Red Robin Gourmet Burgers, Inc.
Q4 2021 Earnings Call Transcript

Published: 10 Mar 2022

[Operator:]

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated Fourth Quarter 2021 Earnings Call. Please note that today's call is being recorded. During today's conference call, management will be making forward-looking statements about the company's business outlook and expectations. These forward-looking statements and all other statements that are not historical facts reflect management's beliefs and predictions as of today and, therefore, are subject to risks and uncertainties as described in the Safe Harbor discussion found in the company's SEC filings. During today's conference call, management will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles but are intended to illustrate any alternative measure of the company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its fiscal fourth quarter 2021 earnings release on its website at ir.redrobin.com. Now I would like to turn the call over to Red Robin's CEO, Paul Murphy.

[Paul Murphy:]

Hello, and thank you for joining us today. I'm here with Lynn Schweinfurth, our Chief Financial Officer, who will review our quarterly results in detail after my opening remarks. Let me begin with our fiscal Q1 2022 sales trends before updating everyone on our business initiatives. Through the first period of our fiscal first quarter, comparable restaurant revenue was down 1.1% compared to the same period in fiscal year 2019, driven by trailing impacts of the surge of the Omicron variant and continued staffing challenges and team member exclusions. During the second period, as Omicron receded, guests started to feel more comfortable dining out, and we experienced fewer team member exclusions. As a result, comparable restaurant revenues increased to 5.3% compared to 2019 levels, and we are pleased with our period 2 sales trends and are seeing this momentum carry into the third period. When I joined Red Robin in 2019, one of the attributes that I most admired was the company's unique brand position in the industry. Our guests are everyday people seeking connection with friends and family across a diverse and multigenerational demographic. While the pandemic has certainly brought forth complex challenges, it has enabled us to improve our operating and financial model. I feel more strongly now than even before that our distinct Red Robin brand equities position us well for future growth. To complement the company's strengths in its brand equity and identity, we have aligned our strategic initiatives within the following 4 pillars

[Lynn Schweinfurth:]

Thank you, Paul. While our fourth quarter results were impacted by the Omicron variant and continued industry staffing and supply chain challenges, I remain confident in our future. Our improving dine-in sales trajectory, incremental, off-premises sales channels and continued dedicated execution of our business strategy together will drive meaningful long-term shareholder value. Turning to fourth quarter results. The 40.1% increase in fourth quarter comparable restaurant revenues, compared to 2020 was primarily driven by operating our dining rooms at increasing capacities. Compared to the fourth quarter of 2019, comparable restaurant revenue was down 0.7% with a sales trajectory that faced headwinds through the holiday season with the onset of the Omicron strain. However, we have seen improvement through the second period and into the third period of our first fiscal quarter as Omicron has receded, as Paul mentioned. We delivered our seventh consecutive quarter of off-premises sales mix and more than double pre-pandemic levels of approximately 14%, comprising 31.4% of total food and beverage sales compared to 43.9% and 14% in 2020 and 2019, respectively. Importantly, we have been able to retain the same level of fourth quarter off-premises sales dollars in 2021 as 2020 or approximately $85 million demonstrating the lasting improvements made in our off-premises sales channel since 2019. As a percentage of total off-premises sales, third-party delivery represented 54.8%, to go represented 36.6%, catering represented 4.9%, and Red Robin Delivery represented 3.6%. Full year net cash provided by operating activities was $47.3 million, while cash used in investing activities was $42.2 million, and cash provided by financing activities was $1.6 million. Since the end of 2019, we have paid down $29.9 million in debt. We completed our lease renegotiation and restructuring initiative that we began in 2020 as a result of the COVID-19 pandemic, resulting in 3% to 4% occupancy savings over remaining lease terms on restructured leases. We ended the quarter with liquidity of approximately $57.7 million, including cash and cash equivalents and available borrowing capacity under our revolving line of credit. We intend to continue effectively managing our bottom line and dedicate our free cash flow over the next several quarters to reinvesting in our restaurants, infrastructure and systems while maintaining flexibility to pursue strategic initiatives that will generate profitable sales growth going forward. Now turning to some of the specifics related to the fourth fiscal quarter. Q4 2021 comparable restaurant revenues increased 40.1% driven by a 26.6% increase in guest traffic and a 13.5% increase in average guest check. The increase in average guest check resulted from a 7% increase in menu mix, including incremental sales related to checks that include Donatos Pizza, a 4.2% increase in pricing and a 2.3% decrease in discount. Fourth quarter total company revenue increased 41% to $283.4 million, up $82.3 million from a year ago driven by operating our restaurants at increased capacities in Q4 and lapping prior year sales more aggressively impacted by the COVID-19 pandemic. Total company revenue decreased by 6.4% compared to the same period in 2019, primarily due to closures of unprofitable restaurants. Restaurant level operating profit as a percentage of restaurant revenue was 13%, an improvement of 6.8 percentage points compared to 2020, primarily due to the following

[Paul Murphy:]

Thank you, Lynn. We believe that our ability to deliver the highest quality guest experience is key to driving top line growth, profitability and long-term shareholder value. With this mindset, we are executing our business strategy, overcoming obstacles and pushing ourselves forward to a bright future for our brand. Our team has been incredible in exhibiting their passion for Red Robin and finding solutions to help us navigate through the operational pressure points as they have arisen. They are why I am so bullish as to our direction and appreciate all that they do for our company each and every day. And with that, let us now open the call for questions.

[Operator:]

Our first question comes from Alex Slagle with Jefferies.

[Alex Slagle:]

The jump in the February sales was pretty notable relative to like the previous levels back in the fall and then broader trends we’ve seen, but I would have expected more headwinds just given the brand’s significant exposure to the Western states that have held on to the mask mandates a bit longer than the rest of the country. California rolling off. But Washington, Oregon, I guess, still to come. Just wondering if you could kind of talk about what you’ve seen in those states that have rolled off the mandates if that’s a notable impact.

[Paul Murphy:]

Alex, this is Paul. It is a notable impact as the restrictions begin to roll off. And you’re correct, California kind of led the way and we had restrictions in Washington State and Oregon and also in Illinois, there were some pretty strict restrictions in Cook County and then some smaller markets, but we’ve seen just a real change in the sales trajectory in those markets as the restrictions fall off. And quite honestly, it’s something that is pretty impactful for the whole market and then for the brand itself. So I mean we’re pleased to see that not only the Omicron fading, but the – some of the other restrictions that kind of came in all around it fading off, and it is having a real positive impact on our business.

[Lynn Schweinfurth:]

And I would just add, Alex, that we’re also seeing off-premises remain pretty consistent, but our dine-in sales are incrementally building. And that really helps the trajectory, and it also will help future flow-through as well.

[Alex Slagle:]

Got it. And then just a question on the Royalty program and the digital bordering assets. And I mean, Red Royalty is pretty large. I mean the membership base relative to your size and peer group, and kind of interested. You touched on some of that, but if you could expand further on the opportunity to leverage this more meaningfully in ‘22. And if there’s any initial results you’ve seen from that, the new loyalty rollout. I know it’s pretty early in the mobile ordering functionality if there’s like changes in average check or frequency or anything else you could comment on.

[Paul Murphy:]

Well, the – first of all, we’re very pleased to have gotten it out the door, so to speak, in Q4, both the new app and then the improvements to the overall royalty program. But I think that just a few of the things. The first thing around the new app, it just makes the whole ordering process much smoother, much more intuitive, and so we’re very, very pleased with that. Just kind of a couple of stats that in – during Q4, we had almost 0.25 million new registrations in Q4. The royalty percentage of revenue was up about 2.4% over Q4 of 2019, which is at about $41.7 million. And the average check for royalty is about $3.90 higher than a non-royalty member. So quite honestly, they’re just more profitable than the non-members for us. So we see that the sales per guest for a royalty member is about roughly $134 for the year and about kind of mid-40s for a non-loyalty member. So it is a real driver for the brand. And what the – I think both the app and the royalty program do is allow us to better communicate with that royalty member to get to know them better. And in the new app, the royalty program is live on that app, so it just gives them another reason to be a part of the royalty program. I think as we mentioned, it was a soft launch. It’s really in this month moving forward, that we’re going to begin to be more aggressive in introducing it to the marketplace. Very happy with the impact, both top line and bottom line so far, but we think that much more to come as we get aggressive about, frankly, marketing it and doing a lot of our initiatives through the app and the loyalty program.

[Alex Slagle:]

Okay. And just 2 questions on the ‘22 outlook and the $80 million to $90 million adjusted EBITDA forecast. And one, I guess on – if you could quantify the impact from Omicron in the first quarter, how that maybe set it back at all, if that was material. And then just assumptions that you have underlying the recovery of the dining room capacity and off-premise stickiness, if you can provide any color on that.

[Lynn Schweinfurth:]

Yes. I’ll start with Omicron. I mean it’s incorporated into the range that we provided as part of guidance. We saw an impact in December initially that carried forward pretty much to the month of January, and then we started to see trends improve as we’ve already indicated.

[Paul Murphy:]

I would say on the dine-in business, Alex, kind of starting mid-January, we’ve just seen a nice cadence of dine-in improving kind of week-over-week. And we believe as restrictions continue to recede and guests become even more kind of, I think, attuned to the new normal that, that part of the business is going to continue to grow. And I think as you know, that’s our most profitable part. So we’re excited to see the impact that, that can have, notably on the top line, but also on the bottom line as we move through this year. So to Lynn’s point, in the guidance that we gave, that takes into account the impact of Omicron certainly in P1.

[Operator:]

Our next question comes from Todd Brooks with The Benchmark.

[Todd Brooks:]

A couple of quick questions, if I may. There was a comment that was in the release talking about margin pressures persisting into fiscal '22, but the trajectory improves year-over-year. I just -- I want to clarify. Are you guys talking about margin pressures versus fiscal '19 versus fiscal '21? What should we be thinking about maybe kind of sequentially exiting out of Q4 of '21 and into '22 from a restaurant level margin standpoint?

[Lynn Schweinfurth:]

Yes. I think what the intention of that language was really to demonstrate that we would see higher inflation in early 2021 and through -- or 2022, excuse me, through the mid part of the year because we had very low costs in 2020 at the same time period. And then as we got to the middle of the year last year, we started to see inflation. So our year-over-year increases will decline through the year, and that was really the intention for some of the language included. I will also say we believe with an improved sales trajectory, with improved staffing through this year and with a reduction of transitory costs. That will have a sequential improvement on our margins as we proceed through the year.

[Todd Brooks:]

Okay. Great. And then maybe to flip it around to the back side of the year, I know there was a comment that you're looking for restaurant-level margins in '23 to equal what you generated in fiscal '19. Can we talk about maybe what that implies for an exit rate? I'm just trying to figure out how much of the improvement we see over '22 getting back there or how much of it is hanging on further recovery in '23 to get back to those high 17%, 18% levels.

[Lynn Schweinfurth:]

I would say we would be within a percentage point in terms of the fourth quarter exit rate. compared to the 2019 full year margin.

[Todd Brooks:]

That's very helpful. And I believe you talked about -- and I think, Paul, in your verbal comments the room to take price, but I think in the release you talked about an actual plan price increase. Can we talk maybe timing and magnitude on that?

[Lynn Schweinfurth:]

Yes, I'll start, and Paul can chime in. It's going to be in the mid-single digits based on at least what we expect right now. We typically take pricing 2 times a year. We're taking it in a little bit more of a blended way in the first half of this year. And then likely in the fourth quarter, we'll take another -- or we'll have another pricing event.

[Todd Brooks:]

Okay. Great. And then just one final one, and I'll jump back in the queue. The SG&A guidance, the $145 million to $155 million versus, I think, $123 million in 2021. What's driving kind of a little bit of a step function up in spending on those line items?

[Lynn Schweinfurth:]

A few things. One is we are planning to spend more in terms of advertising and selling costs. We really muted some of our marketing efforts in 2021 as we were challenged with staffing and some of our other jurisdictional challenges. So we'll try to get to more of a normalized spending rate in 2022 from a selling perspective. And then on the G&A front, we certainly have some inflationary costs related to G&A. We also have a general manager conference that was virtual only in the prior year. And then actually, the design of some of our stock-based compensation is resulting in higher expense recognition in 2022.

[Operator:]

Our next question comes from Brian Vaccaro with Raymond James.

[Brian Vaccaro:]

I wanted to go back to the quarter-to-date improvement that you're seeing on sales. And just to make sure we're all on the same page, could you give us a sense of where average weekly sales are currently running exiting Omicron? And maybe also remind us what normal seasonality would look like as you move into the spring months.

[Lynn Schweinfurth:]

Yes. I'll start with normal seasonality. We see a drop in seasonality in January and February, and then it starts to pick up in March and April as we get to the spring months. And then in terms of average weekly sales -- sorry, Brian, I can't remember the number. I have to look at some of our details here.

[Brian Vaccaro:]

No problem. No problem.

[Lynn Schweinfurth:]

So average weekly sales in P1 we're almost 52,000. And then in P2, we're almost 54,000.

[Brian Vaccaro:]

Okay. Great. That's helpful. And I want to ask on the staffing front as well and specifically your hourly staffing levels. I think you said around 85% of par levels exiting 2021. And I just wanted to -- if that's right, I just wanted to clarify if that par level, is that the same as in 2019? Or can you frame where your current pars are versus pre-COVID? And then could you give any -- give us a sense of to what degree you've seen staffing levels improve further exiting Omicron compared to that 85%?

[Paul Murphy:]

Brian, this is Paul. No, the par levels are -- depending on the volume of the rest on anywhere from 10% to 12% higher than 2019, and that is taken into account the stickiness of the off-premise business. And then obviously, the trajectory that we're beginning to see in the dine-in businesses I mentioned a little earlier, we're starting to see a real week-over-week improvement in dine-in. We're starting to see just I think a couple of things in the numbers. I'll speak on the management side. We feel that we're just about fully staffed on the management side of the business and have seen the turnover rate there drop back down to what I'd call kind of more of a normalized range. On the team member side, we're seeing an ability to drive more applicants than maybe we did kind of during the Omicron time. And we've been seeing a nice steady move on that, but it's still a little bit slower. As we mentioned in the call, we have engaged an outside resource to help us with team member recruiting to basically give -- internally help our internal teams to help move that along a little bit faster. So I feel good about the progress on that. As I said in my prepared remarks, it's -- let's get the management stabilized where it needs to be first. And we feel like we're there today, and then we feel like that's going to help accelerate the team member part as we have buttressed that with the outside resources. And so we're -- we feel like we're on a good trajectory, and that's even going to enable us to move quicker in growing our dine-in business because dine-in is all about capacity, just to be very blunt about it.

[Brian Vaccaro:]

Yes, yes. Understood. Okay. And then just lastly for me on the commodity front. And sorry if I missed it, but what was your year-on-year commodity inflation on the basket in the fourth quarter?

[Lynn Schweinfurth:]

It was roughly 9%.

[Brian Vaccaro:]

Okay. And Lynn, as you think about the mid-single -- mid- to high single-digit guide for the year, what's that cadence look like first half, second half? And then could you also give us an update on the percent of your basket that you're currently contracted on? And any items of significance that you're currently not contracted on?

[Lynn Schweinfurth:]

Okay. Well, as it relates to commodities, we believe we'll be in the low double-digit to mid-double-digit inflationary comparison in quarters 1 and 2. And then it drops down to more of a single-digit increase in Q3, and then we think it will be flat to slightly negative in Q4. From a basket perspective, we have the majority of our commodities locked in. But really in the middle part of the year, we do have some contracts we'll be negotiating around bread and fry oil, in particular, and then also some of our condiments like dressing.

[Operator:]

Our next question is a follow-up from Todd Brooks with The Benchmark.

[Todd Brooks:]

Just one quick follow-up. Obviously, real success over kind of the back half of the year with the LTOs. And you talked about continuing Cheesy Bacon Fondue into Q1, which is a plus operationally. Have we juggled the LTO calendar because we're continuing that product? And I guess, Paul, if you were looking and wanted to put some qualitative thoughts about what you've got coming up from a new product standpoint, we'd love to hear about that.

[Paul Murphy:]

We did juggle the LTO calendar slightly. In fact, in a couple of weeks here, we'll be bringing out the next LTO. And from a qualitative standpoint, the Q2 and the Q3 LTOs, I'm extremely jazzed about. I think that they're right on the mark, and I kind of don't want to quite give it away yet because it's also going to be part of the introduction of the new website that we're rolling out and as we start to push the app, but I think it's a great product. And the last 2, the Scorpion Burger and the Cheesy Fondue Burger, I foresee these next 2 will be in the same category as certainly in the top 10 of any LTOs that the brand has ever done. So I think we -- sometimes it's better. I think that with the scale-down menu, I think the promise that we're giving the LTOs, I think we've hit on a formula that really is helping us to drive not only the top line, but the LTO performance, which also is helping us to drive the profit on that. And I think that with scale-down menu, quite honestly, they don't get lost, so I'm very pleased with the line-up that we have.

[Todd Brooks:]

That's great. And can you remind us what we're running for kind of menu item count now versus where the bread was pre-pandemic?

[Paul Murphy:]

Well, we took it down about 35% pre-pandemic. The one thing, though, that I'd certainly be upfront about is that adding Donatos Pizza into locations as we will through the balance of this year into next year, does add a few. But we have today no intent of driving that number back up because we think the performance of the LTOs is helping to keep the menu fresh and exciting for people and also gives us the ability to react very quickly if there are new trends out there in the marketplace.

[Todd Brooks:]

That's great. And the final one for me. You talked about the success with the virtual brand as a sales layer, and then I think you mentioned that you're launching a licensed virtual brand also. Any details you can give us on that, either timing-wise or maybe concept or what's going on there?

[Paul Murphy:]

Well, I think we'll be, certainly by the end of Q2, fully launched with the licensed brand. At that point, we'll be better -- in a better position to give more detail about it. But overall, obviously, you saw the contribution rate in Q4 at 8.4%. So very happy so far with the performance. I think there's more legs there. But Todd, it's still very early in the life cycle of virtual brands. We're just trying to see where does it go. And quite honestly, we always fall back to making sure that it doesn't impact our core business, it doesn't get in the way of executing the core Red Robin brand. So always looking at the complexity of it. And so far, so good. But we'd like to see where does that part of kind of third-party home delivery, where does that really go? I don't think anyone's quite sure as to the long-term future of that.

[Lynn Schweinfurth:]

Great. And Todd, I might just -- and going back to your G&A question, I was remiss in not mentioning variable base compensation on being higher in 2022 versus 2021. That was another category.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Paul Murphy:]

Well, thanks, everybody, for attending the Red Robin fourth quarter call, and we look forward to speaking again at the end of the first quarter and look forward to a great 2022. Take care.

[Lynn Schweinfurth:]

Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.