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Executives

Greg Ashley - Vice President of Finance

Samuel E. Beall - Co-Founder, Executive Chairman, Chief Executive Officer and President

Michael O. Moore - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Daniel P. Dillon - Chief Branding Officer and Executive Vice President

Kimberly M. Grant - Chief Operations Officer and President of Ruby Tuesday Concept

Analysts

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Peter Saleh - Telsey Advisory Group LLC

Rosemary Sisson

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Reza Vahabzadeh - Barclays Capital, Research Division

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Ruby Tuesday (RT) Q1 2013 Earnings Call October 10, 2012 5:00 PM ET

Operator

Greetings, and welcome to the Ruby Tuesday, Inc. First Quarter Fiscal Year 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Ashley, Vice President of Finance for Ruby Tuesday. Thank you. Mr. Ashley, you may begin.

Greg Ashley

Thank you, Robin. And thanks to all of you for joining us this evening on our first quarter fiscal '13 earnings call. With me today are Sandy Beall, Ruby Tuesday's Chairman and Chief Executive Officer; Michael Moore, our Executive Vice President and Chief Financial Officer; Dan Dillon, our Executive Vice President of Brand Development; and Kimberly Grant, President of Ruby Tuesday Concept and Chief Operations Officer.

I would like to remind you that there will likely to be forward-looking statements in our comments, and I refer you to the notes regarding forward-looking information in our press release and most recently filed Form 10-K. We plan to release our second quarter fiscal '13 earnings in early January. Our first quarter earnings were released today after the market closed and a copy of our press release can be found on the Investor Relations section of our website at rubytuesday.com, and it's also available on Business Wire, FirstCall and other financial media outlets.

Our format today includes the following: an overview of our first quarter financial results, our fiscal 2013 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks, we will respond to your questions, and I will now turn the call over to Sandy.

Samuel E. Beall

Thanks, Greg. I'd like to welcome all of you listening in this evening on our first quarter earnings call. I'll give you a brief overview of our quarter, and Michael and Greg will provide a financial review as well as a guidance outlook. And then Dan will provide an update on our marketing programs and then Kimberly will provide an overview of our operations plans for Ruby Tuesday, as well as Lime and Marlin & Ray's.

We are very pleased to report positive same-restaurant sales of 1.9% in the first quarter, which is in line with our guidance of approximately 2%. These sales results, our first positive same-restaurant sales in the last 7 quarters, are very encouraging when you consider that we accomplished this in a quarter where we significantly reduced our couponing while supporting and building our television marketing programs. Our balanced approach of television, advertising and promotional activity, in particular -- and in particular, more targeted direct-mail campaign, contributed to our improved sales and traffic trends in the quarter, both of which were very good in our opinion.

Our television marketing program is now more competitive with our peer group and is being largely funded by our $40 million to $50 million of annual cost savings initiatives that we've outlined on the last several earnings calls. In addition, we had lower promotional spending also.

We're also excited to report record high scores on our external brand tracker experience metrics, which Dan and Kimberly will discuss later. But they're just in great shape.

We have much work ahead of us. We know that. We also feel that our business is very stable, more stable than it's been in a couple of years and that gives us a certain sigh of relief, really. We believe the Ruby Tuesday brand is headed in the right direction. We're very focused on maximizing our profits on the incremental sales that we're getting as we move forward.

In addition to progress on the Ruby Tuesday brand, we're also pleased with our progress on Lime Fresh. Lime Fresh is now fully integrated into our company following our April acquisition. And now our focus on this concept is to develop a good pipeline of potential locations in areas such as Florida and Washington, where we can cluster units and build brand recognition. In addition the focusing on sales building initiatives, which we've just started here in the last couple of weeks at our current location. And last comment on that, I guess, is same-store sales for Lime, not a huge base but very encouraging. They're very, very positive, the same-store sales for the first quarter.

On the Marlin & Ray's brand, our focus continues to be on select conversions, building quality operations, trying to build a great, very high-value seafood brand with our sales buildings initiatives.

From a balance sheet standpoint, our company is in very good shape. We have significant excess cash for various uses going forward, which Michael will talk about a little bit, and good flexibility as a result of the recent recapitalization with the $250 million high-yield transaction.

And with that, I'll turn it over to Michael to discuss in more detail our financial results.

Michael O. Moore

Thank you, Sandy. I'll review the quarter in detail, give an update on our balance sheet sale-leaseback program, and then Greg will give guidance for fiscal 2013.

We reported first quarter diluted earnings per share of $0.04 or diluted earnings per share of $0.05, excluding CEO-transition expenses primarily related to search fees. This compares to prior year diluted earnings per share of $0.05 and our internal plan of $0.03. We have included a reconciliation of these non-GAAP adjustments and the related earnings per share impact on the Investor Relations page of the Ruby Tuesday website at rubytuesday.com.

Total revenue increased 0.8% from the prior year due to a 1.9% same-restaurant sales increase at Ruby Tuesday, coupled with revenue growth at Lime Fresh and Marlin & Ray's, which was partially offset by 27 permanently closed company-owned restaurants. During the quarter, we opened 2 company-owned and 1 franchise Lime Fresh restaurants. And at quarter end, we had 15 company-owned and 5 franchised Lime Fresh restaurants. We did not open any Marlin & Ray's during the quarter, but opened one subsequent to quarter end, and we now have 12 Marlin & Ray's locations open. And during the quarter, we permanently closed one company-owned Ruby Tuesday restaurant and temporarily closed another one in anticipation of its conversion to Marlin & Ray's.

During the quarter, we completed an income statement reporting reclassification for the prior year quarter to better align our financial statement presentation with our peer group. The reclassification, which had no effect on pretax or net income for the prior year quarter, was in 2 areas. Deferred loan fees and revolving credit facility commitment fees of $0.4 million in the prior year quarter were reclassified from other restaurant operating costs to interest expense; and two, general and administrative personnel payroll taxes, health insurance and retirement expenses of $2.1 million from the prior year quarter were reclassified from payroll and related costs to selling, general and administrative expense where the corresponding salary expenses are reported. In the current year quarter, these amounts were $0.6 million and $1.9 million, respectively. We will make similar reclassification changes to the corresponding prior year amounts throughout the remainder of this fiscal year.

Restaurant-level operating margin was 19.7% for the quarter compared to 15.7% a year earlier or an improvement of 400 basis points. This was due to cost savings initiatives, good control over restaurant labor cost and higher same-restaurant sales. These savings, in addition to lower coupon expense, are largely funding our television marketing programs. And as a result of our cost-saving initiatives, our cost structure is lean and we are well positioned to deliver attractive profit leverage as we grow traffic and sales going forward.

Cost of goods sold was 27.0% of sales versus 29.7% in the prior year or an improvement of 270 basis points. This decrease was primary driven by lower food and beverage cost as a result of our cost savings initiatives and leverage from increased sales. Labor costs decreased 70 basis points to 33.0% of sales versus 33.7% last year due to labor productivity initiatives in low-volume locations and operating leverage from positive same-restaurant sales. Other restaurant operating costs were favorable, 60 basis points, primarily due to lower insurance and utility expenses.

SG&A expenses were 13.0% of sales versus 8.6% in the prior year or up 440 basis points due to higher television advertising cost, a majority of which has been funded by our cost savings initiatives and lower promotional expense. Interest expense in the quarter was $6.8 million compared to $4.4 million last year or an increase of $2.4 million, primarily due to interest expense on our high-yield bonds. Taxes for the quarter were a credit of $2.3 million compared to a charge of $0.6 million last year due to lower pretax income coupled with increased tax credits, primarily due to higher FICA tip credits.

Turning to the balance sheet. Our book debt was $322 million down from 3 47 -- $347 million last year, or a reduction of $25 million related to the paydown of some of our mortgage debt in fiscal 2012. Additionally, we had $65 million in cash on our balance sheet at the end of the quarter from the high-yield bond offering proceeds and sale-leaseback transactions. Total funded debt to EBITDAR, a non-GAAP ratio pertinent to our loan covenants, was 3.34 and provides us 116 basis points of cushion on our loan covenants. We have very good flexibility on our loan covenants as a result of our revolving credit facility amendment, which was closed in tandem with our high-yield bond deal in the fourth quarter of fiscal 2012.

During the first quarter of fiscal 2013, we amended our revolving credit facility to enable us to repurchase up to $15 million annually of our high-yield bonds. Subsequent to the end of the first quarter, we repurchased $1.5 million of our bonds at approximately a 5% discount to par. Also during the quarter, we repurchased 364,000 shares of our common stock at an average price of $6.45 per share and subsequent to quarter end, we purchased another 173,000 shares at an average price of $6.73 per share. Currently, 5.4 million shares remain authorized for repurchase under our share repurchase program.

We continue to make good progress on our sale-leaseback program. In the first quarter, we closed on sale-leaseback transactions on 9 restaurants, resulting in $20.2 million of gross proceeds. Subsequent to the end of the quarter, we closed sale-leaseback transactions on an additional 3 restaurants, resulting in $7.5 million of gross proceeds. Since the third quarter of fiscal 2012, we have completed sale-leaseback transactions on 22 restaurants, resulting in $50.0 million of gross proceeds at an average cap rate slightly under 7%. Given the compression we continue to see in cap rates, we are going to pursue sale-leaseback transactions on up to another 20 restaurants over the next 3 to 4 quarters, if cap rates remain at these low levels.

From a capital structure standpoint, we're in good shape. Our recent high-yield transaction has provided us with significant financial flexibility, which will enable us to continue to invest on our Ruby Tuesday brand and grow our new brands, in particular, Lime Fresh. The excess cash that we currently have on hand, in addition to the cash generated from future sale-leaseback transactions, will be utilized to further reduce our debt levels and opportunistically repurchase our shares going forward.

I will now turn the call over to Greg to go over our guidance for the year.

Greg Ashley

Thanks, Michael. Our guidance for the year is as follows: we estimate same-restaurant sales for company-owned restaurants to be in the range of flat to up 2% for the year. For the year, we expect to open 12 to 16 Lime Fresh restaurants, convert 5 to 7 company-owned Ruby Tuesday restaurants to Marlin & Ray's and permanently close 4 to 6 company-owned Ruby Tuesday restaurants. For the year, our franchisees expect to open 10 to 12 restaurants, up to 10 of which will be international and close 2 to 4 restaurants.

We expect restaurant operating margins to be -- to improve approximately 150 to 200 basis points due to our cost savings leverage, coupled with fixed cost leverage on our incremental sales. This range is higher than our previous guidance, in part due to approximately 20 to 25 basis points of improved margin related to the reporting reclassification of the projected fourth quarter pension settlement expense from the restaurant payroll expense area to selling, general and administrative expenses.

On a commodities front, a significant portion of our proteins are locked in for the remainder of the year. We feel like we're in pretty good shape there. Our depreciation is estimated to be in the $62 million to $64 million range.

Our total advertising expense is estimated to be in the range of $80 million to $85 million for the year compared to $47.9 million in fiscal 2012, primarily due to our incremental television advertising expense, which is largely funded by our cost savings initiatives. As noted on our last call, our total marketing spending is relatively flat on a year-over-year basis, given our increase in television advertising expense, coupled with our reduction in coupon fee [ph] expense year-over-year.

Excluding our total advertising expense, our SG&A expenses are targeted to be relatively flat, primarily due to lower consulting fees on a year-over-year basis and other cost savings initiatives being offset by the reporting reclassification of projected fourth quarter pension expense noted above.

Our interest expense is estimated to be in the $25 million to $27 million range. Based on our lower pretax income, coupled with our FICA tip and other employment-related tax credits, we anticipate a net tax benefit of $5 million to $10 million for the year.

Our GAAP diluted earnings per share for the year are estimated to be in the $0.20 to $0.30 range. Excluding the impact of the CEO pension settlement expense and the new CEO transition expenses, our diluted earnings per share for the year on a non-GAAP basis are estimated to be in the $0.24 to $0.34 range.

Our fully diluted weighted average shares outstanding are estimated to be approximately $63 million to $64 million for the year. Our capital expenditures are estimated to be $44 million to $50 million, and we estimate we would generate $20 million to $30 million of free cash flow during the year. On an adjusted basis, however, our free cash flow is estimated to be in the $31 million to $41 million range, after excluding the impact of the CEO pension payout, which is approximately $8 million, as well as the estimated lease reserve settlements from restaurants we closed in the fourth quarter of fiscal 2012, which is approximately $3 million, as we view both of these items as infrequent in occurrence.

As Michael noted earlier, we estimate that we will pursue sale-leaseback transactions on up to 20 additional properties, with estimated incremental gross proceeds in this $40 million to $45 million range.

I will now turn the call over to Dan to give an update on our sales and brand-building programs.

Daniel P. Dillon

Thank you, Greg. Q1 represented our first full quarter of an integrated marketing plan that leveraged national cable and local spot television advertising for 12 weeks during the quarter. We're very pleased with the results.

Our same-restaurant sales of plus 1.9% for the quarter represented our best sales results in the last 7 quarters. The first quarter results related to traffic and sales share within the category were also encouraging. According to KNAPP-TRACK data, we gained market share in both traffic and sales for the first time in 6 quarters. These sales results were achieved while reducing coupon discounts by approximately 30%. Going forward we believe this balance of national cable television and local spot weight in key markets, along with a base level of coupon incentives, will continue to deliver favorable same-restaurant sales results.

Early in the quarter, we introduced our new chef-inspired menu specials to our feature menu, including our Crab Bite Appetizer, our Chicken Trio, our Salmon Florentine and Jamaican Jerk Shrimp, all including our one-of-a-kind Endless Garden Bar and Fresh-Baked Garlic Cheese Biscuits. We followed this successful Q1 promotion with our second quarter Steak and Lobster Limited Time Offer at a trial-driving dining price of $14.99. This promotion was supported by television advertising, digital media, social media and direct mail. Beginning in late October, we'll finish our second quarter with the introduction of our Mixed Grill Specials starting at $11.99. The Mixed Grill promotions scored very well in both concept and panel study taste tests, and we're confident it will maintain the traffic and sales momentum we're seeing in our business today.

Turning to brand health, as Sandy mentioned, our latest quarterly brand equity tracker analysis shows that our brand building efforts are working. Our in-restaurant experience scores among our users, were the highest we've seen in 6 quarters since we began tracking our efforts. Our consumer clearly appreciates the new menu additions, the value-oriented pricing, the enhanced service elements and the atmosphere changes we've made as we work to revitalize this 40-year-old Ruby Tuesday brand.

For the remainder of the year, our marketing program center around: one, optimizing our mix of television and higher-end promotional offers to drive traffic; two, introducing new integrated marketing elements centered on local market activation and digital integration; three, adding new chef-inspired menu items that continue to deliver on the everyday affordability, while providing unique, boldly flavored menu innovation that you can't get anywhere else; and finally, continue to leverage our consumer research to develop new programs and products that build traffic and consumer preference.

Now Kimberly will provide you with some details on our operational initiatives for each of our brands.

Kimberly M. Grant

Thank you, Dan. As Sandy and Dan noted earlier, we are very pleased with our most recent external brand tracker guest experience scores. Our brand tracker compares our absolute and our trend top-box guest experience scores against key competitors in both the bar and grill and specialty segments. This was our sixth wave of conducting our brand tracker, and our experience scores improved to all-time highs in a number of key areas including: likely to recommend, up 9 points; likely to visit in the next 30 days, up 7 points; a consistent experience across locations, up 5 points; and overall experience, up 4 points.

3 years ago, we set an aspirational goal to consistently deliver a high-quality casual dining experience with compelling value. Since then, we've invested in a number of programs focused on selecting, training and retaining the best service, culinary and leadership teams in the industry. We refer to these internal programs as our star initiative, which focuses on dramatically improving our 90-day hourly retention rate in order to significantly reduce our overall hourly turnover. We know that high levels of retention, both at the management and hourly team levels, results in higher levels of team member engagement, which in turn leads to a consistent high quality experience across the brand for our guests.

This summer our management retention remained quite stable, resulting in low turnover levels versus the prior year. In addition, and what we're probably most proud of, is we reduced our hourly turnover 8%, beginning our year with the lowest team turnover ever for Ruby Tuesday. A financial benefit of this reduction in team turnover was approximately 400,000 of lower training payroll costs year-over-year. Typically, our first quarter is the highest turnover quarter of the year, so we are -- we believe we are beginning with great momentum towards achieving our ultimate goal of running below 80% hourly turnover.

Our operations priority for the Ruby Tuesday brand over the remainder of the year is to maintain high Guest Satisfaction Scores as we drive new trial and frequency through our increased television, direct mail and digital advertising campaigns. In the past, we have relied upon internal guest surveys, distributed through our point-of-sale system, to gather realtime feedback from our guests. In our most recent quarter, approximately 74% of our guests rated their experience a 5 on a 1 to 5 scale, and 92% rated their experience a 4 or a 5. While we believe these surveys were instrumental in providing the feedback we needed to improve the guest experience and increase brand advocacy over the past 3 years, we found, over time, they tend to be completed by guests that are either extremely satisfied or extremely dissatisfied with their experience. Going forward, we will be reallocating these research dollars into a broader, more intuitive social media monitoring tool that allows our leadership and operational team to monitor, not only our performance at both the restaurant and brand level, but also monitor the performance of our key competitors of each of our brands. We believe this new research tool will provide game-changing insights and enable us to operate at an even higher-level going forward.

We continue to make operational and brand development progress in our 2 new brands, Lime Fresh and Marlin & Ray's. We are actively investing in a number of marketing and brand-building initiatives for both concepts as we prudently expand into new markets. During the quarter, we were pleased with the same-restaurant sales performance in our acquired Lime Fresh locations, which was comparable with other competitors in the fast-casual segment. We continue to remain excited about the potential of this brand given its position in the fast-casual sector.

At Marlin & Ray's our focus is on continuing to strengthen the brand as we evolve the restaurant look and feel, enhance the menu design and drive trial and frequency through the introduction of compelling new Days of the Week value seafood specials.

I will now turn the call back over to Sandy for a wrap up.

Samuel E. Beall

Thank you, Kimberly. Our fiscal year is off to, we think, a very, very good start. We are very excited about the momentum we have as a company as many of the investments we made in the brand over last year, such as our cost savings initiatives, our restaurant closures, our upgraded brand position, our 4.0 enhancements and the migration to television advertising are beginning to pay off, really, add fuel to the fire. Our Ruby Tuesday sales and traffic have positive momentum. We're making slow and steady progress with Lime Fresh and Marlin & Ray's. Our capital structure flexibility is aiding our growth plans and our board and management team are excited about the opportunities we have in front of us. We feel we have a stable situation or a stable platform and we're optimistic about our future.

The recent additions of Lane Cardwell and Jeff O'Neill to our board will further aid our strategic direction, given their extensive restaurant industry experience in the areas of marketing and operations, 2 great additions to our new, smaller board. They both added great input at the meeting we had yesterday and today, so we look forward to working with them. Additionally, the board continues to make progress on the CEO search and has identified a handful of strong candidates that they're assessing with the hopes of making an announcement, probably within the next 1 to 2 months is what we're hoping for. As I noted on our last earnings call, we believe that a new long-term CEO in tandem with the board, which offers a combination of past history, as well as fresh thinking for the future, in addition to greater industry experience, positions our company, along with our new CEO and the good management team we have, to create good value for our shareholders as we move forward.

We have invested a significant amount of capital, both actual dollars and intellectual capital, into the Ruby Tuesday brand over the last 3 to 5 years. And we believe we're in a good position, a stable situation, to begin yielding positive returns on these investments in fiscal '13 and well into the future.

With that, I'll open it up into questions, and again, thanks for joining us today.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeff Farmer with Wells Fargo.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Might have missed it, but did you guys provide color on the trends through the first 5 weeks of the current quarter? I apologize if I did miss that.

Michael O. Moore

We did not. We generally don't do that, Jeff.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. And then just sort of, well, somewhere along those same lines here, you might not want to talk about this either, but a lot of focus from investors on the fact that casual dining same-store sales have slowed prematurely in the month of September. More specifically from your standpoint, any commentary that you might have in terms of what's going on with the casual dining consumer?

Michael O. Moore

Jeff, one thing, this is Michael. We are trending positive same-restaurant sales in Q1 and we're within our guidance of flat...

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

You mean Q2, Q2. For September, rather.

Michael O. Moore

And we're within our guidance of flat to up to over -- we are trending positive.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Appreciate that. And just moving on to, in terms of understanding, so obviously, you're able to test the $9.99, the Fresh Garden and entree promotion. Looks like for several quarters before you rolled it out to the system, it looks like it gave you a very good sense of the type of traffic driver it was. But I'm actually more curious now with the $14.99 Perfect Pair. How comfortable are you with that promotion's ability to drive traffic? You gave me a little bit of an answer there, but has that been proven to be as impactful of a traffic driver as the $9.99 promotion?

Samuel E. Beall

Yes, we're very pleased with the results we saw on our Steak & Lobster promotion starting at $14.99.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

And then just a final question, theoretically, I mean, could you be seeing a higher mix overall in terms of looking at that same-store sales number in the current quarter? Would it be fair to expect a mix tailwind based on the $15 price point?

Samuel E. Beall

You mean a higher effect on same-restaurant sales?

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Yes, in terms of having a higher mix...

Samuel E. Beall

The end result because of the mix, no, I don't think so. I think what Michael said sums it up. I think the positive is, is it was tighter in the month of September, and we still -- we're happy with our performance. And as we just said, we're still positive, and I think part of that is the result of the Steak & Lobster promotion.

Operator

Our next question comes from the line of Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

My first question is -- relates to like some changes or nuances in the guidance, one being the cost save target comes up, which is very encouraging. But at the same time, it's basically being full year invested a little bit in other G&A, but mostly in $5 million of incremental marketing. And I was just wondering if you could talk through may be a little bit about the decision to make that commitment to reinvesting it this early in the year instead of, say, maybe letting a little more flow-through. In other words, why reinvest the $5 million -- commit to reinvesting the $5 million this early in the program?

Samuel E. Beall

Well, we're kind of new in advertising. We're trying to figure out how to have the right balance throughout the year, but also have good coverage, what we think is good coverage throughout the entire year. And as we continue, we assess our plan every week and every month, and we decided we felt comfortable enough. I mentioned that we think we have a grip on things. We have a stable platform. We thought we could invest a little more to make sure we have the right marketing coverage and produce the same-store sales that we need. Right now for us I think same-store sales are the most important thing we do. Of course, we have to increase margins and make plan on profits and so forth. But we'd rather have the opportunity to have greater sales and just achieve profits, then we get lucky, maybe we can beat our profits. But it's just, I guess, capital allocation, and we think that's what we need to do. Michael...

Michael O. Moore

No, Keith, we've had a good result now where we've invested the marketing dollars in the first quarter and we're confident. So we've allocated a few more dollars to the balance of the year to continue to drive same-store sales.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. And then kind of along the same lines, if you think about what the plans are for this year, so $80 million to $85 million on G&A, so above 6% of sales. You've got couponing in addition to that. All in it's -- compared to a lot of other, say, benchmark competitors, it's a large rate of spend. As you think about this over the next...

Samuel E. Beall

Keith, first of all, we think we're in sync when we look at their coupons and average marketing spend. Dan, won't you come up, we think we're in sync with the others.

Daniel P. Dillon

Yes, based on our information, this is a competitive level of spending in advertising and discounting that isn't disproportionately high.

Michael O. Moore

It's a large increase from our prior year, but it's...

Daniel P. Dillon

It's pretty good.

Michael O. Moore

But it gets us to a competitive level.

Keith Siegner - Crédit Suisse AG, Research Division

Okay, because that's what I was going to ask...

Samuel E. Beall

From a stabilized standpoint, although it's still a lot less dollars than anybody else.

Keith Siegner - Crédit Suisse AG, Research Division

No, I understand that. What I was trying to get at is, are you at somewhat of a structural disadvantage because of the small size of the dollars, meaning you need to spend more as a percent of sales? Or -- and I guess you answered this then, looking forward, you don't necessarily see this -- let's say this all works, can you actually lever the selling expense in the next couple of years? Or is this the new rate of spend that you need to be at just to compete?

Samuel E. Beall

I think that depends on the economy, and there are lots of other variables. You would hope we could hold it the same. But -- and the only thing we could do is spend more, do national TV instead of spot TV and the most on that is -- well, that's the only other thing we could do, but we're not considering that right now.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. So as we think about modeling the next couple of years, we shouldn't plan on levering G&A -- as a part of SG&A, should the targets all be met on the sales front?

Samuel E. Beall

No.

Operator

Our next question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

First, on the same-store sales increase, I think you mentioned positive traffic. Can you give us the breakdown between traffic and check?

Daniel P. Dillon

Traffic was flat. Check was up slightly.

Michael O. Moore

And the check was up due to less coupons this year. So we saw an increase in base level traffic for non-coupon users and a decrease in coupon users, which drove net average check up.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

And then a question probably for you, Michael, just with the new debt agreement, what are your limitations on sale-leasebacks, share buybacks? And I think you mentioned limitation, I guess, on buying in the debt. I think that's in the release. But what are your sort of guidelines for that or limitations for that from the covenants?

Greg Ashley

Yes, so that's kind of -- that's a good question. Three parts. On the share repurchase, it's really in current base, I think we're capped at 4x leverage. So to the extent we're not at that leverage point, we got a share repurchase basket of $50 million and a general corporate purpose basket of $100 million. There's also a builder basket of 50% consolidated net income that feeds that second basket. On the bond front, that's really more of a credit facility than a bond question. And per the amendment we did about 1.5 months ago, as long as we're not borrowing on the revolver, we can buy up to $15 million of the principal of our bonds each fiscal year. And then your last question on sale-leaseback, the cap on the credit facility is -- I think it's a couple hundred million. That's not the relevant point. The relevant point is on the bond front, we're precluded from doing one transaction that exceeds $17.5 million in principal. So -- but as you know, the process we're going through here, Joe, we're tending to do one-offs through 1031 buyers. So I wouldn't see the 2 or 3 we have left on the first tranche for the 15 to 20 properties Michael mentioned ever becoming an issue with that. We would not let that happen.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And Greg, I didn't understand the share repurchase answer. You lost me with the baskets.

Greg Ashley

Well, I'm saying we're -- we have a leverage cap of 4x. So as long as our leverage is under 4, the only restriction is basically $150 million over the life of the bonds. And it's actually a little more than that because to the extent we're making net income, 50% of that reloads the second basket that I mentioned.

Michael O. Moore

Right now, it's $150 million and don't [ph] bust the covenants at 4x.

Greg Ashley

Yes.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And that's 4x debt-to-EBITDA?

Greg Ashley

Yes. I can get with you on the specific calc. But for all intents and purposes, yes.

Operator

[Operator Instructions] Our next question comes from the line of Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

Just wondering how much of the advertising budget has been spent so far in the first quarter? And what's going to be the cadence over the next 3 quarters for TV advertising?

Greg Ashley

It's pretty evenly split by quarter, slightly...

Michael O. Moore

Total marketing spent regarding that.

Greg Ashley

Total marketing, yes. Maybe 60-40 first half, second half, but it's pretty evenly split.

Peter Saleh - Telsey Advisory Group LLC

Okay. And then on the COGS line, how much of a benefit did you get on the COGS line from the reduction in couponing? My understanding was that the couponing definitely in the past had hurt the COGS line because it flowed through there. So how much of a benefit did you get from reducing the couponing?

Michael O. Moore

Well, on the COGS, which were up about 270 basis points, about 200 was driven by our cost reduction initiatives and about another 70 from sales leverage.

Operator

Our next question comes from the line of Rose Sisson with Lazard Capital Markets.

Rosemary Sisson

I had a question about competition and customers. I was curious when Kim mentioned the new research tool that you have that you can monitor competitors. I was wondering if you can determine who you might be taking share from.

Kimberly M. Grant

It's not really a tool that monitors the financials or statistical. It's more of a sentiment tool. And so what it allows us to do is monitor how promotions and campaigns are resonating in -- with the consumer. For example, if we were to rollout a new menu and a new product, if we start to hear chatter about the products out in the marketplace, good or bad, we would be able to pick up on that information right away. Likewise, with our competitors, if a direct competitor rolls out a new campaign or a new initiative, we can monitor that as well. So it helps us from an offensive and defensive standpoint with our competitive set.

Rosemary Sisson

Okay. And then also on the -- back to the sale-leaseback question just for a moment. I was curious you mentioned that you're going to do probably another 20 properties or so this year, up to 20 properties. Would you have any intentions beyond that of continuing more? Is it just dependent upon the cap rates? Or is there other limitations in terms of how much that you could do in sale-leasebacks?

Michael O. Moore

Rosemary, this is Michael. As Greg mentioned, we have plenty of flexibility on additional sale-leasebacks. And it's a very opportunistic time because of the very low cap rates, so we're taking advantage of that. So I think what we do is go through this next tranche of up to 20 properties and then see where the market it is and...

Samuel E. Beall

We haven't had any discussion on anything beyond that because what we have is a good balance right now, pretty good capital structure. But anything could change, I guess.

Michael O. Moore

But right now it's just the 20 properties.

Rosemary Sisson

Okay. And just to refresh in terms of the number of unencumbered properties at this point or actually after you're done with all of the ones that you've done already, the sale-leasebacks you've done, what do you have left?

Greg Ashley

About 340.

Michael O. Moore

It will be 330 to 340, plus or minus, Rosemary.

Operator

Our next question comes from the line of Bryan Hunt with Wells Fargo.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Just a couple of questions. One, if I look at your current cash balance, the $40 million to $50 million of proceeds you're targeting for sale-leasebacks and the $30 million -- potentially $30 million of free cash flow this year, that's a substantial cash balance potentially. What's your energy around putting that to work through sale-leasebacks and/or bond repurchases throughout the year? Is there any way you could prioritize the cash use?

Michael O. Moore

Well, Bryan, as I stated in my comments, 2 uses we're looking at is to reduce our debt, and we did a bit of that early in the second quarter by buying back some of our bonds, and also opportunistically repurchasing shares, which we've done. So we certainly look at those 2 items. And then always, you want to have enough cash on hand if there was any opportunistic investments that you wanted to make.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

So I should take that to mean that you're continuing to look at acquisitions?

Samuel E. Beall

I wouldn't say we're continuing to look at acquisitions. But I think as you go forward, you could look at acquisitions. That's one viable option. I think also now is not a bad time to be patient. I don't think we're trying to get rid of the cash or burn through that real fast. We want to make wise capital decisions and won't be in a hurry. But as you saw of our first quarter, we are spending some money rebuying debt, repurchasing shares at the right price, and we'd love to have more growth, more units.

Michael O. Moore

And one of the areas to invest is our own current business. We currently have $40-plus million of CapEx, and we continue to find opportunities to invest in our own business. So by investment...

Samuel E. Beall

But we do have a lot of cash and it's not that bad. Not that bad in this economy to be in that cash situation.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

And then my second question was, you made a comment about the same-store sales pace at Lime Fresh and although it is a small base, do you have -- is there any way you can give us an idea what that hard number was? As well as, I believe you may have a few stores that are comping within the Marlin & Ray base as well. Could you comment on those same-store sales?

Samuel E. Beall

Let's see. Do we have any -- you may have the first one in Marlin & Ray's...

Kimberly M. Grant

No, none of the Marlin & Ray's same-store yet. They've just lapping the 1 year at this point. We don't count restaurant same-store until 18 months.

Samuel E. Beall

I think a positive that we've seen on Lime though, because most of our base is in Florida. But Florida over the last -- in South Florida actually, but over the last 3 years -- once a store opens over 3 years, it has a nice increase as people get to know the brand, the differentiation of the brand. So I think Chipotle saw the same thing as they started building out the system. Unlike casual dining where you open and that's about the best year you have. You go up and down a little bit, but nothing dramatic. So I think this is just encouraging to us that, even in our first 6 months of buying it, we do have a much better than Ruby Tuesday same-store sales increase.

Kimberly M. Grant

[indiscernible]

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

All right. And then lastly, you mentioned that you secured a majority of your proteins for the year. Is there any way you could give us an idea what of your inflation might look like in your proteins for the year overall?

Michael O. Moore

Yes, Bryan, I can answer that. So we've locked in -- we have contract price on about 80% to 90% of our proteins for the balance of the fiscal year. And our inflation will be -- over the total fiscal year will be somewhat less than 1%.

Operator

Our next question comes from the line of Reza Vahabzadeh with Barclays Capital.

Reza Vahabzadeh - Barclays Capital, Research Division

On the cost of sales, obviously, significant improvement there. Was most of that driven by the lower couponing? Or was it a combination of low couponing as well as your cost savings plan?

Michael O. Moore

No, we improved cost of goods sold 270 basis points. And as I mentioned earlier, about 200 was due to our cost savings initiatives and about 70 was based on less coupons and higher sales.

Reza Vahabzadeh - Barclays Capital, Research Division

Would you anticipate that mix of cost of sales improvement to remain the same as you go through the year? Or would that change?

Michael O. Moore

Well, I think we'll continue to improve, but the rate of improvement from the prior year is going to decline as we go over the year -- as we go over the balance of the year. Because #1, at the end of the year last year, somewhat in Q3, more in Q4, we achieved a lot of our cost savings initiatives, and now we're going to have to lap those initiatives. So we're going to enjoy -- we expect to enjoy good improvement in cost of goods sold over the first few quarters. But that improvement...

Samuel E. Beall

And our coupon expense went down in the fourth quarter, which would affect the...

Michael O. Moore

Yes.

Greg Ashley

Which is the basis behind restaurant level margin obviously guiding in the number that's south of what we actualized in Q1.

Reza Vahabzadeh - Barclays Capital, Research Division

Right, so you're basically at your $40 million to $45 million of cost savings run rate now?

Kimberly M. Grant

Yes.

Michael O. Moore

Yes, we're confident we're going to deliver that.

Reza Vahabzadeh - Barclays Capital, Research Division

Got it. And as far as the advertising spending increase, is that skewed towards earlier quarters? Or is that the rate of increase roughly evenly distributed?

Greg Ashley

It's fairly evenly distributed. It may be slightly more in the upfront, primarily because we recognize that if we can get our ad awareness up early, we can pull back on weights in the back half.

Samuel E. Beall

And achieve the same results.

Greg Ashley

And to maintain our sales momentum.

Reza Vahabzadeh - Barclays Capital, Research Division

And as far as the same-store sales trends that you've seen so far, did you mention how much of that was traffic or price mix?

Greg Ashley

Yes, traffic was flat, and the increase in sales was primarily a reduction of coupon expense.

Reza Vahabzadeh - Barclays Capital, Research Division

Got it. And any meaningful expense by geography?

Samuel E. Beall

Actually, that's a very good question.

Kimberly M. Grant

Yes, what I think we're most excited about, Sandy referenced stability in our business right now. We have restaurants that span mostly east of the Mississippi, northeast to Florida. And typically, we don't see, if one part of the country, like the northeast, is positive in sales, the southeast might be weaker and vice versa. For the first time in a number of years that we can remember, we have both major parts of our company store sales that are performing similarly, and that's exciting because we're not having to make up a downturn in one part of the country with another part.

Samuel E. Beall

When you say parts, you're talking about north and south of equal increases.

Kimberly M. Grant

North and south, exactly. So we're very encouraged by that. That just means the entire business is getting stronger, and we are very happy.

Samuel E. Beall

Which leads to that stability comment that we talked about. Things are just kind of hitting decent everywhere, seems like.

Reza Vahabzadeh - Barclays Capital, Research Division

Got it. And I'm sorry, one thing that wasn't in the press release. How many Ruby Tuesday stores did you have at the end of the quarter? 712? 713?

Michael O. Moore

712 or 710.

Kimberly M. Grant

It's about 712, 713.

Michael O. Moore

712, company-owned.

Operator

Our next question comes from the line of Dave Hargreaves with Sterne Agee.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Could you let us know what EBITDA was for your debt agreement, and if there were any adjustments for nonrecurring items in that number?

Greg Ashley

I don't have that number in front of me, Dave. We can catch up on that after the fact, if you want to give us a call after we wrap up.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Okay, great. And in terms of -- what is your run rate rent expense now, pro forma for the sale-leaseback transactions?

Greg Ashley

Run rate rent expense?

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Yes, sir.

Greg Ashley

Ask us a third question, we'll get that offline.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Okay, and then were there any other -- looking at the G&A expense, just wondering if there are any other nonrecurring numbers that you would highlight that we could maybe look at adjusting for?

Michael O. Moore

No, not any other G&A.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Okay. Could you give us a sense for what the impact of unit closures were on your same-store sales? Perhaps let us know what the ones you closed were or what it would have been if you hadn't closed them? Or any kind of color you could give us?

Kimberly M. Grant

Referring to the restaurant closed [ph]. The ones that were closed last year, we had estimated about 0.5 point in positive sales to the company. But that was basically the way they were trending at the end of the year.

Michael O. Moore

At that point in time. So really you can't -- we don't know what's the answer.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Okay. And then in terms of your overall commodity basket for 2013, the proteins you locked in, that's great. I'm just wondering overall, how much you're expecting in the...

Michael O. Moore

Well that was the 1% of -- it's about $3.5 million or so. Is that about, right? [indiscernible] which is...

Greg Ashley

Yes, our total crude [ph] spent, $300 million of COGS [ph]. So we're -- for the fiscal year will be less than 1%, $3 million, $4 million. That's all baked into our guidance. Dave, back to your rent number, it's about $50 million-ish. That includes most of the ramp-up for the sale-leaseback. The 25 we sold is about $3.5 million of incremental rent. Half of that's in. The other half, we'll pick up next year. And we'll give you a call back on the bond EBITDA number.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Beall for closing comments.

Samuel E. Beall

Just want to thank you for joining us today. If you have any other questions, give Greg a call, and he will answer it. You all make a great day. Bye.

Michael O. Moore

Thank you.

Operator

This was concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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