Ruby Tuesday CEO Discusses F1Q11 Results - Earnings Call Transcript

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Ruby Tuesday Inc. (NYSE:RT) F1Q11 (Qtr End 08/31/2010) Earnings Call October 6, 2010 5:00 PM ET


Greg Ashley - VP of Finance

Sandy Beall - Chairman and CEO

Margie Duffy - Chief Financial Officer

Kimberly Grant - EVP

Mark Young - SVP and CMO

Dan Dillon - SVP of Brand Development


Jeff Omohundro - Wells Fargo Securities

Brad Ludington - KeyBanc Capital Markets

Joe Buckley - Bank of America-Merrill Lynch

Robert Derrington - Morgan, Keegan

Bryan Elliott - Raymond James

Keith Siegner - Credit Suisse


Greetings and welcome to the Ruby Tuesday Inc. first quarter fiscal year 2011 earnings call. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Greg Ashley, Vice President of Finance for Ruby Tuesday.

Greg Ashley

Thank you, Doug, and thanks all of you for joining us this evening for our first quarter earnings release. With me today are Sandy Beall, Ruby Tuesday's Chairman and CEO; Margie Duffy, Chief Financial Officer; Kimberly Grant, Executive Vice President; Mark Young, Senior Vice President and Chief Marketing Officer; and Dan Dillon, our new Senior Vice President of Brand Development.

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-K. We plan to release second quarter fiscal year '11 earnings in early January.

Our first 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 financial media outlets.

Our format today as usual includes the following: An overview of our first quarter financial results, our fiscal 2011 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks, we will respond to your questions.

I will now turn the call over to Sandy.

Sandy Beall

Thanks, Greg. I’d like to welcome all of you listening in this afternoon and thank you for joining us. We’re pleased to report another great quarter overall highlighted by positive same-restaurant sales. This was our best sales quarter in the last four years and we’re very excited to see that the momentum which began in our brand last year has continued to strengthen.

We saw a year-over-year improvement in restaurant operating margins, and our net income for the quarter excluding accounting gains realized from the franchise partner acquisitions was up 74% over the prior year. We believe the impact of our Game Changers coupled with high cost controls, tight cost management and good operations is providing attractive incremental flow-through to our topline sales numbers.

Our same-restaurant sales for the first quarter were 1.2%, more importantly beating Knapp-Track, the industry benchmark, on a one-year basis by more than 1 point and on a two-year basis by 5 points. Our same-restaurant sales have shown sequential quarterly improvement for the last seven quarters, including two successive quarters of positive results. We are achieving this with fewer commercial marketing efforts.

Our balance sheet is in great shape. During the quarter, our total debt paydown was offset by debt absorbed from our two franchise partner acquisitions. We are comfortably in compliance relative to our debt covenants and our book debt to EBITDA ratio is only 2.08 times during the quarter. This represents a sizeable improvement over the prior year ratio of 2.84.

We continue to strengthen our brand in high-quality casual dining sector from both the food and service standpoint. Our Game Changers which are our innovative and enhanced product offerings such as Brunch or Tuesday Steak and Lobster Night, Gimmie A Mini, our Bar programs, et cetera, all those are exciting, and I think Mark will give you more information on those. Our guest satisfaction scores are at all time high, and Kimberly and team have done a great job on that.

As we discussed on our last call, we’ve spent a significant amount of time with the Board discussing low-risk ways to grow our business. What we want is low-risk, high-return and maintain a lot of free cash flow. We now have all the pieces and personnel in place and have started to execute on our long-range plan.

As we look forward to the next three to five years, our focus will be on the following key initiatives.

First and foremost, we’re focused on continuing to enhance the quality of Ruby Tuesday brand along with continuing to maximize sales and profits through a non-traditional sales building program. We’ll continue to elevate the brand experience by rolling out innovative products, promotions and investing in various labor initiatives to enhance the overall dining experience. Kimberly will talk more about this in her section. We mentioned last time our goal was to end up with the $25 high-quality casual dining experience for $15.

Our second strategy focuses on converting some underperforming company-owned locations to other high-quality casual dining concepts. We have a number of restaurants in our portfolio where there are these less than $1.4 million. While some of these are just bad locations, many of them are good and could be converted to an alternate concept. We’re assessing which brands are best suited for the local market concept, who can do the most volume at best street corner versus just trying to have Ruby Tuesdays everywhere.

So whether it’s a Jim 'N Nicks, upscale Bar-B-Q, Truffles and upscale casual dining restaurant or an internal seafood health concept that we plan on opening this year, which one would get the most volume out of the marketplace. These conversions require nominal capital investments, less than $500,000 on average, and have the potential to drive average restaurant volume of $1 million and more.

We recently opened our first Jim 'N Nicks restaurant in Knoxville, and early revenue is also very encouraging. We are hitting basically what they projected we would do there. We should be able to increase our volumes around $1.5 million, maybe even $2 million at the level ground.

Our first Truffles location is slated to open in the Buckhead area of Atlanta in November. And we believe this brand will provide a nice lift to our average check, has a much higher check at Ruby’s about $18 and thus overall volume also in its conversion opportunities.

Our third initiative is to generate revenue and EBITDA growth through the acquisition of certain of our franchise partners. We acquired two partners in the first quarter, Long Island and New England. These two franchisees were attractive due to geography in the Northeast, et cetera. Going forward, we will continue to evaluate our options, but main thing is our goal is to get out of the franchise partner business, elimination of that so we don’t have to provide finance and we get that off of our books.

The fourth component of our strategy is growth, growing through investments in low-risk, low-capital intensive, smaller inline locations. It’s amazing we paid off about over half of our debt in the last three years, over $300 million. We have so much free cash flow and we need a (work vehicle) out there.

We recently entered into a license agreement with South Florida-based Lime Fresh Mexican Grill in fresh fast casual concept launched in 2004. There are six locations and three more opening in the next 90 days. The Lime brand is in alignment with Ruby Tuesday, as both have a focus on high quality ingredients, fresh great tasting food in a fun and energetic environment. We're very excited to enter the, what we call the higher end of fast-casual segment.

And what's key there is, Lime is positioned extremely well; what excites us, it has so many other touchpoints of casual dining, but with the simplicity, the ease of operation and the strong guest appeal of fast-casual. And whether that's menu touchpoints or whether it's the alcohol service program or whether it's the partial service in the dining room etcetera, but we think it's well fitted for growth and it fits well with us.

It is a segment that is proven; the segment is growing, and one where demand exceeds supply and that's kind of welcome in our industry today.

We expect to open approximately 12 restaurants by the end of fiscal 2012, to be geared up by March and open about one a month every month after that. And if successful after the first 12, then we can roll out the balance in the East United States. But we're taking a step at a time, validate the first 12 first.

The inline growth models which we mentioned to you before represents much lower capital investment but much higher cash on cash return, and we think this is where we should be investing.

Our final strategy is to optimally manage our excess cash flow with a near term focus on continued debt reduction. We'll focus longer term on returning money back to our shareholders we can't invest at all, which I don’t see how in the world we could. And our focus would be on putting our excess capital towards the best use, which is what I think we're doing in these plans.

At a recent investors conference I was asked how things would be different managing multiple brands than say 10 years ago, seems to be a part of question. And I thought about it for a second and, you know, I think the world is different for one. I think when we manage multiple brands is at a different point in time. In fact we split up from Morrisons.

Ruby Tuesday wasn't as good as it is now. Ruby Tuesday needed a lot of work; it's what we are focusing on the East United States. We didn't have endless supply of capital; we are actually short on talent. So for all of those reasons, you know, it was good to focus on Ruby Tuesday and not have the other concepts.

Now flash forward about 10 years, and we have the exact opposite situation. Ruby's is much, much stronger, but there's no real growth opportunity left for Ruby Tuesday with 650 in the East United States unlike 10 years ago. And unlike 10 years ago when we didn't have massive free cash flow, today we do have massive free cash flow. And having something else to invest in seems to make a lot of sense to us.

In addition to that we have a lot of talent. In addition to that, I think and those are real positives, we're not trying to manage a lot of multiple brands. I think that's where a lot of large companies get into trouble. They do it once and think they can do it again. We are licensing brands that entrepreneurs and other people are maintaining the integrity of that. All we do is operate them.

We're folding this into our management structure. Kimberly's team will handle all the dinner house concepts under her group, and then Dan Dillon would be handling the line development program. So we think it's a lot different than it was in the past, and we think our success will be positive.

Let's see. All of these components that I talk about in our plans make our growth strategy, our three-year plans, ones that are up, we believe are low-risk, are high return and generate high levels of free cash flow, even after all the investment. We believe the combination of good earnings, reasonable revenue growth and returning excess capital to shareholders is a great plan in this economic environment and one that we should be rewarded fairly for.

And I'll now turn the call over to Margie to give you an update on the financials.

Margie Duffy

Thank you Sandy, and good evening everyone. The first quarter was very strong. Our ability to drive our sales strength in the quarter and lower promotional levels, while continuing to tightly manage cost resulted in strong earnings compared to the prior year.

I'll review the quarter in detail to provide a high level summary of our quarter-end balance sheet and give our guidance for fiscal 2011.

We reported first fiscal quarter diluted earnings per share of $0.19 or $0.17 per share excluding accounting gains related to the franchise partner acquisitions. This compares to diluted earnings per share of $0.11 last year.

Total revenue increased seven-tenths during the quarter, largely due to the same-restaurant sales increase of 1.2%. We didn't open any company operated restaurants in the first quarter and closed two.

Franchise revenue increased 57% primarily due to higher levels of fees collected from our franchised restaurants. Same-restaurant sales for domestic franchise restaurants increased about 0.4% in the first quarter, with the positive same-restaurant sales being driven by the franchisees participating in virtually all of our promotional marketing programs during the quarter.

We acquired our Long Island and New England franchise partners during the quarter, which resulted in a net accounting gain of $1.7 million. We have included a reconciliation of the pro forma margins, earnings, and EPS versus the actual amounts on the Investor Relations page of the Ruby Tuesday website.

The restaurant level operating margin was 18.5% for the quarter, or 18%, excluding accounting gains from our franchise partner acquisition, and that's compared to 15.9% a year earlier. On an adjusted basis this represents an improvement of 210 basis points over the prior year. Cost of goods sold at 28.3% of sales for the quarter versus 30.2% in the prior year were favorable due to lower levels of incentive marketing coupled with savings from better contractual prices on various food items.

We continue to experience relatively stable commodity costs for the quarter. Labor cost as a percent of sales remain relatively flat at 33.3% compared to 33.6% for the prior year. Other restaurant operating costs were down 50 basis points largely due to the impact of the accounting gain from franchise acquisition noted earlier.

Depreciation was down 40 basis points as a percent of sales, primarily due to assets becoming fully depreciated since the prior year. SG&A expenses rose 110 basis points as a percent of revenues, this increase was largely the result of higher marketing cost from testing our coupon strategy in certain national magazines coupled with an increase in internet advertising expenses from our digital media effort.

And we also incurred additional training expense relative to our 25/15 initiative. The equity and earnings of our franchise partners increased from the prior year in part due to temporary fee forgiveness. Interest expense declined to $2.5 million from $5.4 million reflecting a 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 ratios.

Closure and impairment expenses were up year-over-year due in part to gains on the sale of surplus property that were realized in the prior year. Our tax rate was 22.9% compared to 17.4% last year with the increase in taxable income being partially offset by FICA tax credits for the quarter.

And turning to the balance sheet, our book debt was $295 million down from $386 million a year earlier. At the end of the quarter, our book debt to total capital was 35%. Our book debt to EBITDA was $2.08 million and our total funded debt EBITDAR, the ratio pertinent to our loan covenant was 2.7 which provides us with over 100 basis point cushion to our debt covenant.

Now we’ll take a look at our 2011 guidance. For our full year, please note that it excludes the impact of any gains of losses that may be recognized from franchise partner acquisition pursuant to the business combination role which plays a greater emphasis on fair value. For the year we estimate same-restaurant sales for company operative restaurants to be in the range of flat to up 2% for the year.

We expect to open one to two smaller prototypes in line restaurants this fiscal 2011. And anticipate closing seven to nine company owned restaurants. And converting five to seven lower performing company owned restaurants to other high-end casual dining concepts. Our franchisees expect to open between eight and 13 restaurants in the year up to 10 which will be international.

In addition to the 20 franchise restaurants acquired in our first fiscal quarter, we are evaluating the buybacks of five to 10 additional franchise restaurants over the remainder of the fiscal year. We expect restaurant operating margins to be relatively flat primarily reflecting the impact of our continued investment in high quality menu items and new product offerings as well as some betterment of service to enhance our guest experience and drive sales offset by lower promotional levels.

While it is still early in the year and uncertainty continues to remain in the overall economy, we have good operating momentum. 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 8% to 10% year-to-year, primarily reflecting higher advertising, training and marketing research expenses.

Interest expense is expected to be in the $10 million to $12 million range. 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 2011 are estimated to be in the range of $0.76 to $0.86.

Fully diluted weighted average shares outstanding are estimated to be approximately $64.5 million for the year. Capital expenditures are expected to be $29 million to $33 million and we estimate we will generate $90 million to $100 million of free cash flow during the year. We’ve made tremendous progress over the last few years to improve our operating results and maximize our cash flow and strengthen our balance sheet by controlling cost and paying down our debt as rapidly as we can.

As a result, we’ve considerably more financial flexibility than at any time over the last couple of years.

And with that, I would like to turn the call over to Mark to go over some of our sales building program.

Mark Young

Our marketing strategy for the last two and a half years is focused on the key pillars of print promotion, digital media and local marketing programs to get guests in and see the new Ruby Tuesday, increase frequency and enhance the visibility for the brand. We were pleased to actualize same-restaurant sales positive 1.2% for the quarter, in particular given our lower level of promotions.

Our successes were driven by both continuing to build our Game Change offering we rolled out over the last two to three quarter, such as our Tuesday Steak and Lobster night and our Three Course Sunday Brunch offering. These Game Changes have contributed to our sales improvement, volatile enhancements perception of the Ruby Tuesday brand.

Additionally, we had some success with alternative promotional offers, which resulted in lower redemption rate, better net check and larger party assessments. On August 24 we rolled out our brand-changing enhancements, which featured new menus, complimentary fresh bread program, enhancements to our Fresh Garden Bar, and enhancement to our Sunday brunch program.

Our new menus have been well received, most notably our Fit & Trim offerings, which include 12 menu items that are 700 calories or less. We also added over 10 new entrees, which included new petite lunch salads, seafood selections and new pasta offerings. Additionally, we enhanced the quality and quantity of the side offerings, which now includes fresh green beans, fresh grilled asparagus and baked Mac 'n Cheese.

We have enhanced our Garden Bar with more variety and freshness by adding over 10 new items, including sun dried tomatoes, banana peppers and artichokes. The addition of our fresh-baked garlic cheese biscuits has also been well received by our customers. This cravable hot bread baked fresh to serve, further increases the overall value perception of our brand in line with other high quality casual dining restaurants and fills a void that had existed.

Our Sunday Brunch menu which now includes 15 total items has been enhanced with French Toast, two new omelettes and one new crepe. As we enter the heart of football season, we want to leverage the relationships we have with sports fans, who are some of our most engaged customers. We launched a new branch of our e-mail club, So Connected, called Ruby Tuesday Athletics to communicate our guest key program offerings during the season.

We have enhanced our bar menu with great new food choices, and a line up of beverages to enjoy while watching the Sunday NFL Ticket on our new hi-def TV’s. For the remainder of 2011, we will continue to offer incentives throughout our existing menu items to support our high quality casual dining position, growing our field with product extensions, offering more variety and cravability and explore different campaigns and major out incremental sales.

Our primary goal is to find additional ways to reach different consumers and reintroduce them to the fresh new Ruby Tuesday. In the first quarter we communicated this message in four magazine publications, all specifically selected to reach a certain customer. Additionally, our presence in the digital reign will continue to increase, as we support some of our key end-restaurant programs through digital advertising, and build on the success we’re experiencing with the social media platforms.

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

Kimberly Grant

Thank you, Mark. As Sandy mentioned earlier, our same-restaurant sales continue to outperform our peer group as measured by the Knapp Track. We are focused on many different programs that when complied together we believe will strengthen our brand and provide us a strong foundation for long-term sales growth.

We started our 2011 fiscal year off on a very positive note, with a big value driver being our key operating initiative of delivering a $25 experience for $15 during our dinner meal period. We have made a number of recent enhancements to support this long-term strategy, which we believe will continue to elevate our brand in the high quality casual-dining sector.

Our first change focus on the newly deployed management structure we rolled out during the fourth quarter, which has our assistant managers now designated as either a guest service manager or culinary manager, and is enabling us to focus on delivering a more consistent guest experience. Secondly, in order to maintain our momentum on improving the guest experience, we held culinary school classes for all of our culinary managers and multi-restaurant operators at our Center for Leadership Excellence in Tennessee.

After we finish the upcoming wave, the training for general managers in the fall and guest service managers in the spring, our 25 for this team's foundation training will be complete. And finally, from an operational standpoint, we have implemented smaller station sizes, increased our bartender staffing levels and added food runners. While this will slightly increase our labor cost in the short-term, we believe it is the right thing to do in order to enhance the overall guest experience.

These changes further enhance the attentiveness of service both in the dinning room and the bar by ensuring the guests' meals and beverages are delivered as soon as they are prepared. And based on our external research, our guest scores in the areas of food, service and atmosphere, all recently experienced significant increases, and this further validates that our newly deployed management structure, our new service enhancements, as well as the menu enhancement as Mark mentioned earlier are resonating with our guests.

A second operational initiative value driver for us in fiscal 2011 centers around Fun with Friends. We continue to invest heavily in our bar programs to create what we call a sophisticated sports viewing atmosphere where guests can have fun with friends, watch great sporting events and enjoy a handcrafted beverage and unique bar fare.

Our award-winning beverage program is enabling us to drive beverage mix through a variety of food and drink promotions, most notably our NFL Sunday Ticket program with DIRECTV. Our pictures of Sangria and expanded line list and a variety of new fresh seasonal blackberry cocktails and zero-pres beverages further strengthen our current beverage program.

These offerings along with our new bar food program are enabling us to pursue a key theme goal of increasing total bar sales, including food. And from a guest service standpoint, we now have three quarters worth of guest satisfaction scores from approximately 20,000 bar guests per quarter, and our current top two bar scores are over 95%, which is slightly higher than our dining room experience scores.

In the dining room, our operational fundamentals remain very strong. Our top two box scores for our four key attributes of overall experience, value, intent to revisit and intent to recommend were over 93% for the quarter, with over 70% of our guests rating their overall experience of five on a one to five scale, an amazing accomplishment for our team.

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 while we have a consistently experienced improvements in scores, our number of unacceptable experiences, those guests that rate their experience at one or a two continues to remain at very low levels, in part related to our new management structure as outlined earlier.

As far as our key measures, our year-to-date management turnover was approximately 24%, and our hourly turnover was approximately 100%, both of which are very low levels for our industry.

We continue to find great talent, which is strengthening our brand, and the excitement surrounding our conversion in inline growth strategy will enable us to continue to provide great career pathways for up-and-coming talented team of managers.

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

Now I’ll turn it back over to Sandy for a wrap-up.

Sandy Beall

We feel good about our brand and business, although the operating environment is still difficult. We have sufficient momentum based on the accumulative effect of a number of our programs that we now have in place.

Our sales have been on solid improving trends the last 20-24 months. We’ve been performing better than that by far for the most part, even as we overlapped our improving performance, and on a one-year basis and on a two-year basis we really look good.

We continue to entirely control our cost. We found a good balance of sales, traffic, promotion, profits; we have strengthened our balance sheet by paying down significant debt. And as a management team we are very, very focused on our long range planning. I want to remind you of what those key elements are real fast.

Focus, focus, focus on Ruby Tuesday brand itself, drive sales and profits. Number two; convert underperforming company-owned restaurants to other high quality casual-dining concepts. Continue to acquire franchise partners or convert them to traditional Zs. Slowly grow the company in a low-risk, low capital-intensive manner, primarily through inline locations, and then once you get that pay-down where you need it, which we are real close, return excess capital to our shareholders.

We believe we are in a good position to build shareholder value in the coming years. And now we’ll open up to questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Jeff Omohundro with Wells Fargo Securities.

Jeff Omohundro - Wells Fargo Securities

Sandy, I wonder if you could talk to customer mix, and what are your sense of new customer traffic generation might be with your many initiatives, particularly in light of the strategy through this promo and the potential for that to result in a lapsing of more value-oriented consumers, or price-driven consumers I should say?

Sandy Beall

I’m not sure any of us, I’m looking around, can give very specifics. But I know, Kimberly talked a lot about our bar programs and our sports programs. We’ve gone through different vehicles to track them. We’ve done well on that actually. Monday night's turned to a big night for us with Sports program.

We went after print magazine route, targeting different, whether it's fresh in esters and lady magazines where you are pushing a fresh and healthy approach with a small incentive or whether ESPN or whether it’s (Minfel), et cetera, plus the visible side of things.

We've been much more active in, as we talked about, the alternative distribution methods than just the past discount strategies and mediums that we had been using. And all of that was part of a strategy to reach a different consumer base. So we know, based on where we are at level wise and what we’ve seen the response in those, we’re picking up some.

Mark Young

We continue to try to push more and more dollars to the non-traditional, as you call it, coupon or value-oriented customer. And with that, I think you’ll probably know or maybe not but we just partnered up with Dunnhumby, which a lot of you’ll probably know. We have three companies we partnered with that Kimberly and Dan worked on a lot.

We have Opera.

Jeff Omohundro - Wells Fargo Securities

Dan, want you to explain how you describe Oprah, eSite and Dunnhumby; the real short answer to what each one of them do and how they help us.

Dan Dillon

What Opera does is it tells you through market mixed analysis and analytics of the data at a local level what programs are working; what marketing efforts have driven incremental sales and incremental profits. So they tell you what to do. eSite is a geospatial targeting company. They at a very local level, household level can tell you where you are sourcing your traffic for each of the restaurants. So they help you understand where you should do marketing efforts.

And Dunnhumby is a company that helps with loyalty retention and growing advocacy of your user base. They basically tell you what to go do. So what, where and then how to get the consumer to increase their loyalty with the three agencies that are intended to help us better understand.

Jeff Omohundro - Wells Fargo Securities

And I do have one follow up for Margie. On the franchise acquisition gain, which in the supplemental information that appears to be flowing through the other restaurant operating expense line.

I was wondering if you can give may be a little bit more color on that? and why there no taxes related to it?

Margie Duffy

The taxes are actually requited in the operating income line. It’s just the business combination rules work, in that the gain with tax affected above the line if you will.

Mark Young

We should say it’s not logical because of the accounting laws.

Margie Duffy

But basically it’s the gains that fall out. We report the assets and liability that fair values. And based on appraisals and other input, and the difference either goes to goodwill or to gain. In this case, the assets were greater and went to gain. Those are the new fair value rules. And we’ll continue down that path with future acquisitions as well.


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

Brad Ludington - KeyBanc Capital Markets

I wanted to start off with on your debt. If you can comment on what level of debt repayments you’ll do this year? We expected some kind of debt reduction, had a little added on this quarter. But we also didn’t expect 20 stores to be acquired this quarter. So is that what drove the difference versus our expectations? And what should we expect for the full year?

Margie Duffy

We paid down $17 million of debt during the quarter, but assume $23 million from the acquisition. So that was a net $6 million increase. I believe indicated a free cash flow of $90 million to $100 million for the year. That was approximate as the assumption of debt paid down.

Brad Ludington - KeyBanc Capital Markets

And then I wanted to look at the G&A increase on the guidance. It went up by $6 million or $7 million. I know that part of that was some of the marketing research, it seems that you’re doing for Ruby Tuesday. But is some of that related to getting ramped up for the line refresh development as well?

Mark Young

Not really, our line refresh development, we’re actually, we’re not adding any G&A to that route sourcing everything. I’d say you could say every bit of that is marketing related, whether it’s bringing on Dan as a senior exec and the cost incurred with that. And then just those three companies I just named.

Actually the total of that takes care of all the dollar match you just mentioned.

Brad Ludington - KeyBanc Capital Markets

And then finally, I apologize, my phone cut out a little bit when you were talking about the line refreshes that you said open 12 by a certain date and I didn’t hear that.

Mark Young

What we’d like to do in an ideal world, we think have a solid plan laid out that’s low risk high return and still allow us to have massive free cash flow after that, even if we run as fast as we can. But the next steps are validate the conversions, let’s get five or six underneath our belt and know what the volumes are.

Let’s validate the more capital-intensive growth we’ve the Lime. Let’s get 12 of those open. Let’s be able to say about this time next year to you all, these are the results of the line tests, these are the results of the conversion test. This is how we feel about it, these are their sales, their EBITDAs their profits et cetera.

And this is what we’re going to do with it and how we’re going to hammer down. So right now, the way I look at it this year is let’s keep strength in the brand next year. Let’s validate all the tests. And then mid way through next year and through 2013, let’s hammer down and start getting the value.

Brad Ludington - KeyBanc Capital Markets

And I know there is no impact really to this year I would expect from line refresh, but is there a possibility that some of those could open this year?

Mark Young

We will get two open, I hope to get a little bit more. We’re already very active on the real-estate front.


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

Joe Buckley - Bank of America-Merrill Lynch

Could you talk about the break damage between traffic and check and the same-store sales increase for the quarter?

Greg Ashley

I mean, largely, Joe, our floor traffic is relatively flat to may be nominally down. Traffic continues to be a tough thing to get our hands on. I believe on the to go side, traffic is down a little bit because we’ve paired the focus of that back a bit.

What we do like is the level of couponing coupled with a little bit of pick-up in mix. And largely relatively flat check has kind of got us to the positive 1.2. The other thing to keep in mind is we’ve got very difficult cost on the traffic side next couple of quarter.

So we’re kind of comparing apples to oranges given that a lot of our logos really don’t get more apples to apples until we get into October, November of this year. So keep that in mind.

Mark Young

Maybe one simple way to look at it is if you take the dinning room excluding to go and some of this other stocks, say just the dining room if you are up 1.2 if it checks up a couple of points, two or three points, then you are off on traffic there by zero to one.

Last quarter we were down because you asked the same question last quarter. I think it was down a little bit last quarter, a little bit this quarter, a fraction. I know in September we’re beating that on traffic, I don’t remember for first quarter. But on two-year basis, we are doing real well.

And then as soon as we get into the winter time, I think it will flip again. We were running about six points ahead; I believe averse to competition, not too long ago.

Joe Buckley - Bank of America-Merrill Lynch

The pick-ups in CapEx, it looks like you had about $6 million to the range, $6 million or $7 million I guess, is that predominantly line fresh?

Mark Young

It’s a combination of sales building initiatives but it is conversions Lime Fresh, and then we added more money in televisions, we are trying to develop sports products more. And we have a potential of about $3 million or $4 million in there. If we can pull off our Prime Rib test, that’s really the biggie is guess, Joe. But we’d like to roll that out this winter at the latest next spring. And that’s equipment for that.

And if that doesn’t happen then we don’t perfect it then that won’t be in there. So that’s just the maximum amount.

I do think our maintenance CapEx, we’re very consistent to this, our maintenance CapEx run the basic businesses still in that $20 million range. We think of staying there, we have many discussions on that with the Board.

Joe Buckley - Bank of America-Merrill Lynch

Just two questions on Lime Fresh, with six units open what are they providing you, I mean why not knock it off as opposed to get your licensing deal, and then just walk through unit economics what do you think of the cost to open one, what do you expect to do in average unit volume?

Mark Young

The reason not to knock it off because the time we develop and copy and get one opened et cetera. Weight test it, validate it, you are two years down the road. And it’s hard to understand the culture of why something works. If it’s that easy, Darden and Brinker and Ruby’s could all create so many of their own concepts which don’t seem to ever work really. So I guess insurance is that answer. Now as far as the economics go, it's really very, very similar to Chipotle. Their average unit volume is actually higher than Chipotle, but it is South Florida. So let’s just say it’s about the same. The unit level margins are the same.

The revenues are a little bit higher than Chipotle. The inter-level margins are the same, and their investment's not over 750. It is actually a little bit less, but I assume will be 750 for us, you know, bigger bureaucracy or something. So they're really dynamite. I mean basically, you get the same volume as a Ruby Tuesday with a much higher margin about half the investment, another way to look at it.


Our next question comes from the line of Robert Derrington from Morgan, Keegan.

Robert Derrington - Morgan, Keegan

The fact that you’re partnering up with Dunnhumby is really interesting, significant, especially because we’re really familiar with how successful a lot of their clients have been.

Sandy Beall

They are all successful.

Robert Derrington - Morgan, Keegan

But can you give us some color on how you use that relationship in building your own loyalty program?

Sandy Beall

They have historically been focused on providing loyalty program services to their clients, but they actually are a much broader full service agency in terms of the type of health they can provide in program management, promotion, development, advertising as well as the loyalty cards. But also their main reason for being is that they increase the loyalty of the user base.

And a royalty card or royalty mechanism is just one tactic that they use to do that. They have several other services that they provide to help grow the user based loyalty of a retail client. So we’ll use them for that, they are a partner that will help us understand who our consumer segments are or could be, and how best to attract them to Tuesday and then grow their loyalty over time.

Bob, also, the loyalty is the outcome of the program. It takes about a year to get there. So the really tough work is in the analytics, the research, the data mining, the whatever, the insight generation to get to that point.

Robert Derrington - Morgan, Keegan

And now, typically they only partner up with one company within a category.

Sandy Beall

You're exactly right. We are the only one in casual dining.

Robert Derrington - Morgan, Keegan

Sandy, different topic. You mentioned the possibility of developing a seafood concept. As we look around the industry, we can all think of the biggest fish in the sea who is struggling with difficult trends. Yet we know that you had some success with sea food at your own Ruby Tuesday.

Sandy Beall

Over 23% of our guests, almost one in four guests eat seafood in Ruby Tuesday.

Robert Derrington - Morgan, Keegan

So your new concept will cannibalize your own customers?

Sandy Beall

It could a bit, but it will actually be an existing Ruby Tuesday locations are conversions, remember?

Robert Derrington - Morgan, Keegan

All the conversion concepts are not for new growth, they’re only for converting existing underperforming assets. Any kind of learnings from what you’ve seen out around the industry regarding seafood concepts.

Sandy Beall

You remember we used to have L&N Seafood Grill. Before Bonefish and all that, we had that before we went back to focusing just on Ruby Tuesday after the spin-off from Morrisons. And back in (inaudible) with Ruby’s, how much seafood we sell, it’ll just be a more seafood-oriented Ruby Tuesday, really.

The key if you take all the bar grill is how do you differentiate yourself, how do you become more unique? And even if they reverse inside the 70% seafood with 30% bar grill, you’re perceived as a seafood restaurant. So we think it’ll be good and unique for some conversions, not as a growth vehicle. And it’s very relevant based on what people are eating and their health and so forth.

Robert Derrington - Morgan, Keegan

Last question, Sandy, on the CapEx, if you could help me understand when you presented the other day at an Investor Conference, a number that I saw within the transcript of your presentation mentioned $50 million to $60 million.

Sandy Beall

Well, what that was, Bob, I think somebody asked me if all of this stuff worked, what could your CapEx be? That’s probably about right within $10 million. Let’s look four years out, and if you’re opening maximum number of lamps 35 or so a year and you’re opening 15 conversions or something like that. But then by that time, your gross free cash flow would be $140 million to $150 million, I’m guessing. So you still got $80 million to $100 million of free cash flow just for dividends or repurchases.

So I’m just trying to give some sense of balance that yes, even if we did everything, we’d still be approximately as real free cash flow as we are today. And I think in these economic times, it happens that those kind of strategy we’ve laid out is the most exciting and sexiest thing in the world, no. There’s a good value creation step-by-step, blocking and tackling. It’s one we’re very comfortable with.


Our next question comes from the line of Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James

Just a couple of questions, first a clarification on the game Margie, so essentially it sounded to me like I guess want to clarify that. The acquisitions essentially were debt assumptions and then you have the sort of fair value, the assets and so you wrote them up by a million seven in addition to the debt assumption.

Margie Duffy

No, we would have just fair valued the assets and the liabilities and then the difference falls out. In this case, it’s again that the fair value of the assets were higher than the fair value of the liability.

Sandy Beall

It sounds bizarre, but that’s what will happen here every time we’re buying somebody. And if we end up buying as we laid out all these partners, you’ll have some gains, losses or whatever. And that’s why we went out of our way to make sure you understood that our earnings are net of that. That’s what we look as earnings. The rest of it is just accounting bugaboos. So it’s meaningless to us.

Bryan Elliott - Raymond James

Did any cash exchange hands?

Margie Duffy

There was some consideration, yes, a few hundred thousand dollars.

Bryan Elliott - Raymond James

When you look at the sales gains, a lot of emphasis on the build in the sports business and the Sunday Brunch and Tuesday Night Baked Lobster, I guess I’m asking more sort of non-traditional sort of family dinner, classic casual dining occasions how much did that contribute to the sales gain this quarter? Can you give a sense of that or a quantification?

Sandy Beall

What we’re trying to do is create energy and excitement, like Kimberly, this is what we said, “God, Tuesday Night just feels so good. There so many people in the restaurant.” At the same time you look in and say, “Okay, I wonder Thursday Nights are a little soft because Tuesday Nights are strong”. All we know is when we wake up every Monday morning, every Wednesday morning, we’re 5% to 6% for the day. And so those might give you zero to 1.0 effect for the week or something.

And so that brings to your next question, which is the things are not promoted the days we’re not having energy for something really going on, you’re down a little bit, because you’re only up 1.2 overall. And we know that and that’s why we got to work harder. At least we’re positive, because a lot to do with those programs. That’s not easy out there.

Bryan Elliott - Raymond James

No, it isn’t, but it should be some buy-in-traffic with BOGOs though, so much more successful and profitable for sure.

Sandy Beall

And again, we spent a significant amount less in coupons last quarter. We got to invest in these other programs.

Bryan Elliott - Raymond James

A quick question on the COGS guidance, the cost of goods, food cost guidance sort of flattish for the year given the big gain year-on-year this quarter sort of implies 50 bps by our math is that about right?

Margie Duffy


Bryan Elliott - Raymond James

And then Sandy mentioned in September, I think you traditionally have given us a little look into last quarter to date.

Sandy Beall

We stopped doing that now. No, I can’t do that.

Bryan Elliott - Raymond James

Well, you brought it up, so I though I would.


Our last question comes from the line of Keith Siegner from Credit Suisse.

Keith Siegner - Credit Suisse

Just two quick questions, one follow-up on the Lime Fresh. So you talked about AUVs and margin structure similar to Chipotle. Will you be paying the full franchise fee of $30,000 and 6% royalty?

Sandy Beall


Keith Siegner - Credit Suisse

Different structure for that?

Sandy Beall


Keith Siegner - Credit Suisse

So then in the business model factoring in the lower rates, what’s the anticipated new unit return in the business model for you?

Sandy Beall

It’s huge. Our agreement is in the quarterly filing, right? Detail summary. Our agreement with Lime, we paid a 2% royalty. We paid very little upfront, but we’ve given them huge growth, and so we’re helping each other a lot. As far as the numbers go, the returns are bigger than anything we’ve seen. First, we go to make it work first. So right now just kind of like a good dream.

Keith Siegner - Credit Suisse

Lots of concept discussions here, all different names. Is (Walkhead) dead at this point? We had heard a lot about that.

Sandy Beall

It’s not dead, but I just ran into a guy at the shareholders’ meeting today, he just told me how much he loved it. It’s just not doing the volume. I mean you got to assess everything based on volume, degree of difficulty, ability to stamp it out. So all comes down to risk, right? Right now, we look at these and we say they’re just lower risk. And it’s just not that we don’t like it, it’s just that it’s too high risk to invest in right now I think. And we’re still working on.

We appreciate you all listening in. I appreciate your questions and comments. And you call Greg if you have any more and have a great day.


Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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