Q4 2019 Earnings Call
Please note that today's call is being recorded during the course of this conference call management May make 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.
Uncertainty sets as described in the Safe Harbor discussion found in the Companys FCC filings during.
During the call. The company will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended to illustrate and 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 business. The earnings release. The company has posted its fiscal fourth quarter 2019 earnings release, the supplemental financial information related to the results on its website at www Dot Red Robin Dotcom any investor Relations section now I would like to turn the call over to Red rock.
Been CEO Paul Murphy.
Good afternoon, and thank you for being with us today.
I'm joined by Lynn Schweinfurth, our Chief Financial Officer, who will review, our quarterly financial results and annual guidance.
Let me begin by briefly addressing Q4 within the context of our strengthening business.
We were encouraged to see our second consecutive quarter of positive comparable restaurant revenue.
As anticipated we achieved this topline performance, while intentionally unwinding discounting and with reduced year over year marketing spend.
You may recall that we allocated more of our annual marketing spend to the third quarter and 29 team when do we launched our new omni channel creative campaign.
You can see from our Q4 results that the campaign continues to resonate and drive sales momentum.
Importantly, the sales momentum has continued into 2020.
We also believe our core business and turnaround process is taking shape as evidenced by improvements in key performance indicators, such as staffing retention ticket times and ultimately our guest satisfaction scores.
2019 was a period of diagnosis change and setting the foundation.
2020, we are executing our four point plan to accelerate our turned around and drive long term value creation for all constituents.
Elements to this plan are as follows one recapturing the so other red Robin brand to delivering the brand promise.
Three telling our story to reinforce emotional connections and core brand equities and for accelerating profitable growth.
Recapturing the soul of our brand is about clarifying red Robins positioning and ensuring that our guests experience aligns with why guess choose red Robin for their meal occasion.
What we learned in Q4 through our research is that our gas to find a red Robin experience do for criteria that enable them to create memorable moments of connection.
These are one the flavor of americano on the menu through a gourmet burgers and other favorites.
To the family friendly and playful atmosphere that connects people not only around the table, but also with team members.
Three the spirit of sharing brought to life by our bottomless steak fries.
Irene onion rings, and more recently and test markets with Donato speed. So.
And for engage service that offers the gift of time, where guests have the ability to determine their pace of experience during a red Robin visit.
Importantly, these are all actionable items, which we're emphasizing to our general managers and field leadership must be delivered to our guess.
When these items are executed consistently at a high level, our guests become our strongest spraying advocates and then turn increase their frequency of Donny at Red Robin.
And delivering the brand promise and moments of production, we are implementing a new service model in 2020.
Which is designed to improve the functionality of our service while elevating our hospitality.
Sam's the handheld Pos terminals are a foundational element of the new service model.
In combination with the new service model, we are receiving positive feedback from our operators in test locations, including a reduction in ticket times and increasing our topline sales performance.
Turning to many rationalization, we believe that by rationalizing our menu size, we can improve both ordering experience and overall guest satisfaction through reduced ticket times and consistent high quality execution and the heart of the house.
Our investments in technology are critical to us connecting with our guess both in and outside of our restaurants and strengthening our ability to leverage red Robin royalty, which is already one of the largest loyalty programs and casual dining with more than 9 million members.
In Q4, we began testing in marketing automation as part of our loyalty platform upgrade initiative.
With email offers targeted by visit frequency and purchase behavior.
The initial results are very encouraging and we continue to optimize the effectiveness and profitability at this functionality through testing.
Finally restaurant manager staffing remains above 98%.
General manager manager and hourly turnover are consistently trending downwards and both general manager and manager turnover are now exceeding our best in class target benchmarks.
These metrics correlate positively to guest satisfaction as retention and staffing improves guest satisfaction rises.
Telling our story to reinforce emotional connections and core brand equities. The third part of our plan is about aligning our messaging with the brand.
In Q3 last year, we launched the all the fullest Omnichannel campaign, which is driving guest engagement and an emotional connection with Red Robin Yes. It showcases the America aspect of our menu, coupled with our family friendly and playful atmosphere.
Previous to this campaign, our message was largely price driven.
Yet in research guess told US it was moments of connection that activated or use of red Robin not just price.
When do we corrected this messaging misalignment Red Robin scored as one of the top two brands for search engagement volume across all casual dining during our Q4 media flight.
Notably social engagement doubled year over year with increased positive sentiment and therefore, we are allocating increased resources to social and digital channels and 2020.
Accelerating profitable sales growth represents the fourth and final part of our plan.
We will accomplish this through several means beginning with growing our off premise business, including to go catering third party marketplaces with delivery services and Red Robin delivery.
Red Robin delivery was rolled out nationally in January to the majority of our company operated restaurants.
This order directly from Red Robin, but the deliveries outsourced to a third party and this offers US three advantages one the economics are favorable.
Two we retain guest data.
And three guest can use the red Robin royalty program, which is particularly important as 30% of our business is driven through the loyalty program.
Continued growth of our off premise business in the future will be supported by our new digital platform, which we believe will enhance the guess ordering experience and order completion rates along with other initiatives. Some process focused on improving our to go and delivery execution within the restaurants.
We're also enhancing our menu with the introduction of to not us pizza to our system over the next three years.
We believe this menu enhancement will drive frequency appetizer sales and delivery as has been successfully demonstrated in our test markets.
And finally, we are developing a new restaurant prototype to drive profitable development in the future. We plan to open our first restaurant utilizing this new prototype design in early 2021.
The new prototype will further inform our restaurant refreshes going forward as well.
Before I turn it over to live I want to comment on our recent announcement appointing Allison page to our board of directors.
Allison is an accomplished industry executive and currently serves as the co founder and president of seven rooms.
She brings a unique consumer lens to revolutionizing the restaurant guest experience and we look forward to benefiting from Allison expertise.
Finally, we are laser focused on maximizing value for all shareholders.
We have identified significant and achievable opportunities have a clear path forward and our turnaround is already in process and building.
Our topline momentum is continuing our operational metrics are rising our creative campaign is working and we have proven to test it profitable sales catalyst to positively impact our business.
With that I'll turn the call over to win.
Thank you Paul and good afternoon, everyone as we turn around our performance and invest in the business. We are encouraged by our improving sales trajectory in the fourth quarter 2019 comparable restaurant revenues increased 1.3%, which as Paul mentioned marked our second consecutive quarter positive comps.
Terrible sales ground. The Q4 improvement was driven by a 4.7% increase in average check partially offset by a 3.4% decline in guest traffic.
Overall pricing increased 1.8%, while we also realized an additional 1.8% increase from our decision to lower discounting mixed increased by 1.1% driven by our menu and promotional strategies put in place this year, resulting in lower tavern, Max and higher.
For May and find US next Q4 total company revenues decreased 1.2% Q3 hundred and $2.9 million down $3.8 million from a year ago, driven primarily from 18 fewer restaurants due to closures during 2019 dining.
Sales were down 3.8%, partially offset by off premise sales growth off premise sales growth continues to be meaningful and rose 26.9% in Q4, representing 13.9% of total food and beverage sales catering continues to be an important growth.
Sales category with material and long term potential delivering approximately 12% growth in the fourth quarter over the same quarter in 20 team. Our sales team is focusing on among other things driving business to business national accounts supporting recurring catering occasion.
And refining our core catering menu, including expanding our carbonated beverage offerings.
Q4 restaurant level operating profit as a percentage of restaurant revenue was 18.9% down 50 basis points versus a year ago driven by the following factors.
Cost of sales of 23% improved by 60 basis points compared to a year ago and improved sequentially compared to Q3 as anticipated primarily driven by lower park and steak fries costs, partially offset by unfavorable ground beef costs.
Restaurant labor costs at 34.5% were favorable 20 basis points versus a year or down due primarily to lower group insurance costs in Q4, partially offset by higher average wage rates of approximately 5% and higher manager stocking levels within the restaurant.
Other operating costs increased 110 basis points to 14.7% due primarily to third party delivery commissions, driven by higher deliveries sales and higher restaurant technology costs compared to a favorable adjustment in Q4 2018 Aki.
Vinci costs increased 20 basis 0.28, 0.9% due primarily to higher general liability costs in Q4, 2019, partially offset by decreases in rent due to fewer company owned restaurant locations since the fourth quarter 2018.
General and administrative costs increased 40 basis points to 6.4% of total revenues driven primarily by increased team members salaries and benefits, partially offset by decreases in miscellaneous corporate expenses.
Selling expenses decreased 30 basis points to 5.4% of total revenues due primarily to a decrease in local media spend due in part to higher spending in Q3 to support the launch of our new creative campaign.
Net interest expense and other was point $9 million lower versus the prior year due primarily to a higher gain in our deferred compensation plan assets compared to the same period, a year ago as well as that reduction in interest expense our weighted average interest rate was 5.1%.
The quarter over quarter unfavorable change in the effective tax rate is due primarily to GAAP requirements for calculating taxes on a quarterly basis.
This Q4 expense is in the range of where we expected to be based on the tax benefit that we bumped Q3 year to date, and where we expected our full year tax benefit to be.
During the quarter, we recognized net other charges at $4.1 million, which included charges of $1.4 million related to restaurant closures and refranchising cost $1 million related to asset impairments point $8 million and board and stockholder matter costs.
Point $5 million and executive transition and severance costs and point $4 million, an executive pension costs.
Q4, adjusted EBITDA was $26.7 million as compared to $28.4 million in Q4, 2018, and Q4 adjusted loss per diluted share was 36 cents as compared to adjusted earnings per diluted share a 43 cents in Q4 2018.
Now turning to the balance sheet.
We invested $24.2 million in Capex in Q4, which is primarily related to investments and information technology facilities improvements and costs related to our rollout of did not as in the fourth quarter. We completed the rollout of handheld Pos terminals that along with headsets willing.
Level, our team members to delivering even better guest experience fundamental to the rollout of our service model. We ended the quarter with $30 million in cash and cash equivalents our lease adjusted leverage ratio was 4.72 times and we were in compliance with all debt covenants.
During the quarter, we drew $18 million on our revolving credit facility, resulting in a quarter an outstanding debt balance of $206 million. In addition to letters of credit outstanding of $7.5 million in early January we refinanced our revolving debt agreement with our lenders.
We now have been placed the five year 300 million dollar credit facility, which provides ample liquidity through early 2025 to fund our operational and strategic capital needs and provides capital allocation flexibility and surety.
Our capital allocation strategy focuses on disciplined investment and growth projects, including to not as reinvestment in maintaining our restaurants in infrastructure paying down debt and return of cash capital to our stockholders through increased share repurchases.
We intend to use at least 50% of our free cash flow to de lever our balance sheet and return capital to stockholders by increasing share repurchases under our existing 75 million dollar authorization during the fourth quarter, we bought back approximately 34.8 thousand.
Shares for a total of approximately $1 million.
Turning to our real estate portfolio in the third quarter and during our earnings call, We announced the strategic decision to exit company operations in Canada. As a result during the fourth quarter, we closed our five remaining restaurants in the Edmonton area and Refranchise the remaining 12 rest.
In British Columbia, two in experience restaurant, operator in 2019 that Canada restaurants generated $38.6 million in restaurant revenues and point $5 million in restaurant level operating profit.
We continue to assess our restaurant portfolio and are continuing to develop our refined restaurant prototype that optimizes, both the dining and off premise restaurant experience for future development and restaurant refreshes and Remodels.
We have included our guidance for 2020 as published in our earnings release. This afternoon, we expect to commit between 50 and $60 million to Capex spend in 2020 and expect adjusted EBITDA of at least $101 million flat to 2019.
Consistent with what we announced at the CR Investor Conference in January we expect low single digit positive comparable restaurant revenue growth in 2020.
We further expect that incremental restaurant level operating profit will be offset by Preopening expenses marketing and project expenses associated with our growth initiatives before I conclude I'd like to take a moment to thank our red Robin team in the restaurant than at the restaurant support Center.
Further significant contributions towards the improvements we are seen in our business as we invest in and build assist sustainable long term foundation to create value for our stockholders with that I will turn the call back over to Paul. Thank you Glenn.
To conclude I'm, even more encouraged now than when I first joined a red Robin about the company's potential.
Passion to succeed is contagious across the restaurant support center and the restaurants and I know that by remaining focused on initiatives I have articulated we can transform the company accelerate growth and maximize value for shareholders. The early indicators are positive and we're confident in our abilities.
Deliver the plant.
Thank you and what that we'd be happy to take your questions.
Thank you at this time, we will be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
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You May press Star too if you would like to remove yourself from the Q1 moment. Please while we poll for questions.
Our first questions come from the line Alex Slagle of Jefferies. Please proceed with your question.
Thank you.
Question on to not as soon as you continue to test there I'm wondering how how the operators have responded I imagine its operationally fairly straight forward.
And also could you remind us at the equipment upgrades needed.
Well, so far the operators have.
Responded extremely well.
In fact, we just said our our general manager conference and at that conference.
Every general manager actually had the opportunity.
To get there answered and make a pizza and Coca if the government and.
Actually get to eat it after they made their own pizza so.
The enthusiasm as high for.
The.
General managers that already have it in their locations.
Very bullish they like the results that they're seeing from a topline and bottom line in there.
Their locations and they were great ambassadors for it to general manager conference to the other general manager. So we're we're excited to begin that rollout, which is really going to be and just the next couple of weeks beginning here in the Colorado market.
On the turnover Lin for the equipment side of it okay, and we will be on incorporating into our kitchen, the pizza oven and then make station and moving around some other.
On parts of our kitchen to accommodate the implementation of the not as the capital spend is estimated at $145000 per restaurant and we also expect to incur about $20000 and pre opening expense per restaurant.
Okay and in your initial tests have you seen any cannibalization to speak of and.
There's anything in terms of channel mix, whether its dine in or delivery, where you're seeing.
Something different.
Alex I'll I'll.
Starts and then Paul if you'd like to chime in we have seen the donato sales to be highly incremental.
And we do see a skew of delivery orders, but we also see dine in sales improving as well, including as an appetizer in the restaurant.
No we Alex we've been very pleased with the.
Certainly the topline result, we're saying that its is driving transactions into the restaurants. There is a high degree of incrementality to them.
We see it.
As Lynn mentioned is fitting very well into the delivery side of the business and.
We're seeing it used.
Very much as an appetizer, which we love from a.
The spirit of sharing that we've seen as one of the criteria that that guess say that the reason they use the brand.
From a.
Cannibalization is been extremely minimal and we're.
We're pleased so far with the results that obviously, we've committed to the rollout.
Thanks for the long.
Our next questions come from the line of Gregory Frank for of Bank of America. Please proceed with your question.
Hey, guys. Thanks, Thanks for the questions.
I I had to the first is just on the Tigo mix some.
Where do you envision that going and.
And kind of how long do you think it'll get there any any sort of expectations on the longer term planner on that front. Thanks.
Our current to go <unk> percent of sales is that the while it represents about 6.7% of our.
Sales today, we do expect that number to grow I'm not sure we're prepared to provide a target today, but we have actually dialed back some of our marketing around to go as we were rolling out other initiatives and really stabilizing the business in 2019.
Got it thanks, and then just the other question I was just on labor and I think you had said in the prepared remarks, you're seeing wage rates up about 5%.
And I think you've also been investing in labor hours, but but the the labor costs as a percent of sales was down year over year can you maybe talk about what are the biggest deltas of that is that anything on maybe health insurance or or is it just kind of efficiencies you're finding kind of what are the what are the biggest driver. Thanks.
Yeah on as you mentioned, we are experiencing about 5% wage rate inflation.
Part of the benefits we saw that helped to offset that number included lower group insurance costs.
And we also believe just having higher staffing levels in the restaurants are also helping turnover at the hourly level, which also reduces related training.
Great. Thank you very much.
Yeah.
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Please press star one on your telephone keypad.
Our next questions come from the line of Chris Ocull of Stifel. Please proceed with your question.
Thanks.
Could you guys described the Dinos test maybe how many locations had to test for a year or more in what regions of the country or that.
I had to test.
Yes.
We've had about 25 locations that have been in test.
The regions that have been over a year or then on the east coast in the North Carolina Raleigh area, and then in the Phoenix area.
That was purposeful just to make sure that frankly, we weren't testing into not as backyard certainly wanted to make sure that the.
Do not us pizza resonated them would perform a.
In areas that it might have little bit less brand awareness so were.
Very pleased.
Good to be rolling over to see the the mix sustaining and that were.
Just so we're excited about the impact both as I mentioned earlier, both the top line.
About a 3.5% traffic lift and the influence on the average Chuck.
Okay, Great and then just a follow up Linda if you include the investments in the service model rollout to end that do not as energy introduction do you expect restaurant margin to be flat for the year and also do you expect the timing of the investments to have any kind of outsize impact on margins a restaurant margin any one quarter.
Yeah, I think we believe restaurant level margins can be actually a little bit better year over year. There are few moving pieces to that one is we did close 30 restaurants are refranchise a total of 30 restaurants last year, so having those stores out of the a system do how.
I'll just overall margins.
From that standpoint, we also believe it or not from a cost of sales perspective, we've been able to lock in and we expect our fixed contracts pricing lower waste and again the store closures I mentioned to offset the higher costs were seen in our ground beef and our bacon.
So we will see pressures on our labor and on or other operating expenses, but going back to the closures that I mentioned initially we will see a benefit on the occupancy expense line as well.
It should we expect any kind of variation or volatility in the margin performance any one quarter.
I think there there may be some pressures in the first two quarters that the year and that has to deal with some of our initiative rollouts that we've been talking about on primarily do not have and then as we start to roll out the new service model in the middle part of the year, we'll see some effect associated with that.
Great. Thanks, guys.
Our next question is coming from the line of Brian Vaccaro of Raymond James. Please proceed with your question.
Hi, Thanks, and good evening I just wanted to circle back the press release talked about a quarter to date trends and characterize as the momentum has continued and.
Usually don't get too specific placement, hoping you might be a little bit this quarter given some of the unique dynamics that you saw in the fourth quarter on the unwind in the discounts, which I assume negatively impacted traffic. So you would you be willing to be a little more specific on what you're seeing quarter to date, either from a comp or traffic perspective.
Thank the only thing I would say as I mentioned in my.
Remarks that momentum has continued in.
We're pleased with.
How you know the results of responded to the initiatives that we put in place.
In terms of things that we're doing against the operating model and.
The overall our.
Operations with the company so thanks.
I think please.
As a word this shows I have a high degree of confidence and where we're going.
Okay fair enough and on the guidance when I'm curious what have you embedded in terms of Gionee and another some investments in the initiatives and then some savings that I think are offsetting that can you walk through some of the details within that.
Yeah ill, probably keep my comments, a little bit more general but.
We do believe that investments and initiatives.
Inflation and variable based compensation will be offset by savings initiatives within the at the corporate structure.
All right I'll pass all.
Thank you.
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Your next questions come from the line of a Gregory Francfort Bank of America. Please proceed with your question.
Hey, guys I just had an extra follow up on I know you talked about the margin benefits next year of of some of the closures and Refranchising you guys have done can you maybe help quantify other what the margins were on those still on those stores or what the margin benefit will be from though from sort of taking those out of the base.
Well thanks.
Okay.
Yeah, I'm not sure we're prepared to.
No actually quote a number but I will tell you that as you piece together on some of the disclosures. We made over 2019, we specifically provided numbers associated with the restaurant closures as we move throughout the year.
Okay, great. Thank you.
Our next questions come from the line of Chris I call of Stifel. Please proceed with your question.
Yes, I'm, if Mrs and I apologize if it did but did you see that denied whose agreement is is this a licensing arrangements that you have within autos and so what's the rate or duration of the agreement.
Well, yes. It is a licensing agreement, but we're not right at this moment prepare to give the rate on it as for duration.
I would have to infer to lend on though it's certainly a multiple year agreements and it really takes the form of kind of a more traditional franchise agreement that we are unable to disclose the financial terms, so like related to that agreement.
Okay. Okay. Thanks.
Your next question comes from the line of John Tower of Wells Fargo. Please proceed with your question.
Great. Thanks, just a couple from me first.
I apologize if I missed this but I was curious if you would provide its cadence for how we should think about that it out as rollout, especially the though.
Back on the Preopening line related to that opens being pushed to the stores and then secondarily wouldn't you were testing this product what was the competitive response you were seeing in the markets and what have you seen to date.
When you do advertise this end markets.
Okay, well there were a few questions thrown out there. So maybe let me start with your first question on the cadence of the implementation of denied has and we began to roll out Donato was in the Colorado Ariad generally so that has began in the past two weeks and then well.
Complete the rollout by early in the fourth quarter.
Okay. So in terms of taking a preopening from a dollar standpoint can you help US you know, it's going to be front half weighted or back half is.
The way to frame it.
Yeah, I'm, just kind of looking at my schedule here again, it's a little bit lighter in the first quarter, because we've just begun to roll out Donato was and then it gets to be fairly consistent.
And in the following three three quarters.
Okay.
And in terms of competitive response.
Hi, This is Paul we really haven't seen any we've positioned as a as premium.
And really has been no noticeable that it or response, a either in the Oh Phoenix market are in a in North Carolina or not I haven't noticed anything.
Okay, great. Thank you.
We have reached the end of the question and answer session I will now turn the call back over to management for any closing remarks.
Yes. Thank you for attending a we appreciate the questions.
Appreciate you dialing into the call today on a look forward to the Q1 call. Thank you very much.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.