Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Joe Buckley with Bank of America Merrill Lynch.
Joseph T. Buckley – BofA Merrill Lynch, Research Division
A couple of questions on the — something you didn’t talk about, but gift card sales.
Samuel E. Beall
Sure.
Joseph T. Buckley – BofA Merrill Lynch, Research Division
Do you hear me okay?
Kimberly M. Grant
Yes, Joe. This is Kimberly. Our gift card sales were up about 17% for the holiday season.
Joseph T. Buckley – BofA Merrill Lynch, Research Division
Okay. And Kimberly, give us an idea, were you in more third-party retail outlets this year than last year or…
Kimberly M. Grant
We did add some additional third-party outlets, but we had equal improvement in restaurant as we did on line and in third-party.
Joseph T. Buckley – BofA Merrill Lynch, Research Division
Okay. And then the $15 million to $20 million of cost savings, what part of the business do you anticipate that coming from?
Samuel E. Beall
Well, the 2 largest areas will be RM, repair and maintenance, which a lot of the QSR chains and some of the other casual dining chains have gone to just a centralized system for that. That’s a large area, procurement, purchasing. Alix is probably one of the best in the business in that area. They’ve helped us a great deal, AlixPartners. But those will be the 2 largest areas really.
Operator
Our next question comes from the line of Chris O’Cull with SunTrust Bank.
Christopher T. O’Cull – SunTrust Robinson Humphrey, Inc., Research Division
Just as a follow-up to that question, Sandy, can you expand on repair and maintenance? Exactly are you talking about centralizing what services?
Samuel E. Beall
Kimberly, why don’t you talk about that?
Kimberly M. Grant
Sure. This is the ongoing repair and maintenance within the restaurants. It’s approximately $40 million spend a year annually, and we believe that through using a consolidated group that we can better monitor our rates and our costs on the actual parts and what have you.
Christopher T. O’Cull – SunTrust Robinson Humphrey, Inc., Research Division
But the timing of repair and maintenance isn’t going to change or…
Kimberly M. Grant
No, no, no. It’s 100% just better pricing on parts, better control of labor hours, better control of extra cost that different firms all over the country charge. Today, we manage it 900 different ways, and we’ll be managing it one way.
Samuel E. Beall
It’s basically bulk buying power for the services we’re participating with. It’s like a huge co-op, so better pricing.
Kimberly M. Grant
Exactly.
Christopher T. O’Cull – SunTrust Robinson Humphrey, Inc., Research Division
Okay. Thanks for the clarification. And then is that going to start showing up you said in the fourth quarter or fiscal ’13?
Kimberly M. Grant
In fourth quarter you’ll see small impact of a pilot, but mostly in the fiscal ’13.
Christopher T. O’Cull – SunTrust Robinson Humphrey, Inc., Research Division
And why were controllable expenses still low during this quarter? It looks like other operating expense is quite — was pretty low this quarter.
Marguerite N. Duffy
In terms of absolute dollars?
Christopher T. O’Cull – SunTrust Robinson Humphrey, Inc., Research Division
Yes.
Marguerite N. Duffy
As a percent of sales, I think it’s historically comparable in terms of absolute dollars. We did have better, for instance, general liability experience this year versus last year. So some things like that helped.
Christopher T. O’Cull – SunTrust Robinson Humphrey, Inc., Research Division
Okay. And then just one last one. Margie or Greg, what are the credit agreement restrictions for selling assets? And are the sale leaseback transactions intended to be tax efficient? Should we see the gross net be pretty close?
Marguerite N. Duffy
Our bank covenants allow for a $150 million sale leaseback transaction. We currently have some tax credit carryover that we’re able to utilize to offset the taxable gains that we will see with these transactions. So it does help mitigate that so that we do get pretty close to the proceeds.
Christopher T. O’Cull – SunTrust Robinson Humphrey, Inc., Research Division
Is there a requirement to use the selling proceed — a certain amount of the proceeds to pay down funded debt?
Marguerite N. Duffy
No.
Operator
Our next question comes from the line of Brad Ludington with KeyBanc Capital Markets.
John Dravenstott – KeyBanc Capital Markets Inc., Research Division
I had 2 — sorry, this is John Dravenstott on for Brad. I had 2 questions, I guess, just on timing. Did you offer a time frame on when we should expect to see that $15 million to $20 million in cost savings first of all? And then secondly, on the — I guess the messaging shift in the marketing. I think you initially — this is a quarter ago I think, you initially suggested that we could have these ready by spring. Is that still the case? I know you said the next couple of quarters.
Samuel E. Beall
I think we’re just saying, the messaging shift to TV, we should be at 50% of our system on television starting with fourth quarter. I think that answers your question, right?
John Dravenstott – KeyBanc Capital Markets Inc., Research Division
So 50% by the start of the quarter?
Samuel E. Beall
Yes. And then your other question was on the savings and we get some savings, actually in third quarter, we’re paying for the consultants without getting the savings really. So we bear the bulk of that. In fourth quarter we do have some net gain $2 million to $5 million, somewhere in that range, and then we get the bulk of it really next year. It will all be in place then.
John Dravenstott – KeyBanc Capital Markets Inc., Research Division
Okay. And then when do you think you’ll settle on the kind of nationwide promos as far as the — whether it’s the $8.99 or the $5.99 or the…
Samuel E. Beall
I think we’ve already settled on it. I mean, our tests — we’ve done extensive tests over the last 6 months. We’re continuing that into this quarter, and we think we know what we’re doing, rolling out this for fourth quarter.
Operator
Our next question comes from the line of Howard Penney with Hedgeye Risk Management.
Howard W. Penney – Hedgeye Risk Management LLC
For fiscal ’13, do you have any idea what your capital spending might look like?
Samuel E. Beall
What our capital needs?
Howard W. Penney – Hedgeye Risk Management LLC
Yes.
Samuel E. Beall
Budget what, Margie. $40 million?
Marguerite N. Duffy
Yes, about $40 million, $40 million to $45 million.
Samuel E. Beall
$40 million, give or take, yes.
Howard W. Penney – Hedgeye Risk Management LLC
So you’re — and I would assume you’re probably going to still generate the same level of cash flow, so you’re generating probably 2x your capital needs next fiscal year. So can you maybe explain why you need to do the sale leaseback program and why you need to generate the cash today when your cash flow or your free cash flow is in excess of what you need to spend on your capital needs? And then also, just a little confusing, I thought you said it strengthens your balance sheet. So if you’re selling an asset and taking on a lease, how does the strengthens…
Samuel E. Beall
Well, I think it’s strengthening your balance sheet. It gives you much more financial flexibility because you presumably could have less covenant-related debt versus long-term lease debt. I think the advantage of it, Howard, at least for consideration up to the $150 million is, one, it’s allowed under our revolver. Number two, it is pretty inexpensive long-term 15-plus year debt, which is kind of unique as compared to the last 10 years. Number three, we would like to — we think we have a platform for growth. We think we have some solid core competencies in our company for ability to operate from being able to leverage purchasing technology things that we’re very, very good at. We’re trying to build more of a marketing skill, and we would like to invest more in growth over time and we want to have a balance sheet that allows for that. I guess as a fallback, we also would like to have a balance sheet that allows for more repurchase if we — if it deemed to be just a great value. So it’s kind of — it’s one of the things we may not do though $150 million, but we can see where it could be in hindsight a great — a smart thing to do as we look down the road. And we will — I think the first thing is let’s get the first $50 million done and then let’s start working on the next $50 million.
Howard W. Penney – Hedgeye Risk Management LLC
So just going back to kind of Chris’s question, I mean, the intention use of this cash is to pay down debt?
Samuel E. Beall
To pay down, I think no. It’s repurchase, its debt and it’s more aggressive growth than what we have planned. Understand your question, you’ve got excess capital. You don’t really need it for growth because you could use it for other, so that would say to pay down some debt temporarily anyway and to repurchase shares, unless another [ph] acquisition which isn’t on top of mind but at least you’d have a strong balance sheet that gives you more flexibility.
Operator
Our next question comes from line of Bryan Elliott with Raymond James.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
Just a couple of questions, a little nitpick first. Did I hear correctly, Margie, I think going through the quarter that the employment-related tax credits were below your expectations originally?
Marguerite N. Duffy
So Work Opportunity Tax Credit and FICA Tip Credit, right, are below.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
And is that because of profitability or is there something going on with the expiration or anything like that? Is there something fundamentally changed with that, or was it just based on the pretax profit coming in?
Marguerite N. Duffy
It’s based on the pretax profit and the low second quarter.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
Okay. Did everything that you have been able to utilize get renewed or continues in place for 2012 here with all the political nonsense going on these days?
Marguerite N. Duffy
No. Work Opportunity Tax Credit has been suspended starting with January. We do hope it will be renewed. But at this point, because it’s not renewed, we do not project that, do not have that on projections. [indiscernible] come back into play and timely so that we can actually get the credits. That will be an enhancement.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
All right. Okay. That’s helpful. And bigger picture question. The surprise and delight service enhancements that you all talked about, clarifying, I heard that was in 10% of the units now, is that right?
Kimberly M. Grant
Correct. We went into test in November in about 60 locations, and we’re rolling out — in the process of rolling out the rest of the system in January and February.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
Okay. And any help you can give us in thinking about the — you told us a bit though, I think, about the Guest Satisfaction Scores. But I mean, did it actually seem to increase maybe time between — decreased time between visits or do anything on…
Samuel E. Beall
We don’t know that yet.
Kimberly M. Grant
We don’t know that yet, but the best indication we can have of Guest Satisfaction beyond the survey is how they’re tipping the servers in the restaurant, and the tip percent is up in excess of what the concept is up. So that’s a good indication the guests are happier in the restaurant, and that will always work out to be better for sales.
Operator
Our next question comes from the line of Keith Siegner with Crédit Suisse.
Keith Siegner – Crédit Suisse AG, Research Division
So I have 2 questions, and the one I want to start with really relates to like — you’ve been pretty open about talking how — you’re very focused on maintaining or kind of managing the company to some extent at least to free cash flow. In other words, you’re not going to just chase sales for the sake of traffic or sake of comp if it doesn’t really generate — or if that means lower profits right? So when you think about the incremental advertising spends and you have tested some, but as you roll this out across the system, like what type of lift do you need in your plans to justify sustaining that higher spend? In other words, like if there is still some focus on free cash flow, like where is the threshold for lift or benefit that you need before you might turn off some of that spend?
Samuel E. Beall
That’s not an easy question to answer because at same time you’re doing it — and then Dan, while I’m talking, see if there’s something you want to add, but same time you’re doing it you’re also pulling back on coupons. So you’re looking at net effect of it. But I think if we can get from the TV, that 5% to 10% lift…
Daniel P. Dillon
Yes. I mean, Sandy’s right. It’s really a movement of spending out of coupons into advertising, and coupons are a one-time visit and advertising has a repeat effect that we’re hoping to see. So I don’t know this as easy a question answer as you might have hoped it would be but…
Keith Siegner – Crédit Suisse AG, Research Division
Okay. Then what I’ll do is I’ll tie it into guidance, right? So if you look at your guidance, how it was and how it’s changed, the top line comp comes down a little bit, margin’s actually unchanged. SGA goes up funded by cost cuts. But if we look like, the deltas in the guidance, there is more marketing spend was the biggest piece of the change and that actually means just looking at that little lower free cash flow from like the 4 walls. So kind of the flip side to this end was, what’s the sensitivity to the $90 million to $100 million in free cash flow now? Like, how confident are you still in that number? Where is the push and takes on the $90 million to $100 million now?
Samuel E. Beall
Well, I think — I’m not sure we can answer that right now. I think the advertising expense is up, so that’s going to have — that could happen next year. For this year, we’ve given the guidance on the free cash flow. For next year, depending on what your sales, you could have a moderate impact to your free cash flow based on expense being up, marketing expense being up. It just depends on the sales results we get from it. But you could have a small impact there, you could. But we think that investing in dollars that help change brand perceptions and change the impression of the brand is a much better long-term investment for 6 and 9 and 12 months later than it is spending that same dollar on coupons. Coupons are good for short-term, but they’re not going to help build the business long term. So what you’re saying is right, there could be some exposure there, but all depends on the sales results we get versus expectation. Does that help any?
Keith Siegner – Crédit Suisse AG, Research Division
No, it does. Thank you.
Samuel E. Beall
It just says I don’t disagree with you, but our goal would be keep that to a minimum because we are very free cash flow-driven.
Daniel P. Dillon
And key there [ph] to keep in mind is we didn’t pair back our CapEx guidance for the year, so that should go a long ways towards where we think the free cash flow number should come in for the year.
Operator
Our next question comes from line of Peter Saleh with Telsey Advisory Group.
Peter Saleh – Telsey Advisory Group LLC
Just wondering if you could remind us how much weather had impacted your results in the second quarter last year and in the third quarter of last year. I know that we had some pretty nasty weather on the East Coast here.
Kimberly M. Grant
I don’t remember an event in the second quarter. In the third quarter, I believe — we’ll have to go back and check, but didn’t we say it was like 1.3%, 1.4%. Because you had weather in the 2 years ago as well, so last year’s net effect was about 1.5% if I remember right.
Peter Saleh – Telsey Advisory Group LLC
Great. And then anything on the regional variances that you’re seeing? Are there any pockets of strength versus any places that are actually significantly lower than what your average is coming in at?
Kimberly M. Grant
Sure. During the second quarter, New Jersey and the Pennsylvania-New Jersey area was particularly strong. Florida held up rather well. The Washington, D.C. market, Baltimore market and parts of the South Atlantic were the weakest.
Operator
Our next question comes from line of Robert Derrington with Morgan Keegan.
Robert M. Derrington – Morgan Keegan Company, Inc., Research Division
Sandy, I’m trying to understand directionally, there’s a lot of things that are kind of in the hopper here in the stew, which will affect your sales. Your guidance — your same-store sales guidance of down 2% to 4%. Simplistically, sales were down roughly 4% in the first half of the year. If we assume that they’re flat in the second half of the year, that essentially gets to the minus 2%, which is the, I guess, the less negative comp within your guidance. Yet your sales comparisons are materially easier in the second half. So I’m trying to understand given that you have a surprise and delight program, you have more TV spend in the plan, you’ve got a lot of things that seem to be positive sales drivers but why is it that…
Samuel E. Beall
Because one, having surprise and delight is not going to get your guest any faster until you start communicating it and get a new guest in I think. But we’re pulling back on coupons at the same time we’re spending more on television. And I mean I don’t know what sales are going to be, but I think that’s the prudent way to look at it.
Robert M. Derrington – Morgan Keegan Company, Inc., Research Division
Was there a material amount of couponing that was done in this past quarter?
Samuel E. Beall
In the past quarter, in the second quarter?
Robert M. Derrington – Morgan Keegan Company, Inc., Research Division
Yes, in the second quarter.
Daniel P. Dillon
Well, material as compared to the prior year? It wasn’t material compared to the prior year. In third quarter, we’re couponing less. In the fourth quarter, we’re couponing significantly less. That’s what we anticipate. I mean we review that darn near every week. But we just think as we go through this change, it could be something act [ph] as the balance between pulling back on coupons, which has an immediate effect on sales and adding advertising, which lag — has a lagging effect and being able to call that right now is the difficult part. But that’s the approach that we’re taking is trying to balance the reduction in the short-term effect of coupon withdrawal while we add in advertising that we know has a positive effect in traffic over the long term.
Samuel E. Beall
And I think also what you’ve seen in the last couple of months during the Darden release, et cetera, is that restaurant sales aren’t necessarily better. They’re a little bit worse. I mean, I guess our outlook for the back half is probably a little more conservative than it would have been in October — September, October.
Robert M. Derrington – Morgan Keegan Company, Inc., Research Division
Can you give us any color, Sandy, on how the 200 plus stores, which have the free Garden Bar, how they’ve performed relative to the reported results?
Samuel E. Beall
I think what you have to keep in mind is within those 200 Dan talked about, you’ve got many different tests.
Daniel P. Dillon
Yes. So we’ve got a variety of different sales within the 220 restaurants around that free Garden Bar promotion, 140 of them have television. And even within the 140, we have various weight levels that we’re trying to optimize. But generally speaking, we’re seeing in the high single digits in terms of sales and traffic increases where we’re putting the advertising efforts in place.
Robert M. Derrington – Morgan Keegan Company, Inc., Research Division
So directionally, you combine all those things together and potentially maybe things won’t be as bad as down 2% to 4%.
Samuel E. Beall
Well, it may not be. But it could be worse I guess, but I hope better. But it’s hard — of the stores that we have on the weight levels and the message that we think we’re rolling out with, if we can reproduce that, it could be better. Our new creative that Dan just viewed today with the new agency he says the most impressive ad he’s ever seen, period. And so maybe it could be. But I think the main point here is that we have been underperforming on sales. Disappointing, yes. This back half, it’s an easier overlap, yes. Doesn’t always add up to results. We’re trying not to be overly optimist, but even with that, we can make — we believe we can make the numbers we’re talking about which won’t be terrible — it’s not good, but won’t be terrible based on the amount of investments we’re making and the changes we’re making to better position the brand and to be — add more effective advertising and some growth vehicles. So we will see.
Operator
Our next question is a follow-up question from the line of Joe Buckley with Bank of America Merrill Lynch.
Joseph T. Buckley – BofA Merrill Lynch, Research Division
Just a follow-up on the high single-digit comment…
Samuel E. Beall
On the what?
Joseph T. Buckley – BofA Merrill Lynch, Research Division
On the high single-digit sales increase comment for the stores or TV support. So would that have been in place for the whole quarter?
Samuel E. Beall
No, no, no. That’s just a couple of test sales but it’s what we’re trying to replicate, Joe. And so that’s based on the weight levels that we want to do.
Daniel P. Dillon
It’s a very small percent of the marketplace.
Samuel E. Beall
But that is what we hope to replicate. That’s why we’re still testing. I mean, we’re — but we think we have the right package. That’s what we’re rolling out within fourth quarter.
Joseph T. Buckley – BofA Merrill Lynch, Research Division
Okay. And then just a question on the free cash flow guidance, the $90 million to $100 million. Your EPS guidance is lower. Depreciation and amortization is basically the same. CapEx is basically the same.
Samuel E. Beall
We don’t have much tax at all this year, Joe.
Joseph T. Buckley – BofA Merrill Lynch, Research Division
Okay. So is tax the difference?
Samuel E. Beall
It’s really tax. Did I get that right, Margie?
Marguerite N. Duffy
Yes.
Samuel E. Beall
Okay. So it’s a one-year windfall in other words. So if you pull that out, next year on an apples to apples it will be a little bit less without that unless you improved.
Operator
Our last question is a follow-up question from Bryan Elliott with Raymond James.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
I just would like to hear some of your thoughts I guess, Sandy, really this is directed to. So just thinking back 2 years ago, you were a pretty significant TV player.
Samuel E. Beall
Us? Ruby’s? Never significant TV player, no. No, we weren’t. For about 4 or 5 quarters, we tried it.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
Yes, you went from — at the time it was a pretty significant — You were moving away from TV and going to go back or going to the couponing and direct mail and all of that. But I guess what has — what’s going to be different this time? Or what has changed between then and now or what — why will it be different this time?
Samuel E. Beall
I think one of the biggest reasons why TV is having the effect that we’re seeing in our test markets now is that we’ve got a brand where the experience scores of what guest experience is when they come into our restaurant relative to the changes that we’ve made over the last 2 years that Kimberly and her team have been able to execute, their experience scores are 20 points better than the perception scores are in the marketplace. So by using advertising, you change perceptions and drive traffic. What the consumer is getting when they walk into the restaurant is a very good experience that brings them back. And I don’t know that we had that balanced right the previous times we were doing advertising, and maybe that’s why we didn’t get the results that we had achieved, that we were achieving now is that the experience scores and the perception scores are just so much different now that we’re getting this wow impact when somebody comes into our restaurant and has the experience of today. Their perceptions are so much different and they haven’t changed those perceptions because we haven’t told them anything new about the brand.
Bryan C. Elliott – Raymond James Associates, Inc., Research Division
Okay. That’s very fair. A quick follow-up on Joe’s question. Could you quickly help me make sure I heard correctly? The 140 stores and the up strong sales, were you talking about the strong like high single-digit sales or whatever the number was, that’s a small subset of those stores that we’re talking about?
Kimberly M. Grant
Correct.
Daniel P. Dillon
Three markets out of 11.
Samuel E. Beall
Right. Thank you all very much for joining us today. Please give us a call if you have any questions. We appreciate your support and any ideas you have. Thank you.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
