1Q10 should give us more of an indication of whether the company’s LTO promotions are effectively driving same-store sales higher and whether current estimates are achievable.
RRGB is scheduled to report 1Q10 earnings after the close today. RRGB’s 4Q09 earnings release and call left me with more questions than answers. During 4Q09, same-store sales fell 10.5%, decreasing about 40 bps on a 2-year average basis from the prior quarter. In the first 7 weeks of 1Q10, comparable sales declined 7.8% (including -0.8% impact from unfavorable weather) versus -4.6% in the same period in 2009, implying a 275 bp sequential improvement in 2-year average trends from 4Q09. Despite this -7.8% result, management guided to flat to slightly lower same-store sales growth for 1Q10 and +2.4% to +3.4% growth for the full year.
Management’s guidance is aggressive relative to what we have heard from its competitors and is completely reliant on the success of the company’s Spring LTO which was rolled out the week of February 15, combined with the supporting national advertising campaign launched on February 22. The Spring LTO was scheduled to run 8 weeks supported by 4 weeks (over a 5-week timeframe) of national advertising that was expected to cost $6.7 million in 1Q10. For reference, RRGB’s total FY10 TV advertising expense is expected to increase to $16-$17 million, up from $2.3 million in FY09.
Based on RRGB’s Fall 2009 LTO promotion, which ran in about one third of its company units, management is comfortable with its current guidance. In 4Q09, same-store sales growth was -5.1% in the 10 markets which ran the Fall LTO supported by local TV advertising versus -14.9% in the non-TV markets. This success is driving management’s optimistic growth goals for 2010. Specifically, RRGB’s FY10 same-store sales growth guidance assumes a 5%-6% lift from its expected three LTO promotions. I found this guidance slightly questionable because management, themselves, are not yet fully committed to the three promotions as they want to measure the success of the Spring LTO in 1Q10.
It is important to remember that a 1% change in reported same-store sales growth equates to about $0.18 per share on a full-year basis, which is why reported 1Q10 sales results are so important. If the Spring LTO promotion proves as successful as management hopes, the company will follow with two more. If it is not, they have said they will not invest the additional $10 million in advertising costs to support two additional LTOs, which would significantly impact management’s full year same-store sales guidance relative to the 5% to 6% lift expected from running all three. Management also said that depending on trends during the Spring LTO, it would decide whether the two remaining LTOs would be focused on a specific price point, and if so, that it would prefer to move prices higher than the $5.99 price point used in 1Q10. I can understand management wanting to raise the price point but moving away from a specific price point all together would likely be a mistake from a traffic perspective.
As I said earlier, management guided to a flat to slightly down same-store sales comp in 1Q10 and the street is at -2.2%. A flat comp would assume a 490 bp sequential improvement in 2-year trends from 4Q09 relative to the casual dining industry’s 215 bp improvement, as reported by Malcolm Knapp. Given that same-store sales were down 7.8% in the first 7 weeks of 1Q10, a flat comp implies that same-store sales improve to +6.1% in the back half of the quarter (16-week quarter). The company is facing a much easier comparison of an estimated -10.8% in the back half of the quarter versus -4.6% in the first 7 weeks of 2009. The +6.1% in the last 9 weeks of the quarter would imply another 385 bps of sequential improvement in trends on a 2-year average basis from earlier in the quarter. That being said, RRGB has a lot riding on this Spring LTO and reported 1Q10 results could be a real turning point for the company from a top-line perspective, for better or for worse.
From a margin standpoint, it will be important to hear what RRGB says about commodity costs for the remainder of the year. As of 4Q09, the company was guiding to 2% to 2.5% commodity deflation for FY10. During the fourth quarter, lower food costs helped restaurant margin by 20 bps on a YOY basis and management commented that its average price of ground beef in the back half of 2009 was below 2008 prices. Hamburger, which the company does not have under contract, accounts for about 11% of the company’s food and beverage costs and beef prices are moving higher. Management pointed out on its last earnings call that beef burgers have increased as a percentage of the company’s sales mix as a result of the recent LTOs which have been focused on the company’s gourmet burger offerings.
Howard Penney
Managing Director