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.

Thank you, Lynn. Before we take your questions, I wanted to conclude my prepared remarks with the leadership changes taking place here at Red Robin. As we announced in our press release earlier this week, Lynn has decided to retire from Red Robin at the end of 2022. For nearly four years, she has served us well, spearheading our finance organization through some of the most challenging periods of Red Robins history. During her tenure, we welcomed in a new CEO in Paul Murphy, who has dealt with the challenges of the pandemic and, most notably, established a new credit facility. I want to thank Lynn for her dedication, her commitment, and her leadership, and wish her the very best as she pursues her aspirations outside of Red Robins. Lynn will continue to play a role here through the end of the year as we transition her responsibilities to our new EVP and CFO, Todd Wilson, who will start next week. Todd brings a wealth of financial management experience to Red Robin, and we are eager for him to join us. Most recently, he served as a CFO for Hopdoddy Burger Bar. He also held the role of Vice President of Finance and Investor Relations at Jamba Juice and served as Division CFO for Carrabba's Italian Grill and Fleming's Prime Steakhouse, while spending 10 years at Blooming Brands. In addition, Darla Morse, EVP and Chief Information Officer, and Jonathan Mutar, EVP and Chief Concept Officer, will also be leaving us to pursue other personal and career interests. Darla joined us in March of 2021 and helped to lead us the launch of our new Red Robin app last year, as well as the introduction of HotScalers platform in 2022. Jonathan joined Red Robin in December 2015 as Senior Vice President, Chief Marketing Officer, and became the EVP and Chief Concept Officer in January 2018. Jonathan and his team have been on the forefront of recent menu innovations, limited time offers, as well as the growth of our loyalty program. I want to thank both Darla and Jonathan for their contributions to Red Robin and wish them the very best as they turn to new opportunities. Effective today, we are launching a search to replace both Darla and Jonathan, and we'll hopefully find suitable candidates in the near future. In the meantime, I've asked Dina DePhillips, VP of Technology, to take on the role of Interim Chief Information Officer, and Amy Woolen, VP of Marketing and Brand Management, to take on the role as Interim Chief Marketing Officer. Lastly, I have a great pleasure to announce that Sarah Musketter, will return to Red Robin in December as our new EVP Chief Legal Officer. Sarah is replacing Michael Kaplan, who recently left us to work for a local employer in the home building industry. Sarah is no stranger to Red Robin, having previously worked here from August 2011 to September 2021. During the 10-year timeframe, she held the roles of Associate General Counsel and Vice President, Deputy General Counsel. Most recently, Sarah has been Deputy General Counsel for Skillsoft, a learning application and technology company based here in Denver. Until Sarah's arrival in December, Jeff Hoban will continue as our Interim Chief Legal Officer, and we have promoted him to Senior Vice President, Deputy General Counsel. Jeff joined Red Robin in 2019 after working with Ross Storrs as a Group Vice President for Real Estate. Prior to working at Ross, Jeff worked at Brinker International as Senior Vice President, Assistant General Counsel. As I said earlier, I am squarely focused on ensuring that we are delivering an exceptional restaurant experience and fulfilling our brand promise for our guests. Please be assured that we are urgently working on accelerating the consistent delivery of this high standard, and I look forward to sharing in January how we will achieve this goal. Together with everyone at our support center and within our restaurants themselves, I'm excited to be working in pursuit of our North Star, and thank you for your interest in Red Robin. And now we will open the call for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two.

We will pause for a moment as callers join the queue. The first question comes from Alex Slagle with Jefferies.

Please go ahead.

Thank you. Good afternoon. G.J., great to have you on the call and in the seat. And hi, Lynn. Best wishes on your next chapter. We'll miss you for sure.

Appreciate that. Thank you.

Good to hear from you, Alex. Yeah. And G.J., I guess with all your past experience in the casual dining segment and couple very different situations. I'd love to just dig a little deeper and hear some more of your views on the current strategy at Red Robin and how you think that should play into the current macro backdrop and perhaps any learnings from your past experience leading other organizations that resonate as you approach your new role at Red Robin.

Sure. Well, first let me say I've been here just on eight, not even eight weeks, almost eight weeks. So I am still learning a ton. So much of this is what I've gleaned thus far and what I believe that we can do. Look, I think Red Robin has been an iconic brand for five decades. And over the years, if you look at the core guests and the core guests' expectations back in the heyday, To be honest, if you look at that and you look at what our guests are expecting today, I think it's very, very similar. They may look different, but they expect the same things. And I think over the time, for whatever reason, Red Robin, some of those things have slipped away or changed or they've vanished completely. So we're taking a long look at that and taking a long look at what we can do to bring back the fun, playful nature of Red Robin. execute at a higher level. As an example, we have gourmet burgers on every building that we have out there and, you know, really challenging ourselves or I'm challenging the team. Are we producing a gourmet burger that we all are very, very proud of, or is it just average or is it better than average? We want to be the best that we can be. So really challenging the norm. We do a great job when our burgers are prepared today, but I think we can improve upon that. In addition to that, I think we need to have a full barbell menu strategy where from appetizers to entrees that there's a wide range. And we've got a pretty limited entree section. Today it's really about fish and chips. We have three items in total. And I think we need to expand that. And we have some room relative to some of the work we've done on the menu itself so that we can potentially take some menu items off and allow us to put some entrees back on. So we'll be testing that in the near future as well to see how that shakes out. We want to go back to owning shakes as an example. And so we're looking at how do we improve our shakes. And we do a good job today. I want to do a great job relative to that. From an execution perspective, I would tell you that, you know, candidly, some of the decisions of the past, you know, this company has suffered from and continues to suffer from. The decision that we all know about taking busters out of the restaurants. was a major one. Management complement going to two salaried managers and the rest from hourly associate managers. I think those things definitely have affected the ability to execute at a high level. And so we're taking a long look at that and see how do we help strengthen the management teams within the restaurant so they better can execute against the brand promise. And what I mean by that is that instead of having two salaried managers cover 14 shifts, we go back, depending on the volume, we look at going to four or five, depending on the volume, that can cover shifts and have specific responsibilities within the restaurant, specifically a kitchen manager. I think those things will result in some good learnings and what we can do going forward. So it's things like that that we're going to take a look at that will allow us and allow the restaurant management teams to execute at a higher level, have better throughput, and thus grow sales and give our guests what they expect. So that's just a few things that we're looking at right now. Again, it's early, so I've got much more to do, but at least it gives you a little insight.

Yeah, that's very helpful and actually answered a couple of my other questions. But on the... The guidance, Lynn, maybe you could help with that. It didn't seem like the inflation and pricing outlooks changed a whole lot. G&A a touch lower, but the EBITDA outlook is slightly lower. Is the shortfall due to the commodities or maybe a lower implied revenue outlook or maybe utilities? Just a little more clarity on what drove that.

Yeah, the majority of the change is really commodities and other operating costs. that we experienced in the third quarter, and then looking to improve some of those costs as we move through fourth quarter, but they were higher than we expected.

Okay. So on Donato's, again, you know, really strong results coming out of this program, and, you know, TJ, your thoughts maybe on Donato's and the pace of the rollout now? I mean, I guess the goal is to get to 2,250 company units this year, and I don't know if you have any updated thoughts or initial views on what the rollout for 23 could look like.

Yeah, at this point, it's a little bit too early to tell. I will tell you this, though, that we have some work to do on our existing restaurant base. We need to do some refreshes, some deferred maintenance. That's going to be a priority. Clearly, we are having great success with Donato, so we want to continue to expand it. But it's a little too early for me to say exactly how we'll allocate that capital. But I will tell you that we do think that getting it as fast as we can will make sense, but we do need to give priority to our existing restaurant base.

That makes sense and helpful. Thank you. I'll pass it along. Thanks, Alex. Once again, if you have a question, please press star, then 1.

The next question comes from Todd Brooks with Benchmark Company. Please go ahead.

Hey, thanks for taking my question. G.J., welcome aboard. And Lynn, again, best wishes on next steps for you as well.

Great. Thank you.

A couple questions here. And G.J., you just talked about having to prioritize work that you want to do on the existing base. I saw CapEx was guided up a few million in Q4. Is there a real need identified from a deferred maintenance standpoint of what you're looking to tackle in the existing base that you could think about or maybe communicate what sort of claim on capital that may be to get the base where you want it to grow from?

Again, Todd, we haven't done all that work yet. We have done an assessment. with our operators and our maintenance teams to understand what deferred maintenance needs to be done. So we're looking to prioritize that. As many companies through the pandemic clearly cut back some of that spending, and we need to make sure that we're taking care of these facilities. So it's a little bit early to tell you exactly how much of that capital we'll allocate, but as soon as we do get that plan, we'll share it.

Okay, great. And then secondly, and I'm just trying to put the pieces together as far as what does the profitability model look like for Red Robin as we get to 23 at the restaurant level? Hearing about improved quality and signature items, and I don't know how much additional that costs on the food cost side to get you where you want to be. Improved staffing, including salaried managers. I guess if you're looking at... the recovery and restaurant-level margins, importance of maybe investing in labor and food cost for a couple of your key initiatives versus maybe trying to harvest quick wins on restaurant-level operating profit as we're looking out to fiscal 23? Is it more of an investment year to cement the programs that you've identified?

Well, listen, as we're not going to go into some of these initiatives without testing them and understanding what the ramifications and or investment dollars are. If you take, as an example, the management complement, there is significant, in my opinion, there will be significant improvement on how we train employees in terms of how we hire employees, the turnover in the restaurants, the amount of overtime that we're currently spending. So all those factors will be offset by the investment, the additional investment. In addition, when you're paying more attention to guests and you're allowing our management teams to work with our teams to continue to coach them and be on the floor and be present when we're open, then I believe that we will grow sales. We're going to learn all that. So it's not just pure investment dollars. We believe there's a return and we will definitely look at what those returns will be and we'll share some of that information as we go forward so it's i wouldn't i wouldn't say it's a total investment here we recognize that we're going into a challenging economic environment but i also believe that some of these things are necessary for this brand to get back in the direction that we all wanted to from where we've been in some of the decisions of the past we have to correct those in my opinion

Okay, great. And then just one final kind of higher-level question, and I don't know if you've formulated an opinion on this, but obviously we've got a corporate-owned model to a large extent, but there is a franchisee base. And as you're looking beyond, and I don't know if you're looking beyond stabilization of the brand now to future growth, do you see that being corporate-driven, franchise-driven, still trying to figure it out? Just would love to get your thoughts on that. at that level, and I'll hop back in the queue after that. Thanks.

Sure, no problem. So I think it's a combination of both. It's a little bit early. We have a great group of franchise partners, and as we make some of these changes and have success, I believe that they'll get excited as well. And so they may want to invest and grow their units. But prior to that, we have a lot of work to do before we start to get on the growth path on the company side. As we just talked about, some of the deferred maintenance, refresh, a lot of testing. I want to get some of those things out of the way and learn from those. And then we'll start thinking about opening new restaurants. We do have some backlog of new units. The one unit that we've opened this year is doing extremely well. And so there's some good learnings there. But we have a lot of work to do around what does the prototype look like in the future? What does our kitchen look like in the future? What's the menu look like in the future? So we have a whole lot of work to do first before we start talking about significant growth here on the company or the franchise side. I will say that my early conversations with our franchise partners, I think they are excited about where we can go in the future. And some of the things I've just shared with you all, I've shared with them. And I can tell you that so far it seems like they're pretty excited about it.

Okay, great. I'll hop back in the queue. Thanks.

As there are no further questions, this concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.