Red Robin Gourmet Burgers, Inc.

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated First Quarter 2022 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 of the 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 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 first quarter 2022 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. Thank you for being with us today. I am joined by Lynn Schweinfurth, our Chief Financial Officer, who will review our results for fiscal first quarter in detail and update our financial outlook after I provide some general commentary along with an update on our ongoing business initiatives. Let me begin by expressing how pleased we are that the economy is now fully reopened. This has led to positive sales momentum characterized by improving dine-in sales, while our off-premise sales dollars are continuing to hold at more than double pre-pandemic levels. We will continue to monitor the situation closely, but at this point, we are continuing to experience top-line momentum despite macroeconomic and consumer headwinds. Because our brand is all about moments of connection at an affordable value for friends and family across a diverse and multi-generational demographic, we are well suited to address pent-up demand. This is true even as economic pressures persist, such as navigating the inflationary environment that has been further impacted by the continuing war in the Ukraine and related global supply chain challenges. Our craveable LTO product promotions are selling at record levels, and if conditions were to change, we have proven value-oriented promotions on the shelf that can be added as needed. As dine-in demand has increased, we have also maintained our GM and restaurant management staffing levels, who are focused on attracting and retaining quality team members. By improving that staffing, we are best able to capitalize on the incremental opportunity for dining sales and grow profitability. We are also deploying increased targeted marketing support to take advantage of rising staffing levels. Most of this expenditure is digital because it is more targeted and cost-effective, and importantly, is driving record engagement levels. As part of this support, we will begin to build awareness for our new app and website ordering experience. while highlighting our successful Whiskey River Backyard Barbecue LTO, as well as our value message around bottomless. In addition, we'll be running local media in selected Donata's markets to build awareness around this new product offering. In terms of our fiscal Q2 2022 sales trends to date, during the fifth period, preliminary comparable restaurant revenue rose 7.3%, compared to 2019. Comparable restaurant revenue for the first fiscal quarter rose 3.9% compared to 2019 and rose 19.7% compared to 2021. Sales growth compared to 2021 was driven primarily by higher pricing and mix, and to a lesser extent, higher traffic, as more guests felt comfortable dining out, partially offset by staffing challenges. As we have emphasized over the past few quarters, staffing remains our number one priority. When restaurants are staffed properly, we deliver a more consistent quality experience, which leads to higher guest satisfaction, higher throughput, and higher sales. It also supports our team members in a manner that prioritizes their own satisfaction and retention. We are making progress in hiring and retaining team members. While we are not where we need to be, particularly as it relates to retention, we have been able to reduce the number of restaurants that have had to close early, and we were able to deliver more operating hours in Q1 than in Q4 last year. If we compare ourselves to PAR staffing levels by individual restaurant staffing requirements, as of the end of our fiscal fifth period, we improved our staffing levels to above 85% of our target. Importantly, we are staffed to par at the GM level. This is particularly relevant because as we approach full staffing in our management positions, we expect overall restaurant staffing improvement to accelerate because the latter is highly correlated with the former. The action plan we are executing with regards to people is focused on three key areas. One, restaurant leadership. Connecting with team members, quality training and execution, and running great shifts. Two, wages. We are addressing at the local level to remain competitive. And three, scheduling and flexibility. Accommodating scheduling needs of team members, and we are also in the process of implementing an improved scheduling tool to provide more scheduling flexibility. We are also driving quality applicant flow through various means, including utilizing an outsourced staffing organization to support more challenging locations. Of course, we must not only attract talent, but also retain talent given the competitiveness of the market. This requires raising the bar on workforce engagement so that we can further improve our team member value proposition. Our intention is to mean an active and two-way dialogue with our team members so that we can further improve these important relationships. Our food is centered on a variety of gourmet burgers and other mainstream favorites that guests love. And we are continuing to differentiate and elevate Red Robin's offerings through highly successful, limited time offer menu items. In fact, having already implemented a scaled down menu pre-pandemic, our LTOs are getting more attention than ever before. This is helping us drive PPA, incremental margin, and attachment. On a related note, even as we emerge from the pandemic, we have no intention to broaden the menu. This not only ensures that we do not add operational complexity, but also because our LTO offerings keep the menu fresh and exciting for guests. Recall that our Q1 LTO lineup began with what was a continuation of what we featured in Q4 last year. Our Cheese Lovers LTO featuring our cheesy bacon fondue burger and mozzarella cheese sticks. This has been among our best performing LTOs of all time. Since March, we've been featuring the Whiskey River Backyard Barbecue menu lineup, which includes our Smokehouse Brisket Burger and Tequila Sunset Cocktail. This is our third consecutive LTO promotion to hit record levels of sales. Providing an outstanding guest experience is as important as ever, and we believe that staffing, training, and experience will further improve the quality of execution by our team members. Having welcomed more guests in Q1 than we have since the onset of the pandemic, we are more focused than ever on execution. This approach is based upon elements of our total guest experience hospitality program, which entails delivering fun and playful service that is tailored to our guests' time and occasion and delivering exceptional value through our commitment to bottomless steak, fries, and beverages. Our emphasis on execution is producing improving operating metrics and sales momentum. As we have discussed over the past several quarters, we are implementing process and minor floor plan modifications to improve off-premises efficiency and accuracy and intend to complete these modifications by year-end. We are also evaluating opportunities to make heart of the house execution simpler, which will reduce ticket times and enable us to better cater to our guests' time and occasion. Turning to our foundation, we are continuing to hone multiple growth platforms designed to drive consistent and profitable dine-in and off-premises growth. Beginning with Donatus Visa, this is a long-term growth vehicle that is exceeding our expectations. We had approximately 200 restaurants serving this high-quality product during Q1, which is similar to Q4. Donato's pizza sales reached more than $7 million in Q1 and were supported by additional marketing support at certain locations. Restaurants serving Donato's continue to outperform the rest of the Red Robin system. For restaurants that had Donato's, Comparable restaurant revenue grew by more than 5% over restaurants that did not yet have Donato's. Additionally, guest checks that included Donato's pizza were on average over $10 higher than those that did not include pizza. We also see that Donato's drives higher visit frequency among our royalty members, adding one more visit per year. Recall that we are pacing our Donato's rollout with approximately 50 restaurants this year. most of which will be completed in Q2 and Q3, while the remaining 150 restaurants will be implemented in 2023. All of the kitchen equipment that will be installed in 2022 has been secured. Therefore, we are confident that we will meet our rollout schedule. By the end of 2024, we expect Donatos to generate annual company pizza sales of at least $60 million, and profitability of at least $25 million. While we continue to leverage Donato to enhance the Red Robin dine-in experience and growth, we also believe there is more runway to drive long-term incremental transactions through catering and delivery. Let me now turn to our digital initiatives. I am pleased that we now have an integrated and seamless digital ecosystem to drive frequency, traffic, and check. We view these digital assets as a key strategy for our brand, and we'll make enhancements to them on an ongoing basis with some exciting new features being rolled out over the remainder of the year and beyond. We are continuing to enhance our integrated and seamless digital ecosystem. In late March, we launched a new website experience with user-friendly enhancements to presentation, navigation, and online ordering that are geared towards driving incremental frequency, traffic, and guest check. We were honored that our website was nominated for a Webby Award within People's Choice category and was one of the top five nominees. We view this external recognition as a big accomplishment that validates our digital efforts and traction. Recall that in Q4, we soft-launched our iOS and Android mobile apps. and integrated them with our newly enhanced loyalty platform. We have since implemented four major releases with guest-facing enhancements, but there's still more to come, such as an online wait list and additional payment options. In spite of limited marketing support, as of the end of our fifth fiscal period, we have already had over 400,000 downloads and have achieved an average rating of 4.6 out of 5. Notably, both our website and app are generating increased conversion, and as we add marketing support this year, we expect to see further increases in our downloads. On a related note, our new Red Robin royalty platform, which is integrated with our new app and online ordering experience, has vastly improved our communication capabilities. This is reflected in our ability to improve segmentation, send automated and personalized messaging based upon purchase history, offer smarter campaign offers, and elevate interaction via push notifications. These enhancements are resulting in all-time high levels of engagement for our 10.6 million royalty members, which grew by roughly 300,000 members since the end of 2021. Turning to new restaurant development In Q4 last year, we opened a relocated high-volume 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, which is on track to deliver sales of over $4 million in its first full year. We are developing a real estate pipeline for resuming modest new restaurant growth beginning next year. Leveraging our enhanced prototype design and targeting high return markets where we have a combination of quality operations and financial performance and strong brand recognition. In addition to company development, we're also encouraged that two new franchise restaurants are poised to open by 2023. We are also reestablishing our restaurant refresh program, which includes testing our scope of work with elements of our new prototype this year. Our plan will be to begin rolling this out to the system beginning next year. Finally, I wanted to make you aware that we recently issued our first sustainability report as part of our commitment to environmental sustainability and governance reporting. The report, which outlines Red Robin's journey to sustainability and blueprint for better business, can be found on our investor relations website at ir.redrobin.com, and we encourage you to review it at your convenience. Of course, this is just the first step on our path to progressing sustainability, and we have set clear goals for where we go next across people, products, and place. Let me now turn the call over to Lynn to review our Q1 results.

Thank you, Paul. I remain confident in our future given our improving dine-in sales trajectory, incremental off-premises sales channels, and continued dedicated execution of our business strategy, together creating value for our shareholders. Turning to first quarter results, the 19.7% increase in first quarter comparable restaurant revenues compared to 2021 was primarily driven by operating our dining rooms at higher capacities. As Paul mentioned, we have seen positive sales momentum in Q1 as the country emerges from the COVID-19 pandemic. Our full quarter comparable restaurant revenues increased 3.9% compared to the same period in 2019, marking the first full quarter of positive comparable restaurant revenues to pre-pandemic sales. We delivered our eighth consecutive quarter of off-premises sales dollars at more than double pre-pandemic levels, demonstrating the lasting improvements made in our off-premises sales channel since 2019. As a percentage of total off-premises sales, third-party delivery represented 55%, to-go represented 36.7%, catering represented 4.3%, and Red Robin delivery represented 4%. Full year net cash provided by operating activities was $13.3 million, while cash used in investing activities was $9.5 million, and cash provided by financing activities was $15.4 million. During the first quarter, we paid approximately $8.8 million, representing approximately half of the payroll taxes we were able to defer during the COVID-19 pandemic. we will pay the remaining balance of approximately $8.9 million in early 2023. We completed a new five-year credit agreement, which gives us financial flexibility to execute our long-term strategic plan. We ended the quarter with liquidity of approximately $55.8 million, including cash and cash equivalents and available borrowing capacity under our revolving line of credit. We intend to continue to effectively manage our bottom line and are dedicating free cash flow over the next several quarters to reinvesting in our restaurants and infrastructure while maintaining flexibility to pursue strategic initiatives that will generate profitable sales growth going forward, including adding Donato's to the balance of our system, ongoing investments in restaurant technology and our digital ecosystem and new restaurant development. Now, turning to some of the specifics related to the first fiscal quarter. Q1 2022, comparable restaurant revenues increased 19.7%, driven by a 12.8% increase in average guest check and a 6.9% increase in guest traffic. The increase in average guest check resulted from a 6% increase in menu mix, a 5.4% increase in pricing, and a 1.4% decrease in discount. First quarter total company revenue increased 21.2% to $395.6 million, up $69.3 million from a year ago, driven by operating our restaurants at increased capacities in Q1 2022, and lapping prior year sales more aggressively impacted by the COVID-19 pandemic. Restaurant-level operating profit as a percentage of restaurant revenue was 14%, an improvement of 100 basis points compared with Q4-21, and a decrease of 1.7 percentage points compared to 2021, primarily due to the following. Restaurant revenue increased by $61.9 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, partially offset by favorable mixed shifts and pricing. Labor costs increased by 130 basis points, primarily driven by higher labor inflation and staffing costs, partially offset by sales leverage. Other operating expenses decreased by 30 basis points, primarily driven by lower supply costs, driven by lower off-premises sales and sales leverage, partially offset by increased maintenance costs due to outsourcing, and occupancy costs decreased by 140 basis points, primarily driven by sales leverage. Effective pricing was 5.4% for the quarter. 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. 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 the current backyard barbecue LTO lineup, our cheesy bacon fondue burger, and scorpion gourmet burger, our menu innovation focuses on creative recipes which are driving higher checks and margins. While these items represent higher-priced offerings at our restaurants, we also have promotions with proven effectiveness ready to implement that offer our guests a great value that compels a dine-in occasion. General and administrative costs were $25 million, an increase versus the prior year of $2.8 million, primarily driven by increased stock-based compensation expense, merit increases, and higher manager and training costs. Selling expenses were $9.3 million, an increase versus the prior year of $1 million, driven by increased marketing spend. During the quarter, we recognized other charges of $5.3 million, including $2.1 million related to the impairment of long-lived assets, $1.7 million related to litigation contingencies, $1 million related to restaurant closures, $0.3 million related to other financing costs associated with our new credit agreement, and $0.2 million for COVID-19 related costs. including purchasing personal protective equipment and COVID-19-related sick time for our restaurant team members. First quarter adjusted EBITDA was $28 million as compared to adjusted EBITDA of $27.4 million in Q1 2021. Q1 adjusted loss for diluted share was 12 cents as compared to adjusted loss for diluted share of 30 cents in Q1 2021. On March 4th, the company replaced its prior credit agreement with a new $225 million five-year credit agreement. The new credit agreement provides for a $200 million term loan and a $25 million revolving line of credit. 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 $194.4 million. The company, like all others in the casual dining space, is facing pressure from commodity inflation and disruptions in the supply chain, impacting the availability of product. Due to the continued and prolonged impact of geopolitical events and their impacts on the microeconomic environment during the first quarter, We are updating our guidance to low double-digit commodity inflation for the full 2022 fiscal year. Please refer to our earnings release that was issued today shortly before this conference call. Despite these challenges, we reaffirmed the remainder of our 2022 guidance, including delivering adjusted EBITDA of $80 to $90 million. A big and sincere thank you to our entire Red Robin team. We are making meaningful progress on increasing the dining capacity of our restaurants through staffing, which will drive improved financial and operating performance. We are also executing strategic growth initiatives that will provide platforms for incremental profitability in the years to come, including Donato's digital menu quality and innovation, a differentiated team member value proposition, and new restaurant developments. With that, I will turn the call back over to Paul.

Thank you, Lynn. We have our arms around the business and are pleased with our current momentum. Dine-in sales are returning, and we are maintaining our off-premises sales. We have the strategic initiatives to drive market share and frequency and can certainly pivot should there be changes in consumer behavior. As you heard Lynn say, we are maintaining our 2022 adjusted EBITDA guidance, while navigating the inflationary pressures challenging the industry. When we uphold our brand promise and deliver a consistent quality guest experience, we make Red Robin synonymous with connecting family, friends, and fun through memorable moments over great food. This is why we are so focused on ensuring that we are properly staffed to serve our guests. Our team has always demonstrated an incredible passion for Red Robin. and are always eager to find ways to do what we do even better in pursuit of top-line growth, profitability, and long-term shareholder value. They are why I am so optimistic on our future and why I so greatly applaud their efforts and all they do on our behalf. And with that, let us now open the call for questions.

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. And our first question comes from the line of Alex Lago with Jefferies. Please proceed with your question.

All right. Thanks. Hey, Paul. And congrats on the progress.

Thank you, Alex. How are you doing?

Pretty good. Busy day today. You'd think earnings season was over, but not so. so I just wanted to start on the consumer and it sounds like you're not really seeing anything. I just wanted to dig a little more into that. If you're seeing any changes in how consumers are using the brand or managing check at all, or, or even changes in behaviors of the rewards member versus non-rewards member, anything we can kind of start to look at there.

Well, Alex, you know, as I mentioned in my remarks that at this point, you know, we're not seeing it. We've, uh, still see that the off-premises business is holding. We mentioned that, so we haven't seen really any decline there. We're seeing this kind of consistent build of the dine-in sales. Our LTOs, this is the third one in a row that basically has set a record in our continuing to perform very strongly. I mean, I think the main change is it's against a reduced menu, but there's a burger, there's an appetizer, a non-alcoholic beverage, an alcoholic beverage, and a shake. And those together, we're seeing an extremely high take rate and more in the premium category of pricing. And quite honestly, they just have continued to accelerate. You know, all that being said, if we do start to see it, we have some things that are not only off the shelf but that are going into test that will be ready if the consumer does start to back off at all. And quite honestly, I think in our segment, when we take a look at our PPA versus what the rest of the casual dining segment is, You know, we have a lower PPA, so I think our value proposition is still very strong in conjunction with the bottomless aspect of it. So I think we're well set up, and I think the last thing I'd add is the whole digital ecosystem that we're now able to bring to bear on the business, both with our royalty members and the general public, is bearing fruit for us. So we feel like we're in a good place and going to be able to basically meet any challenges that come our way, the balance of the year.

Makes sense. What's the PPA or average ticket for dine-in like now versus pre-COVID? Is it similar or any changes on that front?

Yeah, I mean overall PPA has gone up certainly quite a bit. As we mentioned, I think pricing is up about 10% compared to 2019 as a data point. So we're seeing PPA being driven by pricing of that magnitude in addition to mix because we have been promoting more premium priced items within our restaurants and in our marketing.

Okay. And on operations, I wonder if you could comment on just recent guest metrics and if you see any opportunities to refine the model further now that capacity's sort of expanded and filling up the dining room a bit more.

Well, I think from a metric standpoint, we still see opportunity on expansion of the dine-in business, Alex. We're not to where we were in terms of 2019. I mean, obviously, theoretically, some of that offset is in off-premises, but I do believe that there's just more room, and I think that's, just to be frank, tied to the improvements we're making on our overall capacity or staffing inside the restaurants. We're seeing that as As that continues to improve, we're improving the dine-in business. And so I think that there's actually more room for growth there. And fortunately, the dine-in business is our most profitable channel. So we think that the most growth we have coming forward is in a very profitable channel for us.

Great. Thanks.

And our next question comes from the line of Brian Recaro with Raymond James. Please proceed with your question.

Hi, thanks, and good evening. I wanted to ask about the updated EBITDA guidance, and I think you've maintained your EBITDA guide. You raised your commodity inflation expectations, and I'm just curious what the offsets were there. Did you raise your sales expectations that were embedded in your prior guide, or perhaps there were some cost lines that moved? to help offset that, or maybe some incremental savings initiatives, just a little more color on the puts and takes there would be great.

Yeah, I would say to a great extent, we updated all of our cost expectations. Sales, we actually did adjust sales, but not by a meaningful amount. But we did adjust some labor expectations associated with transactions that we're seeing from a trending perspective. which did take down expenses a little bit. But then the big offset from a cost standpoint was in the commodity line item. And we increased that from high single digits to low double digits for the year.

Okay, thank you. And also on the SG&A guidance, it's something I also just always want to check in with you on, the 145 to 155. Could you just help us? What does that assume in terms of selling costs versus G&A? And rest of the year, do you expect selling costs to be fairly evenly spread the rest of the year? It's been moving around a little bit in recent quarters. Just wanted to make sure we're all on the same page in terms of forecasting that line item.

Yeah, no, thank you for the question. We were a little bit lower in terms of selling expenses in the first quarter. That was the result of Omicron and also marketing a little bit less as we were staffing our restaurants. So that number will go up in quarters two and three and then probably go up a little more in the fourth quarter based on our current expectations. The actual number will be anywhere from, say, you know, 52 to 56 million. And then the balance will be GNA. And from a cadence for GNA, we will expect to see... higher GNA in the third quarter, which corresponds to the timing of our GM conference this year.

Okay, that's very helpful. And then two quick ones, if I could, on the labor front. Paul, I think you mentioned that operating hours improved in the first quarter versus the fourth quarter. I guess, could you help quantify the degree of improvement that you've seen and to what degree that is still constraining your recent sales volumes?

I'll jump in on that one. I mean, we have certainly improved our operating hours by quite a bit, so we don't expect that that will have a meaningful impact on a go-forward basis, and it didn't have as much impact in this first quarter compared to fourth quarter. Okay.

And then last one for me on wage inflation. Sorry if I missed it, but what was your year-on-year wage inflation? Maybe a specifically on the hourly side in the first quarter. And are wage pressures starting to moderate as the supply of labor seems to continue to improve?

Our inflation for the first quarter year over year was roughly 11% in the first quarter. We do expect that to continue into the second quarter, but then it should go down a little bit in quarters three and four when we saw inflation rise in the prior year. I would say right now we're seeing wages being more consistent, not necessarily getting worse or getting better.

But sort of stabilizing.

I think that's a good way to characterize it, Brian.

Stabilizing. Okay. And maybe for the year, your wage inflation year-on-year would be somewhere maybe in the high single digits ballpark? That's correct. Yes. Okay. Okay, great. All right. Well, thank you. I'll pass it along.

And we have reached the end of the question and answer session. Also, this concludes today's conference, which you may disconnect your lines at this time. Thank you for your participation.