Ruby Tuesday F2Q08 (Qtr End 12/4/07) Earnings Call Transcript

Ruby Tuesday, Inc. (RT)

F2Q08 Earnings Call

January 9, 2008 5:00 pm ET

Executives

Shannon Hepp - Investor Relations

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

Sandy Beall - Chairman of the Board, President, Chief Executive Officer

Kimberly Grant - Executive Vice President

Mark Young - Senior Vice President, Marketing

Analysts

Keith Siegner - Credit Suisse

Joseph Buckley - Bear Stearns

Fitzhugh Taylor - Banc of America

Stephen Rees - JPMorgan

Jeff Omohundro - Wachovia

Barry Stouffer - BB&T Capital Markets

Sean Dodge - Suntrust Robinson Humphrey

Presentation

Operator

Good morning. My name is Heather and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ruby Tuesday second quarter fiscal year 2008 earnings conference call. (Operator Instructions) I would now like to introduce Shannon Hepp, Vice President of Investor Relations and Planning. Ms. Hepp, you may begin your conference.

Shannon Hepp

Thank you, Heather and thanks all of you for joining us this evening. With me today are Sandy Bell, Ruby Tuesday Chairman and CEO; and Margie Duffy, Chief Financial Officer. In addition, Kimberly Grant, our Executive Vice President of Operations and Mark Young, our Senior Vice President of Marketing, are with us for the Q&A portion of the call.

I would like to remind you that there are likely to be forward-looking statements in our comments and I refer you to the note regarding forward-looking information in our press release and most recently filed Form 10-Q.

Our format today includes an overview of our second quarter fiscal 2008 financial results, updated information on fiscal 2008 financial plans, and an update on our plans and strategies and at the conclusion of the call, we will have a question-and-answer session.

Before we get started, I would also like to announce that we are scheduled to release third quarter fiscal 2008 results after the market close on Wednesday, April 2nd, and we will host a conference call that same evening.

With that, I would like to turn it over to Margie Duffy.

Marguerite N. Duffy

Thank you, Shannon. Good evening and welcome, everyone. I’ll take a few minutes to touch on our second quarter financial results and fiscal year 2008 financial plans, and then Sandy will update you on our business plans and initiatives.

As you saw in our release, we reported a diluted loss per share for the second quarter of $0.20. During the quarter, we expensed $5.6 million in costs associated with our remodel initiative, which resulted in a reduction of $0.07 per diluted share.

Revenue decreased by 4.7%, driven by the decrease in same-restaurant sales, which was offset by new restaurant growth, the acquisition of 11 South Florida restaurants in the third quarter of fiscal 2007, and 11 West Palm Beach restaurants and 25 Michigan restaurants in the first and second quarter of fiscal 2008 respectively.

Our newer restaurants continue to perform with stronger average restaurant volumes once they are open for both lunch and dinner and this offset some of the decline in the same-restaurant sales.

Restaurant level margins were 15.5%, which was lower than our expectations as a result of lower same-restaurant sales and traffic due to weakening segment sales and a negative check combined with our heavy value investment. To further expand on that detail, let me discuss some of the components of restaurant level margins further.

Cost of sales was higher than the prior year due to investments in compelling value promotions offered during the quarter that included: a free garden bar with a triple prime purchase; endless garden bar, soup and fresh bread for $7.99; the lunch fresh combinations promotion starting at $6.99; and utilizing direct mail and freestanding insert coupons.

In addition, our rib combination feature ran during the current quarter and has a higher food cost as a percent of sales but a much higher dollar margin than some of our other promotions.

Labor was higher due primarily to loss of leverage from lower check, coupled with moderating negative traffic. In addition, our service excellence program continued to roll during the quarter, resulting in additional training related cost.

We also have not yet lapped the minimum wage increases that went into effect in January.

The other operating expense line was higher than the prior year due to a number of factors, including investments made in the current year. These investments and other factors include the following: higher repair and maintenance for smaller items outside the specific remodel project but being done at the restaurant level as the remodels are rolled to complete the new look; additional costs for replacement of higher quality china and silver and glassware, and higher quality linen like napkins; higher rent due to increased leased restaurants; the additional rent from leased restaurants purchased from our franchisees; lower sales leverage on new released restaurants that are initially open for dinner only; and lost leverage due to lower same-restaurant sales.

In addition to these factors, we have experienced higher utility related costs due to warmer temperatures this fall than in the prior year. We do expect these higher costs as a percent of sales to continue as long as sales are lower.

Equity and earnings came in less than we expected due to lower sales than projected and lower restaurant level margins due to labor and controllable investments, similar to company-owned restaurants.

Depreciation was higher than originally expected due to additional accelerated depreciation associated with the remodel initiative during the quarter as we finalized remodel plans for more restaurants than originally planned, thus shifting more of the expense to second quarter, as well as the loss of leveraging from lower than expected sales.

SG&A and interest came in pretty much as we had anticipated.

In looking at the balance sheet, we ended the quarter with total debt-to-EBITDA, including operating leases, guarantees, and letters of credit of 4.1 times, up from 3.5 times in the first quarter and we ended the quarter with total book debt of approximately $592 million.

Based on the uncertainty of sales, our current models reflect that we may be in violation of debt covenants in the next 12 months. We are not currently in default but because of accounting rules, we’ve reclassified much of our long-term debt as current.

We will be working with our lenders to obtain a modification of covenants for future periods.

Now let’s turn to fiscal 2008. You saw in our press release that our guidance for fiscal 2008 is based on same-restaurant sales of down 6% to 8.5%. Our fiscal 2008 guidance for diluted earnings per share is $0.40 to $0.60, which reflects an estimated $0.16 to $0.18 per share negative impact for increased depreciation due to the acceleration of assets to be retired and depreciation on new assets associated with the remodeling of almost all company-owned restaurants in the fiscal year, as well as other small upgrade costs associated with the remodeling initiative.

In addition, our updated guidance includes the continuing investments in food and labor we began last quarter associated with our compelling value promotions, as I discussed earlier.

Our annual guidance assumes approximately 20 new company owned restaurant openings, 15 to 20 new franchisee openings, $65 million to $75 million in normal CapEx, and $50 million to $55 million in CapEx for our company remodelings. We anticipate we will finish 2008 with slightly positive free cash flow.

Now a little more color on margins for fiscal year 2008. We expect our annual restaurant level margins to be approximately 18% to 19%. We expect food cost as a percent of restaurant revenues to continue at similar levels to second quarter, which includes the investments in pricing and promotions that began in the second quarter.

Labor is now projected to be approximately 220 to 270 basis points higher than prior year with our investments in the rollout of our service excellence initiative, as well as lost leverage due to lower sales and the full year impact of minimum wage increases mandated last January.

We are projecting the other operating line to be approximately 190 to 210 basis points higher than the prior year due primarily to lost leverage on sales. We are now projecting the equity and earnings line to be negative for the year by approximately $4.5 million to $5 million.

We project depreciation expense for the year of $90 million to $100 million, which includes approximately $13 million to $15 million associated with the remodelings. We now expect depreciation to be approximately $23 million to $25 million in the third quarter.

For your additional modeling, I would like to remind you that we do still expect our fiscal 2009 depreciation to be lower than our fiscal 2008 and to be approximately $80 million to $85 million.

As noted during the second quarter, we repurchased two Michigan franchisees which operated 25 restaurants. These acquisitions together are expected to be accretive to earnings in future years, despite having no significant impact in the current fiscal year.

We are projecting G&A for the year at $110 million to $120 million. Stock-based compensation expense is estimated at $12 million to $13 million, up from prior projections as accounting rules require that stock compensation awarded to retirement eligible recipients be expensed on the date of grant.

We expect interest expense for the year to be approximately $33 million to $35 million, excluding any future market rate changes or refinancing activities.

Our tax rate for the second quarter was approximately 31.8%. For the year, we expect the tax rate range to be from 7% to 9% based upon projected pretax income levels for the remainder of the fiscal year and the impact of tax credits.

From an equivalent shares perspective, we are modeling these in the 51 million to 52 million range for the year and to remain fairly consistent each quarter.

So now let me turn the call over to Sandy for an update on our strategies and initiatives.

Sandy Beall

Thanks, Margie. You’ve seen our release and Margie has covered the financial details. Our results echo a common theme across the industry but we are still trending lower than our peers, and these are obviously not the level of financial results we want to be reporting.

In this environment, I think the most important information I can share with you is we are definitely disappointed but believe we are investing in running our business right for the long-term, based on better food, better service, a better place and better value. The result is already an updated, more relevant brand that’s better positioned to create value for the long-term in a more mature casual dining segment.

We do have a segment and sales issue, without a doubt. We also have an earnings issue but we believe we can get that corrected. But I can’t emphasize enough that we do not believe that we have an operations or free cash flow issue and we’ll share some numbers with you, but we have many more numbers than that, of course. But we do not believe it’s an operations or a cash flow issue.

While timing has not been perfect considering the segment and the economic downturn, kind of creating a perfect storm, but we will have our investments in our food and service initiatives as well as all the re-imaging of over 650 restaurants finished and behind us this year and actually in third quarter when we get back to more normal business as we finish out this year and move into next.

We believe we will be very well-positioned for solid earnings, free cash flow, and performance in the future.

We should be well-positioned also to benefit from the increased sales and traffic in the future when the economy and consumer strengthens, whenever that might be but it will happen. Increased sales and traffic as supply is being reduced or the anticipated fewer restaurants, everybody is always cutting back dramatically on openings and I would anticipate some closures, so the demand and the supply will get back in balance.

Also, I think we have an opportunity for increased sales from achieving a positive check. This year, we’re running negative on check right now and most of our peers are running 3% up, so it’s about a 4% effect there.

We also believe that we can have increased frequency from our existing guest as we continue to improve our guest satisfaction scores. We definitely have a plan. We’ve been working on it for two years. It may be a perfect storm, worst timing in the world on the timing of implementing it but we’ve done a lot of work and have already upgraded our brand to be more competitive with a better value and better operating proposition I think than we’ve ever had.

Again, that’s based on better food, uncompromising freshness and quality, better service, gracious hospitality by teams that care, are sharper looking, and offer great service. A better place, updated, more relevant, not frozen bar and grill stuck in the ‘80’s, and it’s already complete in all of our units, or in 600 units, and more compelling value.

We definitely are performing from an operations perspective. I can show you a massive amount of numbers but I’ll just go over a few key items because I think I’ve referenced these before.

Our top box guest satisfaction scores -- top two box, rather, is any guest that rates us a four or a five, which is high, on a zero to five rating, on a one to five rating, actually. We receive over 40,000 of these a month, I think it is, and so it is very accurate.

Our overall experience, just from first quarter to second quarter, has gone from 84 to 87. The end of the quarter is higher -- the month of November is higher than that. Value has gone from 80 to 84; intent to revisit has gone from 87 to 90; and likelihood to recommend has gone from 85 to 88 -- you know, significant, solid progress throughout the quarter, increases in guest satisfaction. They continue to increase, our guest satisfaction scores. They are much better but our sales and traffic are way behind our peer group. We realize that.

We have improved our guest count versus casual dining based on the Knapp-Track surveys. We’ve narrowed the guest count gap from approximately 9% in August to off Knapp-Track approximately 4% in November. We believe the 4% gap in traffic is due to losing more guests with lower discretionary income this year than our competition because of their higher levels of advertising, significantly higher levels of advertising and discounted pricing, as well as the amount of brand change that we’ve gone through in a 12-month period.

I mentioned our check was down approximately 1% this quarter compared to others, which creates -- also makes it very, very difficult on the same-store sales line but we’ll overlap this next summer and be back to positive sales, we believe, on a check basis.

We do believe traffic is the key number. We will be able to get our check back. We have a good opportunity to increase this check, as I mentioned, as we overlap and as the consumer gets stronger and spends more on the economy, we believe we will get our sales back.

With all this said, we have two real things we are focused on right now; we don’t have our head in the sand, we’re not in denial. We continue to question and challenge ourselves, our plans, and our strategies and continue to tweak as needed. Number two, we need to make sure we are really doing in every restaurant what we think we are doing.

Last weekend, a friend of mine was telling one of Peyton Manning’s sayings, and he says he watches his game day films to make sure he did what he was supposed to be doing and that’s helped him be one of the best quarterbacks.

We’re not looking for anything new to do. We have everything we need and we just need to make sure we are doing it every day for every guest in every restaurant.

We have some great measurement devices for I guess watching our game day performance or performance film. Every Monday morning, Kimberly and Mark and several others and I get together to evaluate all of our scores from the previous weekend, the previous week. We review guest feedback from 1-800 lines. We have 40,000 guest responses every month. We go over this trying to look for where we are doing well, but more importantly, where we are not doing as well as we could.

In addition to all this information, over the next 90 days we have all of our key executives out in the field to listen to make sure we are not missing anything and to make sure we are set up the best we can as we enter the new fiscal year in June.

A couple of other points in addition to the ones I’ve made; our team talent is stronger than it has been. That’s continued push for next year. It’s very stable. It’s strong. Our management turnover is still very low. Morale is very, very good. Everybody believes in our quality approach and our goals. We want to be the best bar and grill. We want to be and will be operating at high quality casual dining levels increasing at every quarter.

Our remodeled restaurants are performing better. Our guest satisfaction scores after being remodeled versus being remodeled are better, and our sales are better. We are happy with our menu, although we continue to tweak it whenever reprint is necessary. An example is I think in another couple of weeks, we have another printing coming out. We put our successful rib combinations promotion onto the menu and added a couple of steak combinations also.

We do have excellent value in our menu. I think it’s approximately 55% of all of our guests either order one of our great hand-crafted fresh burgers or one of our salad bar combinations. Both of these represent value, variety, and quality -- three key words that drive our menu in our effort towards having compelling value.

We are conducting some tests that we mentioned on the last conference call in some markets where we hopefully we can sell over time more and more dinners and move our check up more, but of course in a downturn in a recession, it is not the time to take price increases or try to move check up at this point.

Our advertising and marketing dollars continue to be focused on high quality targeted direct mail as well as some television, emphasizing value, quality, and variety, and our fresh new brand.

With respect to our five year goals, normally we update you on these at this time. I don’t think that’s relevant at this year right now but as far as our goals go, we would of course reduce our same-store sales goal based on the environment, the demand, and supply over the next five years, probably from three points down the tube -- not meaningful, I realize right now but the one that is meaningful for us and I think all the other companies that are doing it, we would anticipate opening zero to maybe maximum 10 openings, probably closer to zero for the next couple of years, although our franchise should open approximately 20 new restaurant openings driven primarily by our stronger international markets.

We feel as though demand and supply have increasingly gotten out of balance in the last three or so years. We probably had our head in the sand, although we reduced our openings. We’ve watched demand just slide every year and should have pulled openings back to zero sooner. This imbalance needs to be corrected before we should increase growth further but the restaurants we are opening are performing well.

Our simple, fresh, American dining plans have been implemented. Our restaurants will be remodeled, completed actually at the end of I think this next month and our next year is all about focus.

Our necessary change and most of our improvements will soon, very soon be behind us and our focus is on just making operations better, getting the highest guest satisfaction scores we can have, increasing traffic and same-store sales, and also improving profits. We know we have to do this and we will in maximizing that free cash flow, however you want to define it -- more cash in the bank at the end of the day.

We are very disappointed with the year and continue to examine ways to increase shareholder value now while remaining very focused on building a better brand that adds and maintains value for the long term instead of just focusing on the quarter and the year. We realize the year is bad and nothing we can do to change that at this point in time but we are focused further ahead on next year and beyond.

We’ll do all this by taking care of our existing guests in a way that increases their frequency as they can eat out more and by connecting with and attracting new guests through high quality casual dining.

None of this is easy but we are all working very hard to make a positive difference. It is a very tough business environment, as you know, and it will take some time for us, for all of us.

We’ve been in business for 35 years. We feel our operations are the best that they have been and although we have a segment in sales and earnings this year, as we talked about, we feel we can fix the earnings issue, I will emphasize again we do not have, do not believe we have an operations or a cash flow issue.

With that, I’ll close it. Actually, I just got -- we get e-mails in all the time. I just read an e-mail on my desk about 20 minutes ago and I thought I’d share it with you, as it embodies everything that we’ve been working on for the last two years.

This is an e-mail from a person in Tampa, Florida, it looks like. It says: “I’ve been dining out three to four times per week my entire adult life and I have been to Ruby Tuesday many times in the past. But something really good has happened in the past year. First off, the new ambience and place settings are much classier than in the past. Most importantly, the food has gotten significantly better. Your crab cake is the best in all of Tampa. Your fish and chicken entrees are full of flavor and your deserts are good enough to make me break my diet each time I dine there. Overall, I am very pleased with your recent changes. Good work.”

And with that, I’ll close my comments and open the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

It sounds like the remodel is on track for completion by the end of next month and it sounds like some of the marketing might be shifting a little bit more towards the direct mail program. Can you give us a sense of the unit performance maybe on the comp line, as to units where the first and second round of the direct mail was sent out and how that compared to the rest of the restaurant base?

Kimberly Grant

I can answer that question. In the restaurants that were receiving the direct mail, they averaged about two to three points better than the rest of the system with the direct mail support. Without the direct mail support, they were about three-tenths better than the system in sales.

Marguerite N. Duffy

One thing to keep in mind -- that is, a larger percentage of the system is remodeled, so that would be a larger --

Keith Siegner - Credit Suisse

Right. A question for Margie regarding the free cash flow expectations for fiscal ’08 now, can you give us an updated number for where you are seeing free cash flow?

Sandy Beall

How do you define free cash flow?

Keith Siegner - Credit Suisse

Cash flow from operations less CapEx.

Marguerite N. Duffy

We said it would be slightly positive.

Keith Siegner - Credit Suisse

Okay, and then last question; you’re not in violation of any covenants right now but you say you may be by the end of the year. How close are you on which covenant? Can you give us a couple of details there?

Marguerite N. Duffy

It’s our leverage ratio and our coverage ratio and it depends on sales, the closeness depends on sales.

Keith Siegner - Credit Suisse

How close are you?

Marguerite N. Duffy

Again, it all really depends on sales, so based on even these projections that we’ve share with you for the year, we could be in violation over that timeframe.

Keith Siegner - Credit Suisse

Have you already spoken to any lenders?

Marguerite N. Duffy

Yes, we are.

Sandy Beall

Yes, definitely.

Keith Siegner - Credit Suisse

Okay. I’ll get back in the queue. Thank you.

Operator

Your next question comes from Joe Buckley with Bear Stearns.

Joseph Buckley - Bear Stearns

A couple of questions; first, Margie, I just want to make sure I heard on the tax rate, the tax rate for the full year, did you say 7% to 9%?

Marguerite N. Duffy

Yes, I know that sounds low, Joe, but it’s a function of the pretax profit yet we still generate the credits from work opportunity tax credit as well as FICA tip credits.

Joseph Buckley - Bear Stearns

Okay, and all the numbers you gave us, the same-store sales range, the tax rate, et cetera, that’s all for the full year, incorporating what’s already been reported for the November period, the first half?

Marguerite N. Duffy

Right, that was fiscal year.

Joseph Buckley - Bear Stearns

Okay, and then on the -- going back to the remodeled units for a moment, and I couldn’t hear, Margie, exactly what you added to Kimberly’s answer but what has been the sales experience in the remodeled units? Are you seeing any difference versus the non-remodel?

Sandy Beall

Well, most of the system is remodeled now. We did one thing, we mentioned last time but even now, these large groups we’ve had, during the remodeling we actually lose about 1% in same-store sales, so you have to absorb that. Then once you get complete with the remodel and then you wait and you start your direct mail drops, that’s when you get your couple points, so there is a negative effect for that 30 days when you are disrupting everything.

Kimberly Grant

Joe, about four weeks after the completion of the remodel is where you start to see the positive trends.

Joseph Buckley - Bear Stearns

Okay. And then on the direct mail, well, first let me ask how big is the shift in marketing away from TV? Are you cutting back on that to a large extent? And you shared with us probably on the last conference call some of the direct mail pieces, is that still what’s going on or are you getting more aggressive on the coupon deal or the discount deal on the direct mail?

Sandy Beall

Let me say one thing and then I’ll turn it over to Mark; the last conference call when we talked about we were moving targeted high quality direct mail, we continue to move in that direction. As we move in that direction, we’ll move away from television. We’re not sure where TV will settle out. It’s really I guess -- it will settle out -- it will end up being the residual after we have done everything we need to do on high quality targeted direct mail, however large that market is and we are still exploring all that. But it’s been very successful so far. Mark.

Mark Young

Joe, as we talked about last time, the big key to this whole thing is about compelling value and how do we create that and communicate that to the guest. And from a marketing perspective, the direct mail piece has been very positive for us, very well accepted and we will continue to stay with that strategy, as Sandy said, from a high quality piece so it will not be back into the days of val-pak or anything else. This will be very targeted. Actually, it’s going to get even more targeted than what we have done even to start with based on our learning, but it will be focused on a very high quality piece, and we think that’s the best way for us to continue to drive traffic to the specific locations, announcing about the fresh new Ruby Tuesday.

Sandy Beall

What we can do with our credit card information and what we can do with Axiom, these people where they can go in the neighborhoods and target who our users are exactly, there’s a lot of opportunity to very exactly target who we want and get them when we want them at a reasonable price.

Mark Young

And Joe again, still on the media side, the spending from a competitive standpoint continues to get very aggressive out there and all that, so we have to really look at and reinvest our dollars into something that we know can drive results. And like I said, it’s been very favorable from the guest perspective as well as what it’s done from an impact standpoint.

Joseph Buckley - Bear Stearns

One last one and I’ll turn it over to someone else; Margie, where in that $0.40 to $0.60 full year EPS range is the breakpoint on the debt violations?

Marguerite N. Duffy

It could be in there.

Sandy Beall

We don’t know. We haven’t figured that. We could, I guess.

Marguerite N. Duffy

I mean, every -- it’s all an estimate.

Sandy Beall

Our goal, of course, is to get our covenants adjusted, just as we have in the past. We do not have a liquidity issue. We have massive amounts of free cash flow next year no matter how you want to figure it, so I don’t think that will be an issue but it’s something we had to bring out and discuss and that’s our priority one, Margie’s and Sandy’s, here in the next four weeks.

Joseph Buckley - Bear Stearns

Okay. Thank you.

Operator

Your next question comes from Fitzhugh Taylor from Banc of America.

Fitzhugh Taylor - Banc of America

Just following up on that, just trying to get a gauge of how much you think your customer knows of all the changes that have gone on in the restaurants and how -- is that what the direct mail piece is and the television is still focused on food? How do you balance those things out? I know they are intertwined to some degree.

Mark Young

The direct mail piece is really geared completely to the remodel. It’s got some visuals of the image that we’re talking about and really promoting that. And to be honest with you, I think we can even get more aggressive on that.

The one thing we will be doing from a marketing perspective is in a number of different communication pieces, or in all our communication pieces, continue to reiterate what we have done and the changes that we have made to Ruby Tuesday and what we’ve invested in for that to create this great brand going forward.

So we’ve got to communicate that better than what we’ve done and I think the direct mail piece gives us a great opportunity to do that, whereas TV at this point, you know, we’ve been out there with a value piece from the combinations, is what we’ve done this fall and we saw some positive response out of that from an appeal standpoint. So from a media TV piece, we are still trying to figure that piece out exactly of what role it plays.

But the primary focus of communicating the fresh new brand will be driven from the direct mail program for sure.

Fitzhugh Taylor - Banc of America

Thanks. And Sandy, last quarter I think you talked about some of your weakest markets, Florida, the Gulf Coast and the Washington, D.C. area were mentioned specifically. Has that changed any?

Sandy Beall

Kimberly, why don’t you go over those?

Kimberly Grant

Florida is still continuing to be one of our weakest areas. New England was softer than it had been in the past in this past quarter and the rest is pretty much the same.

Sandy Beall

In Florida though it was only off -- what was it, Kimberly, a couple of points, two to three points?

Kimberly Grant

Two points worse than the system.

Fitzhugh Taylor - Banc of America

Thanks.

Operator

Your next question comes from Stephen Rees with JPMorgan.

Stephen Rees - JPMorgan

You mentioned unit growth next year going potentially to zero and I just wanted to get a sense from you all, with the $50 million to $55 million of CapEx for the remodel not reoccurring, where could that normalized CapEx go next year on what will be pretty refreshed system?

Sandy Beall

Fifteen, $25 million.

Stephen Rees - JPMorgan

Okay, and that would assume zero growth?

Sandy Beall

Correct.

Stephen Rees - JPMorgan

Okay, and can you talk about your rationale for continued franchisee acquisitions, particularly the recent one in Michigan? I mean, at what point do you just allow the franchisees to perhaps close the restaurant or pass it along to another franchisee group? Why are you buying these back?

Sandy Beall

Well, we talked about -- I mean, we’ll buy some back in the East and they are for different reasons. Michigan is a sales challenged area but we’ve got some great people up there and the guy that runs it for us, it’s very hassle free. He’s been with us for 18 years and we actually gave him an expanded role which saved us some G&A, so he oversees an entire region for us now. It does make financial sense. Some are better than others. We bought two, actually. One we bought real cheap and the other one wasn’t so cheap but averaged together, we thought it was a fair deal. And we bought the ones in Florida. We have a couple more in the East that we may acquire over time. They don’t require any capital, very little to no cash, really.

So being very selective and for different reasons, it’s appropriate to consider, we think.

Stephen Rees - JPMorgan

Okay, and then just -- I’m not sure I heard you correctly. You mentioned that you would keep unit growth close to zero for just not only next year, perhaps for a couple of years -- is that right?

Sandy Beall

I think so. I think what’s important right now is what we have to do is drive traffic. We create a tremendous amount of value. All we have to do is get our -- get traffic moving back up and layer our normal regular check increase on top of that. With the quality ratings, we should be able to drive some frequency and we create a tremendous amount of -- as we did from 1996 really through about 2001, if you all remember, created a tremendous growth just focusing on the existing business and driving those sales. You all know we know how to control our numbers. It’s certainly not evident this year but we had 600 remodelings and massive other stuff going on. We will get that under control.

We just want to create value. We want to create a lot of shareholder value, a lot of free cash flow and have to worry about what to do with all that cash.

Stephen Rees - JPMorgan

Okay, and then just finally on the -- you mentioned the hope for or closures in the industry. Can you talk about potential for closures among your system, if there are any units that you think --

Sandy Beall

We really don't have any. I mean --

Marguerite N. Duffy

It’s just the lease expirations is all that’s planned.

Sandy Beall

We’re in good shape there. What I was talking about, I don’t know about closings from other people. I wouldn’t know but I do, just what I hear throughout the industry, I mean everybody is getting very aggressive on -- well, a lot of the people I’ve heard about are getting very aggressive but regardless of that, we are, which I think we should based on the amount of sales for the segment and the recession that we are in and the restaurant industry will be in for a little while.

Stephen Rees - JPMorgan

Okay, great. Thank you very much.

Operator

Your next question comes from Jeff Omohundro with Wachovia.

Jeff Omohundro - Wachovia

Thanks and good evening. I guess my first question, could you talk a little bit about your traffic building initiatives and in particular, what kind of role you see pricing and maybe an incremental step on incentives? What role do you think that might play going forward?

Sandy Beall

I think the role is in balance with it will be, I mean, going forward now. If you look at second quarter, third quarter, I can’t imagine us being any higher than that. I don’t think -- that’s on targeted direct mail, really.

On pricing, I think we are set. We’ve got -- I think our menu pricing is in excellent shape and then as far as discounting or something, we don’t anticipate doing a lot of discounting below the pricing that we have, which we did do some this fall and that really hurt us on check and on profitability. But we don’t anticipate and don’t think we need to because the menu is in such good value shape.

Again, our value ratings, our top two box, fours and fives are up over -- let’s see -- what was it I told you -- it’s up four points over last quarter, it’s like 84% I think. Yeah, we’ve gone from 80% to 84%. That’s pretty good. We don’t have a value issue.

Jeff Omohundro - Wachovia

Your latest mailer seemed to be targeted toward dinner. Is there much difference in day part trends, lunch and dinner?

Sandy Beall

-- check, I mean, if you are going to give somebody $5 or soon to be $4, we’d rather them spend more money, which they do, at dinnertime.

Jeff Omohundro - Wachovia

Yeah, that was a great lunch deal, actually.

Sandy Beall

Pardon?

Jeff Omohundro - Wachovia

That was a great lunch deal.

Sandy Beall

Too good, and that kind of hurt us a little bit in the second quarter too.

Jeff Omohundro - Wachovia

And then lastly, we saw this I guess in the 10-K, this Wok Hay acquisition -- what’s going on with that?

Sandy Beall

That’s just a little local restaurant that we got familiar with about a year or so ago. It’s a cute little restaurant, 3,600 square foot Asian thing that somebody in our organization messes with and we’re just kind of babysitting or nurturing it, just to --

Jeff Omohundro - Wachovia

Do you see it as a possible growth vehicle down the road?

Sandy Beall

The only thing I see in my mind are dollars from having increased traffic and sales and increased profitability in Ruby Tuesday.

Jeff Omohundro - Wachovia

All right. Thank you.

Sandy Beall

Once that happens, then I might open my mind up to something else.

Jeff Omohundro - Wachovia

Thanks.

Operator

Your next question comes from Barry Stouffer with BB&T Capital Markets.

Barry Stouffer - BB&T Capital Markets

I just have one question; could you elaborate a little bit more on the negative check? You mentioned check was down but you were not specific.

Sandy Beall

Well, check was down, if I remember right, almost one point, basically.

Marguerite N. Duffy

Yeah, about a percent.

Sandy Beall

Yeah, and I think if you look at -- well, ours is down that much.

Barry Stouffer - BB&T Capital Markets

And that was pretty consistent throughout the quarter?

Sandy Beall

Oh yeah, and I’d say -- well, if anything, I’d say it’s worse in November than it was but that was about the average of the quarter.

Barry Stouffer - BB&T Capital Markets

Actually, second question, any comment on sales so far in the third quarter?

Sandy Beall

No comment on that, no.

Barry Stouffer - BB&T Capital Markets

Thank you.

Operator

Your next question comes from Sean Dodge with Suntrust Robinson.

Sean Dodge - Suntrust Robinson Humphrey

Sandy, I was wondering if you could comment on the turnover that you are experiencing at the restaurant level for both hourly and management employees and how that compares relative to what you’ve experienced historically?

Sandy Beall

Our management turnover is, Kimberly, still below --

Kimberly Grant

It’s below 20%. We’re in the high teens, 19% on management turnover. It’s been very consistent. What we’ve seen with management turnover over the last two years is that it’s very stable, very predictable, and we know pretty much where we are going to stand from a month-to-month basis.

Hourly turnover, we’ve actually lost less people this year than we lost last year but with the reduced sales and reduced staff, it’s a higher percentage slightly.

Sandy Beall

Slightly but it’s not an issue at all. I think the key thing is because we have a little bit less staff because you have less volume, but we’ve lost less people and I’d tell you this -- Kimberly was talking to the board about this, but our servers and all are making more money, actually with the new service system that we rolled out that we talked to you all about. So we don’t have an issue there.

Again, management side, we’re just in outstanding shape, I believe and have been now for what, two years.

Sean Dodge - Suntrust Robinson Humphrey

Going forward, you don’t see any issues there, given the recent declines in sales or --

Sandy Beall

No, but we -- it’s been tough around here on bonuses on sales for two years. Our people believe in what we are doing. Do you want to add anything, Kimberly?

Kimberly Grant

Our management teams very much want to be a part of a brand that they are very proud of and can see the future and being a high quality casual dining brand is very exciting to all of our teams out there and it provides a lot of opportunity.

For our hourly team members, it’s our job to make sure that they make more money by training and introducing new products and items that they can sell. Our best servers are making more money and when they make more money, they don’t leave.

Sean Dodge - Suntrust Robinson Humphrey

Excellent. Thank you.

Operator

(Operator Instructions) Your next question comes from Bryan Elliot with Raymond James.

Bryan Elliot - Raymond James

Good afternoon. Can you hear me okay? I just wanted to get a little feel for ’09. If we are going to basically stop development, you talked about the CapEx line impact of that. Can you give us a little color on what the income statement impact might be from pre-opening and infrastructure development spending that runs through the income statement?

Sandy Beall

Not really.

Marguerite N. Duffy

I mean, pre-opening averages in the 70,000 to 80,000 per restaurant, so --

Sandy Beall

But you lose --

Kimberly Grant

-- increased sales in the beginning --

Sandy Beall

But you lose the sales for the new units, so --

Bryan Elliot - Raymond James

But just thinking about modeling -- how about G&A? Isn’t real estate --

Sandy Beall

Well, you have to assume, Bryan -- I mean, we talked about this last time. We don’t talk about it with you all, but another big campaign we have in our company, we’ve had for the last six months, is lowering the cost of doing business. And I think we’ve done a very, very good job there. I think we have almost 100 fewer people here at our headquarters now than we had two years ago.

Needless to say, development staff is less today than it was and all those kind of G&A savings, some are being reflected right now but they will be reflected as we go forward into next year also.

So we are being very aggressive at -- we know that or we believe that we have to run the support system -- basically our goal is to be flat. I know that’s hard but we are taking costs out to try to be flat so we can have more money without taking it out of the operations, but more money for our shareholders.

Bryan Elliot - Raymond James

So sort of putting the pieces together, then thinking about SG&A from the base that we are going to have here in ’08, obviously there is some inflation out there and other cost increases that are embedded in that, and then the ad spending flows through that, so the -- whatever delta assumption I want to make on that but we’re not going to see a step down in base G&A spending in ’09 because of the lack of --

Sandy Beall

I think we have an opportunity in G&A versus say our normal growth that we’ve had. Of course, G&A you have advertising -- what you all see, advertising is lumped in there, options, all that kind of stuff. But a pure G&A number, there’s some opportunity there and of course you’ve got advertising opportunity too, depending upon how you spend those dollars. That’s a variable in my mind also.

Bryan Elliot - Raymond James

Great. Thank you.

Operator

At this time, we have reached the end of allotted time for questions. Mr. Beall, are there any closing remarks?

Sandy Beall

No. Thank you for joining us and thank you for your patience. Have a great day.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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