Q3 2023 Red Robin Gourmet Burgers Inc Earnings Call
Good afternoon, everyone and welcome to the Red Robin Gourmet Burgers incorporated third quarter 2023 earnings call.
This conference is being recorded.
Management's presentation and in response to your questions that 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.
Management's beliefs and predictions as of today, and therefore are subject to risks and uncertainties as described in the company's SEC filings.
Management will also discuss non-GAAP financial measures as part of today's conference call.
These non-GAAP measures are not prepared in accordance with generally accepted.
Principles, but are intended to illustrate alternative measures of the company's operating performance that may be useful.
Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release.
The company has posted its fifth.
Thank you Tracy she earnings release unemployed plant I'll talk to you called in Stockholm.
Now I would like to turn the call over to Red Robin's President NCR out.
Good afternoon, and thank you all for your interest in Red Robin.
I'm joined today by Chief Financial Officer, Todd Wilson, who will review our financial results for the third quarter and annual financial guidance. After I conclude my opening remarks.
A little more than a year ago.
After having served carbon sport for two years I agreed to take on the President and CEO worlds, because I believed and strongly believe today and the great potential of this iconic brand.
In January we articulated our north star plan to restore red Robin to growth and align and enable all key stakeholders to measure our progress against these strategic priorities.
I will provide an update on each of the five pillars of our plan in a moment and what we have accomplished so far.
But to begin we needed to revamp our leadership team, bringing on human capital that shares my own passion for Red Robin and has the experience and skill set to nurture a stronger brand create a better future and build long term anxious substantial shareholder value.
We now have new leaders in place across every discipline of our leadership team. Additionally.
Additionally, we are highly experienced and capable board of directors and recently welcomed Nicole Miller Reagan is our newest director someone I am sure. Many of you already know from her many years covering the industry.
Across the organization, we have blended very talented and long tenured red Robin team members with new talent from across the industry.
This combination of internal and external talent provides tremendous expertise to red Robin and positions us well to establish ourselves as the most loved restaurant brand within the communities that we serve.
As I shared in January at the ICR Conference.
We have identified course corrections that are necessary for many of the decisions that were made under previous leadership undoubtedly who had the best intentions of buying at the top.
In the third quarter comparable restaurant revenues declined 3.4 per shop.
This result was in line with our range of expectations and it is important to understand the full context.
In the second half of 2022 Red Robin heavily promoted a combo meal deal significant with National media that offers guests a burger bottomless sides and non alcoholic beverage for $10, a 30% to 40% discount to retail prices.
This promotion drove traffic and sales, but the economics are quite penalize them to profitability.
In 2023, as we upgrade all aspects of the guest experience.
We have intentionally shifted away from national deep discount promotions and broad loyalty offers to build a healthier more sustainable and ultimately more profitable traffic base. However.
However, we're lapping the 2022 promotion as a headwind we expected for our comparable restaurant revenue and related metrics.
Additionally, we made the decision to discontinue the virtual brands that were added in 2021.
While this type of offering had its place during the depths of COVID-19 multiple brands products and procedures.
Great it unnecessary complexity for our operators and distracted the focus of executing a great way Robin experience.
The economics of virtual brands also resulted in minimal profit contribution.
Eliminating these virtual brand offerings in July of this year, what's the right change for the long term success of Red Robin.
By short term optics other comparable restaurant sales headwind of approximately 200 basis points.
Finally, we experienced and we observe industry results for sales and traffic, we can particularly in the back half of the third quarter.
We are pleased to see trends improving to start at the start of the fourth quarter.
Through the first four weeks of the fourth quarter comparable restaurant traffic trends have improved 300 basis points as compared to the final four weeks of the third quarter.
Led by dining traffic.
In a few moments I'll discuss the ongoing proof points of greater guest satisfaction that we expect will lead to traffic growth.
We also continue to print proof points, we are creating a healthier business with greater profitability.
During the third quarter, we generated $6 $8 million and adjusted EBITDA compared to $3 $9 million last year.
On a year to date basis, we have generated $58 $3 million and adjusted EBITDA compared to $43 $7 million last year, a 33% increase.
We have delivered these increases and profitability, while making substantial improvements and investments back into the guest experience.
The total investment in the third quarter was approximately $8 million and the year to date totals approximately $16 million.
We are making a substantial investment to deliver a great guest experience and increases in guest traffic and time.
I'm incredibly proud and thankful for the work of all Red Robin team members because of your work and effort, we are making great progress towards each of the five points of our North Star plan that I will now review.
First we are transforming into an operations focused company.
Our success rests on the success of our operating partners and restaurant leadership teams. They are leaders of their restaurants and make the red Robin experience come to life for their guests and team members. Our operations leaders now have expanded decision, making authority and are actively involved in our entire decision making process.
They will then share and the rewards of the positive impact of these decisions as they are made.
It has now been two full quarters since we revamped our market partner compensation program for multi unit operators. They know rightfully see themselves as owners of the restaurants, they oversee and are rewarded based on their profits.
They are incentivized to deliver strong financial results like never before and have unlimited upside earnings potential this helps to recruit and to retain the best talent.
The multi unit operator role rollout has gone exceedingly well and we are currently preparing to launch the single unit operator, managing partner program in early 2024.
Second we are elevating the guest experience.
The feedback we have received from guests throughout the year, it's clear.
They are more and more satisfied with their red Robin experience and recognize and appreciate the changes that we've made in quality of staffing upgrades to our food and unbridled hospitality.
We continue to measure increases in guest satisfaction across all guest feedback mechanisms, including overall satisfaction for dine in which is where most of the guest experience our improvements and total net sentiment and service net sentiment across our Google Yelp and Tripadvisor reviews compare.
To last year.
Returning to Red Robins traditional and an industry best practice staffing model provides our servers with fewer tables. So they can provide a great experience to every guest and minimize false rates.
We have also added back busters driving increases in cleanliness ratings are better staffed staffing at the host stand, which is improved wait times and brought back the dedicated Expo who is responsible for the in restaurant execution of every order.
Finally, we've added more than 250 dedicated kitchen managers and expect to substantially complete our manager complement investments by year end.
Speaking of food and food quality recall that we successfully completed the system wide rollout of flat top grills during the second quarter.
This upgraded platform season, the burgers juices, delivering a thicker juice ear and more flavorful Burger.
And will serve as the foundation for future innovation.
Team member and guest feedback has been resoundingly positive.
Flattop cooking has returned our burger chefs to real cooking, while being simpler to execute and enabling them to deliver a tastier products. According to our guests.
We have also enhanced our presentation by moving away from wrapping up burgers and wax paper and presenting in a basket to a showcase at a beautiful new plate ware.
In early October we took our commitment to returning our burgers to true gourmet status to the next level.
Vale, new and improved recipes for each one of our more than 20, gourmet burgers now prepared with higher quality and more flavorful ingredients to deliver on our guests promise in a competitive elevated burger experience.
We began communicating these improvements to get guests under the banner of turn up the young.
That builds on the tremendous consumer recognition of our long term Yum Taiwan.
In addition to our relaunched Burger lineup, we introduced new new entrees, appetizers beverages and seasonal additions to delight, our guests with new innovation and provide optionality within the key menu categories that helped build check.
With this launch we have now upgraded ingredients, including mayonnaise vine Ripened Tomatoes bonds pickles fresh pineapple sauces and many other items.
In total we have made enhancements to 85% of our menu.
The new menu includes the first executions of our strategy to broaden both the offerings of menu items and the price points under our barbell pricing strategy.
And we have added new proteins with the tsunami shrimp and the Whiskey River barbecue ribs.
Our culinary Oh has also developed an amazing barbecue bird and Bacon Burger <unk>.
Mast avocado and Bacon Burger.
And we returned a fan favorite burning a lot.
While only in place for a few weeks, we have seen great trial on these new and premium priced items.
Additionally, the appetizers, we added are driving incremental incidents of appetizer purchases.
As part of our regular practices, we regularly survey our loyalty database and amongst the most dedicated guests who have dined with us over the last quarter were seeing positive sentiment.
46% agree our food quality has improved.
52% acknowledged that our burgers are better.
48% agreed that our service and hospitality has improved.
These figures have continually increased as we implement additional changes to improve the guest experience.
We've also upgraded our bar menu to include high quality brands, our guests know and love our cost Amigos Angels, envy, and Kendall Jackson, and our wine and spirit offerings, while making quality upgrades to things like our Margarita mix with fresh lime juice and agave.
Alcoholic beverages.
Our a tremendous opportunity for our business currently representing only 6% of sales versus the competitive average of over 10%.
These changes are the first steps to reinvigorate our bar business and capture this opportunity.
Having achieved great gains in staffing levels hospitality and food quality.
We're finalizing preparations for an Alpha test group of restaurant renovations I announced last quarter we.
We plan to have these restaurants operate without interruption through the busy end of year holiday period, then begin construction right after the new year.
Initial test restaurants are located in Washington, California, and Colorado.
And we will provide a good sampling of our west coast footprint to learn from.
Renovations are planned to upgrade the interior on the ambiance.
And exterior appeal to match, the food and hospitality upgrades in doing so we are bringing all elements of the guest experience together.
Third we are removing cost and complexity.
To help fund our investments back into the guest experience, we have been identifying and then capturing new numerous non guest facing savings opportunity.
These efforts have been centered in the fantastic work of our supply chain team.
Who have found smart savings leathers and had been able to produce products from our vendors of the same or better quality at a lower cost.
Year to date, we have saved approximately $7 million and expect the savings to total approximately $12 million in 'twenty two 'twenty three.
The initiatives implemented in 2023 total annualized run rate that exceeds $20 million and will carry into the benefit of 'twenty 'twenty four.
The final key initiative plan to launch in the fourth quarter or has it changed from frozen to fresh chicken breast.
Move to fresh chicken breast is a tremendous quality flavor and helpful improvement for our guests and one we expect to result in approximately 5 million annualized savings on that product itself. This type of change illustrates how do we think about cost savings as changes that are both good for our guests and.
For Red Robin.
The team continues to do great work, capturing these opportunities in 2023 and building a robust pipeline of initiatives to continue this progress in 'twenty 'twenty four and beyond.
I discussed the complexity aspect earlier.
That was the driving force that led to our decision to exit virtual brands.
Fourth.
We are optimizing guest engagement.
Our ongoing efforts to reinvigorate the red Robin brand and enhance our restaurant experience, we have been proactively elevating our marketing capabilities.
First given the substantial did digital traffic from our guests.
We're rapidly improving guest acquisition capabilities and our capacity to target the right audience with timely and pertinent messages.
We've significantly increase the efficiency of our paid media strategy.
Through more precise targeting allowing us to reach more guests with the same dollars and serve up more purposeful messaging.
We have shifted towards more category specific search strategies to capture the attention of guests seeking experiences like ours and on top of that we have tackled both technical and content related search engine optimization.
<unk> and a notable 30% surge in organic search traffic.
These efforts have restored growth to the web traffic trend that had been declining.
Instead of building excitement around our new gourmet burgers and other menu additions.
Finally, as we continue to invest in our hospitality model and culinary offerings. We are in the process of refining our loyalty program.
Our goal is to deliver more relevant messaging too are over 13 million members transforming the program into a veal VIP like experience than acquiring new members to foster a new generation of Red Robin ambassadors.
Our strategy is to shift away from heavy discounting in favor of rewarding our most loyal guess.
The formal launch of to revamp loyalty program is scheduled in early 2024.
Fifth.
Driving growth in comparable restaurant revenue in unit level of profitability to deliver financial commitments.
We are taking a holistic approach to our decision, making engineering the comeback of red Robin to create a healthy sustainable and growing business for the long term.
Operator: This conference is being recorded. Gerard did management presentation and in response to your questions, that 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 they, for us, reflect the risk and uncertain things as described in the company's ACC violations.
While comparable restaurant revenue declined in the third quarter, we expected that outcome and the decisions that led to it as I discussed earlier are the absolute right decisions to set red Robin up for long term success.
Todd will review the details in a few moments.
And you will hear that our adjusted EBITDA guidance for 2023.
Typically improved from 2022 results.
And well above our initial guidance for 2023.
Operator: Management also discussed non-gap financial measures as a best part of today's conference call. These non-gap measures are not prepared in the holdings with a generally accepted guarantee in principle, but are intended to illustrate alternative measures of the company's operating performance that may be useful. Reconciliation of the non-gap financial measures to the most directed comparable gap measures can be found in the earnings release.
Now, let me turn the call over to Todd.
Thank you D J and good afternoon, everyone I will begin with a recap of our third quarter financial performance and then discuss our financial guidance for 2023.
Total revenues were 277 $6 million, a decrease of $9.2 million versus the third quarter of fiscal 2022.
Operator: The company has posted its third quarter 2020 earnings release on its website at IONTURCHREATOVAN.com.
The decline in revenue was led by a decrease in comparable restaurant revenue of $3, 4% due to moving away from the deep discounting marketing promotions and elimination of virtual brands that GJ discussed earlier die.
Gerard Hart: Now, I would like to turn the call over to Red Robin's president and CEO G.J. Hart. Please go ahead. Good afternoon, and thank you all for your interest in Red Robin. I'm joined today by Chief Financial Officer Todd Wilson, who will review our financial results for the third quarter and annual financial guidance after I conclude my opening remarks. A little more than a year ago, and after having served on Red Robin's board for two years, I agreed to take on the President and CEO roles because I believed and strongly believed today in the great potential of this iconic brand.
<unk> sales increased 0.5% as compared to the third quarter of 2022.
Dining experiences where guest experience all of the hospitality and food investments. We have made we believe the continued sales growth and relative strength of Diamond business is another data point confirming the changes and investments we have made our rights.
As a percentage of restaurants sales diamond represented 75, 6% of sales in the third quarter.
Up from 72.4% in the same quarter last year.
Gerard Hart: And in January, we articulated our North Star plan to restore Red Robin to grow and align and enable all key stakeholders to measure our progress against these strategic priorities. I will provide an update on each of the five pillars of our plan in a moment and what we have accomplished so far.
This consumer shift back to dine in as a broad trend experienced by many in the industry and as accentuated forbid Robyn as we discontinued virtual brands that were only available for off premise consumption.
Off premise sales declined 15, 1% as compared to the third quarter of 2022.
Gerard Hart: But to begin, we need to revamp our leadership team, bringing on human capital that shares my own passion for Red Robin and has the experience and skill set to nurture a stronger brand, create a better future and build long-term and substantial shareholder value. We now have new leaders in place across every discipline of our leadership team. Additionally, we have highly experienced and capable board of directors, and recently welcome Nicole Miller Reagan as our newest director, someone I am sure many of you already know from our many years covering the industry.
Approximately half of that decline is due to the elimination of virtual brands.
We have launched initiatives to enhance the off premise guest experience and promote this offering to become more prominent invisible for those guests looking for a pickup or delivery option.
Within off premise catering remains a bright spots increase in 2007% as compared to the third quarter of 2022.
Catering is a fast growing segment and the team is doing great work to capture this opportunity.
Restaurant level operating profit as a percentage of restaurant revenue was 11.1% a decrease of approximately 150 basis points compared to the third quarter of 2022.
Gerard Hart: Across the organization, we have blended very talented and long-tenured Red Robin team members with new talent from across the industry. This combination of internal and external talent provides tremendous expertise to Red Robin and positions us well to establish ourselves as the most well to restaurant brand within the communities that we serve. As I shared in January, if you see our conference, we have identified course corrections that are necessary for many of the decisions that were made under previous leadership.
The reduction was driven.
Intentional investments back into the guest experience through both staffing levels and food quality.
The deleveraging impact of the comparable restaurant sales decline.
The substantial investment the GJ reference earlier is necessary to restore the overall guest experience to levels that made red Robin so successful in the past.
Gerard Hart: Undoubtedly, we have the best intentions of mine, at the time. In the third quarter, comparable restaurant revenue decline 3.4%. This result was in line with our range of expectations, and it is important to understand it with full context. In the second half of 2022, Red Robin heavily promoted a combo meal deal, significant with national media that offered guests a burger, bottomer side, and non-alcoholic beverage for $10, a 30 to 40% discount to retail prices.
As we have previously discussed in recent years, well intentioned, but misguided cost savings decisions hampered the guest experience and negatively impacted guest traffic.
With the changes we have implemented that this year, we already see gains and guest satisfaction and then expect this reinvestment will ultimately result in increased guest traffic counts and higher levels of restaurant level operating profit.
Gerard Hart: This promotion drove traffic and sales, but the economics were quite penalizing to profitability. In 2023, as we upgrade all aspects of the guest experience, we have intentionally shifted away from national deep discount promotions, and broad loyalty offers to build a healthier, more sustainable, and ultimately more profitable traffic base. However, laughing this 2022 promotion is a headwind, we expected for our comparable restaurant revenue and related metrics. Additionally, we made the decision to discontinue the virtual brands that were added in 2020.
The investment includes additional.
Restaurant level management, which is fixed in nature, and therefore deleveraged is with the lower sales in the third quarter.
Increased hourly team member staffing levels and both the front and the back of the house.
Food quality upgrades.
And finally improved execution by our operational teams to our operating standards.
Inflationary pressure continues to moderate while inflation is present, we see what we considered to be much more normalised levels.
Commodity inflation was approximately 3% in the third quarter improved from 5% in the second quarter.
We experienced cost increases and beef potatoes and bread.
Gerard Hart: While this type of offering had its place during the depths of COVID, multiple brands, products, and procedures created unnecessary complexity for operators, and distracted the focus of executing a great Red Robin experience. The economics of virtual brands also resulted in minimal profit contribution. Eliminating these virtual brand offerings in July of this year was the right change for the long-term success of Red Robin despite short-term optics of a comparable restaurant sales headwind of approximately 200 basis points.
Mostly offset by favorably and other proteins and Fry oil.
Hourly wage inflation was approximately 4% also improved from 5% in the second quarter.
And utility inflation when did across gas and electric was approximately 3%.
General and administrative costs, where approximately $19.2 million a decrease versus the prior year of $2.3 million <unk>.
Decrease results from various initiatives, we enacted to reduce overhead costs.
Additionally, Red Robin held its annual leadership conference in the third quarter of 2022 and did not hold an annual conference in the third quarter of 2023.
Gerard Hart: Finally, we experienced and we observed industry results for sales and traffic. We can particularly in the back half of the third quarter. We are pleased to see trends improving to start at the start of the fourth quarter. Through the first four weeks of the fourth quarter, comparable restaurant traffic trends have improved 300 basis points as compared to the final four weeks of the third quarter, led by dining traffic. In a few moments, I'll discuss the ongoing proof points of greater guest satisfaction that we expect will lead to traffic growth.
Instead led by GJ the leadership team met with our managing partners and operations leaders in multiple town Hall rally settings earlier in 2023 to celebrate and communicate with them.
We intentionally reduced marketing and promotional activity in 2023 compared to 2022 to support our hospitality investments.
Selling expenses were approximately $8 $8 million a decrease versus the prior year of approximately $5.4 million led by reduced media spending on social and local channels.
Gerard Hart: We also continue to print proof points we are creating a healthier business with greater profitability. During the third quarter, we generated $6.8 million in adjusted EBITDA compared to $3.9 million last year. On a year-to-date basis, we have generated $58.3 million in adjusted EBITDA compared to $43.7 million last year, a 33% increase. We have delivered these increases in profitability while making substantial improvements and investments back into the guest experience. The total investment in the third quarter was approximately $8 million and the year-to-date totals approximately $16 million.
We have intentionally paste, our investments and selling through the year keeping powder dry.
With our hospitality upgrades in place and the launch of the new menu in October we expect a sequential increase in spend from the third quarter to the fourth quarter of approximately 30% to promote this new news.
Discounts represented 3.7% of revenue decline of 230 basis points compared to the third quarter of 2022.
It just it EBITDA was approximately $6 $8 million compared to approximately three $9 million in the third quarter of 2022.
In August we completed a second sale leaseback transaction with a central properties Realty Trust to sell and simultaneously leaseback nine owned properties.
Gerard Hart: We are making the substantial investment to deliver a great guest experience and increases in guest traffic in time. I'm incredibly proud and thankful for the work of all Red Robin team, because of your work and effort.
The transaction generated gross proceeds of approximately $34 million, which was used to pay down debt and accelerate investments to drive growth.
Gerard Hart: We are making great progress towards each of the five points of our North Star Plan that I will now review. First, we are transforming into an operations focused company. Our success rests on the success of our operating partners and restaurant leadership teams. They are leaders of their restaurant and make the Red Robin experience come to light for their guests and team members. Our operations leaders now have expanded decision-making authority and are actively involved in our entire decision-making process.
Also during the third quarter, we marketed a third tranche of owned properties and received positive interest in multiple bids from investors.
We continue to engage with our top bidders and they select the winning bid in the fourth quarter if.
If completed we expect a net proceeds will be used to repay debts pursuant to the credit agreement.
The sale leaseback transactions completed to date have allowed us to repay approximately $25 million of that <unk>.
Hearing an interest rate that would have exceeded 12% during the third quarter.
Gerard Hart: They will then share in the rewards of the positive impact of these decisions as they are made. It has now been two-fold quarter since we revamped our market partner compensation program for multi-unit operators. They now rightfully see themselves as owners of the restaurants they oversee and are rewarded based on their profits. They are incentivized to deliver strong financial results like never before and have unlimited upside earnings potential. This helps to recruit and to retain the best talent available. The multi-unit operator rollout has gone exceedingly well and we are currently preparing to launch the single-unit operator managing partner program in early 2024.
Our goal as we continued to improve the profitability of the company is to reduce our debt and leverage metrics to levels that allow us to refinance the remaining debt at more favorable interest rates further freeing cash there's currently allocated to interest payments.
We ended the third quarter with approximately $48.6 million of cash and cash equivalents $12.3 million of restricted cash and $25 million available borrowing capacity under our revolving line of credit.
At quarter end, our outstanding principal balance under our credit agreement was $189 $1 million down from 197 $5 million as of the end of the second quarter and letters of credit outstanding where $11.7 million.
Gerard Hart: Second, we are elevating the guest experience. The feedback we have received from guests throughout the year is clear. They are more and more satisfied with their Red Robin experience and recognize and appreciate the changes that we have made in quality of staffing upgrades to our food and unbridled hospitality. We continue to measure increases in guest satisfaction across all guest feedback mechanisms, including overall satisfaction for dying in, which is where most of the guest experience are improvements and total net sentiment and service net sentiment across our Google, Yelp and TripAdvisor reviews compared to last year.
During the third quarter among other items, we used cash to repay eight $4 million of debt.
Purchase $5 million of stock in.
And deploy $11.3 million for capital expenditures.
With respect to our 2023 financial guidance metrics.
We reiterate our revenue guidance of at least $1.3 billion in comparable restaurant revenue guidance increase of 1% to 3%.
As texture for the fourth quarter portion of this guidance, we would play out a few items.
First the third quarter of 2022 is the largest promotional hurdle to lap from last year because it marked the launch of the 10 dollar meal deal and saw the greatest guest response.
Gerard Hart: Returning to Red Robin's traditional and an industry best practice staffing model provides our servers with fewer tables so they can provide a great experience to every guest and minimize false rates. We have also added back bussers driving increases in cleanliness ratings are better staff at staffing at the host stand, which has improved wait times and brought back the dedicated expo who is responsible for the in restaurant execution of every order. Finally, we have added more than 250 dedicated kitchen managers and expect to substantially complete our manager compliment investments by year end.
Comparable restaurant sales from 2022 are progressively easier comparisons through the fourth quarter.
Second or traffic trends relative to 2019 have been consistent for the past five months and we expect will continue through the fourth quarter.
Third as I mentioned earlier, we have intentionally kept powder dry on the selling or marketing fronts. We anticipate this added sequential investment in the fourth quarter will further support and drive sales.
Finally.
Gerard Hart: Speaking of food and food quality, we call that we successfully completed the system wide rollout of flat top girls during the second quarter. This upgraded platform sees in the burger's juices, delivering a thicker, juicier and more flavorful burger and will serve as a foundation for future innovation. Team member and guest feedback has been resounding. Flat top cooking has returned our burger chefs to real cooking while being simpler to execute and enabling them to deliver a tastier product according to our.
As we have noted previously fiscal 2023 is a 53 week here, we will experience the benefit of the added week during the fourth quarter with a 13 week quarter this year versus our typical 12 weeks.
We expect the added week will benefit sales by approximately $28 million and adjusted EBITDA by approximately $4 million.
We expect restaurant level operating profit between 13, and 13.5% of restaurant sales.
We previously guided to at least 13.5% the.
Gerard Hart: We have also enhanced our presentation by moving away from wrapping our burgers in wax paper and presenting in a basket to a showcase on a beautiful new playware. In early October, we took our commitment to returning our burgers to true Gourmet status to the next level, unveiling new and improved recipes for each one of our more than 20 Gourmet burgers now prepared with higher quality and more flavorful ingredients to deliver on our guest promise and a competitive elevated burger experience.
The change is primarily due to additional investments in the guest experience primarily related to food and timing changes in our cost estimates.
We now expect selling in general and administrative costs between $123 million and $127 million <unk>.
Revised from our prior range of $127 million to $132 million.
This change is due to cost savings opportunities, we expect to capture and revised estimates for annual incentive compensation program expenses.
Gerard Hart: We began communicating these improvements to guests under the banner of Turn Up The Young that builds on the tremendous consumer recognition of our long-term young tagline. In addition to our relaunched burger lineup, we introduced new new entrees, appetizers, beverages and seasonal additions to delight our guests with new innovation and provide optionality within the key menu categories that help build check. With this launch, we have now upgraded ingredients, including mayonnaise, vine ripe and tomatoes, buns, pickles, fresh pineapples, our sauces and many other items.
We reiterate our capital expenditure guidance of $45 million to $50 million.
Our adjusted EBITDA guidance has been tightened to a range of $72.5 million to $77.5 million compared to $72.5 million to $82.5 million previously.
Recall, our original guidance was a range of $62.5 million to $72.5 million and our actual adjusted EBITDA last year in fiscal 2022 totaled $52.1 million.
Gerard Hart: In total, we have made enhancements to 85% of our menu. The new menu includes the first executions of our strategy to broaden both the offerings of menu items and the price points under our barbell pricing strategy. And we have added new proteins with the tsunami shrimp and the whiskey river barbecue ribs. Our culinary has also developed an amazing barbecue burk ends bacon burger, smashed avocado and bacon burger, and we return to fan favorite burning love.
In summary, the quarter demonstrated strategic operational and financial progress against our objectives, and we look forward to finishing near strong and preparing for successful 2024.
With that I will turn the call back over to GJ.
Thank you Todd.
As our newest star plan implementation rolls off.
Fred Robbins comeback will advance.
In summary, we are executing against our strategic vision with an enhanced guest experience through investments and labor and food are expected to drive longterm traffic growth.
We are taking action to improve our margins structure to reduce reduce discounting and the smart cost savings that will benefit our profitability in 2024 and beyond and we are strengthening our balance sheet with adjusted EBITDA far exceeding 2022, allowing for debt reduction and incremental.
Gerard Hart: While only in place for a few weeks, we have seen great trial on these new and premium price items. Additionally, the appetizers we added are driving incremental incidents of appetizer purchases. As part of our regular practices, we regularly survey our loyalty database and amongst the most dedicated guests who have dined with us over the last quarter or seen positive sentiment. 46% agree our food quality has improved. 52% acknowledge that our burgers are better.
Free cash flow to reinvest in the business.
We are truly eager to continue on this journey building an incredible brand history that goes back more than five decades, and ensuring that we will have a successful and sustainable business for many years to come.
Gerard Hart: 48% agree that our service and hospitality has improved. These figures have continually increased as we implement additional changes to improve the guest experience. We have also upgraded our bar menu to include high quality brands, our guests know and love, Acosta Migos, Angels Envy, and Kendall Jackson in our wine and spirit offerings. While making quality upgrades to things like our margarita mix with fresh lime juice and agave, alcoholic beverages are a tremendous opportunity for our business. Currently representing only 6% of sales versus a competitive average of over 10%. These changes are the first steps to reinvigorate our bar business and capture this opportunity.
I feel very fortunate to be leaving this incredible group of dedicated people, who are committed to serving our guests and enhancing long term value for our shareholders.
We would now be happy to take your questions. Operator, Please open the lines.
Thank you Sir.
Ladies and gentlemen, we will now be conducting a Christian <unk>.
If you would like to ask a question please be starting the one on your telephone keypad.
A confirmation time will indicate your line is increased in queue.
You might <unk> and the two if you would like to review your Christian from the queue.
Participants using speaker equipment, it might be necessary to pick up your handset before pressing the soft cheese.
[noise] offers Christian is from public Brooks <unk> company. Please go ahead.
Gerard Hart: Having achieved great games in staffing levels, hospitality, and food quality. We are finalizing preparations for an alpha test group of restaurant renovations I announced last quarter. We planned to have these restaurants operate without interruption through the busy end of year holiday period, then begin construction right after the new year. The initial test restaurants are located in Washington, California and Colorado, and we'll provide a good sampling of our West Coast footprint to learn from. Renovations are planned to upgrade the interior ambit, ambiance, and exterior appeal to match the food and hospitality upgrades. In doing so, we are bringing all our moments of the guest experience together.
Good evening, everyone. Thanks for taking my questions.
Two questions for you if I may one.
Just thinking about the pressures that the full service group saw from a traffic standpoint in August and September.
Lapping some of the posts homochrome strength from.
From the prior year, if I put that headwind together with that kind of 500 basis points that you talked about for lapping the 10 dollar meal.
Neil deal and then a couple of hundred basis points from the exit of the virtual brands.
I know, we're not seeing traffic increases, but do you believe that you are seeing traction from Europe.
Gerard Hart: Third, we are removing costs and complexity. To help fund our investments back into the guest experience, we have been identifying and then capturing numerous non-guest facing savings opportunity. These efforts have been centered in the fantastic work of our supply chain team, who have found smart saving levers and have been able to produce products from our vendors of the same or better quality at a lower cost. Year to date, we have saved approximately $7 million and expect the savings to total approximately $12 million in 2023.
It <unk>.
Muted what.
If the industry slowdown has been mirrored at Red Robin.
We would've been led to lower numbers my senses, there may be traffic improvements that are hidden in the.
And the reported numbers for the quarter.
Hey, Todd Todd Wilson are good to talk to you.
We have the same broad interpretation, we tried to call out through the prepared comments the headwind of the virtual brands.
Discontinuation and we had talked as you mentioned about the the 10 dollar meal deal lap both the the offer itself being such a discount as well as all of the marketing activity that supported it last year as a three to 500 basis point headwinds. So we interpret it the same way and part of the internal analysis that we've done we evaluated.
Gerard Hart: The initiative is implemented in 2023, totaling annualized one rate that exceeds $20 million and will carry into the benefit of 2024. The final key initiative plan to launch in the fourth quarter is a change from frozen to fresh chicken breast. The move to fresh chicken breast is a tremendous quality, flavor, and helpful improvement for our guests. And one, we expect to result in approximately $5 million annualized savings on that product itself.
Q2 trends to Q3 trends and and we walk away very comfortable with the track that we're on encouraged with the improvements that we're seeing in guest satisfaction as well as what we interpret as the underlying traffic trend. So yes, I think your call. It is spot on of there there are very intentional decisions that we've made.
That are right for the long term of the business that a result in these figures.
Gerard Hart: This type of change illustrates how we think about cost savings as changes that are both good for our guests and for Red Robin. The team continues to do great work capturing these opportunities in 2023 and building a robust pipeline of initiatives to continue this progress in 2024 and beyond. I discussed the complexity aspect earlier as that was the driving force that led to our decision to exit virtual brands.
But we think it sets us up very well as we turn the corner both in Q4 and turning the corner into next year.
That's great. Thanks talking on my second question I will get back in queue.
You talked about keeping your your powder dry on the marketing.
Side of things and.
And now having the platform and the menu menu expansion the ingredients on 85% of the items, where you want them in the service model right.
When do we start seeing.
Gerard Hart: Fourth, we are optimizing guest engagement. You know, ongoing efforts to reinvigorate the Red Robin brand and enhance our restaurant experience. We have been proactively elevating our marketing capabilities. First, given the substantial digital traffic from our guests, we are rapidly improving guest acquisition capabilities and our capacity to target the right audience with timely and pertinent messages. We've significantly increased the efficiency of our paid media strategy through more precise targeting, allowing us to reach more guests with the same dollars and serve up more purposeful messaging.
More aggressive efforts on the selling expense side.
We're looking at two four here's this across a holiday window. When you guys thinking that you'll start to really go in store.
To push on messaging, the new experience at Red Robin. Thanks.
Hey, Todd its GJ here.
Look at the first of all when you when you make this many changes you.
You want to make sure that execution is at a high level. So it takes a little bit of time and so what I would say to you is that we'll be ramping up that investment throughout the quarter.
I wouldn't say that it's heavily backloaded towards the holiday season, I would tell you it sooner than that but we wanted to make sure that that we were executing at a high level and get comfortable with that does that helpful.
Gerard Hart: We have shifted towards more categories, specific search strategies to capture the attention of guest seeking experiences like ours. And on top of that, we have tackled both technical and content-related search engines optimization resulting in a notable 30% surge in organic search drafts. These efforts have restored growth to the web traffic trend that had been declining. Second, our investments in earned media and social marketing initiatives have positioned our brand and new consumer touch points, fostering engagement with guests eager to see Red Robin's resurgence and explore our latest menu offerings.
Yeah that is Thanksgiving.
I'll go back into Q.
Thank you.
The next question is from <unk> <unk>. Please go ahead.
Well. Thank you I appreciate all the details and color you guys gave him. The prepared remarks that was very helpful. Trying to update things <unk>. One thing I wanted to clarify was maybe walk through the areas of incremental year over year investment in the guest experience in the corner I think you mentioned.
8 million dollar number.
Maybe talk about the expectation is for the four Q with that looks like I don't know if this timeline has evolved at all and then on the other side the incremental cost benefit she realized it sounds like the quarter. It was maybe at 3 million dollar incremental benefit or so.
Gerard Hart: We've had success garnering coverage in both trade and consumer media space. And a small example of our commitment to social engagement, our Burgetini Collaborations with Ariana Maddox, a celebrity bartender, influencer, and US Weekly's reality TV star of the year generated over 500,000 views in just the first few days showcasing our brand in a compelling matter. Third, we are committed to forging strong connections with the communities we serve through localized marketing initiatives that support the local community.
I guess, if you can just kind of clarify what.
The what the outlook is the timeline for getting to that 20 million savings run right.
Sort of like a <unk> it looks like on that end.
Yeah, Hey, Todd.
Todd here, Alex good to talk to you as well.
Yeah, I'll start with the first part of your question on the investment itself.
Gerard Hart: This approach is not only building goodwill but driving revenue. Additionally, we have executed a nationwide summer of young promotional tour, offering tastings of our improved burgers, opportunities to win prizes, and enjoyable experiences. The response is overwhelmingly positive building excitement around our new Gourmet Burgers and other menu additions.
$8 million at this point, we view as a a wholesome run rates, we may make tweaks here and there, but I think as you think about Q4.
And then we have some of that investment Bacon that the first part of twenty-three that will allow next year, but the $8 million. You can think of is effectively fully loaded. So we would said plainly we would expect probably another $8 million.
Gerard Hart: Finally, as we continue to invest in our hospitality model and culinary offerings, we are in the process of refining our loyalty program. Our goal is to deliver more relevant messaging to our over 13 million members, transforming the program into a VIP-like experience, then acquiring new members to foster a new generation of Red Robin ambassadors. Our strategy is to shift away from heavy discounting in favor of rewarding our most loyal guests. The formal launch of the ReVamp loyalty program is scheduled in early 2024.
Q for the investment itself the bulk of it I would tell you is in labor.
There is a meaningful investment we've made in food, but we're also seeing things like the cost saves that he'll get into next right, we're making investments in food, but we're also able to make some pretty significant upgrades to our food like the chicken the GJ talked about as well as saving money. So there is some net investment in the food, but it's the minority of that $8 million.
As it relates to the cost saves.
Just to ensure clarity we measure about $4 million on the quarter, we had talked about $7 million a year to date and $3 million a year to date through Q2. So on the quarter. It was about $4 million, we do expect that to step up and.
Gerard Hart: Fifth, driving growth in comparable restaurant revenue and unit level profitability to deliver financial commitments. We are taking a holistic approach to our decision-making engineering to come back up Red Robin to create a healthy, sustainable, and growing business for the long term. While comparable restaurant revenue declined in the third quarter, we expected that outcome and the decisions that led to it, as I discussed earlier, are the absolute right decisions to set Red Robin up for long-term success. Todd will review the details in a few moments and you will hear that our adjusted EBITDA guidance for 2023 is significantly improved from 2022 results and well above our initial guidance for 2023.
Q for two about $5 million that gets you to the 12 for the year. The Big initiative that gets us there that incremental step up as the chicken change that GJ talked about that is already partially implemented through the system and just working its way through the supply chain. So how.
Obviously, a high degree of confidence that will capture that save the.
The last part of your question I think about the $20 million yes.
I think maybe I would frame it this way of the of all of the things that will implement this year a full 12 months run rate would be $20 million, we think will capture $12 million of that this year, which leaves an $8 million benefit that we would expect to capture in 2024 only from the things that we've implemented this year at.
Todd Wilson: Now let me turn the call over to Todd.
Todd Wilson: Thank you, GJ, and good afternoon, everyone. I will begin with a recap of our third quarter financial performance and then discuss our financial guidance for 2023. Total revenues were $277.6 million, a decrease of $9.2 million versus the third quarter of fiscal 2022. The decline in revenue was led by a decrease in comparable restaurant revenue of 3.4% due to moving away from the deep discounting, marketing promotions, and elimination of virtual brands that GJ discussed earlier.
The team is working and we'll have a pipeline to plus that up further but that's the way to dimensionalize the run rate of what we've done this year.
Perfect that clarifies. It greatly also question on labor and sort of how we think longer term not getting getting.
Getting back towards historical run rate labor as a percentage of sales and what would kind of need to happen I'm sure. A lot of that is really just driving traffic, but uhm thoughts there with that might look like and then Ah any thoughts on the California minimum wage rules, although not directed at casual dining could have an impact.
Todd Wilson: Dynan sales increased .5% as compared to the third quarter of 2022. The Dynan experiences were guessed experience, all of the hospitality and food investments we have made. We believe the continued sales growth and relative strength of the Dynan business is another data point confirming the changes and investments we have made are right. As a percentage of restaurant sales, Dynan represented 75.6% of sales in the third quarter up from 72.4% in the same quarter last year.
Implications you had secret inflation our pricing next.
Next year related to that.
I'll start in GJ, MA may chime in as well.
The the Labour site itself, the we've been 37% to 38% between Q2 and Q3 and I think in the near term. That's that's a fair way to think about our near term run right. In time, we certainly expect that to get back to the 35% to 36% range and part with traffic growth and leveraging those sales.
Todd Wilson: This consumer shift back to Dynan is a broad trend experienced by many in the industry and it's accentuated for red Robin as we discontinued virtual brands that were only available for off-premise consumption. Off-premise sales declined 15.1% as compared to the third quarter of 2022. Approximately half of that decline is due to the elimination of virtual brands. We have launched initiatives to enhance the off-premise guest experience and promote this offering to become more prominent and visible for those guests looking for a pickup or delivery option.
But quite frankly, there is there is near term opportunities. There one we brought on a number of new team members as they gain experience and mastery of their jobs. We certainly expect that there was the efficiency there and too.
We're looking at things like overtime, where we want our restaurants to have the right amount of labor.
And so it is not a hour reduction, but saving that halftime of pay as a meaningful number for us and so there are things that we can do in the near term to to manage that number appropriately while still giving a great guest experience on our way back to that 35% to 36%.
Todd Wilson: Within off-premise, catering remains a bright spot, increasing 27% as compared to the third quarter of 2022. Catering is a fast growing segment and the team is doing great work to capture this opportunity. Restaurant level operating profit as a percentage of restaurant revenue was 11.1% a decrease of approximately 150 basis points compared to the third quarter of 2022. The reduction was driven by our intentional investments back into the guest experience through both staffing levels and food quality and the deep leveraging impact of the comparable restaurant sales decline.
[laughter].
So in any great on the App that California.
Yeah, I'll I'll take a.
Look at the end of the day, the California situation, there will be some of that affects us we're not quite sure how much of that yet, we've obviously sized it up and <unk>.
Candidly, we're going to have to really evaluate that if we need to take additional price and the state of California, or not which we're not alone in that.
But so we're watching it earlier the closer we do expect a little bit of cream.
Got it thank you.
Todd Wilson: The substantial investment that GJA referenced earlier is necessary to restore the overall guest experience to levels that made red Robin so successful in the past. As we have previously discussed in recent years, well-intentioned but misguided cost savings decisions, hampered the guest experience and negatively impacted guest traffic. With the changes we have implemented this year, we already see gains and guest satisfaction and expect this investment will ultimately result in increased guest traffic counts and higher levels of restaurant level operating profit.
Thank you.
The next question is from Andrew Whoops, Let's see J King. Please go ahead.
Hi, Thank you <unk> actually I just wanted to on the same store on the traffic improvement you've had so far.
In this quarter.
The 300 basis points in traffic is that did check all the same so is that also.
Could we also assume that the same store sales.
Sequentially from September to October improve it about the same yeah.
Todd Wilson: The investment includes additional restaurant level management, which is fixed in nature and therefore de-leverages with the lower sales in the third quarter, increased hourly team number staffing levels in both the front and the back of the house, food quality upgrades, and finally improved execution by our operational teams to our operating standards. Inflationary pressure continues to moderate, while inflation is present, we see what we consider to be much more normalized levels. Community inflation was approximately 3% in the third quarter, improved from 5% in the second quarter.
Andy That's fair way to think about it we're very focused on traffic internally and so that's part of the reason we framed it up that way, but that that's the right assumption is both traffic and sales of epicene the improvement.
Okay. Thank you and I don't know if you went over this but in terms of like kaden.
What how would that 3% compared to the numbers you gave us.
They're very detailed information you gave on the quarter in other words was.
With September much lower or similar to the quarter.
So we could try to translate that too.
Todd Wilson: We experienced cost increases in beef, potatoes, and bread, mostly offset by favorability and other proteins and frio oil. Our low-age inflation was approximately 4% also improved from 5% in the second quarter, and Utility Insulation, one that across gas and electric was approximately 3%. General and administrative costs were approximately $19.2 million, a decrease versus the prior year of $2.3 million. The decrease results from various initiatives we enacted to reduce overhead costs. Additionally, Red Robin Held is annual leadership conference in the third quarter of 2022 and did not hold an annual conference in the third quarter of 2023.
What your cough is running out.
Yeah, I think I would frame it this way handy.
Within Q3, the GJ reference at the back half of the quarter was the softer part of the quarter as we look at that 300 basis point improvement that has us better than we better than the the Q3 results.
And we are very optimistic when we look at especially the multiyear trends of where the quarter could end up.
You know I I imagine that the group can triangulate, what we think from Q4 from some of the guidance figures.
But we think that there is a path to flat to potentially even positive same store sales within Q4.
And that would be somewhat the comparisons against last year's Promotionality easing and also obviously.
Todd Wilson: Instead, led by GJ, the leadership team met with our managing partners and operations leaders in multiple town hall rally settings earlier in 2023 to celebrate and communicate with them. We intentionally reduced marketing and promotional activity in 2023 compared to 2022 to support our hospitality investment. Selling expenses were approximately $8.8 million, a decrease for the prior year of approximately $5.4 million, led by reduced media spending on social and local channels. We have intentionally faced our investments in selling dollars through the year, keeping powder dry.
The changes you've done for the guest experience.
Right the comparisons versus 2022 or later.
When we look at the comparisons versus 19, we feel very comfortable with that track there and then you add on the incremental investment the sequential investment from Q3 to queue for all of those we believe 0.2 to that type of alcohol.
And kind of laughing I just wanted to ask was focusing on the selling expense.
And I'm, not saying in a guidance way because we're in it.
Not a great period for the industry, but if.
If we were in a <unk> in a normal period, what was the what are you guys thinking about it for like a normal selling expense annualized or do.
Todd Wilson: With our hospitality upgrades in place and the launch of the new menu in October, we expect a sequential increase in spend from the third quarter to the fourth quarter of approximately 30% to promote this new news. If counts represented 3.7% of revenue, are the climb of 230 basis points compared to the third quarter of 2022. Adjusted EBITDA was approximately $6.8 million compared to approximately $3.9 million in the third quarter of 2022.
And you're like where it's at or do you think there's.
Florida is it should be higher in a better environment, where you can.
Funded internally.
Or I guess option. Three is are you going to find out if you sort of tests things in the market.
It's really option three [laughter] sorry to be that.
That way about it but we're gonna learn are you're in we definitely we definitely need to get our news out there in a creative way and to be able to generate some excitement. So we're going to learn here and we are going to going to test different ways and different levels to really see what makes the most traction and the most success.
Todd Wilson: In August, we completed a second sale leaseback transaction with essential properties, reality trust, to sell and simultaneously leaseback nine-owned properties. The transaction generated gross proceeds of approximately $30.4 million, which was used to pay down debt and accelerate investments to drive growth. Also during the third quarter, we marketed a third tranche of owned properties and received positive interest and multiple bid term investors. We continue to engage with our top bidders and may select a winning bid in the fourth quarter.
For us.
Okay, but I mean, clearly you've come to the judgment I mean, you've said this one is hundred underline it and a lot of the prior spend was just ineffective.
Not just sort of.
Looking at a big bucket of cost savings.
With wide eyes about this right.
No and that's a great point I mean as I pointed out it's just being a lot more focused and using making the dollars go a lot further and we're already seeing some progress there and a lot of learning. So we are very hopeful that will continue to be way more efficient and what was done in the past.
Todd Wilson: It's completed, we expected net proceeds will be used to repay debts for soon to the credit agreement. The sale leaseback transactions completed to date have allowed us to repay approximately $25 million of debt, carrying an interest rate that would have exceeded 12% during the third quarter. Our goal, as we continue to improve the profitability of the company, is to reduce our debt and leverage metrics to levels that allow us to refinance the remaining debt at more favorable interest rates for their freeing cash that is currently allocated to interest payments.
Thank you.
Thank you very much.
Other questions at this time and I would like to turn it back over to <unk> to some cousin comments.
Thank you all for joining US we appreciate your interest in Red Robin We're excited about our future and look forward to talking to you next quarter take care.
Todd Wilson: We ended the third quarter with approximately $48.6 million of cash in cash equivalents, $12.3 million of restricted cash, and $25 million of available borrowing capacity under our revolving line of credit. At quarter end, our outstanding principal balance under our credit agreement was $189.1 million, down from $197.5 million, as of the end of the second quarter, and letters out of credit outstanding were $11.7 million. During the third quarter, among other items, we use cash to repay $8.4 million of debt, purchase $5 million of stock, and deploy $11.3 million for capital expenditures.
Thank you Sir.
<unk>. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
[music].
Todd Wilson: With respect to our 2023 Financial Guidance Metrics, we reiterate our revenue guidance of at 1 to 3%. As texture for the fourth quarter portion of this guidance, we would employ out a few items. First, the third quarter of 2022 is the largest promotional hurdle to lap from last year because it marked the launch of the $10 meal deal and saw the greatest guest response. Comparable restaurant sales from 2022 are progressively easier comparisons through the fourth quarter.
Todd Wilson: Second, our traffic trends relative to 2019 have been consistent for the past five months, and we expect we'll continue through the fourth quarter. Third, as I mentioned earlier, we have intentionally kept powder dry on the selling or marketing fronts. We anticipate this added sequential investment in the fourth quarter will further support and drive sales. Finally, as we have noted previously, fiscal 2023 is a 53-week year. We will experience the benefit of the added week during the fourth quarter with a 13-week quarter this year versus our typical 12 weeks.
Todd Wilson: We expect the added week will benefit sales by approximately $28 million and adjusted EBITDA by approximately $4 million. We expect restaurant level operating profits between 13 and 13.5% of restaurant sales. We previously guided to at least 13.5%. The change is primarily due to additional investments in the guest experience, primarily related to food, and timing changes in our costs to save estimates. We now expect selling and general and administrative costs between $123 million and $127 million, revised from our prior range of $127 million to $132 million.
Todd Wilson: This changes due to cost saving opportunities we expect to capture and revised estimates for annual incentive compensation program expenses. We reiterate our capital expenditure guidance of $45 to $50 million. Our adjusted EBITDA guidance has been tightened to a range of $72.5 million to $77.5 million compared to $72.5 million to $82.5 million previously. We call our original guidance was a range of $62.5 to $72.5 million. And our actual adjusted EBITDA last year in fiscal 2022 totaled $52.1 million.
Todd Wilson: In summary, the quarter demonstrated strategic, operational, and financial progress against our objectives.
Todd Wilson: And we look forward to finishing near strong and preparing for successful 2020, for.
Gerard Hart: With that, I will turn the call back over to DJ. Thank you, Todd. As our no-star plant implementation rolls off, Red Robin's comeback will advance.
Gerard Hart: In summary, we are executing against our strategic vision with an enhanced guest experience to investments in labor and food are expected to drive long-term traffic growth. We are taking action to improve our margin structure to reduce discounting and smart cost savings that will benefit our profitability in 2024 and beyond. And we are strengthening our balance sheet with adjusted EBITDAF far exceeding 2022, allowing for debt reduction and incremental free cash flow to reinvest in the business.
Gerard Hart: We are truly eager to continue on this journey, building an incredible brand history that goes back more than five decades and ensuring that we will have a successful and sustainable business for many years to come. I feel very fortunate to be leading this incredible group of dedicated people who are committed to serving our guests and enhancing long-term value for our shareholders.
Operator: We would now be happy to take your questions. Operator, please open the lines. Thank you, sir. Ladies and gentlemen, we will now be conducting a question in our position. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation phone will indicate your line is in the question queue. You may press star and then two, if you would like to remove your question from the queue. Hope participants using speed or agreement, it may be necessary to pick up your hands in to be full, facing the farce use.
Operator: Operator's question is for the books, but please go ahead.
Andrew Wolf: A good evening, everyone. Thanks for taking my questions. Two questions for you, if I may. One, I'm just thinking about the pressures that the full service group saw from a traffic standpoint in August in September and allowing some of the post-Omicron strength from the prior year. If I put that headwind together with that kind of 500 basis points that you talked about for lapping the $10 meal deal and then a couple hundred basis points from the exit of the virtual brands, I know we're not seeing traffic increases, but do you believe that you're seeing traction from your initiatives that muted what if the industry slow down has been mirrored at Red Robin? Probably would have led to lower numbers. My senses are maybe traffic improvements that are hidden in the reported numbers for the quarter.
Todd Wilson: Hey Todd, Todd Wilson here. Good to talk to you. We have the same broad interpretation. We tried to call out through the prepared comments, the headwind of the virtual brands, discontinuation, and we had talked as you mentioned about the $10 meal deal lap, both the offer itself being such a discount as well as all of the marketing activity that supported it last year as a three to five hundred basis point headwind.
Todd Wilson: We interpret it the same way and part of the internal analysis that we've done. We evaluated Q2 trends to Q3 trends and we walk away very comfortable with the track that we're on encouraged with the improvements that we're seeing in guest satisfaction as well as what we have on traffic trend. So yes, I think your college is spot on of there are very intentional decisions that we've made that are right for the long term of the business that are resulting in these figures, but we think it sets us up very well as we turn the corner, both in Q4 and turning the corner into next year.
Todd Wilson: The last part of your question, I think about the 20 million, yeah, I think maybe I'd frame it this way of all of the things that will implement this year, a full 12 months run rate would be 20 million. We think we'll capture 12 million of that this year, which leaves an 8 million dollar benefit that we would expect to capture in 2024, only from the things that we've implemented this year. Obviously, the team is working and we'll have a pipeline to plus that up further, but that's the way to dimensionalize the run rate of what we've done this year.
Andrew Wolf: Perfect, that clarifies it greatly.
Todd Wilson: Also, question on labor and sort of how we think longer term about getting, getting back towards historical run rate, labor, as a percentage of sales, and what would kind of need to happen, I'm sure a lot of that's really just driving traffic, but thoughts there with that might look like, and then any thoughts on the California minimum wage rules, although not directed at casual dining, could have an impact in sort of implications. You would see for inflation or pricing next year.
Todd Wilson: Yeah, I'll all start in GJ may chime in as well. The labor side itself, you know, we've been 37 to 38% between Q2 and Q3, and I think in the near term, that's a fair way to think about our near term run rate. In time, we certainly expect that to get back to the 35 to 36% range, in part with traffic growth and leveraging those sales. But quite frankly, there's near term opportunities there.
Todd Wilson: One, we've brought on a number of new team members as they gain experience and mastery of their jobs. We certainly expect that there would be efficiency there, and two, you know, we're looking at things like overtime, where, you know, we want our restaurants to have the right amount of labor. And so it's not a our reduction, but saving that half time of pay is a meaningful number for us. And so there are things that we can do in the near term to to manage that number appropriately while still giving a great guest experience on our way back to that 35 or 36%.
Gerard Hart: So, and anybody on the California? Yeah, I'll take that. Look, you know, at the end of the day, the California situation, there will be some of that affects us. We're not quite sure how much of that yet. We've obviously sized that up, and, you know, candidly, we're going to have to really evaluate that if we need to take additional price in the state of California or not, which I'm, we're not alone in that. But so we're watching it really close, and we do expect a little bit of grief. Thank you.
Operator: The next question, he's from Andrew Wolfe, let's see. Jay King. Are you going to hit?
Andrew Wolf: Hi, thank you. Phil, gang actually. Just wanted to. On the same sort on the traffic improvement you've had so far. In this quarter. The threat of basic points and traffic is that to check hold the same. So is that also. We also assume that the sensor sells sequentially from September to October. Improved about the same. Andy, that's a fair way to think about it. You know, we're very focused on traffic internally and so, you know, that's part of the reason we framed it up that way.
Andrew Wolf: But that that's the right assumption is both traffic and sales and seeing the improvement. Okay, thank you. And I don't know if you want to over this, but in terms of like Caden, how would that 3% compared to the numbers you gave us, you know, the very detailed information you gave on the quarter. In other words, was September, you know, much lower or similar to the quarter. So, you know, we could try to translate that to sort of what your comp is running at.
Andrew Wolf: Yeah, I think I frame it this way. Andy, you know, within Q3, the GJ reference at the back half of the quarter was the softer part of the quarter. As we look at that 300 basis point improvement, that has us better than we better than the Q3 results. And we are very optimistic when we look at, especially the multi-year trends of where the quarter could end up. You know, I imagine that the group can triangulate what we think from Q4 from some of the guidance figures.
Andrew Wolf: But we think that there's a path to flat, potentially even positive, same-store sales within Q4. And that would be somewhat the comparisons against last year's promotionality easing and also obviously all the changes you've done for the guest experience. That's right. The comparisons versus 2022 are lighter. When we look at the comparisons versus 19, we feel very comfortable with that track there. And then you add on the incremental investment, the sequential investment from Q3 to Q4, all of those we believe point two to that type of outcome.
Andrew Wolf: And kind of last thing I just wanted to ask was focusing on the selling expense. And I'm not saying in a guidance way because we're in a, you know, not a great period for the industry. But if we were in a normal period, what are you guys thinking about for like a normal selling expense manualized or do you like where it's at? Or do you think there's more, you know, is it should it be higher in a better environment where you can, you know, fund it internally.
Andrew Wolf: Or I guess option three is are you going to find out if you sort of test things in the market? It's really option three. Sorry to be that way about it, but we're going to learn here and we definitely, we definitely need to get our news out there in a creative way. And to be able to generate some excitement. So we're going to learn here and we are going to going to test different ways and different levels to really see what makes the most traction and the most success for us.
Andrew Wolf: Okay, but I mean, clearly you've come to the judgment. I mean, you've said this, but I don't underline it. And a lot of the prior spend was just ineffective. You're not just sort of looking at a big bucket of cost savings, you know, with wide eyes about this right now. And that's a great point. I mean, as I pointed out, it's just being a lot more focused and using making the dollars go a lot further and we're already seeing some progress there and a lot of learning. So we are very hopeful that we'll continue to be way more efficient than what was done in the past.
Andrew Wolf: Thank you. Thank you very much.
Operator: We have no further questions at this time.
Gerard Hart: I would like to join us back over to DJ Hart for some closing comments. Thank you all for joining us. We appreciate your interest in Red Robin. We're excited about our future and look forward to talking to you next quarter. Take care. Thank you, ladies and gentlemen. This concludes today's 10th conference. You may disconnect your lines at this time and thank you for your participation.