RRGB - I Have Seen this move before and the ending is ugly

There are currently two major components driving the direction of RRGB's traffic trends: pricing and advertising. As I have said before, specifically as it relates to SONC and CBRL, rising prices often leads to a drop off in traffic. It appears that senior management at RRGB is using price to protect margins, at the expense of traffic trends. Unfortunately, this is a story that has an ugly ending for shareholders.
  • Average check was up 4.3% in 1Q08 (traffic down 0.4%) and RRGB management commented at the Oppenheimer conference today that it implemented its expected late June 2.7% price increase. 3Q08's traffic trends could be hurt significantly by this most recent price increase as the company will be running at about 6% price through mid-August and should average about 4% for the year.
  • RRGB launched its national advertising campaign in April of 2007 and ran advertisements for 11 weeks in FY07. This year the company increased this ad time to 23 weeks and its total spending to $18-$18.5 million from $11.5 million in 2007. RRGB's traffic trends benefited in 2Q07 and 3Q07 from this incremental spending but turned negative in 4Q07 when the ads went off the air. There was some sequential improvement in 1Q08 traffic (still slightly negative) when there were incremental weeks of advertising relative to no advertising in 1Q07. 2Q08 advertising levels, however, will be about even with last year. The chart to the right shows the quarters when there was no advertising, increased advertising weeks versus the prior year (upward arrows) or an even level YOY relative to reported traffic results.
  • RRGB is scheduled to report its 2Q08 results on August 14, but management issued an 8-K today stating that recent sales trends may trend to the low end of the previously guided sales assumption for the full-year 2008. Because the company had just raised its top-line guidance on its 1Q08 conference call in late May to 2.5%-4% same-store sales growth (from 2%-3.5%), $905-$918 million in revenues (from $880-$893 millions), trends must have decelerated during 2Q. Traffic was most likely hurt by both the increased pricing relative to last year (and this is before the most recent increase) combined with the fact that there was no incremental advertising relative to 2Q07.