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Ruby Tuesday, Inc. (NYSE:RT)

F3Q08 Earnings Call

April 2, 2008 5:00 pm ET

Executives

Shannon Hepp - Vice President, Investor Relations and Planning

Samuel E. Beall - Chairman of the Board, President, Chief Executive Officer

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

Mark Young - Senior Vice President, Marketing

Kimberly M. Grant - Executive Vice President

Analysts

Keith Siegner - Credit Suisse

Christopher O’Cull - Suntrust Robinson Humphrey

Stephen Rees - JPMorgan

Joseph Buckley - Bear Stearns

Jason Belcher - Wachovia

Bryan Elliott - Raymond James

Robert Derrington - Morgan, Keegan & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ruby Tuesday third quarter fiscal year 2008 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 and thanks to all of you for joining us this evening. With me today are Sandy Beall, Ruby Tuesday Chairman and CEO; Margie Duffy, Chief Financial Officer; and 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 third quarter fiscal 2008 financial results, updated information on our fiscal 2008 financial plans, preliminary information on our fiscal 2009 financial plans, then 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 fourth quarter fiscal 2008 results after the market close on Wednesday, July 9th and will host a conference call that same evening at 5:00 p.m.

I will now turn the call over to Margie.

Marguerite N. Duffy

Thank you, Shannon and good evening, everyone. I’ll take a few minutes to touch on our third quarter financial results, our fiscal year 2008 financial plans, and preliminary fiscal year 2009 financial plans. Then Sandy will update you on our business plans and initiatives.

As you saw in our release, we reported diluted earnings per share for the third quarter of $0.23. During the quarter, we expensed $4.9 million in costs associated with our remodel initiative, which resulted in a reduction of $0.06 per diluted share. Revenue decreased by 7.1%, driven by the decrease in same-restaurant sales, which was partially offset by new restaurant growth and the acquisition of 11 West Palm Beach restaurants and 25 Michigan restaurants in the first and second quarters of fiscal 2008 respectively.

Our newer restaurant sales continued to perform with higher average restaurant volumes once they were open for both lunch and dinner, and this offset some of the decline in same-restaurant sales.

Restaurant level margins were 18.8%, which was higher than our expectations as we were able to improve check throughout the quarter, as well as tighten costs both in the cost of goods sold and payroll and related categories, as we adjusted to the lower traffic. Thus we were able to improve on the lost leverage we saw in the prior quarter.

As we’ve discussed in prior quarters, we have made investments in both food and labor since the prior year and we’ve continued to lap those investments this quarter. In January, we lapped the largest part of the state minimum wage increases that went into effect last year.

The other operating expense line was higher than the prior year due to higher rent, primarily as a result of the additional rent from leased restaurants purchased from our franchisees, an increase in impairment charges and site selection costs due to dead site write-off.

Equity and earnings came in slightly better than we expected due to improved check and cost controls, similar to company-owned restaurants. SG&A also came in better than expected due to lower bonus expense as a result of lower guest counts than projected and lower travel and related costs as a result of cost-cutting measures. Depreciation and interest expense came in pretty much as anticipated.

And looking at the balance sheet, we ended the quarter with total debt-to-EBITDA, including operating leases, guarantees, and letters of credit of 4.6 times, up from 4.1 times in the second quarter, and we ended the quarter with total book debt of approximately $612 million. As noted in the prior quarter, we are working with our lenders to modify our debt covenants. We have agreed in principle on the amended terms and are currently working on completing documentation.

Now let’s turn to fiscal 2008 -- you saw in our press release that our guidance for the year is based on same-restaurant sales of down 9% to 10%. Our fiscal year 2008 guidance for diluted earnings per share is $0.40 to $0.50, which reflects an estimated $0.18 to $0.20 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 of our company-owned restaurants in the fiscal year, as well as other smallwares upgrade costs associated with the remodeling initiative.

Our annual guidance assumes 19 new company-owned restaurant openings, 15 to 20 new franchise owned openings, $60 million to $65 million in normal capital expenditures, and $50 million to $55 million in capital expenditures for our company-owned remodels.

We anticipate we will finish fiscal 2008 with mutual to slightly negative free cash flow. We still project restaurant level margins to be the 18% to 19% range. We are projecting the equity and earnings line to be negative for the year by approximately $3.5 million to $4 million. We are projecting depreciation expense for the year of $90 million to $100 million, which includes approximately $15 million associated with the remodeling.

We are projecting G&A for the year at $110 million to $115 million. Stock-based compensation expense is estimated at $13 million to $14 million. Accounting rules require that stock-based compensation awarded to retirement eligible recipients expensed on the date of grant. Our fourth quarter expense is higher than the rest of the year as a result of a fourth quarter grant.

We expect interest expense for the year to be approximately $31 million to $33 million. Our tax rate for the third quarter reflected a benefit of approximately 24.6% as a result of the impact of tax credits, which remained consistent or increased on top of a decrease in taxable income, and a tax impact of settlements of audits and expiration of certain statutes of limitations.

For the year, we expect the tax rate to be a benefit of 12% to 21%. From an equivalent shares perspective, we are modeling these in the 51 million to 52 million range.

In looking out to fiscal 2009, we are currently projecting two new restaurant openings in fiscal 2009 due to the completion of restaurants in progress in fiscal 2008. Including the associated cost of these restaurants, as well as our regular maintenance capital expenditures, we expect our capital expenditures to be approximately $20 million for the year.

As we have noted in prior quarters, due to the additional accelerated depreciation expense in fiscal 2008, we expect fiscal 2009 depreciation to be at a more stabilized level and are estimating it to be approximately $80 million to $85 million. We will provide further details on these and other areas for fiscal 2009 during our fourth quarter conference call.

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

Samuel E. Beall

Thanks, Margie and welcome to everyone. As we begin today, I just want to say that our teams and I feel very good about the improvements to our brand and the execution of our communicated strategies. As we have said before, we are disappointed with our sales performance this year but we are very encouraged with our third quarter results and think the foundation is in place to build sales and profits going forward.

We are encouraged by the third quarter for the following reasons. First, although same-restaurant sales remain soft, the rate of decline was only two percentage points greater than the second quarter, even though we had no television advertising for 10 weeks during the more volatile winter weather months, and the overall consumer environment also continued to weaken.

Second, we improved average check by approximately $0.40 and that’s really without a price increase from what the check was in the second quarter. And third, we improved -- and probably most important, we improved the flow-through at the restaurant level as Margie mentioned as we regained our control of cost relative to our sales level and obtained improved margins on the better average check as we got past our remodels and able to focus more on the business.

These last two points are very, very important; our ability to raise the average check and improve -- raise the average check with promotions, good promotions and improve margins. These indicate that we are again managing our costs at the restaurant very well as we have in the previous 10 years, with the exception of the second quarter. They also give us confidence that we will realize significant earnings leverage when sales do improve.

Now I’d like to step back and take a more strategic look at where we are. Our mission, which I’ve communicated before, is to consistently deliver a memorable, high quality casual dining experience with compelling value. We’ve changed the culture of the company from a bar/grill mentality to a culture focused and intent on surpassing the bar/grill standards and providing the same quality, passion, and pride found in higher quality casual dining restaurants.

Our real long-term competition are really these restaurants. We believe that delivering on this mission will distance us from our traditional bar/grill competitors and result in satisfied customers who return frequently, leading to growing sales. Higher sales, as we all know, will produce higher earnings that will create shareholder value.

We believe our mission is best realized by focusing on our four brand strategies, which we’ve communicated over and over again -- uncompromising quality and freshness, gracious hospitality, a fresh new look, and we added compelling value in the fall. By focusing unwaveringly on these core brand strategies, we have positioned Ruby Tuesday over the last two years in a way that we are confident will have a positive impact on our business in the coming years. We’ve talked a lot about these strategies in the last couple of years and I want to provide a brief summary of them below.

First, uncompromising freshness and quality -- we have significantly improved the quality of our food with an emphasis on fresh. Our food and beverages are truly significantly better, fresher and higher quality than ever. We’ve revamped the menu from the salad bar to appetizers, entrees, burgers, and our entire beverage program. As a result, our guests rate our menu items much more highly than they ever have -- items like our handcrafted and triple-crown burgers, our handcrafted minis, our fresh all-natural premium chicken, our fresh jumbo crab cakes that are made daily, our premium aged prime sirloin steaks, and premium seafood dishes.

We also upgraded our beverage category when we introduced high value, high quality, handcrafted beers, premium wines and liquors, as well as premium-sized pours. In addition, we introduced a premium line of non-alcoholic drinks anchored by our fresh strawberry lemonade.

As a result of these changes, our guests tell us that our food and beverages are significantly better. We think that this quality differentiates us from a traditional bar and grill competitor, positioning us better for the long-term.

Our second brand strategy is gracious hospitality. We’ve invested heavily in our service programs to improve our level of hospitality. Our leadership and culinary arts center are critical to everything we do here in Maryville. As we’ve evolved the company culture, we invested in retraining all of our managers on new service systems.

For instance, we implemented a new service system utilizing food and beverage runners, which allow our best service staff to focus entirely on the guest and guest experience, resulting in a higher level of service. This is the type of service system you’d find in a fine steakhouse.

We also introduced a fresh new look for our servers with a higher image and dress standard.

We’ve made investments in field based, front-of-the-house training leaders as part of this program. We brought in over 1,000 managers last summer to complete the service training and then roll it out to their restaurants.

We’ve also implemented technology that helped us have better food by better coordinating the timing of the preparation of orders and better measuring the performance level of the entire guest experience so we can react quickly to increase performance.

After improving our food and service programs, we turned our attention to our third brand strategy -- a fresh new look for our concept. We’ve remodeled over 600 company-owned restaurants with a more contemporary, more current, a relevant look that positions us for the future. We accomplished this in less than a year. I don’t think any full service restaurants has ever remodeled this many restaurants in as short of a time.

For those who have not seen our new look, I encourage you to go to our website or better yet, go visit a Ruby Tuesday.

Now I would like to touch on our fourth brand strategy, compelling value. Based on what our guests tell us, it is very important to define what compelling value is, and they define value as an entire dining experience of hospitality, food quality, atmosphere, and price. In the current environment, price is a key component in the consumer’s mind, and we are therefore committed to having a number of items on the menu that are priced comparably to our traditional competitors, hence our current advertising mentioning a $6.99 entry price point for a handcrafted hamburger.

As you can tell, significant change has occurred within our restaurants; change that has touched virtually every aspect of our business, from the food to the service systems, training, and the look and feel of the restaurants. The extent of this change, and in particular our aggressive remodeling program this year, results in taking our eye off of managing check and expenses relative to our levels of sales. As I mentioned earlier, our third quarter results demonstrated that we were once again controlling these areas well.

With all that we’ve accomplished in the last couple of years and with all the change behind us, our entire company is very excited because we can now focus only on execution, providing fresh, high quality products, gracious hospitality, and compelling value for our guests every time that they visit our restaurants.

We continue to believe that we are on the right track as it relates to our guess, and the ability to differentiate ourselves from others in the bar and grill segment. Positive customer -- actually, very positive customer feedback and high and improving guest satisfaction scores fuel our confidence.

For example, our overall top box -- that’s the percentage of guests that rate us a four or a five out of -- on a zero to five, rate guest satisfaction scores have increased our top box overall rating from 80% to over 90%. The intent to revisit and recommend to others has also improved dramatically. Our score on intent to revisit has increased from 86 to 92 and we’ve seen our score on value increase from around 79 to 89, so value has dramatically increased.

Our food ratings continue to improve with significant positive improvement in all key areas. In our most recent food study that we got back in February, our top box scores are the highest they’ve ever, ever been. We were up four and five points on top box virtually across the board.

Our top box freshness ratings, which represents freshness as compared to other casual dining restaurants, top two box rather has increased to 78%, which is very high. Taste and flavor has improved to 91 and value again in this study, a different study, has increased to 88% of our guests rate us a four or a five.

All are very positive scores and are moving -- and continue moving even higher.

Our service scores, we just go back our second full service study that’s done by outsiders also and it improved even more significantly than the food, I think driven by the entire service system rollout that we had in October, as well as the amount of focus now since we passed the remodelings on really improving service. And every category in the service score improved by five, most of them were in the 10 point range. Dramatic improvement there.

A couple of key areas with 10 or more points of improvement on the top box scores to emphasize our fresh new look are the restaurant looked warm, it looked inviting, it looked clean and well-maintained. Seventy-seven percent of those responding gave our servers a five on a one to five scale with regard to being courteous, polite, and friendly, and overall quality of service is up six points.

Two of the most important measures that we frequently discuss are intent to revisit and likely to recommend. Both of these from the food study also are up five points. You can see the food studies and the service study scores really parallel and support our guest satisfaction scores, which is our guest feedback system that we manage internally.

Virtually all attributes of our concept that go into overall guest satisfaction rated much higher now than at the beginning of the year, from service to food to atmosphere. I think where we are really getting a big kick on this is if you go back a year-and-a-half where we just had the food and then we started implementing the service in the fall, and then we started the remodeling programs -- now it’s all complete and the guest is seeing that, instead of just seeing one of those elements and saying hey, but being confused by the other one. It’s all finished and it’s all in integrated field and I think that’s what really driving the value up and overall experience up. They are seeing the final picture and now they’ve had a chance to go in. The first time, maybe it’s a little bit of a shock; second, third time they’re saying aha, this is really good, I like it.

We believe that these levels of guest satisfaction over time should translate into higher sales through both increased frequency and new guest visits. We realize the economy may have to get better, since we certainly don’t have the most advertising dollars in the world. We plan on continuing to focus on raising these ratings even further so when the guest comes back and they come into Ruby Tuesday, they really experience just a wow experience significantly different than others.

Our top two box rating goal is 92%. We were almost there in March so we will probably raise that on up to probably 95%, Kimberly, I guess. We believe our intense laser-like focus on our brand strategies will pay off for our shareholders and will enable us to address our company strategies of getting more out of our existing assets, our restaurants. It’s great, we only have to focus on the restaurants. They need no capital probably for the next five years and we just drive sales. Number two, attaining the right capital structure and three, achieving consistent and predictable results. I’ll comment on each of these briefly.

Getting more out of existing restaurants is essential. We know it drives everything. Cost control only goes so far. Our emphasis on our brand strategies that we’ve talked about and improvement in guest satisfaction is the best way to build long-term brand loyalty, really being significantly better.

In the short run, of course, that’s not enough. We need to use other tactics to increase sales. The two things we are focusing on right now is average check and marketing. As we have mentioned, we are having success at increasing the check. This has been the result of less price promotional activity and as well as an outstanding in-unit promotion. Ruby’s, we do a great job with seafood and our seafood promotion this year, this winter has really helped us with check. At Ruby’s, we actually sell more seafood than chicken, which is kind of amazing, but we are very, very well-known for that and whenever we promote it, it resonates very well with the guest.

The focus on these promotions is improving check through menu mix while at the same time providing improved value and quality in a quality product.

Turning to marketing or advertising, we implemented a four-pronged platform in October as we realized our marketing results for the first five months of our fiscal year were not yielding the expected results. Our goals with the platform are to communicate our new image and tell a value story, thereby driving trail and frequency.

The four pillars of the program are national cable TV to highlight variety, quality, and value. Our commercial is on the web if you’d like to see our latest one. The second pillar, targeted high quality direct mail promotions to highlight our fresh new brand, as well as products, and value. Our latest demographic research supports the fact that we are attracting more guests with higher discretion income. In all of our promotional tests we’ve done, we’ve done a return on investment analysis and we know exactly which ones pay out, which ones add value for the shareholder and that’s what we are focused on as we go into next year.

The third pillar is national print or magazines is the best way to say that, I guess, and this really is about communicating our fresh new brand primarily to women. This is especially important since our oldest remodels have only been complete since the summer and a majority of them have only -- some of them have only been complete for 30 days, but really we are fresh and many people haven’t seen it. So we communicate this visually in magazines.

Finally, our fourth pillar is our in-store promotions, like the seafood promotion I was just talking about. We know what works there and we are just going to keep hammering down on that all next year.

Last quarter we told you that we narrowed our guest count gap versus Knapp-Track from off approximately 9% in August and September to off approximately 4% in November. While we were off, the gap increased to approximately 7% but more recently the gap has further narrowed and with our March TV campaign to approximately 30% in the first two weeks in March -- 3%, I’m sorry -- 3% in the first two weeks of March since we’ve been back on the air.

Our principal goal for restaurant sales is to increase our average restaurant sales over the next five years to $2.5 million, a tough challenge but with all the investments made, all the ratings we have, we think that as the economy comes back, we can have more than those 2% and 3% same-store sales years. But that’s our goal.

This will be the result of a combination of higher guest counts, increased frequency as the economy comes back, increased check, as we’ve discussed before, and closing several low volume units over the next couple of years.

Our year-to-date cash flow from operations is positive. We are projecting positive operating free cash flow in our fourth quarter. When sales increase because of all the actions we’ve taken over the last couple of years and with some help from the economy, we’ll begin to generate even more operating cash flow. Keep in mind CapEx is pretty well fixed. We have no needs in Ruby Tuesday. It’s a cash flow story. We’ll be spending significantly less on really everything and generating substantial positive operating free cash flow. Initially we’ll utilize that cash flow to reduce debt and obtain the right capital structure.

Our capital expenditures next year as I mentioned will be approximately $20 million, be low for several years and our new restaurant development plan of course is minimal.

We target total debt-to-EBITDA at three times or less. That’s where we always were up until the last year or two years at the most. To achieve consistent results, we need to have stronger sales. Everything else is in place. We are confident that the actions we’ve taken will result in higher sales in a stronger consumer environment.

Before I close, I wanted to thank -- we have 50,000 team members out there. They’ve been working hard. They feel great about what they are doing. They see the difference in the food. They see the difference in the way the place looks. They see how professional each other looks, and they are very excited about being part of Ruby Tuesday and what we are doing.

We have been through a lot of change but everybody knows exactly what we are focused on with laser-like focus and we will get results. It’s amazing that even in these difficult times that our management turnover has remained so low, but I think it’s because of the reasons I just stated. People, they believe in the quality, they believe in the passion, and they believe in the pride that we have in Ruby Tuesday.

Finally, I want to leave you with the following thoughts; first, we are operating our restaurants extremely well after being distracted earlier in the year. Second, our guests are definitely recognizing our improved operations by giving us the highest food and service ratings ever, and this isn’t by a point or two -- these are really good scores. Our research guest satisfaction scores and team feedback, they all indicate we are a much stronger brand and over 90% of our guests rate us -- actually, I think 92 isn’t it right now, Kimberly, 92, 93 rate us a four or a five overall on a one-to-five scale.

We believe we have a great brand, a brand that is fresher, better, more relevant, better positioned than ever, and extremely well-positioned for the future.

Third, we are committed to improving cash flow, lots of cash flow, restoring our balance sheet strength and increasing shareholder value.

With that I’ll close and we want to thank you for joining us. We’ll now open it up for questions.

Question-and-Answer Session

Operator

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

Keith Siegner - Credit Suisse

One first quick question -- can you give us any details about the terms that have been agreed to for the covenant amendments? Or at least can you tell us the updated fiscal 2008 guidance factor in the terms that have been agreed to at this point?

Marguerite N. Duffy

It should. There will be minimal impact in the fourth quarter, anticipate a mid-April close so you will have a month-and-a-half of a variance in interest rate, but we’ll have everything outlined when we finalize documentation for a full update for you at that time.

Keith Siegner - Credit Suisse

Okay, and then one other question; there have obviously been a lot of refinements to the menu and tests on the menu over the last several years, but even over the last couple of months, I think the most recent menu change that I saw was back in the end of January. Are you pleased with the response to the menu that you have now with the separate menu for drinks and desserts and --

Samuel E. Beall

We’re ecstatic about our menu. And we haven’t changed our menu significantly now in what, Mark, about eight months, nine months? We did a little tweaking in January. Mark, he’s had a menu study and just talk about a couple of those ratings, if you would. Our menu has no problems. There’s nothing we need to do to our menu for the next year, other than minor tweaks at a reprint.

Mark Young

As Sandy said, we’ve been very limited in the amount of change. We’ve tweaked some menus and done some things from a design standpoint to get it just right and get our financials back in line but the menu that we rolled out at the end of January is very strong. We’ve got scores up and the overall ratings are up five, six points on that. Value ratings, as Sandy talked about, are up great there.

If you look at the categories, overall our categories on the top box rating, the majority of them are scoring above 60 points on the top box, so we’ve really got our menu in a great place and we fond our place again with our promotional strategy and we will continue to leverage those as we are going forward the rest of this year and for sure going forward in ’09.

As far as menu design goes, menu design, those elements, let’s see here -- where is it -- menu ratings, as an example, this is top box, have improved 10 to 15 to -- at least 15% probably since last September even, so it’s in good shape, whether it’s fresher foods, has options that are unique and appealing, consistently higher quality food -- all those scores are up, so we are in good shape.

Keith Siegner - Credit Suisse

Are you finding that the one-pagers at the high volume locations are helping at all on the execution front? I know that has been one of the targets of that one-pager menu.

Kimberly M. Grant

Operationally, the one-page menu is amazing operationally. It helps with execution overall. It helps controlling costs and waste -- it truly helps our high volume locations overall and in some locations it’s contributed positively to check as well.

Mark Young

That’s just a high volume strategy. That’s all that’s for right now. We’re not planning on rolling that out to the system at all.

Keith Siegner - Credit Suisse

Thank you.

Operator

Your next question comes from the line of Chris O’Cull with Suntrust.

Christopher O’Cull - Suntrust Robinson Humphrey

Sandy, what is the company stores’ approximate check average at dinner and lunch right now?

Samuel E. Beall

Hold on here -- what’s your next question while we’re looking it up? Here it is -- so it’s like a little bit below $11 at lunch and high 12s at dinner.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. Do you think the trade area of certain restaurants in the system right now make it possible to raise the check average? And by that I mean do certain locations lack the demographics you need?

Samuel E. Beall

You know, that’s a great question, Chris. We just did some studies, Kimberly did, and we looked at all of our restaurants based on market size, which is generally incomes also. You know, your larger -- your small town markets versus your large markets. We’ve had more -- a higher value rating increase in the small markets than the higher markets, actually.

The other thing we have found is that with the improvement in food and service, really service, again our value rating has been going up every month very highly and that’s even with them spending some more money.

I do think you have, as you execute better and better, you have opportunity to raise prices. Now, we’re not anticipating raising prices. I think next year we’d like to get 1% or 2%. I think 2.2 is the maximum that I’ve seen, if we can get it but we kind of just take that, every time we print the menu, can you get a dime here, a dime there. There’s nothing major planned.

But I think there’s an opportunity to get that but I would like to see the [company] come back first before we start focusing on that.

Christopher O’Cull - Suntrust Robinson Humphrey

And my question was really related to just, you know, most restaurants have I guess a three, five mile trade area. Do you feel like most of the locations have the density of the type of demographic you are seeking to generate higher volumes for that restaurant? I mean, clearly --

Samuel E. Beall

Yeah, it’s the same restaurant. I mean, it’s the same restaurant -- it’s just five times better, I think. And if you look at the small market ratings for overall on a guest satisfaction, you know, they respond to it. There is no difference in the markets. I don’t think -- we certainly haven’t limited our volume by having it in a nicer place, just like Chipotle hasn’t or [inaudible] hasn’t in mid-size market versus a large market. It’s just a more relevant concept.

Kimberly M. Grant

In addition to that, we have locations in very small town America that do $3.5 million in sales, so we know it really doesn’t matter what the size of the market is as much as the competitive set and the reputation of the restaurant in the community.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. Thanks, guys.

Operator

Your next question comes from the line of Stephen Rees with JPMorgan.

Stephen Rees - JPMorgan

Now that you are kind of coming up on some of them that have been completed for I guess almost a year, can you just talk about the average check trends, the traffic trends, the day part usage in some of the stores that have been remodeled for a little bit longer?

Samuel E. Beall

I wish I could. I mean, that’s a big question. I don’t have that. But Stephen, what I did think of when you were asking that question, our very first remodel group has actually seen a little more I guess because of its age, but a little more increase in our guest satisfaction scores overall. I think that’s the way it will go. I think people get used to it and then they say wow, I really like this. And then they go back to a more dated concept look and they say gosh, what a difference. That’s kind of what Kimberly and I did. After we started remodeling, we’d go in and we though Ruby’s looked great, and then we started remodeling them. We’d go from a remodeled store and then go back to a regular store and say eww, you know, this looks so bad in our mind. And I think the consumer will do that some too.

Stephen Rees - JPMorgan

Okay, and then can you just talk about your cash flow negative stores? I think you used to say there was only a handful but that grew a little bit last quarter. Can you just talk about how many stores today are cash flow negative and how you are thinking about potential closures going forward?

Samuel E. Beall

On our total cash flow negative list, what do we have right now?

Marguerite N. Duffy

Mid 20s is what’s negative now, and that’s correct it is higher because of the lower sales right now.

Samuel E. Beall

But the total amount of negative cash flow on all 20 restaurants is -- it’s meaningless money. What is it -- it’s like -- Margie doesn’t want me to go there. It’s very low. It’s very low. Most of -- I mean, they are very low.

Stephen Rees - JPMorgan

But it did seem like there was a few more closures than usual this quarter. I mean, do you anticipate increasing closures next year or --

Samuel E. Beall

No, not really. I mean, Kimberly just said those are mostly lease expirations that came up at that time of the year. I mean, we’ll close a restaurant if it makes sense. We’re not scared of that. But Kimberly said we haven’t closed any other than lease expirations this year.

Stephen Rees - JPMorgan

Okay, and then just finally, just to clarify your comments on March, was that a three point improvement in same-store sales for the whole month or is it just the weeks that you advertise or --

Samuel E. Beall

No, that was a three-point improvement versus Knapp.

Marguerite N. Duffy

In our guest gap versus the rest of casual dining.

Stephen Rees - JPMorgan

A three-point traffic gap improvement versus the --

Samuel E. Beall

Correct.

Stephen Rees - JPMorgan

Okay, for the entire month?

Samuel E. Beall

Yeah, whereas it had been eight or nine, it had been seven before that, and it came down with our advertising. That’s versus casual dining and bar/grill generally runs several, a couple points worse than casual.

Stephen Rees - JPMorgan

Okay, so that improved by three points in March?

Samuel E. Beall

We only had a three point difference between us and all of casual dining.

Stephen Rees - JPMorgan

Okay, and the prior gap was seven points?

Samuel E. Beall

Pardon?

Marguerite N. Duffy

That’s correct, yes.

Stephen Rees - JPMorgan

The gap in February was seven points? Okay, great. Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Joseph Buckley with Bear Stearns.

Joseph Buckley - Bear Stearns

-- average check. You mentioned the sequential improvement second quarter to third quarter of $0.40. What did the average check look like year over year in maybe both quarters, the second quarter and the third quarter?

Marguerite N. Duffy

It’s down versus prior year, probably about -- probably $0.20 to $0.30 down versus prior year.

Joseph Buckley - Bear Stearns

Okay, is that the third quarter, Margie?

Marguerite N. Duffy

That’s correct, yeah, just for the third quarter.

Samuel E. Beall

While you are on there, Joe, I do want -- everybody, we got the coveted Joe Buckley dine-out award. We got a five chef, which is admirable for a bar/grill restaurant and we thank you for that, but I wanted to share that with everybody.

Joseph Buckley - Bear Stearns

It was a family vote. My competitors are wondering what the heck you are talking about but well-deserved, a great experience. Just a couple more questions -- obviously the customer counts are pretty negative and I’m assuming as you try to rebuild those, you are going to be looking for new users as opposed to recapturing some of your lapsed users.

Samuel E. Beall

I think you are looking for some new users but you are really looking for increased frequency from the existing users. I think we talked about that last quarter about our lapsed user study, you know, where -- since we’re not heavy, heavy advertisers, can’t compete with Olive Garden and Applebee’s on that or on the value, our users just say they are eating out overall over a third less. And if you can’t -- if you are not in there fighting for them every day with value or voice, that’s just going to be a fact of life, I think.

Joseph Buckley - Bear Stearns

Sandy, what happens when you are on air? Are the numbers --

Samuel E. Beall

Well, what we said in March, we were on in March and we had a -- it was very good in March. We had a good response from our television. We’ve been doing a lot of testing, promotional testing here and there and understanding our exact returns, which I’ll mention. The TV test, we have a clean read on that and it moved the needle about four or five points, based on what we just said versus Knapp-Track. And we’re not doing that every month right now but it can move the needle.

Joseph Buckley - Bear Stearns

Just to -- you told us a fair amount about March, sort of in a teasing way that we’re not quite sure what the numbers are --

Samuel E. Beall

I don’t want you to get excited about March or anything. I’m not trying to do that. The point was is that we had -- after being off 10 weeks, we did advertise and don’t read anything into March. We did advertise, we had a positive effect by four points versus Knapp. We are very pleased with that and we are just furthering all of our testing and refinement of our four pillar marketing strategy so we will be well-prepared to maximize sales with our little budget as we roll into June, and that’s what we are doing.

Our focus for right now is make money, make cash flow and have -- with our main sales focus being starting in June.

Joseph Buckley - Bear Stearns

Okay, and is there something special going to start in June that --

Samuel E. Beall

Well we’ll have -- this last year we spent most of our advertising money, it was more front-end loaded. We have less. We’ve done -- we think we know what works for us and when we get into June, we’ll have a 12-month year-round strategy again that we think can produce results and based off of what we’ve learned the last six months. We feel good about that.

Joseph Buckley - Bear Stearns

Okay. Thank you.

Operator

Your next question comes from the line of Jeff Omohundro with Wachovia.

Jason Belcher - Wachovia

It’s Jason Belcher for Jeff. I was wondering if you could give us an update on your couponing and incentive strategies related to the reimaging program and what you envision there going forward.

Samuel E. Beall

Well, big picture, the four pillars of our strategy, we will have some level of promotion throughout the year and that’s focused on what most people do, an occasional freestanding insert. And then also a year-round effort at attracting trial from non-users who make over $75,000 through that very high quality tri-fold direct mail program that we do. So it’s a combination of efforts.

You know, in the promotional area, Mark will probably end up with four, five or six different programs going on in small amounts. Anything else, Mark? Okay.

Jason Belcher - Wachovia

Okay, and then just one other one if you could give us an update on your commodity outlook.

Samuel E. Beall

Who wants to do that?

Marguerite N. Duffy

We are still locked in as we’ve always said, Jason -- we do lock in on pretty much everything. We’ve already talked about being locked in our beef through February of 2009. We are locked in through most everything through December and some things a little bit longer. If you want to -- you know, I’ll be happy to go over some more --

Samuel E. Beall

Now through December, we have net savings from Kimberly and team and culinary to offset all of our increases and that’s what we’ve been telling everybody and that’s just a fact. I guess we could have some exposure in the back portion of the year but you also have --

Marguerite N. Duffy

So far we’ve been able to offset it and that’s our --

Samuel E. Beall

It’s not a major issue to us.

Jason Belcher - Wachovia

Okay, that’s helpful. Thank you.

Operator

Your next question comes from the line of Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James

I’m on the road. You may have answered this so I apologize if you did -- this advertising, you talked about only being off for 10 weeks, or being off for 10 weeks in Q3. What is the week count or how many weeks do you expect to be on in Q4? And when you look at ’09, just review quickly -- if you did already, again I apologize, but what’s the --

Samuel E. Beall

No, no, that’s a good question, especially ’09. Mark.

Mark Young

Bryan, ’09, based off what we learned this year, I think you are going to see us back out there -- I’m not going to talk exactly what the plan’s going to look like. We’ll be on probably half the year in way strategically that will get us more impact than what we’ve seen in the past. So you know, we’ll probably be on -- I don’t know, 20 to 30 weeks next year.

Bryan Elliott - Raymond James

Very helpful, and how does that compare to this year? About the same I guess as far as weeks?

Mark Young

Actually, not far from it. Pretty similar to what we were this year.

Bryan Elliott - Raymond James

Okay, and also Sandy, you mentioned a couple of times the comparison of [inaudible] versus the industry and using March gap narrowing -- just give us a sense of the absolute change that you are seeing. What’s your sense of the industry March --

Samuel E. Beall

I don’t think it’s -- I don’t see any benefit -- I don’t see anything improving there. I haven’t really seen that. I think it’s -- I heard Mark talk about it’s really a share game. I think we did better in March because we had a very effective TV ad out there and I bet somebody else did a little worse or something. But I haven’t seen any signs of consumers spending more money. I’d love to.

Bryan Elliott - Raymond James

How about less? Was March worse than --

Samuel E. Beall

Less? Well, I can’t tell really because I don’t know because we were -- I don’t know, Bryan. I don’t know.

Bryan Elliott - Raymond James

Thank you.

Operator

Your have a follow-up question from Chris O’Cull with Suntrust.

Christopher O’Cull - Suntrust Robinson Humphrey

-- questions for you; do you know whether guests that used the direct mail pieces are returning for additional visits without an incentive?

Samuel E. Beall

I don’t know that because we didn’t code those direct mail pieces, so we can’t tell that. We are coding the ones that go out this year and we will be able to tell it, Chris.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, great.

Samuel E. Beall

I mean, we have the technology in place now but we didn’t have it -- because we did most of that through January.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, that’s good. That’s helpful. And Margie, what was the year-over-year reduction in G&A associated with the lower marketing expense?

Marguerite N. Duffy

How much was less advertising year over year?

Christopher O’Cull - Suntrust Robinson Humphrey

Right, that goes to the G&A line.

Marguerite N. Duffy

Okay. About $1.5 million.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, and that was for the quarter?

Marguerite N. Duffy

Right, for the quarter.

Christopher O’Cull - Suntrust Robinson Humphrey

Can we annualize that to come up with a rough estimate for the full year?

Marguerite N. Duffy

No, I don’t think so. I mean, it’s varied by quarter.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. I’ll get it offline. Thanks.

Samuel E. Beall

Anybody else? How many more, Shannon? One or two?

Operator

You have a follow-up question from Stephen Rees with JPMorgan.

Stephen Rees - JPMorgan

Can you just talk about the health of your franchise system? With 220 units, it’s not small and you have had some acquisitions recently. Can you just talk about your propensity for acquisitions in 2009 and how they are doing with the remodels?

Samuel E. Beall

Kimberly, how many remodels did they have?

Kimberly M. Grant

Maybe about 30% of the restaurants.

Samuel E. Beall

Thirty percent, and then probably -- you know, all the new restaurants there’s no need for them to remodel those, so maybe half the old ones or something have been redone. As far as how they are doing, I mean, it’s tight out there, you know. I mean, they are surviving but they are kind of -- they are running about the same as us, actually. They run about the same on sales and the same on profitability and they are controlling costs very, very well and it’s tight.

As far as our appetite for acquisitions, I would envision us buying kind of what we’ve said in the past, maybe zero to two a year. I think we’ve been averaging about two per year over the last three or four years. We may not buy any, may buy one, may buy two -- I just don’t know, don’t have any plans right now.

Stephen Rees - JPMorgan

Okay, great. Thank you very much.

Shannon Hepp

Operator, we have time for one more question.

Operator

You have a question from Bob Derrington with Morgan, Keegan.

Robert Derrington - Morgan, Keegan & Company, Inc.

Thank you for the privilege. Sandy, a question on turnover; can you give us some color on, given the stress the restaurants are under, has it affected turnover at either your staff or your management level?

Samuel E. Beall

Kimberly.

Kimberly M. Grant

Our management turnover has been very low for three years running. We run about approximately 20% and we’ve seen no increases whatsoever on that front. And on the hourly turnover, we are actually experiencing decreased hourly turnover. Right now we are running about five points below prior year and we anticipate to finish with great momentum going into fiscal year ’09.

Robert Derrington - Morgan, Keegan & Company, Inc.

That’s terrific, absolutely terrific.

Samuel E. Beall

It really is but again, Bob, you take what we were and it’s just like -- whether it’s the crab cake or whether it’s the Asian Salmon or whatever, I mean, there’s a lot more pride in what we are doing. It’s easier to keep people. They want to stay here and then also, like our board asked today about quality of life of our managers, I mean, our managers work average 47 hours a week, five days a week. They are proud of it, they are happy with it and they have a good quality of life, and they make pretty good money even without bonuses.

Kimberly M. Grant

And our team members with the new service excellence program are making more tips than they ever have. We are over 18% on tips. For a bar/grill type restaurant, they are making very good money and we’ll continue to have great promotions and great beverage items for them to sell so they can continue to make more money.

Samuel E. Beall

Yeah, 18% of -- I mean, that’s pretty amazing. I think that’s impressive. That’s gone up a lot in the last year.

Robert Derrington - Morgan, Keegan & Company, Inc.

Sandy, given all the upheaval and change that’s gone on within the system over the last 12 months, is it reasonable to expect that logically, you would think there would be a distraction and hopefully as we go forward with less change, maybe there’s a little bit less upheaval and less change and less --

Samuel E. Beall

There is no change right now. We are doing -- the only thing we even think about or do around here, we have the menus just exactly as we want them, we have our service systems in. We just want to do what we are doing better. There aren’t any menu changes, the building’s finished, we don’t have any capital changes, we don’t have to look at new sites, I don’t have to plan remodels.

We spent all of our time -- I mean, I’ve been in the units more in the last two months than I’ve been in the last year probably. Kimberly, the entire executive team has been out in the units. We’re just running great restaurants. That’s all we’re going to be doing for about two or three years, at least -- focus on cash flow, running restaurants, get cash flow.

Robert Derrington - Morgan, Keegan & Company, Inc.

Margie, a quick question on tax rate fiscal ’09 -- is it reasonable to expect a more normalized tax rate?

Marguerite N. Duffy

Yes, it will be more normalized in ’09?

Robert Derrington - Morgan, Keegan & Company, Inc.

Okay, terrific. Thanks, folks.

Samuel E. Beall

Thank you, and thanks for joining us. Call Shannon if you have any follow-ups. Bye.

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