Benihana Q2 Earnings Call Transcript

123jump.com Staff
12 Dec, 2008
New York City

Japanese food restaurant chain revenues in the quarter rose 4.5% to $70 million from a year ago quarter and earnings declined to $2 million or 11 cents a share compared to $2.5 million or 15 cents a share. For the fiscal 2009 the company expects sales between $303 million and $308 million.

Benihana Inc. ((BNHN))
Q2 2009 Earnings Call Transcript
November 20, 2008 5:00 p.m. ET

Executives

Joel A. Schwartz - Chairman and Chief Executive Officer
Juan C. Garcia - President, Chief Operating Officer
Jose I. Ortega - Chief Financial Officer, Vice President

Analysts

Michael Gallo - C.L. King & Associates
Brad Ludington - Keybanc Capital Markets
Anton Brenner - Roth Capital Partners
William Hamilton – SMH Capital
Robert Kosowsky - OFI Institutional
Greg Reudy – Stephens Inc.
Michael Rubin [ph] - Sidoti & Company

Presentation

Operator

Good morning and welcome to the Benihana Inc. second quarter fiscal 2009 earnings conference call. Our hosts to day are Joel A. Schwartz, Chairman and Chief Executive Officer; Juan Garcia, President and Chief Operating Officer; and Jose I. Ortega, Vice President and Chief Financial Officer. (Operator Instructions) At this time all participants have been placed in a listen-only mode and the floor will be open for questions and comments following the presentation. Please be aware that today’s conference is being recorded. Statements in this conference call concerning the company’s business outlook or future economic performance, anticipated profitability, revenues, expenses, or other financial items together with other statements that are not historical fact are forward-looking statements as the term is defined under Federal Security laws. Forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those stated in such statements.

Such risks, uncertainties and factors include, but are not limited to, changes in customers tastes and preferences, acceptance of the companies concepts and new locations, obtaining qualified personnel, industry security, fluctuation in customer demand, the seasonal nature of the business, fluctuations of commodities costs, the ability to complete construction of new units in a timely manner, obtaining governmental permits on reasonably timely basis, and general economic conditions, as well as other risks detailed in the company’s filings with the Securities and Exchange Commission.

I would now like to turn the floor over to Benihana’s chairman and chief executive officer Joel Schwartz. Sir, the floor is yours.

Joel Schwartz – Chairman and Chief Executive Officer

Thank you. Hello everyone and thank you all for joining us today. I will start with some brief updates on our action plans for addressing the current challenges to our company. Afterwards I’ll turn the call over to our President and Chief Operating Officer, Juan Garcia to review our development of remodeling activities and Jose Ortega our Vice President and CFO to conclude our formal remarks with a discussion of our second quarter financials as well as update our fiscal 2009 guidance. After that we’ll answer your questions.

We are operating in perhaps the most difficult environment we’ve seen quite sometime and our quarterly results reflect these broad economic challenges. I want to communicate what we are doing to maintain shareholder value today and the financial strength of the company in the face of these prevailing conditions. The state of our economy and near-term outlook on the consumer has underscored the importance of preserving capital and doing more with less. We are operating our business with this mindset and are doing everything in our power to manage our business with respect to both the credit markets and restaurant operating environment as we will now explain. Undoubtedly many of you maybe concerned about the credit market turmoil and how it relates to our current banking relationships with Wachovia. In view of the economy’s negative impact on our industry and working in conjunction with Wachovia, we have successfully amended certain terms of our credit facility. We believe that these changes will allow us to continue executing on our operating and development plans. Jose will further explain the changes in his review of our financials.

You may recall that we decided to forego two remodeling projects and would therefore be ramping up the entire revitalization program next month when our City of Industry, California location is completed. We are further limited on near-term expansion to those development projects with signed leases and this includes some locations that have now been delayed by the developers themselves for various reasons, having nothing to do with the company. As a result this will further limit our CapEx over the next 18 months as the time tables for construction is pushed back. Looking ahead, we will only commence the new projects that can surpass our stringent hurdle rates and are presently rather cautious in signing deals. Our current pipeline of 14 restaurants is sufficient to provide us with a meaningful opportunity and an economic recovery without over burdening our credit facility and our balance sheet. In other words, we have already reached the appropriate balance between managing the business for today and being positioned for future opportunities as they present themselves.

Although we are addressing the sales challenges to our business, we realize there are limitations to what we can do to meaningfully move the needle in an environment that recently witnessed consumer confidence that is an all time low. Basically we are competing for market share in a smaller pool of would be diners as many people have decided to trade down or simply forego restaurant meals altogether in order to save money. Of course in today’s environment we are stressing the quality of our offerings including service, ambience and interesting foods. Essentially that’s all the touch points that build brand equity and address our value position. We have and will continue to use direct mail including $10 gift cards in some locations to entice trial traffic and higher guest frequency. This is a tactical effort in an underperforming market to create a little more excitement around our entertainment and dining offerings. Given our cultural status within the industry we are however very careful so as not to do anything that would tarnish our reputation and damage the perception of our brand.

With the upcoming holidays we are currently rolling several promotions at our Teppanyaki Restaurants with the intention of encouraging repeat visits within a shorter timeframe. Our holiday Trio menu promotion, which runs through December 31, includes a filet mignon, shrimp, chicken entrée for $35 along with a $10 gift card for a future visit. We are enticing customers to be generous with friends and family in distributing Benihana gift cards while also treating themselves. For every $50 gift card the buyer receives a certificate for a Benihana Roll, one of our specialty sushi rolls on a future visit by mere March 31st, while for every $100 gift card the buyer receives a certificate for a Benihana Delight, one of our specialty entrées on a future visit by March 31st. We are also once again offering our guests the opportunity to train to be a Benihana Master Teppanyaki Chef and cook for their family. This $440 package a gift for four with training for the chef in advance includes a souvenir photo an apron and sash. The truth is that people come to Benihana for all sorts of reasons but most of all to celebrate special occasions such as birthdays, valentine days, holidays, graduations and anniversaries. Considering today’s challenges people are seeking comfortable surroundings, familiarity and are really looking for something to celebrate. We therefore felt the need to emphasize in our marketing efforts, our visit to Benihana is like taking a mini vacation from the everyday and is something truly special.

Our multimedia now lets special campaign which floats in September highlights that when customers are looking for fresh food, personalized service, and chef inspired excitement at every meal, there is no better place to dine than at Benihana. The campaign is largely web-based but is being supplemented with print, billboard and radio. We are also showcasing our Benihana and Haru brands at Madison Square Gardens in New York City with visibility on both 7th and 8th avenue Marquis Signs. We’ve also completely redesigned our Benihana website making it easier to navigate, locate a nearby restaurant or send a Benigram to a friend. As you know, Benihana has only helped its guests memorialize their special events and celebrations with pictures taken at a restaurant. In conjunction with our enhanced website we also launched a new digital picture souvenir program that replaces the existing Polaroid cameras and film in the restaurants. The new technology allows us to immediately print the 4 x 6 color photographs, which is placed in picture frames provided to the guests.

As an additional benefit on the back of the frame, the guests are also invited to go to www.benihana.com/pictures where they can download the picture to share their experiences with friends and family. Our marketing department is also using the tool to capture valuable marketing data which will be used in developing future marketing campaigns. At RA Sushi we have expanded our happy hour menus for both beverages and appetizers as we focus on capturing more guests during the day part. RA Sushi continues to feature half price beverages and appetizers on all occasions during happy hour as well.

Both of our sushi brands are also pounding the pavement by reaching out for all the businesses and hotel concierges. While addressing our top line by encouraging guests and victors more frequently we are also strengthening our operations in the face of the mini sales volume by reducing expenses. Our labor costs year-over-year held steady as a percentage of sales and despite a reduction in comparable sales and higher minimum laboring. In addition to better aligning current sales trend with our latest schedule and reducing overtime we also make greater use of restaurant regional managers in day-to-day operations.

Other initiatives employees include promoting greater purchasing synergies across the organization in the areas of food and beverage, restaurant equipment and supplies. I should also note that similar to the previous quarter, we once again leveraged our G&A costs with much needed investments already made in the past few years. Our corporate infrastructure is now employed to manage the business and we look to further leverage as we add some additional units and ultimately when sales trends begin to improve. Our organization is also more streamlined than it has ever been and while this is certainly important for the health of our business in the near-term, the full benefit of these bill efficiencies will be even more appreciated once we emerge from this current downturn and can begin to leverage our costs through higher sales volumes.

In summary, we are in unprecedented times but remain focused on what we believe are the keys to continue creating shareholder value. The strategy that I’ve laid out of preserving capital, limiting development is accentuating the core characteristics of our namesake brand and carefully monitoring our spending levels is the surest way to successfully riding out this very difficult period. Above all, we have three solid brands that will return compelling economic results over time in our long-term opportunity to remain solid. As always I want to thank all the Benihana team members for their continuing support, effort and commitment to offering to each and every guest that they are all assured of the special experience.

At this time I’ll turn the call over to our COO Juan Garcia. Juan?

Juan Garcia – President and Chief Operating Officer

Thank you, Joel. As we review our development and remodeling activity, during the fiscal second quarter we opened 1 RA Sushi in Chino Hills California and a shop at Chino Hills in a new mixed style lifestyle retail center that features more than 60 merchants. Due to a number of landlord delays outside of our control we now expect to complete 8 restaurants openings this fiscal year versus 11 previously. These 8 locations consist of 4 Benihana Teppanyaki and 4 RA Sushi restaurants of which we have already opened 3 RA Sushi locations through the end of the fiscal second quarter. The remaining Teppanyaki openings include Columbus, Ohio, Plano, Texas, Plymouth Meeting Pennsylvania and Coral Spring Florida, while the remaining RA Sushi opening is in Huntington Beach, California. All 5 locations are scheduled to open in the December, January timeframe. The three locations that have been delayed will only have a minimal effect on the CapEx spending for fiscal 2009 as construction will begin in fiscal 2009 but are slated to open in early fiscal 2010. The 3 RA Sushi locations will be opening in Houston Texas, Leawood Kansas, and Atlanta, Georgia. With many large restaurant chains severely cutting development our recognized brands have become an even more highly sought after tenant, which enables us to negotiate with landlords on favorable terms at our discretion. While we remain growth-oriented we will not pursue growth at any cost and in the current turmoil and the financial markets has started believing that we must balance on our enthusiasm for our 3 brands with a healthy dose of caution.

In total there are currently 14 restaurants under development, including 8 Benihana Teppanyaki and 6 RA Sushi restaurants. These are all carefully screened premier sites as we use to build long-term relationships with our guests. Beyond those locations we are being extraordinarily disciplined so that as we do commit to additional sites we are as confident as we can be that we can wisely deploy our shareholder’s capital. That being said, these signings can take place between 15 and 18 months ahead of restaurant opening. So, even if we decide additional leases over the next few months in all likelihood these locations will be opening well into an economic recovery. Once we are complete with these next 8 locations, which we know is in early 2010, the remaining 6 restaurants we have under development will be opened in the latter part of fiscal 2010 and fiscal 11. So, there is a lot of flexibility on this schedule that we can use to our advantage as necessary. As you know that even in this tough economic environment our most recent of opening some of which have been in what are widely regarded as troubled markets such as software are generating strong sales volumes.

With regards to our Benihana Teppanyaki revitalization program, we have essentially put the bad chapter behind us. During the fiscal second quarter we are reopening at Newport Beach, California as well as in Dearborn Michigan. The new Dearborn facility was built adjacent to our prior restaurant which has since been torn down. Our 22nd and final remodeling effort in the city of Industry California is expected to reopen in December. We are also in the midst of finishing the reconstruction of our Benihana Teppanyaki restaurant in Memphis, Tennessee. We suffered a fire in the fiscal fourth quarter of last year and are using this opportunity to rebuild that location from the ground up with our expanded prototype design which includes four additional Teppanyaki tables. The Memphis location is currently scheduled to open in the December, January timeframe.

That concludes our development and remodeling summary. I’d now like to turn the call over to Mr. Jose Ortega.

Jose Ortega – Chief Financial Officer

Thank you, Juan and good afternoon everyone. I’m going to review our financials for the fiscal second quarter as well as update our annual guidance for the full year. I’ll also discuss the terms of our revised credit facility and how we intend to manage our capital structure given the state of the business. On the top line we delivered total revenue of $70 million for the period which was 4.5% higher than a year ago, including franchise fees and royalties which were up by 5.7% higher than last year at about $400000. There were a total of 1055 store operating weeks in the second fiscal quarter of 2009 compared to 940 store operating weeks in the second fiscal quarter of 2008 or an increase of 12.3%. Total restaurant sales were $69.6 million which was 4.5% higher than last year. The year-over-year comparison comprised of $8.2 million of sales from new restaurants offset by a decrease of $4.1 million due to lower comparable sales as well as $400000 in sales loss of units from units closed and $600000 net related to temporary closures in the current year.

Benihana Teppanyaki total sales decreased for the quarter by 5.2% to $46.4 million. Haru store sales increased 16.4% to $8.7 million and RA Sushi sales increased 42.7% to $14.4 million. Company wide comparable restaurant sales were now 6.5%, while within our three concepts comparable restaurant sales were down 5.1% at Benihana Teeppanyaki, down 11.4% at RA Sushi and down 8% at Haru. In terms of cost, food and beverage costs were 24.3% of restaurant sales during the second quarter which were 80 basis points higher in the comparable period in the prior year. However, concepts benefited from nominal pricing taken over past few quarters. However higher commodity costs proved particularly challenging throughout the period and caused margin erosion. Additionally the discount at happy hour menu at RA Sushi offset any benefits from bare general menu price increases. The only price increase which we are currently contemplating for the balance of fiscal 2009 is on certain alcoholic beverages at RA Sushi, which should amount to less than 1% in aggregate pricing for the brand.

Looking forward, we have reviewed our beef contract for the full 12 month period calendar 2009 which coincides with the beginning of our fourth fiscal quarter, with a 5% decrease in costs compared to our current contract, while our shrimp contract was renewed over the same timeframe at a 7% decrease in costs. Lobster has been renewed for the six months period January to June at a 2% decrease in costs. We are also maintaining current pricing with our main distribution partner for calendar 2009, where we stand to benefit from lower gas prices as well. We also consider to aggressively pursue other opportunities in terms of sourcing. As we discussed in our prior calls, we are beginning to make changes for the food operations in so far as how food is prepared in the back of the house, we are going to contracting additional items that historically we have not contracted and leveraging our purchasing power on different items across all three concepts, where possible. These efforts should further help along our cost of sales and keep them in check.

Labor and related costs were 34.6% of restaurant sales, which was only 10 basis points higher than last year. As discussed during our first fiscal quarter call we have been addressing labor costs at the restaurants. Delivery costs management has been our top priority within our operations where we are delivering food freeze with the success of our efforts here, given the cost to leveraging is normally associated with lower comparable sales volumes coupled with higher salaries due to minimum wage increases. Our actions include reducing total hours across all restaurant personnel where managers at both the regional and store levels are monitoring all schedules to ensure efficiency without sacrificing service. Also it should be noted that sequentially the labor related costs were 120 basis points lower than in the first quarter of the current fiscal year, while the second quarter is usually the time of the year where we experience deleveraging of labor due to seasonality. In addition to our labor costs and fuel efforts, we have begun to realize the end of operating inefficiencies associated with excess labor due to the renovation program.

Currently at certain locations open management positions are not being back filled and regional managers have also been used as part store labor where these vacant positions exist. At our sushi concept where we specifically have some closer locations like at Haru and RA Sushi, we have reduced the management staff and are having regional managers fill in for general managers at some of the different restaurants throughout the week where appropriate. Given our current sales volumes, we realized that further reductions of labor maybe necessary but we will never cross the line where guest experience itself is marginalized. To ride out the major cost drivers at the restaurant level, it is necessary if we have 60 basis points to 3.6% of restaurant sales with the higher energy costs as well as synergy leveraging. Other restaurant expenses were up 30 basis points to 8.3% compared to the prior year.

Depreciation and amortization was flat at 5.8% of restaurant sales and includes less than $100000 net in additional depreciation related to shortened useful life for those restaurants affected by our now almost complete rejuvenation program. Taking these together we generated $9 million in restaurant operating profit compared to $10.3 million in the same period last year with margins decreasing 250 basis points to 12.9% of restaurant sales. When compared sequentially however, restaurant operating profit margins fell by about 30 basis points from the fiscal first quarter. Restaurant opening costs were approximately $250000 and roughly a third less than the prior year quarter due to the timing of openings during the period.

Marketing, general and administrative expenses were 8.3% of restaurant sales and 80 basis points lower on a year-over-year basis. In terms of absolute dollars, marketing, general and administrative expenses were about $300000 below prior year’s second fiscal quarter. As we said last quarter, we believe we are fully staffed at the corporate level and had all key positions filled, and given our total sales growth we are able to be generally leveraging our corporate infrastructure across a wider restaurant base. The extent of continued leveraging however is dependent upon sales policies.

Net income was $2 million for the second quarter of fiscal 2009. It was $2.5 million in the same period of the prior year. Our effective tax rate of 35% was 120 basis points lower than at 36.2% in the prior year quarter and this was due to the effect of increasing tax credits and decreasing taxable income. Diluted earnings per share were 11 cents on a base of 15.3 million shares and equivalents compared to 15 cents in the prior year on a base of 17.2 million shares and equivalents. As Joel mentioned earlier, in light of the current economic conditions we have successfully amended the terms of our credit facility with Wachovia. Under the amended terms the company can borrow up to $60 million under certain terms and conditions while keeping for end of period the covenant ratios previously defined. Along with these changes applicable interest rate margins have been redefined as well. Management is pleased with these terms and believes that the company continues to have sufficient capital available to execute operating development plans with all the flexibility necessary in today’s economic environment.

We had approximately $1.6 million in cash and together with our operating cash flows and credit facilities our cash needs are sufficiently covered. Our credit borrowings against the credit facility were roughly $27.4 million at the end of the fiscal period. CapEx for the quarter was approximately $11.6 million including approximately $6 million for new units and rest of the $5 million for remodeling projects and another $600000 for other major CapEx.

Now I’d like to update our guidance for the 52 weeks of fiscal 2009. I should note that as several of many other restaurants chains, our comparable sales trends have worsened since the end of the fiscal second quarter. We are using this baseline for the balance of the fiscal year which is reflected in our updated guidance. For the full year we now forecast restaurant sales of $303 to $308 million compared to $313 to $318 million previously. Total restaurant operating weeks are expected to be between 4550 and 4600 including the effect of 60 to 75 gross operating weeks which are expected to be lost due to the remodeling. As Juan mentioned before, we now expect to open a total of 8 restaurants this year including 4 Benihana Teppanyaki restaurants and 4 RA Sushi restaurants of which we have already opened 3 RA Sushi in Pembroke Pine, South Miami and Chino Hills. We are poised to complete the renovation program by January for total of 22 Benihana Teppanyaki remodels and related to it, are $400000 in accelerated depreciation costs which we have already incurred in the first half of this year.

Diluted earnings per share now forecast at between 40 cents and 45 cents per share which is down from our previous expectations of 60 cents to 65 cents. Diluted common shares outstanding are estimated to be approximately 15.3 million shares. Taking into consideration our capital expenditure estimate of approximately $47 million for the year, we expect our outstanding debt at the end of fiscal 2009 to be around $40 million. Due to our revised credit terms we believe we have ample liquidity to provide for our current operating and capital needs and should remain in compliance with our newly revised debt covenant ratios.

Finally I want to reiterate that our corporate infrastructure is as ready as it has been and while we have the other line of value these efforts cannot be fully satisfied in today’s economy we strongly believe that over time we stand to benefit even more from our efficiencies as the overall climate improves. I’ll now turn the call back over to Joel Schwartz.

Joel A. Schwartz - Chairman and Chief Executive Officer

Thank you, Jose. In conclusion I want to reiterate that while we continue to operate in a difficult economic environment, management is keenly focused on successfully managing the business through these difficult times. I thank you all for your time today and now we’ll answer your questions, operator?

Question-and-answer session

Operator

Thank you. If you’d like to ask a question today please press “*1” on your telephone keypad. If you are using a speaker phone please make sure that your mute function is turned off to allow your signals to reach our equipment or pick up your handset. We’ll take as many questions as time permits and proceed in the order that you signal us. Again that’s “*1” for questions. We’ll pause just a moment to assemble the roster and our first question will come from Michael Gallo with C. L. King.

Michael Gallo – C. L. King and Associates

Hi good afternoon. Couple of questions, first question I have is just on the relaxing of the covenants as well as can you give us some more details as to what some of the new covenants are as well as how long a period they are waiting for?

Jose Ortega

Sure. In terms of the relaxing of the covenants we still have the same two ratios to meet, the fixed charge ratio and the leverage ratio. In terms of the fixed charge ratio currently we are expected to have a ratio greater than 1.8 to 1 through the duration of the line of credit until maturity. That has been relaxed to hand it to be greater than 1.70 to 1 through the end of fiscal 2010 at which time it goes back to 1.8 to 1 for fiscal 2011 and fiscal 2012. The leverage ratio before the amendment required us to be under 3.5 to 1. The amended terms are that the leverage ratio has to be below 4.25 to 1 through the end of the second fiscal quarter of fiscal quarter 2010 at which time it then drops to hand it to be below 4.0 to 1 for the third and fourth quarter of fiscal 2010 and then it reverts back to 3.5 to 1 for fiscals 11 and 12.

Michael Gallo – C. L. King and Associates

They are also dealing from where you were I thought you are going to be in violations unless we assume you have obviously significant declines from here. Was it just proactively that you did it or how much more you paid in interest as a result of the amendments?

Jose Ortega

You are right, of course we were in compliance with the ratios at the end of the quarter but looking at what some of the economic forecasts were we took the steps of renegotiating with the bank to ensure that we would have the flexibility necessary to continue to execute our plans.

Michael Gallo – C. L. King and Associates

The change of the interest rate?

Jose Ortega

The change in the interest rate we will have the full agreement filed. It should be in tomorrow morning but basically there was a new clause here that was made available for the leverage above 3.5 which is basically LIBOR plus 350 basis points and the other existing pricing bonds were re-priced…basically it hasn’t been about a movement about 50 additional basis points from where we currently were between the original and the new terms.

Michael Gallo – C. L. King and Associates

I understand in the old terms you were at about 3% last quarter?

Jose Ortega

A quarter earlier we were about 3.5% and that had moved to under 3%. The previous agreement allowed us to price at base rate or euro dollar loan based on LIBOR. Under the re-pricing there has not been parity between the two terms. So, we will be basically on a LIBOR plus starting now.

Michael Gallo – C. L. King and Associates

Right, should it be LIBOR plus to my mind based on where you were…

Jose Ortega

It was well below 3.5, it will be LIBOR plus 175. If we go over 3.5 it will be at LIBOR plus 350.

Michael Gallo – C. L. King and Associates

Okay, still pretty attractive interest rates on the loan it looks like.

Jose Ortega

We believe so.

Michael Gallo – C. L. King and Associates

Okay second question I have is, I just wanted to resolve if you can. If you look at the preferred stock at $20 million or so outstanding, I know it is not credible to I think 24 keys how do we go about how we figure out how much of that is share count? I think last quarter if I recollect you talked about an increase in the share count as a result of that. I think it looks like that it has impacted it this quarter. I mean it does look like the forecasting had impacted the rest of the year. Just help us walk through calculation there?

Jose Ortega

In general the preferred stock is convertible at a fixed price of $4.67. The EPS calculation has you assume the most diluted concentration possible. What happened last quarter was we had an additional million fixed above the usual number in there because the stock price had dropped so significantly that the assumption was it wasn’t going to convert at the fixed price, they would be issued at the redemption price assuming no redemption we are dealing at market. The current quarter the stock has further devalued and there is actually a provision that if the market cap fall come in equities is below an aggregate of $75 million they will be precluded from issuing common shares upon redemption and so the calculation at this quarter has no shares being taken into account for the preferred stock and no shares will be assumed in the calculation of EPS until such time as we are back over the $75 million market cap of common equity.

Michael Gallo – C. L. King and Associates

Hi, it is okay, so basically if the market cap goes above $75 million you will be able to redeem it for cash as soon as it became available?

Jose Ortega

Yes and to your comment earlier the preferred stock redemption date is in 2014.

Michael Gallo – C. L. King and Associates

Okay it was very helpful, thanks a lot.

Jose Ortega

Thank you.

Operator

We’ll now hear from Brad Rudington with Keybanc Capital markets.

Brad Ludington - Keybanc Capital Markets

Good afternoon.

Jose Ortega

Good afternoon, Brad.

Brad Ludington - Keybanc Capital Markets

I have got a couple of questions. First up I kind of hear that I think you might have said the timing of the opening here Maine here in 09, when will the Benihana openings fall in and RA Sushi?

Juan Garcia

All five stores under development will open in this fiscal year in the December, January time frame. So this coming month and couple into January

Brad Ludington - Keybanc Capital Markets

Okay. I am looking at a streamlined infrastructure that you talked about in the release. Has there been any kind of reduction of staff or anything that we haven’t heard about since the last call?

Juan Garcia

No. What we are referring to is just positions, that we had at dinner parties, open positions we hadn’t filled those positions. But all of the key positions at our senior director level are fully staffed and have been for a while.

Brad Ludington - Keybanc Capital Markets

Okay and then coming back on the covenants, in your ratio calculations are there any adjustments or do we add anything to the denominator or numerator, non cash and simple packing?

Jose Ortega

In terms of the fixed charge ratio, it was adjusted to…for the leverage ratio and the fixed charge ratio, they were adjusted to qualify non cash stock based compensation was excluded from those calculations. Additionally the fixed charge ratio it was also further clarified that any impairment charges and related tax items will be excluded from those calculations as well.

Brad Ludington - Keybanc Capital Markets

Okay and then I’m just looking at your labor and purchasing productivity, that’s still managing your hours and with RA and Haru really purchasing together or separately?

Jose Ortega

In general the labor was the effort that was made in terms of managing the hours and using the regional managers to supplement at general manager locations have actively reduced the hours spent in all three concepts. In terms of the purchasing we gained as we mentioned before we are actively pursuing improving our purchasing power across all three brands whether it is the synergy of reviewing the distribution agreements and contracting. We renewed contracts we have had as we mentioned before and also looking at newer items that we may not have contracted in the past and now with the volume mass that we have at RA Sushi with 21 locations and 9 Haru, 30 locations we are able to take advantage of all three brands in some of the common items such as rice and chopsticks and stuff like that.

Brad Ludington - Keybanc Capital Markets

Okay very good, thank you very much.

Operator

Moving on to Tony Brenner with Roth Capital Partners

Anton Brenner - Roth Capital Partners

Thank you. Couple of questions, one was just to review those 9 stores in the pipeline where are those supposed to be opened in 09.

Juan Garcia

No, Tony what we are saying is after we open up these next 5 we have three RA Sushis which are to be opened in the first quarter of fiscal 2010. Then the balance of those 6 that are left we are looking at to be spread over later part of 2010 and fiscal 2011.

Anton Brenner - Roth Capital Partners

Okay is there also a little bit of difference between your sales strategies to your three concepts between lunch and dinner?

Juan Garcia

I think from what we are seeing Tony obviously dinner accounts for 85% of the business where all three concepts are there but the biggest decline we have seen obviously has been the dinner. But we have seen some softness let us say in lunch traffic as well.

Anton Brenner - Roth Capital Partners

Okay last one Haru is so focused in New York and so focused on the financial community, it seems particularly vulnerable and I wonder what you are doing and what you can do there to protect yourself from whatever time might be forthcoming from reason of those?

Juan Garcia

We have been really hard it particularly with a delivery basis from the financial institutions. So, Park Avenue for instance and also the two uptown stores as well in the residential markets, we are just putting out a flier this month starting in November to try to help come back businesses, celebrating the 12th anniversary of the (inaudible) the original Haru stores to drive up more traffic.

Anton Brenner - Roth Capital Partners

Bear Stearn has done.

Juan Garcia

Yeah but Bear Stearn is going out of business as we said last time around this will affect the delivery business of our Park Avenue location.

Anton Brenner - Roth Capital Partners

That closes this issue.

Juan Garcia

Right.

Anton Brenner - Roth Capital Partners

Okay, thank you.

Juan Garcia

Thank you.

Operator

Bill Hamilton with SMH Capital has the next question.

William Hamilton – SMH Capital

Good afternoon guys.

Juan Garcia

Hi Bill.

William Hamilton – SMH Capital

I just wanted to know if you can give first of all more color on the regional sales performance across the brand, I guess particularly the sub prime states, California, Arizona and Florida. Did we see further stress across the quarter and is that sustained during the stabilization and all that?

Jose Ortega

Well, I think the takeaways from whatever trends were during Q2 is that while some of those regens we had started to come over, starting to lap over periods of degen comps, what we saw come September when all the news broke about the distress in the economy and all the discussions and all the headlines for the balance of September and into October across all regions, trends were negatively impacted. So, it is one of the things where the pressure, where as it started in those regions, now see it across the board.

Juan Garcia

In addition to that I will add that the September progress with all the financial crisis, sales doubly deteriorated and it was across all markets.

William Hamilton – SMH Capital

Then on the cost side with natural gas prices coming down substantially and other energy costs, are you certainly seeing or were you starting to see some benefits in the priorities which of course has been a bit of a headwind in the first half of this year.

Jose Ortega

We are looking for those. What we have done is we are negotiating with and contracting energy contracts in the states where it is permitted and also for short periods of time. So we are definitely looking for some improvement on the energy charges in the coming periods.

William Hamilton – SMH Capital

Okay, now lastly just on the new marketing campaign is there much change in the actual dollar amounts that you are spending and whether at all that has affected the marketing in Q1?

Jose Ortega

No in terms of the marketing dollars we are holding by statutory the ratio of spend which is 2.6 and 2.7% of restaurant sales.

William Hamilton – SMH Capital

Okay, thanks.

Operator

Our next question comes from Robert Kosowsky with OFI Institutional.

Robert Kosowsky - OFI Institutional

Hi good afternoon guys.

Jose Ortega

Good afternoon.

Robert Kosowsky - OFI Institutional

I was wondering if you could show us how the operating works through each concept, operating weeks works for each concept in the quarter?

Jose Ortega

I don’t have that detail in front of me. I’ll be happy to follow up with that information.

Robert Kosowsky - OFI Institutional

Okay, that’s fine and then how much pricing was in the quarter? Just kind of trying to gauge the pricing versus traffic for different concepts?

Jose Ortega

In terms of pricing if you remember from last call the Teppanyaki took some pricing on the beverage menu which worked out to less than 1% impact on the average check. Ruan Haru took about a 1% to 1.5% price increase during the quarter. Now Haru had also taken some pricing at the beginning of the fiscal year. However RA has a discounted happy hour menu still which I think will offset the pricing. As a brand or across all brands in the system the average check was about 1.5%.

Robert Kosowsky - OFI Institutional

Okay the check was 1.5% and then as you look at the guidance that’s out there what are you kind of baking in as far your comps are concerned? I assume that it is stepped out there and traffic in October and I guess it is standing like 5 in October too? I wonder kind of where it is….

Jose Ortega

Well, what we have done is we don’t speak to a specific comp number but we have factored in for the balance of the year, the trends that we saw coming about at the end of Q2 and at the beginning of the third quarter. On average for the full year we expect to average to a high single digit negative comp.

Robert Kosowsky - OFI Institutional

Okay, so basically taking I guess the last in cerement of the second quarter and you are kind of following that instead of any other thought process.

Jose Ortega

It is again there is a deterioration that we are seeing towards the end of the quarter. So it is slightly more negative that what the full quarter can have there.

Robert Kosowsky - OFI Institutional

Okay thank you very much and good luck.

Jose Ortega

Thank you.

Juan Garcia

Thank you.

Operator

As a reminder that’s “*1” to ask a question. We will go next to Michael Rubin [ph] – with Sidoti & Co.

Michael Rubin - Sidoti & Co

Hi guys.

Jose Ortega

Hi Mike.

Juan Garcia

Hi Mike.

Michael Rubin - Sidoti & Co

Can you give what the covenants were with fixed charging leverage at the end of the quarter?

Jose Ortega

Well, we don’t usually put out the exact number on the leverage ratio which was the one that we were feeling most pressure on. We were coming close to 3.5 although we were below it.

Michael Rubin - Sidoti & Co

Okay and just one other thing here. Do you guys have any exposure with your convertible here on that size brewing 14.1, as far as expensing the difference in rates?

Jose Ortega

No.

Michael Rubin - Sidoti & Co

No? All right, thanks.

Operator

We’ll now hear from Greg Reudy with Stephens Inc

Greg Reudy -- Stephens Inc

Good evening.

Juan Garcia

Hi Greg.

Greg Reudy -- Stephens Inc

If I’m not mistaken many of your Teppanyaki especially some of the older ones you might have where you consider B or C sites in an A trade area or vice versa, given that some other retailers are going dark, how do you balance the capital allocation decision between maybe some additional rebuilds, relocations and expansions versus signing those new leases which now need to pass some higher stringent tests?

Juan Garcia

Right, I could tell you that as far as our Teppen locations, most of the leases we are signing are long-term leases, 15 to 20 year leases with option period. So, we have very few that we are looking to relocate that are coming up for at the end of lease.

Greg Reudy -- Stephens Inc

Okay, is the business strong enough if any of those units were to knock down in a while when someone has conked out next year?

Juan Garcia

We don’t. If you remember most of the Benihana’s are free standing. So, it will really be an addition to the existing building. We are free standing.

Greg Reudy -- Stephens Inc

Okay. You can generally get very good leverage on G&A side against the sushi concepts. In a few months if the growth in these were slow, do you just maintain what you have in place infrastructure wise? If it look like we are in for a longer haul of the economy is there a pull back opportunity?

Juan Garcia

There could be but if you recall what we said is the infrastructure that we had built was to manage the portfolio that we have operating plus what we have in the pipeline. So, what we have as G&A is to build up run the 90 restaurants plus the 14 of the development and then 4, given that the economy continues to deteriorate we will look at making cuts.

Greg Reudy -- Stephens Inc

Okay and then just some of the labor savings you have been able to get here recently are due to managers that are filling it terms of the hours by hiring freeze or what have you. At what point do you have to be cautious enough stretching these individuals and how long can you sustain this type of operating initiative?

Juan Garcia

Right now we have gone with that initiative in 9 out of our 21 RA Sushi locations where we are working with 3 managers given the sales volumes we are at and the decrease. So, we are very mindful of and that’s why we have some of the regional managers coming in for some of the shifts. So, we just don’t put on the pressure on those three remaining managers.

Greg Reudy -- Stephens Inc

Okay last one and then I’ll pass along. The new guidance of 40 cents to 45 cents how much of the reduction there has been caused by the sales from those 3 RAs, not offsetting sentiments?

Jose Ortega

Can you repeat that Greg?

Greg Reudy -- Stephens Inc

Do you really think from a few weeks at the end of 3 RAs, how much of your new guidance reflects the fact that you can’t offset some of those sales?

Jose Ortega

Greg I think the answer is that what you are going to see is the impact on the EPS guidance is driven by two things. It is the forecast in sales volumes.

Greg Reudy -- Stephens Inc

Sure.

Jose Ortega

Comps are assumed for the balance of the year and those are the fact that as we see there is a general deleveraging on the managed ROP right items. To say that either the sales rebound is not as big as we expect is due to the general seasonality than the general increase in ROP margins that was originally assumed is not there. So, it is just sustaining the fact that there is continued pressure on margins with the pressure on sales.

Greg Reudy -- Stephens Inc

Okay, thank you.

Jose Ortega

Thank you.

Operator

And we have no other questions at this time. Mr. Schwartz, I’ll turn the conference back to you.

Joel A. Schwartz

Thank you. Thank you everyone for your joining us today and we will speak to you next quarter. You can call with any other question you have. Thank you. Good evening.

Operator

That does conclude our conference. We do thank you for joining us.