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Ruby Tuesday, Inc. (NYSE:RT)

F2Q07 Earnings Call

January 9, 2007 5:00 pm ET

Executives

Shannon Hepp - VP of IR and Planning

Sandy Beall - Chairman and CEO

Margie Duffy - CFO

Kimberly Grant - SVP of Operations

Mark Young - VP of Marketing

Analysts

Bob Derrington - Morgan Keegan

Steven Rees - J.P. Morgan

Jeff Omohundro - Wachovia

Barry Stouffer - BB&T Capital Markets

Joe Buckley - Bear Stearns

Bryan Elliott - Raymond James

Chris O'Cull - SunTrust Robinson Humphrey

Jonathan Waite - McKay Capital

Operator

Good afternoon. My name is Audrey and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ruby Tuesday Second Quarter Fiscal Year 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and answer-period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, January 9, 2007. Thank you.

I would now like to introduce Shannon Hepp, Vice President of Investor Relations and Planning. Ms. Hepp, you may begin your conference.

Shannon Hepp

Thank you, Audrey, and thanks all of you for joining us this evening. With me today are Sandy Beall, Ruby Tuesday's Chairman and CEO and Margie Duffy, Chief Financial Officer. In addition, Kimberly Grant, our SVP of Operations and Mark Young, our Vice President of Marketing, are with us for the Q&A portion of the call.

I would like to remind you that, there are likely to be forward-looking statements in our comments and I refer you to the note regarding forward-looking information in our press release and most recently filed Form 10-Q. Our format today includes an overview of our second quarter financial results, then an update of our plans and strategies, and at the conclusion of the call, we will have a question-and-answer session.

Before we get started, I would also like to announce that we are scheduled to release third quarter fiscal 2007 results after the market close on Wednesday, April 11 and we will host the conference call that same evening at 5:00 p.m.

So, let me turn the call over to Margie to provide a brief financial overview of the second quarter.

Margie Duffy

Thank you, Shannon, and good evening everyone. Happy New Year. I will take a few minutes to touch on the financial highlights, then Sandy will update you on our plans and initiatives. As you saw in our release, we reported diluted earnings per share for the second quarter of $0.28, which was flat with prior year after expensing $2.2 million in stock-based compensation expense. This was driven by 14.2% increase in total revenue, offset by a slight decrease in net income from stock-based compensation expense, and higher interest expense due to share repurchases in the prior year, which consequently helped lower our diluted shares. The $2.2 million of stock-based compensation expense reduced our earnings per share by $0.02.

Now let me add a little more color to a few things on the income statement for the quarter. Total revenue grew by 14.2% driven by new restaurant growth. The acquisition of 17 Orlando, Florida restaurants in the first quarter of fiscal 2007 and 1.9% increase in average restaurant volume. These were offset by the same-restaurant sales decrease of two-tenths.

Restaurant level margins were better than prior year and our expectation due primarily to continued lower management labor with our lower turnover and efficiencies from KDS, as well as their favorable claims experience on health insurance. Offsetting these labor savings are the additional line cooks and busers added during peak shift, as well as the wage increases we gave to our lead culinary team members in the prior quarter as part of our food quality program.

Cost of sales increased from prior year due to our quality initiative. First, by the enhancement to our fresh burgers, the rollout of fresh steaks and chicken, as well as a larger chicken portion, also our premium fresh beverage products. As we mentioned in last quarter's call, there were several initiatives we rolled slightly in advance of our October menu, which included some offsetting price increases. And then thirdly, we had an increase in French fries portion and ketchup and ramekins on the plate for better presentation.

The other operating expense line was flat as a percent of sales year-over-year. With the milder weather, we are finally seeing some relief from higher utility costs. SG&A was higher than anticipated, primarily due to higher advertising. Equity in earnings was similar to the prior year, and depreciation, interest and taxes came in pretty much as we had anticipated.

And looking at the balance sheet, we ended the quarter with total debt to capital, including operating leases, guarantees and letters of credits of approximately 51% and we ended the quarter with total book debt of approximately $359 million.

As you saw in our press release, with the continuing tougher consumer environment you have heard many referencing and based on our December sales, which while trending better than many of our peers, are still short of our expectations. We’ve reduced our same-restaurant sales projections for the remainder of fiscal 2007. Our guidance for the third and fourth quarters is based on same-restaurant sales of flat to up 2%, and our annual guidance is now based on annual same-restaurant sales of flat to up 1%.

Our guidance for fiscal 2007 is for diluted earnings per share of $1.68 to $1.72. This includes an estimated $0.10 to $0.11 per share impact from the expense of stock-based compensations. We anticipate third quarter diluted earnings per share of $0.52 to $0.54. And Sandy will update you on our sales initiatives that will add a little more color to this guidance.

Before discussing the margins, I do want to note that subsequent to the end of the second quarter, we learned that Specialty Restaurant Group, the company to whom we sold Tia's and American Cafe approximately six years ago, closed 20 restaurants in January 2, 2007. As it has been discussed in our 10-Qs, we are liable on certain of these leases, and anticipate that we will need to take a charge in our fiscal third quarter. While we do not have enough details yet to determine the specific amount, we do know that the remaining scheduled leased payments on the leases for which we are primarily liable total approximately $6.1 million. While we don’t expect our liability to be this high, this would be the high-end of the range, and we would expect our liability to be substantially less than this amount. Given the uncertainty of the ultimate amount, this charge is not included in the guidance previously given.

Now a little more detail on margins for the year excluding any impact of the Specialty Restaurant Group charge. With the continued investments in labor for additional service initiative discussed previously, we expect restaurant level margins for the year to be approximately flat-to-down 10 basis points versus the prior year, with the majority of the additional investment in the third quarter, due primarily to continuation of food increases versus prior year, similar to what we saw in the second quarter. Labor is impacted by increased tips minimum wage rates planned in some states. The latest legislative wage changes result in approximately 2.5 million more labor for the second half of the fiscal year, which is included in our guidance.

On equity and earnings, we are projecting this to be income of approximately $300,000 to $500,000 for the second half of the year, which is less than projected last quarter due to our repurchase of another large franchisee in South Florida with the beginning of the third quarter. We are still projecting depreciation expense for the year of $75 million to $80 million, and G&A for the year of $115 million to $125 million including stock-based compensation expense, which is estimated at $10 million to $11 million. On stock-based compensation expense, we remind you that the fourth quarter should still be slightly higher than the first and third due to the timing of annual option grants.

We anticipate our tax rate will be approximately 32.8% to 33% for the year. From an equivalent shares perspective, we are still modeling these in the 59 million to 61 million range for the year. We are also still projecting to be approximately $40 million to $50 million free cash flow positive for fiscal 2007 based on capital expenditures of $145 million to $155 million.

So now let me turn the call over to Sandy for an update on our strategies and initiatives.

Sandy Beall

Thank you, Margie. Thanks for joining us tonight. Most of my time this evening will be spent on our five-year plan, which we updated and reviewed with our Board over the last two days, but first a couple of quarterly items.

Same-restaurant sales for the company franchisees were respectable considering the consumer environment. Not what we wanted as Margie said, but pretty good and improving compared to overall casual dining and our peer group performance. Company restaurants were down a fraction, two-tenths, but were positive for November, and on a two-year basis for the quarter were positive 1.7%. Franchise restaurants were even better, up 4% for the quarter, and 3.8% on a two-year basis for the second quarter.

Our third quarter started off well, with same-restaurant sales increasing by approximately 2% in December versus 1% for November, and down 2% for the quarter. Last year in December, we were up 3.9%, so we are up 5.9% for the month – for the two years combined. Overall, the system was positive for the quarter in same-restaurant sales.

Even with these sluggish sales, we ran our business well, investing in our programs but also maintaining solid cost controls. We have a very efficient business model at both the restaurant level and the corporate level, resulting in good margins and earnings predictability. The variable for us is all about sales.

Our advertising in the second quarter was focused on our handcrafted burgers in September and October, and our fresh Jumbo Lump Crab Cake and Premium Aged Prime Sirloin steak in November. Sales benefited from our first dinner-oriented ad in two years, featuring our premium dinner product as part of our burger-centric strategy. We will continue to focus on dinner items in addition to our handcrafted burgers throughout the balance of the year. Overall, I think for the quarter, we ran our business well. We feel good about our plans and programs.

Now let’s shift to our annual planning update. Last January and throughout this year, we have talked about evolving our concept towards high quality casual dining supported by our brand position of simple, fresh, American dining. Over the last year, we have looked at a lot of restaurants to figure out relative strategies to take us even further as we continue to refine our concept with quality and differentiation as casual dining continues to mature. We believe our food is as good as any high quality casual dining restaurant, and our opportunities are in the areas of one, service and image. We need – we have got to have a well trained, sharp-looking team that really cares about gracious hospitality. And second, the look and feel of our restaurants, we need one that is less bar and grill, more dinner house and differentiates us from our competition.

We have also spent much time with our Board and bankers on our plans and strategies to ensure we aren’t confusing habits with wisdom, and are doing all we can to maximize shareholder value in addition to what we think are sound operating and brand programs.

I will review with you our updated plans, which build off the plans I discussed last January, and I believe takes them to a whole new level that we believe are the right plans and strategies to maximize shareholder value. Our three key strategies to maximize values are centered around -- first, getting more out of existing assets, lowest risks, high return thing we can do; number two, investing wisely in new restaurants; and three, maintaining the appropriate capital structure to create value.

Let me share with you what we are doing in these areas, and that will allow us to achieve our first strategy of getting more from existing assets, primarily by driving same restaurant sales in the 3% to 5% range.

On our last quarter's call, I discussed all the planned uncompromising freshness and quality programs, which we were going to rollout through the quarter and we did. Fresh steaks, fresh hamburger, Choice hamburger, fresh all-natural chicken, a much fresher garden bar and overall a high quality fresh or better food as well as our fresh higher quality beverage program that we also rolled out.

Next year, you will see a continuation in this direction with items such as fresh salmon served in a couple of different ways. New offerings of high quality premium fresh all-natural chicken dishes with a variety of fresh ingredients and as well as enhanced -- further probably enhancing our garden bar. We will also eliminate all trans fats by this summer and we will also be adding some organic products.

All of these will be part of our plan of introducing and having higher quality especially at dinner time. We want to take advantage of the evening period, primarily weekend sales opportunities, in addition to maintaining our solid lunch business, which is anchored by our garden bar meal and our very successful handcrafted burgers.

Today, 40% of our guests order burger category meal and 25% of our guests ordered garden meal as an entrée. Not to mention another 20% order the garden bar as an add-on filling through their dinner meal. Our menus are anchored with strong lunch day part items, burger and salad bar, which represent quality, speed, and value.

Our new dinner oriented items combined with our core dinner items like our prime sirloin, our fresh stakes, our Gourmet Fresh Chicken Pot Pie, our signature slow cooked ribs, and our very popular fish dishes Creole and New Orleans Seafood. We will add increased emphasis on evening sales opportunities, especially when advertised and balanced with our handcrafted burger. We believe we have opportunity to drive same restaurant sales with both guest and check and we anticipate we can drive 2% to 3% same restaurant sales from check alone over the next five years.

I should also mention our top box food ratings have increased an all time high. Our food is better than it has ever been. Research done after our October menu showed solid improvements in the areas -- really almost every area the taste, quality, appearance, and value. Quality is up, value is up, as well as, our overall rating is also up significantly. 54% of our guests score our food a 5 on a 1-5 scale, that's top box. 90% rate us a 4 or better on a 1-5, that's top 2 box. We are executing and creating value on the strategy of uncompromising freshness and quality. Our food is very, very good.

In addition to our food programs, we'll build off of our alcohol -- off of our premium alcohol and nonalcoholic beverage programs that we rolled out in October. Since the rollout our beverage mix as a percent of sales is up by almost a point in November. In December it's up even little bit more.

Our research showed even more dramatic quality ratings on our beverage program. Our premium wine and handcrafted cocktails both of these categories were 60% top box or higher, extremely high scores or extremely -- they are very, very successful rollout that’s adding to sales and mix.

Next year we expect to rollout even more premium drinks, wines, and handcrafted beers. This should certainly move us toward our new goal of 15% beverage mix. Our beverage program should drive approximately 1% in same-same restaurant sales per year over the next 5 years.

Our off premise program is still progressing that we talked to you about before. We are rolling it out gradually throughout the year. The Southeast is almost complete, the Mid-Atlantic rollout will be starting very soon, and the Northeast to be completed by the end of this summer.

Our off premise is now at 6.7% for freestanding units, up 40% -- I am sorry, up 40 basis points from the second quarter of the prior year, and with our goal of increasing it to 10%, which is really our incremental sales we should be able to drive close to another 1% per year for at least the next three years anyway in same restaurant sales.

So, over the next several years, if we only maintain flat guest counts, which definitely isn’t our goal, our goal is 1% to 2%, but even if they are flat, if we have no impact from re-modelings which we will talk to you about in a minute, the initiatives that I have just discussed should produce approximately 3% to 5% growth in annual same restaurant sales opportunity, plus we will tend to continue to have more effective, I believe more effective and more efficient advertising as we continue learning what works best as we move into our new fiscal year.

We have solid plans -- we believe we have solid plans in place to support our 3% to 5% average same restaurant sales goal over the next 5 years.

High quality food, increasing value are essentially getting more from existing assets, but also extremely important is gracious hospitality. Key to our ability to improve the quality of our guest experience is having experienced, stable professionals managing our restaurants. Our goal last year was to achieve a total management turnover including all the trainees up 20%. I believe we have done an outstanding job in this area and is paying off in guest experience. Our total turnover including management trainees is now consistently running well under 20% versus over 35% three years ago.

Stability and quality are key to evolving to a high quality casual dining position. We are in the people business and we are applying that same management turnover passion to achieving team turnover levels below 100% similar to other high quality casual dining restaurants to further support our ability to achieve 3 to 5% same sales goals. The success of our key service program, gracious hospitality is centered on our new training manager position, which we have talked to you about briefly before. That will -- our training manager program will have rolled out to 80% of the system by the end of third quarter into the entire system by April.

Last year we rolled out KDS, we freed up a manager position in each district. Instead of taking the potential savings to income this year, we have reinvested that $6 to $7 million in this new position that we call training manager -- manager of training and selection for every district. This equals one training manager for every four to five restaurants in the system. Some may call that overkill, we think it can dramatically improve our service and image levels. These managers are 100% focused on further improving the levels of turnover, service and image of our team members to reflect gracious hospitality in a high quality casual dining restaurant. We believe this investment can also add to increase traffic and higher same-restaurant sales, again, further supporting our five year goal of 3% to 5% in same-restaurant sales.

Our third area of focus is on five-star facilities. By our fiscal year end, we will have rolled out, upgraded in more contemporary china throughout the system, higher quality glassware, new napkin program, as well as sharper uniforms. These changes are already having a positive impact on the guest. When you visit our restaurants, I think you will notice the difference even in the last 90 days. Next fiscal year we will again make upgrades in image and uniforms, as our restaurants are certified by our training managers to further enhance the guest experience.

Our last and foremost initiative is company wide remodeling, which we hope will have a positive impact starting next year, but for sure over the next several years. The redesigned box and the image freshens the look and feel of our restaurants, classic but more contemporary, high quality casual dining design. A look that is truly differentiated from the bar grill segment and one that upgrades our image to attract a newer and slightly higher income guest without intimidating or alienating any existing guest.

We have one new restaurant and five remodeled restaurants completed with the new look. We will be fine-tuning the look over the winter based on research and the feedback from lots of different constituencies, and anticipate expanding the test to 30 to 50 more restaurants this summer. We will start remodeling the system next fiscal year. We anticipate spending approximately $70 to $80 million over two-year timeframe on the remodels, and would also anticipate writing-off existing assets such as awnings, chairs, lighting and artifacts, as they are replaced with the newer look and image. We estimate that the non-cash write-off would be approximately $10 to $15 million to be taken by the time the restaurants are remodeled over the next couple of years.

Also I do want to emphasize that these remodels will require no closures or downtime for our restaurants, and then involve construction that's mostly cosmetic, like putting on a new suit basically. We believe the remodels are key to our evolution from a bar-and-grill concept to a higher quality, more differentiated and more current brand position in support to our goal of increasing guest counts 1% to 2% and certainly our goal of increasing, again, same-restaurants sales in 3% to 5% range.

So, we believe we have solid programs in place to help us maximize the same-restaurant sales opportunity in summary for our goal of getting more out of existing assets. I think our goal of 3% to 5% is realistic based on a check increased opportunity of 2% to 3% a year, beverage sales increase of 1% a year, off premise increase of close to 1% a year, and traffic of 1% to 2% a year driven by better foods and service, or gracious hospitality, system wide remodeling and more efficient advertising to attract new guests, as well as increased frequency with existing guests. All of this combined definitely supports our other goal of having average restaurant volumes of $2.5 million within five years.

Our second strategy we discussed last January, is investing wisely and prudently in new restaurants. Last January, we told you we were focusing more on free cash flow, existing assets and reducing restaurant openings from approximately 60 per year to 45 to 50 per year or 6% to 8% restaurant growth. Our focus continues to be on free cash flow and even greater focus on return on invested capital. In addition to our sales average, we have several initiatives planned to impact ROIC, including being even more selective with new restaurant growth, closing select underperforming restaurants as part of our normal course of business. We are franchising more remote locations outside of our core company markets, acquiring select franchisees and continuing to increase our franchising efforts.

Even though our new restaurant returns are well in excess of our cost of capital, we feel we’ve plenty of long term restaurant growth, we feel it’s most prudent based on soft consumer demand and potential excess restaurant supply that we slow growth a little more to 4% or 30 plus restaurants per year over the next several years. We feel this enhances our ability to maximize same-restaurant sales getting more out of existing assets, while maximizing our return on invested capital over the next several by focusing on select high volume, high return new locations. After we’ve achieved our goals, or are well on our way to achieving our same-restaurant goals and average restaurant volume and return goals, we’ll consider allocating more capital to new restaurant growth. And we believe we can create substantial value with this reduced growth level.

We will also continue to review our existing restaurants for lower performers that are achieving less than our cost of capital, which can or should be closed or re-franchised, no massive closing or anything, but just a normal course of business managing that real estate portfolio very, very effectively. This year, we have closed seven restaurants, five since quarter end, and have or in the process of re-franchising seven restaurants west of Mississippi. We anticipate closing a few more by year end, and we’ll continue to manage this portfolio to increase average restaurant volumes, margins, and return on invested capital.

Although new restaurant growth was slow, we will add to overall restaurant and revenue growth by continuing franchise acquisitions. In our first quarter, we acquired the Orlando market, and at the beginning of our third quarter, we acquired the South Florida market. These repurchases are both accretive, and had high returns on investments higher than our current average return. So they are adding value and increasing our return on invested capital.

Based on slowing our growth and being even more selective, we’ve set new restaurant volume goals in the 2.6 million plus range, and new restaurant return on investment capital goals of 15% including 100% of advertising cost and all corporate G&A cost allocations, which will further enhance shareholder value.

Last January, we announced an increased emphasis on franchising with quality select partners. We believe we’ve made some progress in this area, and this will create increased value -- will continue to create increased value from franchising in addition to our company openings of 30 plus restaurants a year. Our franchising programs add significant value especially in the margins and return area, and should add approximately an additional 40 to 50 new domestic and international restaurants per year over the next five years. So if you take the company-owned new as 30, fold in a couple of franchisee acquisitions, and add 40 to 50 franchise locations, you will end up with about 50-50 mix, maybe slanted a little heavier towards franchise.

This year, we have already added three new franchisees, a very good year so far, anticipate adding three more by year end. Additionally, as we review returns, I mentioned, we will re-franchise restaurants in existing markets where appropriate, and where it will generate a higher return to do so. A couple of examples of this: In the first quarter, we sold three restaurants in Missouri and Illinois to an existing franchisee, and are going to be doing the same with four more Arkansas restaurants in the third quarter.

As part of our emphasis on free cash flow and increasing returns and shareholders value, we anticipate utilizing less capital to grow than we have in the past. Last year, our capital expenditures were approximately $175 million with the current year down to approximately $145 million to $155 million. Next year and in the future, we anticipate approximately $100 million to $125 million excluding the system remodels. We will achieve this by opening fewer restaurants than the past. Second, owning a little bit less property. Number three, using more build-to-suits on leased land. And four, getting more landlord allowances on leased properties for finishing out leased space.

We currently own approximately 46% of all company locations, and would anticipate that would move down to the 40% range over the next five years. Key is, if we don't own the land, we don't want to own the building or put a building on there. The benefit of these modifications and our new restaurant plan, combined with our sales and performance expectations on existing restaurants should result in higher average restaurant volumes, higher margins, and higher returns, as well as significantly increased free cash flow.

Our third strategy deals with our capital structure and the allocation of our capital. We have reviewed with our Board, key areas that affect others and others in the industry, items like leverage, real estate values, performance, and value-creating options. This process definitely influences our planning. We are more focused than ever in our history on improving our performance and returns on invested capital. We are including our ROIC, not only in our planning process, in making a strong part of our culture. But we are also reviewing our returns in great detail down to each restaurant on a quarterly basis with our Board for increased accountability. We are totally committed to and believe we have the plans to get ROIC in excess of 13% over the next five years.

Next, as we continue to generate higher and higher levels of free cash flow, approximately $3 per share or roughly $200 million per year by year five, or based on the goals I have just laid out, approximately $850 million in excess free -- in free cash flow over the next five years. We have modified our thinking a bit on what is prudent leverage, what to do with excess cash, and how to further return excess capital to our shareholders. Traditionally, we have maintained a policy of no more than 60% total debt-to-cap including leases, guarantees et cetera. And we have been keeping this really in the 40% to 50% range, 50% for the last year and that's approximately two times total debt-to-EBITDA.

With increased free cash flow, we have potential to return more to our shareholders if we maintain a more prudent leverage and we could see leveraging up as high as approximately three times total debt-to-EBITDA, which we believe would still be low risk based on our significant free cash flow position and still allow us to have the equivalent of an investment grade rating lower our overall cost-to-capital and increase shareholder value.

The primary reason for leveraging up would be share repurchases. In light of this opportunity, today our Board authorized an additional 5 million shares under our current share repurchase program and this brings our total available for repurchase to 10.2 million shares.

The other use of excess capital is dividend. Last year, we increased our dividend dramatically to $0.50 per share annually, which created one of the better yields within our industry. We think dividends are important part of the value equation as our company matures and generates increasing levels of free cash flow.

Today, we announced, I think very importantly so, that our long-term goal is to increase the dividend annually matching our net income growth up to 10% annual dividend growth. So not only will our shareholders hopefully benefit from a solid stock appreciation from our programs, they'll also benefit from a nice dividend yield and increased ownership from fewer outstanding shares.

In summary, we have laid a solid foundation, which continue to improve and elevate our brand. Key to our branded strategy is our commitment to uncompromising freshness and quality, gracious hospitality, Five-Star facilities, slower but better growth and increased returns. The execution of these strategies have led to improvement in many areas already, such as food and beverage scores, beverage mix, improved To Go and off-premise sales and improving the financial metrics such as free cash flow and ROIC.

While the same restaurant sales are lower than we had anticipated, when compared to others in this segment, we are holding on our own and in many cases doing better. We believe our company has great value, yet we don’t currently believe that, that value has fully reflected our stock price. We are taking action to improve value for our shareholders. Our specific goals for the next five years that should result from our strategies and plans are increasing same-store sales in the 3% to 5% range, and average restaurant volumes to 2.5%, while items I mentioned earlier, traffic one to two, beverage mix 1% a years, off-premise 1% a year.

Turnover is very, very important to us, our next goal, maintaining management well below 20% and getting our team turnover down to 100% like other high quality casual dinning restaurants achieving pre-tax margins of 11% to 12%, next goal, opening 30 plus new company restaurants a year plus acquiring couple of franchisees every year, plus 40 to 50 new franchise restaurants yearly.

Next is continuing normalized earnings per share growth of 12.5% to 15%. Improving return on invested capital in excess of 13%, reducing restaurant CapEx $100 million to $125 million per year generating free cash flow in excess of $3 per share, increasing debt -- total debt to EBITDA up to a maximum of three times, continuing our share repurchase program and increasing our dividend based on net income growth up to 10%.

We believe that combination of our strategies and achievement of our goals will maximize returns for our shareholders, strengthen our brand, and create value for our great teams.

I want to thank you for listening to this long presentation. I think it's important, and I think the elements that are essential and the fundamental ways to create value for our great company.

With that I will open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Bob Derrington with Morgan Keegan.

Bob Derrington - Morgan Keegan

Yeah. Thank you. Sandy, could you clarify a couple of points for us for a second? The remodel program that you talked about for the concept, I think you mentioned 30 to 50 that you would undertake and test this summer and that you would begin next fiscal year the more aggressive remodel plan. I assume you are talking about the fiscal '08 for the more aggressive rollout of that through the system?

Sandy Beall

Correct. So if the things go -- if things go well with the test, then we would start rolling out the remodels probably by the fall of next fiscal year -- at the end of next summer.

Bob Derrington - Morgan Keegan

Have you had enough time at this point to gauge the performance of those stores that have undergone it at this point, Sandy?

Sandy Beall

No. Not from a sales standpoint. We have done a pre-research, pre-remodel research. We are fielding post-research next week. We all feel pretty good about it. We have about four different groups of people and couple of more designers looking at it to tweak it. And we hope -- we think this or slight modification of this can be very effective. There is a chance we could delay it, that’s why we say next year, but certainly over the next couple of years. But the ones we have, I took the board to the one last night, it's dramatically different look and it's not intimidating. There is no risk of chasing off existing people and definitely appeals to little bit higher income. So --

Mark Young

One other point --

Sandy Beall

We will see, but we would like to get some of the remodeling done next year.

Bob Derrington - Morgan Keegan

Got you. As far you mentioned the opportunity to take a considerable amount of price within the brand assuming you can -- even assuming essentially flat traffic that you could get 3% to 5% comps. That assumes a lot of menu mix and our pricing. Did I understand that correctly?

Sandy Beall

Yes. I think it's mostly mix, Bob. It's products and mix and it's working more on the dinner segment. I think we can -- all of this is like a puzzle. And I think as we continue to evolve more and more over the next five years towards high quality casual dining, I would hope at the end of that time that we have an average check of $13.50 to $15. And I think we do that with great product offerings. We still have on our menu, as you probably know, you can get a $6 burger, you can get a $10 burger. You can get a $9.95 great steak or most popular steak. We are also selling a lot of our prime sirloin, which is fantastic, and you pay $16 for that. So we have -- we have got the choices for people where they make $40,000 or $80,000. In this net our beverage will add, I believe our beverage program is going to add substantial check opportunity also. We found that as we offer the better beverages, the fresher beverages, the more premium wines, people are buying them. Given the right product, they will spend. But it is, you have to be careful on it, but I do believe that’s the road we are on, I think that’s where we’ll end up, had to be careful though.

Bob Derrington - Morgan Keegan

One last question, if I may, on the --

Sandy Beall

And one thing, Bob, we have been on this journey for two years already, so I think most of our risk actually in our menu changes and all are really behind us in the last year.

Bob Derrington - Morgan Keegan

Got it.

Sandy Beall

You can find values up also even with all of our changes, that’s what's key.

Bob Derrington - Morgan Keegan

Okay. As it relates to price in the December number that I think you are up 2% on the company side, how much of that was traffic versus either menu pricing and/or menu mix?

Sandy Beall

I think most -- it was quite a bit of -- more mix than was pricing, and I think our traffic was probably for December -- I can't remember, it was down a little bit.

Bob Derrington - Morgan Keegan

Okay. All right, very good. Thank you.

Operator

Your next question comes from the line of Steven Rees with J.P. Morgan.

Steven Rees - J.P. Morgan

Great, thank you. I just wanted to ask about the advertising weight in the quarter. How much they were up year-over-year, and how much you think you will end up in fiscal ‘07 in terms of the advertising weight? And do you have any initial thoughts on '08 at this point?

Mark Young

Advertising weights for Q2 was up -- probably doubled what we were at last year in weight level, but regional frequency is what we are really focused on right now moving forward. We averaged probably about 145 to 150 points in weight in Q2 of this year versus last year we have been 75 to 80 points. Our expenditure of margin for this year versus last year was about the same percentage.

Steven Rees - J.P. Morgan

And then do you think the trend will continue as you look out into ‘08?

Mark Young

We think the what will continue?

Steven Rees - J.P. Morgan

The trend in terms of the year-over-year increases in advertising weights?

Mark Young

Not so much in weight level. Again, we are really, as we are learning in the advertising piece for making adjustments in our planning to be, as Sandy said, more efficient and more effective in our media planning, I don’t think you can look it as a straight increase in the trends that you have been seeing. But we will get more effective in our advertising and our buys as we learn more -- as we continue to get -- we are adjusting third and fourth quarter buys as we speak now to take advantage of that.

Steven Rees - J.P. Morgan

Okay. And then you mentioned increasing beverage to perhaps three times debt to EBITDA to buyback more stock over. What sort of time frame would you like to do this in?

Sandy Beall

Within the five year plan. We are not rushing out tomorrow or anything, but it's -- I think it’s a long term strategy. I think our cash flow support increased leverage is throughout the entire five years.

Steven Rees - J.P. Morgan

Great, thank you.

Operator

The next question comes from the line of Jeff Omohundro with Wachovia.

Jeff Omohundro - Wachovia

Thanks, good evening everybody. I guess also on the timeframe question, regarding the moderation in the unit growth rate plans, would you be on that 30-ish unit run rate for fiscal ’08?

Sandy Beall

Yes, for '08, yes. This year I think we are opening about 45.

Jeff Omohundro - Wachovia

Okay. And then on -- regarding the prime sirloin and the full menu update, why don’t you talk a little about how the response to the -- how the mix of prime sirloin perform, say, versus the introductory mix on the triple prime burgers. Is -- how please were you with that?

Sandy Beall

I was very pleased with the prime sirloin, just as pleased as triple prime burger. And you sell lot more $9 burgers than you can $16-$17 steaks. But we sold between 1.5 and 2 points on our prime steak, which is pretty good. The Triple Prime, if you remember came out of the gate about 6%, which needs though -- whether we sell one, two or three isn’t as important as the halo effect, the image of having this Triple Prime, the quality effect, uncompromising quality and freshness, and that kind of creates a halo effect and increases the overall steak category and rating level, same as it did in Burgers. So it is a win-win for us, and I am very typical to sell 1.5 to 2 points.

Jeff Omohundro - Wachovia

And then just finally, just some cost questions. I guess, first, how is the commodity outlook shaping out before you, as you look forward into the new calendar year? And then with the -- I guess, I will call it pending minimum wage increase, how do you expect to respond to that?

Sandy Beall

On the commodities, I think, commodities are pretty stable from now through December. I think the fear is on beef, probably staring next winter, because of growing prices. I don’t think that will hit us till then. I wish they go up, Jeff, because grocery stores have, the super markets have this incredible advantage for the last couple of years, and an incredible advantage. So, it doesn’t bother me if they go up, actually I would like it. Now on the labor, on minimum wage, I think Margie said, that our impact for the balance of the year is about $2.75 million, so on an annualized basis, probably 5, 6 or 7 or so, like that. We have absorbed that in our guidance and it didn’t really change our guidance, I don’t think. Key though, that is probably from -- primarily from a lot of states that also change the tip credit. The federal minimum wage, I think, will have minimal effect on us. We pulled up, RI’s dishwasher makes $8.48 an hour. So, that’s about the low end of it. So, it always has some effect, but it’s not going to be a big deal, I don’t think. I hope, they pass it, I am all in favor of higher minimum wage.

Jeff Omohundro - Wachovia

Great. Thanks a lot.

Operator

Your next question comes from the line of Barry Stouffer with BB&T Capital Markets.

Barry Stouffer - BB&T Capital Markets

Good afternoon. What was the advertising as a percent of sales this year versus last year?

Margie Duffy

It was up approximately 50 basis points for the quarter.

Barry Stouffer - BB&T Capital Markets

To 3.5% or so?

Sandy Beall

No. 3 -- 8 or -- what is it? Hold on here.

Margie Duffy

A little over 4% this quarter versus below 4% last year.

Barry Stouffer - BB&T Capital Markets

And was there anything else that was within the increase in G&A in the quarter, showing it was up over 22% or up over 20% year-over-year, excluding the stock compensation expense?

Margie Duffy

Kim, do you recall anything readily?

Kimberly Grant

No.

Sandy Beall

They will look it up. I will try and answer it.

Barry Stouffer - BB&T Capital Markets

Okay.

Sandy Beall

Answer it. While, when somebody else ask me a question, we will try to answer it.

Barry Stouffer - BB&T Capital Markets

Check average change in the quarter?

Sandy Beall

Check average change for the quarter was 2% to 3%.

Margie Duffy

Yeah. About 2%.

Sandy Beall

Yeah. 2% for the quarter.

Barry Stouffer - BB&T Capital Markets

And how much of that was price versus mix?

Sandy Beall

I think, most of it. I really don't know, Barry, but I think for the quarter, we took the menu price in October a little bit, before that we didn’t have hardly anything. So say half at the most.

Barry Stouffer - BB&T Capital Markets

Okay. And what's the most recent sales mix for the prime burger?

Sandy Beall

Prime burger is around at 4%.

Mark Young

3.5.

Sandy Beall

3.5%. Yeah, 3.5%, which is very good without advertising.

Barry Stouffer - BB&T Capital Markets

Just curious --

Sandy Beall

And almost half the burger we sell actually.

Mark Young

Yeah.

Barry Stouffer - BB&T Capital Markets

Okay. You referred to your food being as good as high quality casual dining concept. I am just curious which or what concept you are referring to?

Sandy Beall

Well, when we -- we actually go around and visit lots of restaurants, and I mean, the one we love most actually even Houston's, we thought our food was better. The restaurants just don’t look as good, and the people don’t look quite -- definitely don’t look as good either. I took our Board down to our restaurant last night. We had about 30 items, and I think -- and actually they made comments on the same. I mean, that's not research, although our research scores are extremely high on our ratings, that's just intuitive, and so you can take it with a grain of salt if you want, but that's what we believe.

Barry Stouffer - BB&T Capital Markets

Okay. And you mentioned comps were positive at lunch, which implies dinner is down?

Sandy Beall

They have been as we have said earlier, our lunch sales have been positive for the last, I don’t know, six or nine months or even longer.

Margie Duffy

The December dinner sales were up profitably.

Sandy Beall

And in December -- yeah, so both were up in December…

Kimberly Grant

Evenly.

Sandy Beall

Evenly.

Margie Duffy

And we – yeah, and then we started in the November period with the new advertising.

Barry Stouffer - BB&T Capital Markets

Can you clarify what they were in the second quarter, the lunch comps were versus dinner?

Sandy Beall

I don’t have that in front of me, right now.

Margie Duffy

For the quarter, they were --- lunch was up approximately 2% and dinner down approximately 2%. But what we are seeing in the December period and since the new advertising in November is that they are comparably up above that 2%, lunch and dinner.

Barry Stouffer - BB&T Capital Markets

Okay. That’s all I had. Thank you.

Operator

Your next question comes from the line Joe Buckley with Bear Stearns.

Joe Buckley - Bear Stearns

Thank you. Question on the remodels, I know you gave us, I think, a $70 million or $80 million total over a couple of year timeframe. How does that breakdown in terms of per unit spending, what do you anticipate on that?

Sandy Beall

Right, it could be a little lower than it, Joe. What we're shooting for is $100,000 unit. We’ll have that fine tuned over the next 60 days. That's our goal though, that’s the objective, it’s $100,000 unit.

Joe Buckley - Bear Stearns

Okay. You mentioned the beverage mix going up, where you referring specifically to the alcoholic beverage mix?

Sandy Beall

Alcohol at that point -- both were up, but the number I gave you, I think, was alcohol wasn’t.

Kimberly Grant

Yeah, Joe this is Kimberly. Our alcohol beverage mix is up approximately half a point during the second quarter, and up about three quarters of that point during December, and our zero plus category, our stock beverage was up approximately 40 basis points or 0.4 during the second quarter and we are getting a little a bit more out of it in December.

Joe Buckley - Bear Stearns

Okay. And the goal to get to a 15% beverage mix is that all alcoholic or is that all in?

Kimberly Grant

15% is alcohol, but we'd also like to get the non-alcoholic from -- it's approximately about 9.5% today, we want to get that up into the 12% to 14% range as well.

Sandy Beall

What we are trying to do, our objective 5 years from now, Joe, is that we are selling a lot more of the premium drinks or premium wines or premium beers and not Budweiser, and selling more all of our lemonades are fresh -- well, our Strawberry Lemonades are fresh-squeezed and not selling coke -- as much coke products.

Joe Buckley - Bear Stearns

Okay. And then lastly on the off-premise, just an update on how the catering business is going versus the kind of out the door retail to go?

Kimberly Grant

Catering business is still on its infancy stage and the restaurants that have been doing catering now for a little over a year and a half were averaging approximately 13% on total To Go. So they are almost double the rest of the system with probably about 30% to 40% of that related to catering. So they are getting very good results. We are just starting to rollout the catering programs in the rest of the country over the coming months.

Joe Buckley - Bear Stearns

Okay. Thank you.

Operator

Your next question comes from the line of Bryan Elliott with Raymond James

Bryan Elliott - Raymond James

Hi. Good evening. Sandy, wanted to explore a little bit the positioning that you have laid out targeting more upscale higher income consumer, et cetera, and how that might jive with your -- the demographics of the trade areas in which your restaurants operate? And how much you might be able to share with us on that issue?

Sandy Beall

Okay. I think -- good question, Bryan. I think one, of course, our desire to slowly evolve that over five-year period, we have laid out for the last year anyway. And as far as demographics go, I found that on our real estate sites anywhere from 25% to about 32% of the markets where we are located have income levels of about $50,000. And what we haven’t been doing is tapping into that as effectively as we could because of the bar/grill positioning or product offering positioning or the type of wine or whatever.

Bryan Elliott - Raymond James

Now is that -- just to interrupt you, sorry, but is that -- when you define that, are you talking like the three-mile radius or some more --

Sandy Beall

Well, we don’t do it on three-mile. It's actually for every market we are in, like say, Atlanta, we might have 30 different market points and depending on how the roads are, the water is or et cetera, you define a market but you could just say generally, yeah, like a three-mile ring.

Bryan Elliott - Raymond James

But more sophisticated to define that market. Okay, just clarifying that. Thanks.

Sandy Beall

Okay.

Bryan Elliott - Raymond James

Okay. Go ahead. So half of them are -- [multiple speakers] are over 50K trade areas. That’s the average or median income?

Sandy Beall

I didn’t say half, but I said --

Bryan Elliott - Raymond James

Yeah. Correct. I am sorry.

Sandy Beall

[multiple speakers] percent. But anyway that’s a market, let's say, may be Carrabba's or Olive Garden or Outback has been benefiting from more than us. And we are saying over the next five years, we would love to sell more of our great prime steak or our incredible fresh jumbo lump crab cake et cetera and it's just like some of the new wines put in the market. I was looking at the research the other day, 75% of the people ordering it. 75% of the people are ordering or making, well over $50,000. And then you can look at -- because we have all this information, then you look and say Woodbridge where the higher income won't buy Woodbridge. Maybe 10% of them buy Woodbridge whereas below at $35,000, 60% of them were buying Woodbridge. So it's just having the right offerings for your total market, and say in the past we have the right offerings for $50,000 and down market. And that basically what bar/grill was. So as we dress our self up internally in the building with our people, as we dress our menu up and have additional offerings while not taking away the core offerings that the $40,000 household family may want, we are going to broaden our market potential, I believe, and thus increase our same-store sales and we are seeing that. We are getting great response from our products right now. I think it's a logical strategy.

Bryan Elliott - Raymond James

Thank you.

Sandy Beall

Okay

Operator

(Operator Instructions). The next question comes from the line of Chris O'Cull with SunTrust Robinson Humphrey.

Chris O'Cull - SunTrust Robinson Humphrey

Yeah. Good evening. Sandy, quick question on the guest survey program that you guys implemented, does it measure the brand loyalty or such as like the intent to return by customers?

Sandy Beall

The in-unit one does and a brand tracker does a bit, but it's like moving an ocean wave.

Chris O'Cull - SunTrust Robinson Humphrey

Okay. So it's too early to see if there is any change in the trend?

Sandy Beall

Mark, do you want to comment on that?

Mark Young

We have got a lot of ground covered but the problem you run with that is it takes so long to make any movement out of that, as Sandy said, it's just a slow, slow moving freightliner that is out there and we have been doing it consistently for the last year and we’ve really just haven’t seen any movement in any of us. And the olive garden outback, the bar-and-grill world or ourselves, is just -- as Sandy said, a lot of ground covered from that perspective in that measurement tool that we use right now. But we do track it.

Chris O'Cull - SunTrust Robinson Humphrey

Okay. Okay, good. Let me -- Mark, the advertising message in the third quarter, will it be more focused on brand building or will you have more of a call to action?

Mark Young

It will be both. As Sandy said, we will be focused on dinner, and then we also communicate our handcrafted burgers out there. But it will be both over the third and fourth quarter.

Sandy Beall

It's about quality and freshness, but the call of action is that there is some great new chicken products that will be introduced in a very creative way we think. And so we think there is a call of action with new product.

Chris O'Cull - SunTrust Robinson Humphrey

Okay, good. And then what was the gift card sales amount for the fourth quarter? And can you kind of give us an estimate for the comp based increase?

Mark Young

I think the --

Margie Duffy

Round about 15%.

Mark Young

15%, the system is up 10%, say, in unit counts, so you get extra kick out of those.

Chris O'Cull - SunTrust Robinson Humphrey

Okay. What was the dollars that were sold in the fourth?

Margie Duffy

$16 million.

Chris O'Cull - SunTrust Robinson Humphrey

Okay. And then I believe you mentioned a new menu rolled out or being rolled out here in the next few months?

Sandy Beall

We have test menu in right now. We always have that and then market rose with the next menu --

Mark Young

Sometime in April, yes.

Chris O'Cull - SunTrust Robinson Humphrey

And you are looking at price on that one again?

Sandy Beall

I don't know yet.

Chris O'Cull - SunTrust Robinson Humphrey

Okay, thanks.

Operator

The next question comes from the line of Jonathan Waite with McKay Capital.

Jonathan Waite - McKay Capital

Yes, good evening. Wanted to know on margin wise, you seem to be doing pretty well there, and you've kind of guided down on the earnings. I am wondering were you conservative before --

Sandy Beall

I don't think we guided down on earnings.

Margie Duffy

Just from the sales primarily.

Jonathan Waite - McKay Capital

You moved the range down for the year.

Margie Duffy

Right. Previously we had anticipated sales for third quarter and fourth quarter 2% to 4%, and now that’s flat up 2%. It was really just from the sales change.

Jonathan Waite - McKay Capital

Okay. So is there anything going -- you are doing a great job on the margin side. Anything that you are changing here or is this kind of all in line with your plan that you had at the beginning of the year?

Margie Duffy

It’s in line with plan.

Jonathan Waite - McKay Capital

Okay. And then the December comp, how much of that was the Christmas shift?

Margie Duffy

I think about 1%.

Jonathan Waite - McKay Capital

Okay. And then on the remodel, I am wondering, you in the past you had the Classic Grill and other reiterations of remodels that try to upscale Ruby Tuesday, but they seem to be kind of a nonstarter in the past. What’s kind of new with --

Sandy Beall

The Classic Grill wasn’t remodeled, that was just our newest version about two years ago of restaurants. It was similar still to the other. It was just --

Jonathan Waite - McKay Capital

But you've had remodels where you have tried to upscale --

Sandy Beall

No, we haven’t. I don’t think we -- we never had a remodeling program in 34 years. We’ve had newer version, newer looks, but they were all basically the same nostalgic stuff on the walls. We moved away from Tiffany’s about two years ago, that’s not a remodel though, on the newer units. The new units are just nicer and fresher looking, but they are still basic outlook.

Jonathan Waite - McKay Capital

Okay. How do they differ then from those?

Sandy Beall

You just have to see it. It's --

Margie Duffy

No artifacts.

Sandy Beall

There aren’t any artifacts. There are I think 12 or 14 pictures in the whole place. They are only Tiffany's. It’s more contemporary, but yet still classic. So, we don’t offend or chase anybody off. The outside, much more contemporary like a Crate & Barrel or [Danube], the striped awnings. It is much lighter colors. We have fully upholstered chairs, new booths, some nice wood top tables, just nicer, just kicked up about four or five notches.

Jonathan Waite - McKay Capital

Okay, great. Keep up the good work.

Sandy Beall

One more question.

Operator

Have a follow-up question from the line of Joe Buckley with Bear Stearns.

Joe Buckley - Bear Stearns

Just a very simple final question. Your improvement in comps in December, it sounds like basically it was the dinner mix. So, do you think it was driven by the advertising shift to dinner to maybe taken a few weeks to kick in?

Sandy Beall

Yes, we think so. We feel very good about what we have got from our dinner ad that we ran, and it is logical. We have really cemented that -- see, we had to do burgers first, because I don’t think it would have been credible for us to roll out steaks or chicken with this high quality level. So, we have spent the last two years making people believe, convincing people that we could have a great burger and then we could have a great fresh burger and then a great choice burger and then vine ripened tomatoes and fresh green leaf lettuce. So I think we have built this brand credibility that now allows us to leverage off of that and do the same thing with chickens and steaks and the crab, etcetera, and I think now it is credible where as it wouldn’t have been two years ago. So it is a logically step by step part of our plan that does seem to be working.

Joe Buckley - Bear Stearns

Okay. Thank you.

Sandy Beall

Thank you all very much. Appreciate you joining us. If you have any questions, I know it is late, but you can feel free to call us whenever you get a change. Thank you very much. Bye.

Operator

Thank you. This concludes today's Ruby Tuesday second quarter fiscal year 2007 earnings call. You may now disconnect.

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