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Article by DailyStocks_admin    (12-30-09 01:37 AM)

Filed with the SEC from Dec 17 to Dec 23:

Red Robin Gourmet Burgers (RRGB)
Hedge fund Clinton Group disclosed that it had met with the casual restaurant chain's CEO and chief financial officer on Dec. 15, but didn't reveal the substance or tenor of the talks. In its filing, Clinton Group also said that it had retained Spotlight Advisors to provide consulting on its investment in Red Robin. Spotlight, which owns a small number of shares of the chain, is headed by Gregory Taxin, the co-founder and former chief executive of proxy advisory firm Glass Lewis & Co.
Clinton Group owns 890,750 shares (5.7% of the total outstanding).

BUSINESS OVERVIEW

Overview

Red Robin Gourmet Burgers, Inc., together with its subsidiaries, is a casual dining restaurant chain focused on serving an imaginative selection of high quality gourmet burgers in a family-friendly atmosphere. Unless otherwise provided in this annual report on Form 10-K, references to "Red Robin," "we", "us", "our" and "the Company" refer to Red Robin Gourmet Burgers, Inc. and our consolidated subsidiaries. In fiscal 2008, we generated total revenues of $869.2 million. As of the end of our fiscal year on December 28, 2008, the system included 423 restaurants, of which 294 were company-owned, and 129 were operated under franchise agreements including one restaurant that was managed by the Company under a management agreement with the franchisee. This restaurant was acquired by the Company on December 31, 2008. As of December 28, 2008, there were Red Robin® restaurants in 40 states and two Canadian provinces.

History

We opened the first Red Robin® restaurant in Seattle, Washington in September 1969. In 1979, the first franchised Red Robin® restaurant was opened in Yakima, Washington. In 2001, we formed Red Robin Gourmet Burgers, Inc., a Delaware corporation, to facilitate a reorganization of the company. The reorganization was consummated in August 2001, and since that time, Red Robin Gourmet Burgers, Inc. has owned all of the outstanding capital stock of Red Robin International, Inc., and our other operating subsidiaries through which we operate our company-owned restaurants. As of December 28, 2008, we had 21 franchisees operating 128 restaurants. Our franchisees are independent organizations to whom we provide certain support. See "Restaurant Franchises and Licensing Arrangements" for additional information about our franchise program.

Business Strategy

Our vision is to be the most respected restaurant company in the world for the way we treat our team members, guests and stakeholders. To achieve this objective, we have developed the following strategies to profitably grow the business and deliver to our guests high-quality food in a fun and energetic dining environment with attentive and friendly service.

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New restaurant growth. We are pursuing a balanced approach to our 2009 new restaurant development as we seek to deploy our capital conservatively while recognizing the opportunities to increase market share in a period where others in the industry may reduce their presence. We opened 31 new company-owned restaurants in 2008 and 26 in 2007. In 2008, we took a measured approach to new unit growth even as we increased the number of new restaurant openings from 2007. We focused on operational and marketing strategies to quickly grow and stabilize profits in new restaurants and build brand awareness in our new markets. In view of the macroeconomic factors currently influencing the casual dining industry, as well as real estate development generally, in fiscal 2009 we plan to open 13 to 14 new company-owned restaurants.

New restaurant openings (NROs) present specific challenges. Generally, new restaurants open with higher sales volumes than the average sales volumes of comparable restaurants (honeymoon period) but level off at a revenue volume lower than the average level of comparable restaurant sales for a period of time before reaching a comparable level of sales and profitability. We will continue to focus on operational and marketing strategies that are intended to accelerate or normalize profits and sales volumes of new restaurants more quickly than our historical experience.


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Drive guest traffic through a strong marketing plan. Red Robin has achieved significant improvements in brand awareness, largely driven by two consecutive years of national brand-building television advertising. The national media campaign, with our "Department of Deliciousness" theme, helped drive awareness and brand understanding, especially in newer, less-established Red Robin markets. The campaigns were effective in communicating and reinforcing Red Robin's key brand equities, including the brand's positioning as the gourmet burger expert and a restaurant chain that offers a fun, family friendly dining environment. Our third party research studies showed a peak in overall brand awareness beginning in the second half of 2008 that we have been able to maintain through 2008. Given the current economy and questionable effectiveness of television advertising in this environment (particularly given our own results from two television advertising tests supporting product and pricing news in the fourth quarter of 2008), we decided to leverage the awareness from our cable advertising and focus 2009 budgets on more targeted traffic and retention driving initiatives. Our marketing approach in 2009 will focus more on product-specific promotions while still supporting our strong brand equities. We will invest significantly more in our digital marketing plan and focus on targeted direct mail and other local initiatives that support product news and our value proposition of bottomless streak fries and beverages. We will expand our internet programs, strengthen the effectiveness of our brand website, www.redrobin.com , launch a new guest retention program and focus even more on increasing gift card sales.

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Managing restaurant operating costs. We are focused on managing our restaurant operating costs including food and other commodities, labor and benefits, restaurant supplies, utilities, occupancy and other operating costs. Macroeconomic and other external factors, such as increases in state minimum wage requirements and commodity price increases have and will continue to put pressure on our costs. We are pursuing strategies to mitigate the impact of these external factors, including continued labor productivity efforts, utility management programs and strategic commodity contracts, where available. In particular, we have launched a program to focus on certain restaurants whose overall financial results are not meeting expectations. We will implement action plans to improve results around labor, occupancy and other controllable costs for these restaurants.

Restaurant Concept

Our menu features our signature product, the gourmet burger, which we make from premium quality beef, chicken, veggie or garden patties, pork, fish or turkey and serve in a variety of recipes. We offer a wide selection of buns and toppings for our gourmet burgers, including fresh guacamole, barbeque sauce, grilled pineapple, crispy onion straws, sautéed mushrooms, roasted Poblano pepper, bruschetta salsa, a choice of seven different cheeses, and even a fried egg. In addition to gourmet burgers, which accounted for approximately 56% of our total food sales in 2008, Red Robin serves an array of other items that appeal to a broad range of guests. These items include a variety of appetizers, salads, soups, pastas, seafood, other entrees, desserts and the Company's signature Mad Mixology® alcoholic and non-alcoholic specialty beverages. All of our gourmet burgers are served with our all-you-can-eat Bottomless Steak Fries®.

Red Robin® restaurants are designed to create a fun and memorable dining experience in an exciting, high-energy, family-friendly atmosphere. Our concept attracts a broad guest base by appealing to the entire family, particularly women, teens, kids ages 8 to 12 to whom Red Robin refers as "tweens," and younger children.

We believe in giving our guests the "gift of time." All of Red Robin's menu items are designed to be delivered to guests in a time-efficient manner. Our service sequence is designed to consistently prepare every menu item in less than eight minutes, which allows guests to enjoy time-efficient lunches

and dinners. We strive to provide guests with a 37-minute dining experience at lunch and a 42-minute dining experience at dinner.

We also strive to provide our guests with exceptional dining value. We have a per person average check of approximately $11.61, including beverages. We believe this price-to-value relationship differentiates us from our competitors, many of whom have significantly higher average guest checks, and it allows us to appeal to a broad base of consumers with a wide range of income levels. A low average guest check, combined with swift service and a kid-and family-friendly atmosphere further differentiates us from other casual dining restaurants.

Red Robin was founded on four core values: Honor, Integrity, Continually Seeking Knowledge and Having Fun . These core values are the foundation for every Red Robin decision, from creating our gourmet burgers to hiring energetic team members and even to deciding new restaurant locations. They also are the foundation for how we treat our team members, guests and communities. These core values can be found embroidered on the sleeve of every team member's shirt, which serve as a constant reminder of what makes our company unique and special. Red Robin also has an unparalleled and extraordinary approach to guest service known as Unbridled Acts®. We have catalogued thousands of stories of Red Robin team members who live our values through random acts of kindness they bestow upon restaurant guests and other team members. Many of our Unbridled Acts® can be found on our website, www.redrobin.com .

Restaurant Site Selection

We believe that site selection is critical to our success and thus we devote substantial time and effort evaluating each prospective site. Our site selection criteria focuses on identifying markets, trade areas and other specific sites that are likely to yield the greatest density of desirable demographic characteristics, heavy retail traffic and a highly visible site. Approved sites generally have a population of at least 70,000 people within a three-mile radius and at least 100,000 people within a five-mile radius. Sites generally require a strong daytime and evening population, adequate parking and a visible and easy entrance and exit. In addition, Red Robin typically selects locations with a demographic profile that includes a household income average of $65,000 or greater and that has a high population of families.

In order to maximize our market penetration potential, we have developed a flexible physical site format that allows us to operate in a range of real estate venues located near high activity areas, such as regional malls, lifestyle centers, big box shopping centers and entertainment centers. Our current prototype restaurant is a free-standing building with approximately 5,800 square feet and approximately 200 seats. Based on this prototype, our 2008 average cash investment for a restaurant was approximately $2.2 million, excluding land and pre-opening costs. We typically operate our restaurants under operating leases for land on which we build our restaurants. However, we have also begun to develop restaurants using in-line mall locations or conversion of existing restaurant structures. In 2009 we will continue to explore such prospects which allow us to capitalize on opportunities in certain real estate markets. Building in these locations significantly reduces the average cash investment while maintaining our presence in our preferred trade areas.

Operations

Restaurant Management

Our typical restaurant management team consists of a general manager, an assistant general manager, a kitchen manager and one or two assistant managers. The management team of each restaurant is responsible for the day-to-day operation of that restaurant, including hiring, training and developing of team members, as well as operating results. The kitchen manager is responsible for product quality, daily production, shift execution, food costs and kitchen labor costs. Most of our restaurants employ approximately 85 hourly team members, many of whom work part-time.

We have recently developed leadership and team member selection processes to improve our selection and retention of team members who will thrive and prosper in the Red Robin culture. We try to identify seasoned leadership teams 12 months ahead of our new restaurant openings, especially those in new markets, with the expectation that seasoned leadership will support quicker profit normalization of new restaurants.

Training

New Restaurants

Team members in a new restaurant complete a robust training process to ensure the smooth and efficient operation of the restaurant from the first day it opens to the public. In 2008, we continued to focus our training in new restaurants on key proficiencies to improve initial and sustained efficiencies. These training initiatives included re-defining and strengthening our hourly team member training during new restaurant openings. We have created a set of core competencies that each of our trainers must possess before they participate in a new restaurant opening. This allows us to maximize training time and resources required to prepare teams at our new restaurants. We also continue to enhance our manager training curriculum to better prepare new managers for the challenging environment that a new restaurant creates so they can confidently execute our processes, systems and values.

Prior to opening a new restaurant, our training and opening team travels to the new restaurant location to prepare for an intensive training program for all team members hired for the new restaurant opening. Part of the training team stays on-site during the first week of operation and an additional team of training support arrives for on-site support during the second and third weeks.


However, in 2008, we entered into fixed price contracts for ground beef, which we believe significantly protected us from the rapid rise in ground beef prices during the first half of fiscal 2008. Our fixed price contract for chicken expires in December 2009 and our beef contract expired in December 2008. In 2009, we have entered into fixed contracts at prices above our 2008 contracted price for 100% of our ground beef volumes through June 2009 and approximately 40% of our ground beef volumes for the remainder of the fiscal year. We monitor the primary commodities we purchase in order to minimize the impact of fluctuations in price and availability. However, certain commodities remain subject to price fluctuations. We have identified competitively priced, high quality alternative manufacturers, suppliers, growers and distributors that are available should the need arise.

Restaurant Franchise and Licensing Arrangements

As of December 28, 2008, we had 21 franchisees operating 128 restaurants in 21 states and two Canadian provinces, and we had 14 exclusive franchise area development arrangements with these franchisees. In 2008, our franchisees opened 10 new restaurants and we expect our franchisees to open between seven to eight new restaurants in 2009. Our two largest franchisees are Ansara Restaurant Group, Inc. with 19 restaurants located in Michigan and Ohio and Red Robin Restaurants of Canada, Ltd. with 18 restaurants throughout Alberta and British Columbia, Canada. Red Robin Restaurants of Canada, Ltd. is owned by an affiliate of Mach Robin, LLC, which is also a Red Robin franchisee. We are not actively seeking new franchisees. However, from time to time, we have, and may in the future grant additional territory to franchisees.

Our typical franchise arrangement consists of an area development agreement and a separate franchise agreement for each restaurant. Our current form of area development agreement grants a franchisee the exclusive right to develop restaurants in a defined area over a defined term, usually a five-year period. Individual franchise agreements authorize the franchisee to operate the restaurant using our trademarks, service marks, trade dress, recipes, manuals, processes, operating systems and related items and typically have a term of 20 years, but give the franchisee the option to extend the term for an additional ten years if the franchisee satisfies certain conditions.

Under our current form of area development agreement, at the time we enter into such agreements, we collect a $10,000 area development fee for each restaurant the franchisee agrees to develop. When a franchisee opens a new restaurant, we collect an additional franchise fee of $25,000. Under earlier forms of agreements with certain of our franchisees, these fees may be lower. We recognize area development fees and franchise fees as income when we have performed all of our material obligations and initial services, which generally coincide with the opening of the restaurant. Until earned, we account for these fees as deferred income, an accrued liability. Our current form of franchise agreement requires the franchisee to pay a royalty fee equal to 4.0% of adjusted restaurant sales. However, certain franchisees pay royalty fees ranging from 3.0% to 3.5% under agreements we negotiated with those franchisees in prior years.

Franchise Compliance Assurance

We actively work with and monitor our franchisees' performance to help them operate their restaurants successfully in compliance with Red Robin's systems and procedures. During the restaurant development phase, we assist the franchisee with site selection and provide them with our prototype building plans. We inspect the completed restaurant to assure that it conforms to the plans we approved. We provide trainers to assist the franchisee in the opening of the restaurant. We advise the franchisee on all menu items, management training, and equipment and food purchases. On an ongoing basis, we conduct brand equity reviews on all franchise restaurants to determine their level of effectiveness in executing our concept at a variety of operational levels.

To continuously improve our operations, we maintain a franchise marketing advisory council, a franchise business advisory council, and a food and beverage committee. The councils advise us on issues of concern to our franchisees, and the food and beverage committee helps us determine which items we select for menu testing and which items we will feature in future promotions. We exchange best practices with and among the franchisees as we strive to attain a high level of franchisee buy-in and to assure the system is evolving in a positive direction.

Information Technology

We have centralized financial and accounting systems for company-owned restaurants, which we believe are important in analyzing and improving profit margins. Our restaurants are enabled with information technology and decision support systems, which are designed to report daily, weekly and period-to-date information including sales, inventory and labor data. This technology includes industry specific pre-packaged solutions, as well as, custom-designed software that helps us optimize food and beverage costs and labor scheduling. These solutions have been integrated with our point-of-sales systems to provide daily sales and labor information that is important for analysis and decision support. We have also piloted new technology that obtains guest feedback via the Internet or a toll-free telephone number. Along with operational data, this feedback positions our managers to consistently improve the guest experience.

We have strong focus on the protection of our guests' credit card information. Our point-of-sales systems have been designed and configured to guard against data loss. In addition, based on outside audits, we believe that our information management practices provide a strong foundation for data security.

Marketing and Advertising

We build brand equity and awareness mainly through national and regional marketing and public relations initiatives. These programs are funded primarily through contractual contributions from all company-owned and franchised restaurants based on a percentage of sales. During 2008, we spent an aggregate of 3.8% of restaurant sales on marketing efforts. Because we are not pursuing our national

television advertising campaign in 2009, but are investing more heavily in digital and target marketing initiatives, the amount we expect to spend on marketing efforts in 2009 will be approximately 2.5% of restaurant sales.

Our main driver of brand awareness in 2008 and 2007 was advertising on national cable television. We ran 23 weeks of advertising using our "Department of Deliciousness" advertising campaign, as well as some advertising later in the year featuring Red Robin's "bottomless" steak fries and beverages to reinforce our value proposition. Based on a third-party research study, we drove significantly higher total brand awareness across all markets, with the biggest gains in less-established Red Robin markets. Red Robin has many digital/online initiatives that work well to target our current and prospective guests. These efforts increase brand understanding and encourage guests to visit the Company's website, www.redrobin.com .

We are pleased with the level of awareness and brand understanding that was driven by two consecutive years of national cable television advertising. However, we will not pursue the national cable television advertising campaign in 2009, but will continue to reach current and prospective guests with a strong online advertising campaign. Our efforts will include strengthening our visibility through Internet search engine initiatives and online videos in the spring to support our new promotional Burnin' Love Burger®. In addition, we will support our gift card initiatives during the top two seasonal time periods for restaurant traffic—spring and the year-end holidays—with in-restaurant and online advertising.

We will continue to support fun, new craveable burgers throughout the year via online support, direct mail and in-restaurant merchandising materials. We will continue to educate guests about our high food quality and standards and our bottomless value proposition.

We will also continue regular outreach and dialog with our guests via our email club, the Red Robin "eClub." The eClub is an on-line membership through which our guests register their email addresses and provide their birth dates in order to get a free burger on their birthdays. In 2008, our eClub membership exceeded more than 1.7 million members.

Public relations and local restaurant marketing are also key components to our marketing plan. We remain heavily involved with schools and organizations in our local communities. We support programs that help build traffic and brand relevance at the grassroots level. We generate media coverage with many of these events, charity partnerships, new restaurant openings and community activities such as our Special Olympics Tip-a-Cop programs, and , of course, our annual Gourmet Burger "Kids' Cook-off" which supports the National Center for Missing and Exploited Children.

For the last three years, we have conducted ongoing independent research studies to monitor our brand equity scores and business drivers among both current and potential guests. The results continue to show that we have high guest retention and our guests recognize and appreciate what sets us apart, including our gourmet burgers, great quality, our fun family-friendly environment and our speed of service (or "gift of time"). We will recognize these strengths in future marketing communications. We have piloted a new study that obtains feedback via the web or a toll-free telephone number from guests shortly after visiting one of our restaurants. We plan to launch this guest satisfaction survey in all company and several franchise restaurants in first quarter 2009 and continue to monitor those results to identify opportunities to improve the experiences of our guests.

Team Members

As of December 28, 2008, we had 27,089 employees, whom we refer to as team members, consisting of 26,788 team members at company-owned restaurants and 301 team members at our corporate headquarters and our regional offices. None of our team members are covered by a collective bargaining agreement. We consider our team member relations to be good.

We support our team members by offering competitive wages and benefits, including a 401(k) plan, an employee stock purchase plan, medical insurance, and stock options for corporate team members and general managers and above. We motivate and prepare our team members by providing them with opportunities for increased responsibilities and advancement, as well as significant performance- based incentives tied to sales, profitability, certain qualitative measures and length of service.

Dennis B. Mullen. Mr. Mullen was appointed Chief Executive Officer and Chairman of the Board of Red Robin in August 2005. Prior to August 2005, Mr. Mullen served as a Director for Red Robin beginning in December 2002. Mr. Mullen currently serves as a trustee of the Janus Investment Fund (since 1971, chairman from March 2004 to December 2007), Janus Aspen Series (since 1993, chairman from March 2004 to December 2007), Janus Adviser Series (since 2000, chairman from March 2004 to December 2007) and Janus Capital Funds PLC, a Dublin, Ireland based non-U.S. fund (since 2004). Mr. Mullen has more than 30 years experience as a corporate executive in the restaurant industry and has served as Chief Executive Officer for several restaurant chains, including Cork n' Cleaver Restaurants of Denver, Colorado; Pedro Verde's Mexican Restaurants, Inc. of Boulder, Colorado; Garcia's Restaurants, Inc. of Phoenix, Arizona and BCNW, a franchise of Boston Chicken, Inc. in Seattle, Washington.

Eric C. Houseman. Mr. Houseman joined Red Robin in 1993. He was appointed President and Chief Operating Officer of Red Robin in August 2005. He previously served as Vice President of Operations from March 2000 until August 2005, Director of Operations—Oregon/Washing ton from January 2000 to March 2000, Senior Regional Operations Director from September 1998 to January 2000, and General Manager from January 1995 to September 1998.

Katherine L. Scherping. Ms. Scherping joined Red Robin as Vice President and Chief Financial Officer in June 2005 and was promoted to Senior Vice President in 2007. From August 2004 until her employment with Red Robin, Ms. Scherping was the Controller for Policy Studies, Inc. in Denver, Colorado. From August 2002 until June 2003, she served as Chief Financial Officer and Treasurer of Tanning Technology Corporation in Denver, Colorado. From April 1999 until August 2002, Ms. Scherping served as Director of Finance and Treasurer of Tanning Technology Corporation. Ms. Scherping has over 26 years experience serving in various finance and accounting roles. Ms. Scherping is a Certified Public Accountant.

Todd A. Brighton. Mr. Brighton joined Red Robin in April 2001 as Vice President of Development. He was appointed Senior Vice President and Chief Development Officer in August 2005.

CEO BACKGROUND

Our amended and restated certificate of incorporation provides for three classes of directors with staggered three-year terms. Class I currently consists of two directors whose terms expire at this annual meeting; Class II currently consists of two directors whose terms expire at our 2004 annual meeting; and Class III currently consists of two directors whose terms expire at our 2005 annual meeting. Tasuku Chino, formerly a Class I director, resigned as a director of our company in January 2003. Following Mr. Chino’s resignation, the board of directors reduced the authorized number of directors to six and reclassified one director, Michael J. Snyder, from a Class III director to a Class I director. Currently, there are no vacancies on our board of directors.



Our board of directors has nominated Terrence D. Daniels and Michael J. Snyder to continue to serve as our Class I directors. If re-elected, Mr. Daniels and Mr. Snyder will continue to serve in office until our annual meeting in 2006 and until their successors have been duly elected and qualified, or until the earlier of their death, resignation or retirement.



Mr. Daniels and Mr. Snyder have each consented to be named as a nominee in this proxy statement, and we expect that Mr. Daniels and Mr. Snyder will be able to serve if elected. Should Mr. Daniels or Mr. Snyder become unable or unwilling to accept his nomination for election, our board of directors can name a substitute nominee and the persons named in the proxy card, or their nominees or substitutes, will vote your shares for such substitute nominee unless an instruction to the contrary is written on your proxy card.



Directors and Nominees



Below, you can find the principal occupation and other information about each of the Class I directors and each of the other directors whose term of office will continue after the meeting.



Nominees for Term Ending Upon the 2006 Annual Meeting of Stockholders - Class I Directors



Terrence D. Daniels, 60, joined us as a director in May 2000. Mr. Daniels has been a partner with Quad-C in Charlottesville, Virginia since its formation in November 1989. Prior to November 1989, Mr. Daniels served as

vice chairman and director of W.R. Grace & Co., as chairman, president and chief executive officer of Western Publishing Company, Inc. and as senior vice president for corporate development of Mattel, Inc.



Michael J. Snyder, 53, was elected as our president, chief operating officer and as a director in April 1996. In March 1997, Mr. Snyder was elected as our chief executive officer. In May 2000, Mr. Snyder was elected as our chairman of the board. From 1979 to May 2000, Mr. Snyder also served as president of The Snyder Group Company. Prior to being acquired by us in May 2000, The Snyder Group Company, under Mr. Snyder’s leadership, was our leading franchisee with 14 units.



Continuing Directors for Term Ending Upon the 2004 Annual Meeting of Stockholders - Class II Directors



Edward T. Harvey, Jr., 55, joined us as a director in May 2000. Mr. Harvey has been a partner with Quad-C in Charlottesville, Virginia since April 1990. From 1975 to April 1990, Mr. Harvey held various financial positions at W.R. Grace & Co., principally in corporate development, acquisitions and planning.



Gary J. Singer, 50, joined us as a director in June 1993. Mr. Singer has been a partner with the law firm of O’Melveny & Myers LLP, an international law firm, since February 1985 and has been associated with O’Melveny & Myers since 1977.



Continuing Directors for Term Ending Upon the 2005 Annual Meeting of Stockholders - Class III Directors



Benjamin D. Graebel, 47, joined us as a director in September 2002. Since July 2000, Mr. Graebel has served as the chief executive officer for the Graebel Companies, Inc. of Denver, Colorado, a privately held transportation and relocation service provider. Since joining the Graebel Companies in June 1979, and prior to his appointment as the chief executive officer of the Graebel Companies, Mr. Graebel held a variety of management positions, including regional vice president, president of the moving and storage group and chief operating officer. Graebel Companies is the largest privately held relocation company in the United States. Graebel Companies include Graebel Van Lines, Graebel Movers International and Graebel Relocation Worldwide. Graebel Companies is a worldwide leader in corporate employee relocation and facility management.



Dennis B. Mullen, 59, joined us as a director in December 2002. Mr. Mullen has been a private investor for the past five years. Mr. Mullen currently serves as a trustee for Janus Funds, chairs the Janus Funds’ nominating and governance committee, and serves on the Janus Funds’ audit and brokerage committees. As a trustee for Janus Funds, Mr. Mullen has also chaired the audit committee. Prior to 1998, Mr. Mullen had more than 30 years experience as a corporate executive in the restaurant industry, and has served as chief executive officer for several restaurant chains, including Cork & Cleaver Restaurants of Denver, Colorado; Pedro Verde’s Mexican Restaurants, Inc. of Boulder, Colorado; Garcia’s Restaurants, Inc. of Phoenix, Arizona; and BCNW, a franchise of Boston Chicken, Inc. in Seattle, Washington. Mr. Mullen started his professional career at PricewaterhouseCoopers and also served as the chief financial officer for Lange Ski Boots.



Required Vote



The two persons receiving the highest number of “FOR” votes present in person or represented by proxy and entitled to vote at the annual meeting will be elected.



Recommendation of the Board of Directors



Our board of directors recommends that you vote FOR the re-election of Mr. Daniels and FOR the re-election of Mr. Snyder as Class I directors on our board of directors.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Our discussions for the fiscal years ending December 28, 2008 and December 30, 2007 refer to a 52-week period. Our discussion for the fiscal year ending December 31, 2006 refers to a 53-week period with the fifty-third week falling in the fourth quarter.

As of December 28, 2008, we owned and operated, or franchised 423 Red Robin® restaurants in 40 states and Canada, of which 294 were company-owned and 129 were operated under franchise agreements including one franchise-owned restaurant managed by the Company under a management agreement. In fiscal 2009, we plan to open 13 to 14 new company-owned Red Robin® restaurants and we believe our franchisees will open between seven to eight new restaurants. As of February 23, 2009, we have opened four company-owned restaurants and our franchisees have opened two restaurant.

Our primary source of revenue is from the sale of food and beverages at company-owned restaurants. We also earn revenue from royalties and fees from franchised restaurants.

The challenging macro-economic environment continued during fiscal 2008 with spikes in fuel costs, increased food commodity costs, and the failure of several investment and commercial banking institutions. Credit markets have contracted as lending institutions have tightened lending policies and equity markets have experienced extreme volatility and downward price movements. Increasing lack of consumer confidence and pressures on guests' discretionary income continue to produce declining restaurant revenue across the industry. In fiscal 2008, we experienced a 4.9% decline in guest counts and a 3% decline in average weekly comparable restaurant sales volumes from the prior year. Despite these external pressures, we were able to grow restaurant sales 14.3% in 2008 from the development of 31 new company-owned restaurants and the acquisition of 15 existing franchised-owned restaurants. In addition to pressures on our guests' spending, the restaurant industry has faced increased costs for food, labor and supplies. In 2008, we focused on cost reductions to mitigate increasing commodity and labor costs. However, while successful in managing many of these costs, we were unable to completely offset the decline in our profitability from those cost reduction initiatives. While we expect the uncertainties in the economy will continue to impact the restaurant industry in 2009, we believe the long-term growth and profit opportunities remain strong for Red Robin.

The following summarizes the operational and financial highlights during fiscal 2008 and 2009 outlook:

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New Restaurant Openings. We opened 31 new company-owned restaurants during fiscal 2008. While our new restaurants have been impacted by the decline in guest visits, our initiatives to reduce costs, both pre- and post-opening, and to normalize operations faster have been successful. In the near term, we are taking a balanced approach to our 2009 development as we seek to deploy our capital conservatively while maintaining restaurant growth. We plan on opening 13 to 14 new company-owned restaurants in 2009. We believe we will fund all 2009 restaurant development from our operating cash flow.

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Comparable Restaurant Sales. For the fifty-two weeks ended December 28, 2008, the 241 restaurants in our current comparable base experienced a 1.4% decrease in sales from these same restaurants last year. This decrease was driven by a 4.9% decrease in guest counts partially offset by a 3.5% increase in the average guest check. Our restaurant revenues are significantly affected by changes in discretionary spending patterns, economic conditions, and cost fluctuations. Many of our guests are impacted by the current macroeconomic pressures and they have changed their discretionary spending patterns.

Accordingly, we continuously strive to maintain and enhance the strength of our brand and to deliver memorable dining experiences that attract new guests and retain our already loyal guest. Because of declines in guest traffic combined with our decision to eliminate cable television advertising, we expect comparative restaurant sales to decline in 2009. However, we cannot project, with confidence, the impact reduced guest spending and less advertising will have on our restaurant sales.

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Franchise Acquisitions. We completed the purchase of 15 existing franchise restaurants and one restaurant that had been under construction for approximately $30.0 million, net of a $451,000 charge related to the purchase of the restaurants. In addition to the acquisition of these restaurants, we gained access to development rights where these restaurants are located—territories that were formerly subject to exclusivity provisions of the former area development agreements. The combined revenue from the 15 existing restaurants was approximately $41.8 million in 2007 (the last full year before we purchased the restaurants). In 2008, these acquisitions added $25.4 million of revenue to our total restaurant revenues. The financial results of all 15 restaurants have been included in our financial results from their acquisition dates forward.

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Food Costs. The costs of many basic foods, including corn, wheat, soy beans and oil increased in 2008. This has resulted in upward pricing pressures on almost all of our food costs categories including beef, dairy, steak fries and fry oil, and we expect that pressure to continue through 2009. We implemented price increases during fiscal 2008 which have helped to offset some of these increased costs. In addition, we mitigated the rising price increases for some of our commodities through favorable fixed pricing contracts in 2008. In 2009, we believe our two largest cost pressures are for ground beef used in our hamburgers and potatoes that are used to make our steak fries. In 2008, we had favorable fixed pricing for ground beef. In 2009, we expect an increase in ground beef prices above our 2008 contract, as we have locked 100% of our ground beef volumes through June 2009 and approximately 40% of our ground beef volumes above last year's contract price for the second half of 2009. The cost of our steak fries will increase in 2009 as many farmers planted higher profit crops during the 2008 planting season and, in turn, reduced the potato crops planted. We expect that we will have less ability to implement price increases to offset increased costs for the foreseeable future given the current pressures on our guests' discretionary income and the competitive landscape.



•
Labor. Labor costs as a percentage of revenue decreased in fiscal 2008 by 0.1% primarily due to the price increases and operational initiatives we have put into practice to focus on improved productivity of our controllable labor. These initiatives as well as our price increases helped offset minimum wage cost increases we experienced in 2008. Minimum wage increases in 2009 will put further pressure on our restaurant-level profitability. In addition, lower comparable restaurant revenue will put additional deleverage pressure on our fixed labor costs.

•
National Media Advertising Campaign. In 2008, we expanded our national media advertising campaign that was started in 2007 by launching the campaign in February 2008 as compared to April 2007, and by airing more than double the number of weeks on-air in 2008 compared to 2007. This advertising campaign was funded by both company-owned and franchised restaurants that in 2008 contributed 1.5% of their sales to a national advertising fund, which was up from 1.0% in 2007. We believe the national media campaign helped to build brand awareness and brand equity in both new and existing markets. Given the increased difficulty in measuring the effectiveness of national cable advertising in an environment where consumers are pulling back on retail and restaurant spending and our desire to reduce costs in this challenging environment, we will not run national cable advertising in 2009. This will result in reduced spending equal to approximately 0.25% of restaurant revenue in 2009. In 2009, our marketing strategy will be focused on expanding our national on-line and digital media advertising efforts as well as introducing a targeted direct mail campaign to support product specific news.

(1)
2006 Acquired Restaurants refers to the 13 franchised Red Robin® restaurants we acquired during 2006. At the beginning of the third quarter 2007, the 2006 Acquired Restaurants entered into the comparable restaurant population and their average weekly sales volumes, from that time forward, are now included in the comparable restaurant category.

(2)
2007 Acquired Restaurants refers to 16 franchised Red Robin® restaurants we acquired during 2007 and one restaurant that we operate under a management agreement with a franchisee. Beginning the third quarter of 2008, these restaurants entered into the comparable restaurant population and their average weekly sales volume, from that time forward, are included in the comparable restaurant category.

(3)
2008 Acquired Restaurants refers to 15 franchised Red Robin® restaurants we acquired during 2008.

Restaurant revenue, which is comprised almost entirely of food and beverage sales, increased by $107.2 million, or 14.3%, from fiscal 2007. The significant factors contributing to our increase in restaurant revenue were restaurant openings and acquisitions. Fiscal 2008 restaurant sales for restaurants not in the comparable base contributed an increase of $66.7 million, of which $51.3 million was attributable to restaurants opened during fiscal 2008. A portion of the restaurant sales for the Acquired Restaurants contributed $47.1 million of the increase in restaurant revenue for the fifty-two weeks ended December 28, 2008. Restaurants sales in the comparable base experienced a sales decrease of approximately $6.6 million during fiscal 2008. The revenue growth in 2007 over 2006 was attributable to revenue from the 2006 Acquired Restaurants, the 2007 Acquired Restaurants and a 0.5% increase in comparable restaurant revenues from 2006. This increase in restaurant revenue was partially offset by decreased revenue from our non-comparable restaurants opened during 2006 and 2005. The increase in comparable restaurant revenues in 2007 was driven by a 3.4% increase in the average check partially offset by a 1.0% decrease in guest counts.

Average weekly sales volumes represent the total restaurant revenue for a population of restaurants in both a comparable and non-comparable category for each time period presented divided by the number of operating weeks in the period. Comparable restaurant average weekly sales volumes include those restaurants that are in the comparable base at the end of each period presented. At the end of fiscal 2008, there were 241 comparable restaurants compared to 192 comparable restaurants at the end of 2007. Non-comparable restaurants presented include those restaurants that had not yet achieved the five full quarters of operations during the periods presented. At the end of fiscal 2008, there were 39 non-comparable restaurants versus 41 at the end of fiscal 2007. Fluctuations in average weekly sales volumes for comparable restaurants reflect the effect of same store sales changes as well

as the performance of new restaurants entering the comparable base during the period. The 3.0% decrease in average comparable restaurant weekly sales in fiscal 2008 was primarily the result of decreased guest counts net of higher average guest checks in addition to 33 less mature restaurants and 17 acquired restaurants entering the comparable restaurant base since the end of fiscal 2007.

Franchise royalties and fees, which consist primarily of royalty income and initial franchise fees, decreased 9.3% from 2007. The year over year decrease in franchise royalties and fees is primarily attributable to the respective $1.7 million and $1.0 million reduction in franchise royalties from the 2008 and 2007 Acquired Restaurants, partially offset by the 10 restaurants opened by our franchisees in 2008. Our franchisees reported that comparable sales decreased 1.1% for U.S. restaurants and increased 3.6% for Canadian restaurants in the year ended December 28, 2008. Franchise royalties and fees for 2007 increased due primarily to the 14 franchised restaurants opened by our franchisees in 2007, partially offset by the respective $1.0 million and $780,000 reduction in franchise royalties from the 2006 and 2007 Acquired Restaurants.

Cost of sales, comprised of food and beverage expenses, are variable and generally fluctuate with sales volume. As a percentage of restaurant revenues, cost of sales increased as a percentage of restaurant revenues over prior year due to higher raw material costs in almost every food category, a shift in the mix of food versus beverage sales, and a decline in the sales of higher priced menu items and beverages. These increased costs were partially offset by price increases implemented in April and June 2008.

In 2007, cost of sales as a percentage of restaurant revenues increased to 22.9% compared to 2006, primarily due to higher commodity costs, including proteins and dairy products offset by lower poultry costs and leverage from price increases implemented between October 2006 and August 2007.

Labor costs include restaurant hourly wages, fixed management salaries, stock-based compensation, bonuses, taxes and benefits for restaurant team members. Labor as a percentage of restaurant revenue for 2008 decreased over the prior year due to the benefit of price increases, lower controllable labor, decreased expenses for workers' compensation benefits and reduced bonus expense. These decreases were partially offset by deleverage of fixed expenses such as minimum wage increases, manager salaries and vacation expenses.

In 2007, labor costs as a percentage of restaurant revenues decreased over the prior year due to the benefit of price increases, decreased expense for workers' compensation benefits and reduced bonus expense partially offset by increases for hourly wages due primarily to minimum wage increases.

Operating costs include variable costs such as restaurant supplies, advertising, including our national advertising fund contributions, energy costs, and fixed costs such as service repairs and maintenance costs. The increase in operating costs as a percentage of restaurant revenues is due primarily to a 0.6% increase in contributions to the national advertising fund.

In 2007, operating costs as a percentage of restaurant revenue increased primarily due to contributions of 1.0% of restaurant revenues made to the national advertising fund beginning in April 2007 offset by a 0.5% of restaurant revenue reduction of historical marketing expense for local advertising such as radio.

Occupancy costs include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance and other property costs. Our occupancy costs generally increase with sales volume but decline as a percentage of restaurant revenues as we leverage our fixed costs. As a percentage of restaurant revenues, occupancy costs increased over the prior year period due to properties with higher fixed rents relative to their sales volumes connected with new and acquired restaurants and higher landlord-related costs charged through our lease agreements.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

The following summarizes the operational and financial highlights of the Company during the forty weeks of fiscal 2009:



• New Restaurant Openings . We opened 13 company-owned restaurants during the twenty-eight weeks ended July 12, 2009 and did not open any additional new restaurants during the third quarter of fiscal 2009. Comparatively, we opened 10 and 27 restaurants for the twelve and forty weeks ended October 5, 2008. We will open an additional two company-owned restaurants in the fourth quarter of 2009. All expenses associated with the opening of our 2009 restaurants have been funded directly or indirectly from our operating cash flows.



• Comparable Restaurant Sales. For the twelve weeks ended October 4, 2009, the 269 restaurants in our current comparable sales base experienced a 14.9% decrease in sales from these same restaurants in the comparable period last year. This decrease was driven by a 13.8% decrease in guest count and 1.1% decrease in the average guest check. For the forty weeks ended October 4, 2009, our current comparable base experienced an 11.2% decrease in sales from these same restaurants in the prior year period. This decrease was driven by an 11.9% decrease in guest counts partially offset by a 0.7% increase in the average guest check. We believe these declines are primarily the result of the macroeconomic environment and our significant reduction in national cable advertising in 2009. It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and the extent to which our operations will be adversely affected by such conditions. We expect continued negative comparable sales trends in the fourth quarter 2009.



• Food Cost. For the twelve weeks ended October 4, 2009, we saw a decrease in the cost of certain commodities, particularly ground beef and cheese. Prior to this quarter, our contracted ground beef pricing had been higher than 2008 levels. In the third quarter, both ground beef and cheese prices declined below 2008 levels and we expect that trend to continue for the remainder of the 2009 fiscal year. During the third quarter, we also entered into contracts for chicken and potatoes that give us pricing at or below the prices we paid in 2008 and earlier this year.



• Marketing Efforts. For 2009, our marketing strategy has been focused on driving guest traffic and retention by expanding our national online and digital media advertising efforts as well as introducing a targeted direct mail campaign to support product specific news. We supported this strategy during the third quarter 2009 by introducing limited-time offers on promotional products through local restaurant market television and radio advertising; reaching approximately 30% of our restaurant base. The $1.1 million in television advertising campaign began in the last week of the third quarter 2009 and continued through the first two weeks of the fourth quarter 2009. We are pleased by the positive traffic and sales results from this three week campaign. In the ten T.V. markets where our television advertising ran we had meaningful improvements in guest counts and comparable restaurant revenue compared to the four week period just prior to the television campaign.



• Restaurant Closings. The Company closed four restaurants during the first quarter 2009. This decision resulted from our identifying those restaurants that were in declining trade areas, performing below acceptable profitability levels and/or would require significant capital expenditures. The locations selected for closure represented older restaurants whose leases were not extended or were in need of significant capital improvement that were not projected to provide acceptable returns in the foreseeable future. The Company recognized a charge of approximately $598,000 during the forty weeks ended October 4, 2009 related to lease termination costs based on estimated remaining lease obligations, net of estimated sublease income, and other closing related costs. This charge is recorded in general and administrative expense in our condensed consolidated statements of income for the forty weeks ended October 4, 2009.



• Cash Tender Offer . On February 11, 2009 we completed a cash tender offer for out-of-the-money stock options held by 514 current employees and officers. As a result of the tender offer, we incurred a one-time charge of approximately $4.0 million for all unvested eligible options that were tendered in the first quarter 2009. This one-time charge represents the compensation expense related to the acceleration of vesting on the unvested options tendered in the offer, which would otherwise have been expensed over their vesting period in the future if they had not been tendered. Approximately $0.9 million of the $4.0 million charge is recorded in labor expense and approximately $3.1 million is recorded in general and administrative expense in our condensed consolidated statements of income for the forty weeks ended October 4, 2009. We paid $3.5 million in cash for the approximate 1.6 million options tendered in the offer.



In view of the foregoing, the Company is making efforts to manage controllable costs and streamline operations, while our restaurant teams focus on driving traffic through the quality and value of our guest experience. In addition, the Company will continue to drive guest traffic through the use of marketing efforts described above.



The Company will maintain flexibility with respect to its development plan for new restaurants in 2010 and will adjust the development plan as the Company deems necessary to respond to the challenging consumer environment. Our reduced levels of new restaurant openings in 2009 and the resulting reduction in capital expenditures have resulted in increased available cash flow which we applied to reduce outstanding indebtedness by approximately $23.9 million during the forty weeks ended October 4, 2009.

Results of Operations



Operating results for each period presented below are expressed as a percentage of total revenues, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenues.



This information has been prepared on a basis consistent with the audited 2008 annual financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our operating results may fluctuate significantly as a result of a variety of factors, and operating results for any period presented are not necessarily indicative of results for a full fiscal year.

(1) 2007 Acquired Restaurants refers to 16 franchised Red Robin ® restaurants we acquired during 2007 and one restaurant that we operated under a management agreement with a franchisee until we acquired it on December 31, 2008. Beginning the third quarter 2008, these restaurants entered into the comparable restaurant population and their average weekly sales volumes, from that time forward, are included in the comparable restaurant category.






(2) 2008 Acquired Restaurants refers to 15 franchised Red Robin® restaurants we acquired during 2008. Beginning the third quarter 2009, these restaurants entered into the comparable restaurant population and their average weekly sales volumes, from that time forward, are included in the comparable restaurant category.



For the twelve and forty weeks ended October 4, 2009, restaurant revenue, which is comprised almost entirely of food and beverage sales, decreased by $21.4 million, or 10.4%, and by $10.7 million, or 1.6%, respectively, from the same periods of 2008. Sales in the comparable restaurant base experienced a decrease of approximately $32.3 million or 16.5% during the third quarter 2009 and approximately $64.7 million or 10.0% during the forty weeks ended October 4, 2009 over prior year periods. The decrease in comparable restaurant sales in 2009 was primarily the result of the lower guest counts driven by the macroeconomic environment and our significant reduction in national cable advertising in 2009. Sales for non-comparable restaurants contributed an increase of $10.9 million and $53.3 million for the twelve and forty weeks ended October 4, 2009 respectively, of which $9.0 million and $24.6 million was attributable to the 13 restaurants opened during the forty weeks ended October 4, 2009.



Average weekly sales volumes represent the total restaurant revenue excluding discounts for a population of restaurants in both a comparable and non-comparable category for each time period presented divided by the number of operating weeks in the period. Comparable restaurant average weekly sales volumes include those restaurants that are in the comparable base at the end of each period presented. At the end of the third quarter 2009, there were 269 comparable restaurants compared to 233 comparable restaurants at the end of the third quarter 2008. Non-comparable restaurants presented include those restaurants that had not yet achieved the five full quarters of operations during the periods presented. At the end of the third quarter 2009, there were 35 non-comparable restaurants versus 44 at the end of the third quarter 2008. Fluctuations in average weekly sales volumes for comparable restaurants reflect the effect of same store sales changes as well as the performance of new restaurants entering the comparable base during the period.



Franchise royalties and fees, which consist primarily of royalty income and initial franchise fees, decreased 8.0% and 9.7%, respectively, for the twelve and forty weeks ended October 4, 2009. For the twelve weeks ended October 4, 2009, this decrease is primarily attributable to declining sales in our U.S. franchise restaurant base. For the forty weeks ended October 4, 2009, this decrease is primarily attributable to the $793,000 year over year reduction in franchise royalties from the 2008 Acquired Restaurants as well as lower current quarter sales revenue. Our franchisees reported that comparable restaurant sales decreased 14.4% for U.S. restaurants and decreased 0.2% for Canadian restaurants in the third quarter of 2009 compared to the third quarter of 2008. For the forty weeks ended October 4, 2009 and October 5, 2008, our franchisees reported that comparable restaurant sales for U.S. restaurants decreased 10.3% and Canadian restaurants decreased 0.2%.

Cost of sales, comprised of food and beverage expenses, are variable and generally fluctuate with sales volume. For the twelve weeks ended October 4, 2009, cost of sales decreased as a percentage of restaurant revenues over prior year due primarily to improved beverage and cheese pricing. We also realized improved pricing on our ground beef which was offset by a shift in our sales mix to our premium burgers. For the forty weeks ended October 4, 2009, cost of sales increased as a percentage of restaurant revenues over prior year due primarily to higher contracted raw material pricing for ground beef and steak fries earlier in the fiscal year. We expect the more favorable ground beef pricing we realized in the third quarter of 2009 will stabilize to levels below our 2008 pricing for the remainder of fiscal 2009. Effective beginning with the fourth quarter 2009, we also entered into new contracts for chicken and potatoes that give us pricing at or below the prices we paid in 2008 and earlier this year.


Labor costs include restaurant hourly wages, fixed management salaries, stock-based compensation, bonuses, taxes and benefits for restaurant team members. For the twelve weeks ended October 4, 2009, labor costs as a percentage of restaurant revenue increased from prior year due primarily to the impact of fixed expenses such as managers’ salaries, on a lower revenue volume. In addition, minimum wage increases and higher benefit costs also increased our labor as a percentage of revenue. For the forty weeks ended October 4, 2009, labor as a percentage of restaurant revenue increased due to fixed salary and minimum wages and higher benefit costs on a lower revenue volume base. A stock based compensation charge of $886,000, also increased labor costs as a percentage of restaurant revenue for the forty weeks ended October 4, 2009 by 0.1% of restaurant revenue. This year over year increase is partially offset by improved productivity of hourly labor for non-management team members and decreased restaurant-level bonuses, as well as lower vacation expense.

Operating costs include variable costs such as advertising, local marketing expenses, restaurant supplies, travel costs, and fixed costs such as repairs and maintenance and utility costs. For the twelve and forty weeks ended October 4, 2009, operating costs decreased as a percentage of restaurant revenue due primarily to a 0.8% and 1.25% effective decrease in 2009 advertising activities for the twelve and forty weeks, respectively. This decreased spending has been offset by higher repairs and maintenance costs.

Occupancy costs include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance and other property costs. As a percentage of restaurant revenue, occupancy costs for the twelve and forty weeks ended October 4, 2009 increased over the prior year periods due to a decline in average restaurant revenues on partially fixed costs and higher fixed rents related to new and acquired restaurants. Many of the restaurants acquired from franchisees in previous years are “build to suit” locations that typically bear a higher occupancy cost as a percentage of restaurant revenue.

franchises, and provide infrastructure to facilitate our future growth. Components of this category include corporate management, supervisory and staff salaries, bonuses, stock-based compensation and related employee benefits, travel, information systems, training, office rent, franchise administrative support, legal, leadership conference, professional and consulting fees and certain marketing costs. For the twelve weeks ended October 4, 2009, general and administrative costs decreased as a percentage of total revenues and in absolute terms due primarily to lower national advertising marketing activities, reduced salary and travel costs related to our training activities and lower stock compensation expense. For the forty weeks ended October 4, 2009, general and administrative costs decreased as a percentage of total revenues in absolute terms due to lower national advertising marketing activities, reduced salary and travel costs related to our training activities, offset by increased performance based bonus awards.

(1)


Average per restaurant pre-opening costs reflect the average pre-opening costs of those restaurants opened during the quarter and year-to-date.



Pre-opening costs, which are expensed as incurred, consist of the costs of labor, hiring and training the initial work force for our new restaurants, travel expenses for our training teams, the cost of food and beverages used in training, marketing costs, lease costs incurred prior to opening and other direct costs related to the opening of new restaurants. Pre-opening expense for the twelve weeks ended October 4, 2009 reflect expenses for two restaurants scheduled to open in the fourth quarter of 2009 as compared to the ten restaurants that were opened during the twelve weeks ended October 5, 2008. Pre-opening costs for the forty weeks ended October 4, 2009 and October 5, 2008, reflect the opening of 13 and 27 new restaurants, respectively in each period presented.



Asset Impairment Charge



During the third quarter of fiscal 2008, we determined that two company-owned restaurants were impaired in accordance with ASC 360, Property, Plant, and Equipment . The Company recognized a non-cash impairment charge of $928,000 related to the impairment of these two restaurants. We reviewed each restaurant’s past and present operating performance combined with projected future results, primarily through projected undiscounted cash flows, which indicated possible impairment. The carrying amount of each restaurant was compared to its fair value as determined by management with the assistance of a third-party valuation firm. The impairment charge represents the excess of the restaurant’s carrying amount over their fair value. There have been no such impairment charges during fiscal 2009.



Reacquired Franchise and Other Acquisition Costs



As a result of the acquisition of the 15 restaurants during the second quarter 2008, we incurred a total charge of $451,000, which is primarily related to avoided franchise fees, that was accounted for in accordance with Emerging Issues Task Force (EITF) Issue 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination (EITF 04-1). EITF 04-1 (which has now been superseded by ASC 805, Business Combinations ), requires that a business combination between two parties that have a preexisting relationship be evaluated to determine if a settlement of a preexisting relationship exists. The $451,000 charge reflects the lower royalty rates applicable to certain of the acquired restaurants compared to a standard royalty rate the Company would receive under the Company’s current royalty agreements.



Interest Expense, net



Interest expense was $1.3 million and $2.0 million for the twelve weeks ended October 4, 2009 and October 5, 2008, respectively. Interest expense for the third quarter 2009 decreased as compared to the third quarter 2008 due to a lower average interest rate of 3.1% versus 3.9% as well as a lower average borrowings outstanding. Interest expense was $5.0 million and $6.1 million for the forty weeks ended October 4, 2009 and October 5, 2008, respectively. Interest expense for the forty weeks ended October 4, 2009 decreased from the same period prior year due to a lower average interest rate of 3.1% versus 4.2% in 2008, partially offset by higher average borrowings outstanding under our revolving credit facility during fiscal 2009.



Provision for Income Taxes



The effective income tax rate for the third quarter 2009 was 16.3% compared to 21.6% for the third quarter 2008. The effective income tax rate for the forty weeks ended October 4, 2009 and October 5, 2008 was 21.4% and 27.0%, respectively. The decrease in the effective tax rate from 2008 is primarily due to the leverage of increased federal income tax credits, specifically FICA tip tax credits, for 2009 as a percentage of net income before taxes. Offsetting these credits in the third quarter of fiscal 2009 was additional expense of approximately $500,000 related to the third quarter filing, of our 2008 federal and state income tax returns. We anticipate that our full year fiscal 2009 effective tax rate will be approximately 21%.

CONF CALL

Katie Scherping
Thanks, Kevin.
Before I get started, I need to remind everyone that part of today's discussion will include forward-looking statements. These statements will include but not be limited to references to our margins, new restaurant openings or NRO, trends, costs and administrative expenses and other expectations. Also, these statements are based on what we expect as of this conference call, and we undertake no obligation to update these statements to reflect events or circumstances that might arise after this call.
These forward-looking statements are not guarantees of future performance and therefore investors should not place undue reliance on them. We refer all of you to our 10-K and our 10-Q filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition. We plan to file our 10-Q for the fiscal third quarter of 2009 by close of business tomorrow.
And I want to inform our listeners that we will be making some references to non-GAAP financial measures today during our call. You'll find supplemental data in our press release on Schedules 1 and 2, which reconcile our non-GAAP measures to our GAAP results.
Now I'll turn the call over to Denny Mullen, Chairman and Chief Executive Officer. Denny?
Dennis B. Mullen
Thanks Katie, and thanks everyone for joining us today.
We also have with us Eric Houseman, our President and Chief Operating officer, and Susan Lintonsmith, our Chief Marketing Officer. Eric will provide detail on the third quarter results and an update on our operations initiatives, and Susan will update you on our traffic, building and loyalty efforts. Then Katie will review in detail our most recent financial performance and our business outlook, but first I want to share with you some of the recent developments on the marketing front.
As you have seen from our earnings press release, our comp store sales decreased 14.9% in the third quarter. In our call last August we told you that our comps were down 15.3% for the first four weeks of Q3 as we lapped our third-best comps in the first four weeks of Q3 '08.
In response to the very challenging business environment, we've implemented a variety of marketing and promotional tactics to support our overall marketing strategy of product news, which has been our strategy since the beginning of 2009. Specifically, we recently introduced our most recent product news and our fall promotion, the Wise Guy Burger and Chicken Caprese Sandwich, with three weeks of local, network and cable TV in 10 markets covering about 100 of our restaurants. These great products were featured with bottomless steak fries at a $5.99 price point as part of a limited time offer. Since the ads began the last week of Q3 and ran through the first two weeks of Q4, the impact on the third quarter results was nominal; however, we are pleased with the campaign's results, and Susan will cover those in greater detail in a few minutes.
On the restaurant development side, we did not have any company opening restaurants in the third quarter; however, more recently in the fourth quarter we opened the last two of the 15 new company owned restaurants planned for this year, all funded from operating cash flow. Together with the four new franchise restaurants that have opened so far this year, a total of 19 new Red Robin restaurants have been opened year-to-date 2009. While company-owned NROs are now complete for the year, one more franchise NRO is scheduled to open in mid-December, and we currently have three company-owned restaurants under construction. We plan to open these three restaurants late in the first quarter of 2010.
As we previously announced, our Board of Directors approved the development of up to 15 new company-owned Red Robin restaurants next year, which we expect to open fairly evenly throughout 2010. Similar to 2009 development, we will fund new company-owned restaurant development in 2010 with operating cash flow. Also, our teams have done a terrific job reducing investment costs for new restaurant development as we expand our base of company-owned restaurants.
Our average cash investment in new company-owned restaurants has been reduced about 24% from roughly $2.5 million per restaurant in 2007 to less than $1.9 million per restaurant estimated for our 2010 development.
So with that as an overview, I'll turn it over to Eric.
Eric C. Houseman
Thanks, Denny, and good afternoon, everyone.
In the third quarter of 2009 our comp store sales decrease of 14.9% was driven by a 13.8% decrease guest counts and a 1.1% decrease in average check. This compares to being down 2.2% in the third quarter last year.
As Denny mentioned, we did not realize a significant impact from television advertising in the third quarter of this year since only one of the three weeks of TV advertising to support our Wise Guy Burger and Chicken Caprese Sandwich LTO was in the third quarter. For the first four weeks of the fourth quarter of this year, which include the last two of the three-week LTO TV ads in our 10 TV markets, our comp store sales trended better on a sequential basis as they were down 11.6%. This compares to down 8% in the first four-week period of the fourth quarter of 2008, which did include two weeks of national cable television advertising.
Average weekly sales for the restaurants in our comparable base were $51,964 during the third quarter of 2009 compared to $62,182 for a comparable base in the third quarter of '08. Average weekly sales for our 35 non-comparable restaurants were $49,385 during the third quarter of 2009. This compared to $56,111 for our non-comp restaurants a year earlier.
Continuing along with the operations update, you'll recall that a restaurant enters our comparable base five full quarters after it opens. The 15 franchise restaurants that we acquired early in the second quarter of 2008 did join our comparable base beginning in the third quarter this year, so our third quarter had 269 company-owned comparable restaurants out of the 304 total company-owned restaurants.
On the NRO front, while we did not open any new company-owned restaurants in the third quarter, our teams continue to strengthen the process for future new restaurant openings. This includes our strategic and scalable NRO training and our ability to now select and prepare new restaurant TMs up to a year before opening as well as fully hiring and training out of a new restaurant building five weeks prior to opening. We believe that these efforts will continue to pay off as we prepare for the NROs that we plan for next year.
Finally, we're making great progress on our leadership development for GMs and multi-unit managers and our Make a Connection training initiative to help our restaurant teams focus on our key loyalty drivers and engage our guests in unbridled ways that make Red Robin fans for life continue to get great results.
So with that overview of operations, let me turn it over to Susan to talk about our recent results and future plans related to marketing.
Susan Lintonsmith
Thanks, Eric.
Our marketing strategy continues to be focused on supporting product news with targeted tactics to drive incremental traffic and retention. Our focus is greater emphasis on product news, quality, value and variety versus pure brand-building initiatives that in prior years were successful in strengthening awareness for Red Robin.
We used the results of our Steak Slider TV advertising in Q2 of this year to determine how to best use TV to support product news going forward. We called out we supported Steak Sliders without a price point for three weeks on national cable TV in June. While we saw a slight shift or lift in sales from the TV ads, we learned several things that we've applied to the latest round of television that Denny described earlier.
In our last call we mentioned that we were exploring local TV advertising as an additional tactic to support our limited time offer or LTO product news - the Wise Guy Burger and the Chicken Caprese Sandwich. Both products are craveable and represent the quality, value and variety that are core to our Red Robin menu.
We decided in early September to make a $1.1 million investment to run local TV advertising in 10 company markets to promote the two LTO products for a value price point of $5.99 each. We were pleased with the TV creative that blended product news with messages of quality, value and variety and with media weights that were significantly higher than our weights with the Steak Sliders in 2Q.
The TV media ran for three weeks, ending on October 18th, in 10 markets, covering about 100 of our restaurants or a third of our company base. We were pleased by the positive traffic and sales results, which I will share with you now.
In the four weeks prior to running the TV ads that supported our LTO, guest count in the 10 TV markets were down 11.4% versus prior year. During the three weeks of TV media guest counts improved more than 1200 basis points, bringing our guest counts in these 10 markets into positive territory.
Sales in the 10 TV markets in the four weeks prior to the TV running we were down 12.4%. During the three weeks of TV media same-store sales in these 10 markets improved more than 900 basis points.
Based on the results from the TV media to date, we believe the TV ads have paid for themselves. The fall LTO promotion continues in restaurants through November 8th, so we will continue to measure and monitor the full impact of the promotion. Since we do not have additional new product news until February 2010, we do not have any more TV scheduled during the remainder of 2009. We will share more details on the full impact of the fall TV and the LTO promotion on our Q4 results in our February earnings call.
In the TV markets both the Wise Guy Burger and the Chicken Caprese Sandwich were very well accepted by our guests, ranking among the top three Red Robin burgers sold in the TV markets. We also added a bounce-back program in the TV markets which was designed to capitalize on the new traffic that the TV media drove into our restaurants with an incentive offer to bring the guests back by mid-December.
We also supported the fall LTO promotion in all markets - TV and non-TV - with an incremental online campaign, an expanded direct mail program, and endorsement radio in several markets. In markets that were not covered by TV media and did not have the $5.99 value offer we provided a $3 off incentive in a direct mail postcard to try either of the two promotional items. We're also testing additional initiatives that include some menu engineering as well as other programs to drive incremental traffic in select trade areas and also during opportunistic day parts.
We'll continue to measure the results of all of our initiatives, including our digital, loyalty and retention, direct mail and endorsement radio as we plan for 2010. We'll share more about our future plans for these tactics and our media plans for 2010 in our February call. We have concluded, however, that our TV media will be an important part of our marketing tactics to support product news LTO strategy during the 2010 promotional windows. There's more to come as we develop our plans in collaboration with our new strategic marketing partner, Minneapolis-based Periscope, which we recently brought onboard as our lead agency.
Our major marketing focus for the next two months is promoting our gift cards. As you know, the holidays are a big time for gift card sales. Again this year we're incenting gift card sales with $5 in Bonus Bucks for $25 gift card purchases. We are supporting the holiday gift cards with a strong digital plan and targeted direct mail to both businesses and consumers. In preparation for this focus on holiday gift card sales, in early October we rolled out our nearly 7-foot-tall gift card kiosk to all of our company-owned restaurants and more than a third of our franchised restaurants.
Third-party gift card sales also continue to grow. Since last quarter we increased nationwide distribution of our gift cards by another 900 retail locations, for a total of nearly 4,000 third-party locations, and we're on target to be in 7,400 by the end of 2009. This program has generated more than $1.5 million in gift card sales so far this year.
We've also shared with you our focus on strengthening guest retention through our Red Royalty program. In July we launched a pilot for this program in four markets. This program is designed to build a robust guest database with the intent to provide personalized incentives to our guests to improve frequency and retention. So far we've seen positive results in driving incremental visits, while we're also gaining visibility into the purchase behavior of our guests. This is helping us develop smart rewards that should strengthen our ability to drive incremental visits from guests who are in the program. We'll continue to share details as we move from pilot to rollout in 2010.
And on December 3rd we're holding our fourth annual Kids' Cook-Off Burger Recipe Contest Championship here in Denver. We're excited to have the Food Network celebrity Robin Miller as one of our judges this year. The Kids' Cook-Off continues to be one of our most successful family-oriented marketing and public relations programs.
The Holy-Peno Burger, created by last year's winner, was one of our most successful kid-invented burgers yet. During Q3, when it was available in our restaurants, we sold about 135,000 Holy-Peno Burgers, which raised more than $60,000 to support the National Center for Missing and Exploited Children. This program reinforces our unbridled culture and also generates a significant amount of positive coverage promoting our family-friendly brand positioning and gourmet burger expertise.
Those are some of the marketing headlines. Now I'll turn it over to Katie to review our financial results in greater detail.
Katie Scherping
Thanks, Susan.
First of all, if you haven't already seen our news release on the quarter's results, you can find it on our website at RedRobin.com in the Investor Relations section.
The fiscal third quarter of 2009 was the 12-week period ending October 4, 2009. Compared to the fiscal third quarter last year, total revenue, including restaurant sales and franchise royalties, decreased 10.4% to $187 million. Restaurant sales decreased 10.4% to $183.9 million and consisted of $163.5 million in sales from our comp restaurants, which include the 2008 acquired restaurants since they're now part of our comp base, and $20.4 million in sales from our non-comparable restaurants. Franchise royalties and fees decreased 8% in the third quarter to $3 million.
The 101 comp restaurants in the U.S. franchise system reported a 4.4% decrease in same-store sales, while the 18 comp restaurants in the Canadian franchise system reported a 0.2% decrease in same-store sales for the third quarter.
As Eric said, our restaurant-level operating profit margin was 16.5% in Q3 2009. The 200 basis point decrease from the third quarter last year was driven by a 160 basis point increase in labor costs and about 100 basis points of higher occupancy costs due mainly to deleveraging from lower average restaurant volumes year-over-year. These higher costs were partially offset by 30 basis points of lower food and beverage costs and 30 basis points of lower operating costs.
From a cost of goods standpoint, we did see some relief in a good portion of our commodity basket in the quarter in addition to receiving some benefit from a true-up of food and beverage rebates.
Our hamburger pricing, which had been running above our contract at 2008 pricing through the first half of the year, saw a reduction in the third quarter that averaged the price we incurred for our fresh ground beef slightly below the 2008 contract for the first time this year. We are expecting the price of ground beef for the remainder of 2009 to continue to stay below our 2008 contract, and therefore we will see some continued benefit year-over-year in our food cost in Q4 from hamburger. Somewhat offsetting the pricing benefit from ground been has been an increase in our sales mix to our beef burger category as our promotions are heavily focused on our core gourmet burger offering.
Another commodity that has seen prices fall below the 2008 level is cheese, which we also expect to stay below 2008 pricing for the remainder of the year even though recent prices have begun to increase slightly for cheese.
As we have mentioned in prior calls, our cost of steak fries have been higher in 2009 than 2008 as our contract that we entered into late in 2008 was at higher prices than the expiring contract. In addition, we have seen a mix shift over the last year to more items that include our bottomless steak fries, which has also increased our cost over 2008. And we'll spend some more time in a few minutes discussing an update on commodities when I talk about our outlook for the balance of 2009 and into 2010.
Our total labor cost increase of 160 basis points is attributed primarily to the impact of sales deleverage on fixed labor costs like management wages, taxes, benefits and insurance, as well as increased minimum hourly wages. As Eric mentioned, we are beginning to see the benefits from our efforts to reduce labor and our continued progress on managing overall controllable hours.
As they have throughout this period of macroeconomic challenges and lower sales volumes, our restaurant teams have managed the controllable costs extremely well, but we continue to feel the sales deleverage impact on our fixed costs. Our occupancy cost is largely a fixed cost, representing primarily base rent as well as common area maintenance charges and real property taxes and insurance. The primary driver of the 100 basis point increase continues to be sales deleverage.
Other operating costs decreased by 30 basis points. The reduction in our national advertising fund contribution of 125 basis points this year has been partially offset in the third quarter by the increase in the advertising and marketing costs that we incurred late in the quarter for all of the tactics supporting the LTO, including the TV media campaign that Susan covered earlier. This increase in costs for Q3 2009 marketing efforts represented about 55 basis points of additional operating expense in the quarter. In the fourth quarter we will incur about $1 million in operating expense for additional advertising and marketing costs for the continuation of this campaign into Q4.
Depreciation and amortization expense during the third quarter was 7% of total revenue, about 110 basis points higher than a year ago primarily due to revenue deleverage.
G&A expense decreased nearly 23% to $12.1 million compared to $15.7 million last year. The decrease was primarily attributed to $1.5 million in marketing expense last year related to the National Advertising Fund versus no NAF-related expense this year, about $1 million in lower operations training costs from lower turnover and reduced new manager hires for fewer NROs versus last year, and about $1.3 million in lower stock compensation expense. We also reversed about $1.7 million in performance-based bonus accruals in Q3 2009, but that was similar to the amount that was reversed in Q3 of 2008.
Our pre-opening expense of $125,000 in the third quarter of 2009 was significantly lower than the $2.7 million in the third quarter last year. Our only pre-opening expense in Q3 this year was related to the two NROs we just opened in early Q4 compared to pre-opening expense a year ago related to 10 new company-owned restaurants that opened in Q3 of 2008.
Net interest expense was $1.3 million in the fiscal third quarter of 2009 compared to $2.1 million during the same period in 2008. Our interest expense in the third quarter of 2009 decreased from the prior year due to a lower average interest rate of 3.1% versus 4.2% in 2008 in addition to a lower average debt balance.
Our effective income tax rate for the third quarter of 2009 was 16.3% compared to 21.6% for the third quarter of 2008. This decrease from 2008 is primarily due to the amount of federal income tax credits for 2009 being applied against lower pre-tax income. We anticipate that our full year 2009 effective tax rate will be approximately 21%.
Net income for the third quarter of 2009 was $5.7 million or $0.37 per diluted share compared to net income of $6.2 million or $0.40 per diluted share in the third quarter of 2008. Included in third quarter 2008 results were asset impairment charges of $0.05 per diluted share after tax.
Looking at the cash flow statement, our cash from operations of $66.5 million for the year-to-date 2009 has exceeded our capital expenditures of $42 million. We have paid down debt of $23.9 million year-to-date through the end of Q3. On October 4, 2009 we have $8.9 million in cash and cash equivalents and a total outstanding debt balance of $197.6 million, including $122.7 million of borrowings under our $150 million term loan along with $58.5 million of borrowings and $5.1 million of letters of credit outstanding under our $150 million revolving credit facility.
Year-to-date through the third quarter, we have made $10.3 million of the scheduled $15 million in payments required by the term loan portion of our existing credit facility in 2009. Since the end of the third quarter we've made additional debt repayments of $5 million on our revolving facility, bringing our total debt payments to $28.9 million so far this year to date. We are subject to a number of customary covenants under our credit agreement, and as of October 4, 2009 we were in compliance with all debt covenants and we expect to remain in compliance through fiscal year 2009, which I'll elaborate on in just a moment.
Now let's talk about our outlook for the remaining quarter of 2009 and 2010.
We have completed our new restaurant development for 2009. The three new company-owned restaurants that are under construction now are scheduled to open late in the first quarter of next year. The last of five franchise NROs for 2009 is expected to open in mid-December. As Denny mentioned, we expect to open up to 15 new company-owned restaurants in 2010 fairly evenly spread throughout the year.
Once again, we will not be providing full year EPS or revenue guidance at this time.
For full year 2009, which is a 52-week period, we expect comparable restaurant sales to continue to decline based on the current macroeconomic environment and the significant reduction in our national cable television advertising. In the fourth quarter of 2008, we were on television for three of the first six weeks of the quarter, ending in mid-November. The two weeks of our recent local TV campaign in just 10 markets in the fourth quarter of 2009 overlapped one week of systemwide national cable advertising in 2008.
On the commodity front, we have entered into several new contracts recently, most notably for our poultry and steak fries, beginning in October, both at prices favorable to the expiring contracts. The poultry contract is for two years, ending in December of 2011, and our steak fry contract expires in October of 2010. We are currently under contract for about 55% of our 2010 commodity basket excluding ground beef and cheese, which we will continue to monitor into early 2010 for contracting opportunities as appropriate. Considering all of our most recent pricing visibility, we currently expect a reduction in our cost of goods basket of 2% to 2.5% for fiscal 2010.
We expect certain costs, including our recent increased marketing efforts and promotional pricing as well as revenue deleverage, will continue to put pressure on restaurant-level profitability for the remainder of 2009; therefore, we are anticipating that without any additional menu price increases and the addition of $1 million of advertising and promotional expense in Q4, restaurant-level operating margins could decline by 150 to 160 basis points for the full year 2009 even after considering the benefit from other cost reduction activity.
It is worth noting that all of the marketing and advertising expense related to the cost of the most recent fall LTO promotion have been included in our operating costs and restaurant operations, about $1.2 million in the third quarter and about $1 million which has been incurred in the fourth quarter. The costs are allocated between quarters depending on the timing of the efforts in each period. For every 10 basis point change in the restaurant-level operating profit during the full year of 2009, diluted EPS is estimated to be impacted by approximately $0.04. We are not currently planning any more menu price increases for the balance of 2009.
Our annual stock compensation expense for outstanding equity grants in 2009 is expected to be about $2.9 million, of which 17% will be charged to restaurant labor and 83% will be expensed in G&A. In addition, the one-time charge for the tender offer for stock options incurred in the first quarter of $3.1 million is also included in G&A expense and $886,000 is included in restaurant labor. We expect our fiscal 2009 G&A excluding the stock option expense of $3.1 million related to the tender offer to decrease by about $4 to $4.5 million from full year 2008 G&A expense levels.
Depreciation and amortization expense on an absolutely dollar basis should increase approximately 12% year-over-year in 2009, and interest expense will be lower than 2008 given average interest rates that are lower than 2008 combined with our significant debt paydown during 2009.
As we said earlier, we funded our new restaurant development during 2009 using our operating cash flow. Taking into consideration our full fiscal 2009 capital expenditure estimate of around $45 million, we expect to use our remaining cash flow primarily to pay down our outstanding during 2009.
Let me remind everyone how our debt leverage calculation works. The total debt outstanding was $197.6 million at October 4, 2009 plus our outstanding letters of credit of $5.1 million, and that's the debt we use to compute the ratio on. Our debt does not include operating leases.
Our last 12 months of EBITDA excludes the non-cash charges for stock compensation expense, acquisition-related reacquired franchise costs, and any asset impairment charges or restaurant closing costs.
Our debt-to-EBITDA ratio for purposes of our covenant was 2.02 to 1 at October 4, 2009.
Assuming we use our expected free cash flow to pay down debt in 2009, including $15 million in scheduled term loan payments, we will stay well below our maximum debt leverage ratio of 2.5 to 1 allowed by our credit agreement for all of 2009.
I also want to remind everyone that $196,000 of pre-tax earnings or expense for us equals $0.01 per diluted share for the full year of 2009, which is equivalent to about 2 basis points as a percentage of revenue. This illustrates the sensitivity level of our business from sales, costs and EPS, which in this uncertain business climate makes accurate forecasts extremely challenging.
With that, I'll turn the call back over to Denny.
Dennis B. Mullen
Thanks, Katie.
In closing, as we've seen from last quarter's results, the operating environment remains difficult, but our teams continue to focus on the right things to strengthen our business and build the Red Robin brand.
We've cited many examples, such as the progress our restaurant teams continue to make in growing our leadership talent, managing controllable costs, delivering great gourmet burgers and making a connection with our guests. Our marketing strategies and tactics are now even more focused on driving traffic and loyalty and at the same time communicating quality, variety and value that Red Robin offers our guests. And our development teams are on track to complete the first of our new locations in 2010 that represent continued and prudent new restaurant expansion at average investment costs that are lower than we've seen in several years.
Across the company our team members are contributing to the continued growth and strength of our brand, and I want to thank them for all their hard work and dedication to each other and to our guests.
With that, we welcome your questions. Thank you.

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