Q3 2022 Red Robin Gourmet Burgers Inc Earnings Call
Good afternoon, everyone and welcome to the Red Robin Gourmet Burgers incorporated third quarter 2022 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 safe Harbor discussion found in the Companys 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 an 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 earnings release.
The company has posted its fiscal third quarter 2022 earnings release on its website at IR Dot Red Robin Dot com.
Now I would like to turn the call over to Red Robin's, New CEO G J Hart.
Hello, and thank you for joining us today with me is Lynch, one for our Chief Financial Officer.
After providing some opening remarks, Glenn will review, our fiscal third quarter results and financial outlook.
I am very excited to be here as the CEO of Red Robin and my optimism around what this brand can achieve has only grown since assuming the role in early September .
Although new to the executive team I have served on the board since August 2019, which I believe provides a great deal of continuity during this leadership transition.
While I have always been a big fan of this brand over the last several years I've gained a deeper understanding of the organization and with that a heightened depreciation for the culture values and brand equities that have made red Robin so iconic for more than five decades.
Predecessor, Paul Murphy is.
Serving as a special advisor to the company through next March and I want to thank him on behalf of the Red Robin team and board for his many contributions over the past three years is successfully navigate navigated us through the pandemic while building key platforms of growth that will continue leveraging going forward on a personal note I am also grateful.
<unk> to be benefiting from his insights and perspective.
Having worked in the restaurant industry for approximately 35 years at both public and private companies I, probably already know many of the people listening to this call and to those that have not yet met I look forward to speaking and meeting you over the coming months ahead.
By way of background. Most recently served as CEO of torches Taco for almost four years and prior to that as executive Chairman and CEO of California Pizza kitchen for over seven years.
I was also with Texas roadhouse for more than a decade, as president and ultimately CEO and took the company public.
Through those experiences and others I believe that I have demonstrated my commitment to profitable growth and the ability to drive long term shareholder value.
I intend to do the same here at Red Robin.
I've spent my initial eight weeks meeting the team visiting restaurants digging into the business and learning as much as I can and as quickly as I can people have always been a key priority for me and building a successful culture and business and I really have been impressed by the team members I have encountered both inside the restaurants and at the.
Our support center.
My attention is urgently focused on delivering on our brand promise starting with building, an extraordinary restaurant experience and being more relevant to our guests.
New initiatives that we are pursuing to capture the opportunities include among others strengthening strengthening the restaurant management structure and service model, improving food quality optimizing the menu with some new items and creating a playful environment that allows our guests to enjoy connecting with friends over a great.
Neil after all this is what red Robin was built upon red Robin will be in operations driven brand with a maniacal focus on quality execution and being of service to our operators.
We're also looking at how we can improve the efficiency and effectiveness for how we operate our business overall.
Our intention is to prioritize capital spending on refreshing our restaurant base.
Now I'd like to provide some opening thoughts on the current state of the business.
Importantly category sales and traffic improved in Q3, when comparing our own sales and traffic trends relative to peers. We outperformed we believe there are several reasons for this first our new limited time product offerings have proven extremely popular with guests generating a higher check average we are <unk>.
<unk> these with compelling promotions, including our $10 gourmet meal deal that continues driving incremental profitable traffic and positive value sentiment that exceeds the category.
These initiatives are complemented by everyday value that includes affordable prices generous portions and signature bottomless sides and drinks. We recently launched our $4 99, Margarita is and are testing other everyday value offers around specific day parts such as happy hour, which is currently featured.
About a third of our restaurants.
Several other initiatives are driving sales growth for the brand.
Catering is well ahead of plan and above 2019 levels driven by our talented catering sales team increased field engagement and readiness and our new virtual catering storefronts.
Donato as pizza offering continues to exceed our expectations.
We are driving incremental sales and the gap is widening widening between those restaurants with donato and those without it in.
In fact restaurants with Donato outperformed non donato as restaurants by 10, 1% versus 2019 that was up from approximately 8% in Q2 and approximately 5% in Q1.
Our digital guest experience, which includes a new website and mobile app and an enhanced loyalty platform is driving frequency traffic and check. We currently stand at 1 million App downloads and the App itself has earned high ratings on Apple and Android. Additionally.
Additionally, the integration of our Red Robin royalty platform into our App and online ordering experience as a result and in best ever levels of engagement with guests.
Royalty membership continues to grow and is now over 11 million members as of the quarter and an improvement of 800000 members since the end of 2021.
Now, let's talk about our operational execution.
While we are making progress in areas of hiring and retention leading to incremental improvements in guest satisfaction. Our guest satisfaction scores remain at levels below best in class for casual dining.
Our implementation of the schedules platform will provide greater scheduling flexibility, which is very important to team members and gives time back to the managers. Our focus will remain on setting our general managers and team members up for success.
While commodity and other operating costs were higher than expected. We do believe that restaurant margins will improve in the fourth quarter and beyond Lynn will provide more detail summarizing what we are doing to address this.
We're also piloting a refresh program that touches external and internal elements and we will and we will complete a handful of projects in Q4.
We will then collect guest and team member feedback and track results to refine the go forward scope of the work.
I look forward to sharing our Northstar vision and strategy, including new initiatives and our 2023 outlook at the upcoming ICR Conference in January .
Lastly, I'd like to sincerely. Thank the team for their continuing efforts in moving Red Robin forward and for welcoming me to the organization.
Now I'll turn the call over to lend to review our Q3 results. Thank you <unk> for our third quarter results. We grew comparable restaurant revenues by five 3% compared to 2021 in the third quarter, surpassing the casual dining segment in both sales and traffic as measured by Black box intelligence.
Compared to 2019, our third quarter comparable restaurant revenues increased five 9%, marking the third consecutive full quarter of positive comparable restaurant revenues versus pre pandemic sale.
We delivered our 10th consecutive quarter of off premises sales dollars at more than double of pre pandemic levels, demonstrating the sustainability of our higher off premise sales channels since 2019.
As a percentage of total off premises sales third party delivery represented 53, 5% to go represented 34, 9% catering represented seven 5% and Red Robin delivery represented four 1%.
Full year net cash provided by operating activities was $38 8 million, while cash used in investing activities was $18 3 million and cash provided by financing activities was $14 $9 million.
During the quarter, we received $8 $5 million in final proceeds related to the sale of a restaurant in our Pacific Northwest market, we will opportunistically pursue replacing the restaurant, if and when an appropriate site in this trade areas identified and are pleased with the boost to our liquidity.
We ended the quarter with liquidity of approximately $75 million, including cash and cash equivalents and $25 million available borrowing capacity under our revolving line of credit.
Now turning to some of the specifics related to the third fiscal quarter Q3, 2022 comparable restaurant revenues increased five 3% driven by a 9% increase in average guest check and a three 7% decrease in guest traffic the increase in average guest check resulted from it.
Seven 7% increase in pricing two 5% increase in menu mix and a one 2% decrease from higher discount.
Third quarter total company revenue increased four 2% to $286 9 million up $11 $4 million from a year ago, driven by increased pricing and favorable menu mix shift partially offset by declining category traffic.
Restaurant level operating profit as a percentage of restaurant revenue was 12, 6% an increase of 10 basis points compared to 2021, primarily due to the following.
Strong revenue increased by $12 $2 million.
Primarily driven by increased pricing and favorable menu mix shift, partially offset by lower traffic cost of goods sold increased by 180 basis points, primarily driven by commodity inflation, partially offset by pricing and favorable mix shifts.
<unk> inflation was approximately 16% in Q3.
Labor costs decreased by 130 basis points, primarily driven by sales leverage lower hiring costs and lower management incentive compensation cost, partially offset by wage rate inflation wage rate inflation was approximately 7% in Q3.
Other operating expenses decreased by 30 basis points, primarily driven by lower hiring advertising costs lower off premises supplies and sales leverage partially offset by increases in utilities and credit card fees and occupancy costs decreased by 20 basis points primary.
Really driven by sales leverage.
General and administrative costs were $21 5 million, an increase versus the prior year of $3 $8 million.
Third quarter, adjusted EBITDA was $4 million as compared to adjusted EBITDA of $8 3 million in Q3, 2021 Q3 adjusted loss per diluted share was $1 three as.
As compared to adjusted loss per diluted share of <unk> 88 in Q3 2021 at.
At quarter end, our outstanding principal balance under our credit agreement was $199 million and letters of credit outstanding were $7 $8 million.
The company faced higher than expected commodity inflation pressure during the quarter.
While these costs have begun to decline as shared last quarter, we entered into a new distribution contract at the beginning of the fourth quarter. As a result, we are expecting Q4 cost of sales as a percent of restaurant sales to be at or slightly higher than Q3.
In addition, other operating costs in the third quarter were higher than our expectations, primarily related to higher repair and maintenance expenses record utility rates and higher than expected usage restaurant supplies and higher fees associated with higher credit card usage.
Pricing net of discounts was six 5% in the third quarter as we continued to strategically increase prices to mitigate inflation, while retaining a strong value proposition.
As a result of higher operating costs, we will implement additional pricing during the fourth quarter of approximately one five percentage points starting in November .
Importantly, we expect restaurant margins to improve sequentially in the fourth quarter related to incremental price.
Lower utility usage and lower maintenance costs as we re implement internal cleaning and janitorial services now that we have stabilized staffing, which will enable us to improve our margins as we enter 2023.
Due to higher commodity and operating costs and other strategic investments we have updated our guidance for 2022 as provided in our earnings release that was published today.
As this is my last conference call I'd like to thank my colleagues and friends at Red Robin for their dedication energy and collaboration that enabled us to get through a very challenging time I look forward to partnering with Todd as he joined the management team to help ensure a smooth transition I shared gj's optum.
Miss him on what this brand has the potential to do and we'll be rooting from the sidelines as an interested shareholder and brand enthusiasts with that I will turn the call back over to J J.
Thank you Lynn before we take your questions I wanted to conclude my prepared remarks with the leadership changes taking place here at Red Robin.
As we announced in our press release earlier. This week Lynn has decided to retire from red Robin at the end of 2022.
For nearly four years. She has served us well spearheading our finance organization through some of the most challenging periods.
Red Robin's history.
During our tenure, we welcomed in a new CEO and Paul Murphy, who has dealt with the challenges of the pandemic and most notably established a new credit facility.
I want to thank Linda for her dedication for commitments and their leadership and wish her the very best as she pursues her aspirations outside of Red Robin.
Lynn will continue to play a role here through the end of the year as we transition our responsibilities to our new EVP and CFO , Todd Wilson, who will start next week Todd.
Todd brings a wealth of financial management experience to Red Robin and we are eager for him to join US. Most recently he served as the CFO for <unk> Burger bar.
We also held the role of Vice President Finance and Investor Relations at Jamba juice and served as division CFO for Carrabba's, Italian Grill, and Fleming's Prime Steakhouse, while spending 10 years looming brands.
In addition, Darla Morris EVP, and Chief Information Officer, and Jonathan Moots, Our EVP and Chief concept officer will also be leaving us to pursue other personal and career interest.
Darla joined Us in March of 'twenty, 'twenty, one and help to lead us the launch of our new Red Robin App last year as well as the introduction of hot schedules platform in 2022.
Jonathan joined Red Robin in December 2015, as senior Vice President and Chief Marketing Officer, and became the EVP and Chief concept officer in January of 2018.
Jonathan and his team have been on the forefront of recent menu innovations limited time offers as well as the growth of our loyalty program.
I want to thank both Darla and Jonathan for their contributions to Red Robin and wish them, the very best as they turn to us to new opportunities.
Effective today, we are launching a search to replace both Darla and Jonathan and we will hopefully find suitable candidates in the near future.
In the meantime, I've asked Dana to Phillips VP of technology to take on the role of interim Chief Information Officer, and Amy Wilson VP of marketing and brand management to take on the role as interim Chief marketing Officer.
Lastly, I have a great pleasure to announce that Sarah Muscat or it will return to Red Robin in December as our new EVP Chief Legal officer, Sarah is replacing Michael Kaplan, who recently left us to work for a local employer in the homebuilding industry.
There is no stranger to Red Robin Havent previously worked here from August 2011 to September of 2021.
During the 10 year timeframe. She held the roles of Associate General Counsel, and Vice President Deputy General Counsel.
Most recently Sarah has been Deputy General counsel for Skillsoft, a learning application and technology company based here in Denver.
Until <unk> arrival in December Jeff Hope and will continue as our interim Chief legal officer, and we have promoted him to senior Vice President Deputy General Counsel.
Jeff joined Red Robin in 2019, after working with Ross stores as a group Vice President for real estate prior to working at Ross, Jeff worked at Brinker International as senior Vice President Assistant General Counsel.
As I said earlier I am squarely focused on ensuring that we are delivering exceptional restaurant experience and fulfilling our brand promise for our guests.
Please be assured that we are urgently working on accelerating the consistent delivery of this high standard.
And I look forward to sharing in January how we will achieve this goal.
Together with everyone at our support center and within our restaurants themselves I am excited to be working in pursuit of our North star and thank you for your interest in Red Robin.
And now we will open the call for questions.
Thank you.
We will now begin the question and answer session.
To join the question queue you May Press Star then one on your telephone keypad.
You will hear a tone acknowledging your request.
If you are using a speakerphone please pick up your handset before pressing any Keith.
To withdraw your question. Please press Star then two.
We will pause for a moment of callers join the queue.
The first question comes from Alex Slagle with Jefferies.
Please go ahead.
Thank you good afternoon.
Great to have you.
On the call and in the seat and Hi Lynn.
Best wishes on your next chapter we will Miss you for sure.
I appreciate that thank you.
Good to hear from you Alex.
Yeah, and I guess with all your past experience in casual dining segment.
Couple of very different situations I'd love to just dig a little deeper in here some more of your views on the current strategy at Red Robin and how you think that could play into the current macro backdrop and perhaps any learnings from your past experience leading other organizations.
Resonate as you approach your new role at Red Robin.
Sure well first let me say I've been here just on <unk> not even eight weeks almost eight weeks. So I am still learning a ton so much of this.
Is what I've gleaned, thus far and what I believe that we can do.
Look I think.
Red Robin has been on my Count Connick brand for five decades and over the years. It's if you look at the core guests and accord guests' expectations back in the Hay day to be honest.
If you look at that and you look at what our guests are expecting today I think it's very very similar they may look different.
Hey.
The same things and I think over the time for whatever reason red Robin some of those things have slipped away or changed or.
They vanished completely so we're taking a long look at look at that and taking a long look at what we can do to bring back the fund playful nature of Red Robin.
Execute at a higher level as an example.
We have gourmet burgers on every building that we have out there and really challenging ourselves around challenging the team are we producing a gourmet burger that we all are very very proud of or is it just average or is it better than average we want to be the best that we can be so really challenging the norm, we do a great job when our burgers.
Our prepared today, but I think we can improve upon that in addition to that I think we need to have them full barbell menu strategy, where from appetizers to two entrees that there is there is a wide range and we've got a pretty limited entre section today, it's really about fish and chips, we have three items in <unk>.
Total and I think we need to expand that and we have some room relative to some of the work we've done on the menu itself. So that we can potentially take some menu items off and allow us to put some monitors back on so we will be testing that in the near future as well to see how that shakes out we want to go back to owning shakes as in.
Example, and so we're looking at how do we improve our shakes and we do a good job today I want to do a great job relative to that.
From an execution perspective.
I would tell you that candidly some of the decisions of the past. This company has suffered from and continues to suffer from the decision that we all know about taken busters out of the restaurant.
<unk> was a major one management complement going to two salaried managers and the rest from hourly associate managers I think those things definitely have affected the ability to execute at a high level and so we're taking a long look at that and see how do we how do we help strengthen the management teams within the rest.
Strong.
Better can execute again against the brand promise.
And what I mean by that is that instead of having two salary manager cover 14 shifts we go about depending on the volume we look at going to four or five depending on the volume.
That can cover shifts and have specific responsibilities within the restaurants specifically.
Specifically, a kitchen manager I think those things will.
It resulted in some some some good learnings and what we can do going forward. So it's things like that that we're going to take a look at that will allow us and allow the restaurant management teams to execute at a higher level have better throughput.
And thus grow sales and give our guests what they expect so that's just a few things that we're looking at right now again, it's early so I have got much more to do but at least it gives you a little insight.
Yes, that's very helpful and actually answered a couple of my other questions.
On the.
The guidance, Glenn maybe you could help with that and it didn't seem like the inflation of pricing outlooks changed a whole lot G&A, a touch lower but the EBITDA.
Outlook is slightly lower into the shortfall due to the commodities or maybe a lower implied revenue outlook.
Maybe utilities, although more clarity on what drove that.
Yes, the majority of the changes really commodities and other operating costs.
That we experienced in the third quarter, and then looking to improve some of those costs as we move through fourth quarter, but they were higher than we expected.
Okay.
And on the Nadas.
Again really strong results coming out of this program in T J.
Thoughts maybe on <unk> and the pace of the rollout now I mean, I guess the goal is to get the 2250 <unk>.
<unk> units this year and I don't know if you have any updated thoughts or initial views on what the rollout for 'twenty three.
Could look like.
Yes at this point, it's a little bit too early to tell I will tell you this though that.
We have some work to do on our existing restaurant base, we need to do some refreshes some deferred maintenance that's going to be a priority clearly we are having great success with donato. So we want to continue to expand it but it's a little too early for me to say exactly how we'll allocate that capital.
I will tell you that we do think that getting it as fast as we can and will make sense, but we do need to give priority to our existing restaurant base.
That makes sense and helpful. Thank you I'll pass it along.
Thanks, Alex.
Once again, if you have a question. Please press Star then one.
The next question comes from Todd Brooks with Benchmark company.
Please go ahead.
Hey, Thanks for taking my question TJ welcome aboard and plan.
Again best wishes on next steps for you as well.
Alright, thank you.
A couple of questions here and <unk> talked about having to prioritize work do you want to do on the existing base.
Capex was guided up a few million dollars in Q4 is there.
You'll need identified from a deferred maintenance standpoint of what youre looking to tackle in the existing base that you could think about whats maybe communicate what sort of claim on capital that may be to get the base, where you want it to grow from.
No.
Again, Todd we Havent done all that work yet we've done an assessment.
With our operators and our maintenance teams to understand what deferred maintenance needs to be done. So we're looking to prioritize that as many companies through the pandemic clearly cut back some of that spending and we need to make sure that we're taking care of leased facilities. So it's a little bit early to tell you exactly how much of that capital.
We'll allocate that as soon as we do get that plan, we'll share it.
Okay, Great and then secondly, and I'm just trying to put the pieces together as far as.
What does what does the profitability model look like for Red Robin as we get to 'twenty three if a restaurant level hearing about improved quality and signature items.
I don't know how much additional that costs on the food cost side to get you, where you want to be improved staffing, including salaried managers I guess, if youre looking at there.
The recovery in restaurant level margins importance of maybe investing in.
Labor and food cost for a couple of your key initiatives versus maybe trying to harvest quick wins on restaurant level operating profit as we're looking out to fiscal 'twenty. Three is it more of an investment year to cement the programs you've identified.
Well listen.
We're not going to not to go into some of these initiatives without testing them and understanding what the ramifications and of our investment dollars are.
If you take as an example, the management complemented.
There is significant in my opinion, there will be significant improvements on how we train employees in terms of how we hire employees the turnover in the restaurants.
The amount of overtime that we're currently spending so all those factors will be offset by the investment. The additional investment. In addition, when you are paying more attention to guests and you're allowing.
Our management teams to work with our teams to continue to coach them and be on the floor and be present in when we're open.
Then I believe that we will grow sales, we're going to learn all of that so it's not just pure investment dollars. We believe there is a return and we will definitely look at what those returns will be and we'll share some of that information as we go forward.
So I would I wouldn't say, it's a total investment year, we recognize that we're going into a challenging economic environment.
But I also believe that some of these things are necessary for this brand to get back in the direction that we all wanted to from where we've been in some of the decisions of the past we have the correct dose in my opinion.
Okay, Great and then just one final kind of higher level question don't know if.
You've formulated an opinion on this but obviously we've got a.
Our corporate owned.
Model to a large extent, but there is a franchisee base and as you are looking.
Beyond and I don't know if youre looking beyond stabilization of the brand now to future growth.
You see that being corporate driven franchise, driven still trying to figure it out just would love to get your thoughts at that level and I'll hop back in with you after that thanks.
Sure no problem.
So I think I think it's a.
Combination of both.
It's a little bit earlier, we have a great group of franchise partners and as we make some of these changes and have success I believe that they will get excited as well and so they may want to invest and grow their units.
But prior to that we have a lot of work to do before we start to get on the growth path on the company side.
We just talked about some of the deferred means refresh a lot of testing I want to get some of those things out of the way and learn from those and then we'll start thinking about opening new restaurants, we do have some backlog of new units. The one unit that we've opened this year is doing extremely well and so there's some good learnings there, but we have.
A lot of work to do around what is the prototype look like in the future what is our kitchen look like in the future. What's the menu look like in the future. So we have a whole lot of work to do first.
Before we start talking about significant growth here on the company or the franchise side I will say that early my early conversations with our franchise partners I think they are excited about where we can go into future and some of the things I've just shared with you all I've shared with them.
I can tell you that so far it seems like they are pretty excited about it.
Okay, Great I'll hop back in the queue. Thanks.
As there are no further questions. This concludes the question answer session and today's conference call you.
You may disconnect your lines.
Thank you for participating and have a pleasant day.
Okay.
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Okay.
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