Ruby Tuesday, Inc. F4Q10 (Qtr End 06/01/2010) Earnings Call Transcript

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Ruby Tuesday, Inc. (RUBY) F4Q10 (Qtr End 06/01/2010) Earnings Call July 22, 2010 4:30 PM ET


Greg Ashley - VP of Finance

Sandy Beall - Chairman and CEO

Margie Duffy - Chief Financial Officer

Mark Young - SVP and Chief Marketing Officer

Kimberly Grant - EVP


Jason Belcher - Wells Fargo Securities

Brad Ludington - KeyBanc Capital Markets

Robert Derrington - Morgan Keegan

Howard Penney - Hedgeye Risk Management

Keith Siegner - Credit Suisse

Brian Innes - Telsey Advisory Group

Chris O'Cull - SunTrust


Greetings and welcome to the Ruby Tuesday Incorporated fourth quarter and fiscal year 2010 earnings call. (Operator Instructions) It is now my pleasure to introduce your host, Greg Ashley, Vice President of Finance for Ruby Tuesday.

Greg Ashley

Thanks all of you for joining us this evening. With me today are Sandy Beall, Ruby Tuesday's Chairman and CEO; Margie Duffy, Chief Financial Officer; Mark Young, our Senior Vice President and Chief Marketing Officer; and Kimberly Grant, our Executive Vice President.

I'd 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 the most recently filed Form 10-Q. We plan to release first quarter of fiscal '11 earnings in early October.

Our fourth quarter earnings were released today after the market closed. A copy of our press release can be found on the Investor Relations section of our website at and is also available on Business Wire, First Call and other wire services.

Our format today includes an overview of our fourth quarter and fiscal 2010 financial results, our fiscal 2011 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks, we will open up the line for questions.

I will now turn the call over to Sandy.

Sandy Beall

Thank you, Greg, and thanks everyone for listening in on this afternoon. We remain very encouraged about momentum we're experiencing throughout our business. Our fourth quarter was the best sales quarter in the last four years. Additionally, our net income for the quarter was up 45% over the prior year.

I'm really very proud of the way our teams have been teed to respond to the economic challenges out there, and it's enabled us to move definitely in the right direction. A solid year for Ruby Tuesday.

Our key objective as we began our year, number one was to get customers in seats to increase traffic and sales, number two to maximize cash flow and reduce our debt, number three to focus strength in our brands through continually providing a high-quality casual dining experience with compelling value for every guest.

I'd like to briefly touch on our performance in these areas. First, getting guest in seats. Our same-restaurant sales for the year were only down 1.3%, beating Knapp-Track, the industry benchmark, on a one-year basis by almost 3 points. And the results were better than last year's same-restaurant sales of down 7.9%.

Our same-restaurant sales showed sequential quarterly improvement throughout the year, 3.1% down than 1.7% down in second quarter, only 0.7% down in the third and then positive in the fourth quarter 0.3%. And that gives us six quarters of sequential improvement.

On a two-year basis for fiscal '10, our quarterly same-store sales have improved from 13.9% down, 12.5% to down 7.5%, to only down 2.9% for the fourth quarter on a two-year basis. So we definitely have very positive momentum there and we're very proud of that.

Our second goal was to maximize cash flow and reduce our debt. Our debt paydown for the year exceeded our expectations as we paid down $204 million of debt, including $33 million in the fourth quarter. These are both notable accomplishments for sure.

Our CapEx needs over the next few years continue to be relatively low, approximately $25 million per year. That's up from $20 million last year, but include some new spending that Margie will go over.

Our third goal was to further strengthen our brand through high-quality casual dining. We believe the consistent focus over the last several years on the brand strategies, uncompromising freshness in quality, gracious hospitality, a fresh new look and compelling value has provided a very strong foundation to build upon and has positioned us well for the future.

We are successfully getting people into seeing the new Ruby Tuesday, and they're coming back as a result of our innovating product offerings and promotions that enhance and differentiate the brand, also offering incremental sales opportunities and increased value.

We refer to these innovating and enhanced product offerings as game-changers. Some examples. Our Tuesday night & Lobster dinner, $13.99. The rollout of actually lobster dishes in the Barboro section of casual dining, we have five lobster dishes; a great notion, just those items alone. We introduced our four-course Sunday brunch as well as our after 9 p.m. giving a mini-burger. These new offerings are driving our momentum forward as a brand.

We're especially excited about some of our upcoming game-changers which Mark will outline later in the call. Our guest satisfaction index, top box score, which is a measure of our guests who rated the overall experience of 5 on a 1-to-5 scale, are an all-time highs.

The continued improvement in our sales, operations and balance sheet has allowed us to begin developing longer-term strategies to improve our return on assets and create additional value. We've focused significant time at our last two Board meetings, discussing ways to drive our business in a low-risk high-return fashion.

As we look forward to the next three years, our focus will be on the following key initiatives. We'll first focus on maximizing our same-restaurant sales through non-traditional marketing, being respectful of what drives volume in each market being very efficient. Additionally, we'll continue to roll out innovative products and promotions, what we call game-changers.

Secondly, we'll continue to improve the quality of our brand by investing in labor and to create a $25 casual dining experience for $15. I think we've ramped up our experience level from the $10 save. But maybe now $15 for about a $12 check, we want to ramp that up, and we think that's the place to be long term.

While this will slightly increase our labor cost, which Margie will talk about, we believe it is the right thing to do in order to further enhance the overall guest experience and thus sales and profits. And we think we can afford to do that by making cuts in some other areas for this year.

We also are focusing getting more out of the existing assets by converting some lower-volume Ruby Tuesday restaurants to other high-quality casual dining offerings. As you probably know, we currently own Wok Hay, a little Asian bistro, which we acquired a few years ago.

We also recently entered into a licensing agreement with Alabama-based Jim 'N Nick's Bar-B-Q, which allows us to offer multiple restaurants under the Jim 'N Nick's name. Jim 'N Nick's is a very high-quality casual dining concept based on totally fresh foods made from scratch, no freezers, all-smoked barbecue and roasted meats, but a great little concept.

Additionally, we entered into a license agreement with Truffles, an upscale casual dining restaurant with an $18 check, which represents a good opportunity for some of our locations also.

All three brands represent easy conversion potential and our conversions were based on the concepts that are best suited for each individual local marketplace where we underperform. These conversions will apply nominal capital investments of approximately $400,000 and have the potential to grab average restaurant volume increases of $1 million.

Our fourth initiative is continue to find franchise partners where it makes sense in order to create additional revenue growth, EBITDA growth and improve our returns.

Another area of focus is to leverage the excess cash flow generated from our conversion strategy and franchise partner acquisitions to invest in high-return new unit growth, including new lower-capital inland restaurants.

Our sixth and final initiative is to be a good custodian of capital, meaning after we reach a conservative level of debt, we take the excess cash that we can't invest to create shareholder value and return that to our shareholders.

I'll now turn the call over to Margie to discuss our financial performance in more detail, and then we'll provide you guidance for 2011.

Margie Duffy

Thank you, Sandy, and good evening, everyone. As Sandy mentioned, the fourth quarter was very strong. Our ability to drive our sales trends in the quarter while tightly managing costs resulted in strong cash flow contributing to our continued aggressive debt paydown. I'll review the quarter in detail, provide a high level summary of the year as well as our yearend balance sheet and give our guidance for fiscal 2011.

We reported fiscal fourth quarter diluted earnings per share of $0.33 versus $0.28 last year. Total revenue decreased 1.2% during the quarter, while same-restaurant sales increased by 0.3%. The decline in total revenue was largely driven by the decrease of 16 company-owned restaurants from the same quarter of the prior year. We didn't open any company restaurants in the fourth quarter and we closed three.

Franchise revenue increased 2.7% primarily due to higher level of fees collected from our franchise restaurants. Same-restaurant sales for domestic franchise restaurants declined 0.5% in the fourth quarter with the gap between franchise and company same-restaurant sales continuing to narrow, as the franchisees participated in virtually all of our promotions and incentive marketing programs during the quarter.

The restaurant level operating margin was 19.7% for the quarter compared with 18.9% a year earlier. Food cost of 28.4% of sales for the quarter versus 29.5% in the prior year were favorable due to a higher average check from our new menu offering coupled with lower levels of incentive marketing.

Additionally, we continue to experience relatively stable commodity cost for the quarter. Labor cost as the percent of sales remained relatively flat at 32.4% compared to 32.3% for the prior year as we tightened our cost savings initiative and new labor scheduling processes.

The restaurant operating costs were up 20 basis points. Increased repair and maintenance costs in part reflecting the installation of new flat screen high-definition televisions and satellite service packages to drive higher traffic and guest experiences in our bar area were partially offset by lower utility and other operating costs.

Depreciation was down 70 basis points as a percent of sales primarily due to assets becoming fully depreciated since the prior year. SG&A expense was 90 basis points as a percent of revenues. The increase was largely the result of higher bonus expense and additional cost for training classes in addition to higher marketing costs.

The equity and earnings of our franchise partners declined from the prior year in part due to higher levels of fees to certain partners. Interest expense in the quarter declined to $2.8 million from $6.5 million, reflecting both the decline in our average debt balances and a lower interest rate on our bank debt because of a lower spread to LIBOR as a result of our improved leverage ratio.

Closure and impairment expenses were down year-over-year primarily because of a prior-year lease reserve adjustment that was related to our store closing program. Our tax rate was 23% compared to 33.2% last year, reflecting higher levels of FICA tax credit for the current quarter.

For the year fiscal 2010, revenues were down 4.3%, reflecting the 1.3% decline in same-restaurant sales, coupled with revenue decline from closed restaurant. We recorded earning per share of $0.73 in contrast to a loss per share of $0.35 a year earlier. Fiscal 2009 loss include charges for closure and impairment and goodwill impairment that after-tax totaled $0.92 a share.

The restaurant operating margin was 17.3% compared with 17.2% a year earlier. Food costs as a percent of sales were slightly higher primarily due to expanding our higher food cost menu offering and higher levels of incentive marketing for the year. These were offset by a full year run rate of various cost saving initiatives.

Turning to the balance sheet, our book debt, including current maturity, was $289 million, down from $322 million at the end of the prior quarter and $493 million a year earlier.

We paid down $33 million of debt in the fourth quarter and $204 million for the year with approximately $73 million of this paydown coming from the net proceeds of our equity offering back in July. At the end of the quarter, our book debt to capital was 35%. Our book debt to EBITDA was 2.1%, and our total funded debt to EBITDA, the ratio pertinent to our loan covenants, was 2.71% which provides us over 100 basis points of cushion to our covenant.

And looking now to 2011, we project same-restaurant sales for company-operated restaurants to be in the range of flat to up 2% for the year. We expect to open one to two of our smaller prototype company-operated restaurant. We anticipate closing seven to nine company-owned restaurants and converting five to seven lower performing company-owned restaurants to other high-end casual dining concept, as Dave referred to earlier.

Our franchisees expect to open between 8 and 13 restaurants in the year, up to 10 of which are international. Additionally, we plan to buy back approximately 25 to 30 franchise restaurants during the year.

We expect the restaurant operating margin to be down slightly, primarily reflecting the impact of our continued investment and higher-quality menu items and new products offering as well as investments and service to enhance our guest experience and drive sales offset by lower levels of promotion. Our food costs are expected to remain relatively stable compared to the prior year.

Depreciation and amortization is projected to be $60 million to $63 million. SG&A is targeted to be up 4% to 6% year-to-year, primarily reflecting higher advertising expenses. Interest expense is expected to be in the $10 million to $12 million range, and the tax rate is projected to be 20% to 25% as we continue to benefit from FICA tip and other employment-related tax credits.

Diluted earnings per share in fiscal '11 are estimated to be in the range of $0.76 to $0.86. Capital expenditures are expected to be $23 million to $26 million. And we estimate that we will generate $100 million to $110 million of free cash flow during the year.

We've made tremendous progress over the last two years to improve our operating results, maximize our cash flow and strengthen our balance sheet, are controlling cost and paying down our debt as rapidly as we can. As a result, we have considerably more financial and operating flexibility than at anytime over the last couple of years.

Now, it's my pleasure to turn the call over to Mark who'll go over some of our sales building programs.

Mark Young

Thank you, Margie. Our marketing strategy for the last six quarters has focused on the following key pillars; brand promotion, digital media and local marketing programs to get guests in to see the new Ruby Tuesday and increase frequency and enhance visibility for our brand.

We have the ability to customize our marketing to specific markets down to the individual restaurant level, and this enables us to respond quickly with a different program if a market or restaurant is not achieving expected results. We're very careful to position our promotions in a way that supports our high-quality casual dining position.

We launched the redesigned website during the fourth quarter as it's more relevant and highlights more ways for us to hear what our guests are saying to very restaurants, including social media. Additionally, the website allows us to be restaurant-specific regarding the programs we have going on in the individual restaurant such as Happy Hour, Prime Rib, other food specials and even our hours of operation.

Our continued top-line momentum, which resulted in positive same-restaurant sales for the quarter, was largely the result of the continued success with several of the programs we rolled out over the last two to three quarters.

Our new menu introduced late in second quarter continues to be well received by our guests and has contributed to a higher check with minimal price increases. Our four-course Sunday brunch program continues to gain momentum by driving incremental sales and traffic in a new day part.

In addition to enhancing the perception of the Ruby Tuesday brand, there are high-quality brunch offerings, including steak and Eggs, cranapple crêpes and new omelets. Our Tuesday Steak & Lobster program has enabled us to drive sales, traffic and increase the image perception of our brand.

It is game-changers like these that Sandy mentioned earlier which are strengthening the brand and providing our guests with more reasons to visit Ruby Tuesday more often.

Our strategy to build liquor cells in the dining room and our food cells in the bar continues to gain attraction. Our $5 all-day, everyday premium cocktail program rolled out in Q2 has resulted in certain diners trading up to a cocktail from a nonalcoholic drink or draft beer and more guests ordering premium cocktails. This beverage program with a focus on fresh, quality ingredients further supports our position of high-quality casual dining with great everyday value.

Our Gimmie a Mini program, which allows anyone ordering a $3 beverage after 9 p.m. to receive a free mini, has helped drive late-night bar business. Also, our separate bar menu in which we are testing new bar-only items such as fish tacos in certain markets has enabled us to gain some attraction in this normally slow period.

In fiscal 2011, we will continue to offer incentives, continue to evolve our existing menu items to support our high-quality casual dining position, broaden our field with product distinctions offering more variety and credibility and provide our guests with compelling value.

We are very encouraged by the feedback we receive regarding our test menu which will roll system-wide in late August. It includes our new complementary fresh-baked garlic cheddar biscuits, new choices of salads for our dinner entrees, a lineup of Fit 'N Trim items that are under 700 calories, an expanded brunch menu and an expanded fresh vegetable and seafood offerings.

The addition of low-carb bread will further increase the overall value perception of our brand in line with other high-quality casual dining restaurants. We also will be offering several new items and enhancements to our Garden Bar, which continues to be our biggest point of differentiation and the number one loyalty builder. All of these offerings are designed to maximize the bill of our brand to a slightly higher income demographic.

Based on our recent external research, we saw higher gains in market share and frequencies in our competition with the higher-income guests, over 100,000 household income demo, driving some of the largest increases. Our external research also validated that some of our focus promotion strategies continue to drive traffic in key strategy areas like Couple's Night Out, fun with friends and Sunday Meal occasions.

As we've discussed before, our long-term goal is to increase our average check to the $12.50 to $14.50 range from approximately $12 where we're currently at. By leveraging our marketing capabilities to drive through and offering new game-changers to complement our existing products, we should see average check increases over time through increased traffic in dinner day part, shifting of menu mix and lower levels of promotional programs.

Now, Kimberly will provide you with more information on sales, teams and guest satisfaction.

Kimberly Grant

Thank you, Mark. As we'd noted before, our mission is to be the best in bar-and-grill by consistently delivering a memorable, high-quality casual dining experience with compelling value. Everything we are doing from marketing and menu to our operational strategy is focused on strengthening our brand, which we believe is by increasing trial, increasing frequency, increasing our average check and most important continuing to improve the overall guest experience.

We believe our ability to drive positive same-restaurant sales in the fourth quarter during a continued challenging sales environment with less promotional dollars, mind you, is the culmination of many of the sales building programs Mark mentioned, which have been tested and deployed over the last year.

To support these programs, we've made a number of investments, including enhanced hospitality and culinary training for a system-wide management team, hands-on mixology training for all of our system-wide bartenders, and as Margie mentioned, the installation of high-definition flat screen televisions in a majority of our company-owned restaurants, which will further enable specialized sports programming in our bar areas.

Now in addition to these investments, we continue to roll out over the quarter our newly deployed management structure focused on delivering a more consistent guest experience. Now, each of our assistant managers are now designated as either a guest service manager or a culinary manager depending upon their individual passions and skill sets.

This new structure has significantly impacted our operating fundamental by helping push our guest satisfaction index overall experience scores to all-time highs and the scores which we consider unacceptable scores, the 1s and 2s, to all-time lows. Now, these scores which we have been tracking for over three years are a meaningful representation of the experiences of approximately 110,000 guests each quarter.

Now, our top two box scores for our four key attributes, which are overall experience, value, intent to revisit, and intent to recommend were all over 92% for the quarter with almost 70% of our guests rating their overall experience a 5 on a 1-to-5 scale, an amazing accomplishment for the brand.

Now while we are consistently experiencing improvements in the scores all year, our number of unacceptable experiences, those 1s and 2s, dropped by over 20% after implementing our new management structure.

Specifically, our scores related to serving hot food hot and pace of meal have dramatically improved, and our external research indicates these are key factors for being our guests' first choice.

Now today, approximately 80% of our system-wide restaurants are on the new program, and we expect to have the remaining restaurant transition later this fall.

Now although we are early into the adoption of this new management structure, the initial results are very, very promising. We're also excited about how these operational initiatives are starting to resonate in our external research which Mark outlined earlier. And based on our external research, our guest scores in the areas of food, service and atmosphere all increased and it further validates that our newly deployed management structure is definitely paying dividends in the eyes of the consumer.

One of our team goals is to increase total bar sales, including food, and we continue to make progress toward this goal as a result of our continually improving beverage program and regular field training to our passionate team of bartenders.

Earlier this year, we began tracking the guest satisfaction in our bars. We currently have two quarters worth of scores from approximately 20,000 guests per quarter and are excited about the momentum we are seeing. Our current top two box bar scores are nearly 95%, which is slightly higher than our dining room experience scores.

Now we continue to leverage our award-winning beverage program as recognized by Cheers magazine to drive beverage mix through a variety of Fun with Friends, Food and Drink promotion such as the March Madness College Basketball Tournament, Cinco de Mayo celebration, the premiere of movie 'Sex and the City,' which featured $5 premium Cosmopolitan and World Cup soccer.

Additionally, we recently rolled out pitchers of Sangria and expanded line list in a very popular new line of a fresh watermelon cocktails and zero-pres beveragesto further strengthen our current beverage program.

Now, I'd like to finish the operational update by commenting on a few of our key team operating measures. 2010 was another very stable turnover year for our brands. We finished the year with management turnover approximately 25% and our hourly turnover was at a record low level of under 100%. Both of these levels are very low for industry.

We also continue to find and hire great talent that is helping to make us a stronger brand everyday. To maintain our momentum on improving the guest experience, this summer we are conducting culinary classes for all of our culinary managers at our Center for Leadership Excellence in Tennessee and holding service classes in the field for all of our guest service mangers.

These continuing education classes are being offered to complement the initial hands-on training sessions our teams received in the field when the new management structure was being rolled out.

And from a labor investment standpoint, as Margie referenced earlier, we are also implementing new server table count standards and adding additional food runner support on nights and weekends to further improve our service level experience.

And we had incredible momentum and are encouraged by our recent performance. However, we are intensely focused on capturing more sales, making our guests happier and constantly looking for new opportunities to operate better and more efficiently.

I'll now turn it back over to Sandy for a wrap up.

Sandy Beall

We feel very good about our brand and our business. Although the economy is still tenuous, we have accomplished a lot and we enter fiscal 2011 with the best momentum we've had in several years.

Some key points here. Our sales have been a solid and improving trend for the last 24 months. We've been performing better than that, even as we overlapped our improving performance from last year. We are tightly controlling our cost. We have found a good balance in sales, traffic and profits.

We have strengthened our balance sheet by paying down a ton of debt through strong cash flows and low CapEx rates.

As a management team, we are laser focused on the three year key initiatives that I outlined earlier, which are to: number one, maximize our restaurant sales, continue to invest in the brand in order to create a high level experience that Kimberly was just talking about, get more out of our existing assets through conversions, buying franchise partners where the economics create value, invest in a new growth vehicle including Inland restaurants and return excess capital to shareholders when we should have plenty of excess capital.

We feel better about our business now than at anytime in the last five years. I feel confident in the outlook for our company, as our positioning efforts are paying off. We have more control over our sales through our marketing strategy that emphasizes local markets, and we continue to leverage technology to be an efficient, low-cost operator in the high-quality casual dining segment.

We're in a good position to begin rebuilding shareholder value in the coming years. And with that, we'll open the floor to questions.

Question-and-Answer Session


(Operator Instructions) Our first question is coming from Jeff Omohundro with Wells Fargo Securities.

Jason Belcher - Wells Fargo Securities

It's Jason Belcher for Jeff. I was wondering if you could give us some color on unit economics for the new smaller prototype stores.

Sandy Beall

Sure. Those units will be below 4,000 foot; in the 3,000 foot to 4,000 foot range. We won't have a maximum investment of $1 million in it. It will be in least space, so you have to capitalize least I guess. We're focused more on preserving capital and have a higher cash-on-cash return.

Jason Belcher - Wells Fargo Securities

One follow-up on that. I know you talked about having excess cash flow and using it to pay down debt. Any thoughts at all on reexamining the dividend.

Sandy Beall

Sure. I think the dividend is part of a logical returning of capital to shareholders. And I think we'll start looking at that seriously in the back half of the year. But we probably want to use this year to payoff debts by another $100 million or so dollar.


Our next question is coming from the line of Brad Ludington with KeyBanc Capital Markets.

Brad Ludington - KeyBanc Capital Markets

I wanted to just get a little, first off, some clarification. I missed when you said the rollout of the biscuits and expanded brunch and all those other things was coming.

Sandy Beall

That's the end of August.

Brad Ludington - KeyBanc Capital Markets

End of August? And then in the write-up there was some commentary on the Steak and Lobster Tuesdays, but not really on the Dinner for Two weekends. Was one of those stronger than the other? Steak and Lobster stronger, or is that just the way the commentary went?

Sandy Beal

The Steak and Lobster is stronger. And we have 10 of two right now. We have a strong weekend promotion we're working on. But we won't be rolling that out, until, and hopefully that'll be a permanent one. But that will be this winter or next spring at the latest.

Brad Ludington - KeyBanc Capital Markets

Okay. And then in the commentary, there was something about Prime Rib brought up. Is that rolled out now, or is that being tested?

Sandy Beall

That's being tested. We like Prime Rib though. We like Lobster and Prime Rib.


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

Robert Derrington - Morgan Keegan

Sandy, it's an intriguing concept to consider converting some of your restaurants to a licensed brand. Can you give us a little bit of color on how many potential restaurants within your system could be eligible for that and how would the relationship work between you and your licensor?

Sandy Beall

Well, as a licensor, hopefully short entrepreneurs who have a great brand to manage it effectively and I think that's what they've done well, what we do well is operate brands via technology to make it efficient for good operators.

So I think it's a perfect blend, we don't want to manage young brands. I think that's what entrepreneurs do but we can definitely operate and that can add to their growth and add to our profits. I know there's an opportunity there. So whether we convert 20 or 50 or 300, I don't know, over the next 5 or 10 years.

But I do know it's a logical way to improve the returns on existing assets by putting good brands that are very inexpensive to convert in there and I just don't know yet. And I don't want to promising anything, but it'll be a good journey, it'll be good for us.

Robert Derrington - Morgan Keegan

Well, again, it's extremely intriguing. But I guess the thing at the back of my mind, I'm kind of wondering is in recent years we've seen a number of large chains who've had multi concepts kind of narrowed down the field of brands they operate. Is there any risk or concern that you have that you could over stretch your management's quality?

Sandy Beall

Yes, I think there's always risk and loss of focus. If we were happen to create these concepts because I think larger corporations, generally tend to or can tend to take value away from a concept or screw it up I guess. I think with those just focusing on operations side and we're not trying to have a growth vehicle, we're having to get a ROIC on a $3.5 million investment or something.

We have, already have an investment and most of these they're underperforming units, you have a low investment you add 400 to it. I think we can handle that extremely well, we're not opening many units, we have tremendous management debt, we have excess operating talent, so since we're not opening many right now I think it's a perfect time to do this, I think it's low risk, we all think it's low risk.


Our next question is coming from the line of Howard Penney with Hedgeye Risk Management.

Howard Penney - Hedgeye Risk Management

One of the things that strikes me about that is the brand management side and I know your comments about your talent pool is deep, but you really go past one brand and then into two and three. You're really trying to manage a brand which is a little bit more than just the operation side.

Sandy Beall

We're not going to manage the brand. The people own these brands, other ones manage them. I guess what you're saying is we have to operate it and manage it in that sense. There is some risk there but the way I look at it we have such management depth, if we open 20 of them and you only get, whatever, you can't lose money on it.

I mean let's take an example, we're converting a Jim & Nick's, we're converting a Ruby Tuesday to a $1.1 million on Lovell Road in Knoxville, Tennessee. Great market point, okay? Jim & Nick's will do $2.5 million on a bad day. It's kind of hard to screw that one up. The flow through on that would be at least $400,000.

And so, we screw it up, we only do $2.2million which we won't screw it up. So it's just a tremendous amount of money with very little capital investment. I think it's a very prudent way to try to get more out of the existing assets. We have about as all chains do, we've had 20% of our system probably that does very low volume.

They're not negative cash flow. But they're doing less than $1.5 million. And so you can say, we'll just let the leases run out. You can say, what can we do about it. And I think we have solid plan to do something about low performing assets while we've got all this extra talent before we start growing again. But, we'll see.

Howard Penney - Hedgeye Risk Management

What if those stores are underperforming because of the…

Sandy Beall

No, I agree with it.

Howard Penney - Hedgeye Risk Management

Because it's bad real estate, or it just shouldn't be a restaurant, no matter what you put there?

Sandy Beall

Howard, I agree with that. You know, we've been doing this a long time and we converted some other bad locations back from the days when we had when we had L & M Seafood and so forth and learned that lesson. And you're right. So out of the ones that are underperforming, I agree with you, a third of them are just bad locations. A third of them have other issues, but probably a third to half of them could be something better.

We're certainly not betting the farm on it. We're doing seven this year. Cost of seven, $2.8 million. That's nothing. So we'll know before we start converting 20 or 30 a year. I doubt that actually we'd ever get up that high. But it can add value. It can add $10 million I bet you in EBITDA over the next three years.

If you can bring in your franchise partners, some of those, you're adding extra millions of dollars of EBITDA. We've got to get our EBITDA up. We've got to grow our revenue, get EBITDA up, grow EPS consistently, and our stock will be okay. Our shareholders will be fine.

Howard Penney - Hedgeye Risk Management

So, just lastly from me, the comp guidance that you gave, I know you had alluded to taking your check up or trying to get the check up. When you look at the top guidance, does that check traffic? How do you think about what your view is for the next fiscal year?

Sandy Beall

I would say our total check next year, I think Margie, the guidance she gave was 0% to 2%. I would say our total check next year would be 2% to 4%. So in this environment you're looking at flat traffic to maybe down traffic a little bit. But then that whole traffic game is, like how in the world do you measure traffic? Like, we are really pushing our Bar business; we don't even count the bar traffic.

So who knows exactly what's down or up with all the different promotions and the way we're running our business. But if you look as compared to last year, I think that's how it would look. And we'd like to get check up, and I think as we continue to deliver, and the brand helps, and all these other, improving the Salad Bar, all that helps in that ability.

But right now, it's still very tight on the consumer, and you have to be very cautious about that. I think we're doing a good job of balancing all of that now, as evidenced by our one year, two year trends, earnings et cetera. So our challenge is, keep it going a little bit with a little bit of improvement every quarter.

Any other questions anybody?


The next question is coming from the line of Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

A question on the buyout to the franchisees that are built into the guidance, the 25 to 30. You mentioned you're going to do it in situations where it makes sense. And I was just wondering if you could talk a little bit more about how you decide which ones make sense.

Are these situations where they come to you and want to sell to you? Are you going to them and asking to buy them? And then also, I want to make sure it's clear; whatever you spend on those is not included in the guidance for CapEx? That's it, thanks.

Margie Duffy

Correct. That's not included in the guidance for CapEx.

Sandy Beall

Yes, it requires very little cash, because generally we're just taking over their assets. We have the right to bond most of those at a very favorable multiple. And how you decide which ones, which was your main question. It's different. Like the first two we are buying are in the Eastern United States. They are key markets for us; it's Long Island and New England.

And good partners operate them; they've got a nice little business. It's in our territory, and we think it makes sense for us without any doubt. There's some in the Midwest. There's one out there that makes good sense for us too. And that somebody, we actually want in the company who does a great job for us.

So it just depends, but I think in making sense you don't want to lose any value, you want to gain territory. I think we're running excellent restaurants now. And it makes sense by adding sales, adding EBITDA, and being a little bit accretive.

Keith Siegner - Credit Suisse

Just to clarify then, like there's two in the Eastern US, the one in Long Island and the one in New England. Did you approach them after finding?

Sandy Beall

We did, definitely. 100%.

Keith Siegner - Credit Suisse

Okay. One other question. And no one has asked this thus far. And usually it doesn't get this far in the call. You gave guidance for comps for the full year. You reported a little bit later than normal, so, we're a good ways into the next quarter. Are you at all willing to talk about quarter-to-date trends?

Sandy Beall

Can't do that; which are good, but can't.

Keith Siegner - Credit Suisse

All right then, one last question. This is my usual one. I've been asking this every quarter for a while. The franchise royalty rate ticked up nicely this quarter, back to more like the levels we saw in the last few years. Just wondering, if we can maintain this type of flattish, maybe even slight growth comp at the franchisee base. Is this quarter more reflective of what we should think of for a royalty rate going forward?

Margie Duffy

Yes, I do think it is for fiscal '11.


Our next question is coming from Brian Innes with Telsey Advisory Group.

Brian Innes - Telsey Advisory Group

Just looking at the fourth quarter, any commentary on regional trends and what you are seeing across the system?

Sandy Beall


Kimberly Grant

The only thing that's of note, we saw a little softness in the New England markets in the fourth quarter, but otherwise the whole country has done pretty well, I mean consistently across the board. But nothing to be concerned. I think that New England has bounced back recently. So it was just fourth quarter.


Our next question is coming from Chris O'Cull with SunTrust.

Chris O'Cull - SunTrust

Kimberly or Mark, I know you guys have a great IVR program, a lot of good data from that. And you may have mentioned this Kimberly in the presentation, but how has the top box score for value changed during the past 12 months given your goal of improving kind of the dinner check average?

Kimberly Grant

Value scores continue to improve quarter-over-quarter. We had a significant increase from Q3 to Q4, similar to how our overall experience increased. And we know that as we give the guests a better experience, a more consistent experience, their value increases. And we saw the exact same trend, so we had big improvements in overall experience which translated to big improvements in value.

Sandy Beall

Thanks for listening in and hearing about Ruby's. And if you have any questions, please call Greg Ashley. You all make a great day. Goodbye.


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

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