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Buffalo Wild Wings, Inc. (NYSE:SMG)

Q2 2008 Earnings Call

July 29, 2008 5:00 pm ET

Executives

Mary J. Twinem – Chief Financial Officer, Executive Vice President & Treasurer

Sally J. Smith – President, Chief Executive Officer & Director

Analysts

Paul Westra – Cowen & Company

Jeffrey Farmer – Jefferies & Co.

Lawrence Miller – RBC Capital Markets

Bryan Elliott – Raymond James

Destin Tompkins – Morgan, Keegan & Company, Inc.

David Tarantino – Robert W. Baird & Co., Inc.

Nicole Miller-Regan – Piper Jaffray

Brad Levington – KeyBanc Capital Markets

Will Hamilton – SMH Capital

Steven Rees – JPMorgan

Operator

Welcome to the Buffalo Wild Wings second quarter 2008 financial results conference call. (Operator Instructions) I would now like to turn the conference call over to Mary Twinem, Chief Financial Officer and Executive Vice President.

Mary J. Twinem

Joining me today is Sally Smith, our President and CEO. By now, everyone should have access to our second quarter earnings release which went out after the market closed today. If you have not received the release, it is available on the investor relations section of our website at www.BuffaloWildWings.com. A script of our prepared remarks will also be posted on our website after the call.

Before we get started, I remind you that during the course of today’s call various remarks we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those contained in forward-looking statements based on a number of factors including, without limitation, the number of locations opening during 2008 and beyond, the sales at these and our other company owned franchise locations, the date acquisitions are closed, our ability to successfully operate in new markets, the cost of commodities, the success of our marketing initiatives, our ability to control restaurant operating costs and other factors disclosed from time-to-time in our filings with the US Securities & Exchange Commission.

On today’s call, Sally will provide an overview of the second quarter results for 2008. After that, I will provide further detail on our recent financial performance and comment on trends in the third quarter. Finally, Sally will share some thoughts about our plans for the last half of 2008. We will then answer questions.

With that, I’ll turn things over to Sally.

Sally J. Smith

Today we released our quarterly earnings and we are confident that you will agree, we delivered an outstanding quarter. Our same store sales were industry leading and our new restaurants repeatedly opened at weekly sales volumes that were significantly higher than our average. These sales paired with year-over-year improvement in the performance of our company owned restaurants and leveraging of fixed costs generated net earnings growth of 46%.

During the quarter we opened five company owned and eight franchised restaurants in eight states and had three closures. We ended the quarter with 515 restaurants in 37 states of which 169 were company owned and 346 were franchised, a growth in units of more than 15% over last year. Total revenue in the second quarter increased by nearly 29% to $97.9 million and our same store sales increased 8.3% at company owned restaurants and 4.5% at franchised owned restaurants, comping over similar high same store sales increases of 8.1% and 4% in the second quarter 2007.

Net earnings for the second quarter of 2008 equaled $5.6 million compared to $3.8 million last year, a 46% increase. Earnings per diluted share of $0.31 compared to $0.22 per share for the second quarter of 2007, 41% increase. Our impressive same store sales and attention to cost controls resulted in improved restaurant cash flow and leveraging of G&A expenses and helped offset $771,000 incremental pre-opening expenses that we incurred in the second quarter.

For the first six months of 2008 our net earnings have grown 29% over the prior year exceeding our 25% annual net earnings growth target. We believe that our same store sales are spurred by a combination of great operation and great marketing and advertising. We are pleased with our operational execution at the unit level. We’ve utilized new training methods such as webcasts and DirecTV broadcasts to effectively communicate and roll out new programs. We’ve also implemented a performance score cards which ranks our company owned restaurants on a number of key metrics helping us identify opportunity areas. Further, we have better aligned our incentive program for our operations team with more specific and rigorous targets for labor and costs of goods. This focus on execution translates in to a great experience for our guests with guest loyalty scores that are rising and great year-over-year margin improvement.

Our second quarter marketing was highlighted by our night hunger campaign which focuses on the after dinner day part. Night hunger rolled throughout the system in June highlighting the fact that our kitchen doesn’t close until we do and was supported by local market radio, online marketing and restaurant promotional materials and a special late night menu featuring our new slammers. Our marketing was rounded out with a Father’s Day and Graduation gift card promotion, a new drink menu and three limited time only salads.

We are extremely pleased with the company owned locations that have opened to date in 2008. We commented on our impressive growth and the average weekly sales volumes in our press release but it bears repeating here. In our second quarter, the average weekly sales volume at our company owned restaurants increased by nearly 11% over prior year and franchise locations are up over 5%. This kind of unit growth in volume growth truly requires the coordinated and tireless effort of thousands of people. We thank the entire Buffalo Wild Wings system for these great results.

Mary will now provide additional details on our second quarter performance and then talk about trends and expectations for the third quarter. Then, I’ll return to share some of our plans for the remainder of 2008.

Mary J. Twinem

As Sally mentioned, total revenue in the second quarter increased 28.8% to $97.9 million versus $76 million in the second quarter of 2007. Company owned restaurant sales for the quarter increased to $87.5 million, a 29.5% increase over prior year. Contributing to this increase was a same store sales increase of 8.3% for the quarter, trending over prior year comps of 8.1%. Menu price increases taken in prior quarters account for about 3.5% of our same store sales increase.

We had 24 additional company owned restaurants in operation this quarter versus the same period last year and the strength of these openings is reflected in the average weekly sales volume increase of 10.7% for the quarter, 240 basis points higher than our same stores sales increase. Our royalty and franchise fee revenue for the second quarter increased 22.9% to $10.4 million versus $8.5 million last year. Franchise restaurants achieved 4.5% same stores sales for the quarter, comping over 4% same store sales in the prior year and a net 45 franchise units have opened since the end of second quarter 2007. Franchise locations had a 5.4% increase in average weekly sales volumes for the quarter.

Now, let’s discuss restaurant operating costs at company owned locations. Cost of sales for the second quarter was 30%, 50 basis points lower than prior year. Cost creep in some commodities was neutralized by increased menu pricing and a decrease in the cost of fresh chicken wings. Wings averaged $1.17 per pound during the second quarter, $0.08 lower than last year’s average of $1.25. Cost of labor for second quarter was 30.9% of restaurant sales, 30 basis points lower than second quarter last year. Our lower than expected self insured workers’ compensation expense offset higher health insurance and unit level bonuses.

Restaurant operating expenses were 15.8% of revenue in the second quarter, down 10 basis points from prior year mainly the result of leveraging repair and maintenance expense and cable programming expenses offset by higher utility costs. Occupancy expense was 6.7% of restaurant sales for the second quarter, leveraging 50 basis points over 2007. Depreciation was up 30 basis points, 10 basis points or $135,000 of which is related to the acceleration of depreciation for our upcoming three relocations as part of the conversion of the eight Don Pablo sites. Additional depreciation for recent facility remodels and HDTV upgrades combined with higher construction costs for new restaurant openings in 2007 and 2008 have caused depreciation to run higher as a percentage of revenue in both the first and second quarters and we would expect this trend to continue in the last half of 2008.

Restaurant level cash flow which is calculated before depreciation and pre-opening expenses was $14.4 million or 16.5% of restaurant sales versus $10.3 million or 15.2% in the second quarter last year, a 130 basis points improvement. General and administrative expenses of $9 million in the second quarter or 9.2% of revenue compares to $8.5 million last year or 11.2% of revenue. Second quarter results in 2008 included stock-based compensation expense of $904,000 versus $1.1 million in the second quarter of 2007. Excluding stock-based compensation, G&A expenses for the current quarter totaled $8.1 million or 8.3% of revenue, down 150 basis points due to lower conference and travel expenses. Pre-opening expenses for the quarter were $1.8 million versus $987,000 last year. We opened five new company owned restaurants in the second quarter of 2008 including one of the converted Don Pablo’s locations. We have also incurred $674,000 of pre-opening expenses in the second quarter for locations that are expected to open in the last half of 2008 including the ongoing rent costs associated with the purchase and conversion of the seven remaining Don Pablo sites.

We had $385,000 of loss on asset disposals and impairments mainly related to facility remodels and HDTV upgrades that are ongoing at various company owned locations. Additional remodel and HDTV upgrades will be completed in the third quarter and we would expect higher asset disposals during the second half of 2008. Interest income equaled $400,000 for the second quarter of 2008 compared to $755,000 in 2007, a reflection of the decline in interest rates. Our effective tax rate during the second quarter was 34.3% versus 33.6% in the prior year. Our estimated effective tax rate for 2008 continues to be around 34%.

In summary, second quarter 2008 net earnings of $5.6 million or earnings per diluted share of $0.31 compares to $3.8 million or $0.22 per share for the second quarter 2007, a 46% net earnings increase over prior year that calculates to a 41% earnings per share increase due to both rounding and an increase in the number of outstanding shares. Great same store sales increased restaurant level cash flows and leveraging throughout the statement of earnings combined for an outstanding quarter.

From a balance sheet standpoint, as of June 29th, our cash and marketable securities balance was $74 million compared to $68 million at the end of 2007 and we have no debt. We ended the quarter with $219 million in total assets and $157 million in stockholders’ equity. Cash flow from operations was $30.7 million for the first six months of the year and we spent $24.7 million on capital expenditures. The strength of our balance sheet will serve us well in the current economy and allows us to take advantage of future development opportunities.

Now, a few trends and details on the third quarter of 2008. We continue to be pleased with the strength of our same store sales. To date, in the third quarter, same store sales are over 6% for company owned restaurants and over 2% for franchise locations successfully hurtling same store sales trends of 11% and 6% in July of 2007. The combined potential benefit in the third quarter for previous menu price increases with a nominal increase taken with our new menu roll out this week is a little over 3.5% for company owned restaurants. Also, in late August, our company owned restaurants will be increasing the promotional price of boneless wings on Thursday from $0.50 to $0.60. We would anticipate that most of our franchise locations will increase their pricing as well. On an annual basis, this is a potential 50 basis point menu price increase for our company owned restaurants.

A total of 16 franchise locations are anticipated to open in the third quarter, one of which is a relocation of an older location. For company owned restaurants we expect to open 12 locations in the third quarter, three of which are relocations.

We expect our third quarter cost of sales percentage to show improvement over prior year. Year-over-year we have seen slight increases in the cost of our sauces, shortening and further processed shipments which is being offset by menu price increases and favorable pricing in the jumbo wing market. Our wing purchases remain based on market pricing and the cost of wings for July and August will average to about $1.15 per pound. As a reference point, wings in third quarter of 2007 averaged $1.24 when our old contract was in place. Our cost of sale margin has improved over 2007 but our suppliers are beginning to discuss the cost of transportation and it is likely that we will see some freight increases in the coming months or as contracts are negotiated for 2009.

For the third quarter we anticipate that the labor percentage will be neutral to prior year. Our restaurant operating expenses have trended slightly under the prior year for the first half of 2008. We anticipate that our G&A expenses in the third quarter, exclusive of stock-based compensation expense will be approximately $9 million. Our estimate for annual stock-based compensation expense for 2008 is unchanged at $3.7 million. Based on our anticipated third quarter new restaurant openings, as well as pre-opening costs for other locations that are under construction, we estimate pre-opening costs in the third quarter to be about $2.2 million. By the end of third quarter we expect that all but one of the eight Don Pablo’s conversions will be opened.

Regarding the Las Vegas purchase, we are scheduled for the final phase of review by the Nevada Gaming Board & Commission in September with a closing date scheduled for the last week of September. We will use about $26 million of our existing cash for this purchase. Please review the risk sections outlined in our SEC filings including our 10Q for the second quarter which will be filed in early August as well as our Safe Harbor statement for factors affecting our forward-looking statements.

With that, I’ll turn it back to Sally.

Sally J. Smith

We are more than half way through the year and football is just around the corner. Along with the kick off of the season, we are also kicking off a new menu, a limited time sauce and two brand new TV commercials. Our redesigned menu which rolls this week includes some enticing menu additions such as our cheeseburger and pull pork slammers, two signature burgers, a new appetizer sampler and a tasty honey barbeque chicken salad. Our newest sauce, southwest chipotle, which is a fire roasted chili sauce was introduced to our guests yesterday. We encourage you to come in and try it.

Our fall media campaign capitalizes on our guests’ interest in sports and takes advantage of football fever. We will be unveiling the two new TV commercials in September with a third quarter media spend that is 15% more than prior year. For the first time this fall, Buffalo Wild Wings will be seen across the nation during NFL games on CBS and FOX and during college football and NASCAR on ABC and CBS. This media coverage will continue in October. In addition, we will be seen on ESPN in September and October as part of our ESPN partnership and on other national cable networks. Watch for us during key late night programming in October as well on shows like Jay Leno, David Letterman and Jimmy Kimel, and we are happy to announce the renewal of our exclusive half time football sponsorship on the fast growing Big 10 Network. Layered on top of this TV presence we will run national and local radio spots throughout the fall. We continue our local store marketing activities as we once again entice fanatical football fans to our restaurants with the sponsorship of fantasy football leagues as well as other local sports sponsorships and community events.

Operationally, our restaurants are ready to compete. We are staffed and trained and eagerly await the energy and excitement that occurs when loyal college and NFL football fans head in to Buffalo Wild Wings bringing our tag line, you have to be here to like. We have made significant upgrades in our audio visual systems, enhanced numerous patios with additional seating, awnings and TVs and have remodels in progress at nine company owned locations.

In summary, we’re very pleased with our performance to date in the first half of 2008. Our strong same store sales, our impressive new restaurant sales volumes and our margin improvement give us great confidence in achieving all three of our growth targets for the year, 15% unit growth, 20% revenue growth and 25% net earnings growth. We have targeted the week of October 27th for our third quarter conference call and hope that you will all join us.

But, before I open the call for questions, we want to extend our heartfelt thanks to our guests for their unfaltering loyalty in these challenging economic times; thank you. And, to the Buffalo Wild Wings team, thank you and congratulations, you make a great quarter like this happen. Your passion, dedication and hard work are key to successfully building Buffalo Wild Wings to a national brand of over 1,000 locations.

Operator, this completes are prepared remarks, we will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Westra – Cowen & Company.

Paul Westra – Cowen & Company

A couple of questions, first on 2Q I was wondering if we could get a little more color on your occupancy comp line item? That levered pretty significant especially in light of the flat year-over-year first quarter performance. Is there anything there we should know about as you project going forward for the second half of the year?

Mary J. Twinem

We had 50 basis point improvement on that line in the second quarter. We would expect to have continuing leverage on that line as we go in to the third and fourth quarter.

Paul Westra – Cowen & Company

Then, on your pre-opening cost guidance, obviously this quarter was up substantially, can you quantify what the sort of Don Pablo impact is and do you expect would you say normalized pre-opening numbers on a per unit opening basis? What is your pre-opening per normal unit and again, should that normalize in the fourth quarter?

Mary J. Twinem

Pre-opening for second quarter was higher than we had expected it to be. We have more stores in construction for opening in Q3 and after I think we have about 16 that we have incurred some type of pre-opening expense on. But, I would say that Don Pablo’s isn’t the only thing to blame. We are seeing that the average costs on several of our most recent openings are more in the $200,000 to $225,000 level range so that’s what brings up our estimate for the third quarter up to $2.2 million.

Operator

Our next question is from Jeffrey Farmer – Jefferies & Co.

Jeffrey Farmer – Jefferies & Co.

I think in one of the most recent investor conference you’ve been pointing to greater net income growth in the back half of the year. Given the performance you just put up in the Q2 is it fair to say that, that guidance no longer applies?

Sally J. Smith

I think if you look at it on an annual basis, our second quarter performance certainly brings our performance past the 25% range. Given some of the comments Mary made regarding the third quarter, we’re still pretty confident that we’ll continue to see net income grow in the last half of the year.

Jeffrey Farmer – Jefferies & Co.

That makes perfect sense, I just didn’t understand if perhaps you had something in the back of your pocket that you saw in June/July that’s still there and then what you delivered in Q2 was just actually on top of that? You can split hairs too much but I’m just really trying to figure out if we’re looking for a lot more than 25% EPS growth or close to 25% EPS growth.

Mary J. Twinem

No, we reiterated our guidance as it stands for the year at 25% .

Jeffrey Farmer – Jefferies & Co.

After really 06 and 07 you put up some great same store sales, you didn’t see a lot of G&A leverage and then this year you’ve been able to turn it on big time so I’m just really curious what’s changed in 08 versus 06 and 07 considering the comparable same store sales performance.

Mary J. Twinem

I think during 06 and 07 we were building some of our infrastructure which we continue to do but as you grow and open more stores you need we’ve been able to leverage the various departments here, not adding probably as rapidly as we did in 06 and 07. We also really watched travel during the second quarter of this year. We knew that there was a lot of unpredictability in terms of sales and overall cost increases so we just watched all of our spending during the second quarter.

Jeffrey Farmer – Jefferies & Co.

Final question for me, some of the biggest chicken producers, suppliers in the country have said that they’re essentially unwilling to enter in to purchase contracts that go out more than three months. So, I guess based on that the question is if you guys wanted to lock in your wings right now, could you?

Mary J. Twinem

At the current marketplace, no but we want to. We would at today’s price but no, you would be right.

Jeffrey Farmer – Jefferies & Co.

Do negotiations go on that you’re willing to pay 10% to 15% greater than the spot price just to lock it in, have those conversations taken place?

Mary J. Twinem

We have conversations all the time with our suppliers and not to go in to a lot of detail but we are currently floating at the market and I would anticipate that would stay like that for a while.

Operator

Our next question comes from Lawrence Miller – RBC Capital Markets.

Lawrence Miller – RBC Capital Markets

I was wondering if you could comment just on the commodity outlook other than chicken, what you’re seeing in some of the other proteins and beer contracts and so forth?

Mary J. Twinem

I mean as it relates to commodities, the only contracts that we have coming up before year end are mostly smaller item stuff. We are hearing suppliers have discussions as it relates to the cost of transportation so we will I think see some freight charge increases in the last part of the year. On wings, who knows how long the price is going to stay down on that end. Of course, we would lock at the current market prices, our suppliers aren’t interested in that so it’s hard to know what that will do in the next six months or 12 months. On beer, our feeling is that we will see increases coming in, in the last half of the year and as we see that we’ll definitely look at our pricing for beer items and make adjustments where we feel it’s appropriate. I would say the biggest unknowns for 2009 are in beef, which would be our hamburgers, oil, potatoes, cheese, further processed chicken doesn’t come up for renewal until April and then obviously wings for all of 09.

We are just beginning to talk to our suppliers as it relates to 09 stuff. I would doubt that even by the October conference call we will have finalized contracts for 09. That’s really the beef, oil, potatoes, cheese, chicken area is really where our biggest unknowns for next year lay.

Lawrence Miller – RBC Capital Markets

Your comps are really better than everybody else’s, have you seen any changes at all in the way that the consumers are using you today at all at this point?

Sally J. Smith

I don’t think there is really anything specific Larry that we can point to. Certainly, we remain strong we feel in July and football season, which we love, is right around the quarter. I don’t know if we’re taking advantage of trade down but what we really focus on, as we’ve said before, what we can generate both in local market and in the four walls. Operations has done a fabulous job of making sure the restaurants are ready to deliver the experience, and great food that our guests, as we know it, want.

Lawrence Miller – RBC Capital Markets

I just had a couple of quick ones, the 20% revenue guidance is it really at least 20% because you grew about 25% in the first half of the year. Is that how I should think about it?

Sally J. Smith

We just continue to reiterate 15% unit growth, 20% revenue, 25% net earnings.

Lawrence Miller – RBC Capital Markets

Then just to make sure, did you say $9 million in G&A in Q3 pre stock comp, is that correct?

Mary J. Twinem

Yes.

Lawrence Miller – RBC Capital Markets

Then lastly, how much was the conference expense that you cited in G&A.

Mary J. Twinem

As it relates to the piece in G&A for the second quarter, we ended up net of stock-comp expense of about $8.1 million. On an ongoing run rate basis, that really would be closer to $8.6 million. So, when we trend out the third quarter to be at $9 million it’s really comparing it to an $9.6 in the second quarter trending up to $9.

Lawrence Miller – RBC Capital Markets

That conference expense was about a half million dollars, is that said another way?

Mary J. Twinem

Yes.

Lawrence Miller – RBC Capital Markets

One last thing, the 50 basis points of price, you said that you’d probably have in late August, is that part of the 3.5% pricing total?

Mary J. Twinem

It is not. It would be incremental for the fourth quarter.

Operator

Our next question is from the line of Bryan Elliott – Raymond James.

Bryan Elliott – Raymond James

Just a quick follow up there Mary on what you just said, it sounds like you actually had a conference expense for your conference?

Mary J. Twinem

Correct. We trended lower on that piece in the second quarter.

Bryan Elliott – Raymond James

So the fees and supplier contributions successor actually more than covered the cost of it?

Mary J. Twinem

It reduced it by $500,000.

Bryan Elliott – Raymond James

On the chicken outlook, the number of egg sets is dropping rapidly, we’re seeing plant closings, it’s clear the number of chickens produced everyday is going to go down maybe a lot and I just wondered how you looked at that and what risks you see by staying on spot? And, if there’s any precedent for significant reduction in the amount of chickens being processed every day? If you can look back in history, has there been a similar problem on the supplier side that’s reduced supply like it looks like we’re going to see? Has this happened in the last 10 years or so since you all have been involved in this business?

Mary J. Twinem

Boy, that’s a big question Bryan. Producers have changed supply every year either increased or decreased and it doesn’t always align with what demand is at the time. As it relates to wings, I would say that the increase we saw in prices in wings last year was higher than you would have expected based on all other kinds of factors in the market and you could argue today that the lower wing prices we’re experiencing are lower than they ought to be. Hopefully we’ll make the right choices as it relates to how we negotiate the contracts for 2009 and we’ll see how that all lands for us.

Bryan Elliott – Raymond James

Also, to probe a little more on Larry’s question about sort of what you can pull out of your usage patterns with respect to consumer behavior, are you seeing increased food mix? Are people coming in and maybe using your more for meals rather than just sort of snacks and beverages during an event on TV? And, what might be happening weekend, weekday and lunch/dinner mix?

Mary J. Twinem

Our food and alcohol percent was 77.23% in the second quarter as compared to just 76.24% last year so almost no change in alcohol. Take out remains steady this quarter versus last quarter. We’re seeing our day part and late night just up slightly, partly because we’ve had a focus on it but our other day parts have really remained pretty steady.

The other item of note would be as we [inaudible] our boneless wing versus our traditional wing, that boneless in the second quarter this year was 16% so up 2% compared to the prior year and wings were down 2% so wings now are about 22% of our overall sales.

Bryan Elliott – Raymond James

Do you think that’s the result of in store marketing? Or, is that anything you’ve driven or is that just behavior change?

Sally J. Smith

I think there’s been some marketing. Thursdays have become probably an event day for us with boneless wings Thursday so I think that’s driving part of it. Some I think is just as we enter in to new markets and people maybe aren’t use to traditional wings, trying out boneless wings and really liking them.

Operator

Our next question comes from Destin Tompkins – Morgan, Keegan & Company, Inc.

Destin Tompkins – Morgan, Keegan & Company, Inc.

My first question is on development especially as it relates to 2009. As you look across the industry and see slowdowns from other restaurants and retail companies, can you kind of help us with how that helps or hurts your development strategy? Does it provide more site availability or do you depend on certain co-tenants as you look at potential sites? And then, as it relates to the franchise pipeline, can you tell us how that looks and is there any risk that financing availability is going to be difficult for your franchises.

Mary J. Twinem

I’ll talk first about company development. For 2009 our pipeline looks good on the company side and it should by now because it really takes probably a good 12 to 18 months before something that you originally start to look at actually comes open. From an availability standpoint, I think that there’s been a little bit of losing there, we might be one of the first people they call versus when a center is getting full.

We haven’t seen any slowdown in particular for 2009 on deals that relay on some big boxes that might be cutting back, we haven’t seen that. On the franchise side, our pipeline, I’m very pleased with the pipeline for 2009 as well. I think that from a financing standpoint, I think there will be pockets of the country that have maybe the same sort of issues that other retailers and other concepts have in finding financing. A lot of our development however is from existing franchisees who have cash flows to support their development. And, I think our selection process of our franchisees, really trying to pick strong partners who have the background of development and have the financial resources. From 2009 from our standpoint, looks good.

Destin Tompkins – Morgan, Keegan & Company, Inc.

As you look at the Olympics coming up, do you have any special promotional activity planned? And, can you kind of give us what your history has been with the Olympics? Is it typically a time that you see more business or do consumers generally stay home more during the Olympics?

Mary J. Twinem

We don’t have any media running during the Olympics and the opening ceremonies for the Olympics, as everyone knows, are on August 8th. Pre-season football games start August 7th so we’re more excited about that beginning so it would be really hard for us to tell whether the Olympics are the driver or football coming back in to season would be the driver for traffic but we have no doubt they’ll be at our stores watching football.

Destin Tompkins – Morgan, Keegan & Company, Inc.

The non the night hunger program Mary, has that moved the needle in terms of what your late night sales have done in the second quarter when you ran that promotion?

Mary J. Twinem

Just a little. We rolled it in June so there’s not a whole lot of data on it yet. It did have media support, there was a radio campaign that went along with all the in store stuff that I did. I mean, preliminary results are that it has increased the same store sales trends that we’ve seen in that late night day part so it’s a partial driver in that 8% or 6% July same store sales increases that we’ve seen so far, but it’s a small component piece to that.

Destin Tompkins – Morgan, Keegan & Company, Inc.

Has there been any other day parts that you might point to as good success stories during the quarter that have helped boost that sales trend?

Mary J. Twinem

From a system wide campaign standpoint, night hunger would be really what we had focused on in the second quarter and in local store basis people will either target lunches or happy hour or a specific day of the week if they have weakness in their particular store, but nothing that was done on a system wide basis.

Operator

Our next question comes from David Tarantino – Robert W. Baird & Co., Inc.

David Tarantino – Robert W. Baird & Co., Inc.

A question on the comps, are you seeing any benefits from mix in that comps or would the gap between the comp and the pricing be all driven by traffic?

Mary J. Twinem

We don’t do a great job of separating out the mix in traffic piece so obviously we know what our overall same store sales are and we can calculate what kind of the maximum potential is for menu price increases if there is no change in mix and then all the rest of it ends up being mix and traffic.

David Tarantino – Robert W. Baird & Co., Inc.

Then just a question on the overall pricing philosophy, what is the thought process behind the price increase you’re considering in Q4 given that the results suggest that you may not really need to take pricing at this juncture?

Sally J. Smith

We didn’t talk about Q4. We talked a little bit about beer pricing that if the cost of beer went up we’d look at it on kind of a market-by-market basis. If you’re referring to the boneless wings for our Thursday promotion where we’re going from $0.50 boneless wings to $0.60 boneless wings that product and that promotional rolled out in 2005. We have not taken a price increase on boneless wings since then. It would be the only item that we’re taking a price increase on sometime in late August. But, we don’t have anything else scheduled for the third or fourth quarter.

David Tarantino – Robert W. Baird & Co., Inc.

I guess on the boneless promotion, that is the one I’m talking about. Is that an opportunistic price increase or are you seeing some cost pressures that you need to offset there?

Mary J. Twinem

Well, it is our expectation, we’ve seen a little bit of these freight charges or surcharges come through in the last month and it is our expectation that there will be more of that, that kind of creeps in so taking up that boneless Thursday pricing a touch should account for that. Plus, as we had moved up our menu pricing earlier in this year, it just made that boneless piece a deeper discount on Thursdays so it seemed appropriate that we move it a little bit closer.

Operator

Our next question is from the line of Nicole Miller-Regan – Piper Jaffray.

Nicole Miller-Regan – Piper Jaffray

I just wanted to follow up with a couple of housekeeping things. On the G&A Mary, can you remind us of what the first half stock option expense was? Then, for the back half should it be pretty evenly split to hit the $3.7 for the year?

Mary J. Twinem

It would. It seems to me the first quarter was not exactly $1.4 but if we have $3.7 million for the year and you have the numbers for the first six months, you can split what’s remaining in to two for third quarter and fourth quarter.

Nicole Miller-Regan – Piper Jaffray

Then I missed what you said on the operating line. I understand that has been down year-over-year were you suggesting that would be the trend? Then, sort of what’s the magnitude? I think it was down a little bit more in the first quarter than in the second.

Mary J. Twinem

You’re referring to which line?

Nicole Miller-Regan – Piper Jaffray

Operating.

Mary J. Twinem

Restaurant operating expense?

Nicole Miller-Regan – Piper Jaffray

Yes.

Mary J. Twinem

I think from the third quarter I think we will see some leveraging over the prior year in the third quarter. Really the unknown for that is whether we’re going to see a bump in our energy cost at the store and that will either reduce or eliminate any leveraging from prior year. But, otherwise we would think we’d have some year-over-year improvement.

Nicole Miller-Regan – Piper Jaffray

Then on the pricing, I understand it to be 3.5% in the third quarter with a little bump I guess as you exit the quarter. Will you be on about 4% price then for the fourth quarter or is there anything that rolls off?

Mary J. Twinem

We would start the quarter at about 4% and then in November there is a small piece that would roll off for some alcohol pricing that we took in November, 2007. Right now we don’t know whether or not we’ll take any replacement pricing I guess you would call it in that area and that will just depend on whether or not we see beer prices go up in the last part of the year.

Operator

Our next question is from Brad Levington – KeyBanc Capital Markets.

Brad Levington – KeyBanc Capital Markets

I just wanted to ask first off, you talked about - your restaurant level margins improved I think about 130 basis points year-over-year which was amazing in this environment and you talked about I know there was some leverage from same store sales but also cost controls. On the last call you talked about the labor scheduling kind of initiatives and kind of theoretical food costs, were there additional things that you were doing this quarter that showed so much improvement?

Mary J. Twinem

No, it would be just continuing to roll out those programs. We mentioned in the conference call how we have the score card, the operation score card so it’s really just keeping top of mind all of those metrics that we think are important in running the units most efficiently. What it kind of does is it definitely highlights performers in a multitude of categories so we do both guest experience and hospitality scores, we do turnover as well as labor efficiencies to our labor scheduling module, efficiencies to our theoretical costing. But, it also creates competition among the stores and among the regions to improve their performance and those metrics are tied in to the incentive programs at the store level and throughout the operations team. I think that’s really been key in the second quarter and I think it will be key in the remainder of the year.

Brad Levington – KeyBanc Capital Markets

Looking at the promotions, I believe you mentioned that some stores might do an individual promotion on a specific day part. Do you they have freedom if there’s a certain store that’s having a slower lunch to do sort of a store based promo?

Sally J. Smith

We have a number of programs or promotions that our restaurants can choose from whether it’s lunch or – late night is more of a system wide promotion but they do have some latitude in working through how they want to promote their individual restaurants.

Brad Levington – KeyBanc Capital Markets

Looking at same store sales, and I apologize, my phone was giving me trouble and I missed the beginning, you may have mentioned this, was there a region that was stronger than the rest? I mean, Midwest seems to be pretty strong for a lot of companies these days. Is there one stronger or weaker one that you can comment on?

Sally J. Smith

We don’t typically break out our results of same store sales by region. I guess to have comps in the regions we were in, we had pretty strong results across the board.

Brad Levington – KeyBanc Capital Markets

Then, on the remodels, are there any additional costs outside of the impairment line that we should expect to see with that?

Mary J. Twinem

The only other line that is affected by it somewhat is the depreciation which I think we’re seeing that trend already. But, as you have these older locations that come in to remodel you’re going to have capitalized cost that gets depreciated.

Brad Levington – KeyBanc Capital Markets

Then just briefly, on the boneless Thursdays, the $0.10 price increase, did I hear you correctly that, that would translate correctly to about 5% price increase on that day I guess?

Mary J. Twinem

No, 50 basis points.

Brad Levington – KeyBanc Capital Markets

I knew I heard that wrong.

Mary J. Twinem

Yes. .5% of overall restaurant sales.

Brad Levington – KeyBanc Capital Markets

Last, when did you start the bundling? Doing fries with the plates?

Mary J. Twinem

That was in the first quarter 2008.

Operator

Our next question is from the line of Will Hamilton – SMH Capital.

Will Hamilton – SMH Capital

Mary, I was wondering if you could just repeat the company openings you expect in the third quarter?

Mary J. Twinem

Company openings, there will be 12 and three of those will be relocations so there will be a net nine more in the third quarter.

Will Hamilton – SMH Capital

Then the franchise were?

Mary J. Twinem

A total of 16 with one of those being a relocation so there will be a net 15.

Will Hamilton – SMH Capital

Then I was wondering in regards to comparisons across the quarter, I think you mentioned in discussing a 6% increase to date that was over 11% a year ago. I guess that suggests that over the course of a year ago in the third quarter the comps declined. Is that the case and was it as dramatic because I think the overall increase last year was about 8%?

Mary J. Twinem

Correct. It was 11% in July at the point of the conference call in July, 2007 and that quarter ended right over 8%.

Will Hamilton – SMH Capital

Then lastly, I was wondering if you could comment at all about the news from Bennigan’s and with their closure are there many markets where you have locations that are pretty close and maybe you get some spill over if you’re able to grab some traffic from their closure?

Sally J. Smith

That just came across before the conference call so we haven’t had a chance to look at that at all. I know that it affects their company owned stores, it doesn’t affect at this point their franchise locations so I have no idea where we’re located, what stores would be opened or closed at this time.

Mary J. Twinem

I would think we would take the same approach we took with Don Pablo’s which is if we are looking for locations in specific trade areas and there happens to be an appropriate match with any of their locations that we would pursue it if possible.

Operator

Our next question is from the line of Steven Rees – JPMorgan.

Steven Rees – JPMorgan

Just a couple of questions, the unit volumes continue to be impressive, trending up above the system average and actually accelerating this quarter. Can you just talk about how these units comp when they do enter the same store base? Are they comping in line with the overall system?

Mary J. Twinem

Well, our goal is that they call comp positive when they enter in the same store sales group. Our newest restaurant openings aren’t in the comp group yet. It’s definitely our goal, it doesn’t always happen but we would like to think that we’re able to sustain sales and when they enter the comp group after 15 months that they’re coming in positive.

Steven Rees – JPMorgan

But you haven’t seen a significant negative impact? The unit volume trends have been strong for several quarters now?

Mary J. Twinem

I don’t think there is any negative to opening a store really strong. It would definitely be our preference.

Steven Rees – JPMorgan

Just on the media spend, I think you mentioned that it was going to be up 15% in the third quarter. Can you just talk about what it was up in the first half of this year and sort of what the plans are for the fourth quarter?

Mary J. Twinem

Q3 will be up about 16%. Q4 will be about flat to what prior year’s spending was. From an allocation between first half of the year and second half of the year, we still have half of our money being spent in the second half of the year. I think the big takeaway on the media piece is the transition in the third and fourth quarter to more national network and national cable and really awesome exposure in the NFL games on CBS and on FOX and on the college football games on network and the Big 10 piece. So, I think even though in the fourth quarter the total dollars are fairly flat, the exposure that we’re getting at a national level is incrementally higher.

Operator

Your final question is from Paul Westra – Cowen & Company.

Paul Westra – Cowen & Company

Just a couple more modeling follow ups, are we finished with the depreciation one-time charges that we saw $250,000 in the first half?

Mary J. Twinem

We had in second quarter $135,000 of our depreciation is additional as it relates to these relocations that we’re doing. There will be a little bit more that happen in the third quarter and then the impairment line in the third quarter is the one that will pick up the store closing costs as it relates to those locations.

Paul Westra – Cowen & Company

So when you refer to the impairment going up, as far as excluding the closure cost on the impairment line, the ongoing if you would impairment closures costs should we expect anything different than what we’ve seen in the $350,000 to $400,000 in the first half per quarter?

Mary J. Twinem

We had about $385,000 in second quarter as it relates to impairment and as we look at third quarter with the number of facility remodels that we’re doing as well as exiting these older sites, we could be even double that in the third quarter for impairment expense.

Paul Westra – Cowen & Company

But will the closures be at least half that?

Mary J. Twinem

I think it will be a smaller piece of that. Most of it is facility remodel and the asset disposals that go with that and the HDTV upgrades.

Paul Westra – Cowen & Company

Lastly, as we approach the fourth quarter, I know fourth quarter is usually a much lower tax quarter, are you assuming a lower tax rate in your guidance?

Mary J. Twinem

No. We calculate it every quarter and it’s based on an annualized income tax rate. We currently believe that to be 34%. Each quarter that gets updated and if there’s any changes obviously they get played in to the income statement.

Paul Westra – Cowen & Company

Lastly, in the fourth quarter of 07 you started the benefit of your leveraging your labor line with your changes and I believe your self insurance line. Do you still expect to see pressure or given that you’re lapping up that benefit starting the fourth quarter, or do you still expect to see flattish labor through the fourth quarter as well.

Mary J. Twinem

I didn’t have specific comments as it relates to the fourth quarter. We believed on the labor scheduling side we’ll see improvement on the hourly piece just based on fully utilizing that program. The unknown always is what health insurance and workers’ comp will do.

Operator

That does conclude our question and answer session.

Sally J. Smith

Thank you again for listening to our call. We hope you’re pleased with our performance, we know we are. We look forward to sharing our third quarter results with you during the last week of October. Thanks again.

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