Red Robin Gourmet Burgers, Inc.

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated first quarter 2024 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 four 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 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 generally accepted accounting principles, but are intended to illustrate alternative measures of the company's operating performance that may be useful. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in an earnings release. The company has posted its first quarter 2020 for earnings release on its website at ir.redrobin.com. Now I would like to turn the call over to Red Robin's President and Chief Executive Officer, G.J. Hart.

Good afternoon, everyone, and thank you all for your interest in Red Robin. Almost 18 months ago, we launched our North Star Five-Point Plan, grounded in a commitment to a great experience through investments in service and food quality. We expect the investments to deliver gains in sales and profits and drive long-term shareholder value. Due to the hard work and dedication of our team members, we are beginning to reap the rewards of the investments by delivering positive comparable restaurant sales in the first five weeks of our second quarter. We have achieved this result despite the 200 to 250 basis point headwind from the strategic removal of virtual brands last year that we will experience through the second quarter. As you've heard from others, the consumer environment is becoming more challenging. and our core consumer of hardworking families is looking for value when they choose to eat out. Our menu and our brand are centered around providing everyday value to each and every guest through our 30 bottomless items, our tab and burger lineup, our pizza offerings, and throughout our menu. We believe this brand positioning has been beneficial to our top-line trends as we continue to create moments of connection over craveable food that only Red Robin can provide. Before I dive into more specifics, I'd like to extend a heartfelt thank you to all of our more than 20,000 team members across the country. The success of Red Robin currently and in the future is due to your efforts and all of us working towards the same goals, all of us in this together. We've come a long way, but we still have more work to do. I am excited for what we can accomplish over the remainder of the year. As a reminder, Our North Star five-point plan consists of the following. Number one, transform to an operations-focused restaurant company. Two, elevate the guest experience. Three, remove costs and complexity. Four, optimize guest engagement. And five, drive growth in comparable restaurant revenue and unit-level profitability while delivering on our financial commitments. I'm proud to say that we continue to make progress against all five facets of our strategic plan. Starting with operations, service is the backbone to our turnaround efforts as we work to ensure every guest has a great experience in our restaurants, rain or shine. As we have spoken to previously, we spent much of 2023 improving our operations. We did this through labor investments, including adding servers so they can focus their effort on fewer tables, adding back bussers, adding a dedicated expo, and bringing back more than 250 dedicated kitchen managers. We also made investments in our food, including flat-top grills, which deliver a thicker, juicier, and more flavorful burger, unveiled more than 20 improved gourmet burgers prepared with higher quality and more flavorful ingredients, expanded our bottomless menu, and upgraded our bar menu to include higher quality brands that our guests know and love. Additionally, as part of our operations improvements, we launched the partner compensation program for our single unit operators at the start of 2024. Through this program, the operators now see themselves as owners of the restaurants that they oversee and are rewarded based on their profits. The feedback has been positive and we are thrilled to align the entire organization around the unified goal of driving traffic and ultimately profit dollars. Turning to the guest experience. If we rewind several years, dine-in guest satisfaction scores at Red Robin began declining and lagging the industry back in 2016. Since we have launched the North Star plan in January of 23, our operators have worked hard to deliver the great guest experience and we saw their efforts translate to gains in guest satisfaction scores throughout 2023. The gains continued in the first quarter with all of these efforts leading to overall guest satisfaction that now has achieved parity to the industry. The measurement proof points align across many different sources. First, from guest surveys, overall satisfaction has increased significantly over the past 18 months and is now in line with the industry average, led by an improved pace of experience, including reduced wait time and more frequent manager engagement with guests. Second, across Google, Yelp, and TripAdvisor, The overall satisfaction score has increased 13% versus the first quarter of 2023. The attentive staff score increased over 30%. We are further encouraged as we see first time guest ratings are even higher than our repeat guests. First time guests rate us higher on things like taste of food and overall value, which are key drivers to overall satisfaction. Finally, The number of guest relations complaints declined by 19% versus the first quarter of 2023 and 79% versus the first quarter of 2018 when we began tracking. Delivering a great experience to our guests is a single key to improving the performance of our business. It requires a relentless pursuit of executing the fundamentals at every level, which our teams are dedicated to pushing forward every day on every shift for every guest. We are proud of what we've accomplished so far and are energized by the road ahead. In addition to our operational improvements, our teams continue to become even more ingrained in the communities we serve. The number of fundraise partnership events, which serve as a great way to support our local communities, while simultaneously introducing new guests to the Red Robin brand, increased relative to last year. This growth is a testament to the tremendous work of our managing partner and their teams, as well as our field marketing team, who has been traveling the country to provide our operators the tools and know how to become more valued partners in the communities that we serve. Following our operational and guest experience focus in 2023, 2024 is about optimizing guest engagement, and that begins with our marketing efforts. Starting in March, we began rolling out our new marketing strategy focused on reigniting visit frequency from our loyal guests, new guest acquisition, and improving our guest engagement capabilities. We began by promoting the competitive breadth and value of our 30 bottomless menu items, far more than only the bottomless steak fries many guests know us for. We have also highlighted our upgraded high-quality ingredients, and reintroduced fun to our iconic brand. We are excited with the results we've seen so far. In May, we launched our Leave Room for Fun campaign that has been developed to take back our ownable position as the most engaging and fun experience in casual dining. We're implementing an all new tone and more contemporary design. Our new advertisement titled Fun Guy has been a hit with viewers. with over 1.5 million views in the first week. After viewing the ad, we measured improvement of our brand perception with viewers across many measures, including a 15 percentage point increase in the metric of brand is better than it used to be, a 6% point increase in intent to visit in the coming four weeks, and a nine point increase in the metric uses high quality ingredients. We've coupled fungi with our video advertisements that connect with guests on a human level, celebrate our new burgers and bottomless promise, and tell stories around the new ingredient transformation. We view our creative strategy as a success as the key message recall of viewers has centered around our better burgers, our upgraded ingredients, and the fact that we now have over 20 new and improved gourmet burgers. While we're excited by the guest reception, We're also focused on the financial returns from our investment. In March, we began testing a marketing heavy up plan in five markets. The initial results have been approximately 200 basis point in traffic improvement versus a control set. These early results have proven that we have the right marketing initiatives to drive traffic and sales gains. That said, we're never satisfied. During the second quarter, we are testing a reconfiguration of the media mix to double down on digital streaming TV and video, including platforms such as Hulu, Peacock, and YouTube TV to further drive performance and investment return. Overall, our communication and media strategy has shown promising results, and we are now in the process of optimizing it to further inform our strategy for the remainder of the year. Turning to loyalty. The Red Robin Royalty Program is a great asset for the company that continues to grow with membership now approaching 14 million guests. That said, it has historically been an underutilized asset serving more as a discount program rather than driving the business. In the past year, Kevin Mayer and our marketing team have done a great job of better utilizing the program, and the proof is in the numbers. 10% member growth in the past year. Members have over a $3 higher average check than non-loyalty members. They visit three times more often and new members are visiting with much greater frequency. In 2023, only 8% of new members made the second visit in the following 12 months. In 2024, 8% of our new members have already made a third visit in just the first 90 days. In our view, These successes are despite the format of our loyalty program, not because of it. One week ago, on May 22nd, that all changed with the launch of our revamped Red Robin Royalty Program, now featuring bottomless rewards. Under our new program, guests earn one point for every dollar spent. After earning 100 points, guests receive a $10 reward good for both dine-in as well as online orders. This will allow guests to earn a reward much faster than the previous program. In addition, the redemption window for the reward allows our guests the flexibility to use it in the following 90 days. We expect the collective result of these changes will be more loyalty members visiting Red Robin with greater visit frequency. In addition, the guest data capability in the new program will also facilitate more personalized communication and offers to members and allow us to reward our best guests. Overall, our team members are excited to reintroduce the program to every guest, and we fully expect this new program to be a driver of our business rather than just a discount program. I'd really like to extend a thank you and congratulations to Jody Lynch and our IT team, Kevin Mayer and our marketing team, and everyone at Red Robin and across our implementation partners who brought the new loyalty program to launch ahead of schedule. With that, now let me turn the call over to Todd to walk you through the financial performance for the quarter. Thank you, G.J., and good afternoon, everyone. In the first quarter, total revenues were $388.5 million, a decrease of $29.3 million versus the first quarter of fiscal 2023, primarily due to a decrease in comparable restaurant revenue of 6.5%. The decline was led by the difficult start to 2024 experienced by many in the industry and that we referenced on our prior earnings call. Additionally, recall we eliminated our virtual brand offerings in the third quarter of 2023. Eliminating these brands comes with minimal profitability impact and significantly reduces the complexity in our restaurants. but results in a 200 to 250 basis point sales headwind. Restaurant level operating profit as a percentage of restaurant revenue was 11%, a decrease of 370 basis points compared to the first quarter of 2023. The decline was mostly driven by our strategic investments in labor and food quality to support hospitality and the guest experience. This investment is the foundation for improved financial performance as we expect it to drive guests back into our restaurants and increase profitability. We made the decision to maintain labor levels in the January and February periods despite adverse weather events that make it difficult to project sales and guest counts to ensure our guests receive a great experience when they choose to visit our restaurants. While this created near-term margin pressure, we see the benefit of that decision in our guest satisfaction scores and believe all of the investments we have made to date are beginning to pay dividends as evidenced by our positive comparable restaurant sales increase of 0.3% in the first five weeks of the second quarter as compared to the same weeks in 2023. Inflationary pressures have generally occurred as we expected, with a more normalized level of inflation across all cost categories as compared to recent years. For 2024, we anticipate inflation across our entire cost basket, including commodities, wages, and operating expenses in a range of 3 to 4% in line with our original 2024 expectations. We also continue to seek out and capture cost savings opportunities in the P&L. In the first quarter, we captured approximately $5 million of incremental cost savings, primarily in cost of goods. We continue to expect approximately $19 million of incremental cost saves in 2024, with $8 million from initiatives started in 2023 and $11 million of new initiatives we have or plan to implement in 2024. General and administrative costs were $25.8 million as compared to $26.1 million in the first quarter of 2023. Selling expenses were $13.5 million, an increase versus the prior year of $5.2 million. The increase reflects our intentional investment to increase communication with consumers, to accelerate visits, and allow guests to experience the upgrades in hospitality. Additionally, our remittance back to local organizations for their share of the fundraiser partnership events that G.J. mentioned earlier is also accounted for here, and drives a portion of the increase. Adjusted EBITDA was $12.2 million in the first quarter of 2024. The decrease relative to the first quarter of 2023 was driven by three key factors. First, the strategic investments we started after the first quarter of 2023 operated at a full run rate in the first quarter of 2024. Second, top-line headwinds in the January and February financial periods in particular were substantial. Finally, the increase in selling costs supported the launch of our marketing communication to guests. Notably, during the final eight weeks of the quarter, in the March and April financial periods, we generated the vast majority of the adjusted EBITDA for the quarter as our top-line trends improved toward the modestly positive comparable restaurant sales we reported in the May period. As we mentioned on our last call, we were pleased to complete our third tranche of sale leaseback transaction during the first quarter. This transaction included 10 properties and generated gross proceeds of $23.9 million, with net proceeds of $21.2 million used to repay debt, bringing the total debt repayment from the three tranches to $45.1 million. we expect the third tranche transaction represents the end of our multi-unit sale leaseback efforts. We are now evaluating the market for five of the properties we own for individual sale leaseback transactions. Due to the nature of the potentially single unit transactions, we expect this effort may require more time than the first three multi-unit tranches, but it is an effort that we plan to act on if the economics are compelling. We ended the first quarter with $30.6 million of cash and cash equivalents, $8 million of restricted cash, and $25 million available borrowing capacity under our revolving line of credit. At quarter end, our outstanding principal balance under our credit agreement was $167.9 million, a reduction of $21.2 million as compared to the end of fiscal 2023, due to repayment of debt from the sale-leaseback transaction proceeds. Turning now to our 2024 guidance, we reiterate all aspects of our previously issued guidance for 2024. Total revenue of $1.25 billion to $1.275 billion, including comparable restaurant revenue of a low single-digit percentage decline. Restaurant-level operating profit of 12.5% to 13.5%, inclusive of investments in the guest experience and rent expenses related to the sale-leaseback transactions, adjusted EBITDA of $60 million to $70 million, and capital expenditures of $25 million to $35 million. The $65 million midpoint of our adjusted EBITDA range represents a modest increase year-over-year when adjusting for the benefit of the 53rd week in 2023 and the additional rent we will incur in 2024 due to the sale-leaseback transactions, and compound annual growth of approximately 12% relative to 2022, the starting point of the North Star Plan. As added color for our 2024 financial guidance, we expect the following factors to influence our results. We will revert back to a 52-week fiscal year in 2024 as compared to 53 weeks in 2023. We expect this will result in an approximate $25 million reduction in restaurant sales and $3 million reduction in adjusted EBITDA as compared to 2023. In the second quarter, we expect to generate modestly positive comparable restaurant sales and a modest sequential improvement in adjusted EBITDA. which would represent a continuation of the monthly EBITDA trends we saw in the second half of the first quarter. This is driven by improved top line trends and a sequential improvement in restaurant level operating profit margin, partially offset by the investments we are making in selling expense. We expect adjusted EBITDA in the third and fourth quarter to be more than that of the first and second quarter, driven by the aggregate sequential benefits of the initiatives we have put in place and including an expectation for positive traffic growth in each of the third and fourth quarter. In summary, we've made significant progress over all points of our North Star plan. We remain on track to achieve our targets and are building this brand to be successful over the long term. With that, I will turn the call back over to G.J. Thank you, Todd. Our comeback journey has not been easy. but what we've accomplished to date has been substantial. Through the continued execution of our team members in operations, utilization of our new marketing strategy, and the relaunch of our loyalty program, we believe we have the levers in place to drive sustainable long-term growth and return this beloved brand to prominence in our industry. We are excited by the progress we've seen so far, but I can assure you that we are only scratching the surface of our potential. I believe in the strategy we have in place, that it's working, and I am thrilled to bring guests back into our restaurants for moments of connection over craveable food that only Red Robin can provide. And with that, we are now happy to open up and take questions. Operator, please open the lines.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 keys. Our first question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.