Description
Ruby Tuesday, Inc. Director Matthew A Drapkin bought 196,526 shares on 8-10-2012 at $ 6.5
BUSINESS OVERVIEW
Background
The first Ruby Tuesday® restaurant was opened in 1972 in Knoxville, Tennessee near the campus of the University of Tennessee. The Ruby Tuesday concept, which at the time consisted of 16 restaurants, was acquired by Morrison Restaurants Inc. (“Morrison”) in 1982. During the following years, Morrison grew the concept to over 300 restaurants with concentrations in the Northeast, Southeast, Mid-Atlantic and Midwest regions of the United States. In a spin-off transaction that occurred on March 9, 1996, shareholders of Morrison approved the distribution of two separate businesses of Morrison to its shareholders, Morrison Fresh Cooking, Inc. (“MFC”) and Morrison Health Care, Inc. (“MHC”). In conjunction with the spin-off, Morrison was reincorporated in the State of Georgia and changed its name to Ruby Tuesday, Inc. Ruby Tuesday, Inc. and its wholly-owned subsidiaries are sometimes referred to herein as “RTI,” the “Company,” “we” and/or “our.”
We began our traditional franchise program in 1997 with the opening of one domestically and two internationally franchised Ruby Tuesday restaurants. The following year, we introduced a program called our “franchise partnership program,” under which we owned 1% or 50% of the equity of each of the entities that owned and operated Ruby Tuesday franchised restaurants. During fiscal 2011, we acquired 11 of our 13 franchise partnerships, representing 106 restaurants. The remaining two franchise partnerships closed or sold their restaurants.
We do not own any of the equity of entities that hold franchises under our traditional franchise programs. As of June 5, 2012, we had 29 Ruby Tuesday concept franchisees, comprised of 11 traditional domestic and 18 traditional international franchisees. Of these franchisees, we have signed agreements for the development of new franchised Ruby Tuesday restaurants with three traditional domestic and seven traditional international franchisees. The seven international franchisees hold rights as of June 5, 2012 to develop Ruby Tuesday restaurants in 27 countries.
During fiscal 2011, we began converting certain underperforming Ruby Tuesday restaurants to other concepts. To that end, we entered into a licensing agreement which allows us to operate multiple Truffles® restaurants, an upscale café concept offering a diverse menu. Another conversion concept available to us is Marlin & Ray’s™, an internally-developed seafood concept.
Also in fiscal 2011, we entered into a licensing agreement which allows us to operate multiple Lime Fresh Mexican Grill® (“Lime Fresh”) restaurants, a fast casual Mexican concept. We opened four Lime Fresh restaurants during fiscal 2012 under the terms of the licensing agreement. On April 11, 2012, we completed the acquisition of Lime Fresh, including the assets of seven additional Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants, and the Lime Fresh brand’s intellectual property.
Operations
We own, operate and franchise the Ruby Tuesday casual dining restaurant chain. Our mission is to be the best in the bar and grill segment of casual dining by delivering to our guests a high-quality casual dining experience with compelling value. While we are in the bar and grill sector because of our varied menu, we operate at the higher-end of casual dining in terms of the quality of our food and service. As of June 5, 2012, we owned and operated 714, and franchised 79, Ruby Tuesday restaurants. Also, as of June 5, 2012, our traditional franchisees operated 36 domestic and 43 international Ruby Tuesday restaurants. Ruby Tuesday restaurants can now be found in 45 states, the District of Columbia, 12 foreign countries and Guam. Our Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic and Midwest of the United States, which we consider to be our core markets. A listing of the states and countries in which our franchisees operate is set forth below in Item 2 entitled “Properties.”
We also own, operate, and in some cases, franchise the Lime Fresh fast casual restaurant chain and Marlin & Ray’s and Wok-Hay casual dining restaurant concepts. We also operate Truffles restaurants pursuant to a license agreement. As of June 5, 2012, there were 13 Company-owned and operated Lime Fresh restaurants, 11 Company-owned and operated Marlin & Ray’s restaurants, two Company-owned and operated Truffles restaurants, and one Company-owned and operated Wok-Hay restaurant. In addition, there were four Lime Fresh restaurants operated by domestic franchisees as of June 5, 2012.
Our Core Ruby Tuesday Concept
Ruby Tuesday restaurants serve simple, fresh, American food with a wide variety of steaks, fresh chicken, crab cakes, lobster, salmon, tilapia, fork-tender ribs, appetizers, handcrafted burgers, and more, in addition to a garden bar which offers up to 35 items and is an important point of differentiation for our brand compared to our peers. Burger choices include such items as beef, turkey, and chicken. Entree selections typically range in price from $6.99 to $18.99. Where appropriate, we also offer our RubyTueGo® curbside service and a delivered-meals catering program for businesses, organizations, and group events at both Company-owned and franchised restaurants.
Over the past five years, we have made significant brand improvements in food and service quality, which we believe have elevated and differentiated the Ruby Tuesday brand from our bar and grill competitors. Our goal is to be the best in the bar and grill segment of casual dining by delivering the ultimate “$25 dining experience for $15.” In order to achieve this goal, our operating strategies focus on consistently executing the following:
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Uncompromising Freshness and Quality . Virtually every item on our menu is made with the freshest of ingredients, in line with our high-quality casual dining positioning. Our chicken breasts are fresh, not frozen, all natural, and contain no growth hormones. Our burgers are made from 100% choice beef and served with crisp leaf lettuce, and fresh, cold-pack pickles on an artisan bun. Our differentiated high-quality seafood menu items include lobster and crab cakes made from jumbo lump crab meat. Our menu items include approximately 30 entrees; Fit & Trim offerings, which consist of menu items that are 700 calories or less; fresh side items, which now include fresh grilled green beans, fresh grilled zucchini, and sugar snap peas; and a Sunday brunch menu with 15 total items including French toast and omelets. We have recently enhanced our garden bar with more variety and freshness and also recently launched our new “Chef Inspired Specials” featuring high-flavor profile entrees like Jamaican jerk shrimp, Asiago peppercorn sirloin, and Cajun jambalaya pasta. Our freshness also applies to our appetizers, which include fresh, made-to-order guacamole. Our beverage offerings include non-alcoholic drinks made to order from fresh berries and fresh lemon, mango, and pomegranate juices. Our cocktails are made with premium call-brand spirits and we also offer an extensive handcrafted beer and wine selection.
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Gracious Hospitality . We focus on our restaurant-level team through implementation of high performance standards, advanced training, and a rigorous selection process. Our assistant managers are designated as either a guest service specialist or a culinary specialist depending upon their individual passions and skill sets, and such designation enables us to more consistently execute at high-quality casual dining levels in both food and service quality. We have implemented smaller station sizes, increased bartender staffing levels, and added food runners to improve the dining experience. Our service system enables our servers to focus more attention on the guests so we can provide them with hotter, fresher food at service levels comparable to those at polished casual dining service levels.
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Compelling Value . We believe our guests perceive “value” as a combination of food quality, service, restaurant atmosphere, menu variety, and price. However, as the economy continues to experience volatility, we believe that price has remained important to our guests. With an average net check of approximately $12.50 to $13.00 for fiscal 2012, we believe our menu pricing provides a compelling value proposition. In fiscal 2011, we began offering fresh-baked garlic cheese biscuits complimentary with our entrees and believe this offering further increases the overall value perception of our brand, in line with other high-quality casual dining restaurants. Additionally, in fiscal 2012 we increased our value position by offering our fresh, endless garden bar complimentary with over 20 entrees and a starting price of $9.99, which provides compelling value to guests and is a point of differentiation for Ruby Tuesday because our competitors typically do not offer a free garden bar with the purchase of their entrees.
Our Other Concepts
We have begun to leverage our expertise in operating Ruby Tuesday to develop and operate other casual dining and fast-casual restaurant concepts, including:
Lime Fresh Mexican Grill
Lime Fresh is a fast-casual fresh Mexican concept with restaurant operations in the Eastern United States, many in the vicinity of Miami, Florida. The Lime Fresh concept menu features organic food and diverse menu offerings such as homemade tortilla chips, customizable nachos, flautas, salads, soups, fajitas, quesadillas, tacos, burritos, and salsa and guacamole. This concept offers a unique experience by providing the speed of a fast-casual restaurant, with the service and food quality of casual dining, in a fun and energetic atmosphere for guests.
On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC, which allowed us to operate multiple restaurants under the Lime Fresh name. As of April 10, 2012 we had opened four Lime Fresh restaurants under the terms of our licensing agreement. Given the knowledge gained about the Lime Fresh brand from the licensing agreement, in addition to the growth potential we believe the Lime Fresh concept affords, on April 11, 2012, we completed the acquisition of Lime Fresh, including the assets of seven additional Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants (one of which opened in July 2012), and the Lime Fresh brand’s intellectual property for $24.1 million. We believe this brand has significant growth potential given its low capital requirements and strong EBITDA margin returns. As of June 5, 2012, we owned and operated 13 Lime Fresh restaurants, and our domestic franchisees operated four Lime Fresh restaurants. We tentatively have plans to add 12 to 16 Lime Fresh locations in fiscal 2013, subject to our ability to locate suitable inline sites for development.
Marlin & Ray’s
Marlin & Ray’s is our internally developed seafood concept that leverages our knowledge of seafood given our guests’ preference for seafood at our Ruby Tuesday restaurant concepts. We developed Marlin & Ray’s to fill a void for seafood that we perceived in the polished-casual sector. The concept offers a diverse menu featuring lobster, crab, tilapia, salmon, mahi-mahi, shrimp, scallops, trout, and other fish and seafood choices. As of June 5, 2012, our 11 Marlin & Ray’s restaurants have been conversions of certain underperforming Ruby Tuesday concept restaurants where we believe the respective markets could support a seafood concept. We view this concept as a strong complement to the Ruby Tuesday brand as it is a natural fit given our execution experience and existing supply chain. We are currently evaluating opportunities to open Marlin & Ray’s concept restaurants in new locations that were not previously Ruby Tuesday concept restaurants.
Truffles and Wok-Hay
We also operate Truffles restaurants pursuant to a license agreement and own, operate and franchise the Wok-Hay casual dining concept. Truffles is an upscale full-service grill that offers a diverse menu featuring soups, salads, and sandwiches, a signature chicken pot pie, house-breaded fried shrimp, pasta, ribs, steaks, and a variety of desserts. As of June 5, 2012, we owned and operated two Truffles restaurants. Additionally, as of June 5, 2012, we owned and operated one Wok-Hay restaurant, which is a full service Asian concept. While these brands will continue to remain part of our overall portfolio, we currently have no plans for any material growth of either brand, with the exception of potential international franchise opportunities, given our focus over the next several years on stabilizing and growing Ruby Tuesday’s same-restaurant sales, growing the Lime Fresh brand in the Eastern United States, and converting underperforming Ruby Tuesday restaurants to the Marlin & Ray’s concept.
Franchising
As previously noted, as of June 5, 2012, we had franchise arrangements with 29 franchise groups which operate Ruby Tuesday restaurants in 14 states, Guam, and in 12 foreign countries.
As of June 5, 2012, there were 79 Ruby Tuesday franchise restaurants which were all operated by our traditional and international franchisees. As further discussed in Note 3 to the Consolidated Financial Statements, we acquired 106 restaurants from franchise partnerships during fiscal 2011 and three restaurants from a traditional domestic franchisee. As of May 31, 2011, all of our franchise partnerships had been acquired by the Company or had ceased operations. Franchisees opened six Ruby Tuesday restaurants in fiscal 2012, seven Ruby Tuesday restaurants in fiscal 2011, and six Ruby Tuesday restaurants in fiscal 2010. We anticipate that our remaining franchisees will open approximately 11 to 13 Ruby Tuesday restaurants in fiscal 2013.
Generally, Ruby Tuesday concept franchise arrangements consist of a development agreement and a separate franchise agreement for each restaurant. Under a development agreement, a franchisee is granted the exclusive right, and undertakes the obligation, to develop multiple restaurants within a specifically-described geographic territory. The term of a domestic franchise agreement is generally 15 years, with two five-year renewal options.
For each restaurant developed under a domestic development agreement, a franchisee is currently obligated to pay a development fee of $10,000 per restaurant (at the time of signing a development agreement), an initial franchise fee (which typically is $35,000 for domestic franchisees), and a royalty fee equal to 4.0% of the restaurant’s monthly gross sales, as defined in the franchise agreement. Development and operating fees for international franchise restaurants vary.
Additionally, we offer support service agreements for domestic franchisees. Under the support services agreements, we have one level of support in which we provide specified services to assist the franchisees with various aspects of the business including, but not limited to, processing of payroll, basic bookkeeping and cash management. Fees for these services are typically contracted to be about 1.5% of revenues, as defined in the franchise agreement. There is also a required level of support services in which we charge a fee to cover certain information technology related support that we provide. All domestic franchisees also are required to pay a marketing and purchasing fee of 1.5% of monthly gross sales. At times of economic downturn, we have occasionally chosen to temporarily lower these fees. Under the terms of the franchise agreements, we also require all domestic franchisees to contribute a percentage of monthly gross sales, currently 2.25%, to a national advertising fund formed to cover their pro rata portion of the costs associated with our national advertising campaign. Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising fund.
We provide ongoing training and assistance to our franchisees in connection with the operation and management of each restaurant through our training facility, meetings, on-premises visits, computer-based training (“CBT”), and by written or other material.
As of June 5, 2012, we also had franchise arrangements with three franchise groups which operate four Lime Fresh restaurants in Florida. In general, Lime Fresh franchisees are currently obligated to pay an initial franchise fee of $30,000, an initial marketing fee of $10,000, and a royalty fee equal to 5.25% of the restaurant’s monthly gross sales, as defined in the franchise agreement. There is also a required level of support services in which we charge a fee to cover certain information technology related support that we provide. Under the terms of the franchise agreements, we also require domestic franchisees to contribute a percentage of monthly gross sales, currently 1.5%, to a national advertising fund formed to cover their pro rata portion of the costs associated with our national advertising campaign. Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising fund.
Training
The Ruby Tuesday Center for Leadership Excellence, located in our Maryville, Tennessee Restaurant Support Services Center, serves as the centralized training center for all of our managers, multi-restaurant operators and other team members. Facilities include classrooms, a test kitchen, and the Ruby Tuesday Culinary Arts Center. The Ruby Tuesday Center for Leadership Excellence provides managers with the opportunity to assemble for intensive, ongoing instruction and hands-on interaction through our training sessions. Programs include classroom instruction and various team building activities and competitions, which are designed to contribute to the skill and enhance the dedication of the Company and franchise teams in addition to strengthening our corporate culture. In addition to the centralized training at the Ruby Tuesday Center for Leadership Excellence, we periodically conduct field training classes. These field training classes have been held for bartenders, managers, and general managers. The field classes partnered the training team along with operational leadership to provide direct training and development in order to reach a large audience faster, and make an immediate impact on our team.
We offer team member training materials for all concepts in several formats to promote better learning. Our materials are produced in a CBT format as well as in written, video and verbal formats. CBT enables us to leverage technology to provide an even higher quality interactive training experience and allows for testing at every level to calibrate our team members’ skill levels and promotes self-paced, ongoing development. All results are captured in a personal transcript for all team members so that we can accurately track their training and development throughout their careers.
Further contributing to the training experience is the Ruby Tuesday Lodge SM , which is located on a wooded campus just minutes from the Restaurant Support Services Center. The Ruby Tuesday Lodge serves as the lodging quarters and dining facility for those attending the Ruby Tuesday Center for Leadership Excellence. After a day of instruction, trainees have the opportunity to dine and socialize with fellow team members in a relaxed and tranquil atmosphere where they are fully immersed in our culture. The Ruby Tuesday Lodge serves as a model of Uncompromising Freshness and Quality and Gracious Hospitality for our managers while they are guests of the Ruby Tuesday Lodge so that they can take that same standard back to their restaurants. We believe our emphasis on training and retaining high quality restaurant managers is critical to our long-term success and we are committed to the ongoing development of our team members.
Research and Development
We do not engage in any material research and development activities. However, we do engage in ongoing studies to assist with food and menu development. Additionally, we conduct extensive consumer research to determine our guests’ preferences, trends, and opinions, as well as to better understand other competitive brands.
Raw Materials
We negotiate directly with our suppliers for the purchase of raw and processed materials and maintain contracts with select suppliers for both our Company-owned and franchised restaurants. These contracts may include negotiations for distribution of raw materials under a cost plus delivery fee basis and/or specifications that maintain a term-based contract with a renewal option. If any major supplier or distributor is unable to meet our supply needs, we would negotiate and enter into agreements with alternative providers to supply or distribute products to our restaurants.
We use purchase commitment contracts to stabilize the potentially volatile prices of certain commodities. Because of the relatively short storage life of inventories, limited storage facilities at the restaurants, our requirement for fresh products and the numerous sources of goods, a minimum amount of inventory is maintained at our restaurants. In the event of a disruption of supply, all essential food, beverage and operational products can be obtained from secondary vendors and alternative suppliers. We believe these alternative suppliers can provide, upon short notice, items of comparable quality.
Beginning in fiscal 2010, we have purchased lobster in advance of our needs and stored it in third-party facilities prior to our distributor taking possession of the inventory. Once the lobster is moved to our distributor’s facilities, we transfer ownership to the distributor. We later reacquire the inventory from our distributor upon its subsequent delivery to our restaurants.
Trade and Service Marks of the Company
We and our affiliates have registered certain trade and service marks with the United States Patent and Trademark Office, including the name “Ruby Tuesday.” RTI holds a license to use all such trade and service marks from our affiliates, including the right to sub-license the related trade and service marks. We believe that these and other related marks are of material importance to our business. Registration of the Ruby Tuesday trademark expires in our 2015 fiscal year, unless renewed. We expect to renew this registration at the appropriate time.
Seasonality
Our business is moderately seasonal. Average restaurant sales of our mall-based restaurants, which represent approximately 18% of our total restaurants as of June 5, 2012, are slightly higher during the winter holiday season. Freestanding restaurant sales are generally higher in the spring and summer months.
Competition
Our business is subject to intense competition with respect to prices, services, locations, employees, and the types and quality of food. We are in competition with other food service operations, with locally-owned restaurants, and other national and regional restaurant chains that offer the same or similar types of services and products as we do. In times of economic uncertainty, restaurants also compete with grocery retailers as guests may choose to limit spending and eat at home. Some of our competitors may be more established in the markets where our restaurants are or may be located. Changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the types, numbers and locations of competing restaurants often affect the restaurant business. There is active competition for personnel and for attractive commercial real estate sites suitable for restaurants.
Government Regulation
We and our franchisees are subject to various licensing requirements and regulations at both the state and local levels, related to zoning, land use, sanitation, alcoholic beverage control, and health and fire safety. We have not encountered significant difficulties or failures in obtaining the required licenses or approvals that could delay the opening of a new restaurant or the operation of an existing restaurant nor do we presently anticipate the occurrence of any such difficulties in the future. Our business is subject to various other regulations by federal, state and local governments, such as compliance with various health care, minimum wage, immigration, and fair labor standards. Compliance with these regulations has not had, and is not expected to have, a material adverse effect on our operations.
CEO BACKGROUND
JAMES A. HASLAM, III
Director of the Company since 1999 Age: 57
Mr. Haslam has been President and Chief Executive Officer of Pilot Travel Centers, LLC, a nationwide operator of travel centers, since September 2001. Mr. Haslam served as Chief Executive Officer of Pilot Corporation, an operator of convenience stores and travel centers in over 40 states, from July 1995 to September 2001 and since October 2008. From 1976 to 1995, Mr. Haslam was Executive Vice President of Pilot Corporation. Mr. Haslam previously served as a director of Dillards, Inc. within the last five years.
Other Current Public Company Directorships:
First Horizon National Corporation
Qualifications:
Management, leadership and strategy – Provides the Board with significant experience in matters involving the running of a large company, mergers, acquisitions, and business combinations.
Financial expertise – Extensive knowledge of lending, credit markets and finance and accounting.
Marketing and consumer experience – In-depth knowledge and experience in retailing from his years of service as the Chief Executive Officer of Pilot Corporation as well as his years of prior service as a director of Dillard’s, Inc.
Risk assessment and capital allocation – Provides the Board with additional insight into issues involving capital allocation, shareholder value and business risk.
STEVEN R. BECKER
Director of the Company since 2011 Age: 44
Mr. Becker has been a partner of Becker Drapkin Management (previously known as Greenway Capital), a Dallas-based small cap investment fund, since September 2004. Previously, Mr. Becker was a partner at the Special Situations Funds, a New York City-based asset manager, which he joined in April 1997, and ran the Special Situations Private Equity Fund from its inception until leaving to establish Becker Drapkin Management. Prior to joining Special Situations Funds, Mr. Becker was a part of the distressed debt and leveraged equities research team at Bankers Trust Securities. He began his career at Manley Fuller Asset Management in New York as a small cap analyst. Mr. Becker previously served on the board of directors of Plato Learning, Inc., a publicly traded educational software company, until it was acquired in May 2010.
Other Current Public Company Directorships:
Hot Topic, Inc.
Strategic Diagnostics, Inc.
Qualifications:
Management, leadership and strategy – Leadership experience through founding, establishment and management of a small-cap investment fund.
Financial expertise – Extensive financial experience in both public and private companies which provides our Board with valuable expertise in corporate finance, strategic planning, and capital and credit markets.
Marketing and consumer experience – Knowledge and experience in retailing from service as a director at Hot Topic, Inc.
Risk assessment and capital management – Provides the Board with experience in capital allocation, shareholder value and financial risk.
STEPHEN I. SADOVE
Director of the Company since 2002 Age: 60
Mr. Sadove has served as Chief Executive Officer of Saks Incorporated since January 2006 and assumed the position of Chairman of the Saks Incorporated Board in May 2007. Before becoming Chief Executive Officer, Mr. Sadove served Saks Incorporated as Vice Chairman from January 2002 to March 2004 and served as Vice Chairman and Chief Operating Officer from March 2004 to January 2006. Prior to his position with Saks Incorporated, Mr. Sadove served as Senior Vice President of Bristol-Myers Squibb Company (“Bristol-Myers”) and President of Bristol-Myers Worldwide Beauty Care and Nutritionals from 1996 to January 2002. Mr. Sadove previously served on the Board of Trustees of Equity Office Properties Trust within the last five years.
Other Current Public Company Directorships:
Saks Incorporated
Colgate-Palmolive Co.
Qualifications:
Management, leadership and strategy – Leadership roles with several well-known consumer products and retail companies over the past 25 years.
Financial expertise – Has overseen and managed operating budgets for various companies throughout his career and has ultimate responsibility for the execution of the financial plans in his current role as Chairman of the Board and Chief Executive Officer of Saks Incorporated.
Marketing and consumer experience – Extensive understanding of consumer products and consumer behavior. Also possesses over 25 years of marketing experience and currently instrumental in shaping the marketing initiatives at Saks Fifth Avenue.
Risk assessment and capital management – Provides the Board with additional insight into issues involving capital allocation, shareholder value and business risk.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview and Strategies
Casual dining, the segment of the industry in which we operate, is intensely competitive with respect to prices, services, convenience, locations, employees, advertising and promotion, and the types and quality of food. We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do. While we are in the bar and grill sector because of our varied menu, we operate at the higher-end of casual dining in terms of the quality of our food and service. Our mission, since we repositioned our brand in 2007, is to be the best in the bar and grill segment of casual dining by delivering to our guests a high-quality casual dining experience with compelling value.
We believe there are significant opportunities to grow our business, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:
Enhance Sales and Margins of Our Core Brand
In order to entice guests to see the new Ruby Tuesday, increase frequency of visits, drive same-restaurant sales growth and enhance brand visibility, we are increasing our television marketing spend. Our marketing strategy for the last several fiscal years has focused mainly on print promotions, digital media and local marketing programs, with minimal spend on television. In fiscal 2012 we began testing television marketing in certain markets with approximately 20% of our restaurants covered by television advertising in the third quarter and approximately 50% to 100% of our restaurants covered in our fourth quarter through leveraging a mixture of network and national cable at varying media weights. Based on favorable trends exhibited by our test markets in fiscal 2012, at the start of fiscal 2013 we deployed a television marketing program which will cover the entire system of restaurants for a portion of each quarter with the remaining portion of the quarter to be supplemented by high-end direct mail and other promotions. Our creative messaging will support a “pure value and quality” advertisement, in addition to potential limited time offers throughout the year. We believe that having television advertising expense levels more in line with our peers in tandem with a more balanced approach on our promotional strategies will position us for improvements in same-restaurant sales in the future through driving repeat and new trial of our brand.
In order to fund the incremental television advertising efforts at no dilution to the overall profitability or cash flow of the Company, we have engaged a leading enterprise improvement consulting firm to assist us in identifying potential savings opportunities in a number of key areas including procurement, occupancy, and maintenance costs. The majority of these cost savings will be reinvested into our television marketing programs.
Focus on Low-Risk, Low-Capital Intensive, High-Return Growth
In an effort to be prudent with our capital, we have a strategy to grow our Company in a low-risk, low capital-intensive and high-return manner, with a focus on the fast casual segment. During the fourth quarter of fiscal 2012, we acquired the Lime Fresh concept for $24.1 million. We had previously opened Lime Fresh restaurants under a licensing agreement. However, after over a year of experience with the brand and better understanding its positioning in the high-quality fast casual segment, we decided that we could more quickly grow the concept if we owned it. The fast casual segment of our industry is a proven and growing segment where demand exceeds supply, and we believe opening smaller, inline locations under the Lime Fresh brand is a good potential growth option for us. We also believe Lime Fresh can create good long-term value and strong cash flow with relatively low risk. We opened six Company-owned Lime Fresh restaurants during fiscal 2012 and plan to open 12 to 16 Company-owned Lime Fresh restaurants during fiscal 2013. Over time, we also plan on opening Company-owned, smaller inline-type Ruby Tuesday restaurants as well.
Increase Returns Through New Concept Conversions
Another part of our long-term plan is to get more out of existing restaurants by generating higher average restaurant volumes and thus more profit and cash flow with minimal capital investment. Therefore, we have been converting certain underperforming Ruby Tuesday concept restaurants into our internally-developed seafood concept, Marlin & Ray’s, which is a uniquely-differentiated, high-value casual dining brand. We converted ten Company-owned Ruby Tuesday restaurants to the Marlin & Ray’s concept during fiscal 2012 and expect to convert five to seven during fiscal 2013. We believe the low capital requirement and potential increased revenue and EBITDA from these conversions, in addition to the revenue increases we are seeing at neighboring Ruby Tuesday locations, can potentially provide attractive cash-on-cash returns and strong cash flow.
Strengthen our Balance Sheet to Facilitate Growth and Value Creation
During the fourth quarter of fiscal 2012, we further strengthened our balance sheet and created additional financial flexibility by issuing $250.0 million in a senior unsecured notes offering with an eight year maturity. As a result of the transaction, we were able to pay off all of our outstanding debt with the exception of some of our mortgage debt from the franchise partnership acquisitions, reduce our revolver commitment size from $380.0 million to $200.0 million, obtain attractive interest rates, extend the maturity date of the majority of our debt for up to eight years, and build excess cash which we will reinvest in the future. We continue to maintain a strong balance sheet and have a sufficient amount of liquidity. Our near-term capital expenditure requirements will consist of converting approximately five to seven Ruby Tuesday concept restaurants to the Marlin & Ray’s concept, opening one newly-constructed Marlin & Ray’s restaurant, and opening approximately 12 to 16 smaller, inline Lime Fresh restaurants during fiscal 2013.
Our strong balance sheet is supported by a high-quality portfolio of owned real estate, and during fiscal 2012 we commenced on a sale-leaseback program on a portion of our properties in order to create greater financial flexibility and generate additional liquidity for debt reduction or reinvestment. We are targeting to raise approximately $50.0 million of gross proceeds from sale-leaseback transactions, of which $22.2 million was raised during fiscal 2012 and utilized for debt reduction. We anticipate the remaining sale-leaseback transactions to be completed over the next one to two quarters and plan to utilize the proceeds for further debt reduction or other corporate purposes. See further discussion in the Investing Activities section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
We generated $74.3 million of free cash flow during fiscal 2012, which was used to pay down debt and repurchase stock. We estimate we will generate approximately $20.0 to $30.0 million of free cash flow during fiscal 2013. Included in these estimates is anticipated capital spending of approximately $44.0 to $48.0 million. Our objective over the next several years is to continue to reduce outstanding debt levels in order to reduce our leverage, focus on new Lime Fresh restaurant development and Marlin & Ray’s conversions, and potentially repurchase outstanding shares under our share repurchase program.
Our success in the four key long range plan initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.
Our fiscal year ends on the first Tuesday following May 30 and, as is the case once every five or six years, we have a 53 week year. Fiscal 2012 was a 53 week year. All other years discussed throughout this MD&A section contained 52 weeks. In fiscal 2012, the 53 rd week added $23.4 million to restaurant sales and operating revenue and $0.03 to diluted earnings per share in our Consolidated Statement of Operations. We remind you that, in order to best obtain an understanding of the significant factors that influenced our performance during the last three fiscal years, this MD&A section should be read in conjunction with the Consolidated Financial Statements and related Notes.
Our same-restaurant sales for Company-owned restaurants decreased 4.5% in fiscal 2012 and our diluted loss per share was $0.00 in fiscal 2012 compared to diluted earnings per share of $0.72 in fiscal 2011. Throughout this MD&A, we discuss our fiscal 2012 financial results in detail, provide insight for fiscal years 2011 and 2010, as well as discuss known events, uncertainties, and trends. We hope our commentary provides insight as to the factors which impacted our performance. We remind you, that, in order to best obtain an understanding of our financial performance during the last three fiscal years, this MD&A section should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Part II, Item 8 of this Annual Report on Form 10-K.
Pre-tax (Loss)/Income
For fiscal 2012, pre-tax loss was $14.9 million or (1.1)% of total revenue, as compared to pre-tax profit of $52.6 million or 4.2% of total revenue for fiscal 2011. The decrease is primarily due to a decrease in same-restaurant sales of 4.5% at Company-owned Ruby Tuesday restaurants, a goodwill impairment charge of $16.9 million, higher closures and impairments ($12.4 million) and interest expense ($7.3 million), and increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of payroll and related costs, other restaurant operating costs, and selling, general, and administrative, net. These higher costs were partially offset by decreases, as a percentage of restaurant sales and operating revenue, of cost of merchandise and depreciation.
Pre-tax income decreased $5.1 million (8.9%) from fiscal 2010 to $52.6 million for the year ended May 31, 2011. The lower pre-tax income was due to increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, payroll and related costs, other restaurant operating costs, selling, general, and administrative, net, and closures and impairments, and higher equity in losses from unconsolidated equity-method franchises. These higher costs were partially offset by $3.8 million in pre-tax income on the 109 restaurants acquired from franchisees during fiscal 2011, an increase in same-restaurant sales of 0.9% at Company-owned restaurants, and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of depreciation, and interest expense, net.
In the paragraphs that follow, we discuss in more detail the components of the changes in pre-tax (loss)/income for years ended June 5, 2012 and May 31, 2011 as compared to the comparable prior year. Because a significant portion of the costs recorded in the cost of merchandise, payroll and related costs, other restaurant operating costs, and depreciation categories are either variable or highly correlate with the number of restaurants we operate, we evaluate our trends by comparing the costs as a percentage of restaurant sales and operating revenue, as well as the absolute dollar change, to the comparable prior year.
Cost of Merchandise
Cost of merchandise increased $14.9 million (4.1%) from the prior year to $380.5 million for the year ended June 5, 2012. As a percentage of restaurant sales and operating revenue, cost of merchandise decreased from 29.1% to 28.8%. Excluding the $27.6 million increase from the 109 restaurants acquired in fiscal 2011, cost of merchandise decreased $12.7 million.
The absolute dollar decrease in cost of merchandise not attributable to the restaurant acquisitions is primarily a result of a decrease in same-restaurant sales during fiscal 2012 of 4.5% coupled with cost savings negotiated with our primary food distributor during the year. Additionally, during the second half of fiscal 2012 we renegotiated contracts and changed the product specifications on several items with certain vendors which resulted in cost savings on many products.
As a percentage of restaurant sales and operating revenue, the decrease in cost of merchandise for the year ended June 5, 2012 is due primarily to cost savings negotiated with our primary food distributor and various other vendors since the prior year as discussed above.
Cost of merchandise increased $21.2 million (6.2%) from fiscal 2010 to $365.7 million for the year ended May 31, 2011. As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 29.0% to 29.1%. Excluding the $22.3 million increase from the 109 restaurants acquired in fiscal 2011, cost of merchandise decreased $1.2 million.
For the year ended May 31, 2011, the absolute dollar change not attributable to the restaurant acquisitions was due to lower food costs at our other restaurants as a result of a decrease in guest counts during fiscal 2011. Contributing to the lower guest counts during fiscal 2011 was inclement winter weather in many of our core markets during the third quarter and lower guest counts in our first and fourth quarters as a result of a shift in our value promotion strategy by changing the “Buy One Get One Free” promotion offered during the first quarter of the prior year to a “Buy One Get One Free Up to $10” or a “25% Off” on our Specialties, Fork-Tender Ribs, and Handcrafted Steaks and reducing the number of system-wide freestanding insert coupons offered during the current versus the prior year. Partially offsetting the decrease in cost of sales due to guest counts were the addition of garlic cheese biscuits, produce price increases, and wine costs as discussed below.
As a percentage of restaurant sales and operating revenue, the increase in cost of merchandise for the year ended May 31, 2011 was due to primarily to the rollout of garlic cheese biscuits at all of our restaurants, price increases during the second half of fiscal 2011 on several produce items due to the winter freeze that impacted crops in Mexico, and increased wine cost due in part to higher sales of our premium wines during fiscal 2011.
Payroll and Related Costs
Payroll and related costs increased $32.9 million (7.8%) from the prior year to $455.1 million for the year ended June 5, 2012. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.6% to 34.5%. Excluding the $36.3 million increase from the 109 restaurants acquired in fiscal 2011, payroll and related costs decreased $3.4 million.
For the year ended June 5, 2012, the decrease in absolute dollars not attributable to the restaurant acquisitions is primarily a result of new staffing guidelines for certain positions in our restaurants and lowered staffing levels attributable to reduced guest traffic from the same periods of the prior year.
As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the year ended June 5, 2012 is due to higher management labor as a result of merit increases during the current year, minimum wage increases in several states since the prior year, and higher FUTA tax owed following the failure of several states to repay the federal government for unemployment insurance loans, coupled with the impact on net sales of increased value-focused promotional activity and loss of leveraging with lower sales volumes.
Payroll and related costs increased $25.4 million (6.4%) from fiscal 2010 to $422.2 million for the year ended May 31, 2011. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.4% to 33.6%. Excluding the $25.5 million increase from the 109 restaurants acquired in fiscal 2011, payroll and related costs decreased $0.2 million.
For the year ended May 31, 2011, the decrease in absolute dollars not attributable to the restaurant acquisitions was insignificant.
As a percentage of restaurants sales and operating revenue, the increase in payroll and related costs was due to higher hourly labor which resulted from additional hours scheduled for Saturday nights, additional bartender labor on Monday nights during football season, increased labor associated with the rollout of our bread program, and unfavorable state unemployment costs due to rate increases in 20 states.
Depreciation
Depreciation expense increased $2.4 million (3.8%) to $65.3 million for the year ended June 5, 2012, compared to the prior year. As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 5.0% to 4.9%. Excluding the $5.0 million increase from the 109 restaurants acquired in fiscal 2011, depreciation expense decreased $2.6 million.
Depreciation expense decreased $0.9 million (1.4%) to $62.9 million for the year ended May 31, 2011, compared to fiscal 2010. As a percentage of restaurant sales and operating revenue, this expense decreased from 5.4% to 5.0%. Excluding the $3.4 million increase from the 109 restaurants acquired in fiscal 2011, depreciation expense decreased $4.3 million.
For both fiscal 2012 and 2011, the increase in depreciation expense is due to depreciation on the restaurants acquired from franchisees in fiscal 2011, which was partially offset by reduced depreciation on assets that became fully depreciated or were retired from service since fiscal 2011 or 2010, respectively.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, net increased $28.6 million (33.2%) from the prior year to $114.5 million for the year ended June 5, 2012. Excluding the $8.1 million increase from the 109 restaurants acquired in fiscal 2011, selling, general and administrative, net increased $20.4 million.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview and Strategies
Casual dining, the segment of the industry in which we operate, is intensely competitive with respect to prices, services, convenience, locations, advertising and promotion, and the types and quality of food. We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do. In 2007 we deployed a brand repositioning initiative designed to clearly differentiate Ruby Tuesday from our competitors since we believed, as the bar and grill segment continued to mature, our lack of differentiation in this segment would potentially make it increasingly difficult to attract new guests. Our brand repositioning initiative first focused on food, then service, and finally on the creation of a fresh new look for our restaurants, which was the most capital-intensive aspect of our brand reimaging program. Our marketing strategy for the last several years has focused on the key pillars of print promotions, digital media, and local marketing programs to entice guests to see the new Ruby Tuesday, increase frequency of visits, and enhance brand visibility. We plan to increase the amount we spend on television marketing to be more competitive with our peer group in order to drive traffic and trial of the Ruby Tuesday brand, partly aided by various limited time offers and other promotions.
As we strategically look out over the next three to five years, our long-range plan is to further strengthen our business in a low-risk, low-capital, and high-return manner by focusing in the following four areas:
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Enhance Sales and Margins of Our Core Brand. We have evolved our existing menu items to support our high-quality casual dining position, broaden our appeal with product extensions offering more variety and cravability, and provide our guests with compelling value. Late in the second quarter of fiscal 2010, we introduced a menu which included an expanded appetizer line and new dinner entrees featuring a variety of lobster combinations. Additionally, we launched a Sunday brunch offering and enhanced our bar area with high definition televisions and an enhanced food and drink menu, both of which have driven incremental sales and traffic while enhancing the overall perception of the Ruby Tuesday brand. In the first quarter of fiscal 2011, we rolled out a new menu, began offering a complimentary bread program, and enhanced our fresh garden bar and Sunday brunch. Our most recent menu includes seven new entrees and three new appetizers; Fit & Trim offerings, which includes menu items that are 700 calories or less; side offerings, which now include fresh grilled green beans, fresh grilled zucchini, baked mac ‘n cheese, and sugar snap peas; and a Sunday brunch menu with 15 total items including French toast and new omelets. We now offer a complimentary garden bar with the purchase of an entrée at several of our restaurants. We also added our fresh baked garlic cheese biscuits which we believe should further increase the overall value perception of our brand, in line with other high-quality casual dining restaurants. Recently we have been focused on increasing our value position in certain test markets through our free Fresh Endless Garden Bar and fresh-baked garlic cheese biscuits complimentary with over 30 entrees and a starting price of $9.99, which provides compelling value to consumers and is a big point of differentiation for Ruby Tuesday since our competitors typically do not offer a garden bar with the purchase of an entree. Additionally, we recently launched a new menu offering new high flavor profile entrees including Jamaican jerk shrimp, asiago peppercorn sirloin, and triple prime meatloaf.
In order to better promote our new value-oriented offerings to drive traffic and same-restaurant sales, we have been increasing the amount we spend on television marketing as we believe this is necessary in order to remain competitive with our peer group. To that end, we have engaged a leading enterprise improvement consulting firm to assist us in identifying potential savings opportunities in a number of key areas including procurement, occupancy, and maintenance costs. We are estimating annualized savings from these initiatives of approximately $35.0 to $40.0 million, or approximately $20.0 million higher than our previous estimates, a small portion of which is expected to be realized during the remainder of fiscal 2012. We plan to reinvest a significant portion of these cost savings in our television marketing programs, with approximately 20% of our restaurants being covered by television advertising during the fiscal third quarter. Additionally, at the start of the fiscal fourth quarter we increased our television advertising coverage to approximately 50% of our restaurants and have plans to increase our television advertising coverage to 100% of the system by the middle of the fourth quarter by using a combination of network and local cable to support a pure value and other advertising.
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Focus on Low Risk, Low Capital-Intensive, High-Return Growth. In an effort to be prudent with our capital and in order to enhance our returns, we have a strategy to grow our Company in a low risk, low capital-intensive and high-return manner. On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC which allows us to operate multiple restaurants under the Lime Fresh Mexican Grill® (“Lime”) name. Lime is a fast casual Mexican concept that currently operates several restaurants primarily in the vicinity of Miami, Florida. The fast casual segment of our industry has experienced high growth in recent years, and we believe opening smaller, inline locations under the Lime brand represents a good potential growth opportunity for us. We opened three Company-owned Lime restaurants during the 39 weeks ended February 28, 2012 and expect to open three to five Company-owned Lime restaurants during the remainder of fiscal 2012. Over time, we also plan to open Company-owned, smaller inline-type Ruby Tuesday restaurants as well.
In light of the growth potential of the Lime brand in the fast casual segment, we recently initiated the acquisition of certain assets, including seven Lime concept restaurants, the royalty stream from five Lime concept franchised restaurants, and the intellectual property of Lime Fresh Mexican Grill, Inc. and certain of its affiliated companies for $24.0 million. We expect this transaction to be completed during the fourth quarter of fiscal 2012 and believe the growth potential that Lime offers can create good long-term value for our shareholders with relatively low risk.
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Increase Shareholder Returns Through New Concept Conversions. Another part of our long-term plan is to increase average restaurant volumes in our existing restaurants thereby increasing profit and cash flow with minimal capital investment. To this end, we have been converting certain underperforming Ruby Tuesday concept restaurants into other high-quality casual dining brands which might be better suited for success in selected markets, with the main conversion concept being our internally-developed seafood concept, Marlin & Ray’s. We converted six Company-owned Ruby Tuesday restaurants to the Marlin & Ray’s concept during the 39 weeks ended February 28, 2012 and plan to convert another two to four during the remainder of fiscal 2012. We believe the low capital requirement and potential increased revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) from these conversions, in addition to the revenue increases we are seeing at neighboring Ruby Tuesday locations, offer opportunities for attractive cash-on-cash returns.
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Allocate Capital to Enhance Shareholder Value. We continue to maintain a strong balance sheet and have a five-year revolving credit facility (the “Credit Facility”) in place which provides us with adequate liquidity. If we are able to stabilize our same-restaurant sales without increasing our cost structure, we have the opportunity to increase our free cash flow assuming our capital expenditure needs remain at historic levels. We define “free cash flow” to be the net amount remaining when purchases of property and equipment are subtracted from net cash provided by operating activities. Our near-term capital expenditure requirements will consist of converting approximately two to four Ruby Tuesday concept restaurants to other high-quality casual dining concepts and opening approximately three to five smaller, inline Lime restaurants during the remainder of fiscal 2012.
We generated $46.9 million of free cash flow during the first three quarters of fiscal 2012, which was used to pay down debt and repurchase stock. We estimate we will generate approximately $28.0 to $38.0 million of free cash flow during the remainder of fiscal 2012. Included in these estimates is anticipated capital spending of approximately $4.0 to $8.0 million. Our objective over the next several years is to continue to reduce outstanding debt levels in order to reduce our leverage and provide the flexibility to repurchase outstanding shares under our share repurchase program. Additionally, we have commenced a sale-leaseback program on a portion of our real estate in order to create greater financial flexibility. We are targeting to raise approximately $50.0 million of gross proceeds over the next one to two quarters to be utilized for debt reduction and opportunistic share repurchases. See further discussion in the Financing Activities section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
Our success in the four key long-range plan initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.
Revenue
RTI’s restaurant sales and operating revenue for the 13 weeks ended February 28, 2012 increased 2.0% to $323.5 million compared to the same period of the prior year. This increase primarily resulted from the acquisition of 86 formerly franchised restaurants during the third and fourth quarters of fiscal 2011 as discussed below, partially offset by a 5.0% decrease in Ruby Tuesday concept same-restaurant sales. The decrease in same-restaurant sales is attributable to lower guest counts, which was partially offset by an increase in average net check in the third quarter of fiscal 2012 compared with the same quarter of the prior year. The increase in average net check was a result of menu price increases and a shift in menu mix.
Franchise revenue for the 13 weeks ended February 28, 2012 decreased 28.5% to $1.4 million compared to the same period of the prior year. Franchise revenue is predominately comprised of domestic and international royalties, which totaled $1.3 million and $1.8 million for the 13-week periods ended February 28, 2012 and March 1, 2011, respectively. This decrease is due to a $0.4 million decline in royalties from our traditional domestic franchisees and a $0.1 million reduction in royalties from our franchise partnerships due to the acquisition of 109 restaurants from our franchise partners during fiscal 2011.
For the 39 weeks ended February 28, 2012, sales at Company-owned restaurants increased 5.7% to $958.5 million compared to the same period of the prior year. This increase primarily resulted from the acquisition of 109 formerly franchised restaurants during fiscal 2011 as discussed below, partially offset by a 4.4% decrease in Ruby Tuesday concept same-restaurant sales. The decrease in same-restaurant sales is attributable to lower guest counts, which was partially offset by an increase in average net check in the first three quarters of fiscal 2012 compared with the same period of the prior year. The increase in average net check was a result of menu price increases and a shift in menu mix.
For the 39-week period ended February 28, 2012, franchise revenues decreased 24.8% to $4.1 million compared to the same period in the prior year. Domestic and international royalties totaled $3.9 million and $5.0 million for the 39-week periods ending February 28, 2012 and March 1, 2011, respectively. This decrease is due to a $0.6 million decline in royalties from our traditional domestic franchisees and a $0.5 million reduction in royalties from our franchise partnerships due to the acquisition of 109 restaurants from our franchise partners during fiscal 2011.
Under our accounting policy, we do not recognize franchise fee revenue for any franchise with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has borrowed directly from us. We also do not recognize additional franchise fee revenue from franchisees with fees in excess of 60 days past due. Accordingly, we have deferred recognition of a portion of franchise revenue from certain franchisees. Unearned income for franchise fees was $2.1 million and $1.2 million as of February 28, 2012 and May 31, 2011, respectively, which are included in Other deferred liabilities and/or Accrued liabilities – rent and other in the Condensed Consolidated Balance Sheets.
Pre-tax Income
Pre-tax income decreased $14.3 million to $1.2 million for the 13 weeks ended February 28, 2012, from the same period of the prior year. The change from the prior year is due to a decrease in same-restaurant sales of 5.0% at Company-owned Ruby Tuesday restaurants, higher closures and impairments ($11.5 million) and interest expense ($0.7 million), and increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of payroll and related costs, depreciation, and selling, general, and administrative, net. These were partially offset by decreases, as a percentage of restaurant sales and operating revenue, of cost of merchandise and other restaurant operating costs.
For the 39-week period ended February 28, 2012, pre-tax income decreased $33.7 million to $3.1 million, from the same period of the prior year. The lower pre-tax income is due to a decrease in same-restaurant sales of 4.4% at Company-owned Ruby Tuesday restaurants, higher closures and impairments ($10.5 million) and interest expense ($3.7 million), and increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, payroll and related costs, and selling, general, and administrative, net.
In the paragraphs that follow, we discuss in more detail the components of the decrease in pre-tax income for the 13-week and 39-week periods ended February 28, 2012, as compared to the comparable periods in the prior year. Because a significant portion of the costs recorded in the cost of merchandise, payroll and related costs, other restaurant operating costs, and depreciation categories are either variable or highly correlative with the number of restaurants we operate, we evaluate our trends by comparing the costs as a percentage of restaurant sales and operating revenue, as well as the absolute dollar change, to the comparable prior year period.
Fiscal 2011 Franchise Restaurant Acquisitions
The table below shows operating results attributable to the restaurants acquired from franchisees in fiscal 2011 that are included in our Condensed Consolidated Statements of Income for the 13 and 39 weeks ended February 28, 2012 and March 1, 2011 (in thousands). Amounts shown for the 13 and 39 weeks ended February 28, 2012 include results for all 109 restaurants acquired during fiscal 2011 while amounts shown for the 13 and 39 weeks ended March 1, 2011 include results for the 96 restaurants acquired during the first three quarters of fiscal 2011 (from the various dates of acquisition through March 1, 2011).
Cost of Merchandise
Cost of merchandise increased $0.3 million (0.3%) to $93.1 million for the 13 weeks ended February 28, 2012, from the corresponding period of the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise decreased from 29.3% to 28.8%. Excluding the $6.1 million increase from the 109 restaurants acquired in fiscal 2011, cost of merchandise decreased $5.8 million.
Cost of merchandise increased $19.8 million (7.5%) to $282.2 million for the 39 weeks ended February 28, 2012, from the corresponding period of the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 28.9% to 29.4%. Excluding the $27.9 million increase from the 109 restaurants acquired in fiscal 2011, cost of merchandise decreased $8.1 million.
The absolute dollar decrease in cost of merchandise not attributable to the restaurant acquisitions is primarily a result of a decrease in same-restaurant sales for the 13 and 39 weeks ended February 28, 2012 of 5.0% and 4.4%, respectively.
As a percentage of restaurant sales and operating revenue, the decrease for the 13 weeks ended February 28, 2012 is due primarily to cost savings negotiated with our primary food distributor and various other vendors since the same quarter of the prior year coupled with a reduction in food cost associated with our rollout during the first quarter of the current year of a new market fresh garden bar with fewer items.
As a percentage of restaurant sales and operating revenue, the increase for the 39 weeks ended February 28, 2012 is due primarily to the impact on net sales of increased value-focused promotional activity, rollout of the complimentary endless garden bar with the purchase of an entrée at several of our restaurants during the second quarter of the current year, and the rollout of garlic cheese biscuits at the end of the first quarter of fiscal 2011.
Payroll and Related Costs
Payroll and related costs increased $5.7 million (5.3%) to $111.9 million for the 13 weeks ended February 28, 2012, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.5% to 34.6%. Excluding the $8.3 million increase from the 109 restaurants acquired in fiscal 2011, payroll and related costs decreased $2.6 million.
Payroll and related costs increased $26.5 million (8.6%) to $332.6 million for the 39 weeks ended February 28, 2012, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.8% to 34.7%. Excluding the $34.9 million increase from the 109 restaurants acquired in fiscal 2011, payroll and related costs decreased $8.4 million.
CONF CALL
Greg Ashley
Thank you, Robin, and thanks to all of you for joining us this afternoon. With me today are Sandy Beall, Ruby Tuesday's Chairman and CEO; Michael Moore, our new Chief Financial Officer; Dan Dillon, Senior Vice President, Brand Development; and Kimberly Grant, Executive Vice President.
I would like to remind you that there will be forward-looking statements in our comments, and I refer you to the note regarding forward-looking information in our press release and most recently filed Form 10-Q. We plan to release our first quarter fiscal year '13 earnings in early October.
Our fourth quarter earnings were released today after the market closed, and a copy of our press release can be found on the Investor Relations section of our website at rubytuesday.com, and is also available on Business Wire, FirstCall and other financial media outlets.
Our format today includes an overview of our fourth quarter and fiscal 2012 financial results, our fiscal 2013 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks, we will respond to your questions.
I will now turn the call over to Sandy.
Samuel E. Beall
Thanks, Greg. I'd like to welcome all of you listening in this evening. Thank you for joining us on our fourth quarter earnings call. I will begin with a brief overview of our quarter and an update of our key value creation initiatives. Michael and Greg will provide the financial review and guidance outlook, then Dan will provide details on our marketing plans, and Kimberly will follow-up with an overview of our operations plans for Ruby Tuesday, as well as Lime Fresh and Marlin & Ray's.
As noted in our press release today, we reported a diluted loss per share of $0.09 for the fourth quarter or earnings per share of $0.21, excluding the various items noted in our press release. Our same-restaurant sales for the fourth quarter minus 4.6% or roughly in line with our expectations as we reduced the level of coupons on a year-over-year basis to get more in line with our quarterly projections going forward in order to eliminate a huge hurdle next year, while also continuing to test our television advertising strategy during the quarter.
Our earnings performance for the quarter on adjusted basis was slightly below our expectations due to unfavorable tax adjustments and higher healthcare costs and interest costs.
Fiscal '12 was a challenging year for us as the environment remained competitive, with a focus on value supported by heavy media levels by most of our competitors. However, we did make some key strategic decisions, which we believe have put our company in a better position going forward. First of all, we made good progress on our upgraded and focused brand position with television test, leveraging our free fresh-baked bread and our Garden Bar free with select entrées, which is a unique differentiator for us among our peers. We completed our marketing program testing in the fourth quarter, with the first quarter fiscal 2013 rollout of our -- what we think is a very good television marketing plan at spending levels more competitive with our peer group, coupled with a more balanced level of promotional spending.
While we still have more work to do on the marketing front, we are happy to report that our advertising continues to gain traction, and we estimate that our first quarter fiscal 2013 same-restaurant sales should be up approximately 2%. Dan will provide more details on this later in the call.
Second, we recently updated our annualized cost savings range to $40 million to $45 million or approximately $5 million higher than the previous quarters estimate. Approximately $8 million of these savings were realized in '12, and the remaining $32 million to $37 million will be realized in this fiscal year.
We plan to reinvest the majority of these total savings into our marketing programs, and we will continue to search for additional savings that do not erode the overall guest experience.
In addition to the cost savings noted above, we also closed 23 underperforming restaurants during the fourth quarter, which is expected to add $1.5 million to $2 million to EBITDA annually and slightly improve same-store sales also.
During the quarter, we acquired the Lime Fresh Mexican Grill concept for $24 million and have plans to grow this brand in the future, including 12 to 16 new company units this fiscal year and 20 plus, hopefully, plus-plus in the following year, fiscal '14. Contingent upon finding -- contingent upon site selection process in getting A sites. This is a very well-positioned, high-quality fast casual brand that offers good growth -- that offers very good growth potential and attractive potential cash-on-cash returns. Our current development strategy is focused on a few P1 markets, Florida, Washington, D.C., New York City area, as well as some other major market points up and down the East Coast.
Fourth, we made good progress on our conversion strategy with our fun, casual and high-value seafood conversion concept, Marlin & Ray's. This is our only conversion concept now, following the testing of other concepts over the last several years. And now we plan to add 5 to 7 new Marlin & Ray's in fiscal '13, as well as from scratch, ground up, to test the potential for a new unit growth in addition to converting Ruby Tuesday's. I'm very excited about that concept also.
Lastly, and very importantly, we recapitalized our balance sheet with a $250 million high-yield bond offering and revolver amendment that closed in early May, resulting in long-term debt capital that provides us with excellent flexibility. Michael will provide more details on this transaction shortly.
Speaking of Michael, we welcomed our new CFO, Michael Moore, to the company during the fourth quarter. As you recall in January, our prior CFO, Margie Duffy, announced her decision to retire at the end of the fiscal year. Margie had served in various accounting and finance capacities during her career, including CFO, for the last 10 years and was very instrumental in a number of key financial initiatives for the company, including leading the franchise partner acquisitions, Lime Fresh acquisition and equity and bond offerings. And we wish her much success in her future endeavors.
Michael has been with the company now for almost 3 months. He's fully up and running in his new role. Michael brings over 20 years of experience as a public and private company CFO, with companies including Bloomingdale's, the Kato Corporation, Advanced Auto Parts and most recently with Sun Capital Partners. Michael's diverse financial and operational background, including previous responsibilities in areas in accounting and finance, SEC reporting, investor relations, strategic planning, information technology and real estate development will be -- will all be instrumental as we execute on our strategic plans.
We have a number of positive things going on, most important traction on our Ruby Tuesday same-store sales, and believe we have good plans to improve our sales and profitability going forward.
I'll now turn the call over to Michael to discuss our financial performance.
Michael O. Moore
Thank you, Sandy. I appreciate the introduction. I'm excited to have joined the Ruby Tuesday team and believe we have a lot of great opportunities ahead of us. I look forward to working with the senior management team and the board to execute on our strategic plans.
I'll review the quarter in detail, provide a high-level summary of the year, give an update on the year-end balance sheet, including our high-yield transactions, sale leaseback program, and then Greg will give our updated guidance for fiscal '13.
We recorded a fourth quarter diluted loss per share of $0.09 or diluted earnings per share of $0.21, excluding the following items: Goodwill impairment costs of $16.9 million, debt prepayment penalties in deferred loans fee write-offs related to the high-yield transaction of $4.8 million, retirement and severance costs of $4.4 million, restaurant closure cost of $3.8 million and Lime Fresh deferred development fee write-off of $1 million.
This compares to our prior year earnings per share of $0.21 or $0.25 on an adjusted basis. We have included a reconciliation of these non-GAAP adjustments and the related earnings per share impact on the Investor Relations page of the Ruby Tuesday website at rubytuesday.com.
Our earnings performance for the quarter, excluding the items noted above, was below our expectations, primarily due to unfavorable year-end tax adjustments, higher health plan costs and higher interest expense resulting from our high-yield bond offering.
Total revenue increased 2.9% from the prior year, primarily due to the 53rd week in fiscal '12, which favorably impacted total revenue by 6.4% during the quarter, partially offset by a negative 4.6% same-restaurant sales. During the quarter, we acquired 7 company-owned and 4 franchise restaurants through the Lime Fresh acquisition, in addition to opening 3 Lime Fresh restaurants. As of quarter ends, we had a total of 13 company-owned Lime Fresh restaurants and 4 franchise restaurants.
Subsequent to quarter end, we opened our 14th company-owned Lime Fresh location. During the quarter, we also opened 4 Marlin & Ray's seafood restaurants and now have 11 Marlin & Ray's locations open. We permanently closed 26 restaurants during the quarter, 23 of which were part of the planned closures announced last quarter, which is expected to increase EBITDA by $1.5 million to $2 million annually and slightly improve same-restaurant sales.
Franchise revenue decreased 3.4%, primarily due to a 7.3% decline in same-restaurant sales for domestic franchise restaurants. The restaurant-level operating margin was 18.8% for the quarter compared to 17.6% a year earlier, or an improvement of 120 basis points, primarily due to our supply chain cost savings initiatives.
As a result of our savings initiatives, we are operating a leaner our cost structure and are well-positioned to deliver attractive profit leverage and incremental revenue as our sales improve in the future.
Cost of goods sold was 27.2% of sales for the quarter versus 29.4% on the prior year or an improvement of 220 basis points. This decrease was due to cost savings negotiated with our primary food vendors as part of our cost savings program and lower promotional spending during the quarter. Labor cost as a percent of sales increased to 33.9%, up from 33.0% for the prior year, primarily due to loss leverage on lower same-restaurant sales, coupled with merit increases during the year and minimum wage increases at several states.
Other restaurant operating costs were unfavorable 10 basis points, primarily due to higher legal cost. SG&A expenses were 11.4% of sales versus 6.7% last year due to the severance and retirement costs I mentioned earlier and higher television advertising cost, a majority of which has been funded by supply chain savings.
Interest expense in the quarter increased to $7.8 million from $4.2 million or an increase of $3.6 million, primarily due to prepayment premiums on notes and mortgage debt that was paid off as part of the high-yield transaction, along with an increase in interest expense from the high-yield bonds.
Taxes for the quarter were a credit of $12.3 million due to a pretax loss, coupled with our FICA tip and work opportunity tax credits. For the full year of fiscal '12, revenues increased 4.8%, primarily due to a full year run rate of the franchise partnership acquisitions and the 53rd week, partially offset by a same-restaurant sale decrease of 4.5% at company-owned restaurants. We recorded a diluted loss per share of $0.00 or diluted earnings per share of $0.41, excluding the impact of the goodwill impairment cost, restaurant closure cost, debt prepayment penalties and deferred loan fee write-offs related to our high-yield transaction, retirement and severance cost and the Lime Fresh deferred development fee write-off.
This compares to prior year diluted earnings per share of $0.72 or a diluted earnings per share of $0.73 on an adjusted basis. Our restaurant operating margin was 6.2% compared with 17% with the decline primarily related to the loss of leverage on lower sales.
Turning to the balance sheet. Our book debt was $327 million, down from $345 million last year or a reduction of $18 million due to our focus on paying down debt. And we had $48 million in cash on our balance sheet at the end of the year from the high-yield bond offering proceeds and the sale leaseback transactions. Total funded debt to EBITDAR, the ratio pertinent to our loan covenants was 3.25 and provides us with 125 basis points of cushion on our loan covenants. These more flexible loan covenants are a result of our revolving credit facility amendment, which closed in tandem with our high-yield bond deal.
During the fourth quarter, we closed on a $250 million senior unsecured notes offering with an 8-year maturity priced at 7 5/8%. As a result of the transaction, we paid off $217 million of outstanding debt, reduced our revolver commitment size from $380 million to $200 million, negotiated more favorable covenants under our revolver, obtained attractive long-term interest rates, extended the maturity of the majority of our debt up to 8 years and built excess cash on our balance sheet. This transaction has provided us with greater financial flexibility, which will enable us to, one, continue to invest in the future by growing our Lime Fresh and Marlin & Ray's concepts; two, continue to reduce our debt and improve our leverage metrics; and three, opportunistically repurchase shares.
We believe this new capital structure provides good financial flexibility that will enable us to create value by executing on our long-term strategic plans. We appreciate the confidence that our new bondholders have on our strategy. In addition to the bond transaction, we continued to make good progress on our sale-leaseback strategy by closing on sale-leaseback transactions on 9 restaurants during the quarter, resulting in $19.9 million of gross proceeds. Subsequent to the end of the quarter, we closed sale-leaseback transactions on an additional 9 restaurants, resulting in $20.2 million of gross proceeds.
Today, we have completed sale-leaseback transactions on 19 restaurants, resulting in $42.5 million of gross proceeds, with cap rates of approximately 7%.
I will now turn the call over to Greg, who will go over our guidance for the year.
Greg Ashley
Thanks, Michael. Our guidance for fiscal '13 is as follows. We estimate same-restaurant sales for company-owned restaurants to be in the range of flat to up 2% for the year. For the year, we expect to open 12 to 16 Lime Fresh restaurants, as Sandy noted earlier. We plan to convert 5 to 7 company-owned restaurants of Marlin & Ray's. We plan to open 1 newly constructed Marlin & Ray's and closed 5 to 7 company-owned restaurants, which obviously exclude our conversions.
For the year, our franchisees expect to open 8 to 10 restaurants, up to 7 of which will be international and close 2 to 4 restaurants, of the 2 of which will be international. We expect our restaurant operating margins to improve approximately 100 to 150 basis points due to our cost savings initiatives, coupled with fixed cost leverage on incremental sales. A significant portion of our proteins are locked in the second fiscal quarter. And while we may have a little exposure in the back half of the year given the summer drought conditions, we do not currently anticipate the impact to be material at this time.
Our depreciation is estimated to be in the $62 million to $64 million range. Excluding our advertising expense, SG&A is targeted to decline by 6% to 10% from a year earlier, primarily due to lower consulting fees and other cost savings initiatives. Our advertising expense is estimated to increase 55% to 65% from a year earlier, primarily due to the incremental television advertising expense, which is largely funded by our cost savings initiatives.
Our interest expense is estimated to be in the $24 million to $26 million range by product of this high-yield transaction. Based on our lower pretax income, coupled with our FICA tip and other employment-related tax credits, we anticipate a net tax benefit of $5 million to $10 million for the year.
Our GAAP diluted earnings per share for the year are estimated to be in the $0.20 to $0.30 range. Excluding the impact of additional pension expense associated with the CEO's payout and new CEO transition-related expenses, our diluted earnings per share for the year are estimated to be in the $0.24 to $0.34 range. Our fully diluted weighted average shares outstanding are estimated to be approximately $63 million to $64 million for the year. Capital expenditures are expected to be $44 million to $50 million, and we estimate we will generate $20 million to $30 million of free cash flow during the year. This range is unfavorable to the fiscal 2012 free cash flow of $74 million due to an array of items, including higher interest expense, our CEO pension payout, higher capital expenditures, the impact of the 53rd week, the estimated lease reserves settlements from the closed restaurant in the fourth quarter, changes in working capital and slightly lower EBITDA.
I will now turn the call over to Dan to give an update on our sales and brand building initiatives.
Daniel P. Dillon
Thanks, Greg. During the fourth quarter, we completed our television and promotional marketing tests, which included changing our discount strategy in combination with various television media plans. Our negative sales for the quarter were primarily driven by a 32% reduction in our level of coupons during the quarter in order to get a lower quarterly run rate going forward, as Sandy noted earlier.
Based on the research and analytics of our marketing throughout fiscal year 2012, we believe we've developed a marketing plan for the year that should stabilize and begin to grow our traffic in same-restaurant sales. Our marketing plan is centered around 100% of our markets being covered on television for at least 8 weeks every quarter. With TV as a foundation, we've created an integrated marketing plan that includes digital advertising, social media, outdoor print and promotional offerings in high-quality distribution channels.
Our marketing message continues to promote our Fresh Endless Garden Bar and Fresh-baked Garlic Cheese Biscuits, both complementary with over 20 entrées starting at $9.99. We had plans to highlight various limited time offers throughout the year.
Results from our television advertising campaign and integrated marketing efforts will take time to build. But as Sandy noted earlier, we're excited that our current traffic and sales trends are estimated to result in same-restaurant sales of approximately 2% for the first quarter of fiscal year 2013, which will be our first positive sales in 6 quarters.
We're also pleased with the results of our new feature menu introduced at the beginning of March, which includes appetizers such as our Asian Chicken Lettuce Wrap, our Baja Chicken Tacos and Baja Chicken Quesadillas in addition to entrées, including our Jamaican Jerk Shrimp and Asiago Peppercorn Sirloin. These offerings are receiving strong preference and feedback from our guests, and we will continue to add boldly-flavored unique products like these to our menus throughout the fiscal year.
For the remainder of the year, our marketing focus will be on driving traffic by optimizing our mix at television and higher-end promotional offers, deploying new menu items that drive traffic by offering value and affordability to our guests, and continuing to leverage our consumer research, develop new programs and products.
Now Kimberly will provide details on operational initiatives for Ruby Tuesday, as well as Marlin & Ray's.
Kimberly M. Grant
Thank you, Dan. From an operation standpoint, we are excited about the year ahead as we prepare to execute on our operating plans. Our primary goals continue to center around the efforts to strengthen the Ruby Tuesday brand, as well as build a strong foundation for our 2 emerging concepts, Marlin & Ray's and Lime Fresh. First and foremost, we are focused on selecting, training and retaining the best operating teams in the industry. We know that operating our concepts with high levels of guest satisfaction starts with the quality of the teams we select, the effectiveness of our training programs and our ability to provide a great place to work for our teams.
We completed fiscal 2012 with approximately 100% hourly turnover and less than 24% management turnover, consistent with previous years and relatively low compared to our industry norms when you include all team members hired. Our goal going forward is to dramatically improve our short-term retention rates, so we can ultimately achieve hourly turnover levels well below 80%.
We know that high levels of retention, now that the management and hourly team levels results in higher levels of team member engagement that positively impacts our guests to a consistent and high-quality stunning experience across the brand.
Over the last 90 days, we have deployed a number of technology enhancements, including PeopleMatter, hire and learn and HotSchedule that show -- enable us to better select, train and retain our team. These tools greatly streamline the on-boarding process to help us maintain better levels of overall staffing in addition to providing our teams with industry-leading scheduling, training and communication technologies.
With respect to our overall guest satisfaction, we are excited about what our brand tracker external research is continuing to tell us from a consumer sentiments point. Since rolling out our new surprise and delight service initiatives in the spring, we continue to achieve scores that are the best in bar and grill, while continuing to close the gap versus specialty restaurants.
Based on our most recent research, our markets that are supported by television are scoring higher in both overall satisfaction and consistent experience across locations, which indicates we are performing well with both new and lapse guests.
Our internal guest satisfaction scores continue to remain at very strong levels as well. Approximately 73% of our guests rate their experience a 5 on a scale of 1-to-5 during the year, and 93% rated their experience either a 4 or 5.
Our operations priority for the year ahead is to maintain these high levels of guest satisfaction scores, as well as the drive new trial and frequency through our increased television advertising campaign. Consistently providing a high-quality guest experience in combination with our media presence, is a key factor that over time should enable us to improve our core traffic trends and lead to improved same-restaurant sales.
We have started this fiscal year with good momentum in both of our emerging concepts, Lime Fresh and Marlin & Ray's. Lime Fresh offers a differentiated dining experience with full service menu variety and quality, personalized service elements like refills and busing not normally found in most fast casual restaurants, while providing the speed and convenience that makes fast casual so successful today.
Our strategic priorities for Lime Fresh are to enhance the overall brand positioning and consumer appeal beyond South Florida, to create higher levels of brand awareness during the first month of operations for our new opening and to continue optimizing the overall operating model.
At Marlin & Ray's, we are encouraged by the opening performance of our most recent conversion restaurants. We continue to see average check levels, higher than the previous Ruby's location, primarily due to stronger appetizer, alcohol and dessert sales. As we look ahead for fiscal 2013, our operational focus areas for Marlin & Ray's center around utilizing research and consumer sentiments to drive our menu offering, adding regional features to create the feel of a local seafood restaurant, leveraging local store marketing tactics to increase brand awareness and drive trial and frequency, and lowering our food and labor costs to create more profit incrementality for this brand.
We are excited about all 3 of our key brands and believe we have good plans to deliver great food, great service in each of these 3 distinct operating environments.
I will now turn the call back over to Sandy for a wrap up.
Samuel E. Beall
Thank you, Kimberly. In closing, I want to comment briefly on a couple of recent announcements regarding Ruby Tuesday. The first is regarding my intention to retire from my position as Chairman of the Board, CEO and President, which was announced almost 2 months ago. As the founder of Ruby Tuesday, it's been a privilege to build the company from the ground up and lead this great brand over the past 40 years. However, I thought it was time to begin a new phase of my life after 40 years, given that we hopefully have a brand headed in the right direction evidenced by positive same-store sales.
We made significant accomplishments over the last several years that have positioned the brand for success in the future. Our Board of Directors has formed a committee that will oversee the search and selection process. I will continue to serve as Chairman and CEO and President until a successor is named, hopefully, later this year.
Secondly, we are spending a lot of time to ensure that we have the right CEO in place as I leave the company, as well as the right Board of Directors composition to support and help grow the company. We believe that change is generally good, and the new long-term CEO in tandem with the board that offers a combination of past history and fresh thinking for the future, positions our company to create good value. In our 8-K filing today, it was announced that Dr. Donald Ratajczak and Claire Arnold will retire from the board after the October annual meeting when their term ends.
Additionally, we announced that Jimmy Haslam will retire from the board, effective immediately, in order to focus on his professional efforts as President and CEO of Pilot Travel Centers. And Steve Barkurn will also resign from the board after the October annual meeting.
I'd like to thank Don, Claire, Jimmy and Steve for their contributions and counsel as members of the board and wish them the very best as they move forward. The board is currently assessing independent director candidates with significant retail restaurant and financial experience, and we hope to have 2 new independent board members in place by the fall.
As we look back on fiscal '12, it was a challenging year for Ruby Tuesday, in particular, on the sales front. But we have accomplished a lot during the year and are in a much better position as a company to create value longer term. As we begin fiscal year '13, we're focused on several key initiatives, which will build upon the groundwork we laid over the past year, and those are, increasing same-restaurant sales at Ruby Tuesday brand. You got to have the same-restaurant sales this year and every year consistently. Two, gearing up to grow our fast casual brand Lime Fresh which we're very excited about. Growing our Marlin & Ray's value-oriented seafood concept, and we are excited about that potential also. If we can do all that, of course, growing EBITDA, earnings per share and free cash flow through growth, sales leverage and tight cost controls and maintaining a strong balance sheet and allocating capital to maximize returns.
While we don't expect any help from the overall economy, economic environment, we to believe we have solid and prudent plans in place to create value in this environment and are excited about the future of Ruby Tuesday's, as well as our growth brands Lime Fresh and Marlin & Ray's.
With that, I'll open it up for questions.
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