Red Robin Gourmet Burgers, Inc.
Q1 2023 Earnings Call Transcript

Published: 24 May 2023

[Operator:]

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated First 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 the generally accepted accounting principles, but are intended to illustrate an alternative measure of the company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its first 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.

[G.J. Hart:]

Good afternoon, and thank you all for joining us today. With me is Todd Wilson, our Chief Financial Officer, who will review our first quarter results and discuss our upwardly revised 2023 financial guidance outlook among other items after I conclude my remarks. We are pleased with our performance to start 2023 and the traction we are seeing as we roll out our North Star plan. I want to thank our operators and restaurant and support center team members. You are doing a fantastic job. Your dedication and hard work drove our success in Q1 and will carry us into the future. Our strong results in the first quarter are a great first step on this journey. And we know this is a comeback that will take time to fully deliver. We are encouraged to see early proof points of success. First, guest satisfaction scores have now increased 5 percentage points as compared to 2022. We are seeing gains across the full portfolio with the greatest increase in our bottom quartile restaurants as we would expect. Second, guest wait times and false waits have declined substantially as we staff our restaurants properly. A year ago, more than 10% of our guests reported waiting more than 15 minutes to be seated. Now that it's down to only 2% of our guests. Shorter wait times result in happier guests and reduced walkaways. Third, first quarter results exceeded the Black Box Casual Dining industry benchmark for both same-store sales and traffic. That beat increased as the quarter progressed. We attribute the speed to the benefits of capturing sales that we previously lost due to false waits and extended wait times. Red Robin has a 16-week first quarter is unique as compared to many of our peer restaurant companies, who more typically report a 13-week first quarter. As a point of comparison, based on our point-of-sale sales data, our comparable restaurant sales increased 10% in the first 13 weeks of the quarter. We also celebrated over 700 new sales records established in the first quarter. These are hourly, daily and weekly high watermarks per restaurant. In a brand that is nearly 50 years old, to set more than 700 new records is a testament to the incredible work of our restaurant teams and the overall direction of our company. Lastly, we printed a meaningful first step to restore restaurant level profitability to historical levels and significant gains in adjusted EBITDA. As I initially shared in January, our blueprint for the comeback of this iconic brand is our Five-Point North Star Plan. The changes we are implementing are designed to cement our competitive positioning, drive sustainable growth and build long-term shareholder value. Now I will share updates on each pillar of the North Star plan. Number one, we are transforming to an operations-focused restaurant company. This change is well underway as we are involving our frontline operators in all key decisions. With the start of the second quarter, we launched our market partner program to all multiunit operators. This program changes the compensation structure for these partners to reward them based on the profits of the restaurants they oversee. By making this change, these leaders are incentivized and rewarded for driving and delivering results. We are learning from the rollout of this multiunit operator program and will incorporate this learning into our single-unit operator program, which we expect to launch with the start of 2024. Number two, elevating the guest experience. Our top 2 investment priorities related to the guest experience are

[Todd Wilson:]

Thank you, G.J., and good afternoon, everyone. I will begin with a recap of our financial performance for the first quarter, which is a 16-week quarter and then walk you through our upwardly revised financial guidance for 2023. Total revenues in Q1 were approximately $418 million, an increase of $22.4 million versus the first quarter of fiscal 2022. The increase in revenue resulted from an increase in comparable restaurant sales of 8.6%, the ninth consecutive quarter of positive comp sales growth and an acceleration from the 2.5% growth we posted in the fourth quarter of 2022. Comparable restaurant traffic increased 0.6%. The balance of our comparable sales growth was due to menu price increases and favorable sales channel mix. Of note, dine-in sales increased 16% as compared to the first quarter of 2022. Dine-in sales represent 74% of restaurant sales in the first quarter. We believe these figures reflect a broad post-COVID normalization and a further proof point of the effectiveness of our North Star plan with guests seeking and enjoying the dine-in experience at Red Robin. Restaurant-level operating profit as a percentage of restaurant revenue was 14.7%, an increase of approximately 70 basis points compared to the first quarter of 2022 and a 330 basis point sequential increase from 11.4% in the fourth quarter of 2022. While we experienced cost inflation across many categories, we were able to grow restaurant-level operating profit margin through the growth in comparable restaurant revenue and the initial implementation of cost savings measures. Commodity inflation was approximately 8% in the first quarter of 2023 and moderated faster than expected from the 13% we experienced in the fourth quarter of 2022. We anticipate year-over-year inflation will continue to sequentially step down through the balance of the year. In labor expenses, hourly wage inflation was approximately 6%. We also invested approximately $3 million in the quarter to add staffing in the operational roles G.J. mentioned earlier. Additionally, incentive compensation expense for our restaurant management teams increased over $1 million versus the first quarter of 2022 due to the significant gains in sales and profit performance the restaurant teams produced. While these are added costs we see real evidence of the benefits of these investments in guest satisfaction, sales and profit results. Even with these investments, total labor costs declined 60 basis points as compared to the first quarter of 2022, led by leverage from the sales gains. In other operating expenses, we experienced lower third-party sales commissions resulting from lower third-party sales mix, which was generally offset by higher repair and maintenance costs. General and administrative costs were $26.8 million, an increase versus the prior year of approximately $2.5 million. The increase is led by accrual of higher incentive compensation expenses and legal and professional fees associated with the sale leaseback and franchise acquisition transactions, partially offset by reductions in staffing levels. Selling expenses were $7.7 million, a decrease versus the prior year of approximately $2.2 million, led by reductions in print, agency and website spending. Adjusted EBITDA was $36.1 million compared to $28 million in the first quarter of 2022. Capital expenditures totaled $16.1 million and were primarily related to $7.4 million of reinvestment into existing restaurants and $5.9 million into the continued expansion of Donatos. We anticipate that 2023 CapEx related to Donatos will be complete in the second quarter of 2023 as the installations for 2023 were front-loaded in the year and are now substantially complete. We expect to continue the expansion of Donatos in 2024. We ended the quarter with approximately $49 million of cash and cash equivalents and $10 million available borrowing capacity under our revolving line of credit. At quarter end, our outstanding principal balance under our credit agreement was $213 million and letters of credit outstanding were $9 million. In view of our great start and outperformance in Q1, we are raising our financial guidance expectations for fiscal 2023. Our revised guidance is as follows

[G.J. Hart:]

Thank you, Todd. We have recently announced appointments to our leadership team, including the addition today. I'd like to welcome Jyoti Lynch, our Chief Technology Officer; Kevin Mayer, our Chief Marketing Officer; Mark Simpson as Interim Chief People Officer, and congratulations to Jason Rusk on his promotion to Chief Business Development Officer. These changes complete our leadership team. I am confident these leaders will help drive the success of Red Robin and empower our people to achieve their full potential. In closing, our mission is very simple, serving up awesome American food and bottomless fun. We are empowering our operators and providing them tools and resources to succeed. The initial proof points of success are evident in our Q1 results, and we will continue to execute on our strategic plan. I remain incredibly optimistic about the future of our company, and thank you all for your interest. We will now be happy to take your questions. Operator, please open the lines.

[Operator:]

Our first question comes from the line of Todd Brooks with The Benchmark Company.

[Todd Brooks:]

Thanks for taking my question and congrats on some really excellent results and evident improvement in the quarter. Great job. Wanted to jump in, it's kind of a combined question. Two big areas of opportunity that you had cited were attacking the false waits and supply chain efficiency, you pointed at real progress against both in the quarter. How much of that opportunity has been harvested? How much is still in front of us as we start to think about the model and revenue trend going forward?

[Todd Wilson:]

Hey, Todd. This is Todd here. I'll start and then let G.J. add in. But he quoted some numbers that I think give you some guidance, at least on the false wait, right? We were -- as we started to look at this data, we were over 10% last year, down to 2% most recently. So super encouraging to see the progress and still a little bit of room to go, but we feel like we've made very quick significant progress there. In terms of the cost savings, and in particular, as it relates to the supply chain, really very early innings in Q1. We ultimately captured a little bit over $1 million of the save in Q1. We expect that will ratchet up really quickly in Q2 and really hit its full run rate in Q3 and Q4. So we're on the pace that we expected. And so that was fully in line with our expectations. But I would say as far as cost saves, we expect that to ramp quickly through the balance of the year.

[G.J. Hart:]

And Todd, I'll just finish up by saying that from a false wait perspective, we have some room to go, but we've made significant progress. But where we're really going to make progress as our staffing levels and our training is fully in place, is on a sales per hour perspective. You heard me quote we broke 700 sales records during the period, and that was individual sales records per hour, per week, et cetera. But the sales per hour levels that we are seeing from some of our best operators are incredible. And so that gives me great hope on what we can do here in the future.

[Todd Brooks:]

That's great. And my final one, and I'll jump back in queue. With the rapid progress that you showed with these results and just some of the acceleration in CapEx spending and maybe faster than expected upgrading of the equipment platform behind flat-tops. Is the overall plan as you've started to dig in and execute against North Star, which I know you gave yourself a three-year window, do you feel like it's accelerating as you guys really started to work against the goals there? It feels like maybe we're getting some of the initiatives pulled forward here given the early strength that we've seen in the first part of the year.

[G.J. Hart:]

Well, Todd, listen, we want to move as fast as we earn our way to do so. And that's exactly what we're trying to do to say that we're ahead of the three-year plan. It's really not -- I'm really not ready to say that yet. There's so much uncertainty out there in terms of the economy and all the things that we all know that are out there from a macro perspective. So are we pleased where we are? Yes. I've been here 8 months and I feel like this team has come around and we're doing some incredible work. But I wouldn't say that we're ready to raise the flag to say, hey, we're feeling super, super bullish about we can move this up significantly, but we are happy where we are.

[Operator:]

Our next question comes from the line of Andrew Wolf with CL King.

[Andrew Wolf:]

Congratulations on all the progress, both obviously with your customers, but financially as well. I just had kind of a simple question. If I understand it, so you -- over 10% of the guests were waiting a year ago and now around 2% are waiting. So obviously, a lot less of them leave. But obviously, that gap is -- how do you correlate that? Or how do you measure how many of them actually walked away and didn't -- in other words, how do you measure what the boost is to traffic based upon that information?

[Todd Wilson:]

Yes, Andy, this is Todd. The data that we're capturing there is through our survey methodology. And so it's as reported by our guests. One of the key pieces, as G.J. and myself and this team got in, that was striking to us was we saw rates reported across all dayparts, all weak parts. And just to give an example there, right, we would look at our data and see our guests on an extended wait randomly, right, at 03

[Andrew Wolf:]

Got it. I think last quarter, you may have said this, obviously, the biggest goal is to build long-term traffic on an uptrend and outperform as you are doing now. Again, the sort of a simple question. I mean, is that going to be -- with the store base perhaps not growing rapidly in the near term, just regaining lapsed customers, people who haven't come, maybe stopped coming at all through previous disappointment or is it going to be -- especially with the loyalty programs as developed as Red Robins to help with that? Or do you envision it being gaining new customers from either other chains or from who are dining at home?

[G.J. Hart:]

Well, I actually think the answer is both we're working towards both. And we're just getting started. When we think about the first quarter, it's really around hospitality improvements or service, if you will, we call hospitality here. When we start implementing in the second quarter here, these changes that I spoke about from cooking to what we're doing with burgers and into the third and fourth quarter, it's going to be really, really interesting what happens, particularly with those lapsed users and even our existing guests that come with us and dine with us a lot, they are our most loyal guests. So in terms of acquiring new guests, we think that the word of mouth and some of the work that we'll do from a marketing perspective when we’re ready, will help us there as well. We've got some pretty exciting things that we'll be speaking about later in terms of how we do that. But the answer is both.

[Andrew Wolf:]

And I guess the last thing I wanted to ask was on the -- just the food cost leverage, which was a big positive surprise how I was modeling things at least. I don't know if you call it vendor consolidation or however you think about it. But obviously, it seems like the cost saves came quite quicker. I mean I guess I'm trying to ask -- Todd might have asked this as well, but clearly, this wasn't all just lower inflation, right, or disinflation because costs were still up. So I assume a lot -- really the result is mainly giving vendors the opportunity to maybe sole source and make more money through volume. But again, how much of -- just sort of could proportionalize that for us. And I guess the other question obviously is how much more is to come with that?

[Todd Wilson:]

Yes. And I tried to add a little bit of texture there. We -- going, kind of, point-by-point to your comments, we did see commodity inflation that we talked about in the prepared remarks. So there was continued inflationary pressure there. Yes, I would point you to, we do have a little over 7% of price in place in the first quarter, and that certainly helped to offset that. As it relates to the cost saves, though, the Q1 number was a little over $1 million, certainly very much in line with what we expected, but also an expectation that we have a clear line of sight that, that number will accelerate through the balance of the year. And so those are really the key drivers within food costs.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to GJ Hart for closing remarks.

[G.J. Hart:]

All right. Well, thank you all for joining us today. We are at an exciting part of the journey here at Red Robin. We appreciate your support, and we look forward to reporting next quarter on our progress. So thank you guys very, very much. Take care.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.