Red Robin Gourmet Burgers, Inc.

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated third quarter 2021 earnings call. Please note that today's call is being recorded. During today's conference call, management will be making forward-looking statements about the company's business outlook and expectations. These forward-looking statements and all other statements that are not historical facts reflect management's beliefs and predictions as of today. and therefore are subject to risk and uncertainties as described in the safe harbor discussion found in the company's SEC filings. During today's conference call, management will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended to illustrate an alternative measure of the company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its fiscal third quarter 2021 earnings release on its website at ir.redrobin.com. Now, I would like to turn the call over to Red Robin CEO, Paul Murphy.

Hello, everyone, and thank you for being with us today. I am joined by Lynn Schweinfurt, our Chief Financial Officer. who will review our third quarter results in detail after my opening remarks. Let me begin our discussion with our most recent sales trends before providing an update on our business initiatives and the strategic progress we are making that will position us for long-term success. Although the sales were softer than we expected due to the spread of the COVID-19 Delta variant and continued staffing challenges, We are optimistic about the positive trajectory we are seeing in our sales trends, including 4% comparable restaurant revenue growth in the last period of the third quarter versus 2019. We experienced a continuation of this momentum with growth of 4% in the first fiscal period of the fourth quarter compared to 2019, inclusive of a negative one to two percentage point impact of storms on the West Coast and the Halloween shift. We believe that there is even more opportunity for upside through the rest of the quarter as we address the staffing headwinds that face our industry. During Q3, we estimate that reduced seating capacity and limited hours due to staffing challenges and team member exclusions resulted in a 2.2% impact to our quarterly comp sales compared to 2019. While our decision to reduce hours and seating capacity impact short-term sales, we believe prioritizing a quality guest experience and supporting a workload for our team members that prioritizes satisfaction and retention are the two most critical considerations for the future success of our brand. Importantly, restaurants that were in the top 75% quartile for sales ended the quarter with staffing levels at or above 2019. and we are executing a prescriptive plan for each restaurant below the levels needed. Staffing is our number one priority, which is why we are committed to ensuring each restaurant is effectively managed, optimally staffed, and that our team members are well trained and retained. We are also removing obstacles for our general managers, improving our wage policies and training programs, and increasing our talent pool. Turning out the supply chain As we've entered the fourth quarter, we are seeing improvement in the availability of product and we continue to actively manage our product needs through additional suppliers and approved substitutes that meet our high quality standards. We are also ordering additional supplies where possible to avoid shortages heading into the holiday season. Finally, we are proactively managing our suppliers and contracts to position ourselves well for 2022. including securing the equipment to continue our rollout of Donatos. Now I'd like to provide an update on our business strategy and how we continue to take steps to accelerate our future growth. Beginning with Donatos Pizza, we added another 38 locations during Q3 and will complete approximately 40 in Q4. Our continued progress in rolling out Donatos will bring our system-wide total to approximately 200 restaurants. Overall, Donato's generated sales of $4.1 million in the quarter, which was aided by an increase in marketing support at certain restaurants. Our restaurants that offered Donato's for the full quarter and did not experience supply chain disruptions experienced comparable restaurant revenue growth of 4.3% compared to 2019. We are pleased that restaurants that have been serving Donato's pizza prior to 2021 are continuing to grow incremental sales beyond the first year as operations mature and brand affinity grows, with comparable restaurant revenue growth of 8.7 percent in the third quarter compared to 2019 in restaurants without supply chain impacts. Recall that we believe Donato's will generate annual company pizza sales of more than $60 million and profitability of more than $25 million in 2023, with 400 company-owned restaurants completed by the end of 2022. During Q3, we sustained an off-premise sales mix of 30.8%, which represents the sixth consecutive quarter that we have more than doubled pre-pandemic levels of approximately 14%. We believe that Red Robin is well-positioned to take advantage of the shift in customer habits toward off-premise occasions due to our value proposition and menu offerings. The elevation of the off-premises experience is critical to maintaining this sales channel, which is why we continue to enhance building modifications to increase space for off-premises orders to improve efficiency and accuracy without impacting our dine-in business. We are on track to complete these reconfiguration efforts in 2022. We are making significant progress advancing our digital strategy with the upcoming launch of two new mobile apps, iOS and Android, a new website experience, and a new loyalty platform creating an integrated and seamless digital ecosystem for our guests. In 2021 to date, we have leveraged new loyalty segmentation capabilities to connect with our guests more meaningfully through personalized messaging based upon their purchase history. This led to new all-time high levels of guest engagement in Q3. In the last quarter, we also reached an important milestone for our brand, surpassing the 10 million loyalty member mark for the first time. In Q4, our new loyalty platform, powered by Punch, a proven player in the restaurant space, will enhance our loyalty campaign and communication capabilities. Our improved and more relevant integrated digital guest experience is expected to soft launch in Q4 and drive incremental frequency, traffic and guest check. Marketing will begin in early 2022 to drive awareness and trial of the new app and website ordering experience. Designed to generate higher order conversion compared with the current online experience, while offering superior suggested upsell capabilities. There will also be ongoing innovations and improvements following the initial launch in the months and years to come. I continue to be pleased with our strategic transition to digital marketing, which allows us to target our messaging, both by geography and to specific consumer segments. Digital marketing drove meaningful incremental traffic in Q3, a new high for the year as we continue to leverage our learnings. We are reaching consumers with more relevant messaging that is also more cost effective. In the fourth quarter, we will remain nimble and efficient with the bulk of our marketing investment in digital. A key feature of our marketing messaging is our new limited time offer menu items. Our Q3 limited time offer burger, the Scorpion Burger, which outperformed our sales expectations, was so well received by guests that it earned a permanent place on our menu. In Q4, our cheese lovers limited time offer lineup is off to a great start. It features the new cheesy bacon fondue burger, which is outperforming expectations by more than five times, while our new mozzarella cheese sticks have become the number one selling appetizer on the menu. Our virtual brands are yet another driver of incremental digital and off-premise sales. We have three differentiated brands available system-wide and across all delivery platforms. During Q3, they generated $5.9 million in sales, which are highly incremental to our business. We continue to be pleased with these brands that highlight distinctive, high-quality products while fully maximizing our kitchen capacity without adding operational complexity. In Q4, we are opening a relocated high-volume restaurant that was closed due to imminent domain in 2020. This restaurant utilizes our new prototype configuration with design enhancements to improve dine-in, off-premise, and curbside execution in an optimized kitchen layout that enhances efficiency. Next year, we'll open another new restaurant based upon this enhanced prototype design and are developing a real estate pipeline for resuming modest growth beginning in 2023. We know that when we create memorable moments connecting family, friends, and fun by upholding our brand promise, Red Robin will be viewed as a leading choice for guests. While the Delta variant and other macroeconomic challenges certainly hindered our recovery momentum in the short term, we have several strategic initiatives underway which provide us with an opportunity to both expand our market share and build guest frequency. Let me now turn the call over to Lynn to review our third quarter results.

Thank you, Paul. While our Q3 results were certainly impacted by the Delta variant and industry staffing and supply chain challenges, I am confident in our future. This is because our improving dine-in sales trajectory, incremental off-premises sales channels, and continued dedicated execution of our business strategy together will drive meaningful long-term shareholder value. Turning to third quarter results, the 34.3% increase in the third quarter comparable restaurant revenues was primarily driven by operating our dining rooms at increasing capacities. Compared to the third quarter of 2019, comparable restaurant revenue was up 0.6% with a sales trajectory that improved through the quarter. We delivered our sixth consecutive quarter of off-premises sales mix at more than double pre-pandemic levels of approximately 14%, comprising 30.8% of total food and beverage sales, compared to 40.7% and 13.2% in 2020 and 2019, respectively. Importantly, we have been able to retain the same level of third quarter off-premises sales dollars in 2021 as 2020. or approximately $81 million. As a percentage of total off-premises sales, third-party delivery represented 52.2%, to-go represented 39.6%, catering represented 4.5%, and Red Robin delivery represented 3.7%. Year-to-date net cash provided by operating activities was $37.6 million. while cash used in investing activities was $20 million, and cash used in financing activities was $16 million. Since the end of 2019, we have paid down $50.5 million in debt while intentionally weighting 2021 discretionary investments to the back half of the year. We ended the quarter with liquidity of approximately $75.2 million, including cash and cash equivalents, and available borrowing capacity under our revolving line of credit, which includes the impact of a $30 million capacity reduction on our revolving line of credit pursuant to terms of the Second Amendment to our credit facility. We intend to continue to effectively manage our bottom line and dedicate our free cash flow over the next several quarters to de-levering our balance sheet, while maintaining flexibility to pursue strategic growth initiatives that will generate profitable sales going forward. Now, turning to some of the specifics related to the third fiscal quarter Q3 2021, comparable restaurant revenues increased 34.3%, driven by a 22.5% increase in guest traffic and an 11.8% increase in average guest check. The increase in average guest check resulted from a 3.5% increase in pricing and an 8.4% increase in menu mix, partially offset by a 0.1% decrease from higher discounts. Third quarter, total company revenues increased 37.4% to $275.4 million, up $75 million from a year ago. driven by operating our restaurants at increased capacities in Q3 and lapping prior year sales impacted by the COVID-19 pandemic. Total company revenues decreased by 6.4% compared to the same period in 2019, primarily due to closures of unprofitable restaurants. Restaurant-level operating profit as a percentage of restaurant revenue was 12.5%. an improvement of 3.9 percentage points compared to 2020, primarily due to the following. Restaurant revenue increased by $73.2 million, primarily driven by favorable guest counts, menu mix, and pricing. Cost of goods sold decreased by 20 basis points, primarily driven by pricing, favorable mix shifts, lower waste, and higher rebates, partially offset by commodity inflation. Labor costs decreased by 80 basis points, primarily driven by staffing challenges and sales leverage, partially offset by higher wage rates, staffing costs, and increased restaurant management compensation costs in 2021. Other operating expenses decreased by 10 basis points, primarily driven by lower utilities and lower supplies due to lower off-premises sales mix, partially offset by increased hiring costs and janitorial and maintenance expenses, and occupancy costs decreased by 290 basis points, primarily driven by sales leverage and restructured lease payments. $3.1 million of transitory labor and other operating costs were incurred due to staffing challenges, including hiring and training costs, temporarily outsourced janitorial costs, one-time bonuses, and overtime pay. As I said earlier, effective pricing was 3.5% in the third quarter, but we have since taken an additional 2.4% price increase at the beginning of the fourth quarter, with expected effective pricing of 3.6% for the full year. Given our relatively modest historical price increases that have been in line with or lagged the industry, We believe we have room to take additional price to mitigate ongoing inflationary commodity and wage pressures that we are experiencing, including increased hiring, training, and retention costs extending beyond the third fiscal quarter. At the end of the third quarter, hourly wage increases were in the mid-single digits, driven by both rates and front-of-house hour mix. Restaurant-level operating profit as a percentage of restaurant revenue was 360 basis points lower than 2019, driven by higher third-party delivery fees and supplies due to higher off-premises sales volumes and mix, hiring costs and technology costs partially offset by lower janitorial expenses. General and administrative costs were $17.7 million, an increase versus the prior year of $2.5 million. primarily driven by merit increases and lapping temporary salary reductions in 2020, increased travel costs, and higher professional services spent. General and administrative costs were $19.2 million in 2019. Selling expenses were $12.7 million, an increase versus the prior year of $6.6 million, and a decrease versus 2019 of $17.6 million. The decrease versus 2019 was due to our emphasis on digital media in 2021 that Paul addressed earlier. During the quarter, we recognized other charges of $1.6 million, primarily triggered by the COVID-19 pandemic. These charges included $1.1 million related to restaurant closures, $0.3 million for COVID-19 related costs, including purchasing personal protective equipment for our restaurant team members and guests and providing emergency sick pay to our restaurant team members, and $0.2 million related to litigation contingencies. Third quarter adjusted EBITDA was $8.3 million as compared to an adjusted EBITDA loss of $0.7 million in Q3 2020. Q3 adjusted loss for diluted share was $0.88, as compared to adjusted loss for diluted share of 19 cents in Q3 2020. Adjusted EBITDA was $14.7 million in the third quarter of 2019, and adjusted loss for diluted share was 24 cents. In response to the continued uncertainty around the impact of industry labor and supply chain challenges, as well as the COVID-19 Delta variant, the company amended its current credit facility. on November 9th, 2021 to obtain additional flexibility to continue to implement our business strategy. The company anticipates refinancing its credit facility in 2022. At quarter end, our outstanding debt balance was $157.2 million and letters of credit outstanding were $8.6 million. Guidance for 2021 is as follows. Mid single digit commodity and wage inflation, selling general and administrative costs between $120 and $130 million, capital expenditures of $45 to $55 million, including continued investment in maintaining our restaurants and systems capital, Donato's expansion to approximately 120 restaurants, including approximately 40 restaurants in our fourth fiscal quarter, digital guest and operational technology solutions, and off-premises execution enhancements. Before I conclude, I'd like to thank our entire Red Robin team for the results they are generating, despite the significant challenges COVID-19 has brought to our business. We are confident in our ability to meet these challenges and deliver long-term value for all of our stakeholders. With that, I will turn the call back over to Paul.