Red Robin Gourmet Burgers, Inc.
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

[Operator:]

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers, Incorporated Second Quarter 2020 Earnings Call. Please note that today's call is recorded. During today's 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 an alternative measure of the company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its fiscal second quarter 2020 earnings release and supplemental financial information related to the results on its website at www.redrobin.com in the Investor Relations section. Now, I would like to turn the call over to Red Robin's CEO, Paul Murphy.

[Paul J.B. Murphy III:]

Hello and thank you for joining us. Let me begin by saying that I hope everyone on the call and your loved ones are safe and healthy during these tumultuous times. With me today is Lynn Schweinfurth, our Chief Financial Officer, who'll provide a detailed update on our liquidity and then review our quarterly results. But first, I would like to discuss where we are with the business and what our plans are for the remainder of the year and beyond. Following the initial outbreak of COVID, we set the following priorities for our business

[Lynn S. Schweinfurth:]

Thank you, Paul. Before I review our second quarter financials, I will discuss a few other relevant topics starting with liquidity. As of August 9, we had liquidity of more than $103 million, including cash and cash equivalents and available borrowing capacity under our revolving line of credit. We believe our liquidity is sufficient given expected cash tax refund, seating capacity expansion currently underway, improved flow-through due to reduced restaurant level and corporate cost and continued cash management efforts. Due to these same factors, I currently expect we will generate positive cash flow before the end of the year and I'm confident in our long-term financial viability. However, given the recent resurgence of the pandemic and the resulting closure of our California dining room, we currently estimate that we will still be losing cash in the fiscal third quarter, with a weekly cash burn rate of approximately $2 million, including the impact of increased occupancy payments compared to the second quarter. During the second quarter, we made meaningful progress in restructuring many of our leases. We appreciate the long-term perspective that our landlords are taking as we continue to engage in ongoing discussions. In response to the COVID-19 pandemic, the company undertook several other measures to preserve liquidity and reduce costs, some of which are meaningful, permanent reductions to better position Red Robin for recovery and long-term growth. We intend to dedicate a significant portion of our free cash flow once achieved over the next several quarters to delevering our balance sheet. During the second quarter, we amended our credit facility, which provides covenant relief through the third quarter of 2021. In addition, we filed a $40 million shelf registration statement with the SEC for the purpose of raising incremental capital as needed to satisfy a condition in our credit facility amendment of raising at least $25 million by November 13, 2020. This condition was satisfied within the first day of our aftermarket equity offering in June when the company raised almost $30 million. As we confirmed last quarter, we are taking advantage of the tax benefits and deferrals as allowed for by the CARES Act. More specifically, we are currently deferring payroll taxes and expect a favorable rate impact of net operating loss carrybacks which could generate between $14 million and $17 million of cash tax refunds within the next 12 months. Now, in terms of the fiscal second quarter, Q2 2020 comparable restaurant revenues decreased 41.4%, driven by a 38.5% decline in Guest traffic and a 2.9% decrease in average check. Overall, pricing increased 2.2% and we also realized an additional 0.6% increase from our decision to lower discounting. Mix decreased by 5.7%, driven by lower sales of beverages and Finest burgers due to higher off-premise sales and consistent with off-premise sales mix we saw pre-COVID-19. Q2 total company revenues decreased 47.7% to $161.1 million, down $146.9 million from a year ago, driven by operating our restaurants at a reduced capacity in response to the COVID-19 pandemic and closed restaurants. Dine-in sales were down 76.2%, partially offset by off-premise sales growth. Our continued focus on our off-premise service model drove meaningful growth in the channel, which as Paul mentioned, rose 208.7% in Q2, representing 63.8% of total food and beverage sales for the quarter. This compares to off-premise sales representing 26.3% in the first quarter of 2020 and approximately 14% prior to the pandemic. We generated restaurant-level operating profit in the second quarter. As a percentage of restaurant revenue, restaurant-level operating profit was 2% and improved through the quarter, coming in better than our internal projections, with higher sales and continued focus on managing costs. Other operating costs included higher third-party delivery costs from increased sales in this channel and sales deleverage impacts on restaurant supplies, utilities and technology costs, offset by reduced maintenance spend. Labor costs as a percentage of restaurant revenue increased, primarily due to sales deleverage and higher hourly wage and benefit rates, driven by shifting labor mix in support of our off-premise operating model, partially offset by lower restaurant manager incentive compensation. Occupancy costs as a percentage of restaurant revenues were driven by the impact of sales deleverage on rent expense and other real estate costs. Cost of goods sold increased 30 basis points primarily from higher ground beef prices, partially offset by lower discounts and waste. General and administrative costs were $14.1 million, a decrease versus the prior year of $7.7 million, primarily driven by lower Team Member salaries and wages, benefits and lower travel and related expenses and professional costs due to cost reduction initiative post-COVID-19. Selling expenses were $5.6 million, a decrease versus the prior year of $7.9 million, primarily driven by pivoting from local and national media to digital marketing, which has proven to be an effective and efficient medium for interacting with our Guests during the COVID-19 pandemic, while taking advantage of our access to the over 9 million members of our Royalty Program, as well as reduced expenses associated with our gift card program. We recognized a tax expense of $3.7 million in the second quarter and the change in the effective tax rate is due primarily to the recognition of a valuation allowance on our tax credit, partially offset by a decrease in earnings and NOL carrybacks allowed as a result of the CARES Act. Despite the valuation allowance we recognized for financial statement purposes, we expect to recognize the cash tax benefit for the $79 million carry-forward balance within the related 20-year period. During the quarter, we recognized other charges of $14.5 million, primarily triggered by the COVID-19 pandemic. These charges included $7.6 million related to restaurant closures and refranchising costs; $5.3 million related to restaurant asset impairment; $1 million in board and stockholder matter cost; and $0.7 million for COVID-19-related charges, including purchasing personal protective equipment for our restaurant Team Members and Guests and providing emergency sick pay to our restaurant Team Members. Q2 adjusted EBITDA was a loss of $15.3 million compared to positive adjusted EBITDA of $25.5 million in Q2 2019. Q2 adjusted loss per diluted share was $3.31 as compared to adjusted earnings per diluted share of $1.03 in Q2 2019. Now, turning to the balance sheet, at quarter end, our outstanding debt balance was $206.6 million and letters of credit outstanding were $7.5 million. In early January, we refinanced our credit agreement with our lenders, securing a $300 million credit facility, which provides liquidity through early 2025. As previously mentioned, on May 29, we further amended our credit agreement to ease financial covenant requirements through the third quarter of 2021 and our recent capital raise requirement hadn't been fulfilled in June. We ended the quarter with $26 million in cash and cash equivalents and our cash burn rate was at the low end of our previously disclosed range at $1 million per week with partial occupancy payment. Our weighted average interest rate was 4.2%. In response to the uncertainty related to the COVID-19 pandemic, we have suspended our share repurchase program, as well as annual and long-term guidance as we continue to evolve our strategy to overcome the complexities of operating in a post-pandemic environment. Before I conclude, I'd like to take a moment to thank our entire Red Robin team for their dedication, hard work and resolve in a dramatically difficult environment that embraces our Red Robin values. It is truly a privilege to work with such an extraordinary group of people who are passionate to serve our Guests and one another. The future is bright and we are committed to delivering value for all of our stakeholders, Team Members, franchise partners, landlord, suppliers, and shareholders. With that, I will turn the call back over to Paul.

[Paul J.B. Murphy III:]

Thank you, Lynn. Before we take your questions, let me leave you with the following thoughts

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Alex Slagle with Jefferies. Please proceed with your question.

[Alexander Russell Slagle:]

Hey, good afternoon, and thanks for the question. Just wondering if you guys could update us on the progress of figuring your dining rooms to handle 75% capacity levels. I believe you held your dining room capacity somewhere around 50% so far, so just curious what portion of your company restaurant base could be bumped up to 75% when you're ready to expand on your end?

[Paul J.B. Murphy III:]

Alex, this is Paul. Yeah. We did hold to 50% capacity. We have a pilot test on the partitions. It's going well, we have 155 restaurants that we're taking a look at now to be able to take the partitions into, where the local jurisdictions or the state regulations would allow us to increase capacity to the 75% number. So we're already doing the work on that. We'll start with the – obviously the higher volume restaurants first and then work our way through the – that number of stores. At the same time, we're also – I just would emphasize that we're working on expanding our patio capacity in all of our restaurants beyond just the kind of the small patio that couple of our prototypes had. So we're in the process of doing that right now and see that being completed over the next two or three weeks across the system.

[Alexander Russell Slagle:]

Okay. How much have you added in terms of incremental new patio space thus far and other sort of at or dining areas (00

[Paul J.B. Murphy III:]

Frankly, we've added very few so far. We just really launched it about 10 days ago and that's why we see it'll take us about two to three weeks to get the majority of the system up on that. We had to go out there and obviously procure the umbrellas and get that ready and then do some of the licensing extensions that we had to do. But we will have that rolled out, we believe, within the next three weeks.

[Alexander Russell Slagle:]

Thank you. That's helpful.

[Paul J.B. Murphy III:]

Great.

[Operator:]

Thank you. Our next questions come from the line of John Glass with Morgan Stanley. Please proceed with your question.

[John Glass:]

Thank you – thank you very much. Paul, can you just provide a little more color on the current comp trends and I'm sorry if I didn't see it in the release, but you didn't comment on it. How much is California – California's closing of dining rooms hurt you? Maybe some color on outside of that in some states where you haven't had closures maybe, but increased cases. How much dispersion is there in terms of the comp performance really over the last six or eight weeks?

[Lynn S. Schweinfurth:]

John, this is Lynn. We did provide weekly sales information in the press release, which includes a comprehensive set of numbers and then the numbers associated with restaurants with open dining rooms. And you can see based on those charts that as of early July, when California required our indoor dining rooms to close, you see an adjustment there in terms of our comp store sales performance of about 4% on a comprehensive basis. However, since the dining rooms were closed, we have since increased our weekly average sales every week for the past five weeks since that occurring.

[John Glass:]

Thanks for that. And then Lynn, while I've got you, what is the profitability at the restaurant? You said it improved through the quarter, so, assuming comps sort of stay where they are today, where do you think restaurant margins would be, say, in the third quarter or at this comp or AUV level? And you've talked about finding ways to take out costs that aren't just temporary costs, but permanent. Can you give us some examples of where those (00

[Lynn S. Schweinfurth:]

Well, that was a pretty large question, John. I mean, as you can see from our second quarter results, we did generate operating profit of $3.2 million at the restaurant level. I think we'll be in the mid-single to low double-digit margin as we move forward. And that's with an increase in terms of comp store sales as we continue to expand our seating capacity. The areas where we're expecting some savings from a permanent standpoint include some areas within our labor line item that we found some ways to be more efficient. Our occupancy costs, as we continue to work with our landlords, as it relates to restructuring our leases and then we're continuing to dive into other operating costs to see what other opportunities we may have.

[John Glass:]

Okay. Thank you.

[Operator:]

Thank you. Our next questions come from the line of Gregory Francfort of Bank of America. Please proceed with your question.

[John Michael Busch:]

Thanks. This is actually John Michael on for Greg. Thanks for taking the question. I want to ask on labor. It's been a lot more variable than we would have expected. And you mentioned the shifting labor mix in support of off-premise. I was wondering if you could just address what's changing on that front and how much is due to the new operating model versus something we might not be aware of.

[Paul J.B. Murphy III:]

I think that the majority of the variability that you've seen is really the move from the increase in the off-premise sales. And so, especially with the number of restaurants that the dining room is still closed and the number of tipped employees who obviously are at a lower wage rate, that has shifted to a higher average – hourly wage rate, not only in the restaurants that have no dine-in right now, but also in the restaurants that do have dine-in just because we continue to have strong off-prem sales as the dining rooms have reopened at the 50% capacity. So it's really just a shift in from tip to non-tip labor inside of the restaurants and the percentage of business that's associated with that.

[John Michael Busch:]

Got it. Thank you. And then zooming out, just wondering what are the biggest changes that you've made as a result of COVID that you expect will stick even as we come out on the other side and consumer dine-in confidence sort of normalizes?

[Paul J.B. Murphy III:]

I think some of the biggest changes, I mean, as Lynn mentioned, we have made some changes in terms of the labor line, in terms of the management structure at the restaurant level and how we see that moving forward. Also with the new TGX model, we're seeing some efficiencies as the dining rooms reopen in terms of the front-of-the-house labor. And then frankly, as in the menu reduction that we did at the – taking 33% of the menu out, we've seen efficiencies also in the back of the house and the menu reduction that we've had has really been able to drive both quality and ticket times and things like that. So we feel good about it. We are – there may be some items brought back to the menu over time, but we see that being a more of a permanent structure, so whether it's the management structure in the front of the house or the back of the house, we see ongoing savings really in all three areas.

[John Michael Busch:]

Got it. Thank you very much.

[Paul J.B. Murphy III:]

Thank you.

[Lynn S. Schweinfurth:]

Thank you.

[Operator:]

Our next questions come from the line of Brian Vaccaro of Raymond James. Please proceed with your question.

[Brian M. Vaccaro:]

Thanks and good evening. Wanted to circle back to the sales mix and looking at the 350 or so company units with reopened dining rooms, curious where the off-premise sales mix has settled out in recent weeks if the AWS (00

[Lynn S. Schweinfurth:]

Sure. I think we're running about 40% off-premise with the number of restaurants we currently have open and carryout has actually outpaced our delivery percentage of those off-premise dollars. And I'm just trying to get a more specific number here for you, Brian.

[Brian M. Vaccaro:]

Okay. And I guess, Paul, one for you maybe as Lynn is looking that up. I wanted to ask about the expanded outdoor dining and I guess based on your current plan, how many seats or total capacity could that add in the average unit?

[Paul J.B. Murphy III:]

Well, I mean obviously that's – okay, I guess average unit, we think that that could be somewhere between 16 to 24 seats in the expanded outdoor dining rooms. And obviously, you're seeing it across the industry, but in our own research, we're seeing that our Guests certainly that, in the research we're doing, have said that they're – even if they're not quite willing to come into a dining room right now, they are willing to engage with Red Robin in a outdoor patio situation. So, we're, as mentioned earlier, rolling that out right now and we're very pleased with early results in the few restaurants that we have opened that up so far.

[Brian M. Vaccaro:]

Okay, great. Great. And similar type question, but on the plastic partitions, I think you said it could help in about a 150-company unit. Could you frame what kind of...

[Paul J.B. Murphy III:]

Well, it can help in more than that over time. Right now, we have 155 restaurants that by regulation, they could get to a capacity of that 75% range. And those will obviously be the first restaurants that we're putting them in.

[Brian M. Vaccaro:]

Okay. And what percentage of the seats in an average Red Robin are booths versus tables?

[Paul J.B. Murphy III:]

That's a good question. And I'll be honest, I take a guess, but I can get back to you with a more specific answer in the future. But...

[Brian M. Vaccaro:]

Okay. No problem.

[Paul J.B. Murphy III:]

I would say about – yeah, I'd say about 30%, 30% to 40%.

[Brian M. Vaccaro:]

Okay. Okay, great. And then last one for me, the weekly burn rate of $2 million a week. Could you decompose that a bit and remind us sort of what the weekly G&A run rate you will expect in Q3 and then the interest costs or any other cost assumptions that are embedded into that $2 million weekly burn rate for Q3?

[Lynn S. Schweinfurth:]

Sure. Sure, Brian and let me circle back to your first question. Of our current off-premise sales when dining rooms opened, about 40% are carryout and 20% are third-party. And then in terms of our ongoing G&A assumption and our cash burn calculation, the G&A assumption is about $1.25 million per week and the interest expense expected is roughly $2 million a quarter.

[Brian M. Vaccaro:]

Okay, okay. Okay. Thank you. I'll pass it along.

[Operator:]

There are no further questions in the queue. And with that, I would like to conclude the call and thank you for joining Red Robins conference call today. You may disconnect your lines at this time and have a great evening.