Red Robin Gourmet Burgers, Inc.

Good afternoon everyone and welcome to the Red Robin Gourmet Burgers Incorporated second 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 other statements that are not historical facts may reflect management's beliefs and projections as of today and 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 an alternative measure of the company's operating performance that may be useful. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its fiscal second quarter 2022 earnings release on its website at ir.redrobin.com. I would now like to turn the call over to Red Robin's CEO, Mr. Paul Murphy. Thank you, sir. Please go ahead.

Hello. Thank you for joining us. With me here today is Lynn Schweinfurth, our Chief Financial Officer. After I provide some general commentary on the business and an update on our initiatives, Lynn will review our fiscal second quarter results in detail, along with some revisions to our financial outlook. As the headlines have become increasingly negative as it relates to consumer confidence, general inflation, and the likelihood of a recession, casual dining traffic has been trending downwards. Still, when we evaluate our sales and traffic trends relative to our peers in the same markets, we are outperforming the casual dining segment. We attribute this outperformance to our high-low strategic approach to value, including higher-priced, innovative, limited-time offers and more compelling promotions, including our $10 gourmet meal deal, which we launched in late June. These promotions are complemented by everyday value that include affordable prices, generous portions, and signature bottomless sides and drinks. Our guest satisfaction scores for both dine-in and off-premises are improving, which we attribute to our back-to-basics operational execution, improved staffing, and declining turnover, which are enabling us to better serve our guests. Our digital platforms are also helping to support our business in ways that were simply not possible even just a year or two ago. We have increased our marketing versus 2021. However, we still remain below 2019 levels. Our marketing is mainly digital and therefore more targeted and cost effective. And it's driving record levels of engagement through guest segmentation, automated offers, and push notifications. We are also supporting the current limited time offer and value message while conveying that Red Robin is all about making moments of connection for friends and family across a diverse and multi-generational demographic. While commodities in general have plateaued, they have done so at a higher level than we had anticipated. The biggest unknowns with commodities are the weather conditions for the remainder of the grain growing season, and whether demand will fall as a result of the macroeconomic backdrop. Lynn will expound about both of these topics in her remarks. Now let's briefly discuss recent and current sales trends. Comparable restaurant revenue for the second fiscal quarter rose 4.1% compared to 2019 and rose 6.7% compared to 2021. For our eighth period ending August 7th, which is the first period in our third fiscal quarter, preliminary comparable restaurant revenue rose 3.1% compared to 2019 and rose 4.0% compared to 2021. In our efforts to be the employer of choice within our industry, we have prioritized hiring and retaining team members because we know that when appropriately staffed, we provide our guests with the quality experience that they deserve. This in turn leads to greater guest satisfaction and team member engagement, higher throughput, higher frequency, and ultimately higher sales. The progress we have made in driving greater applicant flow, hiring, and retention continued into Q2. However, there's still more work to be done. When comparing our progress on overall staffing levels to our hourly team members, we have improved from 82% of our target at the end of Q1 to over 91% at the end of Q2, with the continued goal of getting to 95%. And similar to last quarter, we were essentially fully staffed at our GM position, which can only lead to further restaurant staffing improvement because these two things are highly correlated. This is being driven by significantly improved turnover for the trailing three periods. In the big picture, we have a focused action plan to address a few key areas. starting with connection conversations between restaurant leaders and team members to not only help refine and improve our team member experience and run great shifts, but also provide quality training with a focus on back-to-the-basics execution. We are also offering more competitive wages at the local level and far greater scheduling flexibility, including the implementation of the Hot Schedules platform, which is in process. We believe the combination of these items will lead to higher job satisfaction while optimizing the guest experience as we seek an ongoing two-way conversation to understand, refine, and further improve. In terms of our value and promotional focus, we have broadened the breadth and depth of our messaging to Red Robin royalty members and made our efforts more compelling, driving record engagement levels and higher frequency of visits. The components of our high-low value strategy include keeping the menu fresh and exciting for guests through our successful premium limited-time offers. These higher-priced LTOs drive PPA, incremental margin, and attachment. During the second quarter, we featured the Whiskey River Backyard Barbecue Menu lineup, which included our Smokehouse Brisket Burger, Pineapple Upside-Down Cake Milkshake, and tequila sunset cocktail. This is our third consecutive LTO promotion to hit record sales levels. Our newest LTO, launched in mid-July, brings steakhouse flavors to our restaurants with the steakhouse summer menu and continues our recent success of developing unique, innovative items that have guests saying yum. Items include a new savory steakhouse burger, loaded baked potato fries, two alcoholic beverage choices, and a pumpkin spice milkshake. In addition to these premium LTOs, we are also promoting other compelling value offers that are strengthening their value perception and driving outperformance versus our peers in terms of sales and traffic as measured by black box intelligence and net value sentiment on social media channels. In late June, we introduced a limited time $10 gourmet meal deal which includes a gourmet burger, bottomless steak fries, and a bottomless beverage from a select menu. This deal is attracting guests to our brand to enjoy dining out with their families and friends again. We are also testing other value programs around specific day parts, such as happy hour, that will roll out to the majority of our system in a few weeks. We will also be testing lunch specials in the coming weeks. Catering is well ahead of our plans and above 2019 levels as businesses are resuming larger occasions and we are ready to meet their needs. We continue to lean in on the sales channel, which we believe can continue to grow in a meaningful way in the years ahead. Turning to our foundation, we are continuing to hone multiple growth platforms designed to drive consistent and profitable dine-in and off-premises growth. Let's first talk about Donato's Pizza, a product that continues to exceed our expectations. We are particularly encouraged by the incremental Donato sales generated in the second quarter as we increase marketing support with declining supply chain issues. There were approximately 200 restaurants serving Donato's at the beginning of the year, and there will be approximately 50 restaurants added in 2022. The remaining 150 restaurants will be implemented over the course of 2023 when we complete our rollout schedule. Sales for Donato's Pizza were approximately $6.2 million during the quarter itself, with a sales mix of approximately 60% dine-in and 40% off-premises. Restaurants serving Donato's outperformed restaurants without Donato's by 8.4 percentage points in terms of comparable restaurant revenues versus 2019 in the second quarter. This is well ahead of the same measurement we shared for the first quarter, which was 5% plus, or a sequential increase of more than three percentage points. Additionally, guest checks that include Donato's pizza are on average more than $10 higher than those that do not include pizza. By the end of 2024, we expect Donato's to generate annual company pizza sales of at least $60 million, and profitability of at least $25 million. Our integrated and seamless digital ecosystem, which includes a new website experience, mobile app, and an enhanced loyalty program, represents a key strategy for our brand, and is driving frequency, traffic, and check. We are currently standing at more than 650,000 app downloads, up from over 400,000 as of the end of our first quarter. bolstered by added marketing support in Q2. Notably, both our website and app are generating increased conversion as well. Off-premises digital channels have become the vast majority of our off-premises business, representing 83% of total off-premises sales in the second quarter. The integration of our Red Robin royalty platform into our app and online ordering experience has also improved our communication with guests. and we are leveraging technology to drive frequency. Royalty membership continues to grow. It is now 10.7 million as of the end of the quarter. We are seeing record levels of loyalty engagement driven by improved segmentation and target marketing. This has features in the automated and personalized messaging based upon purchase history. We are also conducting smarter campaigns and beginning to drive elevated engagement via push notifications. We are making ongoing improvements to these digital assets and recently introduced automated and push notifications along with Apple and Google Pay options. We are also continuing to enhance the ordering experience, reducing clicks and offering a more intuitive royalty integration. Additionally, we will be piloting an online wait list in late 2022. Next, let's discuss new restaurant development. A Red Robin franchisee recently opened a new restaurant in West Wichita, Kansas, and we will open a new company restaurant no later than early next year. We are expecting to pursue modest new restaurant growth with an infill strategy in established markets going forward, based on an ongoing track record of successful restaurant openings. The new restaurant we opened late last year in Seattle is currently on track to deliver 2022 sales between $4 and $5 million. This demonstrates the initial success associated with our new prototype. This year, we are also continuing to implement floor plan modifications to improve off-premises execution in our highest volume restaurants and pilot a restaurant refresh program to update our restaurants in the years to come. Finally, as this is my last conference call as CEO of Red Robin, I want to say how much I've enjoyed getting to know our analysts and investors over the past few years. When I joined the company back in October, 2019, it was my intention to serve for three years to quickly improve operating execution and overall performance, and then pass the baton to the next leader. Of course, I certainly could not have predicted that we were just about to enter one of the most tumultuous eras in the history of this industry. and, of course, our own lifetimes. Still, I am proud of the work that we have done in navigating through the pandemic, growing off-premises sales, implementing an enhanced service model, securing a new five-year credit agreement, and positioning the brand for the future with focused initiatives around people, the guest experience, food quality and innovation, a digital ecosystem, and the rollout of Donato's. We recently held our Restaurant General Manager Conference, and I walked away with energy and optimism. The team is engaged, passionate, and focused on our operational priorities. I have no doubt that G.J. Hart will be a fantastic Chief Executive Officer, and I will ensure a seamless changeover in leadership by staying on an advisory role through the first quarter of next year. Let me now turn the call over to Lynn to review our Q2 results.

Thank you, Paul. As Paul outlined, our industry is facing headwinds and a volatile macroeconomic environment. However, given our financial results associated with our strategic initiatives, we believe we are well positioned to create long-term value for our shareholders. Turning to second quarter results, we grew comparable restaurant revenues by 6.7% compared to 2021 in the second quarter. surpassing the casual dining segment in both sales and traffic, as measured by black box intelligence. Compared to 2019, our second quarter comparable restaurant revenues increased 4.1%, marking the second consecutive full quarter of positive comparable restaurant revenues versus pre-pandemic sales. Versus 2021, we experienced a softening of sales in the last two fiscal periods of our second quarter, that ended in mid-July. However, as Paul shared, we have seen our sales increase in our eighth fiscal period that ended August 7th, or the first period of our third quarter, to approximately 4%. We attribute this improvement to our high-low value strategy that is building traction and outperforming the casual dining segment. We delivered our ninth consecutive quarter of off-premises sales dollars at more than double pre-pandemic levels, demonstrating the sustainability of our higher off-premises sales channel since 2019. As a percentage of total off-premises sales, third-party delivery represented 54.3%, to-go represented 35.3%, catering represented 6.3%, and Red Robin delivery represented 4.1%. Full year net cash provided by operating activities was $36.4 million, while cash used in investing activities was $15.6 million, and cash provided by financing activities was $15.5 million. During the second quarter, we received federal cash tax refunds of approximately $12.7 million, which included $0.5 million of interest. We ended the quarter with liquidity of approximately $75.3 million, including cash and cash equivalents and available borrowing capacity under our revolving line of credit. Our ongoing focus includes effectively managing our bottom line, dedicating free cash flow over the next several quarters to reinvest 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 second fiscal quarter. Q2 2022 comparable restaurant revenues increased 6.7%, driven by a 9.6% increase in average guest check and a 2.9% decrease in guest traffic. The increase in average guest check represented a 6% increase in pricing, 3.7% increase in menu mix, and a 0.1% decrease from higher discounts. Second quarter total company revenue increased 6.2% to $294.1 million, up $17.1 million from a year ago driven by increased pricing and favorable menu mix shifts, partially offset by declining category traffic. Restaurant-level operating profit as a percentage of restaurant revenue was 13.6%, a decrease of 2.1 percentage points compared to 2021, primarily due to the following. Restaurant revenue increased by $16.5 million in primarily driven by increased pricing and favorable menu mix shifts, partially offset by declining category traffic. Cost of goods sold increased by 240 basis points, primarily driven by commodity inflation, partially offset by pricing and rebates. Commodity inflation was approximately 19% in Q2. Labor costs decreased by 120 basis points primarily driven by sales leverage and lower group insurance and management incentive compensation costs partially offset by wage rate inflation. Wage rate inflation was approximately 7.5% in Q2. Other operating expenses increased by 80 basis points primarily driven by increases in maintenance costs, utilities, and third-party commissions, partially offset by lower hiring costs and sales leverage, and occupancy costs increased by 10 basis points, primarily driven by higher insurance costs, partially offset by sales leverage. General and administrative costs were $18.7 million, an increase versus the prior year of $1 million. primarily driven by increased stock-based compensation expense, merit increases, and higher manager and training costs, partially offset by lower incentive compensation costs. Selling expenses were $13.4 million, an increase versus the prior year of $2.7 million, driven by increased marketing spend with improved staffing and ability to consistently execute. During the quarter, we recognized other charges of $8.1 million, including $8.7 million related to the impairment of long-lived assets primarily related to six restaurant locations, $0.9 million related to restaurant closures, $0.1 million related to executive transition, and $0.1 million for COVID-19 related costs, partially offset by a net reduction of $1.8 million related to litigation contingencies. Second quarter adjusted EBITDA was $11.9 million as compared to adjusted EBITDA of $19 million in Q2 2021. Q2 adjusted loss per diluted share was 75 cents as compared to adjusted loss per diluted share of 22 cents in Q2 2021. At quarter end, our outstanding principal balance under our credit agreement was $199.5 million, and letters of credit outstanding were $8.4 million. Effective pricing was 6% for the quarter as we continued to strategically increase prices to mitigate inflation while retaining a strong value proposition. In addition, we took incremental price of more than 2% in early Q3. As a result of cumulative price increases along with normalization of costs, we expect margins to improve in future quarters to get back to 2019 levels, and we intend to make significant progress in 2023. The company continues to face commodity inflation pressures, but we did experience an easing in supply chain disruptions in the second quarter, though they have not been eliminated. We continue to diversify our suppliers to manage these disruptions and lessen their impact on our operations. We are also proactively managing lead times related to other equipment purchases, including our implementation of Donato's. In addition, a new distribution contract kicks in at the beginning of the fourth quarter this year, which is factored into our commodity inflation expectations. As a result, we are expecting cost of sales of the percent of restaurant sales to increase sequentially in the fourth quarter from the third quarter. Due to the volatile macroeconomic environment, softening industry sales trends, and higher commodity costs, we have updated our guidance for 2022 as provided in our earnings release that we published today. A sincere thank you to our entire Red Robin team. We have made meaningful progress in staffing our restaurants, which will drive improved financial and operating performance. Restaurant traffic continues to outperform the casual dining segment. 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. Lastly, on behalf of Red Robin, I'd like to thank Paul for his considerable contributions to the brand over the last few years. Under his leadership and guidance, we are not only able to get through the pandemic, but Red Robin is well positioned to thrive in the years to come. Paul, it has been a great pleasure working with and learning from you. With that, I will turn the call over to Paul.