Q4 2020 Red Robin Gourmet Burgers Inc Earnings Call
Good afternoon, everyone and welcome to the Red Robin Gourmet Burgers incorporated fourth quarter 2020 earnings call. Please note that today's call is being recorded during today's conference call management will be making forward looking statements about the company's business outlook and expectations.
Forward looking statements and all other statements that are not historical facts and reflect management's beliefs and predictions as of today and therefore are subject to risks and uncertainties as described and the safe Harbor discussion and found and the company's SEC filings. During today's conference call management will also discuss non-GAAP financial measures.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles and are intended to illustrate an alternative measure the company's operating performance that may be useful a reconciliation of the non-GAAP financial measures to the most direct comparable GAAP measures can be found and the earnings release. The company has posted its fiscal fourth quarter.
<unk> 2020 earnings release, and supplemental financial information related to the results on its website at www Dot Red Robin Dot Com and the Investor Relations section now I'd like to turn the call over to Red Robin and CEO Paul Murphy.
Good afternoon, and thank you for joining US today with me is Lynch wine for our Chief Financial Officer, who will review our quarterly results. After my prepared remarks.
I would like to begin by providing a high level summary, and wear red Robin is today and how our accomplishments in 2020 give us strong confidence and the future of our brand.
2020 was an unprecedented year and while the pandemic brought forth complex challenges and enabled us to intensely focus on improving our operating and financial model.
The material improvements, we made to our business will enable us to resume.
And so that strategy and an even stronger position and deliver our brand promise recapture the soul of Red Robin and effectively tell our story and accelerate profitable growth.
And part of our transformation strategy to deliver our brand promise included improving our guest service model the pay.
<unk> created an opportunity to accelerate the implementation of our total guest experience or T. G X hospitality model is dining rooms reopened.
T J X combines technology and improve service coverage to deliver on elevated and more attentive guest experience.
Enabling our servers to stay and their section the majority of the time and.
Improving our speed of service, including decrease ticket and window wait times and improving cleanliness scores.
We also restructured our management labor model to provide increased flexibility and better supervisory coverage during peak times and this new model is beneficial for both our guests and our team members as it supports our T. Gx hospitality model, while also creating a structure and clear career path.
For team members and the <unk>.
Flexibility of moving to salary manager positions to one to three hourly shifts supervisors also allows us to convert historically fixed labor costs and generate annual savings of approximately $14 million.
Both the T G X service model and our new management Labor model are contributing to our highest ever guest satisfaction scores.
The pandemic also allowed us to focus on improving our enterprise business model with meaningful operational efficiencies and permanent cost reductions, we simplified our menu, which reduced over one third of our offerings and enhanced operations, resulting in over $2 million of annual savings.
In terms of back of the house labor and reduce waste.
We made significant improvements to off premise execution, including process and technology enhancements and implementing a triple check accuracy program, ensuring every order goes through three checks before being handed to the guest.
Our improvements resulted in a 40% inquiries and order accuracy and.
And a 50% increase and overall off premise guest satisfaction scores, even us off premise sales more than doubled compared to the prior year.
We also reset our corporate infrastructure and made it more flexible through a 10% plus reduction and general and administrative expenses or approximately $10 million and permanent annual savings prior to future growth drivers and other inflationary costs.
Finally, we optimize our portfolio as we near completion of our leased and negotiations through February we had completed negotiations for more than 85% of company owned restaurants with 3% to four per cent and occupancy savings expected over remaining lease terms as compared to 2019.
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Our improved cost structures and create over 100 basis points of incremental enterprise margin improvement as the company returns to pre Covid sales volumes.
Red Robin offers a differentiated proposition, we know who our guest is and what they expect of us at Red Robin we not only serve gourmet burgers and mainstream favorites like share Bowl pizza wings, milkshakes and beer better than anyone else, but our playful fun atmosphere is and.
Ideal setting for families and friends to connect with one another around the table.
The Red Robin guest is representative of a robust diverse and multi generational demographic and our focused attention is on Gen X millennials and centennial's, which together represent approximately two thirds of sales.
Our core guests as generally younger than that of the casual dining category and more active and the digital space, allowing us to further leverage digital marketing strategies that are more effective and less expensive.
This transition has resonated with our guests as we drove a record number of guests to our website or social media efforts delivered as well with increased engagement and a new high and total followers.
Further we achieved our best ever loyalty email engagement with our over 9 million royalty members through enhancements to our loyalty segmentation and targeted messaging.
Now as we look ahead, our intention is to build on these achievements and create long term value for all shareholders. As we prepare for what we believe will be a strong casual dining and recovery and a bright future for red Robin in particular.
As of February 28, we have reopened dining rooms, and 126 restaurants since the end of our fourth fiscal quarter and now have 87% of our currently open company owned dining rooms reopened we are very encouraged by our recent sales trajectory comparable restaurant revenues for our restaurant.
And with open indoor dining rooms were down approximately 9% last week with system indoor seating capacity of approximately 45% at restaurants with open indoor dining rooms.
The combination on the recovery of our core western market restaurants, which represented almost 40% of our 2019 sales pent up demand for full service dining and.
Higher average guest check with increasing on premise dining and.
And industry restaurant closures will continue to create significant growth opportunities for the brand throughout 2021.
Additionally, our outdoor seating capacity expansions of approximately 16 to 24 incremental seats at restaurants, where jurisdictions and weather allow represent approximately 10% and incrementals seating capacity on average.
As we adapt to a post COVID-19 operating environment within the full service dining space.
We are preparing our team members with a prescriptive ready set reopen training playbook addressing short medium and long term actions required to continue building satisfaction with our guests and guiding best practices for resuming the operation of our indoor dining rooms at 100 and.
Sent capacity, while retaining higher off premise and outdoor dining sales.
We believe pent up demand coupled with a record high guest satisfaction scores reflective of a vastly improved red Robin experience positions us well to welcome our guests back to our restaurants with increased frequency.
Turning to Donato us with Donato performance during the pandemic. Our conviction has strengthened that it represents a substantial catalyst for growth. We believe Donato us will generate annual company pizza sales of more than $60 million and profitability of more than $25 million by 2020 three.
And when we have completed our rollout to approximately 400 company owned locations.
And 2021, we are planning to add Donato us to approximately 120 restaurants, bringing the total number of company restaurants that offer dinardo us to approximately 200 by the end of the year day.
Donato and provide significant growth opportunities beyond the addition of new restaurants, including and opportunity for growth and catering as we expand us category post pandemic.
Our off premise model has been a tremendous growth driver for Red Robin and we expect to retain a higher portion of off premise sales than or approximately 14% pre pandemic mix. While also improving margin within the channel in restaurants that are operating over 50% of capacity we have sustained off.
And the sales of more than twice pre pandemic levels.
And 2021, we are introducing new third party delivery partners and continuing to improve our technology platforms through website enhancements and a new red Robin mobile App.
These initiatives us cost effective channels to engage on a direct and personalized level with our guests and streamline ordering and improve operational execution drive higher order conversion and increased guest frequency and royalty participation.
Ultimately, enabling us to increase sales to.
To sum it up we achieved a great deal amid the pandemic, including strengthening operations and improving guest satisfaction and fortifying our business model and strengthening our balance sheet. These.
These accomplishments coupled with the aforementioned growth drivers and favorable guest demographics bode well for red Robin as our industry moves closer to an eventual recovery.
And so vaccinations are being rolled out nationwide. We are preparing our teams for a post pandemic operating environment, including staffing and training and are confident we have the foundation in place to create and grow long term value for our shareholders. When we can truly capitalize on pent up demand for a red Robin the case.
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I will now turn the call over to Lynn to review the fourth quarter.
Thank you Paul I share Paul confidence that our brand is strategically positioned for consistent meaningful growth as we move beyond the pandemic. Let me begin my opening comments with a summary of fourth quarter performance liquidity and 2021 and accomplishment.
We experienced a 29% decline and fourth quarter system wide comparable restaurant revenue, primarily driven by restrictions on dining room capacity and some of our key states, including California, Colorado, and Oregon and Washington.
Additionally, restaurants, which offered day not us in the fourth quarter outperformed non day, not us restaurants with similar indoor dining restrictions by over 500 basis points, partially offsetting the decline in net comparable restaurant revenue, we are maintaining strong off premise sales comprising 43 nine.
On a total food and beverage sales and approximately 80% of our off premise orders were driven through digital channels in both regions that have had dining rooms reopen for a prolonged period and regions that have been subject to multiple indoor dining room closures, we are seeing off premise mix sustained net.
Two times pre pandemic level, we believe GAAP have adapted to off premise occasions more than before and that off premise mix will stabilize at a higher level as we've returned to post pandemic sales level.
We ended the quarter with liquidity of approximately $128 million, including approximately $16 million of cash and cash equivalents and available borrowing capacity under our revolving line of credit.
Given the prolonged impact of the pandemic beyond what was previously anticipated last spring during the first quarter of 2021, we entered into a second amendment to our credit agreement and the second Amendment provides increased near term flexibility, we continue to delever, our balance sheet and strategically positioned.
And the brand for 2021 and beyond.
As of the end of the second fiscal period ended February 20, <unk> 'twenty 'twenty, one and our liquidity was $122 million, including the impact of a one time cash payment of $8 $5 million paid during the first quarter of 2021 related to a legal settlement.
Excluding the impact of this onetime legal settlement payment, we had positive cash flow and the first eight weeks of fiscal 2020, one of approximately $2 $5 million.
As we confirmed last quarter, we received $49 4 million and cash tax refunds inclusive of interest payments. During Q4 as a result of the cares Act net operating loss carry back provision, which we used to pay down our revolving line of credit and deleverage our balance sheet. Additionally, we are.
Taking advantage of the tax benefits and deferrals as allowed by the cares Act more specifically, we are deferring approximately $18 million and payroll taxes to be paid back in early fiscal 2020, two and 2023 and we currently expect to generate additional cash tax refund.
<unk> $16 million in 2021 from net operating loss carry back during the fourth quarter. We continued to diligently engaged with our landlords to restructure our leases as Paul mentioned previously we appreciate the long term strategic partnerships, we've had with our landlords.
And we are close to concluding our ongoing discussions related to our remaining.
Due to the COVID-19 pandemic the company undertook several measures to preserve liquidity and reduce costs throughout 2020, including meaningful permanent reductions. We currently expect these permanent cost structure reductions will deliver over 100 basis points of enterprise margin improvement.
And as restaurants returned to pre Covid sales volume. Additionally.
Additionally, we are confident the future of Red Robin as we continue to execute on our transformation strategy and initiatives, Paul previously outlined and prioritizing our strategic initiatives that deliver strong financial returns, while maintaining our diligence on cost management and liquidity has position.
And our brand for recovery and long term growth, especially as our western markets continue to loosen indoor dining room restriction.
We intend to continue to effectively manage our bottom line and dedicate our free cash flow over the next several quarters to delevering, our balance sheet, while maintaining flexibility to pursue strategic growth initiatives.
Now turning to some of the specifics related to the fiscal fourth quarter Q4, 2020 comparable restaurant revenues decreased 29% driven by a 28, 8% decline and guest traffic and a 2% decrease and average check mix decreased by two nine.
And driven by lower sales and beverages and finest burgers due to higher off premise sales and and additional 0.3% decrease from higher discount, partially offset by an increase and overall pricing up 3%.
Fourth quarter total company revenue decreased 33, 6% to $201 $1 million down $101 $9 million from a year ago, driven by operating our restaurants at a reduced capacity in response to the COVID-19 pandemic and closed restaurants.
Dine in sales were down 53, 5%, partially offset by off premise sales growth. Our continued focus on our off premise service model allowed us to capture meaningful growth and the channel, which rose 131, 8% and the fourth quarter, representing 43, 9% of <unk>.
Food and beverage sales for the quarter. This compares to a pre pandemic off premise sales mix of approximately 14% and the fourth quarter 2019.
Restaurant level operating profit as a percentage of restaurant revenue was six 2% primarily due to sales deleverage higher hourly wages and benefit costs and costs driven by higher off premise sales, partially offset by pricing favorable commodity cost and lower janitorial and <unk>.
Maintenance costs.
General and administrative costs were $16 $4 million decreased versus the prior year of $2 $9 million, primarily driven by lower team member salaries and wages lower travel and and entertainment expenses and lower professional service fees due to cost reduction initiatives par.
We offset by increased team member benefit costs.
Selling expenses were $7 $9 million, a decrease versus the prior year of $8 $6 million, primarily driven by lower local and national broadcast media, we recognized a tax benefit of $3 $2 million and the fourth quarter and our effective tax rate for the year was two 6%.
A benefit.
The change and the effective tax benefit is due primarily to a decrease in income partially offset by the recognition of $8 $7 million of additional valuation allowance during the quarter.
During the quarter, we recognized other charges of $15 $6 million, primarily triggered by the COVID-19 pandemic. These charges included $6 $9 million related to restaurant closures $6 $2 million related to restaurant and asset impairment and one $9 million.
Related to litigation contingencies, and point $6 million for COVID-19 related costs, including purchasing personal protective equipment for our restaurant team members and guests and providing emergency sick pay to our restaurant team members.
Fourth quarter, adjusted EBITDA was a loss of $6 $4 million as compared to adjusted EBITDA of $26 $7 million and Q4 2019.
Q4, adjusted loss per diluted share was $1 79.
As compared to adjusted loss per diluted share of <unk> 36 cents and Q4 2015.
Now turning to the balance sheet at quarter, and our outstanding debt balance was $176 million and letters of credit outstanding were $8 $7 million.
And next guidance for 2021 and published in our earnings release. This afternoon is as follows we expect that the recovery of our western markets, which represent a meaningful portion of our portfolio pent up demand for full service dining and higher average guest check with increasing on premise dining and industry.
On closures will drive significant comparable restaurant revenue growth and 2021.
We also currently expect that the combination of enterprise pricing outdoor seating capacity expansions restoration of full operating hours and did not us will generate incremental growth of mid to high single digit comparable restaurant revenue beyond the benefits associated with the recovery.
And we expect capital expenditures of $45 million to $55 million, including continued investment and maintaining our restaurants and infrastructure with maintenance and systems capital do not us expansion to approximately 120 locations digital guest and operational.
<unk> solutions and off premise execution and hence.
Before I conclude I'd like to take a moment to thank our entire red Robin team for the results, they're generating including preparing our teams to capture future occasions through high quality execution and to drive strategic growth, we are confident and our ability to deliver long term value for.
All of our stakeholders.
<unk> shareholders team members franchise partners landlords and suppliers with that I will turn the call back over to Paul.
Lynn, Let me conclude with a few key takeaways before we open the line for questions.
2020 was a challenge and year on all fronts for our team members for the communities and guests that we serve and for our business not only did red Robin and persevere, we use the lens of the pandemic to look at ourselves with introspection and develop our strategy for the future.
And we recaptured our sole by identifying and connecting with our core guest while remaining committed to our focus on operational execution, we told our story by playing to our strengths and digital marketing.
Diving and best ever loyalty engagement and significantly improved website traffic.
We accelerated profitable growth by improving our enterprise business model with meaningful operational efficiencies and permanent cost reductions, which serve to improve our position both in the short run as well as our readiness for recovery.
And we delivered the brand promise by improving our service model, resulting in record high guest satisfaction scores and continuing to provide our guests with a unique and truly differentiated casual dining experience.
And we position ourselves to be ready for recovery and with our future growth drivers in place, we have confidence and the future of Red Robin and of course, all of our great work and optimism for the future would not be possible without the incredible efforts and accomplishments of our red Robin team members we cannot.
Income enough for what they have done on behalf of our company and the communities we serve.
Let us now open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speaker phone please pick up your handset before pressing the key to withdraw your question. Please press Star then two.
Our first question today will come from Alex Slagle with Jefferies.
Hey, Paul Lynn and hope you guys are doing well.
Thank you Alex.
Go ahead.
Just wanted to get your thoughts around the opportunity for market share gains and the western markets. As you mentioned the higher levels of competitive closures and and many of these markets I guess all over the country, but it would suggest.
And any for an even stronger comp rebound and potentially sales volumes and.
Getting above pre COVID-19 levels and recovery takes shape sort of interested if you could provide any additional color on what youre seeing and these markets relative to others and and.
And what that might mean for red Robin down the road.
Well Alex.
Say what were seeing I think youre correct.
On the West Coast is obviously.
Some of the real strength for Red Robin and the highest volume and and frankly has been.
Shut down from restrictions the longest of any parts of the country.
And I'm very encouraged by what I'm seeing by the sales level that we've had.
On the West Coast, and it's just even in California with us.
Outdoor seating reopening.
We are performing well against black box.
Especially on the West coast from a transaction standpoint, and Thats. What it tells me that we're going to be able to.
Take market share as we get the dining rooms reopen there so I believe that to your hypothesis debt.
And the data that we're seeing today tells us that there's going to be market share gain and growth for red Robin and <unk>.
And look not just California, but also our Washington and Oregon.
As we move forward so extremely pleased.
Pleased with what I'm seeing and bullish on what I think the outcome is going to be for our brand.
Got it and then on the just on marketing activities. If you had any comments on the results of the national marketing efforts and for Q with TD and if that sort of in line with expectations and then.
And then separately on the loyalty program.
Okay.
And is coming on deck, if you could comment on the timing and what potential changes might be.
Well.
Obviously, we did do some broadcast media and and.
The fourth quarter.
But we also had a substantial amount of restaurants, where we didn't quite expect a number of dining room closures that we had we did do a pivot.
In Q1 it is on.
Our first basically all digital marketing outreach and and messaging and we've been very pleased to a lot of the work that we did in 2020.
Especially on the royalty or loyalty side is.
Our top three guests segments, we are not only segmented the messaging, but targeted and messaging to each segment and thats, what we have been doing.
In Q1, and we believe that.
The work that we're doing from a.
Technology side will enable us to frankly get even better at debt as we move through 2021, so and.
And actually pleased with all the digital Oh.
Only our outreach and marketing and our Q1 is working.
Which I think bodes well for red Robin because it just gives us.
More opportunity to expand our outreach and as the cost of digital digital is certainly lower than broadcast television.
Yes.
Thank you.
And again, if you do have a question. Please press star and then one to join our Q.
Our next question will come from Brian Vaccaro with Raymond James.
Oh, Thanks, and good evening.
Wanted to ask that question us on the recent sales improvement and we've seen and I know its just one week based on obviously, a pretty significant increase back from 50000, and AWS and things.
And there's a pretty good week broadly from a category.
Curious and broad base, perhaps it was it particularly on a region or segment on the business products and accelerated more just just some color on that week, if he could what's been driving that.
Well I think obviously some dining rooms reopening.
And we were down for the week, 13% in.
In restaurants that had some capacity and their dining room, we were down 9% for this last week.
And but it was very broad based I think the one thing I'd point out is that for that week and California, We have 53 restaurants, and only three restaurants had any indoor dining and Oregon did recently open up but it only is allowing 50 individuals and the restaurants.
And that's inclusive of the team members so capacity is probably more and the 10% to 15% range.
So we are extremely pleased with the nine and the 13.
Our results because we see.
Still a lot more to come with California are reopening and then both Washington, and Oregon, and being able to expand beyond the 10 to 15 or 25% level. So we think that it's really the beginning of.
The recovery cant.
Can't really.
Speak to the pace, but certainly the news out of Texas and some other states.
And yesterday was good and the sense that being able to move.
More restaurants into the 75% to 100% capacity. So I actually think things are just going to get better from those numbers.
Yes, yes that makes sense and I thought I think California, and southern Texas needs, both on the California, and San Francisco and as well.
Allowing you to read about and restaurant group and dine in and 25% up on that correctly.
And I guess, what's what's the typical bogey.
Does it make sense for you to open restaurants. This year, if they allow us 25% or do you need to see higher than that.
No Brian and.
Especially in California, with what we've been able to accomplish with the extended outdoor seating.
Opening it up whether it was at 10, and 15 or even 25% and out of the gate is accretive to us both topline and Bottomline.
And what's really encouraging Brian as our indoor dining rooms are opening our off premise sales are staying at a very sustained high level.
Yeah, Yeah, and I guess to that point is it possible to isolate.
And the units that are at 75% or greater capacity and from any of that might be currently and is it possible to kind of isolate and give us a sense of where sales volumes are for those restaurants, specifically and what that dine and worse off premise mix. It looks like maybe you just spoke to it maintaining yet on the two acts but can you speak to that.
Average weekly sales and and the ones that are further along and.
Raising the effective capacity per download.
Well, Brian This is Paul again at restaurants and have less than 50% capacity.
We're seeing the off premise sales about 55% of the total and restaurants that have 50% to 74% capacity.
And we're seeing the off premise sales mix of approximately 38% and then the restaurants that are 75% or greater and we're seeing them level at 31% in terms of off premise sales and comparing that to the pre pandemic number of 14% certainly that's.
More than double and we're very pleased with what.
And what we believe that bodes for the for the future.
I think as you can guess us as capacity rises or <unk> rise, but I did not break it out into those segments and.
More broken out to be able to tell what are we seeing from wears off premise going as Johnny rooms, reopen because we I believe long term that is really where we're going to be able to see strong incremental growth both the top and bottom line as the dining rooms come back online and I think what.
And we tried to do Brian in our press release today is to provide some additional data points in terms of which restaurants had opened into our dining rooms, and then the full system and then we additionally incorporate at the sales volume for our western markets, which are just starting to reopen.
Yes.
Yes, SaaS some of the capacity implications.
Yes, absolutely and that's very helpful. Sorry, if I missed it but did you disclose the off premise sales mix in the quarter to date period.
Or can you disclose on boarded.
Q1.
Yeah.
Right.
And the honest with you, Brian and I'm not sure. If we have disclosed that we're looking at the material quickly if you're okay with that.
And nowhere is maybe I'll move on.
On the margin and specifically, how youre thinking about the advertising spend and obviously and adjust as the environment normalizes.
And it's a very dynamic environment based on what United and.
What's a reasonable stab at your 2021 and selling costs and then thinking longer term and gives me an opportunity to optimize your AD spend and a post COVID-19 environment.
Yeah, well, Brian and I'll answer your question. This way I mean, we are anticipating savings over 2019 levels, which we shared in the past and we are continuing to evolve our thinking around how we're spending our marketing dollars and the returns we're getting related to those investments. So we're not prepared.
Here today to provide specific guidance on selling expenses.
And we'll tell you Brian.
I've been very pleased with the results.
We have made a bit of a pivot from what you historically have seen with the Red Robin brand and.
And the reliance on broadcast television.
Getting much more into the digital space.
Doing the customer segmentation and targeting against those segments and.
And they're out of the gate. This was the first quarter that we have slowly been doing that and I'm.
Today very pleased with what.
What I'm seeing and the response that we're getting out of our.
Our campaign.
So I think you will see more of that as we move into the future.
And I think as you know that tends to be a bit of a less expensive channel and broadcast media.
Yes, definitely alright, and I'll pass it along thank you very much.
Thanks, Brian.
And if there are any further questions. Please press star one at this time.
Yes.
As there are no further questions. This will conclude our question and answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.
Yeah.
Yes.