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Ruby Tuesday, Inc. (NYSE:RT)

F1Q09 Earnings Call

October 8, 2008 5:00 pm ET

Executives

Steve Rockwell - Vice President, Finance

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

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

Mark Young - Senior Vice President, Marketing

Kimberly M. Grant - Executive Vice President

Analysts

Steven Rees - J.P. Morgan

Keith Siegner - Credit Suisse

Joseph Buckley - Banc of America

Jeffrey Omohundro - Wachovia

Thomas Forte - Telsey Advisory Group

Brad Ludington - Keybanc Capital Markets

Robert Derrington - Morgan Keegan

Howard Penny - Research Edge

Operator

Greetings and welcome to the Ruby Tuesday first quarter fiscal year 2009 earnings call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Steve Rockwell, Vice President of Finance for Ruby Tuesday. Thank you, Mr. Rockwell, you may begin.

Steve Rockwell

Thank you, Manny and thanks to all of you for joining us this evening. With me today are Sandy Beall, Ruby Tuesday Chairman and CEO, and Margie Duffy, Chief Financial Officer. In addition, Kimberly Grant, our Executive Vice President of Operations and Mark Young, our Senior VP of Marketing, are with us for the Q&A portion of the call.

I would like to remind you that there are likely to be forward-looking statements in our comments and I refer you to the note regarding forward-looking information in our press release and most recently filed Form 10-K. A copy of our press release can be found on the investor relations section of our website at rubytuesday.com. We plan to release second quarter fiscal ‘09 earnings in early January of 2009. Our first quarter earnings were released today after the market closed and were available on Businesswire, First Call, and other wire services.

Our format today includes an overview of our first quarter fiscal 2009 results, our updated fiscal 2009 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks, we will open the lines for questions.

I will now turn the call over to Margie.

Marguerite N. Duffy

Thank you, Steve and good evening, everyone. I’ll take a few minutes to touch on our first quarter financial results and continuing fiscal 2009 financial plans, then Sandy will update you on our business plans and initiatives.

As you saw in our release, we reported diluted earnings per share for the quarter of $0.01. The positive is we generated enough cash flow to repay $40 million of debt during the quarter. Total revenue for the quarter decreased by 6.6%, driven by the 10.8% decline in same-restaurant sales, offset by an average of 5% more restaurants in operation, largely reflecting the acquisition of 25 franchise restaurants in the second quarter of fiscal 2008. We closed a net of six revenues during the quarter.

Restaurant level margins were 16.6% compared to 21.4% in the prior year. Food costs were higher due to offering higher quality menu items, as well as better pricing to our guests.

Labor costs were higher due to increases in minimum wage in several states and higher management labor because of a loss of leveraging with lower sales volumes. The other operating expense line was 240 basis points higher than the same quarter of the prior year. The bulk of this increase was due to higher utilities, higher rent from leased restaurants purchased from our franchisees, increased impairment charges, and a loss of leverage on certain relatively fixed costs.

SG&A costs decreased 50 basis points as a percent of operating revenue principally because of lower advertising expenses. We were on television only eight weeks during the quarter, a 25% decline from a year earlier when we were on air for 11 weeks. Management labor also declined year to year.

Equity and earnings of our franchisees was higher than prior year, due primarily to providing fee relief to several of our franchise partnerships as we continue to work closely with our franchise partners to improve their profitability during these soft economic times.

Interest expense was in line with our expectations.

In looking at the balance sheet, we ended the quarter with book debt of $565 million, down approximately $40 million from the end of our fiscal year, and total debt, including operating leases, guarantees, and letters of credit of approximately $857 million.

With our reimaging completed and new unit development effectively on hold, capital expenditures were only $6 million for the quarter.

As we indicated in our press release this afternoon, our revised guidance is as follows: we expect to open two additional company-operated restaurants later in the year and anticipate closing 10 locations with lease expirations at this time. For the year, we expect same-restaurant sales to be down in the mid-single-digit range with sequential improvement throughout the year. EPS is expected to be in the $0.30 to $0.35 range. We expect restaurant operating margins to be down as higher labor and other operating expenses reflecting lost leverage from the lower sales are partially offset by lower food costs. Depreciation is projected in the $79 million to $81 million range and SG&A is targeted to be down approximately 10% to 15%. Interest expense is projected to be up 25% to 30%, reflecting higher interest rates. At this time, we expect to record a tax credit for the year. We expect to generate $80 million to $90 million of operating free cash flow for the year.

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

Samuel E. Beall

Thanks, Margie and thank you for joining us, listening on the phone and the web. We appreciate your interest in Ruby’s.

The first quarter definitely continued to be a challenging one for us, the industry as well as the consumer. With the weaker economy, the housing crisis, all these things that you know about, it’s been very, very difficult. The consumer is spending less and that’s reflected in our sales and in the industry sales.

In the face of these challenges though, the good thing as Margie mentioned is our cash flow is very strong, enabling us to pay down $40 million of debt. I think that’s very important for our company. We also continued to see an increase in our guest satisfaction scores and we managed our controllable costs relatively well, I believe.

We implemented a new menu design during the quarter that has more personality than earlier ones. It offers much greater value to the guest and has enabled us to essentially maintain our check up approximately 1% but maintain our check compared with last year. Now the check increase was essentially flat.

Price value is the key in this environment, price more so than value, really, and we plan on promoting our price and that value more aggressively in the coming months as we overlap only six weeks of advertising in the last five months of our year.

With all of our recent initiatives in place, completed, including our reimaging and renewed emphasis on price value, we believe we are very well-positioned to communicate our value to our guests. We remain committed to our four key strategies -- uncompromising freshness and quality, gracious hospitality, a fresh new look for our restaurants, five-star facilities, we call it, and compelling value. We believe staying true to these strategies is the best way to differentiate ourselves from our competitors and positions us very favorably as we move forward and hopefully when the consumer comes back, we’ll benefit from improved situation.

Our teams remain passionate about executing our strategies. Our team strength has never been better. Our turnover for hourly and management teams is excellent. Hourly actually will hit the lowest that I can remember in the last 30 years, actually.

We continue to easily attract excellent management candidates from high quality casual dining concepts. They see the difference in the concept’s food, service, look and feel and most importantly, the passion of our teams towards quality.

We continue to challenge and push ourselves to be better, whether it’s improving our brand, whether it’s cutting cost, whether it’s figuring out how to make the balance sheet better by just being better overall. We want to attract more guests, we need to attract more guests.

Some examples of what we are doing -- first, we have to know who we are, what we are, and what’s important to our guests. We are about the best burger in the business. We know that. We are to burgers what Outback is to steaks and Olive Garden is to pasta. Forty-percent of our guests order one of our great burgers, whether it’s the minis or the handcrafted or the triple prime. Our burgers are extremely good. They are very highly rated by our guests. We use all the fresh meat. We use choice meat, we use prime meat, we use premium leaf lettuce versus shredded lettuce, vine-ripened tomatoes, pickles, et cetera. Anyway, you get the point -- we build a great burger and it’s so good that we actually guarantee it.

Our other high quality, high value menu items complement our burgers and hopefully when somebody comes in and gets a burger, we can sell them one of our craveables, like our slow-roasted ribs, our New Orleans seafood, one of our salad bar combinations or fresh jumbo lump crabcakes.

Also in this environment, it’s about best prices and best value. Our October menu printing, which will be out I think it’s October 21st, will have a few key items at even more competitive pricing. Our July menu had very competitive value. In October, we’ll even take it a couple of steps further. We’ll be highlighting our burgers, that great burger from $5.99, a powerful price point for the best burger around. Attractive prices like this will enable us to better communicate or actually get more effect from the ads when we are on television.

Also, we believe we need to add more fun and energy to our restaurants in our bar areas, especially in these difficult economic times, un-fun times, I call them. So we need to lighten it up a little bit, lighten up our guest’s day with a little better music, more energy in our menu and our promotional materials and our advertising.

We also plan on increasing television advertising more than originally planned in the back half of our year to help drive our guests. We have a fresh new brand with great food and service and a fresh new look. Now is the time to invest, even though it may seem like the most unlikely time. I think we have to invest as much as we possibly can in our business to attract guests to see what’s new at Ruby Tuesday.

We want to run our business more offensively than we have really in the last nine months. I think that’s important. Our advertising will send a clear, consistent message on who and what Ruby Tuesday is today, with more television support in local and regional promotions in addition to the television.

We’ll communicate our great food and value, giving consumers a powerful reason to give us a try. I think this will even be better than the ad we are currently running, which is actually doing well, our mini ad, which is a very differentiated product, our mini trio ad, where we are getting decent results there.

We are also investing in a stronger sales building culture. It’s not just our marketing department but Kimberly has an entire operations team thinking more about sales. We want them to be as good, learn to be as good at building sales locally as we are cost control, which we are excellent there. This involves training, dedicated manpower, focus, local and regional programs, and of course investing in some marketing and promotional dollars, especially in southern locations, which we started last month.

Our same-store sales decline is exaggerated by our locations in the south where we have over half of our restaurants. The rate of decline at these locations was about 50% higher than that of our restaurants in the north during the first quarter, and this has continued into September. We are addressing this sales discrepancy with a dedicated team that just focuses on the south, promotional and advertising activity market by market.

In addition to strengthening our brand, we are also looking for ways to strengthen our balance sheet and increase our financial flexibility. We continue to work with our financial advisors to evaluate the impact and cost of various options. Very few exist in this kind of marketplace but those come and go but we are constantly working on that.

Our most important focus though is to continue to strengthen our balance sheet by paying down significant levels of debt from internally generated cash flow, just like we did in the first quarter. Because of our recent reimaging, we require very little capital for our business. This year it’s in that $23 million, $24 million, $25 million range but going forward, it’s only in that $15 million plus range every year, so we are positioned to continue deleveraging from internal cash flow.

Our sales focus for the year, just to recap that, executing on a clear brand vision; number two, creating more energy and fun for our guests; number three, establishing even greater value through selectively pricing menu items more attractively; number four, creating a high energy sales culture; number five, starting to advertise more consistently and competitively, and on price than we have in the past year; and number six, focusing on our weakest area, the south, with a dedicated team and tailored plan.

We are also committed to managing our costs. We know in these times we have to continue to reduce cost, reduce them further. I think we’ve done a good job reducing costs in the last year but it’s not enough. We have to go further. This will enhance our ability to pay down even more debt and strengthen our balance sheet even further.

These are difficult times for all. We’ve made great investments in our brand and our operations teams have executed them very, very well and we brought those investments to life, I believe. I am very proud of what I see when I go into Ruby Tuesday. It’s resulted in the best food, the best service, the best team members and five star facilities we’ve ever had.

I want to thank you for your interest and I’ll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Steven Rees with J.P. Morgan.

Steven Rees - J.P. Morgan

Thank you. Just on the debt covenants with the $40 million of debt pay-down this quarter and I guess 80 to 90 expected for this year, can you just review the covenants, where you stand today and how comfortable you are with remaining compliant with this level of expected pay-down, and how much room you have on your new, lower earnings outlook?

Marguerite N. Duffy

We are still comfortable with compliance on the outlook we gave you.

Steven Rees - J.P. Morgan

Okay, so how much wiggle room do you have in terms of same-store sales being down worse than mid-single for the year? Have you looked at that?

Samuel E. Beall

Well first of all, same -- well, they are worse right now. We did say we expect them to get better throughout the year. In reality, who knows what sales are going to be going on out there but we know our September is better than August, we know the end of September is better than the first part of September. We hope that -- and maybe it’s only hope -- but we hope that October and November are stronger and the third and fourth are stronger.

If somebody could tell us what sales are, we could give -- I could tell you what profits are and exactly where we would be on bank covenants. It’s just -- it’s difficult to project anything right now but we are comfortable with the bank covenants right now.

Steven Rees - J.P. Morgan

Okay, great and then just on the topic of restaurant closures, I think you closed eight this quarter and you said an additional 10 would be closed this year. Could you just talk about how many if any units are out there that are losing money, particularly if you own the real estate you could close them down beyond the ones that you expect for the lease expirations?

Samuel E. Beall

Well, we’ve got -- we have as far as negative cash flow losers, I think last quarter what did we say, it was about 49 or 50, something like that? I can’t remember. I’m talking about the last conference call. This quarter, I’m not sure --

Marguerite N. Duffy

It’s comparable in that area.

Samuel E. Beall

It’s comparable in that area but the bigger question I think, Steven, is we are going through our entire real estate portfolio. I’d say all companies are right now. I heard Jack Welch project that there are going to be 8,000 restaurants close, 5,000 this year and up to 8,000 next year. If so, that’s probably what, 4% or 5% I guess for the industry. He’s talking about the entire restaurant industry. But we are going through that same process. If we can find ones that make sense to close, we’re not shy about closing them but we are working through that process now.

Steven Rees - J.P. Morgan

Okay, and then just finally on the food costs up only 30 basis points seems amazing in this environment. Can you just review your contracts, where you stand today? And I think you said you actually expect food costs to be down slightly year over year but if there’s anything --

Samuel E. Beall

For the year but keep in mind last year, last year was difficult too. We have done an outstanding job picking away at every kind of food item we can and cutting costs in commodities and we’ve been lucky on some of our contracts. I think fortunate for all of us, commodities have got to come down in this market. I mean, with all the -- everything going in the world. They always have when this situation happens and I expect them to, although we are not forecasting that in our models. It’s only what we have contracts for. But our contracts -- yes, Steven?

Steven Rees - J.P. Morgan

And what are you contracted for? Just remind me.

Samuel E. Beall

Well, we’re contracted for -- 99% of everything we buy is contracted for 12 months out and the contracts expire every month throughout the year. I’d say our -- anyway, we are pretty confident about that number, unless we just lowered prices more or ran a promotion.

Steven Rees - J.P. Morgan

Okay, great. Thank you very much.

Operator

Thank you. Our next question is from the line of Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

I just wanted to ask a quick question on the fee release and kind of in relation to the royalty rate or the -- you know, that you can see on your franchise revenues. I mean, can you tell us how much the fee release was this quarter, how we should think about the royalty rate for the franchise business going forward? I mean, as a percent of franchise sales, it’s been declining every quarter for over a -- for a year now and I’m just trying to get a sense of how we should think about that going forward.

Marguerite N. Duffy

Right. A part of that decline too is the acquisition of franchisees versus the prior years, so we did acquire 25 restaurants versus the same quarter of the prior --

Samuel E. Beall

We did every year before that, too.

Marguerite N. Duffy

Right, so -- but the fee release, we have had to do that over the last 12 months as well, so it may be slightly higher this quarter than in some of the others, or in our guidance for the year but not significantly higher.

Samuel E. Beall

We have given away fees -- gosh, what, Margie, for the last three or four years, every year really since we’ve done this. You’ve got different ones who are good partners who are tight and we don’t book any fee if somebody doesn’t have the cash to pay it. If they have to borrow on it, we don’t do that either so we are very conservative on how we book fees, thus we always have more out there and then sometimes we just permanently forgive them.

Keith Siegner - Credit Suisse

So when I look at the royalty rate as a percent of the franchise system sales, I mean, it’s 2.8% this quarter, it’s been down for four straight quarters. I mean, last year at this time it was 3.4%. It’s a lower percentage of those sales. How should I think about that royalty rate percentage going forward?

Marguerite N. Duffy

You can look at it comparably for the year as the first quarter, for instance.

Keith Siegner - Credit Suisse

Okay. Another question then, I wanted to ask just briefly on the impairment charges that you mentioned. The impairment charges, was it primarily related just to store closures this quarter or was it for more than that, kind of across the system? How much was the charge?

Marguerite N. Duffy

$1.4 million was the charge but primarily related to those with shorter lives, shorter remaining lease lives is what the impairment was associated with.

Keith Siegner - Credit Suisse

Okay, and then one last question -- have you seen any release of fuel surcharges given the easing in the diesel fuel prices?

Samuel E. Beall

Are you talking about for our distributors or something?

Keith Siegner - Credit Suisse

Exactly, right.

Marguerite N. Duffy

Well, for PFD I’m sure because it’s related to what the gas price is, so we pay a surplus on an agreed upon contracted price, so we are realizing savings from that perspective.

Keith Siegner - Credit Suisse

Okay. That’s it, thanks.

Operator

Thank you. Our next question is from the line of Joseph Buckley.

Joseph Buckley - Banc of America

Thank you. Margie, could you go back to the debt covenant question for a moment? You gave us the total adjusted debt number of about 857.

Marguerite N. Duffy

Right.

Joseph Buckley - Banc of America

And you know, just looking at the change in EBITDA this quarter, I’m guessing your trailing 12 months EBITDAR number now is somewhere around $207 million, something like that?

Marguerite N. Duffy

Right.

Joseph Buckley - Banc of America

Okay, so the key is at the end of next quarter, that debt to EBITDAR ratio has to be 4.5 or --

Marguerite N. Duffy

Right.

Joseph Buckley - Banc of America

Okay. So it sounds like you’ve got about a $17 million EBITDA cushion --

Samuel E. Beall

EBITDAR or EBITDA?

Joseph Buckley - Banc of America

Well, EBITDAR, I think --

Samuel E. Beall

EBITDAR, right.

Joseph Buckley - Banc of America

Yeah, about a $17 million cushion?

Marguerite N. Duffy

It’s in that ballpark.

Joseph Buckley - Banc of America

Okay, so how -- I know you are starting to lap much easier numbers. How --

Samuel E. Beall

And we continue to pay down more debt.

Joseph Buckley - Banc of America

Okay. Kind of walk through how you are thinking about it because it’s a cushion but it’s not a big cushion, relative to the first quarter performance, so --

Samuel E. Beall

The way we think about that is yes, we have a cushion. You know, you’d like to have a huge cushion. There are two ways you would change that in this environment, I think, and it’s pay down more debt. How do you pay down more debt? It’s from operations but it’s also in our case you look at our books, we’ve got about $35 million or $38 million of excess real estate that we are trying to sell rather fast. But if you look at other assets of how you can raise cash just to create more insurance for yourself, and then the other way, you skip down to plan D and you say okay, if you said okay, $17 million or $30 million or $10 million isn't enough cushion. How do you create more? And that’s by cutting costs and increasing profits and so really those are the two ways and after that you go to well, do you sell equity, do you do some other financial deal to try to enhance the balance sheet.

But for us, it’s primarily -- how can we pay down more debt, how can we have less lease liability, I forgot to mention that one. If you had some underperforming units that had a lease liability out there, and/or how do you make more money?

Joseph Buckley - Banc of America

Right. Okay, back to the price value message that you talked about, talk about how we are approaching it this year versus last year because I think that was part of the problem in your second quarter a year ago, was that you hit the price value pretty hard and I guess the customer responded to it and ended up wreaking havoc on your margins.

Samuel E. Beall

Well, I think last year we ran the combos and we lost about $0.60 in check and what we’ve done since then, we’ve pulled that back some but I think we have better value today than we had then spread throughout the menu, not just on the combinations. So if you look at our menu today, the one we put out in July even, you know, this has got incredible price points, incredible price points, I think.

So we have check under control right now. We kind of lost control of it last October but since then, we have. We’ve been building it back up.

We think that yes, by -- we’ll get a little more competitive on a couple of items and that will cost us about -- well, it could cost us $0.10 off of our models but we are going over a period of time when the check is down so we can absorb that and still have even yet better advertising in these -- I mean, better value in these difficult times. So we think it works. We are getting better value, not less value.

Joseph Buckley - Banc of America

Are you going to cut price on some items in this October menu?

Samuel E. Beall

Well when I mentioned the hamburger, the hamburger is the one we are really cutting, just from $6.99 to $5.99, so we have an advertised price point. And that would be, either be a temporary for the fall or it would be permanent. We’ll just see but we can afford to do that, I think.

Joseph Buckley - Banc of America

Okay. Thank you.

Operator

Thank you. Our next question is from the line of Jeffrey Omohundro with Wachovia.

Jeffrey Omohundro - Wachovia

Thanks. I just wonder if you could elaborate a bit on the advertising strategy dollars and what the timing might be in terms of the waiting. I think you mentioned something in the second half.

Samuel E. Beall

Mark, do you want to talk about -- well, let me start it by saying one, we won’t talk about the dollars yet because in these times, that’s kind of flexible or variable. Right now, we do anticipate having much more television on than we had last year in the back half of the year and just kind of have to see what happens in the world. But we think we need some key points of the advertising program that we think we need are -- Mark.

Mark Young

I think the first thing is we just need to be consistent with our message, as Sandy alluded to, and that message is centered around the burger position that we have, the strong burger position that we have and the variety that we have within the burger. The beauty for us is that we have great variety not only in our handcrafted section but we also have it with a category in the minis and also our premium section, which no one has and can match us on. So it’s leverage the position of burgers throughout the back half of the year, as Sandy talked about. And again, just going up against really no advertising in the back half of Q3 allows us an opportunity to leverage that.

Samuel E. Beall

And you know, we started the burger thing three years ago and we got good results off of it the first year we advertised it and -- although sometimes you want higher check and on higher sales but the burger always represents great value. Our burger ads work and generate -- create some traffic and we think that the more consistent we are on that, we think we’ll be better -- it will be a low risk way to build traffic long-term. Maybe not the best short-term but it’s good short term and I’m sure you can run all-you-can eat or cheaper price for it and drive something better short-term but we think it’s right long-term.

But in addition to that, Mark, we are also investing heavily in --

Mark Young

Yeah, well we’re looking in the back half of the year as well and as Sandy alluded to on the -- from a promotional standpoint that we are going to do market by market and really attacking the Southeast, which is again -- the north is responding very favorably to our TV campaigns and really it’s doing very well. And in the back half, we need to look at the Southeast and really the south and understand where we can leverage different promotional opportunities in those markets with better value and some other things that we are doing in addition to what is happening in the system. So we’ll be more aggressive promotionally in the back half as well. As Sandy alluded to, we are attacking it with a team from a marketing standpoint as well as partnering up with operations to understand each market and having a marketing plan for the markets to drive business to get traffic in to see the great value that we’ve put into the menu on an everyday basis.

Samuel E. Beall

In certain markets, you may need a $5.99 lunch and other markets you don’t, so don’t give it away where you don’t need it.

Jeffrey Omohundro - Wachovia

There’s been a couple of references to the challenges in the South and Southeast. Does that correlate with the markets that have been hardest hit from a real estate standpoint or is there something more going on here?

Samuel E. Beall

I think it’s the real estate -- well, I think there are a couple of things, Jeff. I think one, over the last five years, I’d say yeah, we’ve built a lot of restaurants in the Southeast when everybody was building restaurants and we only had the South and the Northeast to build in, and I think that’s hurt us somewhat. The South has been easier to develop in for everybody, so I think you’ve had an increased competition there but I do think that they’ve been hurt more in the South, that includes Florida, more from a real estate standpoint, from an oil impact standpoint, and probably from -- I’m guessing, I’m not sure on this but I’m guessing from unemployment. But I’ve talked to some other businesses too and the South is just -- it’s a bit weaker.

Jeffrey Omohundro - Wachovia

Thanks.

Samuel E. Beall

Some if it is our fault with cannibalization, I think, but I think it’s just a weaker area.

Jeffrey Omohundro - Wachovia

Thank you.

Operator

Thank you. Our next question is from the line of Thomas Forte with Telsey Advisory Group.

Thomas Forte - Telsey Advisory Group

Thank you. The first question I had was you talked about paying down $40 million in debt during the quarter. What was your operating cash flow in the quarter?

Marguerite N. Duffy

I think it was about $37 million, I believe.

Samuel E. Beall

About $37 million.

Thomas Forte - Telsey Advisory Group

Great, and then can you talk about sort of for the challenges in the South, what impact if any has there been incrementally from the recent gas shortages?

Samuel E. Beall

Well, you’re right -- a lot of people don’t realize in the South that you actually have been out of gas a lot in the last really three or four weeks. Even as recently as a week ago, you couldn’t get gas in Nashville, Tennessee and I was on --

Marguerite N. Duffy

Or Atlanta.

Samuel E. Beall

Or Atlanta, or I was in South Carolina, there was one station that had gas. I think that’s all behind us now. The good thing on gas is, as one of our board members is in the oil business and gas should be below $3 a gallon here within another three or four weeks, so that’s going to help the consumer some and if we can get the election behind us and get something positive going in this country, at least in spirit, maybe things will break a little bit.

But gas has been an impact. It’s been up to $5 a gallon through most of the South but it will be $3 a gallon relatively soon.

Thomas Forte - Telsey Advisory Group

Great, and my last question was when we looked at the monthly trends, August versus July in particular, what would be the reason for the improvement on a sequential basis?

Samuel E. Beall

In August? Gosh -- what was it, a couple of points better than in July?

Marguerite N. Duffy

It was but I do think it was promotional activity too.

Mark Young

And advertising has nothing going on in July.

Marguerite N. Duffy

And Mark was saying there was no advertising in July so I think it was a promotional activity in August that helped the flow.

Samuel E. Beall

We had a very good June. We had three of our best weeks in the previous year really in June, and then July just kind of fell apart. We didn’t advertise at all. August we advertise a little bit but it’s in the middle of all the conventions and the Olympics, et cetera. September was kind of clean except for the hurricanes and gas shortages but the last week has been cleaner and, as I mentioned, September is better than August but we’ll see.

Marguerite N. Duffy

And we also rolled a new menu that contributed positively to check in both food and beverage checks.

Samuel E. Beall

While giving better value. If you look at our menu, the entire specialty section, it’s like a massive amount of complete dinners for $9.99 to $11.99, except for about one item or two items, maybe.

Thomas Forte - Telsey Advisory Group

Great. Thank you very much.

Operator

Thank you. Our next question is from the line of Brad Ludington with Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

Good afternoon. I wanted to ask, the previous caller just covered one of the questions on the gas shortage but just kind of building on that, should we assume probably that September was pretty solidly negative when trying to in fact come up with --

Samuel E. Beall

Yeah, definitely. I said it’s better than August but I didn’t, you know --

Brad Ludington - Keybanc Capital Markets

Better than August?

Samuel E. Beall

Yeah, I mean, we’re not saying what it is. Yes, I mean -- no, no, September wasn’t dramatically different. I mean, I can’t imagine how September could be. Retail sales just came out, the worst I’ve ever seen, ever. It’s challenging. I was just saying it’s better than August.

Brad Ludington - Keybanc Capital Markets

Okay. And then looking at a kind of trends, you know, the second quarter is traditionally seasonally the slowest and I know that last year negative EPS hit but you had a lot of significant one-time costs that fell in. I mean, if same-store sales remained very low, is it possible that EPS could turn negative again in the second quarter?

Marguerite N. Duffy

Yes, it is.

Samuel E. Beall

Sure, sure, yeah, in second quarter. I mean, like last year, we made most of our money in the back half and that’s what I would anticipate we’d do again this year, right, Margie?

Marguerite N. Duffy

That’s correct. And as we said, sales improvement sequentially too would mean there’s more pressure on the second quarter.

Brad Ludington - Keybanc Capital Markets

Okay, so then on the debt pay-down schedule, we should probably assume there’s little to no debt being paid down in the second quarter and the bulk of it in third and fourth?

Samuel E. Beall

Sure, that would be logical.

Marguerite N. Duffy

That’s correct.

Brad Ludington - Keybanc Capital Markets

Okay. Well, thank you very much.

Samuel E. Beall

Anything else? How many more?

Operator

Thank you. Our next question is from the line of Robert Derrington with Morgan Keegan.

Robert Derrington - Morgan Keegan

Thank you. Sandy, I’m just curious -- you know, given the weak trend that you’ve seen in sales, why is it that we are talking about building sales in the second half of the year? Why not the second quarter of the year, just out of --

Samuel E. Beall

Well, we are, Bob. I was just saying our advertising this year in our first half of the year will be down from last year but we have -- yeah, we have a solid ad campaign all the way from now, we’re running our mini trios right now. I was just moving to the back half but all the way through about the second week of December I think now, third week of December. So we have our best runs really starting about what, Mark, two weeks ago, a week ago, two weeks ago? And that same campaign basically will run with some variation. We’ll have an updated burger ad for October 21st but it runs through right before Christmas and then we’ll drop off and I’m anticipating instead of last year from January through May only having six weeks, as Mark said we’ll probably have all but -- I hope we’ll have all but about four or five weeks on television at some levels.

Robert Derrington - Morgan Keegan

When we look at the advertising campaign over the last 12 months, Sandy, it’s been a dramatic improvement from what we’ve seen from the company in years past, yet as we go forward, the trends have been negative, they’ve been weak and obviously there are a lot of peripheral concerns that are weakening the sales. What is it that you can do now that will be different than what you’ve advertised before that will make sales improve measurably?

Samuel E. Beall

Greater value, I think a more focused product and better value and probably a more energetic ad, also. I think those -- Mark, what else would you say?

Mark Young

No, I would say that’s the key of it, is being consistent in the message and what we are saying and how we are saying it. And then I think as Sandy alluded to, the price point and value piece is much more important today than what it was six months ago or a year ago but it’s becoming more and more important.

Samuel E. Beall

Bob, from December last year, I mean, I appreciate you saying our advertising is much better but from December of last year through August 7th of this year, we only advertised 11 weeks on television. It wasn’t that strong.

Robert Derrington - Morgan Keegan

Is TV the best way to reach your user or --

Samuel E. Beall

We think in this environment, you have to have a certain level -- you have to be in there on television and we see that television moves it. I mentioned June was -- we had three weeks of our best, some great sales. We had some good sales in March or April also, it was all the burger ads. So I mean, I almost think you need to be on. You need to also support that with more active promotional dollars in certain markets to attack it market by market because we don’t have the $180 million that Applebee’s does. We’re more -- we even have less than Outback but we’re more similar to Outback, hopefully as we move ahead.

Robert Derrington - Morgan Keegan

Thank you.

Steve Rockwell

We have time for two more questions.

Operator

Thank you. Our next question is from the line of Howard Penny with Research Edge.

Howard Penny - Research Edge

Thanks very much. I was -- I think I heard you, Sandy, you said you were sort of trying to go through a pretty fast process of selling real estate to help some of the issues that you had with the banks breathing down your neck. In that response to the issues that you have, you actually diminish the operating flexibility of the company because you are taking on leases and you are not paying rent for --

Samuel E. Beall

No, no, I’m sorry, Howard -- I wasn’t talking about sale leasebacks. No, not on sale leasebacks. I’m talking about excess property we own. We still have excess sites that have never been built on, et cetera, or maybe a closed unit or two where we just have them in inventory. I’m not talking about sale leasebacks. I agree with you. That’s a financing of last resort but it’s not one you really want to do.

Howard Penny - Research Edge

Thank you for that, and then secondly, I guess my follow-up for that was going to be one of the other ways you can sort of stop the bleeding, if you will, is to just to close some of those stores that just aren’t performing well.

Samuel E. Beall

I agree with that also, Howard. I agree totally with that.

Howard Penny - Research Edge

Okay.

Samuel E. Beall

And I mentioned we are, as I am sure every other chain out there, is looking, is doing an assessment and the way you should look on us, which ones are losing EBITDAR, which ones are losing cash flow, which ones have negative EBITDAR, which ones are losing cash flow, which ones are kind of older and maybe a brand issue, which ones are -- which ones if you closed then would help some of the other stores, but things like that and we are in the process of going through that.

Again, we are not -- we wouldn’t be shy about closing restaurants that made sense. I think a lot of people will be closing some restaurants. They already are. I mean, it’s just, you know, if you look around the neighborhoods.

So I agree with you on both of those, Howard.

Steve Rockwell

One last question.

Operator

Certainly. Our final question is a follow-up from Joe Buckley. Please go ahead.

Joseph Buckley - Banc of America

Thank you. Just on the advertising, I think last call you said that total ad budget would be down around $18 million year over year. Are you -- is that going to be down less than that as you kind of realign your marketing plans?

Samuel E. Beall

Yes, I think that will be down less than that now, Joe, yes, definitely.

Joseph Buckley - Banc of America

Okay. Do you have a sense of how much or --

Samuel E. Beall

Well, I guess it would be in the -- you know, if we were going to be down 18, it would be down $6 million to $18 million, somewhere in that range.

Joseph Buckley - Banc of America

Okay. Thank you.

Steve Rockwell

All right, thank you very much, everyone. Please feel free to give me a call if you have any additional questions.

Operator

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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