Rubio’s Restaurants, Inc. Q4 2007 Earnings Call Transcript

| About: Rubio's Restaurants, (RUBO)

Rubio’s Restaurants, Inc. (RUBO) Q4 2007 Earnings Call March 27, 2008 5:00 PM ET


Daniel E. Pittard - President and Chief Executive Officer

Frank E. Henigman – Senior Vice President and Chief Financial Officer

Lawrence A. Rusinko - Senior Vice President of Marketing & Product Development


Ian Corydon - B. Riley & Company

Tony Brenner - Roth Capital Partners

[Daniel] – Lord Abbott


Welcome to the fourth quarter and full year 2007 Rubio’s Restaurants earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Dan Pittard, President and CEO.

Daniel E. Pittard

Thank you for joining us today, with me is Frank Henigman, our Chief Financial Officer and Larry Rusinko, our Senior Vice President of Marketing. We are here to review today’s press release regarding Rubio’s fourth quarter and year-to-date 2007 results.

I’ll turn it over to Frank, who will discuss our financial performance.

Frank E. Henigman

I would like to remind everybody about the Safe Harbor rules regarding forward-looking statements and encourage you to review the Safe Harbor disclosure at the end of today’s press release.

First I’ll address fourth quarter results. Specifics for the 13-week fourth quarter as compared to the prior year 14-week fourth quarter are as follows. Net loss for the quarter was $242,000 compared to a net loss of $4.692 million for the same quarter a year ago. Earnings per share for the quarter were a loss of $0.02 compared to a loss of $0.48 per share in the fourth quarter of 2006.

The company would have reported earnings for the fourth quarter of 2006 of $140,000, or $0.01 of EPS, assuming the pre-tax charge of $8 million for the class action settlement and related costs were excluded from the reported results.

The fourth quarter of 2007 was impacted by store closure expense of $292,000 as compared to a reversal of $158,000 in 2006. The $292,000 charge in 2007 was primarily comprised of a $229,000 charge related to the closure of our Beverly Center location in the Los Angeles, California area.

Revenues for the quarter increased by 1% over last year’s fourth quarter to $41.7 million, up from $41.3 million in 2006. Adjusting for the extra week in the fourth quarter of 2006, revenues increased by 8.8%. Revenues in the fourth quarter of 2007 included $382,000 in gift card breakage revenue associated with the portion of our gift card liability that is not expected to be redeemed.

Comparable store sales increased by 1.7% for company-owned restaurants for the quarter on top of fourth quarter 2006 comp sales of 4.9%. Comparable store sales would have increased an estimated 2.1% after adjusting for an estimated $180,000 in lost sales due to the October 2007 Southern California wildfires.

Adjusted EBITDA for the 2007 fourth quarter was $2.4 million versus $2.5 million in the fourth quarter of 2006. Please see the calculation for these amounts in our earnings release as the 2006 settlement and related costs were included as an add-back in the fourth quarter of 2006.

Restaurant operating margins for the fourth quarter were 16% compared to 17.7% for the prior year quarter. Restaurant labor decreased by 30 basis points, however cost of sales increased by 20 basis points and occupancy and other costs rose by 180 basis points.

Details of the components of restaurant operating margin are as follows. Cost of sales for the fourth quarter was 27.9% of restaurant sales as compared to 27.7% for the same quarter last year. Beef stock and ingredient cost pressures, fourth quarter increases in the cost of avocados and tortillas, and a less than expected impact from the menu change and price increase implemented during the quarter contributed to the quarter-over-quarter increase.

Restaurant labor was 31.8% of restaurant sales for the fourth quarter of 2007, versus 32.1% for the same quarter last year. Restaurant labor again benefited from reduced workers’ compensation expense and required reserves.

Restaurant occupancy and other expenses were 24.3% of restaurant sales for the fourth quarter in 2007 versus 22.5% for the same quarter last year. The quarter-over-quarter increase was primarily due to the following. First, advertising costs were lower in the fourth quarter of 2006 due to our decision to halt media spending in our Los Angeles market.

Second, rent expense as a percentage of sales was higher primarily due to the impact of fixed rent payments being spread over the 14-week quarter in 2006 compared to the 13-week quarter in 2007. Finally, common area maintenance costs increased as some of our landlords passed through increased utility and tax expenses.

G&A expenses for the quarter were in line with expectations at $4.4 million or 10.5% of revenues versus 31% for the same quarter last year. Class action settlement and related costs totaling $8 million were included in the 2006 quarter. Excluding these costs would have reduced G&A as a percentage of revenues down to 11.6% for the fourth quarter of 2006.

G&A expenses in the fourth quarter of 2007 included costs related to the addition of two senior vice presidents to complete the executive team as well as costs associated with adding systems for scalable growth.

The summary of the 52-week year-ended December 30, 2007 as compared to the 53-week prior year is as follows. For the year, net income was $1.189 million or $0.12 per diluted share compared to a net loss of $3.461 million or $0.36 per share for the last year.

Company would have reported earnings for 2006 of $1.371 million or $0.14 of EPS assuming the pre-tax charge of $8 million for the class action settlement and related costs were excluded from the reported results. Revenues for the year were $169.7 million an 11.5% increase from $152.3 million last year.

Comparable store sales increased 6.2% versus the comparable store sales increase of 2.0% for 2006. Transactions decreased 2% and average check increased 8.3%. Average unit volumes for all restaurants open for a full year was $1.034 million compared to $980,000 in 2006.

Adjusted EBITDA increased 17.9% to $12.3 million from $10.4 million in 2006. Please see the calculation for these amounts in our earnings release of 2006 settlement and related costs were also included in the add-back in 2006.

Restaurant operating margins for the year were 16.3% as compared to 16.7% in the prior year. The details of the components of restaurant operating margin are as follows. Cost of sales for the year was 28.5% of restaurant sales as compared to 27.7% for last year.

Percentage increase in fiscal 2007 as compared with fiscal 2006 is a direct result of higher cost of seafood, avocado, and corn, with corn directly impacting the cost of chicken, steak, tortillas, cheese, and beverage syrup. Additionally, the cost of cooking oil increased due to our transition to the exclusive use of zero trans fat oil during the third quarter of 2007.

Restaurant labor for the year was 32.1% versus 31.9% for last year. The increase in 2007 compared with 2006 is primarily the result of the increase in the minimum wage at the beginning of the fiscal year, increased staffing levels at the restaurants, and the cost of our long-term incentive plan for our restaurant general managers.

In contrast what we experienced in the fourth quarter, for the year restaurant occupancy and other expenses were 23.1% of restaurant sales versus 23.7% last year. This decrease came primarily from advertising as a result of our decision to shift a significant amount of advertising dollars from mass media advertising in the LA and Phoenix markets, to localized neighborhood marketing efforts.

G&A expense for the year as a percentage of total revenue was 9.6% versus 15.4% for a year ago. Class action settlement and related costs totaling $8 million were included in G&A in 2006. Excluding this charge would have reduced G&A down to 10.1% of revenues for the 2006 year. Included in G&A was a non-cash share-based compensation expense under FAS 123(NYSE:R) of $1.2 million for 2007, and $600,000 for 2006.

On the development front, we opened five new restaurants in the fourth quarter and a total of 11 for the year including one franchise location in Las Vegas. We have opened an additional four restaurants in the first quarter of 2008 and expect to open one more on the last day of the quarter. In terms of new store performance as of March 16, the 17 stores not yet in our comp base have average weekly sales that are collectively 17.2% higher than the respective market average.

I’ll now turn the call over to Larry for his perspective.

Lawrence A. Rusinko

My comments will include a review of fourth quarter accomplishments and provide insight in the results and initiatives for the first quarter. As Frank noted, comp store sales increased 1.7% for the fourth quarter. This reflected a considerable change from the first three quarters of 2007. As noted previously, the Southern California wildfires negatively affected October comps by approximately 0.4 percentage points.

Additionally, we began lapping over 2006 price increase of approximately 5% on October 10. Starting in the third and fourth weeks of November and continuing through the year-end, we experienced a general softening in our business, the result of a weakened economy being pressured by higher gasoline prices and the subprime problems in housing.

All of our markets experienced downward pressure on sales during this time. However, three markets in particular, Phoenix, Sacramento, and the Inland Empire region of Los Angeles, all on the front end of the subprime loan problems were primarily responsible for our weakening fourth quarter comps.

Worsening economic conditions simply caused consumers to pullback on discretionary spending. In turn, comp sales turned negative in these markets for November and December weighing heavily on our overall results despite continued positive fourth quarter comps in all other markets. In fact, excluding Phoenix, Sacramento, and the Inland Empire, our Q4 comps sales would have been 3% versus 1.7% before adjusting for the impact of the Southern California wildfires.

We also implemented a menu change and modest pricing adjustment for combos at the end of October 2007. Our intent was to reduce the discounts on our combos and cover some of our ingredient cost increases. However, these changes combined with what has now revealed itself to be a very different and difficult economic environment negatively impacted the business. Average check did increase but we also lost some of our price-sensitive guests more quickly than we anticipated.

Transactions for the fourth quarter declined 3.8%. Again these three market areas, Phoenix, Sacramento, and the Inland Empire were primarily responsible as transactions declined severely starting in mid-November and continuing through December. In addition, Phoenix transactions were negatively impacted by unfavorable year-over-year advertising comparisons.

We expected transactions to remain slightly negative for most of 2006 as we lapped our previous price point driven strategy and some price-sensitive consumers did in fact leave the brand. At the same time, our strategy of offering high-quality products with unique tastes and flavors has positioned us more appropriately to reach and attract our intended target consumer of high income, highly educated adults between the ages of 25 and 49.

Our research shows that value ratings for our core user group are improving. So we continue to believe our strategy is sound. However, with the onset of a more challenging economic environment, even high-income households, those in the $60,000 to $100,000 range are being pinched and are cutting back on discretionary spending.

Our local store marketing and sampling efforts especially within a 7-minute radius of each of our restaurants continue to play a prominent role in our marketing mix during the fourth quarter. In fact, fourth quarter LSM sales increased 51% versus the same period in 2006.

Our restaurant managers continued to aggressively establish themselves as business leaders and partners within their communities, while pursuing fundraiser sales, Rubio’s A-Go-Go sales, and off-site event sales, our general managers have reached our target consumer in a cost effective manner, and increased our brand presence in our trade areas.

In addition to these efforts, our operators have recently begun conducting what we call marketing blitzes. Groups of our general managers, district managers and neighborhood marketing coordinators aggressively blanketed trade areas to visit offices and businesses in a concentrated two to three hour time span with the goal of introducing people to Rubio’s.

At all levels, we remain committed to ensuring our local store marketing efforts, reach the places our guests and potential guests work, live and play through trade area sampling and the above noted sales opportunities.

Promotional events for the fourth quarter focused on communicating the exceptional taste, quality and flavor of Rubio’s, again in-line with our strategy. During the first four weeks of the fourth quarter we concluded the successful reintroduction of our popular Langostino lobster tacos and burritos. The highly anticipated return of these delectable crustaceans was the key driver in sales and transactions during the promotional run.

The remainder of the quarter focused on sales of the Rubio’s card for holiday gift giving and a reinvigorated line of bigger and tastier enchilada plates, each featuring two enchiladas stuffed with melted cheese, carnitas, or grilled chicken and topped with our special fire-roasted enchilada sauce then accompanied by rice, beans and chips.

Additionally, we continue to build awareness and trial of Rubio’s A-Go-Go, our takeout and large off-premise order program. Our goal is to grow the Rubio’s A-Go-Go business from its current 4% of AUVs to represent up to 10% of AUVs within three years. We continue to believe that Rubio’s A-Go-Go program offers best-in-class product ordering and packaging designed to meet the consumer needs space of office catering and lunches as well as home meal replacement options.

I would now like to share insight into the first quarter of 2008 and review several initiatives currently underway for the year. Our Q1 comps through the first 12 weeks are tracking at approximately negative 3.5% on top of first quarter 2007 comp sales of positive 8.3%.

Since mid-February, persistent economic pressures, gas prices that continue to climb, and a rollover of 12.5% comps are driving these weak results. However, as in the fourth quarter of 2007, the soft Q1 ‘08 results are due primarily to continued sharp declines in both sales and transactions in Phoenix, Sacramento, and the Inland Empire region.

We expect 2008 to present a particularly challenging economic environment for many of our markets, especially those markets mentioned previously. And we are aggressively moving to protect our market share by taking steps to rebuild guest traffic and sales. In essence, we are making what we believe is a short-term smart detour on the road to fulfilling our strategy by embarking on a two pronged marketing strategy.

First and foremost, we are appealing to our core user by leading with high quality taste and introducing unique and crave-able products throughout our 2008 promotional calendar. Without taking our focus off this strategy, we are also featuring some of our most popular menu offerings at very attractive prices.

This action is intended to appeal directly to consumers in economically challenged communities as well as those consumers who are cutting back on frequency or occasionally trading out of restaurant dining completely.

We are offering bundled meals such as our three street taco combos for $5.99 and three fish taco combos for $6.99 to appeal to guests seeking more food for less money. And we are offering a la carte favorites at low price points such as blackened Mahi Mahi taco’s for $2.99 to appeal to guests simply seeking to curb their lunchtime spending. These rotating specials are being promoted in all of our restaurants, and we intend to continue to use them throughout 2008, assuming the economy remains weak.

Additionally, we are preparing to implement in Q2 a further layer of market-specific and/or store-specific tactical actions to gain tailwinds where the economic environment remains particularly challenging.

And finally in balancing traffic driving efforts with cost controls, we are reevaluating our remainder of the year marketing expenditures. Now, I am not an economist, nor do I profess to be, and I’m sure you’ve seen and heard many forecasts addressing the balance of the year economic environment.

All of us would like the macro economic climate to approve. But we don’t know if that is realistic, at least not in the near term. However, in a one-time and unusual departure from our protocol, I would like to share with you our current forward-looking view of the situation.

Assuming no further deterioration in the business environment and some improvement in the latter half of 2008 as well as a bit of good fortune, we believe our balance of the year comps could improve to between negative 1% and positive 2%. This thinking is based on three factors.

Number one, we will be rolling over progressively easier comps especially in Q4. Number two, we believe we have an arsenal of great new products to spur renewed interest in the brand, and number three we will be featuring attractively priced promotions to encourage traffic to the restaurants.

So despite the short-term turbulence we are now facing, we continue to pursue several long-term key initiatives to deliver against the strategy. First, our food and beverage team continues to develop menu products which highlight the distinctive tastes and flavors loved by our core users. Over a dozen new products are in various stages of testing with many slotted for addition to the menu during 2008.

Menu development work remains rooted in the strategy of developing complex menu tastes and products which leverage our full kitchens and provide competitive barriers, especially to those competitors with assembly line kitchen models.

Secondly, we are fine tuning our new restaurant opening processes and spending levels. Our strategy in opening new restaurants is to continue to invest more aggressively than in the past with the goal of boosting awareness, trial and sales, as well as getting new restaurants to steady state run rates at a quicker pace.

Third and finally, we are implementing an awareness building and trial generating strategy this year to propel the Rubio’s A-Go-Go business forward. Tactics include out-of store and online advertising, sampling the neighborhood businesses, and sales training for our field operations and neighborhood marketing teams. And most of those initiatives are beginning right now at the end of the first quarter and beginning of the second quarter.

We believe we are continuing to make progress against our objectives, especially in the face of these difficult consumer times and consumer spending environment, and we remain committed to improving the overall guest experience and the performance metrics at Rubio’s.

Thank you for your support. And I will now turn the call back over to Dan.

Daniel E. Pittard

As Frank and Larry have discussed, starting in mid-November and continuing in Q1, the business environment has been challenging especially in those cities where the sub-prime loan problems have been most severe. Despite the economic downturn, high gas prices and increasing commodity prices, I continue to be very excited about the opportunities for Rubio’s and believe we have an opportunity to build a very profitable $400 million company over the next four to five years.

My reasoning is that we have a large market opportunity, a winning strategy for our targeted segment, and we have assembled a team that can run a $400 million company, or larger.

As one investment banker commented to me, just as Rubio’s established a winning strategy and recruited the senior team to execute, the business environment turned difficult. In the face of a tough business environment, we could stop building new sites and cut personnel to reduce expenses in the short-term.

While we are taking some tactical steps to address the challenges of a tough business environment, we believe the best interests of the shareholders is for us to continue to execute our strategy, albeit a little slower until we have better visibility of when the economy will turn.

In the remainder of my remarks I will review the tactical actions we are taking to address the business environment, and then I will review the reasons in more detail of why I remain optimistic we can achieve profitable long-term growth. We are taking a comprehensive set of actions in five areas to mitigate the challenging business environment.

Number one, executing a two-pronged marketing strategy to drive sales and transactions, as Larry noted, we will continue to roll out new and unique products that taste great, while offering value pricing especially in those trade areas where the subprime housing problems are most acute. We view these actions as surgical.

These actions are designed to drive traffic, increase guest loyalty, and help our guests including the higher-income guests understand that we empathize with the financial squeeze they are experiencing. Since Larry reviewed this action in detail I won’t comment further.

Number two, dramatically improving our local store marketing capabilities. Through a combined operations and marketing approach, we are continuing an emphasis on encouraging our general managers who think and act like these “mayors” of their communities. Their actions beyond the four walls through fundraiser sales, Rubio’s A-Go-Go sales, off-site event sales, and marketing blitzes, are a key component of our sales growth objectives.

Number three, working to contain prime costs including product and labor as well as reducing G&A costs. I will comment on the actions in each of these major cost areas starting with product cost. Food costs over the last year or more has increased dramatically. Even since last November, the price of wheat has moved up from just over $8 a bushel to over $14 last week.

We have contracts in place for most of our major ingredients through June and for some key ones like soft drinks, chicken, and beef, through the end of the year at attractive prices. We are actively negotiating with new suppliers to make sure we pay at or under market prices for those that are not locked down for the year.

We expect price increase pressures on tortillas, cheese, avocados, and fish in the latter part of the year. As a consequence, we are planning a modest price increase in July. The food cost increases and the product specials we are offering combined with the price increase should leave us with a cost of sales of between 28.5% and 29.5% for the year.

Regarding labor costs, we rolled out our new labor model and after a couple of weeks of transition we have been hitting the targeted hours and average wage. However, with the lower volumes in sales volumes in Q1, our labor cost as a percentage of sales is de-leveraged slightly from last year.

Now we’ll review our actions on G&A expense. We are being very prudent with our G&A. As you likely recall, we added two SVPs at the end of last year and we experienced other cost increases, for example the cost of our employee health insurance. I’m confident we have the senior team to build the business and we want to sustain our momentum and where we have developed contingency plans that place several projects on hold until we have a better view of the timing of the economy improving.

Similarly we have delayed adding staff to support growth in several departments. Collectively, these actions will keep our G&A expense between $4.5 and $4.8 million per quarter in ‘08.

Number four, re-doubling our efforts to deliver a great guest experience everyday for every guest. The arrival of Marc Simon, our new Senior VP of Operations has reinvigorated our Operations Team. Marc is actively working with our retail managers to spread best practices across the system and to increase our on-the-job coaching, especially to build local store marketing skills. He is also continuing to high grade the team.

Number five, shifting our development focus to the mature trade areas where we can negotiate attractive lease terms. As we noted in the last earnings call and in several presentations, we have shifted our focus to mature markets and are seeking to capitalize on the weak real estate market to negotiate more favorable lease agreements that were offered last year and will be available when the economy turns.

In addition, because of the weak economy, we are seeing significantly more hold pay locations with less competition for the space. Hence our real estate teams can be more productive and increase the potential to achieve our growth targets even in the weak environment. I do want to emphasize that we are mindful the downturn could get worse before it gets better and could last into ‘09.

Consequently, we will be scrutinizing our site selections very carefully and will make adjustments according to the economic conditions. For ‘08, Frank noted, we should open five in the first quarter including one scheduled to open next Sunday, the last day of Q1 for us. We have two units under construction now and two more that should begin construction shortly, for a total of four that will open in Q2.

By the way, we walked away from three units that would have opened in Q2 because we thought the trade areas had been impacted too heavily by the subprime problem early this year.

For the last half of ‘08, we have two additional signed leases, three signed letters of intent, and four sites in negotiations that would open this year. We also have 10 additional sites we are evaluating for ‘08. With this pipeline, 18 units should be achievable in ‘08.

Regarding funding the growth, at present we are in the latter stages of negotiating a credit facility with two banks that will allow us to finance our planned expansion. We expect to choose one of the banks over the next few weeks. If we are unable to reach acceptable terms, we would need to reduce our growth of new units. With these actions, we believe we will maximize our performance in ‘08 and position the company for sustained growth.

Now, I would like to turn to my continued belief that we can grow a profitable business. In the last call, I cited four reasons for my belief that we can grow Rubio’s to a $400 million profitable business in four to five years. I will briefly review each reason and go over why the reason is still valid.

The first reason I gave is that the fast-casual market is large at over $10 billion and growing double-digits. Although, I haven’t seen new updates from third-party researchers, I would expect the growth to slow and may be flat in ‘08. Even so, the market is very large relative to our growth targets and will likely regain its growth as the economy improves. Further, the downturn in the economy will thin the ranks of competitors.

The second reason I gave is that our research and our 2007 sales results of 6.2% comps have confirmed Rubio’s menu and guest experience are a great fit with our targeted guests. The additional research we have conducted this year reaffirms our conviction that we have an attractive value proposition for our targeted group.

The third reason I noted is that we have attractive store economics. We have updated our store economic performance and it remains attractive even with the weak fourth quarter. As a reminder, last year, we reported that we have around 30 stores with AUVs under $800,000 and that over the next four years we expect to close around a dozen of these and manage the remaining for a very high return on cash investment. We closed two of these last year and have plans to close two more this year.

As of the end of 2007, we have 123 restaurants in our comp base, excluding those with AUVs below $800,000. These 123 restaurants have an AUV of $1.099 million. Total cost of sales is 59.9%, comprised of product costs of 28.6% and labor costs of 31.2%. The restaurant operating margin is 18.4%. We believe this performance compares well with the industry.

As I stated, going forward our strategy is to open restaurants that can achieve at least $1.1 to $1.2 million revenues in three to four years. As of the end of 2007, our restaurants with $1.1 to $1.2 million sales have an AUV of $1.13 million with a total cost of sales of 58.5% and a restaurant operating margin of 20%. With an average unit investment of approximately $575,000, we believe the return is very attractive.

The fourth reason I gave is that we are confident that we can build a team to open 160 to 180 restaurants in four to five years. Since the Q3 earnings call last November and as we mentioned earlier, Ken Hull and Marc Simon have joined the Rubio’s team as Senior VPs for Development and Operations respectively. They have added significant capacity to build and successfully operate 160 to 180 new restaurants in four to five years.

So in summary, we have a large market opportunity, a winning strategy that offers our guests great tasting unique products at reasonable prices and good value. We have assembled a senior team that is capable of running a $400 million company or larger.

As noted earlier, in the face of a tough business environment, we could stop building new units and cut personnel to reduce expenses in the short-term, and certainly we will continue to monitor the conditions in our trade areas and make adjustments as necessary if the business environment deteriorates further.

While we are taking some tactical steps, we believe the best interests of our shareholders are for us to execute our strategy while taking pragmatic tactical actions to keep our guests coming to Rubio’s. The biggest upside is to leverage G&A expense by adding additional restaurants at a time when there is less competition for the A-sites and lease terms are more favorable.

Now, we are ready for questions.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Ian Corydon - B. Riley & Company.

Ian Corydon - B. Riley & Company

On marketing expenses, it sounds like you kind of ramped those in the fourth quarter, what’s the plan for 2008?

Lawrence A. Rusinko

For 2008, what we are looking at is, as part of the contingency plans, we are looking at possibly reducing some of our expenditures. As a percentage, our plan was essentially the same as 2007, which would have been less absolute dollar spent.

Ian Corydon - B. Riley & Company

And can you give us a sense for where occupancy and other expenses might come out as a percentage of sales, if you hit the comp guidance you provided for the year?

Frank E. Henigman

It will probably come out in the range of about 23.5% to 24%, based on the comps that we disclosed, but obviously that could be leveraged and de-leveraged greatly by sales changes.

Ian Corydon - B. Riley & Company

And in the first quarter, did you comp positive outside of the Inland Empire, Phoenix, and Sacramento?

Lawrence A. Rusinko

We did in some markets but not in all markets.

Ian Corydon - B. Riley & Company

And the development plan for this year sounds like about 16 net new stores, is that development dependent on reaching the credit line agreement or is it growth beyond ‘08 that’s dependent on getting the credit line?

Daniel E. Pittard

First, let me say the 18, we will actually have more opportunities than that, but we are trying to keep our powder dry until we see better what’s going to happen with the economy. The developers are calling us with sites and that hasn’t happened in a number of years. And from a financing standpoint, both credit facilities that we are talking about would provide funding out for at least a couple to three years.


Your next question comes from Tony Brenner- Roth Capital Partners.

Tony Brenner - Roth Capital Partners

Dan, in talking about your five strategic initiatives, I believe you said that you are delaying adding staff to support growth, yet you are not slowing the intended growth, so I am just wondering where that impact might be?

Daniel E. Pittard

Tony, I commented in there that I thought our real estate team could be more productive in an environment like this, because not just us but all types of retailers are cutting back. And we are actually getting calls from competitive brands, particularly franchisees offering us sites. So I think the time it requires for our team to find a site is going to be less in this environment. So I think they can be more productive.

And I just think we haven’t given up on the range we’ve presented at the last few conferences. We just think this quarter proved to be a lot harder than certainly, I expected. And we just thought we had to be a little careful on that until we see just how the year plays out economically.

There are some analysts that are predicting it’s going to get lot worse before it gets better, if that’s the case then, we will probably be forced to do some more cuts. But based on what we see now, we want to keep shooting for the 18 and with a little luck we can beat that, but we don’t want to count on it right now. And then for the following years, we are still committed to the tight numbers that we have presented in the past assuming the economy comes back.

Tony Brenner - Roth Capital Partners

Speaking of things getting worse, recently, virtually all commodity costs have declined from their peak levels, are your forward contracts still below current market levels?

Daniel E. Pittard

The main one we have is cheese, and yes, we are still below it. What we are not covered in it expires at the end of June. So we are not covered on cheese for the latter part of the year. We’ve been watching for an opportunity to go in and maybe take a position, but a reasonable hedge has not presented itself, and the price is coming down.

So we are hopeful that it will come down pretty much to what we are paying now. And so our hedge for the year would have proved very profitable, and we’ll be okay in the latter half of the year in cheese. In the case of chicken and beef, particularly chicken, our contract is significantly below current market rates. And it runs through the end of the year as an example.

Tony Brenner - Roth Capital Partners

But you mentioned, tortillas specifically as being a cost pressure going forward here. So, has that improved given maybe slight decline we’ve seen in wheat costs?

Daniel E. Pittard

No, we locked in a price, but we are getting pleas from our supplier to help them out some. I guess that’s the best way to describe it, with such a dramatic run up. So, we are negotiating with our tortilla supplier, we are negotiating with another supplier and going to play those against each other.

But we had already figured in our cost, so that is going increase in tortillas starting the first quarter. And we are trying to make sure we have no further increases until the latter part of the year and we would help address that and the price increase in July.

Tony Brenner - Roth Capital Partners

Are you making any effort to induce people to substitute corn for flour tortillas?

Daniel E. Pittard

No, we leave that for our guests, to pick which they want. Thus far we haven’t tried to induce them promotionally.

Lawrence A. Rusinko

And frankly, we are seeing the cost pressures in our corn tortillas as well as our flour tortillas too. One thing that we are doing, Tony, is to address what Frank and Dan said about chicken being at below-market levels, we are going to promote a lot of chicken products this year to try to take advantage of that.


And your next question comes from the line of Daniel [Inaudible] - Lord Abbott.

[Daniel] – Lord Abbott

So did you say you were going to have some price reductions in the tough markets, but overall, implement price increases in June/July time period to combat some of the commodity prices, just wanted to clarify that?

Daniel E. Pittard

Yes, that’s why we call it our two-pronged marketing approach. What we are trying to do in the areas that are really hit bad is to get promotions that we are not offering in other markets. And we’ve gone store-by-store to determine which ones get the special promotions.

I just want to call it surgical, and those are so we keep our guests coming. We don’t want them to forget about us and get out of a pattern of coming to our restaurants. There is a lot of research to support you don’t want that to happen.

And so that’s also why we’ve upped our guidance where we think we’ll come out on total cost of sales, our product costs, to allow for some of that discount. We try to project the amount of that and what impact that would have on our food costs, but we think it’s important to keep those guests coming.

And frankly even the higher-end restaurants are running promotions. Certainly the casual dining are running promotions all the time now. So we felt we had to respond in some way to that. And then, yes we do think we can have a price increase, but it will be on our unique great tasting items that we think our higher income guest will pay for the taste. And there won’t be a large increase. It will be a modest increase that will help us on the cost side.


At this time I have no further questions in queue.

Daniel E. Pittard

Thanks very much for taking the time to listen and we look forward to talking to you on the next call and seeing some of the analyst presentations. Good afternoon.

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