Red Robin Gourmet Burgers, Inc.

Good afternoon everyone and welcome to the Red Robin Gourmet Burgers Incorporated first quarter 2023 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 and therefore are subject to risks and uncertainties as described 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 the 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 gap measures can be found in the earnings release. The company has posted its first quarter 2023 earnings release on its website at ir.redrobin.com. Now, I'd like to turn the call over to Red Robin CEO, G.J. Hart.

Good afternoon, and thank you all for joining us today. With me is Todd Wilson, our Chief Financial Officer. who will review our first quarter results and discuss our upwardly revised 2023 financial guidance outlook, among other items, after I conclude my remarks. We are pleased with our performance to start 2023 and the traction we are seeing as we roll out our North Star plan. I want to thank our operators and restaurant and support center team members. You are doing a fantastic job Your dedication and hard work drove our success in Q1 and will carry us into the future. Our strong results in the first quarter are a great first step on this journey, and we know this is a comeback that will take time to fully deliver. We are encouraged to see early proof points of success. First, guest satisfaction scores have now increased five percentage points as compared to 2022. We are seeing gains across the full portfolio with the greatest increase in our bottom quartile restaurants as we would expect. Second, guest wait times and false waits have declined substantially as we staff our restaurants properly. A year ago, more than 10% of our guests reported waiting more than 15 minutes to be seated. Now that is down to only 2% of our guests. Shorter wait times result in happier guests and reduced walkaways. Third, first quarter results exceeded the black box casual dining industry benchmark for both same-store sales and traffic. That beat increased as the quarter progressed. We attribute this beat to the benefits of capturing sales that we previously lost due to false waits and extended wait times. Red Robin as a 16-week first quarter is unique as compared to many of our peer restaurant companies. who more typically report a 13-week first quarter. As a point of comparison, based on our point of sale sales data, our comparable restaurant sales increased 10% in the first 13 weeks of the quarter. We also celebrated over 700 new sales records established in the first quarter. These are hourly, daily, and weekly high watermarks per restaurant. In a brand that is nearly 50 years old, To set more than 700 new records is a testament to the incredible work of our restaurant teams and the overall direction of our company. Lastly, we printed a meaningful first step to restore restaurant-level profitability to historical levels and significant gains in adjusted EBITDA. As I initially shared in January, our blueprint for the comeback of this iconic brand is our five-point North Star plan. The changes we are implementing are designed to cement our competitive positioning, drive sustainable growth, and build long-term shareholder value. Now we'll share updates on each pillar of the North Star plan. Number one, we are transforming to an operations-focused restaurant company. This change is well underway as we are involving our frontline operators in all key decisions. With the start of the second quarter, we launched our market partner program to all multi-unit operators. This program changes the compensation structure for these partners to reward them based on the profits of the restaurants they oversee. By making this change, these leaders are incentivized and rewarded for driving and delivering results. We are learning from the rollout of this multi-unit operator program and will incorporate this learning into our single unit operator program which we expect to launch with the start of 2024. Number two, elevating the guest experience. Our top two investment priorities related to the guest experience are, number one, staffing and hospitality levels, and number two, food quality enhancements and breadth of menu options. Our hospitality model changes and investments represent a return to an industry standard staffing model, and the staffing model Red Robin used for many years to generate great success. Key changes add back bussers, hosts, bartenders, and expo roles that were eliminated or reduced in Red Robin's past, and reverting back to our more traditional hospitality standard, where servers have fewer tables and do not rely as heavily on server assistance. We made significant progress in the first quarter and are more than 50% complete with these additions. We expect to be substantially complete by the end of the second quarter. For our food and menu updates, on the side of every one of our restaurants hangs a sign proclaiming gourmet burgers. The bar has been raised over the years on what it means to deliver a truly gourmet burger, and we are upping the ante. The first step in upgrading our cooking platform from a legacy conveyor belt driven system to a flat top grill. Changing the cooking method alone delivers our guests a 20% larger, juicier, and more flavorful burger. We tested the flat-top grills in the first quarter of the year and began the system-wide rollout in April. We have moved very quickly and already installed flat-top grills in nearly 300 restaurants and expect to complete the system-wide implementation in the second quarter. Not only does this change provide great flavor, quality, and value to our guests, Team members are excited by this change, have a greater sense of pride for their work, and report it is easier to execute. Finally, we expect the flat-top grills will significantly reduce repair and maintenance costs, cleaning costs, as compared to our legacy system. The investments in the burger patty is a critical first step, and we are not stopping there. In February, we welcomed Chef Brian Sullivan to lead our culinary efforts. He and the team have done a fantastic work to identify and solve key upgrades to burger toppings and new menu options. Following completion of the flat top installation, we will phase in upgrades to buns, bacon, mayonnaise, vine ripened tomatoes, and other produce amongst other changes. We will also change our preparation procedure to deliver more delicious caramelized onions and sauteed mushrooms. Red Robin has historically presented its burgers wrapped in wax paper, which fit at the time the brand was developed. With an upgraded burger patty and the best and fresh ingredients we can source, we think the time has come to showcase the beauty and deliciousness of our truly gourmet burger. Later this year, we will move away from the wax paper wrapping to introduce new plateware, allowing each burger to stand tall on its own. next to the plentiful serving of our bottomless fries and other sides. Lastly, as it relates to the menu, we were in final development stages for new entrees beyond our burger lineup with new non-fried appetizers that provide guests greater variety and enable a true barbell menu pricing strategy. We expect all these upgrades will be implemented across the system by October of this year. Number three, removing costs and complexity. In order to help support our guest-facing investments, we have been hard at work identifying areas where we can thoughtfully reduce or remove costs that do not impede the guest experience or detract from our commitment to quality. Our supply chain team has done a great job identifying and now capturing opportunities that provide our guests a parity or better product at a reduced cost. In addition, many vendors have partnered with us to restructure contracts that provide more favorable rates and the opportunity for both sides to benefit as our business grows. Number four, optimizing the guest engagement. As we move to an operator-focused company and strive to become the most loved brand in communities that we serve, we are empowering our restaurants to engage with their communities directly. Red Robin was the original leader in local marketing, and we will drive to return this to our local marketing roots. We are fortunate to have an incredibly strong Red Robin loyalty program, now with 11.5 million members, up from 11.3 million members a quarter ago. We have begun the work to engage and evolve the program further by focusing on rewarding our most loyal guests rather than what was primarily a discount strategy in the past. Our new Chief Marketing Officer, Kevin Mayer, and the team have hit the ground running, and I'll share more progress in the future. Number five, driving growth in comparable restaurant revenue and unit-level profitability to deliver on our financial commitments. Q1 results demonstrate what we can accomplish when we have the right strategy in place and execute accordingly. and we have only just begun. Credibility with the investment community is critical, and this first quarter results are a good start and a first step on this journey. We will continue to be diligent in our operational execution to drive sales and profit growth, and confident that when we provide financial commitments, we can deliver on them.

Let me now turn the call over to Todd. Thank you, G.J., and good afternoon, everyone. I will begin with a recap of our financial performance for the first quarter, which is a 16-week quarter, and then walk you through our upwardly revised financial guidance for 2023. Total revenues in Q1 were approximately $418 million, an increase of $22.4 million versus the first quarter of fiscal 2022. The increase in revenue resulted from an increase in comparable restaurant sales of 8.6%, the ninth consecutive quarter of positive comp sales growth and an acceleration from the 2.5% growth we posted in the fourth quarter of 2022. Comparable restaurant traffic increased 0.6%. The balance of our comparable sales growth was due to menu price increases and favorable sales channel mix. Of note, dine-in sales increased 16% as compared to the first quarter of 2022. Dine-in sales represent 74% of restaurant sales in the first quarter. We believe these figures reflect a broad post-COVID normalization and a further proof point of the effectiveness of our North Star plan with guests seeking and enjoying the dine-in experience at Red Robin. Restaurant-level operating profit as a percentage of restaurant revenue was 14.7%, an increase of approximately 70 basis points compared to the first quarter of 2022, and a 330 basis point sequential increase from 11.4% in the fourth quarter of 2022. While we experienced cost inflation across many categories, we were able to grow restaurant-level operating profit margin through the growth in comparable restaurant revenue and the initial implementation of cost savings measures. Commodity inflation was approximately 8% in the first quarter of 2023 and moderated faster than expected from the 13% we experienced in the fourth quarter of 2022. We anticipate year-over-year inflation will continue to sequentially step down through the balance of the year. In labor expenses, hourly wage inflation was approximately 6%. We also invested approximately $3 million in the quarter to add staffing in the operational roles G.J. mentioned earlier. Additionally, incentive compensation expense for our restaurant management teams increased over $1 million versus the first quarter of 2022 due to the significant gains in sales and profit performance the restaurant teams produced. While these are added costs, we see real evidence of the benefits of these investments in guest satisfaction, sales, and profit results. Even with these investments, total labor costs declined 60 basis points as compared to the first quarter of 2022, led by leverage from the sales gains. In other operating expenses, we experienced lower third-party sales commissions resulting from lower third-party sales mix, which was generally offset by higher repair and maintenance costs. General and administrative costs were $26.8 million, an increase versus the prior year of approximately $2.5 million. The increase is led by approval of higher incentive compensation expenses and legal and professional fees associated with the sale-leaseback and franchise acquisition transactions, partially offset by reductions in staffing levels. Selling expenses were $7.7 million, a decrease versus the prior year of approximately $2.2 million, led by reductions in print, agency, and website spending. Adjusted EBITDA was $36.1 million compared to $28 million in the first quarter of 2022. Capital expenditures totaled $16.1 million and were primarily related to $7.4 million out of reinvestment into existing restaurants and $5.9 million into the continued expansion of Donato's. We anticipate the 2023 CapEx related to Donato's will be complete in the second quarter of 2023, as the installations for 2023 were front loaded in the year and are now substantially complete. We expect to continue the expansion of Donato's in 2024. We ended the quarter with approximately $49 million of cash and cash equivalents and $10 million available borrowing capacity under our revolving line of credit. At quarter end, our outstanding principal balance under our credit agreement was $213 million, and letters of credit outstanding were $9 million. In view of our great start and outperformance in Q1, we are raising our financial guidance expectations for fiscal 2023. Our revised guidance is as follows. Total revenue of at least $1.3 billion. Comparable restaurant revenue growth of 2% to 4%. This is a new addition to our guidance that we believe will be helpful to the investment community. Restaurant level operating profit of at least 13.5%, inclusive of investments and the guest experience. Selling and general and administrative expense of $127 to $132 million. The increase from our prior guidance is led by expected higher incentive compensation costs due to performance. Capital expenditures from $45 million to $50 million. Adjusted EBITDA from $70 million to $80 million. An increase from our original guidance of $62.5 million to $72.5 million. There is a thoughtful phasing to our investments and our approach is to earn our way to additional investments. This guidance reflects our confidence to both accelerate investments in food and labor while also increasing our adjusted EBITDA outlook. As we look to the balance of the year, comparable restaurant sales have remained positive and better than the industry benchmarks to start the second fiscal quarter. Due to typical seasonal sales shifts and the accelerated investments, we expect second quarter restaurant-level operating profit margin to take a step back from first quarter levels, then sequentially increase through the balance of the year as cost savings achieve a full run rate. Finally, I would like to update our previous communication regarding evaluating a sale-leaseback transaction. Following our evaluation, in the first quarter we marketed an initial tranche of 10 owned properties to investors. The marketing process included multiple interested parties and multiple rounds of bidding. We are currently progressing through the final stages of documentation and diligence with the winning buyer. We expect to close the transaction in the second quarter and generate gross proceeds of approximately $30 million. We anticipate the transaction will add occupancy expense of approximately $2 million, and we have incorporated an additional $1.2 million of occupancy expense into our 2023 guidance in anticipation of completing the transaction. The expected closing of this transaction supports the increase in our 2023 capital expenditure guidance. We expect proceeds from the Sale East Back transaction will be used to repay debt, fund capital investments, and support repurchasing shares of company stock subject to the terms of our credit agreement and board approval. In closing, we are extremely pleased with our first quarter performance, our track for 2023, and the overall direction of Red Robin. With that, I will turn the call back over to G.J.

Thank you, Todd. We have recently announced appointments to our leadership team, including the addition today. I'd like to welcome Jody Lynch, our Chief Technology Officer, Kevin Mayer, our Chief Marketing Officer, Mark Simpson as Interim Chief People Officer, and congratulations to Jason Rusk on his promotion to Chief Business Development Officer. These changes complete our leadership team. I am confident these leaders will help drive the success of Red Robin and empower our people to achieve their full potential. In closing, our mission is very simple, serving up awesome American food and bottomless fun. We are empowering our operators and providing them tools and resources to succeed. The initial proof points of success are evident in our Q1 results, and we will continue to execute our strategic plan. I remain incredibly optimistic about the future of our company, and thank you all for your interest. We will now be happy to take your questions. Operator, please open the lines.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may 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 star key. Our first question comes from the line of Todd Brooks with Benchmark Company. Please proceed with your question.

Hey, thanks for taking my question, and congrats on some really excellent results and evident improvement in the quarter. Great job. Thanks, Todd. I wanted to jump in. It's kind of a combined question. Two big areas of opportunity that you had cited were attacking the false weights and supply chain efficiency. You pointed at real progress against both in the quarter.

um how much of that opportunity has been harvested how much is still in front of us as we start to think about uh the model and revenue trend going forward hey todd uh this is todd here i'll start and then let uh dj add in but um you know he he quoted some numbers that i think give you some guidance at least on the the false weights right we were as we started to look at this data we were over 10 last year down to two percent most recently so you know, super encouraging to see the progress and still a little bit of room to go, but we feel like we've made very quick, significant progress there. In terms of the cost savings and particularly as it relates to the supply chain, you know, really very early innings in Q1, we ultimately captured a little bit over a million dollars of the save in Q1. We expect that'll ratchet up fairly quickly in Q2 and really hit its full run rate in Q3 and Q4. So, We're on the pace that we expected. And so that was fully in line with our expectations. But I would say as far as cost saves, we expect that to rip quickly through the balance of the year.

And Todd, I'll just finish up by saying that from a false weight perspective, we have some room to go, but we've made significant progress. But where we're really going to make progress as our staffing levels and our training is fully in place is on a sales per hour perspective you heard me quote we broke 700 sales records during the period and that was individual sales records per hour per week etc but the sales per hour levels that we are seeing from some of our best operators are incredible and so that gives me great hope on what we can do here in the future that's great my final one and i'll jump back in queue

with the rapid progress that you showed with these results and just some of the acceleration and CapEx spending and maybe faster than expected upgrading of the equipment platform behind flat tops, is the overall plan as you've started to dig in and execute against North Star, which I know you gave yourself a three-year window, do you feel like it's accelerating as you guys really have started to work against the goals there? It feels like maybe we're getting some of the initiatives pulled forward here, given the early strength that we've seen in the first part of the year?

Well, Todd, we, you know, listen, we want to move as fast as we earn our way to do so. And that's exactly what we're trying to do. To say that we're ahead of the three-year plan, it's really not, I'm really not ready to say that yet. There's so much uncertainty out there in terms of the economy and all the things that we all know that are out there from a macro perspective. So are we pleased where we are? Yes. I've been here eight months and And I feel like this team has come around and we're doing some incredible work. But I wouldn't say that we're ready to raise the flag to say, hey, we're feeling super, super bullish about we can move this up significantly. But we are happy where we are.

Okay, great. Congrats. I'll jump back in the queue. Thanks. Thanks, Todd.

As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Andrew Wolf with CL King. Please proceed with your question.

Hi. Congratulations on all the progress, both obviously with your customers but financially as well. Thanks. I just had kind of a simple question. If I understand it, so over 10% of the guests were waiting a year ago, and now around 2% are waiting. So obviously a lot less of them leave. But obviously that gap is, how do you correlate that or how do you measure how many of them actually walked away and didn't, you know, in other words, how do you measure what the boost is to traffic based upon that information?

Yeah, Andy, hey, this is Todd. The data that we're capturing there is through our survey methodology. And so it's as reported by our guests. You know, one of the key pieces as G.J. and myself and this team got in that was striking to us was we saw weights reported across all day parts, all week parts. And just to give an example there, right, we would look at our data and see our guests on an extended wait, you know, randomly, right, at 3 o'clock on a Wednesday afternoon, a time period that we should never be on a wait. we want to be on a weight when we're full on a Friday night, right? But it's across that breadth of the spectrum that initially caught our attention. And so the data is reported through our survey and we're looking across that full spectrum of when are we on weights and is it because we're truly at capacity or is it because we truly haven't filled all of these positions yet? We're making great progress, but we know there's still more progress to come. Um, and ultimately we're going to look at our sales and our traffic results as it compares to the industry. You know, as G.J. called out, right, we beat the industry on both. We continue to see that into the second quarter. And so all of those are encouraging signs to us.

Got it. You know, I think last quarter, you may have said this, you know, obviously the biggest goal is to build long-term traffic, you know, on an uptrend and outperform as you are doing now. Again, the sort of simple question, I mean, is that going to be, you know, with the store base perhaps not growing rapidly in the near term, just regaining lapsed customers, people who haven't come, maybe stopped coming at all through previous disappointment? Or is it going to be, you know, especially with the loyalty programs as developed as Red Robins to help with that? Or do you envision it being, you know, gaining new customers from either other chains or from, you know, who are dining at homes?

Well, I actually think the answer is both, and that we're working towards both. And, you know, we're just getting started. When we think about the first quarter, it's really around hospitality improvements or service, if you will. We call it hospitality here. When we start implementing in the second quarter here these changes that I spoke about from cooking to what we're doing with burgers and into the third and fourth quarter, it's going to be really, really interesting what happens, particularly with those lapsed users and even our existing guests that come with us and are dying with us a lot that are our most loyal guests. So in terms of acquiring new guests, we think that the word of mouth and some of the work that we'll do from a marketing perspective when we're ready will help us there as well. We've got some pretty exciting things that we'll be speaking about later in terms of how we do that. But the answer is both.

Thank you. And I guess the last thing I wanted to ask was on just the food cost leverage, which was a big positive surprise how I was modeling things at least. I don't know if you call it vendor consolidation or however you think about it, but obviously it seems like the cost saves came quite quicker. I mean, I guess I'm trying to ask – Todd might have asked this as well, but clearly this wasn't all just lower inflation, right? or, you know, disinflation because costs were still up. So I assume, you know, a lot, you know, really the result is mainly giving, you know, vendors the opportunity to maybe sole source and, you know, make more money through volume. But, again, how much of – just sort of could you proportionalize that for us? And I guess the other question, obviously, is, you know, how much more is to come with that?

Yeah, Andy, sorry, I tried to add a little bit of texture there. You know, we – Going kind of point by point to your comments, we did see the commodity inflation that we talked about in the prepared remarks, so there was continued inflationary pressure there. Yeah, I would point you to, we do have a little over 7% of price in place in the first quarter, and that certainly helped to offset that. As it relates to the cost saves, though, the Q1 number was a little over $1 million, certainly very much in line with what we expected. but also an expectation, and we have clear line of sight, that that number will accelerate through the balance of the year. And so those are really the key drivers within food costs.

Got it. All right. That's it for me. Thank you.

Thanks. As a reminder, it is star one to ask a question. There are no further questions in the queue. I'd like to hand the call back to G.J. Hart for closing remarks.

All right. Well, thank you all for joining us today. We are at an exciting part of the journey here at Red Robin. We appreciate your support, and we look forward to reporting next quarter on our progress. So thank you guys very, very much. Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.