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Ruby Tuesday (NYSE:RT)

Q4 2011 Earnings Call

July 21, 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.

Brad Ludington - KeyBanc Capital Markets Inc.

Keith Siegner - Crédit Suisse AG

Jeffrey Omohundro - Wells Fargo Securities, LLC

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

Michael Wolleben - Sidoti & Company, LLC

Joseph Buckley - BofA Merrill Lynch

Peter Saleh - Telsey Advisory Group

Operator

Greetings, and welcome to the Ruby Tuesday, Inc. Fourth Quarter Fiscal Year 2011 Earnings Call. [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.

Greg Ashley

Thank you, Bob, 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; Dan Dillon, Senior Vice President, Brand Development; and Kimberly Grant, Executive Vice President.

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 first quarter fiscal '12 earnings in early October.

Our fourth 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 fourth quarter and fiscal 2011 financial results, our fiscal 2012 outlook and a review of our plans and strategies. At the conclusion, as usual, we will respond to your questions. I will now turn the call over to Sandy.

Samuel Beall

Thank you, Greg. I'd like to welcome all of you listening in this afternoon. Thank you for joining us. Our fourth quarter is marked by several accomplishments, including the completion of our franchise partner acquisitions, the opening of our second Marlin & Ray's restaurant on June 1, and the launch of several exciting limited time offers.

We're glad to have closed this year with positive same-store sales of 0.9%, our first positive same-restaurant sales results in 5 years. However, the quarter was very challenging as you've seen from both the sales and profitability standpoint.

We saw a very aggressive promotional environment within the casual dining bar grill segment, especially at the lower end of casual dining during the quarter, which was also supported by very heavy media TV levels. We began the first month of the quarter with negative sales, as March showed sequential monthly improvement, which included positive same-restaurant sales in May, and we ended the quarter with the nearly flat same-restaurant sales. These results trailed KNAPP-TRACK on a one-year basis by approximately 2 points, and we're approximately in line with KNAPP-TRACK on a 2-year basis.

Although we did have success with our promotional strategies during the fourth quarter, the competitive promotions had recently become even more aggressive. and our current promotional programs do not compete as well versus high-value, heavy TV advertisements in this type of environment. While we were slow to react, we believe we have a better plan beginning in August and more so in September to drive traffic and sales.

Our diluted earnings per share of $0.21 trailed our prior results of $0.33 per share in part due to basically flat same-restaurant sales, not providing any cost leverage on the various investments we've made this year. Higher levels of advertising expense and various charges we incurred during the quarter, which resulted in earnings per share dilution of $0.04 per share. Margie will comment on those later.

While investments we made this year on a new bread program, additional labor hand service and a marketing research will benefit our brand longer term, we're very disappointed with our financial results of the year and believe me, we're actively working on it. We expect the competitive pressures that impacted our results in the fourth quarter will remain for the near term.

To combat this environment, our efforts in energy in fiscal year '12 will be sharply focused on 4 primary goals; first one is increasing our same-restaurant sales; second, lowering our cost; third, enhancing our margins; and fourth, maximizing our strong free cash flow position, 4 critically important directional points. Executing on each of these goals is key to getting ourselves and earnings back to stronger levels and building shareholder value.

Our balance sheet is in good shape, and we're very comfortable with compliance of our debt covenants. Our book debt-to-EBITDA ratio was 2.66 at the end of the quarter. It's an increase over the prior year, which was 2.1, but that's due to the assumption of debt from the franchise partner acquisitions. And Margie will provide more details in the call regarding our balance sheet, including our revolver credit facility which we just raised.

I'd like to briefly review our 3-year strategic plan, which we still believe very much in to create shareholder value and increase our returns. First and foremost, we're focused on many ways. We just spent 2 days with our board, reviewing all of our business plans for this year, which all support our 3-year plan, and we feel very good about those.

But the Ruby Tuesday is the horse. It creates all the cash flow for us, and our focus there is improving our sales, our margins, overall strength of the brand. Our marketing has done a great job in establishing exact -- establishing a great brand position, again, it's the heart of the company. Our food is better and fresher than ever before, and our operation and market teams are committed to fulfilling our brand goal to be America's top choice for the casual dining experience.

We have several new compelling lunch and dinner value offerings and a continued focus on improving overall guest experience, which should help us increase traffic and sales. Kimberly and Dan will share more on these 2 items later.

The second strategy is focused on increasing shareholder returns through new concept conversions. We opened our second Marlin & Ray's in Manassas, Virginia on June 1. This dinner-only concept is performing well from both the revenue and customer feedback standpoint. On June 15, we opened a new Wok Hay, our Asian concept. It's right down the street from Pei Wei and about 3 miles down the street from P.F. Chang's. Good, good market thus for us.

During fiscal year '12, we will continue testing Marlin & Ray's, primarily Truffles some and Wok Hay some in order to determine which concepts provide the best conversion growth vehicle to generate solid returns for our shareholders in the future.

The third component of our strategy is growth through investments in low-risk, low capital-intensive, smaller in-line locations. We now have 6 Lime Fresh Mexican Grill locations on our 2012 development schedule, including test rollouts for Washington, D.C., and core Southeastern markets, including Alabama, Georgia and Tennessee.

Our final strategy is to allocate capital to enhance shareholder value. Our balance sheet is in good shape. Our capital structure needs over the next years -- or next several years are very manageable. I mean, our capital expenditures are very manageable, which should position us to return excess cash to our shareholders through an opportunistic share repurchase program and/or we could utilize some of that cash to repay some of our higher interest debt, if that was an opportunity also.

Before I turn the call over to Margie, I want to comment on our 2 new board members, Steve Becker and Matt Drapkin. I spent quite a bit of time with both Matt and Steve in person over the phone for the last month and a half, and we're very excited to have both of them on board. At our board meeting this week, they both made very positive contributions and fit in extremely well.

I'll now turn the call over to Margie to discuss our financial performance in more detail.

Marguerite Duffy

Thank you, Sandy, and good evening, everyone. I'll review the quarter in detail, provide a high-level summary of the year as well as our year-end balance sheet, and then Greg will update our guidance for fiscal 2012.

Our lower same-restaurant sales in relation to the prior year, coupled with the various incremental investments we made in the brand this year, eroded some of our profitability during the quarter. However, we were able to create a significant amount of free cash flow during the quarter of approximately $31 million.

We reported fiscal fourth quarter diluted earnings per share of $0.21 compared to earnings per share of $0.33 last year. Included in the fourth quarter results were higher than prior-year impairment costs; income tax charges related to an allowance for state tax net operating losses; and gains and losses from franchise partnership acquisitions, which together represented $0.04 per share. The largest of these were impairment charges incurred on 4 underperforming restaurants, which we're not improving fast enough, and so we recognized these impairment charges. We have included a reconciliation of these items on the Investor Relations page of the Ruby Tuesday website.

Total revenue increased 12.6% during the quarter, primarily due to the franchise partnership acquisitions during the current year. We did not open any new restaurants in the fourth quarter and closed 7 restaurants, 2 of which experienced significant tornado and hail damage.

Franchise revenue decreased 24.3% due to franchise partnership acquisitions, offset slightly by higher fees realized from a traditional franchisee. We acquired the remaining 2 franchise partnership businesses, representing a total of 13 restaurants during the quarter, bringing our total number of acquired franchise restaurants to 109 for the year.

The restaurant level operating margin was 17.6% for the quarter, compared to 19.7% a year earlier, a decline of 210 basis points due to our brand-enhancing investment this year, which were not offset by increased sales levels. Cost of goods sold were 29.4% of sales for the quarter versus 28.4% in the prior year. This increase was driven by our continued investment in the higher quality menu items and new product offerings such as our complementary bread. Commodity costs also increased for one month in the quarter due to the early February freeze in Mexico. Also, cost leverage loss from basically flat same-restaurant sales impacted our margins.

Labor cost as a percent of sales increased to 33%, up from 32.4% from the prior year, primarily due to lower same-restaurants sales in addition to our brand-enhancing investment, which included incremental hourly labor added for guest service coordinators to enhance service during the Saturday dinner meal period, as well as additional labor related to the bread program. Other restaurant operating costs were up 50 basis points, largely due to lower same-restaurant sales during the quarter; insurance retention expenses associated with the spring tornado and hail damage, which significantly impacted 2 of our restaurants and damaged several others; and higher rent cost associated with several acquired restaurants.

SG&A expenses were 6.7% of sales for the quarter versus 5.6% in the prior year due to higher marketing costs. Also driving the increase is the acquisition of 109 franchise restaurants during the year, and the loss of fee income from acquired franchise partnerships, which historically offset selling, general and administrative expenses. The equity and earnings of our franchise partners increased slightly from the prior year, but will be eliminated going forward given our recent exit from the franchise partnership program through our acquisitions during the year.

Interest expense in the quarter increased to $4.2 million from $2.8 million, primarily due to the higher cost third-party debt, which was assumed as part of franchise partnership acquisitions. Impairment expenses were up $3.1 million year-over-year, offset by lower lease reserves for closed restaurants in the current year. Our tax rate was 11.5% compared to 23% last year largely due to a year-over-year increase in the level of FICA Tip and work opportunity tax credits for the quarter in tandem with the exclusion for tax purposes of the net gains from franchise partnership acquisitions during the quarter, offset by the recording of an allowance for state tax net operating losses.

For the full year fiscal 2011, revenues increased 5.9%, reflecting the 0.9% increase in same-restaurant sales coupled with the franchise partnership acquisitions, partially offset by declines from 12 restaurant closures. We recorded earnings per share of $0.72 compared to earnings per share of $0.73 a year earlier. The restaurant operating margin was 17.0%, compared with 17.3%, and was primarily related to the year-over-year brand enhancing investments we've made this year in the areas of bread and incremental labor.

Turning to the balance sheet. Our book debt was $344 million, up from $289 million a year earlier due to the assumption of $127 million in debt year-to-date from the franchise partnership acquisitions as well as the settlement of $6.7 million, and debt guarantees during the third quarter from 2 franchise partnerships which we did not acquire, both of whom had ceased operation. At the end of the quarter, our book debt-to-total capital was 37%; our book debt-to-EBITDA was 2.66; and our total funded debt to EBITDAR, the ratio pertinent to our loan covenant, was 2.84, which provides us with almost 70 basis points of cushion to our loan covenant.

On July 19, we added $60 million in additional commitment capacity to our revolving credit facility through our accordion feature, which increased our revolver size to $380 million. This additional capacity did not change our LIBOR plus 200 basis point pricing, or any of our other terms, and will provide us with additional flexibility as we execute on our strategic plan.

Now I'd like to turn the call over to Greg to go over our guidance for fiscal 2012.

Greg Ashley

Thanks, Margie. Our guidance for the year, which should be noted included the 53rd week, is as follows. We estimate same-restaurant sales for company-owned restaurants to be in the range of flat to 1% for the year, with the first 2 quarters of fiscal '12 providing more headwinds due to current competitive environment, coupled with more difficult comps to lap from the prior year.

Our first quarter same-restaurant sales are estimated to be in the range of down 1.5% to 2.5%. We expect to close 4 to 6 company-owned restaurants, which exclude our conversions; convert 6 to 8 lower-performing company-owned restaurants to other high-quality casual dining concepts; open 1 new restaurant and open 7 to 9 Lime Fresh Mexican restaurants. Our franchisees expect to open 6 to 8 restaurants in the year, up to 6 of which will be international.

We expect restaurant operating margins will improve slightly, primarily due to fixed cost leverage from the 53rd week in addition to our cost-savings initiatives. The majority of our proteins and seafood were contracted through the end of calendar '11, with any potential food cost exposure in the back half of fiscal '12 expected to be partially offset by a freight-savings program, resulting in total net exposure of approximately 1% to 1.5% of food cost for the year. Depreciation is estimated to be in the $66 million to $68 million range.

SG&A is targeted to be up approximately 15% to 20% from the year earlier, primarily reflecting a shift in spending from promotional initiatives to advertising expenses of approximately $10 million, in addition to the loss of fee income from the acquired franchise partnerships which have historically offset selling, general and administrative expenses. Excluding these expense shifts, SG&A is relatively flat on a year-over-year basis, reflecting our focused efforts on cost containment.

Interest expense is estimated to be in the $15 million to $17 million range. The effective tax rate is estimated to be 20% to 24% as we continue to benefit from FICA Tip and other employment-related tax credits, although this tax rate has doubled our fiscal 2011 effective tax rate due to higher levels of pretax income.

Diluted earnings per share for the year are estimated to be in the $0.75 to $0.85 range. Our first quarter earnings per share are estimated to be in the $0.03 to $0.06 per share range. The largest drivers of the unfavorable variance over the prior year first quarter include incremental advertising expenses of approximately $3 million to $4 million; flow-through loss on lower sales levels of approximately $3 million to $4 million; incremental bread expense of approximately $2 million given that, that program was rolled out late in Q1 of fiscal 2011; and incremental interest expense of approximately $2 million.

We anticipate both making up this deficit and growing our earnings per share on a year-over-year basis in the back half of the year, based on our easier same-restaurant sales comps in our 2 strongest revenue quarters, which was the third and fourth quarters; by more value-oriented offerings launched in the second quarter, which should drive traffic; by lapping the third quarter fiscal 2011 inclement weather impact, and the fourth quarter fiscal 2011 charges that Margie mentioned earlier; our extra week in the fourth quarter of fiscal '12, which I mentioned earlier; and year-over-year cost-savings initiatives, which we recently put in place.

Our fully diluted weighted average shares outstanding are estimated to be in the $63 million to $64 million range for the year. Lastly, our CapEx is expected to be in the $43 million to $47 million range, and we estimate we will generate $90 million to $100 million of free cash flow during the year. Now I will turn the call over to Dan to go over some of our sales and brand-building programs.

Dan Dillon

Thank you, Greg. As Sandy noted earlier, we are continuing to develop and refine a number of new offerings and programs designed to drive traffic into all of our brands. Entering fiscal 2012, we've maintained our focus on 3 core marketing goals, which will be the basis behind all that we do. They are: one, leveraging consumer insights and develop differentiated, high-quality, affordable lunch and dinner menu items; two, change the perception of lapse in non-guests through efficient and effective communication; and three, aggressively driving guest traffic and sales through an integrated marketing plan.

On the menu front, during the fourth quarter, we transitioned to a separate lunch and dinner menu and introduced some additional menu items, including petite plates, burger platters at dinner, and a create-your-own section for ribs and steaks, which has led to a check increase during the dinner daypart. Our Ruby Seafood Festival limited time offer, which launched on February 15 and ran through the fourth quarter -- end of the fourth quarter, introduced some exciting new seafood offerings, such as a shrimp fondue appetizer and a shellfish trio entrée and a Tuscan crab tilapia. They all had broad appeal and a motivating price point starting at $10.99.

This was a good promotional campaign for us, as it resulted in an increase in both purchase intent and food check. Over time, we plan to continue shipping our promotional dollars away from coupons and incentives and towards more limited-time offers and frequency building program. In order to continue to leverage our Garden Bar as a point of differentiation, we've implemented a fresher Garden Bar that more resembles a fresh produce stand, and consumers' response has been positive.

Lastly, on the menu front, we've made some changes to our beverage menu including introduction of a new drink and dessert menu that highlights a number of new refreshing beverages, along with a better way to drink with our antioxidant and skinny drink items. These changes fit well with the investments we've made in our bar program and should support our goal of moving alcohol sales from 9% to 12%.

On the media front, we communicated Ruby Seafood Festival in a number of different digital mediums, including banner ads, online videos during March Madness On Demand broadcast and a variety of search engines. Additionally, at the beginning of the fourth quarter, we began promoting this limited time offer with a 30-second ad in approximately 200 cinemas. The video shown in cinemas and online, highlighted the affordability, freshness and quality of our Seafood offering and is a great example of our nontraditional marketing approach.

From a television standpoint, we tested TV in 11 spot markets with positive impacts on both traffic and sales. Our So Connected email club now has approximately 2 million members, and we currently have approximately 500,000 fans on Facebook, both all-time highs for the company.

We continue to reach new users in Ruby Tuesday through our presence in magazines like Better Homes and Gardens, Men's Health and SELF in order to target and drive retention from a slightly younger and higher income demographic. As we refine our integrated marketing plans, our strategies and tactics will continue to leverage consumer and shopper insights to ensure we are growing awareness and relevance amongst our target consumers.

We expect to continue leveraging customer research through our analytical partners to refine our marketing and business strategies, including more detailed analytics and help track and report on all of our test programs. This will help us to ensure our marketing dollars are being directed to programs that have the highest potential impact on driving sales and traffic.

For the fiscal 2012, we are currently testing a series of new items focused on creating a more compelling dining experience for our guests. These items were developed based on insights from our analytics and research partners. Additionally, on June 15, we launched a second dinner limited-time offer, our Summer Mixed Grill Favorites. The limited-time offers are starting at $11.99 and include a choice of 6 separate entrées. Our most popular is a mixed grill entrée featuring a trio combination of jumbo shrimp, grilled sirloin steak and blackened chicken.

As we look ahead in the quarter, our focus will continue to be on enhancing everyday affordability and tapping communication channels designed to efficiently grow awareness and relevance of changing brand perceptions in this highly competitive marketplace. Now Kimberly will provide you with more information on sales, what our sales teams are doing and guest satisfaction.

Kimberly Grant

Thank you, Dan. Our operating mission is to make guests happy by consistently delivering a high-quality casual dining experience with compelling value, or as we like to say here internally, the ultimate $25 dinner experience for $15. We believe our efforts towards this objective have, and will continue, to strengthen our brand and longer term, will provide a strong foundation for sales growth comparable to other high-quality casual dining brands.

Over the last 2 years, we have significantly improved the guest experience to become among the best in bar and grill, yet we remain very focused on operating at an even more consistent and higher level. To do this in 2012, we have challenged ourselves to achieve 3 key operating goals.

The first is we want to aggressively continue to attract and hire the best talent in the hospitality industry. The second is to attract and retain the most sincere and sharpest looking service staff in all of casual dining. And our third goal is to have the hottest, freshest food in all casual dining. We believe all of these goals are critical and will allow Ruby Tuesday to become more competitive and it all starts with attracting, hiring and promoting only the best.

Over the last year, we've significantly improved the talent and the depth of our management and hourly teams. In fiscal 2011, we improved the quality of our talent by hiring approximately 74% of our managers externally compared to 66% in fiscal year 2010, with the specific focus on hiring talent from high-quality casual dining competitors and not bar and grill.

Additionally, we have improved the staffing levels of our restaurants by successfully reducing the number of open management positions by over 60%, and we are beginning fiscal 2012 at the best level of staffing in the concept history. And lastly, we have achieved great retention rates for fiscal 2011 as our management turnover was approximately 22%, and our hourly turnover was under 100%, again, 2 years in a row. Both of these performances are very low levels for our industry. The tremendous progress we have made over last 3 years in improving the quality of our hourly team has enabled us to achieve consistently low turnover while increasing the accountability for delivering a better service experience for our guests.

In fiscal 2012, we are focused on taking our service to a higher quality casual dining level through a focused effort on hiring friendly and sincere service teams who truly care about looking their very best every day as we believe this is the key difference between a bar and grill experience, and a memorable casual dining experience.

Now our desire to have the hottest, freshest food in casual dining sector is well supported by our management structure that we put in place approximately a year ago, which enabled us to deliver a more consistent guest experience of having culinary managers focused on serving hot, fresh food, and guest service managers focused on providing gracious hospitality. Additionally, in the few instances when we miss it from a guest point of view, our newly enhanced recovery program is enabling us to focus more proactively on guest recovery by empowering our team members to get involved early when we fail to achieve our high standards, with an ideal goal of identifying and correcting an issue before the guests even notice it.

Now we are now over a quarter into this new initiative, and the results today include improved guest satisfaction scores, decreased customer discounts, decreased guest complaints and the most important, increased tips for our service teams. Our efforts over the last few years to significantly improve the guest experience are supported by our external brand tracker scores, as well as our internal guest satisfaction scores.

From an external research standpoint, the improvement in scores from 2009-2011 was tremendous and included the following. Our atmosphere and ambiance was up 10 points. The taste and flavor of our food was up 8 points. Value for money was up 8 points. Likely to recommend our restaurant was up 7 points, and overall service was up 3 points.

Now our internal top box -- top 2 box scores for overall experience were almost 94% for the quarter, with approximately 71% of our guests currently rating their overall experience of 5 on a 1-to-5 scale. This is a record high level for us once again. Additionally, our number of unacceptable experiences, which we call 1s and 2s, continues to remain at low level.

At this point, our operational metrics are above all of bar and grill in virtually every attribute, and this is a strong testament to the great restaurant teams we have who work hard to operate the Ruby way every day. And lastly, the integration of our over 100 franchise restaurant acquisitions has been very smooth thus far, including an improvement of our guest satisfaction scores in these restaurants anywhere from 2 to 10 points depending upon the market since we've acquired them.

We have been focusing on sales and execution in order to maximize profitability on these locations and have already seen marginal improvement in these restaurants on a year-over-year basis, which is critical in reaching our goal of $20 million of net incremental annual EBITDA going forward once the integration of these restaurants are complete.

Now I'll turn it back over to Sandy for a wrap up.

Samuel Beall

Thank you, Kimberly. Based on what we perceive to be a very weak economy honestly, especially for those households making $100,000 or less, plus the expected -- and then plus, really, the amount of TV and commercials that's going on out there. We do expect the next couple quarters to be difficult given the tough comps year-over-year and same-restaurant sales.

But we realize we must operate successfully on whatever environment is out there, and we're working hard at that. We know we must get guests in to see and to experience the new Ruby Tuesday. We are operating well. We just got to figure out how, in these very difficult times, to get guests in to see what we're doing.

We're sharply focused on our 4 primary goals for fiscal 2012. It's not a lot of investing. It's about running the business well. It's driving same-restaurant sales, aggressively going after sales, aggressively lowering cost, enhancing our margins and maximizing our strong free cash flow even in an environment we played out for this year, and with the earnings that we'd given you guidance on.

We feel good about our business strategies. We believe we have good short-term and long-term plans. We have a strong balance sheet, very solid levels free cash flow and on the $90 million to $100 million a year range, and topnotch talent in our restaurants, which collectively should enable us to create value for our shareholders in the future.

With that, we'll open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets Inc.

Sandy, I wanted to start off with the acquisitions that came in the last 2 quarters. I mean, is there some kind of -- can you quantify what the earnings may have been without those? It seems like there's some kind of hit we've taken on the higher interest debt and looks like low volumes -- the volumes of franchise units improved dramatically more than their comp when those got taken out. Is there some kind of strain on those right now until you kind of fix some performance issues with them?

Samuel Beall

Okay. It was flat on profits, but we've got an EBITDA improvement of how much, Margie? $7 million?

Greg Ashley

Right. That's $7 million, yes.

Samuel Beall

It's about $7 million I think. But earnings...

Greg Ashley

Year-to-date...

Samuel Beall

For third and fourth quarters.

Brad Ludington - KeyBanc Capital Markets Inc.

$7 million EBITDA improvement year-to-date?

Samuel Beall

For third and fourth quarter. But just for fourth quarter, the impact on bottom line for the last quarter on earnings per share was basically flat due to that. So it didn't hurt us, didn't help us that quarter.

Brad Ludington - KeyBanc Capital Markets Inc.

Okay. And then, if we're looking at where free cash flows is going to go next year, you talked about paying down some of the high interest debt and...

Samuel Beall

Maybe, maybe, maybe, yes. Share repurchase, there's been a lot of prices talk, but it's a good investment I would think, and we think it is.

Brad Ludington - KeyBanc Capital Markets Inc.

Okay. So if stock looks like it's at an attractive value, we should assume maybe it's weighted more towards share repurchase?

Samuel Beall

Good assumption.

Brad Ludington - KeyBanc Capital Markets Inc.

Okay. And then also on the analytical partners, dunnhumby and everything else, is there some sort of program that's rolling out through the dunnhumby relationship this year?

Samuel Beall

Yes, we have 2 tests that will be rolling out in September-ish approximately. So we should know something on those by, what, January then?

Greg Ashley

6 months.

Samuel Beall

6 months, yes.

Operator

Our next question comes from the line of Jeff Omohundro with Wells Fargo Securities.

Jeffrey Omohundro - Wells Fargo Securities, LLC

Two questions. One in the same line as Brad's on free cash flow. Maybe, if you could deconstruct the step up in CapEx components in 2012 first.

Samuel Beall

Sure. The maintenance CapEx on the store is relatively the same. That ran -- it's been as low as $13 million, as high as about $17 million, if I remember right. In the guidance I gave you on CapEx, I think $43 million to $47 million, you've got about $10 million there of technology. If things get tight, we'll pull some of that back. I think you've got about, what, $9 million or $10 million in total new restaurant development. So really, the change -- the bulk of the change is really technology and then these new conversion concepts and new growth. And again, if we get tight, we'll just crank that back down, probably pull it back down $5 million, $6 million, $7 million or so.

Jeffrey Omohundro - Wells Fargo Securities, LLC

And then my other question is...

Samuel Beall

The most important thing is maintaining approximately $100 million free cash flow, and we'll manage to that.

Jeffrey Omohundro - Wells Fargo Securities, LLC

My other question is related to the menu. Given the weak economy, I wonder if you could talk to menu elevation versus guest preference. And how you go about balancing that? I'm thinking specifically about the number of offerings such as the trout almondine or the spaghetti squash, which certainly I personally find appealing. But I just wonder if there might be some overreach relative to a broader Ruby Tuesday audience and how you go about assessing that.

Samuel Beall

Fried trout appeals to the masses, I guess, and we're actually changing the name from almondine to something to make it more appealing, but basically, fried trout skillet. But I hear what you're saying on the -- we have a great fresh vegetable selection now. We have the squash and marinara sauce, which we have -- that's probably 3% or 4% of our guests. It didn't hurt us to have it. There's really very few items compared to the whole menu. Most of it's ribs and burgers and fat, but then we have a lot of fish also. So I think the menu is in good shape. I think one thing you're alluding to, right now if you look at KNAPP-TRACK, I guess, if you look at KNAPP-TRACK, bar grills kind of, because of the tighter economy, I think the under $100,000 are changing a little bit this summer from either last spring or last fall for sure. People are probably -- we think that they're downscaling just a little bit, I guess. Wouldn't you say that, Kimberly?

Kimberly Grant

Yes. Definitely, bar grill seems to be outperforming casual dining...

Samuel Beall

For the first time in a long time. So I think there is something worth, and that's why everybody you see out there is pushing price, limited-time offers of $9.95, lunch is at $5.95, $6.95, et cetera. Value is definitely the word of the day, what gets results.

Operator

Our next question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Joseph Buckley - BofA Merrill Lynch

Just got a couple of questions. Sandy, Garden shared that their June results were terrific on the back of the Red Lobster Seafood Fest. Do you think you're a little bit more exposed to that competitively given your high seafood mix?

Samuel Beall

I hadn't thought so, but I guess that's a possibility, Joe. I would -- where we're most -- I mean, that's an interesting perspective. I think where we're more exposed is if you assume the times are kind of challenging, when -- Red Lobster has huge voice, so when they come on, whether it's with a high-value promotion for them, whether it's them or Applebee's or Olive Garden, when you have that much voice, that much TV weight and you put basically a TV coupon out there, a high-value promotion, it's kind of hard to compete with that when you don't have a big voice. But that's what I would have thought is more of the challenge. In normal times it's not a big deal. But the seafood element is one to consider also. We are a little bit over 20% seafood, so.

Joseph Buckley - BofA Merrill Lynch

Okay. Then a question on the shift in marketing. So I've seen in the month of May you were really aggressive with coupons and you got back to positive comps in the month of May. So how do you think you'd transition out of that? And you know I'm not a fan of couponing. But is that a more surefire way to get people in the door than advertising and marketing?

Samuel Beall

We keep trying to -- we've been trying not to increase couponing, and our goal is we'd like to have about $60 million here in coupon and then we'd like to have $50 million and then $40 million and then $30 million. It's just figuring out the alternative for the other 70% of the guests who don't use coupons, how you drive those and to see the new Ruby Tuesday. I know we're operating well. It's just how you do that, and we keep trying to work on that, but that's why we have Dan Dillon here now also. And we hope -- knock on wood, we're getting closer and closer to that, but we haven't cracked that one yet. You're right, Joe. But no, it's not our goal to be using that many coupons.

Joseph Buckley - BofA Merrill Lynch

Okay. Just a question on getting people in to see the new Ruby Tuesday. It's sort of been the goal for about 3 years now.

Samuel Beall

It has.

Joseph Buckley - BofA Merrill Lynch

When do you enter another remodel cycling where you got to go back to refresh the restaurants you first touched?

Samuel Beall

I think the restaurants are first touch. I don't think we're -- I don't think we have a need for that probably for, gosh, 5 years, something like that, other than your normal -- yes, unless it's carpet or whatever. We do have the next phase Ruby Tuesday that we'll open 3 or 4 of those this year, and we'll see how that goes, but that's a longer-term project. But as far as the condition of facilities, we don't need it. You may need it for other reasons, but not for the facilities.

Joseph Buckley - BofA Merrill Lynch

Okay. And Margie, question on the interest expense. What does that assume with respect to the relatively high cost debt from the franchisees? Can you -- does that assume you'll get out of some of the high cost debt and focusing to your debt structure or...

Marguerite Duffy

No. It really only assume that as it amortizes, it goes away. But otherwise, it carries about an 8% interest rate.

Samuel Beall

Let's assume we keep it in there all year.

Joseph Buckley - BofA Merrill Lynch

And what are your actions with that? Are there ways to accelerate getting that off your books?

Marguerite Duffy

We are working with those primarily.

Samuel Beall

Prepayment penalties, Joe. So it's just being negotiated out of those, otherwise you'd probably let them ride.

Operator

Ladies and gentlemen, our next question comes from the line of Keith Siegner with Crédit Suisse Group.

Keith Siegner - Crédit Suisse AG

So I want to follow up on the question about the shifts from promotions to marketing, and you talked about how it's kind of like $10 million of the swing and x that SG&A, we'd kind of relatively be flat. Well, along the same lines, if you shifted it out of promotions, then theoretically, we're getting some benefit either as a reduction of a contract revenue or picking up some restaurant level margin.

Samuel Beall

Correct.

Keith Siegner - Crédit Suisse AG

How much impact is there, like, beneficial impact is there on either the comp guidance or on the company restaurant margin guidance from the shift, or for those same lines?

Samuel Beall

I mean, Keith, who would know -- I don't think anybody can project -- or excuse me, we can't project same-store sales exactly as we used to in the past because the economy doesn't seem to be stable, at least from what I see. So I don't know. But intellectually, you're question is, yes, if you shift it to -- if you shift a greater coupon -- greater expense to G&A, then you would have a greater same-store sales increase as you boost up your revenue, and the net effect on bottom line is neutral. I mean, that's what it should happen, and that's what we hope happens.

Keith Siegner - Crédit Suisse AG

Okay. So there's no like built-in benefit into company restaurant margin guidance range or anything like that because...

Samuel Beall

Well, if you look at our guidance, I mean, I don't know how to closely spell it out, but our pretax improvement this year, when you model it out, is respectable. It is respectable, and there's some margin improvement, and so I think it works.

Keith Siegner - Crédit Suisse AG

Okay. One other question, I mean...

Samuel Beall

So long as we get it, it works.

Keith Siegner - Crédit Suisse AG

Here's a relatively simple one. Now that you bought out the franchise partners, so you have just the traditional company-operated and franchise-owned system. Do you think about refranchising, especially any of these units that you just bought? Is that on the table?

Samuel Beall

No, no, no. We run company-owned operations. We sure as hell wouldn't have bought them back, if we're going to refranchise them. But we're company-owned operations. We run them great, Kimberly's team. This is already in there. We're doing a much better job. We're probably happy to have them and will have them.

Keith Siegner - Crédit Suisse AG

Okay. One last question for me, and then about check. Can you talk about what the change in check was in the quarter? And if you have it, can you tell me kind of dinner and lunch?

Samuel Beall

Middle and dinner and lunch, but the change in check was [indiscernible] $0.20.

Keith Siegner - Crédit Suisse AG

Up $0.20 you said?

Samuel Beall

Yes, ways to dinner. The lunch is probably flat to down a little bit.

Operator

Our next question comes from the line of Chris O'Cull with SunTrust Bank.

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

I had a couple of follow-up questions, and I apologize if I missed these comments in the call. But Sandy, did you see that system-wide, you now have a lunch and a dinner daypart menu?

Samuel Beall

Correct, separate menus.

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

And when did that go into effect?

Samuel Beall

April?

Dan Dillon

April.

Samuel Beall

There's subtle differences. It's not major right now. But you have the platform that way for differences and be able to highlight certain value at lunch versus dinner, et cetera. It's not a major deal right now.

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

It's really the way they're organized and presented?

Samuel Beall

Yes, yes, and a little bit on pricing, a little bit on pricing.

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

Okay. Great. And then...

Samuel Beall

At dinner, it was a hamburger you get choice of two sides, at lunch, it's one side. Matter of differences.

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

Okay. And then Greg, I apologize if I missed this, but would you go over the exposure to commodity cost in the back half, whether you're exposed to what items and what are your assumptions for inflation for those items?

Greg Ashley

I think the number we gave was 1% to 1.5%, but that's kind of for the full year, weighted heavily towards the back. On the lunch, we have our proteins, Chris. We're in great shape through December of '11 on some of our seafood. We're in various contract maturities through back of '11 and partly into '12.

Samuel Beall

Like salmon is way up as an example. Tilapia is up a little bit. You got -- we're in good shape. I don't -- we're not worried about being anymore than that, and we're not worried about locking in prices within that structure. We're not worried about beef really. I mean, we just upgraded our beef. That's cost us some. That's not from a commodity price increase.

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

Okay. And then the shared guidance reflects a lower amount than currently outstanding. So is the company assuming some repurchases on its guidance?

Samuel Beall

That's what that would assume.

Christopher O'Cull - SunTrust Robinson Humphrey, Inc.

Okay. And the authorization right now, I know it's an older authorization, can I just...

Samuel Beall

It's 7.5 million shares...

Dan Dillon

7.9 million.

Samuel Beall

7.9 million.

Operator

Our next question comes from Robert Derrington with Morgan Keegan.

Robert Derrington - Morgan Keegan & Company, Inc.

Sandy, listening to Dan and to Kimberly speak, there's a lot of positive things going on in the business. But obviously...

Samuel Beall

We don't have sales.

Robert Derrington - Morgan Keegan & Company, Inc.

Yes, it's leaking out. And can you kind of help identify, is it lunch, is it dinner, is it shoulder periods, is it bar? Can you kind of give us a little bit of color there?

Samuel Beall

Kimberly, you want to do that?

Kimberly Grant

Yes, it's not a difference between lunch and dinner. We saw some of that in Q3, but it stabilized in Q4. What we -- most of what you're seeing is a negative impact on the weekday dinners.

Robert Derrington - Morgan Keegan & Company, Inc.

On weekday dinners.

Kimberly Grant

Yes. Weekday dinners is where we're weak, and...

Samuel Beall

And which I think that ties into, I don't know what the other people are saying, but I think it ties into a tightening economy, the summer and those cutting back.

Robert Derrington - Morgan Keegan & Company, Inc.

Sandy, as you -- I think you had been on Tuesday running your steak and lobster promotion. You're not still doing that now, are you?

Samuel Beall

No, we shifted that to being an all-weekend promotion.

Robert Derrington - Morgan Keegan & Company, Inc.

Did that hurt the sales as you moved out of that?

Samuel Beall

It would hurt a little bit. But like the weekday sales, they're up about -- this is for what period, Kimberly?

Kimberly Grant

It's the last quarter.

Samuel Beall

The last quarter, we're off on weekday, on week...

Kimberly Grant

Day and night.

Samuel Beall

Week day and nights, we're off about 7% or so versus weekends are down a fraction but not much.

Robert Derrington - Morgan Keegan & Company, Inc.

And Sandy, how would you assess the success or lack thereof of your bread program? When you rolled that out, there...

Samuel Beall

I think the number one -- this is the first quarter ever in brand tracker that we just fairly -- that we've really beat bar grill in the 2 elements of a real dinner house or high-quality casual dining restaurant, I think, is bread. And I think that had a major impact. It's just coincidental, but the impression of Ruby Tuesday from a guest reading there has been substantially elevated, and I think that's one thing we've done different. Salad is the other one, and we're working on that also.

Robert Derrington - Morgan Keegan & Company, Inc.

One last question. When I look back in time, there was a period in which you had kind of tweaked the business around, put some emphasis against appetizers and your burgers, and it seemed like the business really took off. Is there anything to be gained as we look back in time about that relative to your dinner house strategy?

Samuel Beall

No. I think that was a totally different period of time, Bob, as you know, and Ruby's at a totally different place. We believe, and are committed, that you need to have the house quality restaurant you can have to be able to get a reasonable check, to be able to make money long term as healthcare folds in, as they continue to eliminate tip credits for tip employees and you can't be -- it's going to be more and more of challenge to try to sell food for $10 and $12. And you can't just upgrade overnight, become a Capital Grille or whatever overnight. It takes a while, and we think that that's the best long-term position to have, and that's what we're committed to. We don't have any -- we do not plan to turn back into a burger joint.

Operator

Our next question comes from the line of Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group

Just wondering if you could give us a little bit color on different regions of those country maybe that you were seeing weakness and if there's any pocket of strength? And then secondly, how you're thinking about menu pricing for fiscal 2012?

Samuel Beall

Menu pricing, we don't anticipate really any pricing in 2012. I mean, we'll take it wherever we can get it, but I don't know of any that's available out there right now. Kimberly will talk about the sales pockets.

Kimberly Grant

So I think the areas of strength that we're experiencing, and this is for Q4 and has continued as a trend, is Florida is very strong, the Mid-Atlantic and kind of the east north central type -- part of the country where we seem to be the most weak as in the South Atlantic area. So the Washington, Carolinas, Atlanta, Georgia, those types of markets.

Samuel Beall

So we're in pretty good shape except for that South Atlantic.

Operator

Our next question comes from the line of Howard Penney with Hedgeye Risk Management.

[Technical Difficulty]

Operator

Our next question comes from the line of Michael Wolleben with Sidoti & Company.

Michael Wolleben - Sidoti & Company, LLC

Just a couple of quick things here. That $10 million shift into G&A, is that already occurring, or is it more heavily weighted to the back half of the year?

Samuel Beall

No, it starts -- it's starting this quarter. I mean, starts now in about a couple of weeks.

Michael Wolleben - Sidoti & Company, LLC

Okay. Then still, with the rollout of the Marlin & Ray's being dinner-only, are you guys still looking at a up to $1 million increase in revenue and with a 30% flow through to EBITDA?

Samuel Beall

We still hope so.

Kimberly Grant

Yes. That actually, potentially have the opportunity to have higher flow through with being dinner-only. You leverage some other costs that you would have if you were open for lunch.

Samuel Beall

So far it's an exciting concept, but we need to get -- we have 5 more we're going to open here come February and then we'll know what kind of legs it has.

Michael Wolleben - Sidoti & Company, LLC

Okay. And then just lastly, circling back to the free cash flow again. You guys implied share repurchases as the main thing here. But given the cushion on your covenant has come in a little bit, is there any preference to -- or what stops you from buying back some of that debt or paying it down?

Samuel Beall

Well, you have -- you're talking about on the, like, the third-party debt, et cetera. It's really the penalties on there. I mean, you have prepayment penalties, where it just doesn't really make it advantageous versus just have an 8% debt. I think our average debt right now is, what, about 4.5%, 5%, 5.5%.

Greg Ashley

The good thing, Michael, is we're going to do what would be as best for -- generate the highest returns for the shareholders. So we're weighing that daily, weekly.

Operator

Our final question comes from Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets Inc.

I just had a couple of follow-ups about opening -- first off, on the Lime Fresh openings that you guided to. Can you comment on timing when we should see those start up?

Samuel Beall

Well, I think we have -- our next one will opens, what September, October?

Kimberly Grant

October is the first 2 -- it will be 3 openings in the second quarter, and then 3 openings spread out between the third and fourth.

Samuel Beall

And the Lime opens are really [indiscernible].

Brad Ludington - KeyBanc Capital Markets Inc.

Okay. And then Sandy, you said something about maybe opening -- when the guidance is up and I think one Ruby Tuesday on the release, but then I think you said something about the next-gen Ruby's opening up 3 or 4 this year?

Samuel Beall

Those are remodelings, and the other one was a restaurant, I think. That's actually a Truffles restaurant in Orlando, Florida.

Brad Ludington - KeyBanc Capital Markets Inc.

Okay. Yes, I thought I heard that wrong. And then finally, I just like to see if you could comment a little bit on -- moving over to the TV ads versus direct mail, email and things you've been doing with some success over the last couple of years, TV ads seem to be less successful historically. Is there something that's changed that's driving this move back, or is this just a test?

Samuel Beall

I'll let Dan comment on that. I'll make one comment on it. Our TV is all -- we're trying to market and trying to run our business based on what's best for the local market and how we'd be most efficient within each of those markets. So if it's TV you're talking about. Right now, you're just buying spot television where it makes sense for you and where you drive sales and make an investor turn out of it. But, Dan?

Dan Dillon

Yes, I mean, the business issue that we're trying to solve here is to drive traffic, and the way to do that is to change perception for the brand among people who haven't been in for a while. The most efficient way to do that is obviously mass communication and television, and the effectiveness of that television is dependant upon the message, your media plan and the marketplace, the competitiveness of the market place. That's why when Sandy said we're doing spot, it's -- we're evaluating the competitiveness of the marketplace to see where we think we have the best odds of growing traffic. But fundamentally, our business challenge is to drive traffic through changing perception to the brand, and using everyday affordability as the incentive and the de-risking of that trial.

Samuel Beall

We said a year ago we're trying to shift more and more dollars to reach new customers, instead of just existing coupon customers, and we've been trying to do that. We started that midyear, whether it's the national magazines or television in fourth quarter -- some television in the fourth quarter; our digital campaigns, et cetera. We just want to keep pushing more and more towards people who are non-coupon. We want to keep the coupon users to shift in more and more dollars. And even adding dollars, we have to create a trial to see the new restaurant.

Dan Dillon

In terms of effectiveness, we don't have too many tactics that's been as effective as the television has been in the test markets that we've been testing in. So I would say television can be very effective. It hasn't historically work [indiscernible] of the time and the metrics. But right now, it seems to be in our test market a very effective tool.

Samuel Beall

So we're testing more in August, and then if the test continues like we think then we'll be more aggressive on it starting in September for the second quarter.

All right we appreciate you all dialing in today, and if you have more questions, which I'm sure you will, please call our friend Greg, and make a great day. Bye-bye.

Operator

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

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