working together as a team to improve our capabilities as an organization and to create and sustain a winning culture.

We believe continued focus on our brand transformation efforts and on these key priorities will position our company for long-term success and will generate sustainable improvement in shareholder returns overtime.

With that I’ll now open up the call for your questions.

Question-and-Answer Session

Operator

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

Bryan Elliott – Raymond James & Associates

Thank you, good afternoon. Just a couple of follow-ups on the guidance. What is the advertising assumption in the G&A guidance for 2015?

Jill Golder

Go ahead Bryan.

Bryan Elliott – Raymond James & Associates

I'm sorry, and I apologize if I missed it. Go ahead.

Jill Golder

Yes. In fiscal 2015, we would expect our marketing to be similar to this year or somewhat slightly lower.

Bryan Elliott – Raymond James & Associates

Okay. And the proceeds from real estate, what are the assumptions behind that? It was an $8 million to $12 million?

James J. Buettgen

Well, yes. The assumptions right now we have four properties under contract, or letters of intent for about $4.5 million. We also have another 10 or so land building properties that were actively trying to market. So we feel confident that will bring in somewhere between $8 million and $12 million for the year.

Bryan Elliott – Raymond James & Associates

Okay, great. Thank you.

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.

Yes, thank you. JJ, help us understand, if you could for a second, your guidance for same-store sales for your first fiscal quarter – I would have guessed, given how weak they were I guess in the first quarter of fiscal 2014, that we would have seen a pretty nice rebound, except that it sounds like your guidance is relatively cautious in that regard. Can you help us understand a little bit about that?

James J. Buettgen

Yes, sure. Thanks for your question. Over the course of the year, we expect to continue to make progress and build on the slight positive that we had in the fourth quarter, which is why – our guidance for the year is 0% to 2%. In the first quarter in particular, it’s been pretty choppy and somewhat volatile. We’ve seen some variability across time, and also by market, and we’re still seeing some swing. So, we’re comfortable with the range we’re giving, but that’s kind of where we think we’re going to land, based upon what we’ve seen so far this quarter.

Robert Derrington – Wunderlich Securities, Inc.

So that’s a fairly good representation of essentially what the underlying trend is as we speak?

James J. Buettgen

Yes. That's based upon what we've seen quarter to date.

Robert Derrington – Wunderlich Securities, Inc.

Got you. And can you give us a little bit of color on what your thoughts are around the average check as we go through the course of this year? Do you have some opportunities there with menu mix? Or do you anticipate keeping the menu offerings relatively low to be more broadly appealing? Or how should we think about that?

James J. Buettgen

A couple of answers, one of which is we continue to do a lot of work on the menu front. So, as we mentioned in our prepared remarks, we have either added or improved 40 items in the last three quarters, and they are at a range of price points, anything from burgers and flatbreads, which were under $10, to improvements in pastas and some other things that were in the $12 to $14 range as well as some new steak items. So going forward, we would still expect to be adding or improving a range of different products with different price points. And in terms of specifically how much check increase, still we’re early in the year to forecast that.

Robert Derrington – Wunderlich Securities, Inc.

Okay, and then one more, if I may. We have seen, I guess – just trying to understand your couponing strategy relative to prior years. We've seen some buy one, get 50% off offers. With the use of those be more measured versus prior year, or how should we think about that?

James J. Buettgen

We have the buy one, get one half off or offers of similar value that’s been the range we’ve been working in for most of our offers over the last couple of quarters I guess in terms of comparing that to where we’ve been and giving you some sense of what – at least given what we know now, what we’d likely do – is if you go back to, say, the beginning of fiscal 2014 we were still – 2013, I’m sorry those were buy one, get ones versus buy one, get one half off, with really high discounts. Last year the tail end of fiscal 2013, and the earlier part of 2014 you remember we did some $5 off two, and we saw some drop-off in redemption. Interestingly the buy one get one half off does intend up being that much different in terms of what it cost us then a $5 off two launch rate, but it seems to be much better received in more compelling to our guests. So, we’ve offered – our discounts have been in that range for the most part although we have varied of the products we feature and kind of what we use in terms of the messaging in the coupon. But that range is working pretty well for us now and we don’t really anticipate a big change but part of that depends upon competitive environment and trends through the year.

Robert Derrington – Wunderlich Securities

Got it. Thanks, JJ. Appreciate it.

James J. Buettgen

Welcome, thank you for your question.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Bryan Hunt with Wells Fargo Securities, Inc. Please proceed with your question.

Bryan Hunt – Wells Fargo Securities, Inc.

Good afternoon. Thank you for taking the time. I was wondering if, one, you could disclose the losses associated with the restaurants that were closed this past fiscal year, as well as the ones you are planning to close in fiscal 2015.

James J. Buettgen

Well the ones, that these 33 that we closed on the second half of the year had a negative EBITDA of about $1 million, so there’s about $1 million benefit going forward.

Bryan Hunt – Wells Fargo Securities, Inc.

Okay. And the ones you plan on closing for the upcoming fiscal year?

James J. Buettgen

Those ones we plan on closing typically they would be end of term, so there is not – they are not cash flow negative, they are modestly negative or modestly positive when might be at the end of the term we are choosing not to stay on the market place.

Bryan Hunt – Wells Fargo Securities, Inc.

Okay. And if you're at the end of the term, I assume all those are at the end of the term; you don't own any real estate there at all.

James J. Buettgen

Not on those 8 to 12. We might be the end of term that we are choosing not to exercising option.

Bryan Hunt – Wells Fargo Securities, Inc.

All right, great. And switching topics, you all have obviously, JJ, transformed the menu and worked on service and atmosphere. Can you talk about the areas where you've made the greatest progress from your customer surveys, and where you feel like you are generating a lot of traction with customers at this point?

James J. Buettgen

Thank you for your question. I would say the area that we probably or one of the areas we’ve made a lot of progress is in terms of our menu offering. And I’d characterize that a couple of different ways. One of which is just the amount of new product offerings, and how compelling our guests have found those items, because we’ve gotten a lot good trial.

Baked into the menu strategy and the menu changes, we’ve – a lot of the products have helped kind of round out the range of price points. So we’ve seen a lot of good interest in things like the new burgers, the new flatbreads, the new chicken tenders, which helps with kind of affordability perceptions and helps make us a better option for, for example early-week dinners or lunch, because we have more offers at that price point.

We have also gotten some good credit from our guests to some of the changes we’ve started to make in terms of some of the softer side of décor. So, for example, people have noticed the changes in things like music and lighting, and most recently the changes we made to the server uniforms to make them more casual and more colorful.

And then we’re doing a lot of work, working together with our partners in operations, things like scheduling and staffing and making sure that we’re stay and focused on the right things. But those are a little bit more behind the scenes or longer-term benefits. But that the menu and some of the changes we made in atmosphere have made a pretty big difference.

And as I guess it’s a little bit of a tangent, but in terms of consumer perceptions and kind of what we’re communicating about our brand we’ve continued to see strong and improving scores in the testing we do around our advertising, which means we’re communicating the new products and the changes we’re making to the company in a way that consumers are finding compelling and easy to understand.

Bryan Hunt – Wells Fargo Securities

Okay. And then two last questions, if I can. One, you mentioned in your script about cost savings that were implemented earlier in the year. Is there any way you can talk about what the run rate cost savings are at this point that you pulled out of – whether its store operating costs or SG&A?

Michael Moore

Yes, Bryan. This is Michael. We identified in the second and third quarter calls that we had saved or identified savings of about $6 million on an annual run rate in cost of goods sold and $7 million in the SG&A on an annual run rate. Some of those savings started in the second half of fiscal year 2014, so we actually achieved about $2 million saved in COGS and about $3.5 million in SG&A. Most of that will be realized in the first half a bit in the third quarter. Now the COGS savings is baked into the guidance that we gave for restaurant level margins. And the SG&A savings are baked into the SG&A guidance that we gave over $128 million to $132 million.

Bryan Hunt – Wells Fargo Securities

Great, fantastic. And then when I look at my last question, looking at the balance sheet - in the script, it was mentioned that free cash flow would be used to pay down debt. When I think about the balance sheet and weighing growth opportunities, and the proper amount of leverage on the balance sheet, what's your ultimate goal in terms of leverage before you start to return incremental money, either to grow the business or to return money to shareholders? Thanks.

James J. Buettgen

Well, in thinking of how we think about our use of cash, we entered the year with $50 a little about $15 million in cash. We want to maintain an adequate cash balance, we want to have the adequate cash. So we can internally fund our capital expenditures going forward, which we gave guidance for $28 million to $32 million and after that we are looking to continue to further pay down debt. We paid down $35 million of our high yield bonds and we paid down $20 million mortgages in fiscal 2014. So that would be the next use of excess cash, but we want to make sure we have adequate capital to continue invest in the business and after that would be to continue paid down debt, and continue to further improve our leverage and fixed charged coverage ratios.

Bryan Hunt – Wells Fargo Securities

I appreciate all your time. Thank you, and I'll get back in the queue.

James J. Buettgen

Thanks, very much.

Operator

Our next question comes from line of Hale Holden with Barclays. Please proceed with your question.

Hale Holden – Barclays Capital

Thanks. I had two. On the COGS guidance for fiscal 2015, is that reduction just associated with the cost reduction efforts you've taken and the smaller store base? Or is there also an assumption there on lower input raw material costs?

James J. Buettgen

Oh, no. These are structural changes. Obviously we’ll save COGS because we have less stores open, but this is structural change where we identified initiatives throughout the company that affects all go forward source.

Hale Holden – Barclays Capital

Okay. And then the second question I guess related to Bryan's, on uses of cash, can you kind of walk us through the decision tree on how you make the decision on whether to repay the mortgage loan or purchase the high-yield bonds? Is there a price you look at on the high-yield bonds versus the mortgage debt? I'm just trying to think how you think about it.

James J. Buettgen

Yes, how we would think about it, is the high yield bonds have no prepayment penalty. So that would be favorable to pay down a high-yield bonds some of the mortgages that we have paid down, we've looked to prepay mortgages which would have small prepayment penalties. So there is a large prepayment penalty, that would be less attractive to pay down than a high-yield bond.

Hale Holden – Barclays Capital

Okay, thank you very much.

Operator

Thank you. Our next question comes from the line of Keith Siegner with UBS. Please proceed with your question.

Keith Siegner – UBS Securities

Thank you. Just to circle back to that last question and clarify one point. As we try to pull together all these moving pieces on the COGS guidance for this upcoming year, could you just talk a little bit about what you’re seeing in terms of a COGS underlying inflation pressure, given the changes you've had in menu, just to clarify a little bit about where you see the underlying core inflation going, and maybe how much of that you had locked? Thank you.

James J. Buettgen

Yes, what I talked about is the COGS are structural changes that $6 million on an annual run rate. But we do expect – or we have inflation, commodity inflation baked into our guidance. We expect it to be about 1% in the first half and then 1.5% to 2% on the back half.

Keith Siegner – UBS Securities

Thank you.

James J. Buettgen

You’re welcome. 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

Thanks. JJ, you mentioned in your prepared remarks, targeting your messaging towards younger adults and young families. Anecdotally it seems a lot of them are watching less TV or cutting the cord completely. So what is the marketing media, medium – I don't even know which of those two would be the right tense, to show how old I am – to communicate with that target audience?

James J. Buettgen

If I understand your question correctly, you are asking kind of given their TV viewership or lack thereof, what are we doing specifically to target the group? Which I think is a good and fair question, but a little bit of a – maybe a future question for us. And the reason I say that is part of it is related to where we’re starting from. So, as part of the – kind of the effort to move the brand upscale in the earlier years, we made a number of changes to the brand that made it harder for those people to either afford the brand or feel comfortable bringing their family to the restaurant because it was more quiet, more formal, there were less expensive items available. So, if you've seen our advertising lately a couple of different things that have changed, one of which is just the tonality and the energy level spots. The products that we featured for the most part are kind of fighting against the upscale piece and kind of showing more affordable items things that people would eat on a more everyday basis. And to the degree we do have live talent in the spots, it’s usually either a family or child that we show, just a kind of make that to send that message.

The other thing is it’s not that people who have kids choose all or zero of their occasions in a given restaurants. So for us, the way that manifest itself would be that people who, say for example on the lower income would have come to us during the week as well as on the weekend. As the restaurant got more expensive we became more of a special occasion play.

Where now if they come and see our – if they try our restaurant on the weekend, they still see how much the restaurant has changed and they know it’s a little more affordable which can hopefully overtime bring back some early week visits. And we’ve been doing things to improve both the menu offerings to our kids. So we’ve improved things like our chicken tenders, the kids burgers we made improvements to the offering itself.

And by starting to make changes to the atmosphere things like you know little bit louder more energetic more contemporary music servers in jeans and button down shirts versus black pants and a black top. Again starts to tell people who are in the restaurants that’s it exchanged and it’s becoming more casual.

Longer-term I think your question is fair, but it’s a bigger issue TV viewing patterns are changing, people are moving to digital and watching less TV we’re going to have to figure that out in general. Then in the short-term we think there is upside and to the changes we’re making to the offering and changes we’ve made to the creative so far.

Bryan Elliott – Raymond James & Associates

Thank you.

James J. Buettgen

Thank you.

Operator

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Mr. Buettgen for closing remarks.

James J. Buettgen

I would just like to thank everybody again for joining us today. Happy to have the chance to give you an update and we look forward to connecting again after the first quarter. Thank you all again. Take care.

Operator

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

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Ruby Tuesday (NYSE:RT): FQ4 EPS of $0.03 misses by $0.06. Revenue of $307.3M (-2.8% Y/Y) beats by $3.5M. Shares +2.25%.