Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) Q2 2023 Earnings Call Transcript August 18, 2023
Operator: Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers, Inc. Second Quarter 2023 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 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 accounting 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 second quarter 2023 earnings release on its website at ir.redrobin.com. Now I’d like to turn the call over to Red Robin’s CEO, G.J. Hart. You may begin.
G.J. Hart: Good afternoon, and thank you for joining us today. With me is Todd Wilson, our Chief Financial Officer, who will review our second quarter results and updated 2023 financial guidance, among other items, after I conclude my remarks. Let me first begin by expressing how pleased we are with our performance through the first half of 2023 and the continued traction we are seeing with our North Star plan. I want to acknowledge the hard work of our restaurant team operators our team members as well as our restaurant support center team. Thank you, and keep up the great work. Our strong financial results in the second quarter, combined with other guest data provide further proof points that we are on the right track in this multiyear comeback.
The highlights include comparable restaurant sales increased for the tenth consecutive quarter. The simple changes we have already made provide our operators greater ownership and control of their businesses, and they continue to break sales records. In the first half of 2023, we have now broken over 900 hourly, daily, weekly and period sales records. This is an amazing accomplishment for a 50-year-old brand. Guest feedback continues to demonstrate how much they appreciate the changes we are making. We measure these in multiple ways and find aligned proof points across all measures. Dine-in is where most guests experience the improvements we have made to hospitality and food. We are encouraged by our growth in dine-in sales and our overall SMG satisfaction scores, which increased 3 percentage points versus a year ago.
We also monitor Google, Yelp and Tripadvisor reviews. Total net sentiment and service net sentiment increased 13% and 28%, respectively, as compared to the second quarter of 2022. Finally, we routinely survey our loyalty database. Among these most loyal guests who have visited us in the past month say, 42% agreed food quality has improved, 44% agree burgers have improved and 46% agree service and hospitality have improved. When we drill in further, the greatest gains are in our bottom quartile special focused restaurants, which represent tremendous opportunity for us. While making improvements in the guest experience, we’ve also quickly reinvigorated our profitability. In the first half of 2023, we have already generated $51.5 million of adjusted EBITDA, compared to just $52.1 million for the entire year of 2022.
Now let me provide some brief updates on each of our 5 points of our North Star plan. First, we are transforming into an operations-focused restaurant company. Our frontline operators are the most influential people in ensuring our continued success. This is why we are keeping them front and center in every decision we make. They are the ones closest to the action, and so this is paying dividends as we roll out our guest experience improvements. We want to make sure the goals of our operators are the same as the goals of our support center and shareholders. As announced previously at the start of the second quarter, we launched our revamped market partner compensation program, which rewards our multiunit operators by allowing them to share in the profitability of the restaurants they oversee.
This incentivizes strong financial results and helps us hire and retain the best of talent available. We are learning from the multiunit operator rollout, which has been well received to date and we are developing a single-unit operator program, which we expect to launch in early 2024. Second, we are elevating the guest experience. As I mentioned earlier, we are seeing traction amongst our guest base evidenced by increases to our overall satisfaction. This is a direct result of the people, food and hospitality investments we have made to improve their experience. We are focused on the quality of staffing and delivering on our promise of unbridled hospitality. We have returned our overall hospitality model to what it was during Red Robin’s long and successful history, beginning with service being responsible for fewer tables so they can deliver a great experience to each guest while minimizing the false waits that have occurred in the past.
Other staffing improvements include adding back busters, which has driven increases in cleanliness ratings, staffing at the host stand, which has improved wait times and bringing back the dedicated expo, who is responsible for the in-restaurant execution of every order. The additions we targeted for all of these roles are now substantially complete. Finally, we know having the right management complement in place at each restaurant is paramount to ensuring consistent execution. So far this year, we’ve added over 200 dedicated kitchen managers and expect to substantially complete our management complement investments by year-end. On food quality, we moved quickly and successfully completed the rollout of flat top grills during the second quarter across the entire system, including franchise-owned restaurants.
This upgraded cooking platform, sears in the natural juices of the burger delivering a 20% larger and more flavorful burger. The cooking process is also simpler to execute enabling greater throughput and a more consistent end product delivered to our guests. We are very pleased with the guest feedback thus far. This upgraded cooking technology serves as a foundation for additional and future innovation as it is more flexible platform than the previous conveyor belt char broiler. To showcase our food, we have upgraded the presentation by moving away from serving our burgers wrapped in wax paper in baskets and now showcase them on a beautiful new plateware. Chef Ryan has done fantastic work to identify and develop improvements across our menu, and we could not be more excited.
Along with changes to our cooking procedures, we have improved the quality of our chicken in our fried chicken sandwich, moving to a hand-bread fresh product that tastes and looks amazing. Coming down the pipeline, we are phasing in upgrades to our bacon, mayonnaise, vine-ripened tomatoes and other produce. We also plan to launch new menu items later this year to broaden our barbell strategy. This includes St. Louis style pork ribs, featuring our signature Whiskey River barbecue sauce, panko breaded tsunami shrimp and crispy parmesan brussels sprouts as an appetizer. While we are so pleased with the progress to date, through our prioritized investments in people, food and hospitality, it is now time to take the next step. In the second half of the year, we expect to launch the Red Robin renovation program and an output test group of up to 5 restaurants.
We plan to use this first test group to redefine design elements, evaluate economies of scale for a full rollout and guide our investments in 2024 and beyond. Perhaps most importantly, we expect to demonstrate Red Robin’s potential in bringing all elements of the best guest experience together. This entails upgrading the interior ambience and exterior appeal of our restaurants to match the food and hospitality upgrades that we are already underway with. We expect the test group renovations to start in the fourth quarter and to be complete in late 2023 or early 2024. Third, removing costs and complexity. To fund our guest-facing investments, we identified a number of nonguest-facing cost savings opportunities. Our supply chain team has done a fantastic job collaborating with our vendor partners finding smart cost savings levers and recurrent products at the same or better quality at a lower cost.
Year-to-date, we have saved approximately $3 million and expect the savings rate to accelerate in the remainder of 2023. We also made the decision to exit the partnership with MrBeast Burger, virtual brand. This decision supports our operators by reducing complexity in our kitchens, allow them to focus on executing great food and hospitality under the Red Robin brand while driving more profitable sales. We wound down the partnership and we’re substantially complete with the exit in July. Fourth, optimizing the guest engagement. We are making great progress in this area as we refocus our efforts towards driving our vision of being the most loved brand in the communities we serve. Our restaurants are returning to what made them great in the past, a focus on local marketing to build relationships.
We are empowering each single unit operator with a local store marketing toolkit including engaging in fundraisers to support local community initiatives. To build visibility and excitement around our investments in food quality, we launched the coast-to-coast Summer of Yummm promotional tour, letting prospective guests sample our new and improved burgers, win prizes and have some real fun. The response has been great as we connect with local communities across the U.S. Our team is also focused on enhancing the ability to reach more guests efficiently through a digital infrastructure and omnichannel approach. This includes leveraging the strength of our owned marketing channels, including our approximately 12.9 million member loyalty program to drive traffic efficiently.
At the same time, we are making changes to the program, pivoting away from what we view as an overreliance on discounts, instead rewarding those who are truly most loyal to the brand. As we continue to make investments in our people and food, we intend to reduce our reliance on discounts going forward. We are currently designing and developing a new program structure that we believe will enhance the value of this program to our guests and to Red Robin. Our new Chief Marketing Officer, Kevin Mayer and the team have hit the ground running, and I will share more as this work progresses. Fifth, we are driving growth in comparable restaurant revenue and unit level profitability to deliver on our financial commitments. Q2 marked our tenth quarter of comparable restaurant revenue growth.
We achieved this despite the headwind of intentional reductions in marketing spend and discounting compared to a year ago quarter. These funds have been reinvested back into the guest experience to drive traffic that is stickier and sustainable over the long term. Traffic and sales in the second quarter were in line with our expectations. Credibility with our multiple stakeholders is critically important. With the results that have been achieved this quarter, we continue to demonstrate our ability to deliver on our financial commitments. Now let me turn the call over to Todd.
Todd Wilson: Thank you, G.J., and good afternoon, everyone. I will begin with a recap of our financial performance for the second quarter, then discuss the moderating inflation trends we are seeing and our updated financial guidance for 2023. Total revenues in the second quarter of fiscal 2023 are $298.6 million, an increase of $4.6 million versus the second quarter of fiscal 2022. The increase in revenue resulted primarily from an increase in comparable restaurant revenue of 1.5%. We continue to see strength in dine-in sales which increased 5.9% as compared to the second quarter of 2022. As a percentage of restaurant sales, dine-in sales mix increased in the second quarter and represented approximately 75% of sales. We expect this shift back to dine-in will continue as consumers seek the service and experiential aspects of dining with family and friends and as we step away from virtual brands.
Like many in the industry, we experienced year-over-year sales declines in the off-premise portion of our business and the third-party delivery segment in particular. We observed the greatest change in consumer behavior in the third-party segment with guests managing their check down by approximately 12% as compared to the second quarter of fiscal 2022. A bright spot in our off-premise business is catering. Catering generated approximately $23 million of revenue in fiscal 2022 and has grown 44% in the first half of 2023 and as compared to last year. The team has done fantastic work building and growing this business, and we believe plenty of opportunity remains. Restaurant-level operating profit as a percentage of restaurant revenue was 12.6%, a decrease of approximately 100 basis points compared to the second quarter of 2022.
Directionally, this change was expected, as we said on our last conference call, and the actual result was better than our internal target. The reduction was driven by inflation across all cost categories and our intentional investments back into the guest experience through both food quality and staffing levels. While we do continue to see rising costs, the rate of inflation has eased faster than we expected. Commodity inflation was 5% in the second quarter of 2023, down from 8% in the first quarter and 13% in the fourth quarter of 2022. We expect commodity inflation will continue to sequentially step down through the balance of 2023. Hourly wage inflation was approximately 5%, moderating from 6% in the first quarter. We invested approximately $5 million in the quarter to add staffing across the different roles G.J. reviewed earlier.
This amount substantially represents the quarterly run rate of our people investments and increased total labor to approximately 37% of restaurant revenue in the second quarter. We anticipate a lag effect from the time that we make investments like this until we see the return in the form of increases in guest traffic. In time, we expect these added resources to gain mastery of their role and build efficiency. In addition, we expect traffic growth to leverage our fixed costs. Together, we anticipate these levers can drive total labor as a percentage of restaurant revenue back to Red Robin’s historical run rate of approximately 35%. In other operating expenses, inflation continues to moderate, particularly in natural gas, as we lap the geopolitical events that drove increases last year, and electric costs now that we are past the big increases in absolute rates during the first half of 2022.
In addition, this expense category experienced lower third-party sales commissions due to the lower third-party sales mix. General and administrative costs were approximately $20.7 million, an increase versus the prior year of $1.9 million. The increase is led by accrual of higher incentive compensation expenses. We intentionally reduced marketing and promotional activity to support our hospitality investment. Selling expenses were approximately $6.2 million, a decrease versus the prior year of approximately $7.2 million, led by reduced spend in internet, local media and Donatos marketing costs. Discounts represented 3.9% of revenue in 2023, a decrease of 90 basis points compared to the second quarter of 2022. Adjusted EBITDA is $15.5 million compared to adjusted EBITDA of $11.9 million in the second quarter of 2022.
We ended the quarter with approximately $44 million of cash and cash equivalents and $25 million available borrowing capacity under our revolving line of credit. At quarter end, our outstanding principal balance under our credit agreement was $197.5 million and letters of credit outstanding were $11.7 million. During the second quarter, among other items, we used cash to repay $15.5 million of debt, purchase $5 million of stock and capital expenditures totaled $9.7 million. We have made two updates to our 2023 financial guidance metrics. First, we updated comparable restaurant revenue guidance from an increase of 2% to 4% previously to now an increase of 1% to 3%. This change is primarily due to the elimination of the MrBeast virtual brand.
Due to the economics of the agreement, we do not anticipate a material profitability impact. Second, we increased adjusted EBITDA guidance from a range of $70 million to $80 million previously to now a range of $72.5 million to $82.5 million. The increase is due to, first, our overperformance versus our expectations in the second quarter; and second, inflation rates easing more quickly than we previously expected. We reiterate all other measures from our prior guidance. I will add texture to one of the other guidance metrics. Our prior and current guidance for capital expenditures is from $45 million to $50 million. We are actively marketing additional properties for potential sale-leaseback transactions and remain optimistic these efforts will prove successful.
If we do complete additional sale-leaseback transactions in 2023, a we expect to reinvest a portion of the proceeds back in the business through capital expenditures, which could increase our 2023 expectation. Finally, as a reminder, as we think about the remainder of 2023, we will overlap Red Robin’s $10 meal deal promotion from the second half of 2022. We expect our marketing messaging in 2023 will support the launch of our now better burger with significantly less discounting than last year. While last year’s promotion successfully drove traffic in sales, the deep discount economics were quite penalizing to the profitability of the company in the second half of 2022. We anticipate shifting away from this type of heavy discount promotion in 2023 and on building a healthy, sustainable and more profitable traffic base.
In summary, we are extremely pleased with our financial performance through the first 2 quarters of the year, and have set up Red Robin to achieve and exceed our objectives for 2023. With that, I will turn the call back over to G.J.
G.J. Hart: Thank you, Todd. In closing, I remain incredibly optimistic about the future of Red Robin. Our mission is very simple, serving up an awesome American food and bottomless fun. We have great people doing the hard work of transforming a brand across all touch points, growing traffic and sales and increasing profitability. And we are having fun doing it. We have the right people, the right plan, an iconic brand with 50 years of amazing history and an amazing loyal guest base to build on, and I’m proud to be a part of this incredible comeback story. We are now happy to take your questions. Operator, please open the lines.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from the line of Alex Slagle with Jefferies.
Alex Slagle: I wanted to kind of touch on the same-store sales and traffic and maybe you could elaborate on those trends relative to the peer benchmarks as you progress through the quarter and into the 3Q? And what you think were the bigger drivers of relative performance? Because I think you would mostly pick the low-hanging fruit from bringing down the false waits and more — really shifting more to driving the sales per hour as you start to improve the service and food and experience and really leverage those investments. But imagine that does come pretty gradually. So if you could kind of talk about how that progressed and what the path ahead looks like as you ramp awareness and frequency.
Todd Wilson: Yes, Alex, Todd here. Absolutely happy to talk about that. As we saw the quarter progress and now thinking about the balance of the year, if you go back to Q1, we outpaced the industry, and especially on the marketing front, we had, I’d say, relatively similar levels of marketing support this year versus last year. And so with similar marketing, to your point, the benefit of eliminating the false wait, those types of things in our favor that drove the beat versus the segment. It was really the second half of the second quarter that we started to see the change in year-over-year spend. Now keep in mind, we very intentionally held powder dry, so to speak, in the first half of the year so that we’d have marketing dollars to work for us in the second half of the year to support the better burger.
But even with that, we’re going to face year-over-year declines in marketing spend. Again, we think that’s right because ultimately, we do have to make the guest experience compelling to build that healthier, stickier traffic that G.J. spoke about. But that’s part of really what you see in our sales guidance. We knew that hurdle was going to be out there. our sales guidance of 1% to 3% for the full year really implies flat-to-potentially negative sales in the balance of the year. That’s been contemplated in our numbers. And even with that, we’re able to deliver the much higher adjusted EBITDA guidance. But that’s how we’re thinking about the year. And so yes, we see the headwinds in the absolute numbers and relative to the segment. But part of this — really all of this is about the reset of this brand to set us up long term.
Alex Slagle: That’s good. Maybe you could talk about the opportunity to build awareness and get people in the doors to experience the improvements in the food and service and perhaps more details on the marketing plan. You mentioned a few things, but just whether you need to step beyond the digital, social and local or just how you’d weigh your options?
G.J. Hart: Yes. Alex, it’s G.J. here. At this point, the way we’re looking at it is we revamp our whole loyalty platform and focus on doing the right thing by our most loyal guests and being able to communicate them, that’s a process that we’re in the middle of right now. We will use that as we really have the launch of our third — or if we call it T3, our promotion with all better ingredients that we launched in early October. And that will be combined with things that we’re doing digitally that are very, very targeted to the communities that we serve and becoming much more efficient in terms of how we use media. That’s the current plan. In terms of going outside into something more of a more national media itself, I don’t see us doing that at the moment.
I think, candidly, we think that there’s enough going on here that from a word of mouth and an experience perspective that we’re going to gain traction pretty rapidly. And we’re seeing that early phases with what we’ve done with our flat top cooking. Just the changes we’ve made to date with the bun, the burger cooking as well as the way we presented on the plateware. So I feel good about where we are and when we — we’ll take some of this marketing spend and put it to work here later in the year.
Operator: Our next question comes from the line of Andrew Wolf with CL King.
Andrew Wolf : Just wanted to kind of ask a follow-up on the same-store sales guidance. First of all, for the quarter, did the discontinuation of the virtual brand, the MrBeast, was that in the second quarter at all? Or was that a comp that did not get penalized by that?
Todd Wilson: Yes, Andy, Todd here. A little bit in the second quarter, really more of a third quarter impact, but right at the tail end of the second quarter is when we really started to wind that down and we did exit.
Andrew Wolf : Okay. So if I just use the number there and kind of back into the back half, I mean Todd, you did say that you’d be flat to down. But I think I got — it’s a pretty wide range, plus 1% to down 3%. And — so is there something in some of the trends you’re seeing that — maybe a lot of variability in the weekly sales or daily sales that suggests you need that wider range? Or is that sort of just the typical prudence you’d like to have on your guidance instead of tightening it up I’m just trying to get to why that range might be so tight for the back half — wide for the back half?
Todd Wilson: Yes. I guess as we think about it, it’s not an intentional wide or narrow, just kind of the range that we feel like we need. The trends certainly can ebb and flow but we still frankly have, right, half of the year to go. So there’s a long way to still get through the balance of the year. And so not intentionally wide or narrow, just kind of the range that we felt comfortable with. And I think we would typically have at this point in the year.
