Red Robin Gourmet Burgers, Inc.

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated fourth 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 risks and uncertainties as described in the Safe Harbor discussion found in the company's SEC filing. 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 any alternative measure of the company's operating performance that may be useful. The 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 fourth 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, and thank you for joining us today. I'm here with Lynn Schweinfurth, our Chief Financial Officer, who will review our quarterly results in detail after my opening remarks. Let me begin with our fiscal Q1 2022 sales trends before updating everyone on our business initiatives. Through the first period of our fiscal first quarter, comparable restaurant revenue was down 1.1% compared to the same period in fiscal year 2019. driven by trailing impacts of the surge of the Omicron variant and continued staffing challenges and team member exclusions. During the second period, as Omicron receded, guests started to feel more comfortable dining out, and we experienced fewer team member exclusions. As a result, comparable restaurant revenues increased to 5.3% compared to 2019 levels, and we are pleased with our period two sales trends. and are seeing this momentum carry into the third period. When I joined Red Robin in 2019, one of the attributes that I most admired was the company's unique brand position in the industry. Our guests are everyday people seeking connection with friends and family across a diverse and multi-generational demographic. While the pandemic has certainly brought forth complex challenges, it has enabled us to improve our operating and financial model. I feel more strongly now than even before that our distinct Red Robin brand equities position us well for future growth. To complement the company's strengths in its brand equity and identity, we have aligned our strategic initiatives within the following four pillars. People, to be the employer of choice in the industry. Food, to deliver a variety of gourmet burgers and mainstream favorites that our guests love. guest experience to create relevant, personalized, and memorable guest experiences and foundation to execute profitable growth platforms. On the people front, we champion a culture of diversity and inclusion where our people are developed, recognized, and celebrated. Staffing remains our number one priority, and it goes hand in hand with creating a compelling team member value proposition. Having properly staffed restaurants in turn enables us to deliver a quality guest experience, which leads both to higher sales and supports our team members in a manner that prioritizes their satisfaction and retention. We have worked closely with our operators to determine a par staffing level by individual restaurant staffing requirements. Our staffing focus begins with being properly staffed at the restaurant management level. and we are making meaningful progress in 2022, hiring approximately 15 management team members per week through the end of our second fiscal period. At the end of 2021, we were 93% staffed in salaried manager positions and 96% staffed in the general manager role. Currently, we are staffed at approximately 85% of overall PAR levels. As the company approaches full staffing in our management positions, we expect overall restaurant staffing improvement to accelerate. The ongoing demand for Red Robin is very strong. What we are solving is a staffing issue, which is limiting our throughput, not a brand issue. Our period two sales trends demonstrate that margin will continue to improve as we improve our staffing, and restrictions having receded with the trajectory of Omicron in our most significant markets. enabling us to provide the occasion our guests expect from a visit to our restaurants. We recently hired Wayne Davis as our Chief People Officer, a respected executive who brings robust experience from multiple industries to Red Robin. Wayne is already leading proven initiatives to support individual restaurants in driving applicant flow, including the use of outsourced recruiting assistance to amplify internal resources. Given the competitiveness of the market with respect to compensation, we are constantly monitoring our compensation policies to ensure that we attract and retain talent. We are also engaging with our workforce to understand and improve our team member value proposition because compensation alone is not sufficient to ensure a happy workforce. In fact, we have completed a discovery initiative to better understand what matters to our team members and how we can improve their quality of life and create a sense of belonging. And we will be incorporating these learnings into our culture to further improve these important relationships. Red Robin's food makes no mistake about who we are. We deliver a variety of gourmet burgers and other mainstream favorites that guests love. We have several initiatives underway to further differentiate and elevate our product offerings, including our limited time offer menu items. In Q4, we featured our cheese lovers limited time offer lineup, including a cheesy bacon fondue burger and our mozzarella cheese sticks. The cheesy bacon fondue burger has been among our best performing limited time offers of all time. Because of its popularity, we have continued to offer it as a featured burger on our menu in Q1, which has the added benefit of reducing operational complexity. Donato's Pizza has also proven to be a strong addition to our brand and has more than earned a spot on our menu. In 2021, we rolled out Donato's to 120 restaurants, including 41 in Q4, and ended the year with high-quality pizza available at 198 restaurants. Donato's generated sales of $4.8 million during the quarter, aided by an increase in marketing support at certain restaurants, And Donato's restaurants continue to demonstrate strength relative to the rest of the Red Robin system. For the full year, Donato's generated sales of $14.4 million. Donato's continues to drive meaningful growth for Red Robin. Notably, restaurants that have served Donato's prior to 2021 also continue to grow incremental sales beyond the first year as operations mature and brand affinity grows. For those that did not encounter supply chain impacts, comparable restaurant revenue grew 8.1% in Q4 compared to 2019. Additionally, during 2021, guest checks that included Donato's Pizza were on average over $10 higher than those that did not include pizza. Both of these metrics serve to demonstrate the potential of our partnership with Donato's. We view Donato's as a long-term success vehicle, and nothing is more important than getting it right on day one at every restaurant where it is implemented. As I previously mentioned, as the company works to stabilize operations at restaurants where staffing is considered to be below par levels, we want to enable these restaurants to focus on the hiring and training of new team members before adding incremental menu initiatives. This will ensure our guests receive an outstanding service experience. For these reasons, we have moderated our rollout of Donato's to approximately 50 restaurants in 2022, with the kitchen equipment already secured, and will complete our rollout to the remaining 150 in 2023. Recall that a full implementation of Donato's should generate annual company pizza sales of more than $60 million, and profitability of more than $25 million. This remains our goal, but it will now be a 2024 event, as the rollout will not be completed until sometime in 2023. As we address the trailing impacts of the Omicron variant and the industry staffing headwinds, we are leveraging our total guest experience hospitality program to deliver fun and playful service that is tailored to our guests' time and occasion. and delivers exceptional value to our commitment to bottom with steak, fries, and beverages. Providing outstanding guest experience is as important as it has ever been. During Q4, we sustained an off-premises sales mix of 31.4%, which represents the seventh consecutive quarter of sales that are more than two times pre-pandemic levels of approximately 14%. Because of our value proposition and extensive menu offerings, Red Robin is well positioned to capitalize on shifting customer behaviors to off-premises occasions, which is why we are constantly seeking to elevate the off-premises experience through all possible levers. I will discuss how we are accomplishing this digitally in a moment, but physically, we have increased space for off-premises orders through building modifications to improve efficiency, and accuracy, and we'll be continuing these reconfiguration efforts to benefit both dine-in and off-premises execution. During Q4, we opened a new restaurant which utilizes our new prototype configuration. The design enhancements are geared towards improving dine-in, off-premises, and curbside execution, while the optimized kitchen layout enhances efficiency. We are highly encouraged by the performance of this restaurant. as it has achieved average weekly sales of over $80,000 through the second period and is tracking to be a well over $4 million restaurant in terms of annual sales. We are developing a real estate pipeline for resuming modest new restaurant growth, leveraging our enhanced prototype design and targeting high return markets where we have a combination of strong presence and brand recognition. Turning to our foundation, We have developed several platforms designed to drive consistent and profitable growth. We are investing in these platforms that include our digital ecosystem to support the growth of dine-in, off-premises, and catering channels. Telling our story through compelling messaging has been imperative to Red Robin. Our campaigns showcase the soul of the brand and inform our guests of our enthusiastic dedication to delivering a great guest experience. At the beginning of 2021, we pivoted our marketing efforts to be exclusive to digital media. This pivot has been successful for our brand, enabling us to efficiently and effectively target and engage with existing and new guests. Our messaging is focused on communicating our brand promise of memorable moments of connection. Our digital marketing momentum continued in Q4 with strong digital media returns driving year-over-year traffic growth. Our efforts were targeted at driving traffic and sales to restaurants that were staffed and ready for incremental guest visits. We leveraged new product news and tailored our messaging to highlight dine-in or off-premise occasions, taking into account local conditions. We made further progress in Q4, advancing our digital strategy by soft-launching our iOS and Android mobile apps and integrating them with our newly enhanced loyalty platform. we have vastly improved our Red Robin royalty communication capabilities through segmentation and personalized messaging based upon purchase history, resulting in all-time high levels of engagement. We recently began marketing our new mobile apps to guests, including the more than 10 million members of our royalty program. Our external marketing efforts showcasing the new apps and enhanced digital guest experience will continue to expand in the coming months. We are also launching a new website experience in Q1, building upon the improved online ordering experience that launched in Q4. This new experience will be much more user-friendly and creates a seamless digital ecosystem that can drive incremental frequency, traffic, and guest check. Let me add that we view our digital assets as always ripe for improvement. and intend to make ongoing enhancements subsequent to these launches. These will include jail fencing, which will inform restaurants when the guest is near for pickup, as well as implementing additional payment options to enhance convenience, such as Apple Pay and Google Pay. Our marketing efforts in 2022 will continue to be primarily digitally based, which allows us to target our messaging both by geography and through specific consumer segments. in a cost-effective manner. We will drive awareness and trial of the new app and website ordering experience, which should lead to higher order conversion while offering superior upsell capabilities. We will also utilize traditional local marketing to raise awareness and support the Donato's rollout. Our virtual brands, which are driving incremental digital and off-premises sales, offer distinctive, high-quality products that enable us to fully maximize our kitchen capacity without adding operational complexity. Three virtual brands are available system-wide and across all delivery platforms. We are also in the final phase of launching an additional licensed brand across our system. During Q4, our virtual brands, which each target specific demographics, collectively generated $8.4 million in incremental sales. To conclude, we recognize that we've been hindered in our ability to rebuild sales momentum and maintain or increase profitability as we deal with the ongoing pandemic and staffing challenges and other inflationary pressures affecting our supply chain. Of course, these issues are macroeconomic, not company-specific. We know that the demand for Red Robin experiences, dying in and dying out, persists as strongly as it does because when we empower the people who make Red Robin possible, we create memorable moments connecting family and friends over great food while delivering a fun and playful guest experience. It is through our key strategic initiatives that we are building the foundation to position us to gain market share and increase guest frequency. Let me now turn the call over to Lynn to review our Q4 results.

Thank you, Paul. While our fourth quarter results were impacted by the Omicron variant and continued industry staffing and supply chain challenges, I remain confident in our future. 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 fourth quarter results. The 40.1% increase in fourth quarter comparable restaurant revenues compared to 2020 was primarily driven by operating dining rooms at increasing capacities. Compared to the fourth quarter of 2019, comparable restaurant revenue was down 0.7% with a sales trajectory that faced headwinds through the holiday season with the onset of the Omicron strain. However, we have seen improvement through the second period and into the third period of our first fiscal quarter as Omicron has receded, as Paul mentioned. We delivered our seventh consecutive quarter of off-premises sales mix at more than double pre-pandemic levels of approximately 14%, comprising 31.4% of total food and beverage sales, compared to 43.9% and 14% in 2020 and 2019, respectively. Importantly, we have been able to retain the same level of fourth quarter off-premises sales dollars in 2021 as 2020, or approximately $85 million, demonstrating the lasting improvements made in our off-premises sales channel since 2019. At the percentage of total off-premises sales, third-party delivery represented 54.8%, to-go represented 36.6%, catering represented 4.9%, and Red Robin delivery represented 3.6%. Full year net cash provided by operating activities was $47.3 million, while cash used in investing activities was $42.2 million, and cash provided by financing activities was $1.6 million. Since the end of 2019, we have paid down $29.9 million in debt. We completed our lease renegotiation and restructuring initiative that we began in 2020 as a result of the COVID-19 pandemic, resulting in 3% to 4% occupancy savings over remaining lease terms on restructured leases. We ended the quarter with liquidity of approximately $57.7 million, including cash and cash equivalents and available borrowing capacity under our revolving line of credit. We intend to continue effectively managing our bottom line and dedicate our free cash flow over the next several quarters to reinvesting in our restaurants, infrastructure, and systems while maintaining flexibility to pursue strategic initiatives that will generate profitable sales growth going forward. Now, turning to some of the specifics related to the fourth fiscal quarter, Q4 2021 comparable restaurant revenues increased 40.1%. driven by a 26.6% increase in guest traffic and a 13.5% increase in average guest check. The increase in average guest check resulted from a 7% increase in menu mix, including incremental sales related to checks that include Donato's Pizza, a 4.2% increase in pricing, and a 2.3% decrease in discounts. Fourth quarter, total company revenue increased 41% to $283.4 million, up $82.3 million from a year ago, driven by operating our restaurants at increased capacities in Q4 and lapping prior year sales more aggressively impacted by the COVID-19 pandemic. Total company revenue 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 13%, an improvement of 6.8 percentage points compared to 2020, primarily due to the following. Restaurant revenue increased $81.1 million, primarily driven by favorable guest counts, menu mix, pricing, and discounting, Cost of goods sold increased by 220 basis points, primarily driven by commodity inflation and timing of certain rebates and substitute products, partially offset by menu pricing and favorable mixed shifts. Labor costs decreased by 350 basis points, primarily driven by sales leverage, partially offset by restaurant labor, cost inflation, staffing, and training costs. Other operating expenses decreased by 170 basis points, primarily driven by sales leverage, partially offset by increased third-party commissions, higher off-premises packaging costs, and increased hiring costs. And occupancy costs decreased by 380 basis points, primarily driven by sales leverage, savings from permanently closed restaurants, and restructured lease payments. $3.2 million of transitory labor and other operating costs were incurred due to staffing challenges, including hiring and training costs, substitute products, temporarily outsourced janitorial costs, one-time bonuses, and overtime pay. For the fourth quarter, hourly wage increases were in the high single digits. Effective pricing was 3.6% for the full year. Given our relatively modest pre-pandemic price increases that have been in line or lagged the industry, we believe we have flexibility to take additional price if needed to mitigate ongoing inflationary commodity and labor pressures. We also expect increased staffing and supply chain transitory costs extending beyond the fourth fiscal quarter. Looking forward, leveraging our digital ordering enhancements We expect to drive higher checks by featuring appetizers, beverages, and other add-on items that appeal to specific guest segments while staying committed to our bottomless promise and core value proposition. Building on our recent success with new products such as our Cheesy Bacon Fondue Burger and Scorpion Gourmet Burger, our menu innovation will focus on driving higher checks and margins. Finally, we expect that channel mix will contribute to higher checks as dine-in sales continue to recover. General and administrative costs were $17.8 million, an increase versus the prior year of $1.3 million, primarily driven by higher manager and training costs and increased travel costs. Selling expenses were $15.7 million, an increase versus the prior year of $7.8 million. During the quarter, we recognized other charges of $6.8 million, primarily triggered by the COVID-19 pandemic. These charges included $5.7 million related to the impairment of the long-lived assets associated with our excess properties, $1 million related to restaurant closures, and $.2 million for COVID-19-related costs including purchasing personal protective equipment and COVID-19-related sick time for our restaurant team members. Fourth quarter adjusted EBITDA was $8.9 million as compared to an adjusted EBITDA loss of $6.4 million in Q4 2020. Q4 adjusted loss per diluted share was $1.03 as compared to adjusted loss per diluted share of $1.79 in Q4 2020. On March 4th, the company replaced its prior credit agreement with a new $225 million five-year credit agreement with Fortress Credit Corp. The new credit agreement provides for a $200 million term loan and a $25 million revolving line of credit and was arranged by JPMorgan Chase as sole lead arranger and sole book runner. The new agreement gives us long-term flexibility to strategically invest in our business and create value for our shareholders. At quarter end, our outstanding debt balance was $177 million, and letters of credit outstanding were $7.9 million. Additionally, please refer to our earnings release that was issued today shortly before this conference call, which introduces our 2022 guidance. 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.