Q3 2021 Red Robin Gourmet Burgers Inc Earnings Call
Good afternoon, everyone.
And welcome to the Red Robin Gourmet Burgers incorporated third quarter of 2021 earnings call.
Please note that today's call is being recorded.
They're in today's conference call management 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, our subject to risks and uncertainties as described in the Safe Harbor discussion found in 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, but are intended to illustrate an alternative measure of the companies 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 earnings release.
The company has posted its fiscal third quarter of 2021 earnings release on its website at I R Dot Red Robin Dotcom.
Now I would like to turn the call over to Red Robin CEO Paul Murphy.
Hello, everyone and thank you for being with US today I am drawing by Lynch line for our Chief Financial Officer, who will review our third quarter results in detail after my opening remarks.
Let me begin our discussion with our most recent sales trends before providing an update on our business initiatives and the strategic progress we are making that will position us for long term success.
Sales were softer than we expected due to the spread of the COVID-19 Delta variant and continuous staffing challenges. We are optimistic about the positive trajectory, we're seeing in our sales trends, including 4% comparable restaurant revenue growth and the last period of the third quarter versus <unk>.
19.
We experienced the continuation of this momentum with growth of 4% in the first fiscal period, the fourth quarter compared to 2019 inclusive of a negative one to two percentage point impact of storms on the west coast.
And the Halloween shift.
We believe that there is even more opportunity for upside through the rest of the quarter as we address the staffing headwinds that face our industry.
Q3, we estimate that reduced seating capacity and limited hours due to staffing challenges and team member exclusions resulted in a two 2% impact to our quarterly comp sales compared to 2019.
While our decision to reduce hours and seating capacity impact short term sales, we believe prioritizing a quality guests experience and supporting a workload for our team members that prioritizes satisfaction and retention are the two most critical considerations for the future success of our bra.
Land.
And partly restaurants that one of the top 75% quartile for sales ended the quarter with staffing levels at or above 2019, and we are executing a prescriptive plan for each restaurant below the levels needed.
Staffing is our number one priority, which is why we are committed to ensuring each restaurant is effectively managed optimally staff and that our team members are well trained and retained.
We are also removing obstacles for our general managers, improving our wage policies and training programs and increasing our talent pool.
Turning now to supply chain as we've entered the fourth quarter, we're seeing an improvement in the availability of product and we continue to actively manage our product needs through additional suppliers and approved substitutes that made our high quality standards.
We're also ordering additional supplies where possible to avoid shortages heading into the holiday season.
Finally, we are proactively managing our suppliers and contracts to position ourselves well for 2022, including securing the equipment to continue our rollout of Donato.
Now I'd like to provide an update on our business strategy and how we continue to take steps to accelerate our future growth.
Beginning with Donato Speedster, we added another 38 locations during Q3 and will complete approximately 40 in queue for our continued progress in rolling out the Nodoze will bring our system wide total to approximately 200 restaurants.
Overall Donato is generated sales of $4.1 million in the quarter, which was aided by an increase in marketing support at certain restaurants.
Our restaurants that offer denials for the full quarter and did not experience supply chain disruptions experienced comparable restaurant revenue growth of four 3% compared to 2019. We are pleased that restaurants that have been serving to an artist pizza. Prior to 2021 are continuing to grow incremental sale.
Beyond the first year as operations mature and brand affinity grows with comparable restaurant revenue growth of eight 7% in the third quarter compared to 2019 and restaurants without supply chain impacts recall that we believe the novels will generate annual company pizza.
Sales of more than $60 million and profitability of more than $25 million in 2023 with 400 company owned restaurants completed by the end of 2022. During Q3, we sustained an off premise sales mix of 38% which represents the.
Six consecutive quarter that we have more than doubled prepandemic levels of approximately 14% we've.
We believe that Red Robin is well positioned to take advantage of the shift in customer habits toward off premise occasions.
Due to our value proposition and menu offerings.
The elevation of the off premises experience is critical to maintaining the sales channel, which is why we continue to enhance building modifications to increase space for off premises orders to improve efficiency and accuracy without impacting our dining business. We are on track to complete these reconfigure.
<unk> efforts in 2022.
We are making significant progress advancing our digital strategy with the upcoming launch up to new mobile apps and Android a new website experience and a new loyalty platform, creating an integrated and seamless digital ecosystem for our guests.
In 2021 to date, we have leverage new loyalty segmentation capabilities to connect with our guests more meaningfully through personalized messaging based upon their purchase history.
This led to new all time high levels of guests engagement in Q3, and the last quarter. We also reached an important milestone for our brand surpassing the 10 million loyalty member Mark for the first time in queue for our new loyalty platform powered by punch a proven player in the <unk>.
Restaurants space will enhance our loyalty campaign and communication capabilities are improved and more relevant integrated digital guests experience is expected to soft launch in queue for and drive incremental frequency traffic and gas check.
Marketing will begin in early 2022 to drive awareness and trial of the new App and web site ordering experience designed to generate higher order conversion compared with the current online experience, while offering superior suggested upsell capabilities.
There will also be ongoing innovations and improvements following the initial launch in the months and years to come.
I continued to be pleased with our strategic transition to digital marketing, which allows us to target our messaging, both by geography and to specific consumer segments.
Digital marketing drove meaningful incremental traffic in Q3, a new high for the year as we continue to leverage our learnings, we're reaching consumers with more relevant messaging. There's also more cost effective and.
In the fourth quarter, we will remain nimble inefficient with the bulk of our marketing investment in digital.
A key feature of our marketing messaging is our new limited time offer menu items are Q3 limited time offer Burger the Scorpion Burger, which outperformed our sales expectations was so well received by guest that earned a permanent place on our menu in queue for our cheese levers limited.
[noise] time offer lineup is off to a great start it features the new cheesy Bacon fondue, Burger, which is outperforming expectations by more than five times, while our new mozzarella cheese sticks have become the number one selling appetizer on the menu.
R. Virtual brands are yet another driver of incremental digital and offer them a sales we have three differentiated brands available system wide and across all delivery platforms during.
During Q3 day generated five $9 million in sales, which are highly incremental to our business. We continue to be pleased with these brands that highlight distinctive high quality products, while fully maximizing our kitchen capacity without adding operational complexity.
In queue for we are opening a relocated high volume restaurant that was closed due to eminent domain and 2020.
This restaurant utilizes our new prototypes configuration with design enhancements to improve dine in off premise and curbside execution and and optimize kitchen layout enhances efficiency.
Next year will open another new restaurant based upon this enhanced prototype design and are developing a real estate pipeline for resuming modest growth beginning in 2023.
We know that when we create memorable moments connecting family friends and fun by upholding our brand promise Red Robin will be viewed as a leading choice for guests while.
While the Delta variant and other macroeconomic challenges certainly hindered our recovery momentum in the short term, we have several strategic initiatives underway, which provide us with an opportunity to both expand our market share and build guests frequency.
Now turn the call over to land to review our third quarter results.
Thank you Paul while R. Q3 results were certainly impacted by the Delta they're in an industry staffing and supply chain challenges I am confident in our future. This is because our improving dining sales trajectory incremental off premises sales channels and continued dedicated explication of art.
Business strategy together, we will drive meaningful long term shareholder value.
Turning to third quarter results, the 34.3% increase in the third quarter comparable restaurant revenues, let's primarily driven by operating our dining rooms that increasing capacity compared to the third quarter of 2019 comparable restaurant revenue was that 0.6% with a sales pitch afternoon.
That improved during the quarter.
We delivered our six consecutive quarter of off premises sales next at more than double prepandemic levels of approximately 14%.
Rising 38% of total food and beverage sales compared to 47 and 13.2% in 2020 in 2019, respectively. Importantly, we have been able to retain the same level of third quarter off premises sales dollars in 2021 is 2020.
<unk> $81 million.
As a percentage of total off premises sales third party delivering represented 52, 2% to go represented 39, 6% catering represented four 5% and Red Robin delivery represented three 7%.
Year to date net cost provided by operating activities was 37 $6 million, while cashing in investing activity was $20 million in cash seized in financing activities with $16 million.
The end of 2019, we have paid down $55 million in debt, while intentionally waiting 2021 discretionary investment to the back half of the year.
We ended the quarter with liquidity of approximately $75 $2 million, including cash and cash equivalents and available about borrowing capacity enter our revolving lineup Krabill, which includes the impact of a 30 million dollar capacity reduction on a revolving line of credit pursuant to terms.
The second amendment to our credit facility.
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 proceed strategic growth initiatives that will generate profitable sales going forward.
Now turning to some of the specifics related to the third fiscal quarter Q3, 2021 comparable restaurant revenues increased 34.3% driven by a 22.5% increase in guest traffic and 11.8% increase in average desktop.
The increase in average guest check resulted from a 3.5% increase in pricing and an eight 4% increase in menu mix, partially offset by a 1% decrease from higher this time.
Third quarter Tuttle company revenues increased 37.4% to 275 $4 million up $75 million from a year ago, driven by operating are restaurants that increased capacity and keep clean and lapping prior year sales impacted by the COVID-19 <unk>.
Total company revenues decreased by six 4% compared to the same period in 2019, primarily due to closures of unprofitable Rostock.
Restaurant level operating profit as a percentage of restaurant revenue was 12.5% an improvement of three nine percentage points compared to 2020, primarily due to the following restaurant revenue increased by $73.2 million, primarily driven by favorable guest.
Count menu mix and pricing cost of goods sold decreased by 20 basis points, primarily driven by pricing favorable next chest lower waist and higher rebates, partially offset by commodity inflation labor costs decreased by 80 basis points, primarily driven by stacking challenges.
And sales leverage partially offset by higher wage rates staffing costs and increased restaurant management compensation costs in 2021.
Other operating expenses decreased by 10 basis points, primarily driven by lower utilities and lower supplies due to lower off premises sales Max.
Firstly offset by increased hiring cough and janitorial and maintenance.
And occupancy costs decreased by 290 basis points, primarily driven by sales leverage and restructured lease payments.
$3.1 million of transitory labor and other operating costs were incurred due to staffing challenges, including hiring and training costs temporarily outsource janitorial cost one time bonuses and overtime pain.
As I said earlier effective pricing with 3.5% in the third quarter, but we have since taken an additional 2.4% price increase at the beginning of the fourth quarter with expected effective pricing that three 6% for the following year, given our relatively modest historical price increase.
Pieces that have been in line with or lagged the industry. We believe we have room to take additional price to mitigate ongoing inflationary commodity in wage pressures that we are experiencing including increased hiring training and retention costs extending beyond the third fiscal quarter.
At the end of the third quarter hourly wage increases we're in the mid single digits, driven by both rates and plan of house hour Max.
Restaurant level operating profit as a percentage of restaurant revenue was 360 basis points lower than 2019, driven by higher third party delivery fees and supplies due to higher off premises sales volumes and mix hiring costs and technology costs, partially offset by lower janitor.
All expenses.
General and administrative costs were $17 $7 million, an increase versus the prior year of $2.5 million, primarily driven by merit increases and lapping temporary salary reductions in 2020 increased travel costs and higher professional services and general and administrative.
Costs or $19 $2 million in 2019.
Selling expenses were $12.7 million, an increase versus the prior year, six $6 million and a decrease versus 2019 and $17.6 million the.
The decrease versus 2019 was due to our emphasis on digital media in 2021 that Paul addressed earlier.
During the quarter, we recognized other charges of one $6 million, primarily triggered by the COVID-19 pandemic. These charges included $1.1 million related to restaurant closures point $3 million for COVID-19 related costs, including purchasing personal protective equipment for.
Restaurant team members and guests and providing emergency sick pay to a restaurant team members and $2 million related to litigation contingency.
Third quarter, adjusted EBITDA was eight $3 million as compared to an adjusted EBITDA loss of point $7 million in Q3 2020.
Q3, adjusted loss per diluted share was 88 cents as compared to adjusted loss per diluted share of 19 in Q3 2020.
<unk> was $14.7 million in the third quarter of 2019 and adjusted loss per diluted share was 24 cents.
In response to the continued uncertainty around the impact of industry labor and supply chain challenges as well as the COVID-19 Delta variance the company amended its current credit facility on November 9th 2021 to obtain additional flexibility to continue to implement our business strategy.
The company anticipates refinancing that credit facility in 2022.
At quarter end, our outstanding debt balance is 157 $2 million and letters of credit outstanding were eight $6 million guidance for 2021 is as follows mid single digit commodity in wage inflation, selling general and administrative costs between $120.
$130 million capital expenditures at $45 million to $55 million, including continued investment in maintaining our restaurants and systems capital did not as expansion to approximately 120 restaurant, including approximately 40 restaurants in our fourth fiscal quarter digital.
<unk> guest and operational technology solutions and off premises execution enhancement before I conclude I'd like to thank our entire red Robin team for the results. They are generating despite the significant challenges COVID-19 has brought to our business. We're confident in our ability to meet these challenges and deliver.
Long term value for all of our stakeholders with that I will turn the call back over to Paul.
Thank you Lynn the foundation upon which we can create and build long term shareholder value through growth and profitability drivers remains firmly in place.
In the near term, we're contending with increasing staffing our retention costs and other inflationary pressures, but at the same time the underlying business recovery is continuing and we remain focused on delivering the highest quality guests experience, which will drive growth for the long term.
I think it goes without saying that we are blessed with a great team we have a great passion for this brand they've certainly stepped up and enabling us to execute our business strategy and position us for even better days ahead.
And their accomplishments during these rather unusual times are why I am bullish on Red Robin.
I cannot thank them enough for all that they do on our behalf.
And with that let us know open the call for questions.
Thank you.
At this time will be conducting our question and answer session.
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Our first question comes from Alex Slagle with Jeffries. Please state your question.
Hey, Thank you how you doing Paul Lynde.
Hi, Alex Alex how are you today.
Very good.
One to dig into the acceleration in the same store sales trends in September and October it's significant jump relative to the pier benchmarks and.
And now actually outperforming maybe diversity kind of give us some granularity how much.
Is like improved staffing verse specific growth initiatives like deny those are the virtual brands.
And marketing just maybe pieces out a little bit where you see the acceleration coming from.
Well.
Alex I think it's a combination.
I think that.
Our staffing has been improving and.
That certainly has allowed us to know from our capacity standpoint and.
From.
Really have it all channels of business open improve that.
But also staffing we've seen that.
Turnover has actually begun to slow down and also as we.
Came out of.
Out of the third quarter into the fourth quarter. So.
That's obviously, helping our staffing efforts also.
So.
<unk> is that we've done in Q3 and in the queue for as I mentioned or performing extremely well seem to be hitting really hitting the mark with our customers I think a real level of.
Comfortability there.
The digital.
Really the pivotal digital marketing just seems that with the segmentation work that we did in 2020 and I think of refined and 21 or messaging is more direct and more on target with the different segments.
In the marketplace. So I think it's Ah.
Balance of all three.
But.
It would be disingenuous, if I didn't say that staffing has been a big part of that and we're happy to report that it just.
Just continues to get better. So that's why we said we are certainly bullish and we felt like those.
Those results could grow as we move through the fourth quarter.
Got it on I guess on the staffing and you do seem confident about that what's the effective capacity level. What does that look like now versus maybe this started the third quarter.
Maybe how much more you have to do in terms of hiring to get where you want.
Well I think.
We mentioned earlier are top 75, or 75th percentile of restaurants are at or better than our 2019 staffing and so our opportunity has really been the bottom quarter.
So that is intact, our capacity and I'd say, our capacity is rapidly running between 85% to 90%.
Got it okay.
Maybe on the same store sales Kate and Sage.
Some color on the pricing.
I guess it sounds like it was around 3.5% through the the.
The end of the third quarter and then you added price at some point during that.
That final period, 11, or an actor yeah, we took our incremental price at the beginning of period 11, correct at the beginning of the fourth quarter. So we carry that 3.5% third quarter pricing throughout the quarter.
Once you blend olive our quarters together that I will bring us to a little above three 5% for the full year I think I said, specifically three 6%.
And the other thing of note is we're rolling off 1.5% pricing at the prior year at the beginning of the fourth quarter.
Okay and.
What was the restaurant level margin or what did it look like exiting the quarter just to give us some sense for how to think about the fourth quarter I know.
And now that you're going to a bar.
Well I will say that our diamond sales did follow some seasonality that we've seen in the past. So I am period 10 is our lowest period from a seasonal standpoint, so margins actually went down throughout the quarter, but that was in.
It was something we expected so as we go through the fourth quarter. The office that will happen so margins should get better through the fourth quarter.
Got it yeah, I'm just trying to think through the incremental pricing is coming on and then you'll be balancing that way.
I assume higher commodities and labor, maybe you could kind of comment on the commodity pieces with visibility there.
Yeah, we saw it I think mid single digit wage inflation in fact, it was probably a little bit mid single digit plus and wages at about 7% in the third quarter and then from a commodity standpoint, we were at about almost 9% inflation for the third quarter.
Now take into account that we started the year with very favorable pricing. So when we provided the full year guidance as mid single digit inflation. It benefited from the early part of the year and then we'll see increasing inflation through the back half of the year.
Great. Thanks.
Passed along.
Thank you. Our next question comes from Brian Vaccaro with Raymond James Police to your question.
Yeah, Thanks, and good evening I wanted to circle back on the monthly cadence that you saw and I. Appreciate the same store sales in the comparison back to 19, but could you maybe provide some context on on how AWS revenue sales dollars trends it through the quarter and perhaps just a level set where we are.
Through October where average weekly sales in October where as well.
[laughter].
As I mentioned with seasonality our average weekly sales started the quarter at the highest level and kind of tended trended down through the quarter. We started at 56000.
And.
Let me get the get 56000, MPA, and then that ramp down to about 51010.
Okay, and then P 11 is it in that ballpark of of 51 or any color on where P. P 11 is.
Start a little bit as I mentioned earlier, the entire quarter starts to train up for it.
Okay. That's that's helpful. Thank you for that and on your commodity outlet for the year just to make sure. We're all on the same page could you just give us what what were you expect for Q commodity inflation and wage inflation to be specifically just to tie into that annual outlook.
Fourth quarter commodity inflation should be around 15%.
And then in the fourth quarter.
Wage inflation should be between seven or 8%.
Okay.
And.
The temporary costs that easy noted the 3.1 million can you help us sort of allocate that between labor and other opex by chance.
Yeah, what I would say the majority did had the labor a line item.
Okay.
I guess given that that other opex line and it looks like it moved up.
Quite a bit sequentially $4 million or so for $4 $5 million could you could you walk through kind of puts and takes of the cost pressures that you saw in the other opex line.
Yes, I think certainly there were higher off premise sale.
In the current quarter, so that we actually.
Ramped a little bit up in terms of off premise sale.
So that impacted the commission expenses that we.
Recognized in that line item and then y.
While the majority of the transitory costs, we talked about did fall to the Labour line I'm. There there was a piece certainly within other operating expenses. So that included some of our hiring higher.
Hiring awards.
Okay, and then last one for me on the credit facility Amendment could you remind us the reduction that was that was put in in terms of the capacity where is the new capacity on that facility.
Where does it <unk> do sound too.
The revolving.
So there's a term loan and a revolver the revolver reduced to $100 million.
Alright, great. Thank you very much.
Thanks, Brian.
Thank you, ladies and gentlemen, and there are no further questions at this time and that does conclude today's call. Thank you for attending and all parties may now disconnect have a great day.