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Ruby Tuesday (NYSE:RT)

Q3 2011 Earnings Call

April 06, 2011 5:00 pm ET

Executives

Dan Dillon - Senior Vice President of Brand Development

Greg Ashley - Vice President - Finance

Kimberly Grant - Chief Operations Officer and Executive Vice President

Marguerite Duffy - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Assistant Secretary

Samuel Beall - Co-Founder, Executive Chairman, Chief Executive Officer and President

Analysts

Robert Derrington - Morgan Keegan & Company, Inc.

Bryan Elliott - Raymond James & Associates, Inc.

Brad Ludington - KeyBanc Capital Markets Inc.

Keith Siegner - Crédit Suisse AG

Jeffrey Omohundro - Wells Fargo Securities, LLC

Joseph Buckley - BofA Merrill Lynch

Operator

Greetings, and welcome to the Ruby Tuesday Inc. Third Quarter Fiscal Year 2011 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Greg Ashley, Vice President, 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; and Dan Dillon, Senior Vice President, Brand Development.

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 8-K. We plan to release fourth quarter fiscal '11 earnings in late July.

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

Our format today includes an overview of our third quarter financial results, an outlook for the remainder of fiscal 2011, 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.

Samuel Beall

Thanks, Greg. First of all, I would like to welcome all of you for listening in this afternoon. Thanks for joining us.

Overall, we had a reasonably good quarter, considering the negative impact to sales and EPS that we experienced due to the severe winter weather on the East Coast during the quarter. Unlike most of our competitors, the majority of our company-owned locations, approximately 90% of those, are located in the East United States. And this was an area that was hit especially hard as you know in December and January.

Our teams has worked diligently. And we were able to accomplish a lot during the quarter, including acquiring the majority of our franchise partnerships, the balance of which we bought in the fourth quarter; opening two new conversion concepts; positioning ourselves for a new line of growth in fiscal '12; and launching a brand-new menu, I think, which launches actually this week, today, with lots of great offerings to continue to strengthen our brand.

Our same-store sales for the third quarter were negative as you saw, 1.2% slightly trailing KNAPP-TRACK bar grill and also trailing KNAPP-TRACK all-casual dining, which includes bar grill, which has been the benchmark of course, this is on a one-year basis -- I'm sorry, we trailed casual dining on a one-year basis about approximately 1.5 points. On a two-year basis though, we figure we're trending better than KNAPP bar and grill still by over three points and are favorable to KNAPP all casual by over one point.

Absent the snow-related impact during the quarter, which we estimate at 1.5 to two percentage points on top of last year's negative weather impact, we would have had our fourth quarter in a row positive same-restaurant sales.

We have seen sales in bar grill lag casual dining overall and have recently seen some non-weather-related issues in some of our markets, more so in the south, which is most likely due to the gas prices being significantly higher year-over-year, and tracking a bit like we saw in 2008. Our sense is that the economy is softer, than it was in the fall that consumers are adjusting to spending behavior. We are actively responding with sales building programs to drive traffic in these markets, which we hope will offset this behavior over time.

We've given our third quarter diluted sales from the winter weather impact in addition to higher gas prices, resulting in a sluggish economy for mass America, maybe not all of America, including the higher end. But we have scaled back our same-restaurant sales guidance for the year somewhat.

Our diluted earnings per share of $0.25, this is $0.24, excluding the impact from franchise partner acquisitions. But the $0.24 trailed our prior year results of $0.28. However excluding the weather dilution impact, estimated $0.03 to $0.04 per share on the quarter, we would have been in line with the prior year. And we actually exceeded our internal expectations for the quarter, which probably doesn't mean much. But we exceeded, would have exceeded, what we had expected, even after absorbing the various investments we made this year.

We will have invested approximately $9 million in loan in our fresh bread program, and our new marketing program brand research initiatives by the end of fiscal year '11, and with some offsetting costs. But basically, a big investment year. We'd be glad to get this year behind us. Next year, we don't have of these planned at all.

Well we believe that these investments should all yield returns for us in the future. An example being the bread program, based on the research we got back this quarter, our competitive brand tracker ratings, I guess you'd could call it then, are the highest they've ever been. Our net promoter score's the highest we've ever seen it also. And I think we're talking around here, I think that the bread investment itself is probably the primary driver of that, so we're already getting some results, just need to translate into sales.

Our balance sheet is in good shape. we're pleased with the flexibility we have with our new five-year $320 million revolving credit facility, which closed in early December. We're comfortably in compliance relative to our debt covenants. Our book debt to EBITDA was 2.61 at the end of the quarter, an increase over the second quarter ratio, which was 2.03. This increase is due to the franchise partner acquisitions, where we assumed approximately $128 million in debt. So naturally sought. Margie will give you a little bit more detail in her section of the call.

As we discussed on several prior calls, we're very focused on our three-year strategic plan to create value for our shareholders in the following areas: First and foremost, we continue to stay focused on getting more out of Ruby Tuesday, continuing to enhance the sales margins and all the strength of that great brand. We want to maintain that cash flow and create even more cash flow from Ruby Tuesday, the cash cow, so that we can reinvest it in other areas, and if we can't, return it to shareholders in whichever way is appropriate.

We believe that our investments in the brand both in new and innovative products, promotions, what we've already done, what we have planned, as well as our service initiatives where we're really ramping up to provide an ultimate $25 high-quality casual dining experience for $15. And all these are examples of focusing on our brand. Dan will talk to you about some of the marketing promotions that we've done this winter, including our [indiscernible], some movie theater advertising, et cetera. We're very pleased with our research and how our brand is coming along as it relates to other bar grill competitors out there in the industry.

Our second strategy is focused on increasing shareholder returns through a new concept conversions. We believe that converting our low-volume Ruby Tuesday restaurants that are in good site locations, that are high quality casual dining concepts, whatever is best suited for that local marketplace is what we're focused on. Actually, we're trying to run our entire company now in almost in every respect on what's right for that market instead of being a national brand as more of a roll-up or a collection of communities in our company.

Our focus on the conversions is to convert restaurants for less than $500,000 and get a $100 million in revenue and get another $300,000 or $400,000 in EBITDA. We all know how that works. We opened our first, opened our barbecue concept in, I think, it was in the second quarter. In the third quarter, we opened Truffles, which is the higher-end position for some of our high-end mall locations. We call it our cash flow protector, so the landlord doesn't want to move to another more avant-garde concept, higher-end concept. Then Marlin & Ray's, which we're very excited about, which is our new internally developed seafood concept, very casual with low rent, very excited about it. And it's performing extremely well.

We've recently strengthened our real estate development team as we get back into trying to move into the investment with excess capital and start growing. But again Mike Beck will be our Chief Development Officer, Real Estate Development, very seasoned guy, more than 20 years experience with Extended Stay America, Blockbuster, et cetera. Very talented guy. So we're very excited to have him on our team. That pretty well completes everything we need for I think a top-notch executive team in our industry, or any industry for that matter.

Our third strategy is to create value by increasing revenue and EBITDA through franchise partner acquisitions. We'll pretty well have this complete, we'll have it complete by the end of the year. Margie will talk about that a little bit.

Fourth strategy is to grow, is to create not just conversions but new investments. Our primary focus there is of course Lime Fresh Mexican, which we told you about. Additionally, we hope to get our first new Ruby Tuesday of the future open by this fall. And we think we'll create a lot of learning experience for our brand from that also.

Our final strategy is to allocate capital to enhance shareholder value. And even with the assumption of debt from the franchise partnerships, our balance sheet is still in great shape. With that, we're still focused on using our excess cash flow to pay down debt for a little while. We also have an option of paying down some -- a little more expensive third-party debt. And then of course, if you can't spend your money, return it to shareholders in the best way.

While the economy continues to be sluggish, we believe our plan is to increase revenue, improve margins and smartly deploy our capital is a very, very sound plan in this environment. Our focusing on free cash flow in addition to the points I made just a few minutes ago, we feel good about the various investments we've made to create value, and the fact that our key brand investments are behind us, makes us a little more comfortable next year, Although we are nervous about sales, due to gas prices for next year, as I assume everybody will be getting -- I assume everybody in the industry is.

With that, I'll turn it over to Margie. And then we'll get to your questions here in a few minutes. Margie?

Marguerite Duffy

Thank you, Sandy, and good evening, everyone. We performed solidly in third quarter after taking into consideration the winter weather impacts we absorbed during the quarter, in addition to the various investments we've made in the brand this year. I'll review the quarter in detail, provide a high-level summary of our quarter-end balance sheet. And then Greg will give you our guidance for 2011.

We reported fiscal third quarter diluted earnings per share of $0.25, or $0.24 excluding the accounting gains and losses realized from franchise partnership acquisitions and guarantee charges relating to franchises not acquired, as compared to diluted earnings per share of $0.28 last year. Total revenue increased 3.8% during the quarter, primarily due to the acquisition of 96 restaurants from franchisees during the year. We did not open any company-operated restaurants in the third quarter and closed seven, one of which was closed in anticipation of conversion.

Franchise revenue increased 17.3% due to higher royalty from traditional franchisees. These increased royalty was due in part to higher same-restaurant sales for domestic franchise restaurants of 4/10 for the third quarter in addition to higher fees actualized from a traditional franchisee.

We acquired seven franchise partnership businesses and an individual restaurant from an eighth franchise partnership during the quarter, representing 73 total restaurants. We recorded a net accounting gain of $5.1 million during the quarter primarily comprised of gains from the settlement of pre-existing contracts, which was offset by debt guarantee expenses of $6.7 million incurred for franchise partnership businesses that were not acquired. We have included a reconciliation of the pro forma earnings margins and EPS versus the reported amounts on the Investor Relations page of the Ruby Tuesday website.

The restaurant-level operating margin was 17% for the quarter, excluding the franchise acquisition gains and losses and guarantee charges. And that's compared to 19.5% a year earlier, or a decline of 250 basis points over the prior year, due to the challenge of managing food and labor with the sales volatility brought about by the winter weather in addition to our brand-enhancing investments.

Costs of goods sold were 29.3% of sales for the quarter. That's compared to 28.5% in the prior year. It's higher due to our continued investment in high-quality menu items and new product offerings, such as our complementary bread program in order to enhance our guest experience and drive sales. Our core commodity costs are relatively stable during the quarter, although we did experience some cost increases during the quarter on certain produce items due to the early February freeze in Mexico.

Our acts-of-god clause affected food costs slightly in the back half of the third quarter, but pricing returned to normal levels on April 1. The majority of our closings in seafood are contracted through the end of calendar 2011. While we currently could have some food costs exposure in the back half of fiscal 2012, we also have plans for savings, which on a net basis, we currently estimate to approximate a 20 to 30 basis points increase in food costs for fiscal 2012. We will provide an additional update on our fiscal 2012 commodities outlook when we issue our Q4 results in July.

Labor costs as a percent of sales increased to 33.5%, up from 32.7% for the prior year due primarily to lost sales leverage from the weather impact of our business in addition to our brand-enhancing investments. Our investments this year includes incremental hourly labor added for guest service coordinators to enhance the Saturday dinner meal period, as well as additional labor related to the garlic cheese biscuit program, which was rolled out in the second quarter.

Other restaurant operating costs were up 80 basis points, excluding the franchise acquisition gains and losses and guarantee charges, largely due to a loss of leverage from lower revenue during the quarter, in addition to higher maintenance expenses related to an increase in snow removal expense and roofer care due to the winter weather. We also had higher rec costs associated with several acquired restaurants, and higher costs related to the DIRECTV and NFL packages in our restaurants.

SG&A expenses were flat as a percent of revenue. While we experienced higher marketing costs from testing our coupon strategy in certain national magazines, and from higher Internet advertising expenses associated with our digital media efforts, as well as higher agency fees related to our customer analytics initiative, these costs were partially offset by favorable print advertising and newspaper expenses, and cost efficiencies gained from utilizing larger [indiscernible] placements and savings in our freestanding inserts during the quarter.

Debt within earnings of our franchise partners decreased from the prior year primarily due to an impairment loss of approximately $600,000, which represents our share of the impairment loss recorded on a closed franchise restaurant.

Interest expense in the quarter declined to $3.1 million from $3.6 million, primarily due to lower average debt on our revolver during the current quarter and the pay off of the Series A private placement notes in the prior year -- in this prior quarter, slightly offset by higher third quarter -- the third-party debt, which was assumed as part of the franchise partnership acquisition.

Partial and impairment expenses were down year-over-year due to overall lower impairment charges as well as lower lease reserve on closed restaurants in the current year. Our tax rate was a benefit of 2.9% compared to tax expense of 20.1% in the prior year, largely due to a year-over-year increase in the level of FICA TIF and work opportunity tax credit for the quarter in tandem with the exclusion for tax purposes of a net gain from franchise partnership acquisitions during the quarter.

Turning to the balance sheet. Our booked debt was $359 million, up from $322 million a year earlier due to the assumption of $129 million in debt year-to-date from the franchise partnership acquisitions, as well as the settlement of $6.5 billion in debt guarantees during the quarter from franchise partnerships we did not acquire. At the end of the quarter, our booked debt to total capital was 38%. Our book debt to EBITDA was 2.6. And our total funded debt to EBITDAR, the ratio pertinent to our loan covenant, was 2.78, which provides us with almost 100 basis points of cushion to our loan covenant. I'll now turn the call over to Greg to go over our guidance for the year.

Greg Ashley

Thanks, Margie. Please note that our full year guidance excludes the impact of any gains or losses or related guarantee expenses recognized, or to be recognized, from franchise partnership acquisitions due to the business combination rules, which place a greater emphasis on fair value.

Our guidance for 2011 is as follows. We estimate same-restaurant sales for company-owned restaurants to be in the range of flat to positive 1% for the year, as a result of the third quarter severe winter weather impact and softer sales in the Bar Grill segment primarily due to the higher fuel prices over last year. We do not expect to open any in-line restaurants in fiscal '11, anticipate closing eight to 10 company-owned restaurants. These closures obviously exclude our conversions, and converting four to six lower performing company-owned restaurants to other high-end casual dining concepts.

Our franchisees expect to open between six to eight restaurants in the year, up to three of which will be international. In addition to the 96 franchise restaurants acquired year-to-date through the third quarter, as Sandy noted earlier, we plan to buy back the remaining 13 franchise partnership restaurants during the fourth quarter.

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 such as our complementary bread program as well as investments in service to enhance our guests' experience and drive sales, all offset by lower promotional levels. Our core food costs are expected to remain relatively stable compared to the prior year.

Depreciation and amortization is estimated to be $62 million to $64 million. SG&A is targeted to be up approximately 18% to 20% year-to-year, primarily reflecting a shift in spending from promotional initiatives to advertising expense, higher marketing brand research, higher training expenses and the loss of fee income from the acquired franchise partnerships, which has historically offset our selling, general and administrative expenses.

Interest expense is estimated to be in the $12 million to $13 million range. The tax rate is estimated to be 10% to 15% as we continue to benefit from FICA, TIF and other employment-related tax credits.

Diluted earnings per share in fiscal 2011 are estimated to be in the range of $0.74 to $0.82. Our prior guidance was $0.76 to $0.86. And given the diluted weather-related impact in the third quarter of $0.03 to $0.04 per share, coupled with the recent sales softness we have seen in certain markets, we have tightened our earnings range. Fully diluted weighted average shares outstanding are estimated to be approximately 64.9 million for the year.

Capital expenditures are expected to be $29 million to $32 million. And we estimate we would generate $70 million to $80 million of free cash flow during the year, with this number being lower primarily due to the snow-related impact during the quarter and our lower sales outlook and our onetime guarantee costs related to franchise partnership entities that were not acquired.

We have made good progress over the last two years to improve our operating results, maximize free cash flow and strengthen our balance sheet while paying down our debt. While uncertainty continues to remain in the overall economy, we have considerably more financial flexibility than at any time over the last three to four years as a result of our operating momentum, stable cash flow and flexible credit facility. I will now turn the call over to Dan to go over some of our sales and brand-building programs.

Dan Dillon

Thank you, Greg. We're very excited about the limited time offer featured menu that we launched on February 15. Ruby Seafood Festival limited time offer featured menu, which introduced some exciting new seafood offerings such as shrimp fondue appetizer and shellfish trio and Tuscan Crab Tilapia has broad appeal and a motivating price point which starts at $10.99.

In addition to introducing new limited time offer menu items, we also introduced new communication strategies leveraging video footage. We placed digital banner ads and video placements online including on cbssports.com during the March Madness on-demand viewing. At the beginning of the fourth quarter, we began promoting our Ruby Seafood Festival with a 30-second ad in approximately 250 cinemas. The video showed in cinemas and online highlights the affordability, freshness and quality of our seafood offerings, and is an example of our nontraditional marketing. If you've not seen the video available on our website, and I encourage you to take a look at it.

During the third quarter, we also offered a three-course bundled meal option to celebrate both New Year's Eve and Valentine's weekend. For the Valentine's promotion, we also provided guests a bounce back incentive to return within the next 14 days to try our new limited time offer feature menu.

We're very pleased with the response to the bounce back offer, and we're able to drive high redemptions on this program. We hope to continue shifting our promotional dollars away from coupons and incentives and towards LTO product offerings, and frequency-building program.

From a promotional and advertising perspective, we continue to have success with our RT Athletics program, which is a part of our So Connected email club. Integral part of this promotion during the start of the fourth quarter revolves around our March Madness campaign, and the Second Annual Ruby Tuesday Million Dollar Bracket Challenge, which created excitement with our sports fans and built enthusiasm in our bar area.

The investments we have made in the bar program to create a more sophisticated sports viewing experience where guests can come and have fun with friends, watch great sporting events, and enjoy hand-crafted beverages, and unique bar fare, have resulted in improved bar sales, and are helping to support our goal of moving alcohol sales from 9% to our goal of 12%.

Additionally, we continue to reach new users of Ruby Tuesday through our presence in magazines like Better Homes and Gardens, Men's Health and Self. We believe that positioning our brand in publications such as these allows us to target and drive redemption from a slightly younger and higher-income demographic.

Going forward, our brand strategies will continue to leverage consumer and shopper insights to ensure we are growing our awareness and relevance amongst our targeted consumers. The continued insight into our business and consumer behavior provided by the work with our partners offer solutions and [indiscernible] USA, should enable us to refine our marketing and business strategies focused on creating long-term value for the Ruby Tuesday brand.

We're investing approximately $4 million in order to better understand consumer and guest behavior this year, and anticipate these investments will continue to positively impact sales and brand strategy throughout fiscal 2012.

The remainder of fiscal 2011, we'll evolve our existing many items to support our high-quality casual dining position, broaden our appeal with product extensions, offering more variety and credibility, and continue to modify our incentive strategy in an effort to balance sales traffic and operating margins. Yesterday, we introduced a new lunch and dinner menus based on the recent success of our test menu that was placed during the second quarter. This menu introduces new items including petite plates, grilled jumbo shrimp, and create your options in the steak and [indiscernible] categories.

Later this month, we will continue to expand our award-winning beverage program with new drinks and dessert -- with a new drink and dessert menu. And we're also rolling out a new kid menu featuring healthier side items. As we look ahead in the quarter, our focus will be on enhancing our value position and testing communication tactics designed to grow awareness and relevance.

Before I turn things over to Kimberly, I want to give a quick update Lime & Fresh Mexican Grill. We are still researching and negotiating potential sites for restaurant development, and are on track to open our first Lime restaurant in the first quarter of fiscal 2012 and should have six to eight opened by the end of the calendar year. We're targeting three regions for development, including Washington D.C, the Midwest and Ohio Valley area, and of course Southeast.

Two of our three regional directors have completed the Lime & Fresh Mexican Grill training. And a third is scheduled to complete the training by the 1st of May. We're very excited about the attractive growth potential for this brand. And it's well aligned with our focus on high-quality food and service, and is an exciting concept that's well positioned to a younger demographic. Now I'll turn it over to Kimberly, to provide you more sales information on our teams and Guest Satisfaction.

Kimberly Grant

Thank you, Dan. Our key operational objective for 2011 is to consistently deliver the ultimate $25 dinner experience for $15. We believe our efforts towards this objective have and will continue to strengthen our brand, and in the long term will provide a strong foundation for sales growth comparable to other high-quality casual dining brands.

Now as we have discussed in previous calls, we believe the new management structure we put in place in the fourth quarter of last year enabled us to deliver a more consistent guest experience by having our culinary managers focused on serving high-quality food and our guest service manages focused on providing Gracious Hospitality.

Now throughout this year, we have conducted detailed training sessions for all of our managers at our Center for Leadership Excellence in Tennessee. We are currently in our final phase of this training with our guests service managers with added emphasis on our newly enhanced recovery programs. Our enhanced recovery program focuses on a more proactive approach to guest recovery, by empowering all of our key members to get involved early when we fail to achieve our high standards with an ideal goal of identifying and correcting an issue long before the guest even notices.

Now while we are very early on with this new initiative, which went system-wide in March, the preliminary results from this new program has been very positive, including improved Guest Satisfaction Scores, decreased customer discounts, decreased guest complaints and increased tips for our services.

As Margie mentioned earlier, we acquired and operationally integrated a total of 73 franchise partnership restaurants during the third quarter. As a part of this integration, we established a new western region to lead the acquired western area restaurants, emerged the remaining restaurants into existing regional structure and began focusing on driving sales and execution in order to maximize profitability of these locations. This integration has been very smooth thus far and has provided continued stability for our teams and our guests.

Now as Sandy noted earlier, one of our key strategies is focused on getting more out of existing assets to converting certain underperforming company-owned locations to other concepts. We know that these three conversion locations -- we now have three conversion locations opened with the Jim 'N Nick's conversion, which opened in Knoxville in September, a Truffles conversions which opened in the Atlanta Buckhead area in December, and our new seafood concept Marlin & Ray's, with is our internally developed concept that's opened in Maryville on March 1.

Now we like the progress we are making on our conversion strategy, and in particular Marlin & Ray's concept, which opened with higher-than-expected sales and continues direct solid sales with very good positive guest feedback. Our next planned conversion will be a Marlin & Ray's slated for the Northern Virginia area early this summer.

Now our tight [ph] collections for our planned conversions over the next 12 to 15 months are largely complete. And over the next nine to 12 months, we should have a better idea of which brands represent the best conversion growth opportunity in each individual market.

Our internal Guest Satisfaction scores achieved a record high during the quarter, which is in line with the progress that we have seen in our outside research, as Sandy mentioned earlier, the net promoter scores. Our top two box scores for overall experience were almost 94%, with approximately 71% of our guests rating their overall experience a five on a one to five scale. This is a record-high level for our brand, and we're very proud of this accomplishment. Additionally, our number of unacceptable experiences, which are ones and twos, continues to remain at very low levels.

Our year-to-date management turnover is on track to be under 22%. And our hourly turnover is on track to be under 100%, again this year. And both are very low levels for our industry. Although we are in a very difficult and fragile sales environment, our operations teams are so excited about our current brand initiatives, which continue to strengthen our Ruby brand as well as the new opportunities that are being created by our new conversion concept and new growth strategy. Now I'll turn it back over to Sandy for a quick wrap up.

Samuel Beall

Thanks, Kimberly. Even though the operating environment is very difficult and we were slammed by winter weather during the quarter, we feel good about our business, and believe the cumulative positive effect of a number of our programs and investments that we have in place will continue to result in a stronger brand and a stronger company.

As we enter the final quarter of the fiscal year, our teams are focused on attacking and strengthening any pockets of sales, weakness and maximizing our same-restaurant sales. Second, tightly manage expenses and being prudent with our capital. In spite of the various uncontrollable economic factors, I believe our company is well positioned given our strong combination of people, plans and product offerings.

Our balance sheet is in good shape. Our CapEx needs are relatively low, with any increases being related to growth type initiatives, which will generate incremental cash flow. And we have a prudent, I think, a very good three-year strategic plan in place to create shareholder value. With that, we'll open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets Inc.

I wanted to start off with the franchise acquisitions. It was absolutely an acceleration beyond what we expected. And I guess good to see it's getting done already. But I wanted to see kind of what the timing of those acquisitions was? With the comp, were the lower performing units, did they hurt the comps and did they hurt margins a little bit more as they came in this quarter?

Kimberly Grant

This is Kimberly. I'll speak to the sales side. Those restaurants were performing comparable to the restaurants, the company-owned restaurants. With regards to the margins, Margie?

Marguerite Duffy

No, it would have been about a wash -- except for the things we specifically mentioned associated with the acquisition. In particular, the $600,000.

Samuel Beall

$2 million in total basically.

Marguerite Duffy

Yes.

Samuel Beall

Basically, that affected us, but it's a little bit.

Brad Ludington - KeyBanc Capital Markets Inc.

The $2 million strain, okay, that's helpful. And then just looking on the restaurant operating expense line, it was definitely higher than we expected. But I think I probably didn't account for some of the DIRECTV and NFL.

Samuel Beall

I think more than that, some of those expenses -- I think the other thing that really played on us was just how to manage, we had such severe weather, we had how many days that's closed?

Marguerite Duffy

We had 202 operating days lost that we weren't even open for business. And in addition to that, we had so many days where we were open and just did terrible sales. So that probably depressed margins more than any other outside of maybe the bread investment.

Brad Ludington - KeyBanc Capital Markets Inc.

So 202 operating days closed?

Marguerite Duffy

Yes.

Brad Ludington - KeyBanc Capital Markets Inc.

That helps.

Operator

The next question is from Jeff Omohundro with Wells Fargo.

Jeffrey Omohundro - Wells Fargo Securities, LLC

Kimberly provided a little bit of color on the Marlin & Ray's performance. I wonder if you could maybe expand a little bit on that. And also on Jim 'N Nick's and Truffles, how they're performing relative to expectations? Are you thinking about any of them, changing either positively or negatively?

Samuel Beall

I think the one we're most excited about is Marlin & Ray's. And that's why we'll open up another probably eight to 12, 14 or so next fiscal year is what we're thinking now. The Truffles is performing fine. Not better than we thought, but it's fine. And actually, Jim 'N Nick's is performing well too. It's taken a $1.1 million unit. And we haven't even started catering yet and it's doing over $2.2, something like that. That one is more difficult to operate, et cetera. I don't want to guess early, we want to end the year with probably a couple that we can grow. Then ones that aren't really good, we'll just kind of take out the fold. And as soon as we realize that, we'll do so. We also have Wok Hay, which we have two of those opening in the next 60 days. And so by fall, we'll know about those and we'll either have something to grow or we'll close us down or convert it with something else too. So I think we're in good shape in knowing and I think by the end of the year, we will be ramping -- you will have already seen that we ramp some up and ramp some down and eliminate some probably.

Jeffrey Omohundro - Wells Fargo Securities, LLC

And Sandy I think in the new investment section, there is reference, certainly the Lime & Fresh, I think you mention something about Ruby Tuesday for the future, something about it opening in the fall?

Samuel Beall

We have -- we're always working on the next generation of Rubys. And I hope we have our location that we'll be opening in late summer actually. I hope we get it worked out. And that will be here in Knoxville. We like to test everything in Knoxville. And it's just how we take it to the next level. And so that's an interesting project. It's finished, the menu, the interiors, everything, so we have excitement about that also.

Jeffrey Omohundro - Wells Fargo Securities, LLC

Any more color in terms of positioning of it.

Samuel Beall

No, not really.

Operator

The next question is from Joe Buckley with Merrill Lynch.

Joseph Buckley - BofA Merrill Lynch

For the company-operated same-store sales performance, can you give us a sense of what the ticket was versus the traffic?

Samuel Beall

Ask another one, Joe. We'll answer that, we're just looking it up.

Joseph Buckley - BofA Merrill Lynch

Sandy, the comments about the gasoline prices and the impact on bar and grill, can you fill that out for us a bit. And I guess how confident are you that sales drop you're seeing is driven by gas prices? And maybe if you would talk about what you're seeing lunch versus dinner?

Kimberly Grant

Joe, I guess this is good news, bad news. We have experienced with enduring higher gas prices, so we have some historical places to look. But the most important analysis we look at is we used to offer our partners to help us understand which markets are most sensitive to fuel prices. And we correlate their sales with that as gas prices increase and decrease. And so we're pretty confident that we're seeing a similar pattern that we saw in 2008 in those markets as well as we're seeing that starting over the last few weeks.

Samuel Beall

Also seeing that, Joe, because you got [indiscernible] if you separate bar grill from casual dining, you start seeing softness as in the bar grill category, as gas prices started moving up.

Kimberly Grant

Towards the middle to end of December is where we started seeing some movement in those sensitive parts of the country.

Samuel Beall

And that's with fuel where it is now, which is $3.50, $3.75 or whatever, and most people we talk to, of course, the summer fuel probably well over $4, which kind of makes us nervous.

Joseph Buckley - BofA Merrill Lynch

And is the softness in those markets more lunch or dinner?

Kimberly Grant

No, most of the markets -- there's some in the North but most are in the South. And the softness we see in the South is predominantly on a weekend business. In the North, when there's a market that's sensitive to fuel prices, we see more impact on weekday business versus weekend.

Joseph Buckley - BofA Merrill Lynch

So no real spook between lunch and dinner, just weekend in the South and weekday in the North.

Kimberly Grant

No, not from gas prices.

Joseph Buckley - BofA Merrill Lynch

Just one last one...

Samuel Beall

Kimberly mentioned as from gas prices, where lunch is a little bit softer is actually Chilli's $6 lunch Olive Garden has been pounding $6 lunches also. And so that always affects you a little bit when everybody is on the Compelling Value rampage.

Kimberly Grant

Whenever we see their promotional spending increasing on television, we definitely, or at least this time we've seen some impact to Ruby's lunch sales.

Joseph Buckley - BofA Merrill Lynch

And then just one last one, so the full year guidance of flat to plus 1%, am I correct that implies kind of flat to down 4% for the final quarter is the guidance range where that lies?

Samuel Beall

No, I think it would be -- I mean we certainly hope to be positive. But no, it's nothing like -- if you do the math on it, isn't it like maybe down a half to -- Joe when we do the math, we were -- but no it's definitely not down 4 anything. We hope not to be down. As far as your other question, for the quarter, you had traffic that was down probably 3%. And that's basically, I think, all weather-related or mostly weather-related.

Kimberly Grant

Mostly, it's about two points are weather-related.

Operator

The next question is from Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG

I have a couple of margin questions. I'll try to go quickly through these and hopefully the answers don't take long either. With the acquisitions, do you pick up G&A beyond losing the fee income? Do you also pick up just some general G&A costs?

Marguerite Duffy

We will for the regional oversight and probably another $750,000 or $800,000 or so.

Kimberly Grant

Second question, how much gross margin do you pick up? You've talked about from the transfer of promotions to advertising. So It's going to hurt your G&A. But what's the benefit to the gross margin from that transfer?

Marguerite Duffy

It depends in the end how much of the actual redemption we get in. How much bills actually are. In the end it depends on the actual redemption, not like projections.

Keith Siegner - Crédit Suisse AG

Theoretically though in dollars, it should just be a transfer out of one category into the other though, is that right?

Marguerite Duffy

The dollar with come out of [indiscernible] but then your food cost on higher sales is what we will look on to.

Keith Siegner - Crédit Suisse AG

So the guidance for a relatively flat CRM or company restaurant margin for the full year implies a pretty big step up from third quarter level to fourth quarter level. Outside of the weather impact, and it sounds like the acquisitions are basically similar in margin profile. Is there anything else impacting that margin than what we've just talked about?

Marguerite Duffy

No, I don't think so.

Samuel Beall

Back to your question, I'm not sure if you're factoring the acquired franchise partners in to the same-restaurant sales numbers. we're looking at relatively flat to slightly positive number in Q4. So I'm not sure where the math difference is. But we can circle from that later on if you want to.

Operator

The next question is from Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James & Associates, Inc.

I guess maybe follow-up a bit on the sales side. I guess how do you determine -- what kind of measurement, help us understand you've talked about how you've sort of been able to isolate or designate certain markets as being more gas-sensitive, gas price-sensitive than others. Just wondered if you could elaborate a bit without giving away any secrets? Sort of what the characteristics of gas sensitive versus nonsensitive markets might be?

Kimberly Grant

I think they tend to be southern cities, not major markets but not rural. Where we see the most sensitivities in North Carolina, South Carolina, some towns in the Alabama, like Hunstville, Birmingham, rural Georgia. Detroit, it tends to be very sensitive. Some cities in Ohio. It's really sporadic throughout the country, but it's more focused in the southern market. But Carolinas were very consistent in the last, in 2008. They were one of the first markets to react to gas sensitivity, and they are again today.

Samuel Beall

We track our sales of course, you track your sales by market and fuel prices. It's pretty easy to see with rising fuel, what's happening to core grill sales. Maybe we're the only ones who see it, could be.

Bryan Elliott - Raymond James & Associates, Inc.

And you mentioned to Joe, that we could see the breakout from the KNAPP-TRACK, we actually don't get any kind of detail. We just get the aggregate KNAPP numbers here in the investment community. So could you maybe just elaborate a bit on that?

Samuel Beall

I thought you all got that here.

Bryan Elliott - Raymond James & Associates, Inc.

No. So you're definitely seeing category weakness in bar and grill relative to the overall KNAPP number, not just Ruby Tuesday bar weakness relative to overall KNAPP?

Kimberly Grant

No, we started seeing gas prices starting to creep in, in September, October is when the first anything significant. It had remained relatively flat throughout the spring and summer. And coincidentally at the exact same time they started to increase from about a base of $2.78 a gallon up to $3.50 now is at the same time where you saw a decrease in all of our grill. We lagged the decrease a little bit comparatively. But it's a definite trend line correlated to the fuel prices.

Samuel Beall

And that's really starting at about January?

Kimberly Grant

No, it's in November, October, November, those periods for the year. And February is a difficult period to look at because of the flip-flops with holidays and with the positive weather impact from the D.C. blizzard last year. So it will throw off KNAPP trends from what you might see.

Bryan Elliott - Raymond James & Associates, Inc.

And a quick accounting question, when was the relief acquisitions in the Q3 actually closed? Were they late in the quarter or in the quarter.

Kimberly Grant

First day of the third period of the quarter.

Samuel Beall

First day of the third period, so ...

Kimberly Grant

About one month.

Samuel Beall

About 40% -- no, about 60% through.

Operator

The next question is from Robert Derrington with Morgan Keegan.

Robert Derrington - Morgan Keegan & Company, Inc.

Sandy, can you give us a little bit of color on the new menu that you just rolled out. It's got some little tweaks and changes to it. And I'm just wondering, for example, it looks like burgers at dinnertime now include an additional side versus lunchtime. And it bumps the price up, it looks like about $2 on a classic burger. What kind of testing did you all do with this new menu? And how did consumers respond to the higher prices versus the lunch menu?

Samuel Beall

Whenever we test -- we test all of our menus, and we actually had that one on forever and ever, probably four months or so. And so on that product, I would have guessed it different that some would have traded down. We've got no negative feedback at all at dinnertime. It's actually win-win. It's much more full plate, much more of a dinner type experience. And we charged about $1 more on the average and that was a win-win for us. And there weren't any major changes on this menu. But I guess that was one you could say is different. It's all in sync with being a little bit trying to move to high-quality casual dining versus bar grill. The other interesting ones are a continuation of trying to have the right-sized portion, the right food for whatever taste and flavor and health level you want but are the petite plates and all that offer. There are some outstanding dishes. For less than 350 calories, you've got seven or eight items on there, in addition to our Fit & Trim's or that are all under 700, I think, calories, Dan. I think those were another interesting one, we added actually spaghetti squash, which you'll got some love letters on that from people, spaghetti squash served with marinara and zucchini. Now we're not trying to turn into health nuts or anything, but we do believe in having better pressure, better pressure foods for those who want it.

Robert Derrington - Morgan Keegan & Company, Inc.

Another interesting observation, your Steak & Lobster, which I think you had featured on Tuesday...

Samuel Beall

Weekend, it's a weekend thing, because lobster is special. It's something people will go out for. We've got three or four items listed for lobster there. And we can do more business on Fridays Saturdays than we can on Tuesday.

Robert Derrington - Morgan Keegan & Company, Inc.

So it permanently is removed from Tuesday, and it's been moved to the weekend.

Operator

We have one final question from Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets Inc.

I wanted to follow up on when you're talking about IMG [ph] rolled out and changes you're making, I think you said something about petite plates. Could you expand on that a little bit?

Samuel Beall

Well, they're just -- I think we have seven or eight. They're a combination of three or four small solids, three or four small entrées, like about 3.5 ounces chicken with broccoli. I think it's in mashed potatoes for like 350 calories. Same thing with fish, same thing with steak. So for somebody who just wants a light meal on a small plate, I guess you could call it, and one that's good for you. That option's available at lunchtime, I think right now, not at lunch and dinner.

Brad Ludington - KeyBanc Capital Markets Inc.

And what's the price range on those?

Samuel Beall

Those are all $6.99 to $8.99 a plate.

Brad Ludington - KeyBanc Capital Markets Inc.

Is there any thought or discussion of share repurchases in the fourth quarter? Is that something that you discuss maybe going into fiscal '12.

Samuel Beall

I think that's something. We're taking on, where you take all of the franchise partners who will have them by the end of the year about $140 million in debt, $142 million, something like that. And I think our focus right now, could we absorb that, make sure we are sales positive. And we've got -- they have some high-interest debt, we'd probably like to, if any people want to sell that at a reasonable price, we might be interested in buying some of that. And probably get to the ball.

Brad Ludington - KeyBanc Capital Markets Inc.

And finally just one more accounting question on the G&A guidance. It seems to imply from last quarter's guidance that it's up about $7 million. I know you have lower contributions and you talked about a shift to advertising expenses and some other shifts. Is this more of a shift than you were talking about earlier in the year? Are you going back to TV advertising?

Samuel Beall

I won't say exactly what we're doing, but as far as the national TV program, no. The way we'll drive -- I think Dan mentioned this, but our focus on how do we drive sales in every market? And in our size company, as competitive as it is today, there isn't a one shoe fits all kind of scenario. And so I think TV would be part of a platform, local store market is certainly part of a platform, national magazine is a good part of it, coupons and incentives. It's a combination of all of that. And you got to work real hard to find the most efficient way to drive sales. And that's what we're trying to do.

I want to thank all of you all for joining us today. Thank you for your time. I know you're all busy. And I appreciate -- if you have any questions or anything, give Greg a call or Margie or myself et cetera. Make it a great day. Goodbye.

Operator

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.

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