Red Robin Gourmet Burgers, Inc.

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated Second Quarter 2025 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 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 the earnings release. The company has posted its second quarter 2025 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, Dave Pace.

Good afternoon, everyone, and thank you for your interest in Red Robin. Since stepping in as CEO in early Q2, challenges facing our business have come further into focus. At the core, it's imperative that we return the business to sustained growth in traffic and same-store sales. As we assess the opportunities, we unveiled our first choice plan last month, and our team has been busy executing against this bold plan to position Red Robin for long-term success. While our top-line performance during the second quarter is not yet reflective of what we believe Red Robin is capable of, we strongly believe the strategy we've put in place will turn the ship around and we're moving quickly to put all aspects of our plan in motion. Today, I'll walk you through where our focus has been in the first 30 days of the implementation of our First Choice Plan, along with addressing some of the highlights from our second quarter. To quickly recap, our First Choice Plan consists of the following. First, hold serve. Protect and build on the foundations established under the North Star Plan. Second, drive traffic. Creatively engage with guests and inspire visitation. Third, find money. Manage profits, expenses, and assets to reduce debt and allow for critical reinvestments. Fourth, fix restaurants. Invest in the physical estate to improve the overall dining experience. And fifth, win together. Create a high-performance environment that attracts and retains the best talent in the industry. Through this plan, our goal is threefold. To make Red Robin the first choice for guests searching for a differentiated restaurant experience, team members looking for a great place to work, and investors seeking reliable returns on their investments. With a clear plan in place, we've been hard at work executing the first choice plan and are seeing positive early results creating even greater conviction in our long-term plan to capture these opportunities. First, let's talk about hold-serve. As we spoke to on our last call, we were very pleased with both the level of labor efficiency our operators achieved in the first quarter and how fast they achieved it, given that we expected it to accelerate more gradually through 2025. As we formulated the first choice plan, we made hold-serve the first pillar in the plan to focus our operators on maintaining this level of execution going forward. The great news is that in Q2, our operators continue to do what they do best, run great restaurants and deliver great food and service. The increased efficiency they achieved in the second quarter drove a 270 basis point improvement year over year in restaurant level operating profit margin, entirely driven by 300 basis points of labor improvements. At the same time, our operations team has been able to maintain our guest satisfaction scores at or above previous levels. Turning to our Drive Traffic initiative, as we think about our path back to positive traffic growth, we know that we need to build sustainable traffic so that we are not overly reliant on LTOs or aggressive discounting for long-term success while still being responsive to the marketplace and the need states of our guests. We know that it will not be any single initiative that drives our success, Instead, we're building traffic driving layers. We believe getting these layers to work in unison will be the key to our success in the long term. The first step in building these layers was to address our weak competitive positioning in price point value offers. As we surveyed the competitive landscape, it was abundantly clear that price point and value offerings under $10 are essential to help break through the noise to drive trial and consideration in today's environment. To address this, on July 21st, we launched the Red Robin Big Yum Burger Deal, which includes a Red's Double Tavern Burger, a bottomless side, and a bottomless beverage starting at $9.99. In addition, the Big Yum Deal has been thoughtfully structured to offer trade-up opportunities like extra burger patties, bacon, avocado, or upgraded sides and beverages designed to help mitigate check pressure while still delivering strong value to guests. Now, it's still early days, but we're encouraged that the Big Yum has been successful in improving traffic relative to our Q2 exit rate, which started the third quarter at an approximate 4% decline to date. At the same time, we're capturing significant insights that will feed into the next phase of our marketing approach. Our second traffic driving layer will be a state-of-the-art, data-driven approach that we expect will begin to roll out late in Q3. As we've mentioned before, this approach incorporates micro-targeting capabilities that we expect will allow us to engage guests more personally, precisely, and efficiently than traditional broad-based messaging and other performance marketing capabilities. This unique and innovative approach leverages a proprietary mix of tools, analysis, and competitive strategy to understand guest decision-making behaviors, enabling us to deliver deeply personalized tactics to place Red Robin as the first choice in our guest consideration set. Effectively competing with larger, more resourced brands in our space will not be successful by just mirroring their strategies. Our approach will leverage these proprietary analytics that will help level the playing field at the restaurant level in a highly efficient manner. While we intend to take a modest step up in our marketing spend in the second half of the year, we're maintaining our adjusted EBITDA guidance of $60 to $65 million as we balance traffic growth investments with disciplined profitability management. I want to be clear. We don't expect traffic trends to turn overnight, but we're building the foundation for sustainable, profitable growth through this combination of immediate value offerings and long-term analytical capabilities that we expect will position Red Robin to compete more effectively for guest consideration and frequency. Next, let me update you on our Find Money initiative. As Todd will speak to in a moment, Our operating results in terms of EBITDA generation exceeded our expectations in the first half of the year, giving us incremental capital to address our most pressing challenges. In addition, the corporate efficiency initiatives that we spoke to on our last call have been completed, and we continue to expect to see a $3 to $4 million benefit in G&A in 2025, with a full $10 million run rate expected to be achieved in 2026. While we're maintaining our current EBITDA guidance for the year, some of the upside from the first half of the year will be invested in key projects that we anticipate will be the drivers of our future top-line growth success, including investments in marketing and critical deferred maintenance that I'll discuss in a moment. Turning to re-franchising, since we launched our outreach efforts with Brookwood Associates last month, we've been pleased with the initial reception and conversations we're having with both existing and potential new franchisees. The level of interest we have seen only underscores my confidence in the relevance of our iconic brand and showcases the expectation that Red Robin will succeed in the long term. This will be a thoughtful and planful process and we intend to provide further details on our November earnings call as discussions progress. Next, I want to touch on our fixed restaurants effort. Investments and upgrades we've made over the past two years in food and hospitality have elevated the guest experience. The next leg of this journey is to fix our restaurants to better align the atmosphere with modern day standards and achieve parity or better with the broader casual dining industry. To achieve this, we plan to invest in critical deferred maintenance, including flooring updates, internal finishings, furniture repairs, and external improvements like paint, lighting, and landscaping that directly impact guest perceptions and their experience. The pathway to address the entire system will take time, but we're taking a strategic approach to piloting refreshes across approximately 20 restaurants in four markets ahead of our first choice marketing launch later this year. This will allow us to understand the impact of these packages and fine-tune where to invest additional capital ahead of a more fulsome company-wide rollout. While we're in the very early stages of this initiative, I'm pleased with the image that our refreshed restaurants will present and believe it will set a more inviting foundation to complement our traffic growth objectives and actions. As I alluded to earlier, We're able to fund and accelerate these initial investments due to the EBITDA upside we saw in the first half of the year. Going forward, we will judiciously meter out further investments as funds become available through the remainder of the year. Lastly, I want to talk about the win-together plank of our strategy. As I've visited restaurants over the last three months, I heard team members tell me that they knew what we needed to do but they needed help to do it. They wanted a value offering to be able to compete in the marketplace, they wanted to be able to fix their restaurants to address long-standing maintenance and repair issues, and they wanted technology and tools within the restaurant to help them execute more efficiently to deliver the improved operating performance that they were being asked to deliver. As we drive our guest-centric culture, we looked at each of these problems through the lens of our guest perceptions and we've committed to giving our operators the tools and environment that they need to be successful. During the last two quarters, we completed multiple new technology implementations with more to come. By taking this approach and listening closely to the input from our restaurant teams, our operators see that we're in this together and we're working by their sides to support them and give them the tools that they need to win and deliver the results that we are asking for. With that in mind, I want to extend a heartfelt thank you to the more than 20,000 team members we have across the country. Your dedication to outstanding hospitality every day is what drives our success and will be key to driving our future results. We're very pleased with the profitability performance of the business in the second quarter, and I look forward to winning together as we continue to work to drive the comeback of this iconic brand. In closing, While we're in the early stages of this transformation, we expect the combination of our improved operational efficiency, strategic marketing initiatives, updated physical estate, and upcoming re-franchising transactions will position us well to deliver on our commitment to make Red Robin the first choice for guests, team members, and investors. With that, Todd will now review our second quarter results.

Thank you, Dave, and good afternoon, everyone. In the second quarter, total revenues were $283.7 million versus $300.2 million in the second quarter of fiscal 2024. Comparable restaurant revenue decreased 3.2%, including a 4.4% increase in net menu price, offset by a 5.5% decline in guest traffic. Guest traffic trends decelerated through the quarter, which we attribute to further increases in competitive promotional activity and our intentionally reduced selling expenses as we developed our new marketing strategy. Restaurant-level operating profit as a percentage of restaurant revenue was 14.5%, an increase of 270 basis points compared to the second quarter of 2024. This was primarily driven by the continued success of our operations team, delivering significant gains in labor efficiency. General and administrative costs were $17.4 million as compared to $16.6 million in the second quarter of 2024. Selling expenses were $6.4 million, a decrease as compared to $12 million in the second quarter of 2024. As I've mentioned earlier, we intentionally slowed some of our marketing activity during the quarter as we developed our new marketing strategy. While we believe this reduction contributed to our traffic decline as we move through the quarter, it was a necessary transition phase that now positions us to fully fund the first choice plan through the remainder of the year. Adjusted EBITDA was $22.4 million in the second quarter of 2025, an increase of $8.8 million versus the second quarter of 2024. Adjusted EBITDA increased due to cost efficiency gains, particularly in labor, the benefit of menu price increases, and reduced selling expenses. We ended the quarter with $24.4 million of cash and cash equivalents, $9.2 million of restricted cash, and $37.5 million available borrowing capacity under our revolving line of credit. One of our financial priorities in 2025 is to position the company to refinance the term loan that matures in the first quarter of 2027. Through the first two quarters, we repaid approximately $20 million of debt, resulting in an outstanding principal balance under the credit agreement at quarter end of $169 million. The debt reduction, coupled with our significant gains in adjusted EBITDA, results in a net debt to adjusted EBITDA ratio of approximately two times leverage on a trailing 12-month basis. We believe this positions us well as we now begin to engage in substantive refinancing discussions with potential lending partners. Turning to our outlook, we will now provide the following guidance for 2025. First, total revenue of approximately $1.2 billion as compared to our prior guidance of $1.21 to $1.23 billion. This incorporates expectations The comparable restaurant sales will decline 3% to 4% in the remainder of the year, and we will end 2025 with 386 company-owned restaurants in operation. Second, restaurant-level operating profit of 12% to 13%, in line with our prior guidance. Third, adjusted EBITDA of $60 to $65 million, also in line with our prior guidance. Finally, we now expect capital expenditures on the higher end of our prior guidance of approximately $30 million as we implement the first choice plan and launch investments to fix restaurants. As we shared in July and as Dave alluded to earlier, we expect to use EBITDA over delivery to invest back into our business to drive traffic gains and address deferred maintenance in our restaurants. The strong profitability results from both the first and second quarter support our ability to accelerate our investments under the first choice plan the added investments now included our guides are as follows first we launched our big yum promotion on july 21st delivering on our commitment to deliver value for the money to every guest initial guest reception has been strong with approximately nine percent of guests choosing the big yum deal importantly we have seen traffic trends improve across the system with the launch of Big Yum as compared to trends exiting the second quarter. Our guidance incorporates current traffic trends and a negligible change in PPA versus last year, as guests capitalize on the great value of this offer. With these baseline guidance assumptions, we expect this to be a near-term investment in the remainder of 2025 that will deliver benefits in traffic, sales, and profitability in 2026 and beyond. I would note that any further traction in traffic in 2025 will reduce this near-term investment. Second, to accelerate the traffic curve, we are investing further in our marketing efforts and now expect selling expenses to total approximately $32 million in 2025. We expect this additional investment to support messaging related to Big Yum and our First Choice marketing initiative later this year. Third, we expect to address deferred maintenance in approximately 20 pilot restaurants ahead of the first choice marketing launch. This investment is designed to ensure our guests enjoy a great atmosphere that matches the upgrades we made previously to our food and hospitality. This is primarily a capital investment, but likely will result in a limited increase to repair and maintenance expenses on the P&L. Fourth, we now expect G&A expense to total approximately $80 million in 2025, reduced from our prior expectation of approximately $87 million. The $7 million reduction includes approximately $3 million of cost favorability experience in the first half of the year and an additional $4 million expected in the second half of 2025. I would note these totals include non-cash, stock-based compensation expense of approximately $10 million in our original expectation and $8 million in the current outlook. Finally, we expect much of the G&A favorability in the second half of 2025 will be absorbed by higher commodity costs, particularly in ground beef and poultry. Overall, we are very pleased with our progress capturing cost efficiencies while delivering a great guest experience. We have made significant gains increasing restaurant-level profitability, reducing debt, and growing EBITDA. We are encouraged with the initial launch of Big Yum, and we look forward to the great value at Red Robin delivering growing guest counts. In closing, I'd like to offer a tremendous thank you to our operators, our restaurant teams, and the team at the Restaurant Support Center. This great progress in the business is a result of your hard work, and I'm excited for what's next. Dave, I will now turn the call back to you.