Red Robin Gourmet Burgers, Inc.

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated third quarter 2022 earnings call. This conference is being recorded. During management's presentation and in response to your questions, they 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. Management will also discuss non-GAAP financial measures as part of today's conference call. 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 2022 earnings release on its website at ir.redrobin.com. Now I would like to turn the call over to Red Robin's new CEO, G.J. Hart.

Hello, and thank you for joining us today. With me is Lynn Schweinforth, our Chief Financial Officer. After providing some opening remarks, Lynn will review our fiscal third quarter results and financial outlook. I'm very excited to be here as the CEO of Red Robin, and my optimism around what this brand can achieve has only grown since assuming the role in early September. Although new to the executive team, I have served on the board since August 2019, which I believe provides a great deal of continuity during this leadership transition. While I have always been a big fan of this brand, over the last several years I've gained a deeper understanding of the organization, And with that, a heightened appreciation for the culture, values, and brand equities that have made Red Robin so iconic for more than five decades. My predecessor, Paul Murphy, is serving as a special advisor to the company through next March, and I want to thank him on behalf of the Red Robin team and board for his many contributions over the past three years. He successfully navigated us through the pandemic while building key platforms of growth that we'll continue leveraging going forward. On a personal note, I am also grateful to be benefiting from his insights and perspective. Having worked in the restaurant industry for approximately 35 years at both public and private companies, I probably already know many of the people listening to this call. And to those I have not yet met, I look forward to speaking and meeting you over the coming months ahead. By way of background, I most recently served as CEO of Torchy's Taco for almost four years. And prior to that, as an executive chairman and CEO of California Pizza Kitchen for over seven years. I was also with Texas Roadhouse for more than a decade as president and ultimately CEO and took the company public. Through those experiences and others, I believe that I have demonstrated my commitment to profitable growth and the ability to drive long-term shareholder value. I intend to do the same here at Red Robin. I've spent my initial eight weeks meeting the team. visiting restaurants, digging into the business, and learning as much as I can and as quickly as I can. People have always been a key priority for me in building a successful culture and business, and I really have been impressed by the team members I have encountered, both inside the restaurants and at the Restaurant Support Center. My attention is urgently focused on delivering on our brand promise, starting with building an extraordinary restaurant experience and being more relevant to our guests. New initiatives that we are pursuing to capture the opportunities include, among others, strengthening the restaurant management structure and service model, improving food quality, optimizing the menu with some new items, and creating a playful environment that allows our guests to enjoy connecting with friends over a great meal. After all, this is what Red Robin was built upon. Red Robin will be an operations-driven brand with a maniacal focus on quality execution and being of service to our operators. We are also looking at how we can improve the efficiency and effectiveness for how we operate our business overall. Our intention is to prioritize capital spending on refreshing our restaurant base. Now I'd like to provide some opening thoughts on the current state of the business. Importantly, category sales and traffic improved in Q3, when comparing our own sales and traffic trends relative to peers we outperformed. We believe there are several reasons for this. First, our new limited time product offerings have proven extremely popular with guests, generating a higher check average. We have balanced these with compelling promotions, including our $10 gourmet meal deal that continues driving incremental profitable traffic and positive value sentiment that exceeds the category. These initiatives are complemented by everyday value that includes affordable prices, generous portions, and signature bottomless sides and drinks. We recently launched our $4.99 margaritas and are testing other everyday value offers around specific day parts, such as happy hour, which is currently featured in about a third of our restaurants. Several other initiatives are driving sales growth for the brand. Catering is well ahead of plan and above 2019 levels, driven by our talented catering sales team, increased field engagement and readiness, and our new virtual catering storefronts. Our Donato's pizza offering continues to exceed our expectations. We are driving incremental sales, and the gap is widening between those restaurants with Donato's and those without it. In fact, restaurants with Donato's outperform non-Donato's restaurants by 10.1% versus 2019. That was up from approximately 8% in Q2 and approximately 5% in Q1. Our digital guest experience, which includes a new website, mobile app, and an enhanced loyalty platform, is driving frequency, traffic, and check. We currently stand at 1 million app downloads, and the app itself has earned high ratings on Apple and Android. Additionally, the integration of our Red Robin royalty platform into our app and online ordering experience has resulted in best ever levels of engagement with guests. Royalty membership continues to grow and is now over 11 million members as of the quarter end, an improvement of 800,000 members since the end of 2021. Now let's talk about our operational execution. While we are making progress in areas of hiring and retention, leading to incremental improvements in guest satisfaction, our guest satisfaction scores remain at levels below best in class for casual dining. Our implementation of the HOTS schedules platform will provide greater scheduling flexibility, which is very important to team members and gives time back to the managers. Our focus will remain on setting our general managers and team members up for success. While commodity and other operating costs were higher than expected, we do believe that restaurant margins will improve in the fourth quarter and beyond. Lynn will provide more details summarizing what we are doing to address this. We are also piloting a refresh program that touches external and internal elements, and we will complete a handful of projects in Q4. We will then collect guests, and team member feedback and track results to refine the go-forward scope of the work. I look forward to sharing our North Star vision and strategy, including new initiatives and our 2023 outlook at the upcoming ICR conference in January. Lastly, I'd like to sincerely thank the team for their continuing efforts in moving Red Robin forward and for welcoming me to the organization. Now I'll turn the call over to Lynn to review our Q3 results.

Thank you, G.J. For our third quarter results, we grew comparable restaurant revenues by 5.3% compared to 2021 in the third quarter, surpassing the casual dining segment in both sales and traffic as measured by Black Fox Intelligence. Compared to 2019, our third quarter comparable restaurant revenues increased 5.9%. marking the third consecutive full quarter of positive comparable restaurant revenues versus pre-pandemic sales. We delivered our 10th 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 53.5%, To-go represented 34.9%, catering represented 7.5%, and Red Robin delivery represented 4.1%. Full-year net cash provided by operating activities was $38.8 million, while cash used in investing activities was $18.3 million, and cash provided by financing activities was $14.9 million. During the quarter, we received $8.5 million in final proceeds related to the sale of a restaurant in our Pacific Northwest market. We will opportunistically pursue replacing the restaurant if and when an appropriate site in this trade area is identified and are pleased with the boost to our liquidity. We ended the quarter with liquidity of approximately $75 million, including cash and cash equivalents, and $25 million available borrowing capacity under our revolving line of credit. Now, turning to some of the specifics related to the third fiscal quarter, Q3 2022 comparable restaurant revenues increased 5.3%, driven by a 9% increase in average guest check and a 3.7% decrease in guest traffic. The increase in average guest check resulted from a 7.7% increase in pricing 2.5% increase in menu mix, and a 1.2% decrease from higher discounts. Third quarter total company revenue increased 4.2% to $286.9 million, up $11.4 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 12.6%, an increase of 10 basis points compared to 2021, primarily due to the following. Restaurant revenue increased by $12.2 million, primarily driven by increased pricing and favorable menu mix shifts, partially offset by lower traffic. Cost of goods sold increased by 180 basis points, primarily driven by commodity inflation, partially offset by pricing and favorable mixed shifts. Commodity inflation was approximately 16% in Q3. Labor costs decreased by 130 basis points, primarily driven by sales leverage, lower hiring costs, and lower management incentive compensation costs, partially offset by wage rate inflation. Wage rate inflation was approximately 7% in Q3. Other operating expenses decreased by 30 basis points, primarily driven by lower hiring advertising costs, lower off-premises supplies, and sales leverage, partially offset by increases in utilities and credit card fees. And occupancy costs decreased by 20 basis points, primarily driven by sales leverage. General and administrative costs were $21.5 million, an increase versus the prior year of $3.8 million, primarily driven by a timing shift of our annual leadership conference, increased stock-based compensation expense and merit increases, partially offset by lower corporate office costs. Selling expenses were $14.2 million, an increase versus the prior year of $1.5 million, driven by increased marketing spend. During the quarter, we recognized other gains of $5.2 million, including a $9.2 million gain related to the sale of a restaurant and $2.5 million in lease termination gains related to previously closed locations, partially offset by $2.2 million related to the impairment of long-lived assets, $1.8 million related to executive transition, $1 million in other financing costs, $0.9 million in costs related to restaurant closures, $0.3 million in corporate office sublease costs, $0.1 million related to litigation contingencies, and $0.1 million for COVID-19 related costs. Third quarter adjusted EBITDA was $4 million as compared to adjusted EBITDA of $8.3 million in Q3 2021. Q3 adjusted loss for diluted share was $1.03 as compared to adjusted loss for diluted share of $0.88 in Q3 2021. At quarter end, our outstanding principal balance under our credit agreement was $199 million and letters of credit outstanding were $7.8 million. The company faced higher than expected commodity inflation pressure during the quarter. While these costs have begun to decline, As shared last quarter, we entered into a new distribution contract at the beginning of the fourth quarter. As a result, we are expecting Q4 cost of sales as a percent of restaurant sales to be at or slightly higher than Q3. In addition, other operating costs in the third quarter were higher than our expectations, primarily related to higher repair and maintenance expenses, record utility rates, and higher than expected usage. restaurant supplies, and higher fees associated with higher credit card usage. Pricing, net of discounts was 6.5% in the third quarter, as we continue to strategically increase prices to mitigate inflation while retaining a strong value proposition. As a result of higher operating costs, we will implement additional pricing during the fourth quarter of approximately 1.5 percentage points starting in November. Importantly, we expect restaurant margins to improve sequentially in the fourth quarter related to incremental price, lower utility usage, and lower maintenance costs as we reimplement internal cleaning and janitorial services now that we have stabilized staffing, which will enable us to improve our margins as we enter 2023. Due to higher commodity and operating costs and other strategic investments, we have updated our guidance for 2022 as provided in our earnings release that was published today. As this is my last conference call, I'd like to thank my colleagues and friends at Red Robin for their dedication, energy, and collaboration that enabled us to get through a very challenging time. I look forward to partnering with Todd as he joins the management team to help ensure a smooth transition. I share G.J.' 's optimism on what this brand has the potential to do and will be rooting from the sidelines as an interested shareholder and brand enthusiast. With that, I will turn the call back over to G.J.