McCormick & Schmick's Seafood Restaurants Q3 2007 Earnings Call Transcript

McCormick & Schmick's Seafood Restaurants, Inc. (MSSR)

Q3 2007 Earnings Call

November 7, 2007 5:00 pm ET

Executives

Doug Schmick - Chairman and CEO

Manny Hilario - CFO

Analysts

Larry Miller - RBC Capital Markets

Nicole Miller - Piper Jaffray

Matt Difrisco - Thomas Weisel Partners

Andy Barish - Banc of America Securities

Jeff Omohundro - Wachovia

Chris O'Cull - SunTrust

Michael Smith - Oppenheimer

Dean Haskell - Morgan Joseph

Amy Vinson - Avondale Partners

Keith Curtis - Brant Point Capital

Dan Winchell - Ad Capital

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the McCormick & Schmick's Seafood Restaurants Incorporated Third Quarter 2007 Earnings Call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for questions. I would like to remind everyone this conference is being recorded.

And I would now like to turn call over to Mr. Manny Hilario, Chief Financial Officer of McCormick & Schmick's Seafood Restaurants Incorporated. Please go ahead, sir.

Manny Hilario

Thank you, Allen. Good afternoon everyone. By now, everyone should have access to our third quarter 2007 earnings press release. It may also be found on our website at www.mccormickandschmicks.com, under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore, you should not put undue reliance on them.

We refer all of you to our recent filings with the SEC for more detailed discussions of the risks that could impact our future operating results and financial condition.

With that, I'd like to turn the call over to Doug Schmick, Chairman and Chief Executive Officer of McCormick & Schmick's.

Doug Schmick

Thank you, Manny. Good afternoon, everybody. We intend to cover several topics during this call. I'm going to start with a brief review of the third quarter, and touch upon some of the recent initiatives we have put in place.

Manny will then go through our financial results, provide guidance for the fiscal year '07, as well as our development outlook for '08. We'll then be happy to answer any questions you may have.

For the third quarter, we generated revenues of $88.1 million, which is 16.5% higher than a year ago period, and net income of $2 million, or $0.14 per diluted share.

Comparable restaurant sales decreased 0.01%. We ended the third quarter with 77 restaurants having opened in Schaumburg and Oak Brook--both suburbs of Chicago--Dayton and Cleveland, Ohio, as well as Austin, Texas.

As of to date, we have also opened a new Boathouse restaurant in Port Moody, Vancouver, British Columbia, and a McCormick & Schmick's Restaurants in Annapolis, Maryland.

Third quarter was a challenging quarter for us and for those who have been following the industry, it comes as no surprise that the business environment for restaurants, as a whole, was very challenging.

Based on our analysis, the middle income consumer has pulled back their discretionary spending, due to higher gas prices, than the housing front. While this has certainly hurt the casual dining segment most, it has also negatively impacted upscale and fine dining concepts, like McCormick & Schmick's.

Even though we're very strongly oriented to the affluent post-war baby boomers, the business traveler, and so on, we do have approximately 10% to 15% of our customer base in, what we call, the “aspirational” category.

Over the last 18 months or so, we have relatively outperformed the industry, including the more upscaled chains, effectively navigating our earnings and costs through this rough patch, by focusing on our daily printed menus, as well as offering a wider range of premier high-end products for the business person and the post-war baby boomers.

In the first quarter and second quarters of this year, our promotions included; fresh crab, halibut--as well as an array of fresh salmon--and we also implemented, as you are aware, the history of the American cocktail program, which is now the mainstay of our regular bar program. These efforts proved to be very successful, and have allowed us to up sell our core high-end customers.

Both July and August were reasonably solid months. We experienced a significant decrease in traffic in the mid weeks of September, and given the suddenness of this decrease, it was difficult to appropriately scale back on labor cost. While we voice spread ourselves on being responsive to the needs of our guests having experience numerous economic cycles over the past 35 years.

We've also appreciated the importance of tactically putting initiatives in place to address specific conditions on the ground. In other words, we’ve always tried to evolve the concept while still remaining true to what McCormick & Schmick's is all about, essentially not losing our assets.

From our vantage point we believe that even upscale chains are becoming more and more marginalized, with a lot of our competitors beginning to look and feel as if they want another. This places additional responsibilities on us to explain why we’re are distinct, namely emphasis on fresh sea food and our unique menu format.

As you are aware, we print our menus twice a day at each location, taking advantage of product availability and customer preferences. We’re also able to adjust to commodity pressure and the pricing volatility inherent in our industry. Even in our third quarter we were able to keep our costs of sales ratio stable year-after-year despite an unfavorable cost environment.

Going into the fourth quarter, we believe that one of the strengths in the market is the business traveler in higher-end consumer. So, we're refocusing our efforts and marketing on this segment. For example, we're spending a large portion of our advertising budget on national publications, such as USA Today, as well as online business journal advertising and in-flight magazine.

On the right side of our menu we've been using a box section to focus on premier higher-end products. Our core demographics are certainly well, and participants in our up selling for premium products in the first half of the year, with our Dungeness crab and salmon promotions.

We're revisiting this strategy in the fourth quarter. Specifically, we're offering unique reasonable products and presentation, in an attempt to go after that same higher-end customer that's willing to trade up in terms of chip.

At the same time, looking in our demographic and geographic distribution, we estimate that roughly three quarters of our restaurants are in, what we now consider, price sensitive market.

And we are, therefore, using the flexibility of our menu to present a very strong price value proposition at these locations. Underneath the fresh sheet listing we have a new section entitled, 'light on trades in sandwiches', with price points between 795 and 1395. So, just as we are making sure that there are several first three premier products on the menu, we are also balancing those by maintaining lower price points preserve the opportunity for this aspirational consumer. Though the sales mix of this portion of our new menu is very modest, somewhere in the 2%-3%, it definitely created a strong value proposition it's being very well received.

The other area that really differentiates us, besides our focus on for our Seafood, is our commitment to a premier bar program. It makes up approximately 30% of our sales, which is quiet unique in the white-tablecloth business.

Earlier this year we introduced our history of the American cocktail initiative. More recently, we've also rolled out an enhanced wine program. We are now offering a graph of two different wine sizes, 5 ounce and 8 ounce, which obviously gives us two opportunities to upsize the check. We're also placing greater emphasis on our $95 food program during non-peak hours disperse U.S. traffic.

Again, we're trying to sell up our more of flowing guest we are also continuing to offer great value to the aspirational consumer. With regards to our lunch program, while we've been doing this for many years, we're highlighting and re-emphasizing our 45 minute lunch guarantee via direct marketing. The lunch reminds people that they can come in, sit down and have a great meal at comfortable setting all within a short time span.

Understanding that we need to be broaden in our field in a tighter spending environment, early in the fourth quarter, we successfully completed the rollout of our high quality steak program, something that we have touched upon in our last conference call.

This is also a tactical move to broaden our guest appeal, help eliminate the (inaudible) and optimistically generate a higher average check. This program expand our steak mix from two to three items to a broader offering, which now includes a six and a nine ounce (inaudible) specialty cuts and composed presentation.

This also has the potential to enable us to sell more red wines and there by generate higher wine sales. Enhancing our steak offering an opportunity for us to improve on which what we are already doing while remaining true to our seafood centric concept. Therefore, in conjunction with the steak program we are highlighting various combinations of fresh seafoods in quality steak that work well together.

Last week, we've started advertising a 29.95 steak and seafood combination in USA today. And this item is basically a six ounce filet with a choice of your as stuff shrimp, salmon or crab leg, accompanied by our signature (inaudible) dessert.

This is a great opportunity for us to up sales. The initial response to this program, it has been very positive. We're also refocusing some of our marketing efforts. Since the end of the year we have shifted a certain amount of our spending towards national publications to reach the business traveler head-on, since we believe that this continues to be a strong sector of the economy.

As I just mentioned, we're running ads in USA Today, which is available in firstly every hotel in the country. In addition, we're directing our local marketing efforts at Cottiers programs, and working with hotels to drive more awareness for the McCormick & Schmick's brand.

We're also doing much more with Public Relations, because getting third party endorsements of our product and being seen by the general public as the expert on fresh seafood, is an important differentiation of our brand.

In October, we aggressively promoted National Seafood Mart and, in addition, deemphasizing the well-known benefits of eating seafood. Featuring healthier items, we also made a donation to the American Heart Association.

We're also actively utilizing the internet to directly market to our guest and provide them with special offers to bring them in to our restaurants, more often.

Our Loyalty program now has over 25,000 registered members, which is tracking well above our expectations, and has given us a very nice library of loyal guests. We send our rewards for new restaurants opening to double points, during different times of the month, so we keep them informed in terms of what happened to give them an additional tenure to join us again.

During the holiday season, we will be highlighting our strength to host banquet and business events. Banquet business has historically represented about 14% of our total sales in the fourth quarter. And so far our bookings are up compared to last year.

We know there are a lot of opportunities to expand this highly profitable business and we will continue to communicate our banquet capabilities and periodicals such as Crain. We will also utilize an email blast and other print ads in our messages. We believe the strong corporate profits have equated to an opportunity to drive our large T&E budget.

Finally, we’re making an even strong effort on promoting gift cards. Last year, we moved approximately $3 million in gift cards through the Costco system, while this year we’ve up that to a $10 million commitment, a very sizeable increase. We began placing these gift cards in September compared to October of last year to capture the early bird gift purchasers.

In addition to Costco we’re also extending the gift card program by rolling them on to 2,100 grocery stores, for people trying to last minute gift purchases during the holiday season, supermarket is really a very ideal placement. But besides these external programs we’re also internally driving a lot of our incentive programs in the fourth quarter around gift card sales throughout our restaurants.

As you can see, we’re clearly focused on doing what’s necessary to manage through these challenging times, while making a major commitment not to confuse our customer. The various initiatives that I have discussed are in fact a reinvigoration of core concepts fundamental to McCormick & Schmick's, such as maintaining broad customer based appeal focused on fresh regional flavor and exciting distinctive bar program.

This is a strong time to time-tested and resilient brand, and one that can arise to the challenges. With that, I would like to turn the call over to Manny to go over the financial results and update our guidance.

Manny Hilario

Thank you, Doug. For the third quarter ended September 29th, 2007, total revenues increased 16.5% to $88.1 million, from $75.6 million in the third quarter of 2006.

As Doug mentioned, comparable restaurant sales decreased 0.1% quarter-over-quarter, which reflected an approximate 5% traffic decrease, offset by primarily pricing. Please note that the restaurants including the comparable restaurant base in the first full quarter following its 18 month of operation.

Let's now review our restaurant operating costs and expense as well as profitability for the third quarter of 2007.

Food and Beverage costs were $25.7 million in the third quarter of 2007,or 29.1% of revenues, compared to $22.1 million, or 29.2% of revenues in the third quarter of 2006. Once again, we were able to manage costs of goods sold within a narrow range primarily because of our twice-daily print menu.

We did benefit from several successful regional fish promotions, which had higher price points than our typical offerings and contribute positives to the mix.

Labor costs were $28.4 million in the third quarter of 2007 or 32.2% of revenues, compared to $23.8 million ,or 31.5% of revenues in the third quarter of 2006. The increase in labor costs as a percentage of revenues is primarily due to the service of the traffic decrease in the month of September, which made it difficult to scale back labor costs.

Operating costs were $13.9 million for the third quarter of 2007 or 15.8% of revenues compared to $11.8 million or 15.6% of revenues in the third quarter of 2006. Operating costs as a percentage of revenues increased primarily due to an increase in advertising and marketing costs, credit card discount fees, as well as repair and maintenance expenses.

Occupancy costs were $8 million in the third quarter of 2007 or 9.1% of revenues compared to $7 million, or 9.2% of revenues in the third quarter of 2006. Total restaurant operating costs was $75.9 million in the third quarter of 2007, or 86.2% of revenues compared to $64.7 million or 85.5% of revenues in the third quarter of 2006.

General and administrative expenses were $4.7 million in the third quarter 2007 or 5.3% of revenues, compared to $4 million or 5.3% of revenues in the third quarter of 2006.

Restaurant pre-opening costs were $2.1 million in the third quarter of 2007, compared to $0.3 million in the third quarter of 2006. We opened five restaurants in the third quarter of 2007, in Schaumburg and Oak Brook, Illinois, respectively; Dayton and Cleveland, Ohio, Respectively, and Austin, Texas compared to one opening in the third quarter of 2006.

We also made preparations for the five restaurants we intend to open in the fourth quarter of 2007, of which two have opened so far. We're currently targeting approximately $400,000 of pre-opening expense per restaurant, which is higher than our previous estimate of 350, largely due to higher travel and lodging costs for our training teams.

Depreciation and amortization expense was $3 million in the third quarter of 2007, or 3.3% of revenues, and $2.7 million, or 3.7% of revenues in the third quarter of 2006. The decrease in depreciation and amortization as a percentage of revenues was primarily due to assets that became fully depreciated in the third quarter of 2006.

Operating income was $2.4 million in the third quarter 2007, or 2.8% of revenues, compared to operating income of $3.9 million, or 5.1% of revenues in the third quarter of 2006. Interest income net of interest expense was $70,000 in the third quarter of 2007, compared to $69,000 in the third quarter of 2006.

As of September 29, 2007, we had an outstanding balance of $9 million and our $50 million credit facility. We also had standby letters of credit totaling $3 million, resulting in $30 million available borrowing under the facility.

For the third quarter of 2007, we generated $2.5 million in income before income taxes, compared to $4 million in the third quarter of 2006. We had $0.5 million of tax expense in the third quarter 2007, reflecting an effective tax rate of 28.8%, compared to the effect of tax rate of 31.8% in the same period last year. Primarily, the estimated tax impact of share based compensation and (inaudible) tax credits.

Net income was $2 million, or $0.14 per diluted share, compared to $2.7 million, or $0.19 per diluted share last year.

Our weighted average outstanding diluted share count for the third quarter 2007 was approximately 14.8 million, which reflects 0.3 million more shares than in the third quarter of 2006.

Internal financial guidance: we expect fourth quarter 2007 revenues to be between $100 million and $102 million on the comparable restaurant sales increased between 1%-2%. We also expect diluted earnings per share to be between $0.31 and $0.34. We plan to open the total five restaurants in the fourth quarter of 2007 of which The Boathouse restaurant in Port Moody, Vancouver B.C. and the McCormick & Schmick's Restaurant in Annapolis, Maryland have opened. The remaining two locations the company intends to open in the fourth quarter are in Virginia Beach, Virginia; Skokie, Illinois; and Pittsburgh, Pennsylvania.

We expect fiscal year 2007 revenues to be between $359 million-$361 million and a comparable restaurant sales increase between 1.3%-1.8%. Diluted earnings per share are expected to be between $0.97 and $1. The guidance provided is inclusive of The Boathouse Restaurant acquisition, which was completed on March 30, 2007. We intend to open a total of 11 domestic McCormick & Schmick's Seafood Restaurants and one The Boathouse Restaurant in fiscal 2007, of which nine of these locations have opened as of today. In fiscal year 2008, the company intends to open 12 domestic McCormick & Schmick's Restaurants.

We are pleased to announce that we have engaged Bank of America Securities to arrange a larger senior credit facility of up to $150 million for the company. The proceeds of such facilities maybe used to finance optimistic acquisition, share repurchases, growth capital expenditures and general corporate purposes. We anticipate closing this facility before our 2007 fiscal year is over. This new facility will provide us with significantly more flexibility than our current facility of $50 million, which is appropriate given the growth of our company and our track record.

In fiscal 2008, while it will be too premature to offer the definitive earnings guidance, we do look to open the total of 12 McCormick & Schmick's Restaurants, of which half will be in existing markets. So far, I can tell you that we’ll opening Cherry Hill, New Jersey; Anaheim in California; Milwaukee in Wisconsin; Atlantic City, New Jersey; National Harbor, Maryland; Scottsdale, Arizona; Rosemont, Illinois and (Reilly), North Carolina, among others.

We do not intend to open up any The Boathouse Restaurants in 2008, given the high construction costs leading up to the winter Olympic Games in Vancouver, though we’ll visit the growth strategy for the Boathouse in 2009 timeframe. So the concluding fact of our fourth quarter concept--we now compare to the third quarter--which we find encouraging, and while we cannot say that we have fully regained our momentum, we think we’re addressing the challenges arising from the current environment head on.

We know that if we stay true to our core concept and continue to offer a great range of products we’ll emerge as a stronger and more firmable brand as a result. We thank for your continued interest in McCormick & Schmick's.

Allan, would you please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll take our first question from Larry Miller with RBC Capital Markets.

Larry Miller - RBC Capital Markets

Hey guys can you hear me?

Doug Schmick

Yes.

Larry Miller - RBC Capital Markets

I guess I am just trying to reconcile your fourth quarter guidance, it sounds like sales might have bounced back into that range of 1% to 2% which is historically where you guys have been able to manage through it several times yet pretty significant margin compression, can you help me understand what you are seeing and we are not?

Manny Hilario

Larry this is Manny. A couple of things about reconcile and that we were changing our guidance probably for 2 to 3 to 1 to 2 in the quarter which probably changes the earnings for that quarter by about $0.03 to $0.04 and we are also doing incremental marketing in national vehicles in the fourth quarter that's going to be about $0.02 earnings in the quarter and than we are also the pre-opening expenses have increased on a pro-rational basis. So that’s another penny, so trying to reconcile back to our previous guidance that's kind of what I would consider the direct selling items.

Larry Miller - RBC Capital Markets

Okay. So would that mean you need greater than 2%, 3% to hit kind of margin neutrality in go forward terms in '08?

Manny Hilario

Yeah. Probably about 2% plus.

Larry Miller - RBC Capital Markets

2% plus, okay. And then can you kind of talk about $150 million on credit facility. I don't recall that you were planning on buying that in the past and so when might you enter the market if you feel that it's obviously after this encloses?

Manny Hilario

Well. Obviously that requires a board resolution to do any kind of transaction like that, but more importantly I think the $150 million facility will give us some much more flexibility in terms of looking optimistic acquisitions and so forth out there but we certainly are looking for having that flexibility with us.

Doug Schmick

Larry, this is Doug. I will say that having done this with 35 years and have seen the economic cycles with those challenges often times there is an offset with opportunities. So we just want to make sure that we've got the flexibility to proceed with that and we are very pleased with Banc of America is about the confidence and enthusiasm to get behind us.

Larry Miller - RBC Capital Markets

Okay. But it sounds like, priority one is acquisition and two is the share repurchase or is that a characterization.

Doug Schmick

I think all options are open.

Larry Miller - RBC Capital Markets

Okay. Fair enough.

Manny Hilario

Accretive transactions for the shareholders what you look.

Doug Schmick

Yeah, I think the whole issue of accretion is what you really need to focus on and we're going to have to be very, very disciplined.

Larry Miller - RBC Capital Markets

Yeah. It looks like a [depurative] accretive at these levels, that's great. And then, just with the light on trade that you referenced, Doug. Is there a negative mix implication in that business?

Doug Schmick

Larry as I've said, I mentioned in my comments I do want you to know that I have used the strategy in the past in a couple of markets going back 10 or 12 years ago. And in fact this strategy continues to remain in place in a few of those restaurants in California. Basically what the results are you run about a 3% menu mixed, 2% to 3% of that. But it's really driving a very strong initial impression of value to the consumer and historically and what we're currently seeing it is not a meaningful offset to per person. I think it's so important for us as we go through this period of time to make sure that we're continuing to reach out to that middle income consumer and make sure that when we come out of this cycle we still have the broad base appeal that we had going into it.

Manny Hilario

As a matter of fact we opened Dayton, Ohio and Cleveland where the section on the menus and these reviews from the local media, interesting enough made a pretty strong point about how we normally had a great seafood concept and how it was very value oriented. And when we look at the product mix for those particular restaurants we're not selling any more than 3% out of that section. So we really created a very strong value proposition where the review that was looking at the operation.

Larry Miller - RBC Capital Markets

Okay. Thanks guys. I appreciate it.

Operator

And we'll go next to Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

Good afternoon.

Manny Hilario

Good afternoon, Nicole.

Nicole Miller - Piper Jaffray

I just want to hit at the same-store sales question again. I guess obviously that we are very pleased to see improving trends into the third quarter from the third. And I thought I had some of the same questions related. I am trying to understand a lower ticket purchase and what does that reinforce. The question is if you look at the rebound into the fourth quarter is it the return of the aspirational guests as a function of these items that are more appropriate for them or did you better target the higher end or travel expense check consumer and they rebounded?

Manny Hilario

No. This is Manny, Nicole. In regards to the booking to the fourth quarter is from a comp sales prospect we really think that's coming from the higher end, the banquets and the fees with related business. While we are getting protection for the longer terms, I think with the (inaudible) section. We still positioning the, by having that section in the menu and considering that this fourth quarter is a very heavy traffic quarter for the restaurant business. That will give a good marketing and will be a great inter restaurant marketing tool, to really promote the message of value, with all these people coming to the door. So really for the aspirational consumer we are not so much seeing recovery them in the fourth quarter, but are looking at this as a fourth quarter marketing opportunity till we remind the ones that come in that were a great value proposition as a restaurant.

Doug Schmick

Also I think it's note worthy, though we don’t have a tremendous amount of debt on we certainly have a lot of good initial response. The enhancement of the steak section, both in terms of range and number of offerings that we put in to that section as well as is very strong focus on the fresh seafood and steak combination and 29/95, which we're aggressively promoting. We are definitely seeing some strong results in terms of big uptick in terms of items coming out that section.

As you are aware that does a couple of things for us; number one it eliminates the zero board, but as also if you look at our menu, probably our average on tray medium, on tray prices is somewhere around $20, $21. This steak and sea food combination, is giving people to trade up with what is the narrow minds of value, but its trading up to the 29.95 range.

So, we should be seeing positive menu mix coming out of that as well. Also, we definitely know that this section along with what we're doing with the value section, which we just talk about in terms of banding as well as the wine program with a five and eight hours core, which gives more range. Ultimately we’ll continue to reach out to that middle income consumer.

Nicole Miller - Piper Jaffray

And actually speaking of the seasonality of the fourth quarter, can you give us some color on how banquet and sales are, I guess how the reservations are coming in so far and how that looks on a year-over-year?

Manny Hilario

Well, Nicole this is Manny. We just did that analysis a couple of hours ago. We have about 8 restaurants that make up a big chunk of that business. We’re seeing double-digit increase in terms of deposits, which is an indication of the number of bookings going to the restaurant. So, it's right now at the lead and its pretty strong.

Doug Schmick

With that said, we do feel and we felt for some time and again that end of the business will be very strong to the fourth quarter and what will be the ultimate determinant is making sure that core business continues to improve and move forward.

Nicole Miller - Piper Jaffray

And then just a couple of housekeeping things, is there anything in terms of like covenants or restrictions that prohibit you from using the line of credit for share buyback or are you open to use that facility as need, or as desired?

Manny Hilario

That facility does require us to get to pre-clearance from the bank if we had to do that, but that probably would not be a problem.

Nicole Miller - Piper Jaffray

Okay. And then for the 2008 development what would that look like by quarter and what might be a rush CapEx number for '08.

Doug Schmick

Well, we're going to do probably 2 to 3 in the first quarter, 2 to 3 in the second quarter. So it's a more well shaped development plan next year. In terms of CapEx for next year point about 1.5% revenues for maintenance CapEx and around $2.5 million to $2.6 million for new restaurant that we are opening next year.

Nicole Miller - Piper Jaffray

Thanks. That's all I have today.

Operator

And we go now to Matt Difrisco with Thomas Weisel Partners.

Matt Difrisco - Thomas Weisel Partners

Hi, Manny, can you just tell us which line item I guess got us to $0.14 from the initial expectation back in mid-September of $0.16. What was sort of the escalating cost or surprise and if all of them?

Manny Hilario

Primarily pre-opening, the costs of traveling and lodging for our trading teams, once we went back and cleaned that up it was much bigger than we expect as I would say that. The fact that the hotel occupancies were strong obviously helps on the revenue side of analysis as we offset that which was much higher to costs on a pre-opening side.

Matt Difrisco - Thomas Weisel Partners

So are we going to adjust then going forward for 400,000 or do you think…..

Manny Hilario

Yeah, right now for the fourth quarter I think our target as we were looking at here now, we're looking at 400,000 versus 350,000 per restaurant.

Matt Difrisco - Thomas Weisel Partners

Right, but is there some low hanging fruit there given that I think your, it seems like a lot of your restaurants are opening within a proximity of existing restaurants. That the travel shouldn't be that intense or is there a way that as we get a little bit more of a national player, there is some leverage in there. Is there some low hanging fruit that you produced?

Manny Hilario

Yeah. We think once we get up to, some of the for instance in the '08 openings when we go back and open Rosemont, Illinois now we have of 5 or 6 restaurants that we can actually draw from the strength theme. So from [allowing] food there is some opportunities, therefore related time trying to get some of that number back.

Doug Schmick

You know, Matt it is a very strong initiative with the development and training team to see if we can bring those cost down a bit. But, just inherently there has been some inflation on that line item and we are going to continue to try to bring it down and definitely take advantage of synergy in existing market.

Matt Difrisco - Thomas Weisel Partners

Okay. And then, what is your dollar amount and if you have planned for per-opening in the fourth quarter. I mean, I know you have a couple of -- you have incurred already a lot of the cost that we would have thought in the third quarter given that these stores open pretty closely beginning of the quarter. But then again you are also having an '08 plan that factors into there. Can you give us a dollar so we can adjust our other margins off of that?

Manny Hilario

Yeah. I'll just get back to that in a couple of seconds here.

Matt Difrisco - Thomas Weisel Partners

Okay. And then as far as the Boathouse acquisition and the leverage or the accretion that you had planed, one of the drivers to that was going to be G&A as that was a 2.5% of sales G&A. Is that still coming out or we're seeing an outs, I am wondering why G&A is not getting levered more in the current quarter plus going in the implied fourth quarter guidance as well. Is there a reinvestment of -- it looks like about half a million dollars are now for marketing incrementally?

Manny Hilario

There is some corporate marketing going through there as well as -- just in general, sales has been softer, you are not seeing that's going down as a percentage of revenues. Your earlier question about pre-opening costs for the fourth quarter, we are looking about $1.6 million of 1.6 to 1.7 on the field inline. Also understand that we are opening some of our early 2008 openings in the first couple of weeks of '08 year.

Matt Difrisco - Thomas Weisel Partners

Right. Okay. So, even if that goes through the 1.6 and your whole G&A flat, you are still looking for some the mid-point of that guidance is looking for greater margin compression than you experience in the current quarter. Though the comps improvement, I mean to get $0.32 you would have to have about 110 basis point of margin compression at the restaurant level.

Manny Hilario

Oh yeah, like I still we got about $0.02 on the marketing side. We have…

Matt Difrisco - Thomas Weisel Partners

Marketing would be G&A or would that be in a restaurant…

Manny Hilario

That will be out of the restaurant side for that part, and…

Matt Difrisco - Thomas Weisel Partners

Okay, I can go through this with you offline.

Manny Hilario

Okay.

Matt Difrisco - Thomas Weisel Partners

And then just looking, I guess if we were to look at all the cost pressures in the future investments to maintain some sales here and your earliest comp outlook, what do you think should be -- I know it seems like comfortable to give an earnings absolute number for '08 but what do you think is the correct way to look at '08 as far as up or down as EPS given your stock price performance side there is some pretty negative sentiment out there. I think it be helpful if you gave us a level of conviction as far as confidence in growing earnings in '08 versus the basis of $0.97 to $1?

Manny Hilario

I won't link it directly dollar per dollar, but I would say that the strength of the initiatives are very good. We have enough particularly with the steak program enhanced wine program, I think that the 29/95 steak conceive with program. These are strong initiatives that I think we will have a very strong payout for us next year.

Doug Schmick

Also I can say Matt, with a high degree of confidence that the flurry of new openings that we have had here in the second half of the year including the Boathouse in Vancouver and even early results coming out of the Minneapolis had given us high degree of confidence about the new unit response. As we go into the year and they start getting their labor and overhead cost under control which comes with maturity. I mean that's definitely an upside as well. I mean, we are certainly aware that this is the challenging economic environment but I got to tell you, I think the initiatives that we got in place and the renewed focus and reinvigorated focus we have on our core competencies I think we should be just fine.

Matt Difrisco - Thomas Weisel Partners

Okay, last question can you give just us a house keeping question here. Boathouse sales for the third quarter if you could aggregate that out for us.

Manny Hilario

Yeah I’ll get you that number Matt.

Matt Difrisco - Thomas Weisel Partners

No problem thanks.

Operator

And we’ll take our next question from Andy Barish with Banc of America Securities.

Andy Barish - Banc of America Securities

Hey guys, yeah I guess one question kind of the near-term margin stuff and then a little bit more of a forward-looking question. I mean was it -- I guess the de-leverage on the labor line was it just that it happened so quickly or is there a sort of a template you guys wok within given volume or comp changes that again got back to just not been able to adjust because it happens so fast. And then looking forward in 2008 part of the story has been kind of coming back in and back filling markets where you maybe only head one or two restaurants Chicago obviously in the last 18 months been a good example. Do you still expect to see the leverage in those kind of in fill markets over write any of the external characteristics out there in terms of margin pressures for the overall enterprise?

Manny Hilario

Andy this is Manny. I will answer the labor question, the labor question I guess two things one was on the scheduling because we weren’t anticipating sales for that dramatically change on us from a traffic perspective. We’re basically anticipating much higher usually heavily time of two to three weeks in our scheduling and so its really difficult to take labor out in the short-term for U.S. So it was really more of scheduling and not being able to react fast enough to as a number one factor. The second factor is when we look at the sales volumes between lets say 730, 830 in our business models. Those were still pretty good, the problem is that you didn't have enough volume to show the period. So you still have to have your labor schedule to deal with the high volumes coming in for your peak back in dinner hour. So it was a combination of both the scheduling as well as the effect of the shorter time period around really having business. I really want that to support the labor that we had on the floor.

Doug Schmick

I mean it was, it did come to us as a shock I mean that drop off and traffic was not anticipated and it was highly amplified in terms of what was happening to us on the weekends during that period of time. And again as Manny says when you are acquiring a full capacities for a couple of hours even on the soft by your Saturday night. The ability to pull out invariable labor becomes very difficult. And also being at the end of the quarter, you just don't have a chance to readdress your labor metrics like that we have in mid quarter such happens to us in Valentines Day and we were able to go back and restrategize some different approaches to build out that back but it caught us at the tail end.

Manny Hilario

Matt. This is for you, in terms of revenues for the Boathouse was $6.4 million in the quarter?

Operator

And we'll move now to Jeff Omohundro with Wachovia.

Jeff Omohundro - Wachovia

Well. Thanks. First just perhaps you could elaborate a little bit about some efforts you are doing around the banquet and private dining business in order to help drive the results you referenced in the fourth quarter?

Doug Schmick

Just we are briefly Jeff, we got several things going on. And number one this commitment that we've made with the Business Journal and Crain's has been very good for us. We are doing aggressive programs with them reminding those people which are very strong potential customers about our banquet facilities and so on.

We're also merchandising in-house as well. We have over the years have really developed this year, I think a higher level of proficiency at the unit level with our sales staff, which are doing a very, very good job.

I also believe and we've just seen extraordinary results coming out of our loyalty program in the rest of our email addressing that by marketing through those formats we are definitely getting response. So I think they are all combined to have given us a pretty good program.

Manny Hilario

In the loyalty I guests, we are sending email blasts, letting people know that they do get points for parties, so if you're somebody who coordinates parties for an office and so forth and you're part of that library, you're going to get a message there, to reminder you they can get some nice points in our program for it.

Jeff Omohundro - Wachovia

Okay. And then another question on this new credit facility. I guess I'm a little bit surprised by the size the facility that you're ranging. Maybe you elaborate a bit more. I mean are you contemplating significant acquisitions.

Now what is the need for a $150 million credit line, your company has $216 million market cap and a fairly modest unit growth outlook in '08. Maybe if you could give us a little more color on that? And also is there unused comment fees, is it causing you to have this much availability and so forth.

Manny Hilario

Well, in terms of the deal we're getting on our facility. The deal is very good financially for us, so the open line facility fees are not a lot. So it's an affordable facility for us. In terms of the size of the facility, it certainly gives us an opportunity to as an example of looking at those. As Doug mentioned earlier in times of, I guess challenging consumer environment you do get great opportunities out there and I think that having that level of facility available to us give us flexibility to a concerns very interesting, a little bit more medium size type of targets. So it's just a lot of flexibility that gives in the shorter term here.

Jeff Omohundro - Wachovia

How would you prioritize your interest in M&A versus significant share repurchase?

Manny Hilario

Well, accretion obviously is the number one screen and so obviously we are actively, working to make some more accretive sense to us.

Jeff Omohundro - Wachovia

Very good, thanks.

Operator

And now we'll move now to Chris O'Cull with SunTrust.

Chris O'Cull - SunTrust

Yeah, good afternoon guys.

Manny Hilario

Hello Chris.

Chris O'Cull - SunTrust

Just a follow up question on the credit facility, Manny would you provide us with the financial covenants or at least the one that has tied us with amended facility?

Manny Hilario

I could, I don’t have this term sheet here in front of me, but I guess I could do that.

Chris O'Cull - SunTrust

But will the covenant, will it allow you to get to the capacity or are you restricted?

Manny Hilario

I think the covenants would allow us to get close to the capacity.

Chris O'Cull - SunTrust

Okay and then are there baskets or is there amount for the baskets regarding acquisition and share repurchases in the negative covenants?

Manny Hilario

No.

Chris O'Cull - SunTrust

Okay, meaning there hasn’t been anything carved out for those; you have to go back to the banks?

Manny Hilario

That’s correct.

Chris O'Cull - SunTrust

Okay and then to follow up Doug with you regarding some of the banquet reservations comments, about the year-over-year increases. Are you far enough in to the season to know whether this is a good indication for banquet bookings performance?

Doug Schmick

I think it’s a little early, but it is a meaningful indication of and we as Manny had alluded to we traced that by reservation deposits and about 16% of our stores, do actively go after deposits and they tend to be the leading indicator. As to what that whole environment is going to be. So, we're basing our optimism on is the preliminary deposit of check over last year. And I also think that, just commonsense would tell me that, the way in which we’ve seen the premier higher end customer responding to our overall program, would lead me to believe that, they're going to have an equal response to banquet and entertaining during the holidays. So, that’s what gives me optimism regarding the banquet side of the business.

Chris O'Cull - SunTrust

Okay. And then, lastly Manny, was there a reversal of the bonus accrual during the quarter?

Manny Hilario

No reversals during the quarter.

Chris O'Cull - SunTrust

Okay. Great, thanks guys.

Operator

And we'll move now to Mike Smith, Oppenheimer.

Michael Smith - Oppenheimer

Could you tell me how the double pour in the wine category is affecting the profitability of your wine sales?

Doug Schmick

Yeah, I was just, with our operators, we’ve only got probably about four to five weeks of good data on this, but at this point, its looking like our wine car should be improving between half and a three quarters of a point. And we're also seeing some good indicators in terms of increased wine sales. So at this point, we feel, I mean obviously that’s a very successful initiative. The other thing I like about it Mike, is that by operating the five ounce in addition to the eight ounce, what it's doing is giving the more modest consumer an opportunity to have a great glass of wine at a price that they've never seen before. So, it's really taking care of both of our initiatives. Optimizing the premier customers, previous position to sell as well as giving something affordable to the middle income consumer, so overall it has been a good initiative.

Michael Smith - Oppenheimer

Thank you.

Operator

And we go now to Dean Haskell with Morgan Joseph.

Dean Haskell - Morgan Joseph

Thank you very much. The steak program that you rolled out earlier this year, you seem to have had pretty stable food cost up until the third quarter when you were up 30 basis points. Is some of that attributable to the steak program?

Manny Hilario

I guess I am trying to reconcile this. We were at 29.1 for this quarter and 29.2 last quarter. Are you talking about the Delta or …

Dean Haskell - Morgan Joseph

The sequential first, second and third quarter.

Manny Hilario

Well, I think I mean that the beef program does have a little bit of an impact. There is a lot of pressure on the cost side coming through the on the commodities normally. We had very high egg prices, tined fish continued to be pretty high cost. So I would say it’s more of a combination of the high commodities and the steak program alone.

Dean Haskell - Morgan Joseph

Okay, did you need to something Doug?

Doug Schmick

No I think what you again as we get more data on this we'll be more specific. But I do recognize that there is uptick in per persons sales, with fix labor in your kitchen you are serving a 29.95 item with the same labor that would be selling an average menu item at 21.95. Yes there would be a little bit of an uptick in food costs, but you'll also have the ongoing opportunity that more red wine sales, which are a better margin sale for us will start falling into our mix as well.

So overall we're looking at this increasing the sales of that section and the focus on that combination has been a very positive additive component to what has always been our commitment and as have broad based appeal. I think this really starts filling out the broad based appeal quotient.

Manny Hilario

Now what that said, those intending what the product mix ends being in the fourth quarter, because of the beef price the cost might remain to have a slight impact.

Doug Schmick

Yeah. We might have some impact but not enough to reconsider as a positive initiative.

Dean Haskell - Morgan Joseph

No, absolutely not. I mean 30 basis points move on a mix issue is reasonable and certainly if you could drive wine cost. Housekeeping question, your press release says 15 stores opened since last years third quarter. There was 63 units, 15 makes 78 but you only have 77 units opened at the end of the quarter, 79 currently operating minus the two that opened in the fourth quarter did I miss a closing or…

Manny Hilario

Now, we exited the Santa Rosa management agreement earlier in the year.

Dean Haskell - Morgan Joseph

Okay. So Santa Rosa management is gone.

Manny Hilario

Yeah.

Dean Haskell - Morgan Joseph

Okay. And one last question when you refer to solid in July and August were you implying that those months ran at about the same level as second quarter same store sales gains.

Manny Hilario

There where positive comps so around 1% so we were on track to our guidance of one and half, two and half.

Dean Haskell - Morgan Joseph

Okay. So I put 1% into back out what it was for the month of September. Thank you.

Operator

And our next question comes from Amy Vinson with Avondale Partners.

Amy Vinson - Avondale Partners

Hi, guys. just a quick one on pricing with the price value component that you're highlighting in a lot of markets as well as the higher end things, what would you look at as kind of a blended price increase that we should expect by the end of the year.

Doug Schmick

Well, first of all the value component of the menu running at 2% to 3%. I really don’t see that as having any significant impact. We just have to see with a little more time on the steak program how much price steak that’s given us. We certainly know that in the first two quarters of the year where you have availability all of these great crab and halibut and salmon products that you were able to get out on the menu for $30 plus.

A lot of items are not available to us in the fourth quarter. So, I think what is existing about what we are doing right now, is that the steak program has given us a lever in the fourth quarter that we really haven't had in the past in terms of featuring the higher priced item. We also as Manny had stated as well as myself during the regional sections on our menu, this is first time that we have done this in the fourth quarter and we are allowing those sections to have a nice spread in price and move that several of McCormick items in the $26 to $28 range at the top end.

So we are getting more levers to go after that consumer that we have been discussing than we have had in the past, and certainly successfully promoting those approaches in the first two quarter worked well for us, and I hope that it will help offset some of the issues that we are dealing with as it relates to middle-income consumer.

Amy Vinson - Avondale Partners

Okay, and kind of going off of that can you just from [house willing] just a fact, can you give us what average check was during the quarter?

Manny Hilario

We can, I'll get back to you just in a second.

Amy Vinson - Avondale Partners

And Doug can you well Manny is looking for that can you talk to us about what kind of success you are seeing out of the mixed strength program the heritage?

Doug Schmick

Out of what?

Amy Vinson - Avondale Partners

Out of the heritage during program?

Doug Schmick

Well it's -- I haven't seen big uptick in terms of overall bar sales, but I can tell you that the percentage of those drinks that we are seeing sold, it continues to grow and I think, as I said before, this was never an initiative to increase sales dramatically but more initiative to make sure that our programs remain irrelevant and progressive as it relates to highly competitive segment of our business which is the bar.

I think, in terms of sales increase in the bar, the wine initiatives', we will probably from pure sales perspective, have a larger impact in that particular program.

Manny Hilario

Amy for the average check we run about $44.50 for dinner and $21.15 for lunch.

Amy Vinson - Avondale Partners

Okay, great, thanks guys.

Doug Schmick

Thank you

Operator

And we will go now to Keith Curtis with Brant Point Capital.

Keith Curtis - Brant Point Capital

Yes, can you guys just comment on your acquisition pipeline, want to talk about the credit facility just curious if you are seeing more opportunities in this tough environment, are prices coming down. Some color there?

Manny Hilario

We don't have any specific pipeline comments to make, but there's always plenty of opportunities out there right now, that we are taking a look at.

Keith Curtis - Brant Point Capital

So how should we think about a potential buyback then I mean, would you mark a certain date in the future where if we don't have any acquisition done, we go ahead and announce an authorization or ?

Doug Schmick

I don't -- I am trying not to make this too simplistic but in fact, it is really is an analysis on accretion and I think that, the one thing I've learned again over 35 years, when you have availability of capital as we have right now, you have an additional responsibility to be particularly prudent and conservative with it. I think that there will be prudent, conservative, accretive opportunities into '08, just based on my experience of what I have seen in similar economic cycle. What they are? When they would occur? It's all dependent on, you know, the analysis.

But we will not do something that's going to, you know, compromise our core focus and we do have 12 restaurants wind up for this next year. And we're just very focused on making them successful, as well as obviously taking these initiatives that we feel. I feel the menu is better balanced now it's got a broader base appeal than it ever has in the history of this company. And my goal, our goal with the management team is to make sure that we execute what I consider a very, very good program. We won't allow ourselves to get distracted.

Analyst

But you are going to agree that buying a stock at levels that it could potentially be a tomorrow be pretty accretive as well.

Manny Hilario

Yes, we understand that and as Doug said we continue looking at opportunities.

Keith Curtis - Brant Point Capital

Thank you very much.

Doug Schmick

Thank you.

Operator

We go to [Michael Pruner] with [Ad Capital].

Dan Winchell - Ad Capital

Good afternoon. This is [Dan Winchell] for [Michael Pruner]. Two or three questions please, Manny can you start with, let's take a look at the development costs. You talked about pre-opening going from 350 to 400, 2 or 3 development questions. First of all distribute what a cost to new unit development, I thought it was around $2.5 million is that number going up or down. And in the 400,000 remind us essentially how many people are there, how long are they there for and is your difference, Manny, between the in fields markets versus new markets on any of the above that's kind of question one.

Manny Hilario

Okay. Well, we typically for the new restaurants we look at on the net basis to us about 2.5 on construction less TI, for next year we are looking at about 6% to 8% inflation on that but we have shop that was going on in terms of construction cost. We will probably see a 16% increase on the construction cost.

Dan Winchell - Ad Capital

But here it seems like everything we are hearing is inflation it's not deflation in building products as well as services going the other way.

Manny Hilario

Well, that's based on what we get from our doing with our builders, so and checking around, so I want to say that…

Dan Winchell - Ad Capital

Okay.

Manny Hilario

That bets our intelligence on that. In terms of the pre-opening team, Doug?

Doug Schmick

Well, I will say overall this last year we are spending more management focus and training focus on opening than we ever have in the past. The primary uptick as Manny said to that 350,000 to 400,000 has been in the cost of transporting and lodging those people.

It is certainly, I think had paid big dividends in terms of our new units successfully opening that strong volumes and the ability to get cost inline quicker than we have in the past.

The dividend of having that in our additional focus and professionalism out in the field, is really paying off and there is no way that I want to cut that back. With that being said, we do have opportunities close to 50% of the new stores that we have going on next year that are in existing market to try to get ahead of the curve a bit with doing a better job, building our bench within the existing units in those markets.

And we'll try to leverage that as best we can in terms of making sure that that pre-opening cost is not only effective, but also cost-effective.

Dan Winchell - Ad Capital

Any sense, how long the pre-opening timeframe is and again how many people, and what you're saying there really is no difference that 400 is whether it's an infill or a new market, the numbers are about the same.

Doug Schmick

No, we are using that as the average number, I think we'll start to see some efficiencies as we do the infill into this next year. I am not encouraging anybody to build that into their pro forma at this point. In terms of number of people in the pre-opening process is literally a three month process. So, from the time that we are getting people tuned up and trained to step into key management positions to our pre-opening marketing which goes into affect about 60 to 75 days prior to opening. Depending on the size of the restaurant and the market that were in, we can have anywhere from 10 to 12 key personnel involved in training the line position or service positions and so on. We also have a certain amount of follow-up management and we have got a strike team that goes in if start off in a restaurant that comes out of the box with particularly high volumes. We want to make sure that we are getting some people back into the units, refresh the existing management team and give him a break. So, I mean, it is a very focused and sophisticated program.

Operator

And ladies and gentleman that’s all the time we have for questions today. Mr. Schmick, I would like to turn it back to you for any additional or closing remarks.

Doug Schmick

Well, I want to thank everybody for being on the call today, and I think the most important concept that I want to get across is that this company has been around for 35 years, the last three and half years of being public. It certainly realized that we have exceeded or at least everybody's expectations. This was the challenging quarter. It's challenging times, but we have got great initiatives in place and I am very confident that we are going to continue to grow and be a success. So, with that I thank you very much.

Operator

And ladies and gentleman, that does conclude today's call. Thank you for your participation. You may now disconnect.

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