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Executives

Marguerite N. Duffy - Chief Financial Officer, Senior Vice President and Principal Accounting Officer

Kimberly M. Grant - Chief Operations Officer and Executive Vice President

Daniel P. Dillon - Senior Vice President of Brand Development

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

Greg Ashley - Vice President of Finance

Analysts

Keith Siegner - Crédit Suisse AG, Research Division

Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Robert M. Derrington - Morgan Keegan & Company, Inc., Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Ruby Tuesday (RT) Q1 2012 Earnings Call October 5, 2011 5:00 PM ET

Operator

Greetings, and welcome to the Ruby Tuesday First Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Greg Ashley, Vice President of Finance for Ruby Tuesday. Thank you, Mr. Ashley. You may begin.

Greg Ashley

Thank you, Manny, and thanks 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 notes regarding forward-looking information in our press release and most recently filed Form 10-K. We plan to release second quarter fiscal '12 earnings in early January. Our first quarter earnings were released today after the market closed, and a copy of our press release can be found on the Investor Relations section of our website at rubytuesday.com, and is also available on Business Wire, FirstCall and other financial media outlets.

Our format today includes the following: An overview of our first quarter financial results; our fiscal 2012 outlook; and a review of our plans and strategies. At the conclusion of our prepared remarks, we will respond to your questions.

I will now turn the call over to Sandy.

Samuel E. Beall

Thanks, Greg. I'd like to welcome all of you for listening in this evening, and thank you for joining us on our first quarter earnings call. While our same restaurant sales for the quarter were below our expectations, our quarter included several positive accomplishments including traction on our new value-oriented test offerings such as our pre-Garden Bar with all 40 entrees, progress on media tests at several markets, the opening our second and third Marlin & Ray's conversion restaurants and the first step and execution of our plans to return excess free cash flow to our shareholders through our implemented share repurchase program.

Our same restaurant sales results for the quarter were minus 4.1, which were negatively impacted by approximately 40 basis points due to the adverse impact of Hurricane Irene. I trailed KNAPP-TRACK on them on a 1-year and of course 2-year basis. That said, though, our earnings of $0.05 per share were within our guidance range and overall we had respectable profits this quarter considering the sales. After factoring in the lower same-store sales, of course it didn't provide us any leverage and hurt bottom line quite a bit, coupled with higher levels of advertising and promotional expense. Margie will provide more commentary on this later.

We continue to see a very aggressive promotional environment with heavy advertising levels. I think it almost basically peaked this summer with Red Lobster's effective summer promotion, but throughout really the entire industry. As noted on the last call while we're having some success with our marketing strategies, the competitive promotions continue to remain very aggressive and our current promotional programs do not compete as well as those high TV programs of a lot of our competition.

As a result, we've been testing various value-oriented offerings in some of our markets. A portion of these tests have been supported by media, including a test menu in selected markets offering Fresh Endless Garden Bar and fresh-baked garlic cheese biscuits, all complimentary with 40 entrees starting at $8.95, and Dan will talk about this more later.

While our primary focus remains on strength in the Ruby Tuesday brand, we continue to make good progress in other areas of our 3-year strategic plan. The first one is our conversion strategy. It continues to gain traction as we now have 4 Marlin & Ray locations open, including new locations open during the quarter in Manassas, Virginia; Acworth, Georgia; as well as Lithonia, Georgia, with all of those are Atlanta market. We continue to see positive sales lifts in our surrounding Ruby Tuesday restaurants post-conversion, which is a big benefit of our conversion strategy.

We believe Marlin & Ray's has the most growth potential. It's clearly a differentiated brand position and if successful, it's where we will invest our conversion dollars. We've learned that much so far.

Secondly, we continue to make progress on our in-line growth strategy with Lime Fresh Mexican Grill. We just opened our first location today in Huntsville, Alabama; had a great high-volume lunch. But what's key is what it does 6 months from now, but we're excited about that. We have a second location scheduled open to mid-November and then basically every 30 days throughout the balance of the year. Our remaining openings will include Washington D.C., and back to the southeast, Atlanta, Alabama and Tennessee. Lime is a strong brand that fits well with our focus on fresh food and great service. It takes fast casual to, I think, the service levels of casual dining, so it's a great blend of quick food with key casual dining service points and food quality points. It's also low-risk, very low capital-intensive and very high return, so we're excited about this.

Last, we continue to allocate capital to enhance shareholder value not only through our conversion and land development, but also through the repurchase of 2 million shares of stock during the quarter. Our balance sheet is in good shape. We are well in compliance with the debt covenants and our capital expenditure needs over the next several years are very manageable, which should position us to return a large portion of our free cash flow to our shareholders through opportunistic share repurchases.

We have made a number of investments in our brand over the last year, including a new bread program, additional labor-to-hand service, marketing research. We believe all these will benefit the brand longer term. You won't hear us talking about a lot about investing. We've invested the bulk by far of what we need to invest. We're now trying to execute on our margin enhancements. However, given the current competitive environment, we continually sharply focus on 3 primary goals outlined in our last earnings call, which include the following: First we'll focus on increasing our same-store sales, talk some more about that. But the emphasis is more on value for our guests. In these times, everybody's doing that. Our food is better and fresher than ever. Our external brand tracker scores are higher than ever by far, and we're very impressive there. We have great food, great guest experience. We just need to get more people in to see what Ruby Tuesday has to offer. And as a result, we're shifting our marketing promotional dollars to spend to a different mix to attract more regular casual dining users instead of just the coupon users of the past.

We have a strong brand which is led by a strong marketing executive. We have a new ad agency just selected this week. We have solid research analytics including 2 quarters of good test data that we will leverage in the back half of the year to affect same-store sales.

Secondly, we're focused on lowering our cost and enhancing our margins without negatively impacting the guest experience. We've recently engaged in enterprise improvement consulting firm to assist us in an in depth strategic study on cost reduction which has been a great experience, and we'll provide more details surrounding this on our second quarter conference call. Last, we remain focused on maximizing our strong free cash flow given our attractive free cash flow yield. We have deferred some non-critical capital expenditures for this fiscal year totaling about $10 million, ones that do not impact our conversion for in-line growth strategies in order to maximize our free cash flow for fiscal 2012.

We are going to explore alternatives to potentially -- we're also going to explore alternatives to potentially monetize a portion of our real estate portfolio and utilize the proceeds in tandem with our free cash flow, primarily for an opportunistic share repurchases and/or to repay some of our high interest debt.

I'll now turn the call over to Margie to discuss more financial information.

Marguerite N. Duffy

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

Our lower same restaurant sales, coupled with higher advertising expenses, negatively impacted profitably as compared to the prior year. We posted positive earnings for the quarter primarily driven by our continued focus on tight cost controls and cost savings, which offset the unfavorable impact of lower same restaurant sales, coupled with the benefit of favorable year-over-year stock compensation expense.

We reported first quarter diluted earnings per share of $0.05 compared to earnings per share of $0.19 last year, with the prior year earnings including $0.02 per share of accounting gain from the franchise partnership acquisition. Total revenue increased 9.1% during the quarter, primarily due to the franchise partner acquisition during the previous fiscal year. We opened 2 Marlin & Ray's and 1 Wok Hay conversion restaurant, permanently closed 2 restaurants and temporarily closed 2 restaurants in anticipation of conversions and other concepts.

Franchise revenue decreased 27.4%, primarily due to the elimination of royalties from our franchise partnership restaurants which were acquired in fiscal 2011. The restaurant level operating margin was 15.1% for the quarter compared to 18% a year earlier excluding accounting gains from our franchise acquisition or a decline of 290 basis points due to our brand-enhancing investments from the previous year, which were not offset by increased sales levels.

Cost of goods sold was 29.7% versus 28.3% in the prior year. This increase was driven by our continued investment in items designed to enhance our guest experience and drive sales including our higher quality menu items and new product offerings such as our complementary bread program, which rolled out at the end of the first quarter for fiscal 2011.

Labor costs as a percent of sales increased to 34.4%, up from 33.3% a year earlier, primarily due to lower same-restaurant sales in addition to our brand-enhancing investments, which include incremental labor associated to the rollout of the complimentary bread program and higher management labor from an increase in the number of managers per restaurant in relation to the prior year, coupled with minimum wage increases in several states.

Other operating costs were up 110 basis points largely due to lower same restaurant sales, net gains from restaurant acquisitions in the prior year and higher maintenance related expenses. SG&A expenses were 8.1% of sales for the quarter versus 7.4% a year earlier due to higher levels of TV advertising in the quarter coupled with the loss of fee income from acquired franchise partnerships which historically offset selling, general and administrative expenses. These increases were partially offset by lower general and administrative expenses primarily due to a reduction in stock comp expense.

As noted on our previous call, the equity and earnings of our franchise partners has now been eliminated given our exit from that program due to our acquisitions during the prior year. Interest expense in the quarter increased to $4.0 million from $2.5 million, primarily due to the higher cost third-party debt which was assumed as part of the franchise acquisitions.

Impairment expenses were down $1.1 million year-over-year in addition to lower closed restaurant lease reserves in the current year. Our tax rate was 15.4% compared to 22.9% last year, largely due to lower pretax income for the quarter which led to an increase in the FICA Tip work opportunity tax credit in the [indiscernible] spaces for the quarter.

Turning to the balance sheet, our book debt was $347 million, up from $295 million a year earlier due to the assumption of debt in fiscal 2011 from the franchise acquisition and recent stock repurchases. At the end of the quarter, our book debt to total capital was 37%. Our book debt to EBITDA was 2.85% and our total funded debt to EBITDAR, the ratio pertinent to our loan covenant, was 3.01% which provides us with almost 50 basis points of cushion in our loan covenant.

Lastly, during the first quarter, we repurchased $18.4 million of our stock which represents 2 million shares. Over the next few years, we will continue to opportunistically pursue share repurchase with our excess free cash flow. At the end of the first quarter, 5.9 million shares remain available for repurchase under the share repurchase program authorized by our Board.

I'll now turn the call over to Greg to go over our guidance for the year

Greg Ashley

Thanks, Margie. Our guidance for the year, which includes the 53rd week, is as follows: We estimate same-restaurant sales for company-owned restaurants to be in the range of flat to down 2% for the year. Our second quarter same restaurant sales are estimated to be in the range of down 2% to 3% due to headwinds from the current competitive environment, coupled with more difficult comps to lap from the prior year of positive 4.2%, but we do expect positive same restaurant sales on a 2-year basis.

For the year, we expect to close 3 to 5 company-owned restaurants excluding our conversions, convert 6 to 8 lower-performing company-owned restaurants to other high-quality casual dining concepts, open 1 new Truffles grill and open 6 to 8 Lime Fresh Mexican restaurants.

For the year, our franchisees expect to close 14 to 16 restaurants, up to 14 of which will be international and open 7 to 9 restaurants, up to 6 of which will be international. We expect restaurant operating margins to decline slightly with the negative impact of lower same-restaurant sales offset by fixed cost leverage from the 53rd week in addition to our cost-saving initiatives. The majority of our proteins and seafood are contracted through the end of fiscal '12, with any potential food cost exposure in the back half of the year expected to be partially offset by freight savings programs put in place resulting in total net exposure of approximately 1% of food costs for the year.

Depreciation is estimated to be $66 million to $68 million. SG&A is targeted to be up approximately 13% to 16% from a year earlier, primarily due to incremental advertising expense and loss of fee income from acquired franchise partnerships, which historically offsets selling, general and administrative expenses.

Interest expense is estimated to be in the $16 million to $18 million range. The effective tax rate is estimated to be 10% to 15% as we continue to benefit from FICA tip and other employment-related tax credits.

Diluted earnings per share for the year is estimated to be in the $0.60 to $0.75 range, with our second quarter estimated to be a net loss of $0.04 to $0.08 per share due to lower same-restaurant sales and year-over-year increases in advertising and interest expense. We do anticipate making up this deficit in the back half of the year based on easier same-store sales comps and our 2 strongest revenue quarters and more value-oriented offerings which should drive traffic. Additionally, assuming a less harsh winter this year, we will be lapping the third quarter fiscal '11 inclement weather impact as well as benefiting from an extra week for the quarter of fiscal '12.

Fully diluted weighted average shares outstanding are estimated to be approximately $62 million to $63 million for the year. Capital expenditures are expected to be $33 million to $37 million, and we estimate that we will generate $90 million to $100 million of free cash flow during the year.

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

Daniel P. Dillon

Thank you, Greg. As Sandy noted, we are continuing to develop and refine a number of new offerings and programs which we believe will result in higher traffic and trial for our brand. We remain focused on 3 key marketing goals outlined in a previous quarterly call, which includes leveraging the consumer insights to develop differentiated high-quality affordable lunch and dinner menu items, changing the perception of lapse to non-guest through efficient and effective communication and aggressively driving guest traffic and sales through an integrated marketing plan.

On the Food and Beverage front, we began the quarter with the introduction of our Summer Mixed Grill limited time offer starting at $9.99, which highlighted a number of our new menu items and drove increases in both check and margin. We followed that up in August with the reintroduction of our Seafood Mixed Grill limited time offer, also starting at $9.99, which featured some of our strong sellers from the previous Seafood Mixed Grill, including our shellfish trio entrée, featuring a premium jumbo lump crab cake, tender lobster tail and a grilled shrimp brushed with garlic scampi butter on a single plate. We're pleased with the success of this promotion as it resulted in an increase in both purchase intent and food check. Our marketing strategy includes continuing development of additional Limited Time Offer promotions and frequency building programs as we begin to shift our promotional dollars away from coupons and incentives over time.

Additionally, we also implemented a new Happy Hour program with half price appetizers, $2 tacos and minis and new drink specials to drive trial during the quarter. The investments we've made in our beverage lineup and bar program should help us reach our long-term goal of increasing alcohol sales to 12% of revenue.

In addition to the limited time offers, we also have been testing several new offerings designed to drive trial and traffic for our brand. We currently have a new test menu in select markets which is designed to create a more compelling dinner house dining experience by including our endless fresh garden bar and fresh baked garlic cheese biscuits complementary with over 40 entrees at a starting price of $8.99. This menu is currently being tested in approximately 200 restaurants, with about half of those supported by television advertising, and we think this could potentially be a real game changer for our brand.

Additionally we have 2 lunch specials in test including soup, bread and Endless Fresh Garden Bar offering at $6.99 and a salad bowl, soup and bread offering at $5.99. Both of these lunch specials which are available Monday through Friday in the various test markets are designed to drive traffic and sales of our brand during lunch day part, while providing our guests with a compelling value-oriented lunch choice.

As noted above, we've also been conducting 3 different television tests during the quarter for our Limited Time Offer Seafood Festival, our $6.99 Garden Bar and soup lunch special and our $5.99 salad, bowl and soup lunch special. These tests have been positive traffic and sales drivers for us and this is one of our first steps towards slightly slowly migrating more of our marketing dollars from our couponing and promotion strategy to our more media-focused marketing effort. During the quarter, we turned to television in 12 spot markets with positive impact on both traffic and sales.

We continue to experience growth in our So Connected e-mail club, with now having approximately 2.3 million members and we currently have approximately 700,000 fans on Facebook. Growth of these subscriber bases provide a great incentive distribution platform for us that lower our costs with better than average redemption rates.

We made good progress with our analytical partners in refining our marketing and business strategies, including more detailed analytics to help track and report on all our testing program. We have -- now we have data and tools to help us evaluate the effectiveness of our TV placements and to identify the key factors that are affecting results. We're also analyzing all of our historical couponing and the spending associated with that to gain additional information on the incremental impact of couponing on net sales and margin to guide future strategies. Analyses such as these will help to refine and guide future marketing strategies and ensure our marketing dollars are being directed to the programs which have the highest impact on sales and traffic in order to grow our awareness and relevance among our target consumer.

Now Kimberly will provide you with more information on sales teams and our guest satisfaction.

Kimberly M. Grant

Thank you, Dan. We are committed to operational excellence as reflected in our operating mission, which is to make guests happy by consistently delivering a high-quality casual dining experience with compelling value. To accomplish this, our teams are focused on delivering what we call the Ultimate $25 Dinner Experience for $15. The improvements we have made over the last 2 years have enabled us to significantly improve the guest experience to become among the best in bar and grill. Now while we are proud of this progress, we remain focused on operating at an even higher and more importantly, a more consistent level.

Last quarter we laid out our key operating goals for fiscal 2012, which are to aggressively attract and hire the best talent in the hospitality industry, to attract and retain the most sincere and the sharpest looking service staff in all of casual dining and to serve the hottest, freshest food in all of casual dining. So simply stated we want to hire the best, retain the best and serve the best foods in all casual dining.

Now we have made numerous improvements operationally as a company, which are reflected in our improving external brand tracker scores that I will discuss shortly. But we know that we must continue to improve in all aspects of the guest experience in order to earn market share. Now from a team perspective, we have upgraded the talent and the depth of our management and our lead teams by first focusing on improving the quality of our hires and the quality of our training programs.

During the quarter we hired the majority of our managers, almost 70%, from external sources with a specific focus on hiring talent from high-quality casual dining competitors and not the bar and grill segment. We have also improved the staffing levels of our restaurants by successfully reducing the number of open management positions and we began fiscal 2012 at the best staffing level in the concept's history.

Now as mentioned on previous calls, we have been successful in achieving a consistently low hourly turnover level for our industry just under 100%. However, over the next year, we are challenging ourselves to dramatically increase our short-term retention rate within the first 90 or 120 days. In support of this initiative, we have invested in hands-on food training for all of our service teams, we are revamping our various team member benefit programs, we are implementing a scheduling tool that leverages social media and texting platform and offering incentives to our managers and trainers for achieving our retention goal. We are focused on being a great place to work for our teams and are excited about how this increased retention can support our goal of continuing to improve our overall service-levels.

Now we continue to benchmark our efforts through our external brand tracker scores and our internal guest satisfaction scores. From an external research standpoint, the improvements in scores as compared to the spring of 2011 were tremendous, with our largest improvement coming from the category of consistency and experience across locations which was up 9 points overall. We also saw a significant improvement in the atmosphere of the restaurant, likely to revisit, the quality of the service and the friendliness of our staff. Additionally and very importantly, we did not experience a decrease in any key service experience metric.

Now our internal top 2 box scores for overall experience were almost 93% for the quarter, with approximately 73% of our guests currently rating their overall experience of 5 on a 1 to 5 scale. This is a record high level for us. The fact that almost 3 out of 4 guests rate their overall experience a 5 is a strong testament to the great restaurant teams we have in the field who executed a very high level day in and day out.

Additionally our number of unacceptable experiences, which we call our 1s and 2s, continue to remain at very low levels. These guest satisfaction scores give us confidence that as we are able to drive new guests to the Ruby Tuesday brand through the various marketing plans that Dan outlined earlier, we have a strong likelihood of repeat visits given the level of satisfaction our current guests are experiencing.

By the end of the second quarter, more than half of 100 of our franchise partnership acquisition units that we acquired in fiscal 2012 will have been completely remodeled, which we believe should strengthen the brand and positively impact sales for these specific restaurants going forward. We continue to see both improved profitability and improving Guest Satisfaction Scores at these restaurants, which have increased approximately 4 points since we acquired them. We continue to focus on sales building initiatives and margin improvement programs at these restaurants in order to grow EBITDA going forward.

Quickly I'd like to provide some additional insight into the impact of Hurricane Irene on our operations. During the first quarter, we lost an equivalent of 210 operating days due to the closures, early closures and mandated curfews in addition to waste and the cost inefficiencies you experience both on a labor and food cost front when you endure what these weather events. We have unfortunately recently faced multiple weather-related events but as a result, we are becoming quite efficient at dealing with these and minimizing the associated losses to a great degree.

Now there is little impact to our second quarter results since the majority of these restaurants were back up and operating at the start of the second quarter.

Now I'll turn things back over to Sandy for a quick wrap-up.

Samuel E. Beall

Thank you, Kimberly. The overall economic environment has improved since last quarter, and we believe this will result in a continued aggressive competitive promotional environment this year and maybe many, many years. While we expect the second quarter to be difficult, we will adjust our strategy so we can operate more successfully in this environment. We will continue to focus on our primary goals for fiscal '12, increasing same-store sales, lowering costs, enhancing our margins and maximizing our strong free cash flow, which all contribute to our strong free cash flow yield in relation to our competitors.

We have a good strategy in place focused on preserving capital while investing in our concept conversion test in Lime growth plans, providing more value for our guests to grow our top line, being cost-conscious without degrading the brand and utilizing our excess free cash flow to buy back stock [indiscernible] over the next couple of years. We feel good about our plans and we believe we can successfully execute against them to create good food, good value in shareholders and look forward to getting past second quarter where we're overlapping positive 4% sales and getting onto third where there's a chance going positive again.

With that, I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Jeff Omohundro with Wells Fargo.

Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

My question relates to the complimentary Garden Bar and cheddar biscuit test. I was wondering if you could elaborate a bit more about where you are in the test, when you might make your decision to roll it system wide or not. And secondly, how you might be managing margin impact, perhaps your price setting on the balance of the menu? Those are my first 2 questions.

Samuel E. Beall

It isn't tested in 200 stores. We haven't decided yet. I think it will be rolled out -- assume we roll out further, it will be rolled out either in the spring or spread out over 3 different quarters just to absorb it easier. As far as the cost impact that you're talking about, Jeff, on that test menu we took an average of about $0.40 to $0.50 price increase, we got to make sure we're getting that, and that plus you get the salad bar and 1 side or you get 2 sides as you used to. So the check increase as well as the cost of the other side offsets the cost of salad bar. So we're hoping -- that's why we're testing. We've got to get a few more months on it to fine-tune the check and all. We're hoping it's 100% offset to roll it faster.

Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

I know it's early, but any order of magnitude, traffic impact on TV versus non-TV versus rest of the system?

Samuel E. Beall

Definitely. The best ad we have is a combination of that $8.99 free garden bar, free fresh-baked biscuits combined with $6.99 salad. We had good impact, good impact. We also had a lunch ad which gave us pretty darn good impact, just lunch only $5.99. So we're learning. The main thing is we've got a great team in place, we are learning, we are taking it slow so we don't blow it. And I hope in third quarter we have good sales, we turn the corner, we overlap the easier times and we'll have more effective marketing in place that can work effectively in this next 5 years of sluggish environment.

Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

And as a follow up, just one quick question. The $10 million in deferred CapEx, what sort of items would that relate to?

Samuel E. Beall

It was a $5 million CapEx project for POS, if I remember, that we're just referring to next year. It was what community tables, some table improvements we wanted to do. What else, Margie?

Marguerite N. Duffy

Bathroom remodels.

Samuel E. Beall

Just moderate. Just million here, million there kind of stuff, which can all wait. Nice to have, not have to have, I guess that's how I'd say it.

Operator

Our next question is from Keith Siegner with Credit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

Just one question to start off with which is, the potential to monetize some of the real estate and -- you're probably not surprised I'm asking this, but with that potential, I mean this has been a topic now for 6 months. Are you just now investigating this? Do have some progress, like what...

Samuel E. Beall

No, we wouldn't be talking about if we hadn't investigated it. We've already done our homework and we discussed it with the Board and we think it's a great thing to do if we can get the right rates.

Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

How long does it take to find out what that might look like?

Daniel P. Dillon

Greg, if you wanted to do a sale leaseback and we started today, it'd take us what? We were talking about doing it.

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Close in less than 60 days.

Keith Siegner - Crédit Suisse AG, Research Division

One other question, this is kind of higher level. So there's a lot of talk about the box scores being up, value being up, quality being up. I mean the consumer is definitely winning from this. But at the same time, sales are down and profits are down. And I guess I wonder, like in this environment with everybody going after quality, everybody going after value, everybody basically saying their own scores are up, like is the environment right now just making it too difficult to actually take that profit and translate it to the bottom line? And I guess as you think to like the comp outlooks for the second half, how essential are cost cuts to getting to the new guidance?

Daniel P. Dillon

To the new guidance? Well, no cost cuts are anticipated in the new guidance at all. Now we may or may not make the guidance, of course, but none of our cost savings we talked about in our study are in that. We would like to have those costs, hopefully we'll get some this year. But for sure all by next fiscal year, and we'd hope to use some of those for additional marketing dollars to be more competitive in this environment, because -- and then also bring some home to bottom line, which we need to do and we realize that. You commented on one thing. In this environment, it is all about value right now. But the key thing is once they come in the store, are they excited? Did they leave happy? Did they see a difference in your concept versus another concept? And I think once we start communicating to, because you have to in this environment, once you start communicating to the general public through TV more, you can get people then to see the new Ruby Tuesday. And that's what -- I mean in this environment, were going to have to do that to drive same-store sales because of the heavyweights. Like I think even Red Lobster this summer had just a huge, huge increase in ad expenditure and other big brands like that are doing the same. To be competitive and take market share, we have to. I think we're prepared for them, we're taking our time to get ready for it. Dan, you want to add anything to that?

Daniel P. Dillon

No. The real optimistic point from our perspective is the difference between the experience scores and perception scores. And if the perception scores are lower than experience scores, then you could just get trial then you can win. And we believe very strongly that our challenge is changing people's perceptions and driving trial to brand. Because once they're in the restaurant, they're going to have an experience that they won't be able to forget.

Samuel E. Beall

We don't want to risk earnings and bottom line, so we are doing it slowly. Been testing, building and that will continue for the back half of this year and increase on into next fiscal year. What's next?

Operator

Our next question is from Brad Ludington with KeyBanc.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Sandy, I wanted to follow up -- not to beat this point down too much, but I wanted to follow up on the monetizing of the property. If you did get the right rates and got this done, is there any idea what kind of range you're looking at? I mean $60 million, $80 million somewhere in there, and if that was done soon enough, I would assume that changes guidance at least on the average shares outstanding for the year. Is that correct?

Samuel E. Beall

Yes, it would change. It could change because it depends on how you use it. If you bought shares back sooner versus later or paid off debt, whatever. I think what you trying to do on this is you try to do it in tranches, kind of. So you take a bite of it the first time, make sure the process works and you have it set up if you want to raise more. And so I'm not sure what the amount would be, but probably somewhere in that lower end of what you said.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

And then on the dunnhumby loyalty program, should we still expect for that to be rolled out by end of the second quarter?

Samuel E. Beall

End of second, beginning of third is what we're planning right now.

Daniel P. Dillon

Not rolled out, but done in test. It will be in pilot for 6 months and then -- or more. So it could be beginning next year, midway through next year, whatever, if it pays out.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Okay, and do you know roughly how many stores that will be in -- that pilot test will be in?

Daniel P. Dillon

I don't think we've nailed it down. It will be more than -- 30 to 50.

Operator

[Operator Instructions] And our next question is from the line of Joe Buckley with Bank of America.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

In the new revised CapEx numbers, it sounds like some of the cuts come out of what would be considered maintenance CapEx. So is there a level of maintenance CapEx in that new range?

Samuel E. Beall

Well, your maintenance CapEx is always, [indiscernible], Joe. We didn't cut that. It's like normal $15-plus million. All we did was take out -- we took out some remodellings. We took out a technology project, a $5 million technology project, about a $3.5 million kind of new table project, not major stuff. Again, like to haves, not have to haves, but nothing affecting maintenance of the restaurants. Restaurants are in good shape.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Tables and bathrooms aren't considered maintenance CapEx?

Samuel E. Beall

I consider bathrooms remodeled. If there's a maintenance item, of course we're maintaining the bathrooms and the tables. One of the table projects we'd like to do; nice to have, not a have to have, is revamping the -- putting taller tables in all throughout the bars, not a have to have at all. And we'll do that; we've done that in some, we'll do that more next year.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. I mean on the, of course I guess on the potential monetizing of the real estate, aren't you in effect leveraging wealth to buy back stock again?

Samuel E. Beall

No, I think you read our press release, Joe. It said -- actually I think it strengthens the balance sheet in some very strange financial times. If we feel good about ourselves, we may use it to buy back stock. We may use it to buy back stock, we may use it to pay off high interest debt. We've got a bunch of debt at 8% from the franchise partner acquisition, the lease is at less than that. And so I guess we have financial flexibility, you'd call it.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

So the high cost debt -- you advertised doing a high cost debt that you could replace, would sell leaseback debt that is less expensive? Would that be the game plan?

Samuel E. Beall

Well, that and/or buy back some shares. If we get it done in third or fourth quarter, then in fourth quarter or first quarter or whatever, we settle out how to use it. I think that what's popular right now, I think since we're selling at less than what our real estate value is, it'd be nice to legitimize or whatever what we sell some real estate for. Whether it's right or not, that what seems to be popular and it does give us some financial flexibility and whether it's -- and then we can either use it for repurchase or debt payment or let it sit on the revolver basically. We'll figure that after we get it done and see what kind of rates we can get.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Is it safe to assume this is the input from the 2 new Board members, your former activist shareholders?

Samuel E. Beall

Yes, I mean Steve does like that one, but the rest of the Board is not opposed to that either. Because again, I think when the world's as crazy as it is, having the strongest balance sheet you can have is good. It allows you to do that and then you can decide whether to purchase shares or how to use it.

Daniel P. Dillon

Joe, we look at sale leaseback every 15 or 18 months. And it's time to look at it again. There's a confluence of events that make it seem like an attractive option for us.

Samuel E. Beall

Sell leaseback rates, the way we're doing it, they're not going to get any cheaper than this ever. And when you lock in 15-year debt at less than 7% we hope, that's not the worst thing. I want it to be less than 7%. He wants it about 7%, 7.25%. But when you do that, that's not a bad option considering the times.

Operator

The next question is from the line of Robert Derrington with Morgan Keegan.

Robert M. Derrington - Morgan Keegan & Company, Inc., Research Division

Sandy, by your own admission, you mentioned that it's tough to compete with all the volume of advertising noise that's in the marketplace, whether it's some of your considerably bigger competitors. Do you -- I'm just curious, have you taken a different view of the shift in your promotional spend? Previously, there's a lot of couponing and you've tried to wean your business away from that. Given how loud the advertising is from competition, can you effectively compete and communicate the changes that you're making to the brand?

Samuel E. Beall

I think you can. If you take Outback, it's basically the same size system that Ruby's is. I think they effectively compete with that. And I think their ad -- I remember a couple of years ago, they only spent about $60 million in TV. I think they've ramped it up a little bit since then. But you can effectively compete at that. They have. So [indiscernible] and Olive Garden, but you can compete. I say that only because they do.

Operator

And our final question comes from the line of Chris O'Cull with SunTrust.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Just as a follow-up, Sandy, Outback is obviously competing. It's Texas Roadhouse who doesn't advertise and...

Samuel E. Beall

They don't, but you know, Chris, how much they spend on their local store, marketing managers in every store, all their promotion, et cetera. Because you and I talked about the calculation. I don't know what theirs is, but we all spend. We spend in different ways, right?

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

That's fair. So, okay, their total investment is quite a bit. Just on terms of advertising, did you quantify the -- is it still $10 million to $12 million shift from coupons to TV advertising?

Samuel E. Beall

What are you talking about? For the year or for the quarter?

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Well for the year and is that primarily in the back of the year?

Samuel E. Beall

We are shifting dollars. Not going to quantify it yet, but we have shifts of dollars from promotion. Actually we started shifting dollars in October. Modest shifts, but we're shifting downward with the plan of getting to where we'd like to have it at by the beginning of next fiscal year as we're shifting down or ramping up television.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Is the total advertising investment, including coupons plus TV and any other medium, is that staying relatively unchanged for the year, though?

Samuel E. Beall

As I tried to say earlier, we need to increase that and we need to find some cost savings to pay for that and that's why we're aggressively going after cost savings right now with another consulting group. We have some good ideas. Because we do want to spend more on overall marketing. And as you and I have talked, we do under market compared to our competition when you roll it all in and in the next -- in the market we're in for the next 5 to 10 years, you're going to have to compete or you're going to lose market share. We have a great brand. The brand scores are great. You go in our restaurants, you know they're good. But we haven't told any of the nonusers about it now for about 5 years. And we're going to do that.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Have you all looked at testing in on 1 or 2 markets of significant increase in marketing just to see what impact that could have in one market?

Samuel E. Beall

We're in about 100 stores right now. We have been in those same 100 stores with different ad messages for about 3 quarters now in different weight levels, yes. Different messages, different weight levels and the most effective one is the one we just finished here for the last 4 weeks, and we start back up here in another week and a half, another 10 days in the same markets. And so we're testing and learning. We're not jumping into it. We're not going to throw money away on it. We'll do it methodically.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

And then one last question, Margie or Greg, is there any restrictions in the current credit agreement in terms of selling property?

Samuel E. Beall

$150 million.

Christopher T. O'Cull - SunTrust Robinson Humphrey, Inc., Research Division

$150 million is the basket?

Samuel E. Beall

Yes, that's the cap.

All right, I want to thank you all for joining us today. Have a great week. Bye.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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