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

Jan. 9.08 | About: Ruby Tuesday, (RT)

Ruby Tuesday, Inc. (NYSE: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, ChiefExecutive 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

Operator

Good morning. My name is Heather and I will be yourconference facilitator today. At this time, I would like to welcome everyone tothe Ruby Tuesday second quarter fiscal year 2008 earnings conference call.(Operator Instructions) I would now like to introduce Shannon Hepp, VicePresident 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 thisevening. With me today are Sandy Bell, Ruby Tuesday Chairman and CEO; andMargie Duffy, Chief Financial Officer. In addition, Kimberly Grant, our ExecutiveVice President of Operations and Mark Young, our Senior Vice President ofMarketing, are with us for the Q&A portion of the call.

I would like to remind you that there are likely to beforward-looking statements in our comments and I refer you to the noteregarding forward-looking information in our press release and most recentlyfiled Form 10-Q.

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

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

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

Marguerite N. Duffy

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

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

Revenue decreased by 4.7%, driven by the decrease insame-restaurant sales, which was offset by new restaurant growth, theacquisition 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 andsecond quarter of fiscal 2008 respectively.

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

Restaurant level margins were 15.5%, which was lower thanour expectations as a result of lower same-restaurant sales and traffic due toweakening segment sales and a negative check combined with our heavy valueinvestment. To further expand on that detail, let me discuss some of thecomponents of restaurant level margins further.

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

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

Labor was higher due primarily to loss of leverage fromlower check, coupled with moderating negative traffic. In addition, our serviceexcellence program continued to roll during the quarter, resulting inadditional training related cost.

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

The other operating expense line was higher than the prioryear due to a number of factors, including investments made in the currentyear. These investments and other factors include the following: higher repairand maintenance for smaller items outside the specific remodel project butbeing done at the restaurant level as the remodels are rolled to complete thenew look; additional costs for replacement of higher quality china and silverand glassware, and higher quality linen like napkins; higher rent due toincreased leased restaurants; the additional rent from leased restaurantspurchased from our franchisees; lower sales leverage on new releasedrestaurants that are initially open for dinner only; and lost leverage due tolower same-restaurant sales.

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

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

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

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

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

Based on the uncertainty of sales, our current modelsreflect that we may be in violation of debt covenants in the next 12 months. Weare not currently in default but because of accounting rules, we’vereclassified much of our long-term debt as current.

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

Now let’s turn to fiscal 2008. You saw in our press releasethat 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 forincreased depreciation due to the acceleration of assets to be retired anddepreciation on new assets associated with the remodeling of almost allcompany-owned restaurants in the fiscal year, as well as other small upgradecosts associated with the remodeling initiative.

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

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

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

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

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

We project depreciation expense for the year of $90 millionto $100 million, which includes approximately $13 million to $15 millionassociated 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 youthat we do still expect our fiscal 2009 depreciation to be lower than ourfiscal 2008 and to be approximately $80 million to $85 million.

As noted during the second quarter, we repurchased twoMichigan franchisees which operated 25 restaurants. These acquisitions togetherare expected to be accretive to earnings in future years, despite having nosignificant 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 stockcompensation awarded to retirement eligible recipients be expensed on the dateof grant.

We expect interest expense for the year to be approximately$33 million to $35 million, excluding any future market rate changes orrefinancing 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 uponprojected pretax income levels for the remainder of the fiscal year and theimpact of tax credits.

From an equivalent shares perspective, we are modeling thesein the 51 million to 52 million range for the year and to remain fairlyconsistent each quarter.

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

Sandy Beall

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

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

We do have a segment and sales issue, without a doubt. Wealso have an earnings issue but we believe we can get that corrected. But Ican’t emphasize enough that we do not believe that we have an operations orfree cash flow issue and we’ll share some numbers with you, but we have manymore numbers than that, of course. But we do not believe it’s an operations ora cash flow issue.

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

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

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

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

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

Again, that’s based on better food, uncompromising freshnessand quality, better service, gracious hospitality by teams that care, aresharper looking, and offer great service. A better place, updated, morerelevant, not frozen bar and grill stuck in the ‘80’s, and it’s alreadycomplete 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 keyitems 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 zeroto five rating, on a one to five rating, actually. We receive over 40,000 ofthese a month, I think it is, and so it is very accurate.

Our overall experience, just from first quarter to secondquarter, has gone from 84 to 87. The end of the quarter is higher -- the monthof November is higher than that. Value has gone from 80 to 84; intent torevisit has gone from 87 to 90; and likelihood to recommend has gone from 85 to88 -- you know, significant, solid progress throughout the quarter, increasesin guest satisfaction. They continue to increase, our guest satisfactionscores. They are much better but our sales and traffic are way behind our peergroup. We realize that.

We have improved our guest count versus casual dining basedon the Knapp-Track surveys. We’ve narrowed the guest count gap fromapproximately 9% in August to off Knapp-Track approximately 4% in November. Webelieve the 4% gap in traffic is due to losing more guests with lowerdiscretionary income this year than our competition because of their higherlevels of advertising, significantly higher levels of advertising anddiscounted pricing, as well as the amount of brand change that we’ve gonethrough in a 12-month period.

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

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

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

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

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

We have some great measurement devices for I guess watchingour game day performance or performance film. Every Monday morning, Kimberlyand Mark and several others and I get together to evaluate all of our scoresfrom the previous weekend, the previous week. We review guest feedback from1-800 lines. We have 40,000 guest responses every month. We go over this tryingto look for where we are doing well, but more importantly, where we are notdoing as well as we could.

In addition to all this information, over the next 90 dayswe have all of our key executives out in the field to listen to make sure weare not missing anything and to make sure we are set up the best we can as weenter 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 nextyear. 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 ourgoals. We want to be the best bar and grill. We want to be and will beoperating at high quality casual dining levels increasing at every quarter.

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

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

We are conducting some tests that we mentioned on the last conferencecall in some markets where we hopefully we can sell over time more and moredinners 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 thispoint.

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

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

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

Our simple, fresh, American dining plans have beenimplemented. Our restaurants will be remodeled, completed actually at the endof 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 trafficand same-store sales, and also improving profits. We know we have to do thisand 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 toexamine ways to increase shareholder value now while remaining very focused onbuilding a better brand that adds and maintains value for the long term insteadof just focusing on the quarter and the year. We realize the year is bad andnothing we can do to change that at this point in time but we are focusedfurther ahead on next year and beyond.

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

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

We’ve been in business for 35 years. We feel our operationsare the best that they have been and although we have a segment in sales andearnings 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 ora cash flow issue.

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

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

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

Question-and-AnswerSession

Operator

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

Keith Siegner -Credit Suisse

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

Kimberly Grant

I can answer that question. In the restaurants that werereceiving the direct mail, they averaged about two to three points better thanthe rest of the system with the direct mail support. Without the direct mailsupport, 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 ofthe system is remodeled, so that would be a larger --

Keith Siegner -Credit Suisse

Right. A question for Margie regarding the free cash flowexpectations for fiscal ’08 now, can you give us an updated number for whereyou 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 anycovenants right now but you say you may be by the end of the year. How closeare 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 itdepends 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 eventhese projections that we’ve share with you for the year, we could be inviolation 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 - BearStearns

A couple of questions; first, Margie, I just want to makesure I heard on the tax rate, the tax rate for the full year, did you say 7% to9%?

Marguerite N. Duffy

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

Joseph Buckley - BearStearns

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

Marguerite N. Duffy

Right, that was fiscal year.

Joseph Buckley - BearStearns

Okay, and then on the -- going back to the remodeled unitsfor a moment, and I couldn’t hear, Margie, exactly what you added to Kimberly’sanswer but what has been the sales experience in the remodeled units? Are youseeing 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 theremodeling we actually lose about 1% in same-store sales, so you have to absorbthat. Then once you get complete with the remodel and then you wait and youstart your direct mail drops, that’s when you get your couple points, so thereis a negative effect for that 30 days when you are disrupting everything.

Kimberly Grant

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

Joseph Buckley - BearStearns

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

Sandy Beall

Let me say one thing and then I’ll turn it over to Mark; thelast conference call when we talked about we were moving targeted high qualitydirect mail, we continue to move in that direction. As we move in thatdirection, we’ll move away from television. We’re not sure where TV will settleout. It’s really I guess -- it will settle out -- it will end up being theresidual after we have done everything we need to do on high quality targeteddirect 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 wholething is about compelling value and how do we create that and communicate thatto the guest. And from a marketing perspective, the direct mail piece has beenvery positive for us, very well accepted and we will continue to stay with thatstrategy, as Sandy said, from a high quality piece so it will not be back intothe 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 withbased on our learning, but it will be focused on a very high quality piece, andwe think that’s the best way for us to continue to drive traffic to thespecific locations, announcing about the fresh new Ruby Tuesday.

Sandy Beall

What we can do with our credit card information and what wecan do with Axiom, these people where they can go in the neighborhoods and targetwho our users are exactly, there’s a lot of opportunity to very exactly targetwho 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 acompetitive 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 weknow can drive results. And like I said, it’s been very favorable from theguest perspective as well as what it’s done from an impact standpoint.

Joseph Buckley - BearStearns

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 debtviolations?

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, justas we have in the past. We do not have a liquidity issue. We have massiveamounts of free cash flow next year no matter how you want to figure it, so Idon’t think that will be an issue but it’s something we had to bring out anddiscuss and that’s our priority one, Margie’s and Sandy’s, here in the nextfour weeks.

Joseph Buckley - BearStearns

Okay. Thank you.

Operator

Your next question comes from Fitzhugh Taylor from Banc ofAmerica.

Fitzhugh Taylor -Banc of America

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

Mark Young

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

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

So we’ve got to communicate that better than what we’ve doneand 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 piecefrom the combinations, is what we’ve done this fall and we saw some positiveresponse out of that from an appeal standpoint. So from a media TV piece, weare still trying to figure that piece out exactly of what role it plays.

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

Fitzhugh Taylor -Banc of America

Thanks. And Sandy, last quarter I think you talked aboutsome 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 andthe 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 tozero and I just wanted to get a sense from you all, with the $50 million to $55million of CapEx for the remodel not reoccurring, where could that normalizedCapEx 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 continuedfranchisee acquisitions, particularly the recent one in Michigan? I mean, atwhat point do you just allow the franchisees to perhaps close the restaurant orpass 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 theEast and they are for different reasons. Michigan is a sales challenged areabut we’ve got some great people up there and the guy that runs it for us, it’svery hassle free. He’s been with us for 18 years and we actually gave him anexpanded role which saved us some G&A, so he oversees an entire region forus now. It does make financial sense. Some are better than others. We boughttwo, actually. One we bought real cheap and the other one wasn’t so cheap butaveraged together, we thought it was a fair deal. And we bought the ones inFlorida. We have a couple more in the East that we may acquire over time. Theydon’t require any capital, very little to no cash, really.

So being very selective and for different reasons, it’sappropriate 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 onlynext year, perhaps for a couple of years -- is that right?

Sandy Beall

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

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

Stephen Rees -JPMorgan

Okay, and then just finally on the -- you mentioned the hopefor or closures in the industry. Can you talk about potential for closuresamong 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’tknow about closings from other people. I wouldn’t know but I do, just what Ihear 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 butregardless of that, we are, which I think we should based on the amount ofsales for the segment and the recession that we are in and the restaurantindustry 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, couldyou talk a little bit about your traffic building initiatives and inparticular, what kind of role you see pricing and maybe an incremental step onincentives? 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’timagine us being any higher than that. I don’t think -- that’s on targeteddirect mail, really.

On pricing, I think we are set. We’ve got -- I think ourmenu 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 onprofitability. But we don’t anticipate and don’t think we need to because themenu is in such good value shape.

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

Jeff Omohundro -Wachovia

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

Sandy Beall

-- check, I mean, if you are going to give somebody $5 orsoon 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 thesecond quarter too.

Jeff Omohundro -Wachovia

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

Sandy Beall

That’s just a little local restaurant that we got familiarwith about a year or so ago. It’s a cute little restaurant, 3,600 square footAsian thing that somebody in our organization messes with and we’re just kindof 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 havingincreased 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 somethingelse.

Jeff Omohundro -Wachovia

Thanks.

Operator

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

Barry Stouffer -BB&T Capital Markets

I just have one question; could you elaborate a little bitmore on the negative check? You mentioned check was down but you were notspecific.

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 thatmuch.

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’sworse 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 inthe 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 SuntrustRobinson.

Sean Dodge - SuntrustRobinson Humphrey

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

Sandy Beall

Our management turnover is, Kimberly, still below --

Kimberly Grant

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

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

Sandy Beall

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

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

Sean Dodge - SuntrustRobinson Humphrey

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

Sandy Beall

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

Kimberly Grant

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

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

Sean Dodge - SuntrustRobinson Humphrey

Excellent. Thank you.

Operator

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

Bryan Elliot -Raymond James

Good afternoon. Can you hear me okay? I just wanted to get alittle feel for ’09. If we are going to basically stop development, you talkedabout the CapEx line impact of that. Can you give us a little color on what theincome statement impact might be from pre-opening and infrastructuredevelopment 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 perrestaurant, 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 - RaymondJames

But just thinking about modeling -- how about G&A? Isn’treal estate --

Sandy Beall

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

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

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

Bryan Elliot -Raymond James

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

Sandy Beall

I think we have an opportunity in G&A versus say ournormal growth that we’ve had. Of course, G&A you have advertising -- whatyou 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’vegot 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 forquestions. Mr. Beall, are there any closing remarks?

Sandy Beall

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!