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Executives

Greg Ashley – VP, Finance

Sandy Beall – Chairman and CEO

Margie Duffy – Chief Financial Officer

Kimberly Grant – Executive Vice President

Dan Dillon – Senior Vice President, Brand Development

Mark Young – Senior Vice President and Chief Marketing Officer

Analysts

Jeff Omohundro – Wells Fargo

Keith Siegner – Credit Suisse

Joe Buckley – Merrill Lynch

Brad Ludington – KeyBanc Capital Markets

Robert Derrington – Morgan Keegan

Bryan Elliott – Raymond James

Ruby Tuesday, Inc. (RT) Q2 2011 Earnings Call January 5, 2011 5:00 PM ET

Operator

Greetings and welcome to the Ruby Tuesday, Inc. Second Quarter Fiscal Year 2011 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-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, Greg Ashley, VP of Finance for Ruby Tuesday. Thank you. You may begin.

Greg Ashley

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

I’d 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 8-K. We plan to release third quarter fiscal ‘11 earnings in early April.

Our second quarter earnings were released today after the market closed and a copy of our press release can be found on the Investor Relations section of our website at rubytuesday.com, and is also available on Business Wire, First Call, and other financial media outlets.

As usual our format today includes an overview of our second quarter financial results, our fiscal 2011 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks we will respond to your questions.

I will now turn the call over to Sandy Beall.

Sandy Beall

Thanks, Greg. I’d like to welcome all of you listening in this afternoon. Thank you for joining us. We’re pleased to report another good quarter overall highlighted by strong positive same-store sales and profitability. This was our best sales quarter in almost five years.

We had solid year-over-year improvement in restaurant margins and our net income for the quarter was up sizeably over the prior year. We believe the impact of our Game Changers coupled with our tight cost -- cost control management is providing attractive, incremental flow through of our topline sales numbers. Always be better but it’s pretty good.

Our same-restaurant sales for the second quarter were positive, 4.2% beating Knapp-Track on a one year basis by almost 3 points and on a two year basis by more than 6 points. Our same-restaurant sales have shown sequential quarterly improvement for the last eight quarters, including three successive quarters of positive results.

Our balance sheet is in good shape, in particular given our new five year $320 million revolving credit facility which closed in early December and Margie will give you details on that later in the call. But this was really the last key component to our long range plan that we talked to you all about although here in the second again.

We are very comfortable in compliance relative to our debt covenants and our book to EBITDA ratio of 2.03 at the end of the quarter that represents a very good improvement over the prior year ratio of 2.57. Additionally our guest satisfaction index topped box scores are all time highs. Overall our business we feel is in good shape and we have momentum as we move forward.

As we discussed in our last call, our sales and earnings growth and strong balance sheet and now our new credit facility are allowing us to begin executing on our three year strategic plan to create value in the following areas.

First and foremost, we’re focused on continuing to enhance the sales margins and overall strength of the Ruby Tuesday brand, the brand that creates all the cash flow for us to do other things with. Our goal is to provide the ultimate $25 high-quality casual dining experience for $15, which Kimberly will provide more details on later on. We believe the continuing to invest in the brand both in new innovative products and promotions in a various self-service relate initiatives will enhance overall dining experience further.

Our second strategy focuses on generating incremental revenue, more sales and more cash flow, more EBITDA, through converting some underperforming company-owned restaurants to other high-quality casual dining concepts and through selective franchise partnership acquisitions.

We opened our first Jim ‘N Nick’s conversion in Knoxville on September 21st, and opened our first Truffles conversion in the Buckhead area of Atlanta on December 8th, and our seafood concept the first unit there will open by the end of the third quarter.

We believe the value creation opportunity is high for our conversion strategy given the nominal capital investment of approximately $4 to $500 and the potential average restaurant volume increases of $1 million each, which creates a nice EBITDA flow through $300,000 or so, on each deal we hope.

On the franchise side, while we did acquire three additional franchise restaurants during the second quarter, we did not acquire any franchise partners but will continue to evaluate our options. We would like to exit the franchise partner program primarily by acquiring them and/or converting some of them to traditional Z’s.

The third component of our strategy is growing through investments -- is growth through investments and low risk, low capital, intensive smaller in-line locations. We remain excited about the licensing agreement we recently signed with Lime Fresh Mexican Grill out of Miami. We plan on opening our first unit in the fourth quarter of this fiscal year.

This fast casual concept is aligns very well with Ruby Tuesday, both have a focus on high quality ingredients, freshness and great tasting food, and delivering in their case a semi casual dining experience but great casual dining service queues and high quality casual dining food and Dan will provide a brief update later on our development plans for this brand.

Our final strategy is to allocate capital to enhance shareholder value with a near-term focus on continued debt reduction. We’ll continue to enhance our cash flow through our low risk, high return opportunities and then plan to return any excess cash to our shareholders likely through an opportunistic share repurchase program.

We believe our strategies surrounding improving margins, low risk revenue growth and returning excess cash to our shareholders is a very sound plan in this economic environment in the low capital high return potential.

I’ll now turn the call over to Margie to discuss our financial performance.

Margie Duffy

Thank you, Sandy. We had a very good second quarter as our ability to drive sales in the quarter while continuing to tightly control and manage our costs, resulted in solid earnings compared to the prior year. I’ll review the quarter in detail, provide a high level summary of our quarter and balance sheet, and then Greg will give you our guidance for fiscal 2011.

We reported fiscal second quarter diluted earnings per share of $0.07, compared to earnings per share of $0.01 last year. Total revenue increased 6.2% during the quarter, largely due to the same-restaurant sales increase of 4.2%. We did not open any company operated restaurants in the second quarter and we closed one.

Franchise revenue decreased 5.4% due to lower levels of fees primarily as a result of our first quarter acquisitions at the Long Island and New England franchise partner businesses, coupled with temporary reduced royalties for certain franchisees.

Same-restaurant sales for domestic franchise restaurants increased by 1.6% in the second quarter, their second consecutive quarter of positive same-restaurant sales, as franchisees participated in virtually all of our promotional marketing programs during the quarter.

The restaurant level operating margin was 15.1% for the quarter, compared to 13.7% a year earlier. This represents an improvement of 140 basis points over the prior year.

Cost of goods sold were 29.3% for the quarter versus 28.9% in the year prior, which is higher due to our continued investment in high quality menu items and new product offerings such as our complementary bread program which we just started in this quarter in order to enhance our guest experience and drive sales. We continue to experience relatively stable commodity costs for the quarter.

Labor costs as a percent of sales improved to 34.5%, down from 35.2% the prior year due to staffing changes deployed in the third quarter of the prior year that result in an additional labor efficiency.

Other restaurant operating costs were down 100 basis points largely due to favorable insurance and bad debt expenses and leveraging from higher sales, offset by higher expenses related to the DirecTV and NFL packages in our restaurants.

Depreciation was down 60 basis points as a percent of sales primarily due to assets becoming fully depreciated since the prior year and leveraging from higher sales.

SG&A expenses rose 130 basis points as a percent of revenue. The increase was largely the result of higher marketing costs from testing our coupon strategy in certain national magazines, an increase in internet advertising expenses from our digital media efforts and higher agency fees related to our customer analytics initiatives.

The equity and earnings of our franchise partners increased from the prior year in part due to fee forgiveness. Interest expense in the quarter declined to $2.6 million from $4.6 million reflecting both a decline in our average debt balances and low interest rate on our bank debt because of a lower spread to LIBOR as a result of our improved leverage ratios.

Closure and impairment expenses were up year-over-year due primarily to higher lease reserves in the current year. Our tax rate was 13.3% compared to 47.4% last year largely due to a year-over-year increase in the level of FICA tax credits and work opportunity tax credits for the quarter.

Turning to the balance sheet, as Sandy mentioned earlier, December 1st we closed on a new $320 million five-year revolving credit facility. The facility which is priced at LIBOR plus 200 basis points includes a $50 million accordion feature.

In addition to attractive pricing the credit facility also gives us more flexibility in a number of areas, including the availability to prepay more expensive third-party debt, acquire additional franchise partners and more freely utilize stock repurchases and/or dividends to return excess cash to our shareholders.

At the end of the second quarter our book debt including current maturities was $291 million, down from $365 million a year earlier. At the end of the quarter our book debt to total capital was 34% and our debt -- book debt to EBITDA was two times and our total funded debt to EBITDAR, the ratio pertinent to our loan covenants was 2.7 times, which provides us with over 100 basis points cushion to our new loan covenants.

I’ll now turn the call over to Greg to go over guidance for the year.

Greg Ashley

Thanks, Margie. Please note that our full year guidance excludes the impact, any potential gains or losses that may be recognized from franchise partner acquisitions due to the business accommodation rules which place a greater emphasis on fair value and now for our fiscal 2011 guidance.

Our same-restaurant sales guidance remains unchanged from our last call, as we continue to estimate same-restaurant sales for company owned restaurants to be in the range of flat to positive 2% for the year.

We expect to open one to two in-line restaurants in fiscal 2011, anticipate closing seven to nine company owned restaurants and converting five to seven lower performing company owned restaurants to other high-end casual dining concepts.

Our franchisees expect to open between eight and 10 restaurants in the year, up to five of which will be international. In addition to the 20 franchise partner restaurants acquired during the first fiscal quarter and the three traditional franchise restaurants acquired during the second quarter, we are evaluating the acquisition of additional franchise partner restaurants over the remainder of the fiscal year as Sandy noted earlier.

We expect restaurant operating margins to be relatively flat primarily reflecting the impact of our continued investment in higher quality menu items and new product offerings, as well as investments in service to enhance our guest experience and drive sales, offset by lower promotional levels.

Our food costs are expected to remain relatively stable compared to the prior year. Depreciation and amortization are projected to be in the $60 to $63 million range.

SG&A is targeted to be up approximately 8% to 10% year-to-year, primarily reflecting higher brand marketing -- marketing brand research and training expenses.

Interest expense is expected to be in the $10 to $12 million range. The tax rate is projected to be 20% to 25% as we continue to benefit from FICA tip and other employment related tax credits.

Diluted earnings per share in fiscal 2011 remain unchanged from our last call and are estimated to be in the range of $0.76 to $0.86 a share. Fully diluted weighted average shares outstanding are estimated to be approximately $64.5 million for the year.

Capital expenditures are expected to be $29 to $33 million and we estimate we will generate $90 to $100 million of free cash flow during the year.

We believe we made a lot of progress over the last two years to improve our operating results, maximize our cash flow and strengthen our balance sheet by controlling costs and paying down our debt, while uncertainty continues to remain in the overall economy, we have good operating momentum and our new credit facility [entitle] with our strong free cash flow provides us with considerably more financial flexibility than at any time over the last three to four years.

I will now turn the call over to Dan to go over some of our sales and brand building programs.

Dan Dillon

Thanks, Greg. We’re pleased with our same-restaurant sales results of 504.2% for the quarter on comparable promotional levels from last year. We have continued to build on our Game Changers offerings we rolled out over the last three to four quarters, such as the Tuesday night, steak and lobster and our three-course Sunday Brunch offering. Both continue to have a positive impact on our overall weekly sales and traffic in addition to enhancing the overall perception of the Ruby Tuesday brand.

On August 24th we rolled out several brand changing enhancements which included a new menu with additional entree selections, several Fit & Trim offerings, a fresh bread program served complementary with every entree, additional high quality side items, additional variety and freshness for our garden bar and an enhanced Sunday Brunch offering.

Our most recent food study showed those -- these efforts were impactful with improving -- improvements in almost every category we measure. The largest improvements were in overall entree taste and quality which were up 4 points each to 61% and 60% top box respectively. Additionally our scores in appearance, freshness and overall satisfaction grew one to three points in top box scores.

We continue to expand our efforts to reach new guests. From a promotional and advertising perspective, we’ve seen success in our Ruby Tuesday athletics program, a new branch of our So Connected Club which builds on the relationships we have with sports fans and communicates exclusive email offerings geared to specific sporting events. Our advertising efforts on Facebook resulted in over 300,000 consumers becoming fans of Ruby Tuesday with almost 15% of those joining our So Connected loyalty program.

Going forward our brand strategies will continue to leverage consumer and shopper insights to ensure we are growing our relevancy amongst our targeted customers. Continue to explore new communication and marketing platforms to test and learn as we execute our marketing programs and the insights into our business and consumer behavior with partners like Opera Solutions and Dunnhumby U.S.A will enable us to create long-term value for the Ruby Tuesday brand.

We’re investing approximately $4 million to better understand consumer and shopper behavior this year and anticipate that our investments will begin to positively impact sales and brand enhancement by this time next year.

The additional branding efforts we made to communicate in more targeted way with our consumer during the second quarter through the use of magazines and digital prove to be beneficial for us and will continue to expand these strategies to find additional ways to reach different consumers and reintroduce them to the fresh new Ruby Tuesday.

For the remainder of 2011 we’ll evolve our existing menu items to support our high-quality casual dining position, broaden our appeal with product extensions, offering more variety and capability, and continue to focus our plans on maximizing our incentive strategies to drive affordability that results in increased traffic and sales while still maintaining our operating margins.

Switching gears quickly before I turn things over to Kimberly, I want to provide a quick update on the Lime Fresh Mexican Grill. We are still actively seeking sites for restaurant development with a goal to open 10 to 12 by this time next year and as Sandy said earlier, we’re on track to open one or two Lime Fresh Mexican Grill restaurant in the fourth quarter of fiscal year 2011. We remain very excited about the attractive growth potential and the solid unit economics this brand can generate.

Now Kimberly will provide you with more information on sales, Ruby Tuesday’s teams and guest satisfaction.

Kimberly Grant

Thank you, Dan. We continue to focus on several different programs on the operations front that when we take them together we believe will strengthen our brand and provide a strong foundation for long-term sales growth while continuing to elevate our brand in the high-quality casual dining sector.

During the quarter, we continued our focus on our key operational initiative of delivering the ultimate $25 dinner experience for $15. The new management structure we put in place in the fourth quarter of last year is enabling us to deliver on a more consistent guest experience.

We recently completed our leadership training with all of our General Managers from both our company and franchise owned operations at our center for leadership excellence in Tennessee. Now upon returning to the field, each of these General Managers held training sessions with their entire restaurant service teams, which focused on enhancing all phases of the overall guest experience from the greeting at the front door to the fond farewell as the guests leave with a primary focus on making a genuine connection with each and every guest.

We continue to see positive results from our recent staffing changes, which included complementing smaller station sizes, increasing our bartender staffing levels and the addition of food runners to ensure we serve hot food hot.

As we indicated last quarter, these changes will slightly increase our labor costs in the short-term but will further enhance the tentativeness of the service both in the dining room and in the bar. Now based on our external research thus far, our guest scores in the areas of food, service and atmosphere all recently experienced significant increases and it further validates we are focused on the right brand initiatives for our guests.

We continue to have success with other key operational initiatives including one of which centers around our Fun with Friends. The investments we have made in our bar programs which are focused on creating a more sophisticated sports viewing experience where guests can have fun with friends, watch great sporting events and enjoy handcrafted beverages and unique bar fare have resulted in improved bar sales and are helping to support our goal of moving our alcohol sales from 9% to a goal of 12%.

Our success in building the bar sales on Monday night has in turn had a hallow impact on Thursday night, All Day Saturday and All Day Sunday where sports viewing is also focused. Now we will be placing similar efforts around building sales at our bars during the upcoming March Madness season with college basketball.

During the second quarter we completed a smooth operational integration of both Long Island and New England franchisees. We utilized current leadership in these regions to take on multi-unit supervision of the restaurants which provided continued stability for our teams and our guests.

Now as Sandy mentioned earlier, one of our key strategies is focused on getting more out of our existing assets through converting certain underperforming company owned restaurants to other concepts.

Our first Jim ‘N Nick’s conversion in the Knoxville area has been open for around 100 days now and we are pleased with the incremental sales volumes we have experienced. Additionally, on December the 8th we opened our first Truffles cafe conversion in the Atlanta Buckhead area and the guest response to date has been very positive.

We continue to remain excited about the value we can create with these conversions given the attractive financial returns they can potentially create for our brand. We are in the process of determining our conversion site selection for fiscal 2012.

Our operational fundamentals remain very strong with our top two box scores for overall experience all over 93% with approximately 70% of our guests currently rating their overall experience a five on a one to five scale. Additionally, a number of unacceptable experiences which are ratings of a one or two continue to remain at very low levels.

Our year-to-date management turnover was approximately 24% and our hourly turnover was approximately 100% both of which are very low levels for our industry. We continue to attract a very best talent out there which is further strengthening our Ruby Tuesday brand and our conversion an in-line growth strategies will be able to allow a great career path for our up and coming talented team of leaders.

Now, I’ll turn it back over to Sandy for a quick wrap up.

Sandy Beall

Thanks, Kimberly. Even though the operating environment is very difficult still, we feel good about our business and believe the cumulative positive effect of a number of programs that we have in place has resulted in a strong Ruby Tuesday brand and stronger company today.

Our sales have been on improving trend for two years and we’ve been improving better than that even as we overlapped our improving performance from last year. We have strengthened our balance sheet by paying down $337 million of debt over the last 30 months and in closing on new $320 million revolving credit facility providing excellent financial flexibility in very, very good rates.

We have found a good balance of sales traffic and profits. We still need more profits. We need higher margins. We’re working on that. We realize that. We have, I think, we have reasonable balance now. We continue to tightly control our cost and have low CapEx needs.

I feel confident in the outlook for our company. We believe that we have excellent low risk, low capital, high free cash flow plans in place to enhance shareholder value and these are plans that we spent the last 18 months very thoroughly creating, analyzing and developing with our board and now our focus over the next three years will be on successfully executing on these plans as they have been communicated.

Our repositioning efforts are paying off. Our marketing strategy is continues to work better almost every quarter and our new sales builders continue to be well received by our customers with more coming forward.

We look forward to leveraging our various growth options, our strong balance sheet and our talent team members to continue building shareholder value in the coming years.

With that, we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Jeff Omohundro with Wells Fargo. Please go ahead with your question.

Jeff Omohundro – Wells Fargo

Thank you. I wonder if you could elaborate a little bit about your thinking of couponing in this improving macro environment. You alluded a bit to the H2 plans. I wonder if you could maybe give a little more detail on that?

And then secondly, a little bit of more information on the Dunnhumby effort and customer profiling and the loyalty program research. What you hope to get from that and when you might see some results? Thanks.

Sandy Beall

Okay. You were breaking up a little bit. We didn’t hear. I didn’t hear everything really. Dan, why don’t you start with Dunnhumby?

Dan Dillon

Okay. We expect getting them. Dunnhumby is helping us understand consumer information about our current consumer in an effort to better segment and provide services and offers to them on a more individual one-to-one basis or at least in an aggregate way that allows us to make offers that are more specific to what the consumer of Ruby Tuesday is looking for.

So, in short, they’re allowing us to be much more efficient and effective with our marketing programs because they’re giving us information about specific consumers so that we can make offers that are more relevant.

Sandy Beall

As far as other questions and Dan can chime in on this one, but you ask about our coupon strategy in line with improving consumer economic situation. And I think generally regardless of that as Dan talked about shifting more and more dollars to digital, more and more dollars to print magazine, et cetera, we continue to reach out in many ways to reach new guests that we have an incentivized to come in, target new people in the season Ruby Tuesday brand and that will continue to move forward. I guess ideally you wouldn’t spend anything in an FSI coupon if you didn’t have to but it does work very effectively and works well. Dan, do you want to add to that?

Dan Dillon

Yeah. I mean, it’s predictable. Obviously, we have got a lot of history on what the results will be from couponing and that way but really the objective around couponing is to provide an incentive and an affordable option for consumers to come in and visit. There is a variety of different ways that are more effective and more efficient than just dropping a mass coupon in an FSI or Dow type vehicle.

So our efforts to better understand our consumers and to find better ways of marketing to them to a one to one more intimate basis is really what we’re doing with our partners at Opera Solutions and Dunnhumby, better understand what their needs are and wants are and to provide them with an incentive that makes more sense. It may not always be a coupon. It may just be the right product presented in the right way.

Jeff Omohundro – Wells Fargo

Thanks and congrats on the quarter.

Dan Dillon

Thank you.

Operator

Thank you. The next question is from Keith Siegner with Credit Suisse. Please go ahead with your question.

Keith Siegner – Credit Suisse

Thanks. My first question is about -- in regards to SG&A. The guidance implies kind of a $10 million decline in second half versus first half. And I was just wondering is this really just the lower spend on the training and on the market analytics stuff and based upon that second half is that below what we might consider a run rate and I guess, what I am trying to get at is how should we think about G&A in fiscal ‘12 at this point in dollar terms?

Margie Duffy

Right. I think our advertising was more front-half loaded, some of our research and some of our training has been more front-half loaded. So I do think that’s why you might see a lower run rate in the back half of the year. And then it’s always our goal to keep -- to minimize the G&A growth. So I do think something comparable to the current year. We would like -- what we’ve done this year is that a step up the training from last year. Last year we did curtail that. We didn’t necessarily want to, but again we were looking for every dollar of cost savings.

So having a little more training, we do think is important, bringing our team members in for the appropriate amount of training and then having them go back and train their members. So while we’re always looking for more effective and efficient ways to do that whether it is in unit, CBT training versus bringing them in. I mean, it is still important to bring them in and let them touch and feel each -- be with each other in the current culture.

Sandy Beall

As far as fiscal year ‘12 goes, the only thing that changes what Margie is saying is if we spent more, say, on magazine distribution or digital distribution, but in doing so we bring down our incentive or coupon expense which comes out of revenue. So the way we judge it, we would be about even for next year. We kind of take our coupon expense and divide that in half and then add back in your advertising dollars. And we’ll maintain a flat budget there probably, but it could move around a little bit. And we’ll get guidance on that later in the year, Keith.

Keith Siegner – Credit Suisse

Okay. One last question for me. Thinking about the franchisee partner buyings, it sounds like you clearly would like to get rid of those. There wasn’t an update on timing but may be what factors determined how many and when you might buy those in and even if you don’t want to give us a near-term, how long do you think it might take to say complete that program just in loose terms?

Sandy Beall

I think right now we’re just getting the quarter behind us and just had our board meeting. And I think here in the next two or three weeks, we’ll have time to kind of meet on that and hopefully start making some decisions I guess so would that be fair, Margie?

Margie Duffy

Yeah.

Sandy Beall

Yeah. I think that would be fair.

Keith Siegner – Credit Suisse

Would you like to have this done within say definitely within the next year or two kind of approach or …

Sandy Beall

I guess, we kind of move fast. I would love to have it done this fiscal year but who knows.

Keith Siegner – Credit Suisse

Okay.

Sandy Beall

The sooner the better, I guess, but we’ll see on that. No final decisions.

Keith Siegner – Credit Suisse

Okay. Thank you very much.

Operator

Thank you. The next question is from Joe Buckley with Merrill Lynch. Please go ahead with your question.

Joe Buckley – Merrill Lynch

Thank you. I’ll ask a couple questions on same store strategy and a couple questions on guidance. The sales number was terrific and could you give us a breakdown of how it shook out weekday, weekend and I think you made reference to the couponing being roughly equal year-over-year. I’m curious if you got a big pickup off the football related promotions.

Sandy Beall

Kimberly is our resident sales expert right now. So as far as the coupon thing was basically flat year-over-year. Go ahead, Kimberly.

Kimberly Grant

Joe, we really didn’t see a significant difference between a weekday and weekend as far as same restaurant sales where we saw some strong sales performance in the New England and Florida markets. They really drove a solid second quarter although we had solid sales every where. They had a significant improvement over the rest of the country.

And then on the bar question, within our bar area, we were able to increase those sales by about 20% at the bar and create a very busy bar environment on Monday nights and then Thursday, Saturdays and Sundays.

Sandy Beall

The overall effect was that…

Kimberly Grant

The number is only 10% of our business.

Sandy Beall

…very small. So I think, Joe, and we had an overall pickup in the business and of course we know part of that is consumer start spending. I assume everybody has that, and then our difference between us and them, I guess, which I think NAP was about three points if I remember right. You know, it was -- we’d hope to think some of our new digital marketing, reaching new guests instead of the same old guests, continue to discount the same old people. We hope it is that and we hope we’re getting some traction from like our bread.

When you start giving away $6 million worth of free bread that has an impact on consumer satisfaction, some of our game changers. We hope it is all of these little bit of things that we’re doing that add up to something better.

Joe Buckley – Merrill Lynch

Okay. And presumably check and ticket were up, check and traffic were up in the 4.2%?

Sandy Beall

Traffic was definitely up, very clearly. We always give it a range and I would say the range this time was from zero to 1.5 or two or something like that, but it was definitely up where as last quarter I think we said flat to down one ballpark. And check was up some also. Not significantly. What was check, would you say, Greg? What’s the range?

Greg Ashley

One to two.

Sandy Beall

Okay.

Joe Buckley – Merrill Lynch

Okay. And just question on guidance. You’re following up on key question on SG&A. If you take the first half performance and the full year guidance most of which was unchanged, it is a pretty negative implications actually for the second half. So…

Sandy Beall

We’re not trying to have -- I am not trying to say negative -- I mean, I know when we say -- we didn’t update guidance last quarter. We’re not updating it this quarter. I still think sales, I think the economy is fragile. I know there is some pluses out there. There could be some negatives and it will fall as it falls. I mean, we’re working hard to have the best back half of the year we can. We’re in the needless to say we feel comfortable with the guidance range we have given. We hope we can beat it and if that looks bad, it looks bad. Hopefully, we can beat it. We don’t want to go out over promising. The world is not easy. It is not easy yet it is not as predictable as it used to be in the old days. So…

Joe Buckley – Merrill Lynch

More of a decision not to update it as opposed to fresh guidance?

Sandy Beall

Yeah, yeah. We just said let’s just leave it same as we did last quarter and it will be what it is. That’s a tough one to answer but we don’t want to over promise and we’re working hard every day to hit -- love to beat our numbers, love to beat your numbers, but who knows.

Joe Buckley – Merrill Lynch

And then just a question on the cash dividend share repurchase dividend decision, sounds like you’re leaning to share repurchase.

Sandy Beall

Yep.

Joe Buckley – Merrill Lynch

And I guess I am curious why.

Sandy Beall

Well, because it is flexible, one, opportunistic share repurchase. I think right now we said the best thing is to use in the short-term for still pay off more debt. If we are able to buy all of these franchise partners in need to absorb that. But the good thing about our share repurchase program opportunistic one is it is not unlike dividend. I think we’ll get more credit from shareholders. We listen to our shareholders. I’ll tell you it is 95 -- really 99% unanimous that’s what they would like to see of the 40 or so I talked to in the last month and-a-half. It doesn’t put a burden on us as a dividend would, where it is a commitment of capital and it is still crazy times. So I think it is -- I think it is perfect for us and the board agrees.

Joe Buckley – Merrill Lynch

Okay. Thank you.

Sandy Beall

Okay. The board would like to see us figure out how to spend more capital but I am not sure we can ever spend that much capital. Anyone else.

Operator

Thank you. The next question is from Brad Ludington with KeyBanc Capital Markets. Please go ahead with your question.

Brad Ludington – KeyBanc Capital Markets

Thank you. First off, congratulations. Same-store sales look great. I wanted to start off with the royalty rate on franchise sales. If you look at the first quarter year-over-year, there was a pretty big bump up, north of 90 basis points year-over-year and it seemed to really flatten out here in the second quarter and in spite of the positive comp. Is there a reason that slowed down and is it kind of …

Sandy Beall

We bought a bunch of them in, remember, brought in Long Island, New England, Kentucky. That’s the biggest part of it is in the margin.

Margie Duffy

Right. And it is a reduction in the actual franchise revenues, it is a part of it and the continued forgiveness of fees.

Brad Ludington – KeyBanc Capital Markets

Okay. So continued forgiveness for fees will impact the effect of royalty rate for a little while still pretty heavily?

Margie Duffy

Right. This quarter overall their revenues like our revenues, this is their lowest quarter of revenues.

Brad Ludington – KeyBanc Capital Markets

Okay. You know, and then looking at debt repayments, is there something net in the first half of the year, I know you took on 20 million or whatever it was with acquisition of those 20 units last quarter. So on a net basis it is actually debt has gone up by 1.5, 2 million. Is there a net debt repayment range that we should expect for the full year?

Sandy Beall

We also paid off a large chunk of [privates] in the last 12 months also.

Margie Duffy

In the last 12 months. We will continue to pay down with that 90 to 100 million free cash flow that we mentioned. We will continue to service debt with that.

Brad Ludington – KeyBanc Capital Markets

Okay. And then when you talk about the tax rate, you had tip credits and work opportunity credits which I assume refers to hiring, employ people and getting some of the tax breaks on that?

Margie Duffy

That’s correct.

Brad Ludington – KeyBanc Capital Markets

So should that continue? I mean, those work opportunity credits as long as those people are still working probably carry over into the next couple of quarters at least, correct?

Margie Duffy

That’s right. What happens is those credits are less impactful when you have a higher pretax profit to start with. It is more meaningful, I guess, when you have a lower profit like we do in the second quarter just associated with seasonality as those profits grow and your higher volume quarters, the tax credits would have less impact there.

Brad Ludington – KeyBanc Capital Markets

Okay. Thank you very much.

Operator

Thank you. The next question is from Robert Derrington with Morgan Keegan. Please go ahead with your question.

Robert Derrington – Morgan Keegan

Yeah. Thank you. Sandy, when you look or at least when I look at the plan from the outside, it looks like clearly you’re ramping up a lot of programs for the second half of the year that look like though potentially could really come to fruition as we look out into fiscal ‘12 and one of the key things in the back of my mind is how do you stand with your management team at this point? Do you have enough horsepower or man power so to speak?

Sandy Beall

We have incredible strength. Kimberly, do you want to say anything on that?

Kimberly Grant

You know, it is one of the best times from a talent acquisition position we have ever been in. We’re continually hiring great talent from great other brands that strengthen our team, and everyone is so excited about the potential opportunities that lie within Lime and the conversion, it’s a very exciting time for our teams and we have no problems whatsoever attracting great talent right now.

Sandy Beall

Absorbing franchise partners is not even an issue. We exhibit that on the last two or last three really and the last 90 days, the teams in place to do it all. We feel very good about that. The thing that’s interesting, Bob, I mean, it is a tight year for us. I mean, we hope to have a good year.

It is a tight year and we’re fund ago lot of stuff that doesn’t pay off until next year whether it is $4 million in expenses or bringing in a top level development officer, Dan, in this year or bringing in a top one of the best in the country international executives who is on board and working very hard or whether it is funding all of these operation people that Kimberly has, setting up separate teams for the new concepts. So it will be easier for us next year than it is this year, but we are funding a lot and we have a lot of good people that are working on these projects.

Robert Derrington – Morgan Keegan

Are there any other key additions that you need to bring in, Sandy?

Sandy Beall

No. We feel very good. We also brought in finance -- two people finance this year and we’re in very good shape. Greg came in just how long ago, Greg, nine months ago or so?

Greg Ashley

Yeah.

Robert Derrington – Morgan Keegan

Real quickly, if I could one follow-up, looking at…

Sandy Beall

Sorry, we do have one other person coming in, very key position here in the next couple months, but that’s -- we’re excited about that, can’t say what it is but we’re very excited about then we’re finished.

Robert Derrington – Morgan Keegan

Okay. Listen, regarding your conversions, you got -- we visited your Truffles and your Jim ‘N Nick’s and a bunch of the Limes in Florida, they certainly seem like pretty encouraging opportunities. Sandy, what have you learned so far from the initial Jim ‘N Nick’s, the Truffles conversion. How do you -- do you have a different perspective or what have you learned from the initial process so far?

Sandy Beall

Kimberly, you’re the operations person. While she is thinking, I think what I have kind of learn, we do know how to run restaurants. We know how to open restaurants and we’re kind of a machine and thank goodness we’re not having to own the brands or do the marketing, et cetera, for these other ones so that when we focus on Ruby Tuesday.

But we open restaurants well and we can run good restaurants so it doesn’t matter whose brand it is. I think we’re doing an outstanding job with Jim ‘N Nick’s and Truffles which you saw you have to be impressed with that. I mean, that’s Houston level quality all the way. So it is encouraging that I think we can operate multi-brands very, very effectively with our great team. Kimberly.

Kimberly Grant

I think the other exciting piece is that you never really know how the relationship with the new partner is going to work out until you are actually into the day-to-day and the biggest thing that we’ve learned is we partnered with people and brands that are committed to quality and we share that as brands.

And so whether it is making -- you know, items from scratch at Truffles or the commitment to passion for wonderful melt in your mouth barbeque at Jim ‘N Nick’s, we have some great partners and some great products to be really proud of and that excites our entire team. So you don’t know these things until you get in there, but these are very high quality brands and we’re excited to be a part of them.

Robert Derrington – Morgan Keegan

Last question, any kind of color or what can we expect out of the seafood concept that you’re incubating?

Sandy Beall

Not really but you can see it come up here in March and we’ll show it to you.

Robert Derrington – Morgan Keegan

Very good. We’ll make it a point. Thanks.

Sandy Beall

Thanks for going to see those, Bob.

Robert Derrington – Morgan Keegan

Sure.

Sandy Beall

Anybody else? One more question.

Operator

Mr. Beall, your last question is from Bryan Elliott with Raymond James. Please go ahead with your question.

Bryan Elliott – Raymond James

Good evening. Just a couple follow-up questions. I guess first, Sandy, what’s your sort of target debt to EBITDA or adjusted debt to EBITDAR, the point at which you begin to divert some cash flow from debt repayment to share repo?

Sandy Beall

I think we want to be below two times.

Margie Duffy

Debt to EBITDA.

Bryan Elliott – Raymond James

Okay. So we’re essentially there, though, right?

Sandy Beall

We’re essentially there. But when you fold -- if you did, after we evaluate the franchise partner thing if we did fold them in there, that can affect it by 20 to 30 basis points maybe. So you factor that in and then you check the water and see how sales are and then you want to make sure you’re paying a good price for the shareholders, too.

Bryan Elliott – Raymond James

Understood. Okay. That’s helpful. All right. And there is certainly a lot of speculation and concern in the investment community about a couple of things here in recent weeks. One, obviously the storms in the Northeast and the bad weather generally across the country and secondly, whether the strong retail sales that appear to have happened over the Christmas shopping season maybe came at the expense of some restaurant spending rather than sort of having a positive spending environment. So in light of the comp guidance I appreciate and understand the prior comments about we just decided to leave it where it was, it might be helpful for a little bit of clarification on those issues.

Sandy Beall

Well, given the guidance essentially.

Bryan Elliott – Raymond James

Yeah.

Sandy Beall

I guess what I can say is the second question, I think excluding the weather factor, you know, we would have a reasonably good December, not a 4% type thing but I think a good December, a reasonably good December, whether it did affect everybody, at least in the East United States, but it makes you cautious. We are heading to the winter season and who knows what January and February will bring but we did survive December. So I am not embarrassed about that.

We did have a good gift card sales year, so that may be something positive because most of it was bought in the restaurants. So I don’t think the second thing where good retail sales pull from restaurants is necessarily true, but I don’t know what everybody else is doing either?

Bryan Elliott – Raymond James

Okay. All right. That’s helpful. Thanks a lot.

Sandy Beall

All right. Thank you. Thanks again for joining us and you all make a great day and call us if you need us. Goodbye.

Operator

This concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.

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