Management's Discussion and Analysis of Financial Condition and Results of Operations provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying condensed consolidated financial statements. All comparisons under this heading between 2009 and 2008 refer to the twelve and forty week periods ending October 4, 2009 and October 5, 2008, respectively, unless otherwise indicated.

Overview

The following summarizes the operational and financial highlights of the Company during the forty weeks of fiscal 2009:

† New Restaurant Openings. We opened 13 company-owned restaurants during the twenty-eight weeks ended July 12, 2009 and did not open any additional new restaurants during the third quarter of fiscal 2009. Comparatively, we opened 10 and 27 restaurants for the twelve and forty weeks ended October 5, 2008. We will open an additional two company-owned restaurants in the fourth quarter of 2009. All expenses associated with the opening of our 2009 restaurants have been funded directly or indirectly from our operating cash flows.

† Comparable Restaurant Sales. For the twelve weeks ended October 4, 2009, the 269 restaurants in our current comparable sales base experienced a 14.9% decrease in sales from these same restaurants in the comparable period last year. This decrease was driven by a 13.8% decrease in guest count and 1.1% decrease in the average guest check. For the forty weeks ended October 4, 2009, our current comparable base experienced an 11.2% decrease in sales from these same restaurants in the prior year period. This decrease was driven by an 11.9% decrease in guest counts partially offset by a 0.7% increase in the average guest check. We believe these declines are primarily the result of the macroeconomic environment and our significant reduction in national cable advertising in 2009. It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and the extent to which our operations will be adversely affected by such conditions. We expect continued negative comparable sales trends in the fourth quarter 2009.

† Food Cost. For the twelve weeks ended October 4, 2009, we saw a decrease in the cost of certain commodities, particularly ground beef and cheese. Prior to this quarter, our contracted ground beef pricing had been higher than 2008 levels. In the third quarter, both ground beef and cheese prices declined below 2008 levels and we expect that trend to continue for the remainder of the 2009 fiscal year. During the third quarter, we also entered into contracts for chicken and potatoes that give us pricing at or below the prices we paid in 2008 and earlier this year.

† Marketing Efforts. For 2009, our marketing strategy has been focused on driving guest traffic and retention by expanding our national online and digital media advertising efforts as well as introducing a targeted direct mail campaign to support product specific news. We supported this strategy during the third quarter 2009 by introducing limited-time offers on promotional products through local restaurant market television and radio advertising; reaching approximately 30% of our restaurant base. The $1.1 million in television advertising campaign began in the last week of the third quarter 2009 and continued through the first two weeks of the fourth quarter 2009. We are pleased by the positive traffic and sales results from this three week campaign. In the ten T.V. markets where our television advertising ran we had meaningful improvements in guest counts and comparable restaurant revenue compared to the four week period just prior to the television campaign.

† Restaurant Closings. The Company closed four restaurants during the first quarter 2009. This decision resulted from our identifying those restaurants that were in declining trade areas, performing below acceptable profitability levels and/or would require significant capital expenditures. The locations selected for closure represented older restaurants whose leases were not extended or were in need of significant capital improvement that were not projected to provide acceptable returns in the foreseeable future. The Company recognized a charge of approximately $598,000 during the forty weeks ended October 4, 2009 related to lease termination costs based on estimated remaining lease obligations, net of estimated sublease income, and other closing related costs. This charge is recorded in general and administrative expense in our condensed consolidated statements of income for the forty weeks ended October 4, 2009.

† Cash Tender Offer. On February 11, 2009 we completed a cash tender offer for out-of-the-money stock options held by 514 current employees and officers. As a result of the tender offer, we incurred a one-time charge of approximately $4.0 million for all unvested eligible options that were tendered in the first quarter 2009. This one-time charge represents the compensation expense related to the acceleration of vesting on the unvested options tendered in the offer, which would otherwise have been expensed over their vesting period in the future if they had not been tendered. Approximately $0.9 million of the $4.0 million charge is recorded in labor expense and approximately $3.1 million is recorded in general and administrative expense in our condensed consolidated statements of income for the forty weeks ended October 4, 2009. We paid $3.5 million in cash for the approximate 1.6 million options tendered in the offer.

In view of the foregoing, the Company is making efforts to manage controllable costs and streamline operations, while our restaurant teams focus on driving traffic through the quality and value of our guest experience. In addition, the Company will continue to drive guest traffic through the use of marketing efforts described above.

The Company will maintain flexibility with respect to its development plan for new restaurants in 2010 and will adjust the development plan as the Company deems necessary to respond to the challenging consumer environment. Our reduced levels of new restaurant openings in 2009 and the resulting reduction in capital expenditures have resulted in increased available cash flow which we applied to reduce outstanding indebtedness by approximately $23.9 million during the forty weeks ended October 4, 2009.

Restaurant Data



The following table details restaurant unit data for our company-owned and
franchise locations for the periods indicated.



                                       Twelve Weeks Ended                    Forty Weeks Ended
                               October 4, 2009    October 5, 2008    October 4, 2009    October 5, 2008
Company-owned:
Beginning of period                        304                281                294                249
Opened during period                         -                 10                 13                 27
Acquired during period                       -                  -                  1                 15
Closed during period                         -                  -                 (4 )                -
End of period                              304                291                304                291

Franchised:
Beginning of period                        131                123                129                135
Opened during period                         1                  3                  4                  7
Sold or closed during
period                                       -                  -                 (1 )              (16 )
End of period                              132                126                132                126

Total number of Red Robin®
restaurants                                436                417                436                417

On December 31, 2008, we acquired a franchisee restaurant that was managed by the Company under a management agreement since June 2007 with a franchisee.

Results of Operations

Operating results for each period presented below are expressed as a percentage of total revenues, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenues.

This information has been prepared on a basis consistent with the audited 2008 annual financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our operating results may fluctuate significantly as a result of a variety of factors, and operating results for any period presented are not necessarily indicative of results for a full fiscal year.

                                              Twelve Weeks Ended          Forty Weeks Ended
                                           October 4,    October 5,    October 4,    October 5,
                                              2009          2008          2009          2008
Revenues:
Restaurant                                       98.4 %        98.4 %        98.4 %        98.3 %
Franchise royalties and fees                      1.6           1.6           1.6           1.7
Rent revenue                                        -             -             -             -
Total revenues                                  100.0         100.0         100.0         100.0

Costs and Expenses:
Restaurant operating costs:
Cost of sales                                    23.4          23.7          24.1          23.8
Labor (includes 0.1%, 0.1%, 0.2% and
0.1% of stock-based compensation
expense, respectively)                           34.9          33.3          34.6          33.7
Operating                                        17.4          17.7          16.5          17.2
Occupancy                                         7.8           6.8           7.4           6.6
Total restaurant operating costs                 83.5          81.5          82.6          81.3
Depreciation and amortization                     7.0           5.9           6.7           5.8
General and administrative (includes
0.3%, 0.9%, 0.8% and 0.7% of
stock-based compensation expense,
respectively)                                     6.5           7.5           7.8           7.8
Pre-opening costs                                 0.1           1.3           0.5           1.1
Asset impairment charge                             -           0.4             -           0.1
Reacquired franchise and other
acquisition costs                                   -             -             -           0.1
Income from operations                            4.4           4.8           3.8           5.3
Interest expense, net                             0.7           1.0           0.8           0.9
Other                                               -             -             -             -
Income before income taxes                        3.7           3.8           3.0           4.4
Provision for income taxes                        0.6           0.8           0.7           1.2
Net income                                        3.1 %         3.0 %         2.3 %         3.2 %

Certain percentage amounts in the table above do not sum due to rounding as well as the fact that restaurant operating costs are expressed as a percentage of restaurant revenues, as opposed to total revenues.

Total Revenues



                                            Twelve Weeks Ended                             Forty Weeks Ended
                                                          October 5,     Percent       October 4,     October 5,     Percent
(In thousands, except percentages)    October 4, 2009        2008        Change           2009           2008        Change
Restaurant revenue                   $         183,878   $    205,286       (10.4 )%  $    648,436   $    659,086        (1.6 )%
Franchise royalties and fees                     3,035          3,299        (8.0 )%        10,265         11,367        (9.7 )%
Rent revenue                                        34             53       (35.8 )%           147            166       (11.4 )%
Total revenues                       $         186,947   $    208,638       (10.4 )%  $    658,848   $    670,619        (1.8 )%
Average weekly sales volumes:
Comparable restaurants               $          51,964   $     62,182       (16.4 )%  $     55,610   $     63,852       (12.9 )%
Non-comparable restaurants                      49,385         56,111       (12.0 )%        53,893         55,776        (3.4 )%
2007 Acquired Restaurants (1)                        -              -           -                -         61,335           -
2008 Acquired Restaurants (2)                        -         54,562           -           51,392         54,701        (6.0 )%

(2) 2008 Acquired Restaurants refers to 15 franchised Red Robin® restaurants we acquired during 2008. Beginning the third quarter 2009, these restaurants entered into the comparable restaurant population and their average weekly sales volumes, from that time forward, are included in the comparable restaurant category.

For the twelve and forty weeks ended October 4, 2009, restaurant revenue, which is comprised almost entirely of food and beverage sales, decreased by $21.4 million, or 10.4%, and by $10.7 million, or 1.6%, respectively, from the same periods of 2008. Sales in the comparable restaurant base experienced a decrease of approximately $32.3 million or 16.5% during the third quarter 2009 and approximately $64.7 million or 10.0% during the forty weeks ended October 4, 2009 over prior year periods. The decrease in comparable restaurant sales in 2009 was primarily the result of the lower guest counts driven by the macroeconomic environment and our significant reduction in national cable advertising in 2009. Sales for non-comparable restaurants contributed an increase of $10.9 million and $53.3 million for the twelve and forty weeks ended October 4, 2009 respectively, of which $9.0 million and $24.6 million was attributable to the 13 restaurants opened during the forty weeks ended October 4, 2009.

Average weekly sales volumes represent the total restaurant revenue excluding discounts for a population of restaurants in both a comparable and non-comparable category for each time period presented divided by the number of operating weeks in the period. Comparable restaurant average weekly sales volumes include those restaurants that are in the comparable base at the end of each period presented. At the end of the third quarter 2009, there were 269 comparable restaurants compared to 233 comparable restaurants at the end of the third quarter 2008. Non-comparable restaurants presented include those restaurants that had not yet achieved the five full quarters of operations during the periods presented. At the end of the third quarter 2009, there were 35 non-comparable restaurants versus 44 at the end of the third quarter 2008. Fluctuations in average weekly sales volumes for comparable restaurants reflect the effect of same store sales changes as well as the performance of new restaurants entering the comparable base during the period.

Franchise royalties and fees, which consist primarily of royalty income and initial franchise fees, decreased 8.0% and 9.7%, respectively, for the twelve and forty weeks ended October 4, 2009. For the twelve weeks ended October 4, 2009, this decrease is primarily attributable to declining sales in our U.S. franchise restaurant base. For the forty weeks ended October 4, 2009, this decrease is primarily attributable to the $793,000 year over year reduction in franchise royalties from the 2008 Acquired Restaurants as well as lower current quarter sales revenue. Our franchisees reported that comparable restaurant sales decreased 14.4% for U.S. restaurants and decreased 0.2% for Canadian restaurants in the third quarter of 2009 compared to the third quarter of 2008. For the forty weeks ended October 4, 2009 and October 5, 2008, our franchisees reported that comparable restaurant sales for U.S. restaurants decreased 10.3% and Canadian restaurants decreased 0.2%.

Cost and Expenses



Cost of Sales



                             Twelve Weeks Ended                         Forty Weeks Ended
(In thousands, except     October 4,     October 5,    Percent      October 4,     October 5,    Percent
percentages)                 2009           2008       Change          2009           2008        Change
Cost of sales            $     42,961   $     48,705     (11.8 )%  $    156,472   $    156,558       -0.1 %
As a percent of
restaurant revenue               23.4 %         23.7 %    (0.3 )%          24.1 %         23.8 %      0.3 %

Cost of sales, comprised of food and beverage expenses, are variable and generally fluctuate with sales volume. For the twelve weeks ended October 4, 2009, cost of sales decreased as a percentage of restaurant revenues over prior year due primarily to improved beverage and cheese pricing. We also realized improved pricing on our ground beef which was offset by a shift in our sales mix to our premium burgers. For the forty weeks ended October 4, 2009, cost of sales increased as a percentage of restaurant revenues over prior year due primarily to higher contracted raw material pricing for ground beef and steak fries earlier in the fiscal year. We expect the more favorable ground beef pricing we realized in the third quarter of 2009 will stabilize to levels below our 2008 pricing for the remainder of fiscal 2009. Effective beginning with the fourth quarter 2009, we also entered into new contracts for chicken and potatoes that give us pricing at or below the prices we paid in 2008 and earlier this year.

Labor



                             Twelve Weeks Ended                         Forty Weeks Ended
(In thousands, except     October 4,     October 5,    Percent      October 4,     October 5,    Percent
percentages)                 2009           2008       Change          2009           2008        Change
Labor                    $     64,113   $     68,300      (6.1 )%  $    224,063   $    222,395        0.8 %
As a percent of
restaurant revenue               34.9 %         33.3 %     1.6 %           34.6 %         33.7 %      0.9 %

Labor costs include restaurant hourly wages, fixed management salaries, stock-based compensation, bonuses, taxes and benefits for restaurant team members. For the twelve weeks ended October 4, 2009, labor costs as a percentage of restaurant revenue

increased from prior year due primarily to the impact of fixed expenses such as managers' salaries, on a lower revenue volume. In addition, minimum wage increases and higher benefit costs also increased our labor as a percentage of revenue. For the forty weeks ended October 4, 2009, labor as a percentage of restaurant revenue increased due to fixed salary and minimum wages and higher benefit costs on a lower revenue volume base. A stock based compensation charge of $886,000, also increased labor costs as a percentage of restaurant revenue for the forty weeks ended October 4, 2009 by 0.1% of restaurant revenue. This year over year increase is partially offset by improved productivity of hourly labor for non-management team members and decreased restaurant-level bonuses, as well as lower vacation expense.

Operating



                            Twelve Weeks Ended                         Forty Weeks Ended
(In thousands, except    October 4,     October 5,    Percent      October 4,     October 5,    Percent
percentages)                2009           2008       Change          2009           2008        Change
Operating               $     31,950   $     36,236     (11.8 )%  $    106,976   $    113,139       (5.4 )%
As a percent of
restaurant revenue              17.4 %         17.7 %    (0.3 )%          16.5 %         17.2 %     (0.7 )%

Operating costs include variable costs such as advertising, local marketing expenses, restaurant supplies, travel costs, and fixed costs such as repairs and maintenance and utility costs. For the twelve and forty weeks ended October 4, 2009, operating costs decreased as a percentage of restaurant revenue due primarily to a 0.8% and 1.25% effective decrease in 2009 advertising activities for the twelve and forty weeks, respectively. This decreased spending has been offset by higher repairs and maintenance costs.

Occupancy



                            Twelve Weeks Ended                         Forty Weeks Ended
(In thousands, except    October 4,     October 5,    Percent      October 4,      October 5,    Percent
percentages)                2009           2008       Change          2009            2008        Change
Occupancy               $     14,434   $     13,977       3.3 %   $      47,836   $     43,195       10.7 %
As a percent of
restaurant revenue               7.8 %          6.8 %     1.0 %             7.4 %          6.6 %      0.8 %

Occupancy costs include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance and other property costs. As a percentage of restaurant revenue, occupancy costs for the twelve and forty weeks ended October 4, 2009 increased over the prior year periods due to a decline in average restaurant revenues on partially fixed costs and higher fixed rents related to new and acquired restaurants. Many of the restaurants acquired from franchisees in previous years are "build to suit" locations that typically bear a higher occupancy cost as a percentage of restaurant revenue.

Depreciation and Amortization



                            Twelve Weeks Ended                         Forty Weeks Ended
(In thousands, except    October 4,     October 5,    Percent      October 4,      October 5,    Percent
percentages)                2009           2008       Change          2009            2008        Change
Depreciation and
amortization            $     13,112   $     12,248       7.1 %   $      43,815   $     38,777       13.0 %
As a percent of total
revenues                         7.0 %          5.9 %     1.1 %             6.7 %          5.8 %      0.9 %

Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of acquired intangible assets and liquor licenses. Depreciation and amortization expense increased as a percentage of total revenues for the twelve and forty weeks ended October 4, 2009 compared to prior year due primarily to increased depreciation and amortization expense related to new restaurants and the 2008 Acquired Restaurants and lower average restaurant sales volumes.

General and Administrative



                             Twelve Weeks Ended                          Forty Weeks Ended
(In thousands, except     October 4,     October 5,    Percent       October 4,      October 5,    Percent
percentages)                 2009           2008        Change          2009            2008        Change
General and
administrative           $     12,109   $     15,659      (22.7 )%  $      51,080   $     52,588       (2.9 )%
As a percent of total
revenues                          6.5 %          7.5 %     (1.0 )%            7.8 %          7.8 %     (0.0 )%

General and administrative costs include all corporate and administrative functions that support existing restaurant operations,

franchises, and provide infrastructure to facilitate our future growth. Components of this category include corporate management, supervisory and staff salaries, bonuses, stock-based compensation and related employee benefits, travel, information systems, training, office rent, franchise administrative support, legal, leadership conference, professional and consulting fees and certain marketing costs. For the twelve weeks ended October 4, 2009, general and administrative costs decreased as a percentage of total revenues and in absolute terms due primarily to lower national advertising marketing activities, reduced salary and travel costs related to our training activities and lower stock compensation expense. For the forty weeks ended October 4, 2009, general and administrative costs decreased as a percentage of total revenues in absolute terms due to lower national advertising marketing activities, reduced salary and travel costs related to our training activities, offset by increased performance based bonus awards.

Pre-opening Costs



                            Twelve Weeks Ended                         Forty Weeks Ended
(In thousands,          October 4,      October 5,    Percent     October 4,       October 5,    Percent
except percentages)        2009            2008       Change         2009             2008        Change
Pre-opening costs      $        125    $      2,661     (95.3 )% $       3,263    $      7,265      (55.1 )%
As a percent of
total revenues                  0.1 %           1.3 %    (1.2 )%           0.5 %           1.1 %     (0.6 )%
Average per
restaurant
pre-opening costs
(1)                    $          -    $        262         -    $         267    $        270       (1.1 )%

Pre-opening costs, which are expensed as incurred, consist of the costs of labor, hiring and training the initial work force for our new restaurants, travel expenses for our training teams, the cost of food and beverages used in training, marketing costs, lease costs incurred prior to opening and other direct costs related to the opening of new restaurants. Pre-opening expense for the twelve weeks ended October 4, 2009 reflect expenses for two restaurants scheduled to open in the fourth quarter of 2009 as compared to the ten restaurants that were opened during the twelve weeks ended October 5, 2008. Pre-opening costs for the forty weeks ended October 4, 2009 and October 5, 2008, reflect the opening of 13 and 27 new restaurants, respectively in each period presented.

Asset Impairment Charge

. . .