Red Robin Gourmet Burgers, Inc.
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Good afternoon, everyone and welcome to the Red Robin Gourmet Burgers Incorporated Fourth Quarter 2019 Earnings Call. Please note that today’s call is being recorded.During the course of this conference call, management may make 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 the call, the company 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 maybe 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 2019 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 Murphy:]

Good afternoon and thank you for being with us today. I am joined by Lynn Schweinfurth, our Chief Financial Officer who will review our quarterly financial results and annual guidance.Let me begin by briefly addressing Q4 within the context of our strengthening business. We were encouraged to see our second consecutive quarter of positive comparable restaurant revenue. As anticipated, we achieved this top line performance while intentionally unwinding discounting and with reduced year-over-year marketing spend. You may recall that we allocated more of our annual marketing spend to the third quarter in 2019 when we launched our new omni-channel creative campaign. You can see from our Q4 results that the campaign continues to resonate and drive sales momentum. Importantly, the sales momentum has continued into 2020. We also believe our core business and turnaround process is taking shape as evidenced by improvements in key performance indicators, such as staffing, retention, ticket times, and ultimately, our guest satisfaction scores.2019 was a period of diagnosis, change and setting the foundation. In 2020, we are executing our 4-point plan to accelerate our turnaround and drive long-term value creation for all constituents. The elements of this plan are as follows

[Lynn Schweinfurth:]

Thank you, Paul and good afternoon everyone. As we turnaround our performance and invest in the business, we are encouraged by our improving sales trajectory in the fourth quarter of 2019. Comparable restaurant revenues increased 1.3%, which as Paul mentioned, marked our second consecutive quarter of positive comparable sales growth. The Q4 improvement was driven by a 4.7% increase in average check partially offset by a 3.4% decline in guest traffic. Overall pricing increased 1.8%, while we also realized an additional 1.8% increase from our decision to lower discounting. Mix increased by 1.1%, driven by our menu and promotional strategies put in place this year, resulting in lower Tavern mix and higher Gourmet and Finest mix.Q4 total company revenues decreased 1.2% to $302.9 million, down $3.8 million from a year ago driven primarily from 18 fewer restaurants due to closures during 2019. Dine-in sales were down 3.8% partially offset by off-premise sales growth. Off-premise sales growth continues to be meaningful and rose 26.9% in Q4, representing 13.9% of total food and beverage sales. Catering continues to be an important growing sales category with material long-term potential delivering approximately 12% growth in the fourth quarter over the same quarter in 2018. Our sales team is focusing on, among other things, driving business-to-business national accounts, supporting recurring catering occasions, and refining our core catering menu, including expanding our carbonated beverage offerings.Q4 restaurant level operating profit, as a percentage of restaurant revenue, was 18.9%, down 50 basis points versus a year ago driven by the following factors

[Paul Murphy:]

Thank you, Lynn. To conclude, I am even more encouraged now than when I first joined Red Robin about the company’s potential. Our passion to succeed is contagious across the restaurant support center and in the restaurants. And I know that by remaining focused on initiatives I have articulated, we can transform the company, accelerate growth and maximize value for shareholders. The early indicators are positive and we are confident in our ability to deliver the plan. Thank you. And with that, we would be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first questions come from the line of Alex Slagle with Jefferies. Please proceed with your questions.

[Alex Slagle:]

Thank you. A question on Donatos and as you have continued to test there, I am wondering how the operators have responded, I imagine it’s operationally fairly straightforward. And also could you remind us of the equipment upgrades needed?

[Paul Murphy:]

Well, so far, the operators have responded extremely well. In fact, we just had our general manager conference and at that conference, every general manager actually had the opportunity to get their hands dirty and make a pizza and cook it to the oven and actually get to eat it after they made their own pizza. So, the enthusiasm is high for it. The general managers that already have it in their locations are very bullish. They like the results that they are seeing from a top line and bottom line in their locations and they were great ambassadors for at the general manager conference to the other general managers. So we are excited to begin that rollout, which is really going to be in just the next couple of weeks beginning here in the Colorado market. I am going to turn it over to Lynn for the equipment side of it.

[Lynn Schweinfurth:]

Okay. And we will be incorporating into our kitchens, a pizza then in a make station and moving around some other parts of our kitchen to accommodate the implementation of Donatos. The capital spend is estimated at $145,000 per restaurant and we also expect to incur about $20,000 in pre-opening expense per restaurant.

[Alex Slagle:]

Okay. And in your initial test, have you seen any cannibalization to speak of and if there is anything in terms of channel mix, whether it’s dine-in or delivery, where you are seeing something different?

[Lynn Schweinfurth:]

Yes, Alex, I will start and then Paul, if you would like to chime in. We have seen the Donatos sales to be highly incremental and we do see a SKU of delivery orders, but we also see dine-in sales improving as well, including as an appetizer in the restaurant.

[Paul Murphy:]

No, Alex, we have been very pleased with the certainly, the top line result where we are seeing that it’s driving transactions into the restaurants. There is a high degree of incrementality to it. And we see it, as Lynn mentioned, is fitting very well into the delivery side of the business and we are seeing it used very much as an appetizer, which we love from the spirit of sharing that we have seen as one of the criteria that guests say that the reason they use the brand. From a cannibalization, it’s been extremely minimal and we are pleased so far with the results that obviously, we are committed to the rollout.

[Alex Slagle:]

Thanks, long.

[Operator:]

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

[Gregory Francfort:]

Hey, guys. Thanks. Thanks for the questions. I had two. The first is just on the to-go mix. Where do you envision that going and kind of how long do you think it will get there? Any sort of expectations on the longer term plan around that front? Thanks.

[Lynn Schweinfurth:]

Our current to-go percent of sales is well it represents about 6.7% of our sales today. We do expect that number to grow. I am not sure we are prepared to provide a target today. But we have actually dialed back some of our marketing around to-go as we were rolling out other initiatives and really stabilizing the business in 2019.

[Gregory Francfort:]

Got it. And then just the other question I have was just on labor. And I think you had said in the prepared remarks, you’re seeing wage rates up about 5%. And I think you’ve also been investing in labor hours, but the labor cost as a percent of sales was down year-over-year. Can you maybe talk about what are the biggest deltas of that? Is that anything on maybe health insurance or is it just kind of efficiencies you are finding, kind of what are the biggest drivers? Thanks.

[Lynn Schweinfurth:]

Yes. And as you mentioned, we are experiencing about 5% of wage rate inflation. Part of the benefits we saw that helped to offset that number included lower group insurance costs, and we also believe just having higher staffing levels in the restaurants are also helping turnover at the hourly level, which also reduces related training.

[Gregory Francfort:]

Great. Thank you very much.

[Operator:]

[Operator Instructions] Our next questions come from the line of Chris O’Cull of Stifel. Please proceed with your questions.

[Chris O’Cull:]

Thanks. Could you guys describe the Donatos test, maybe how many locations had to test for a year or more? And what regions of the country are had to test?

[Paul Murphy:]

Yes. We’ve had about 25 locations that have been in test. The regions that have been over a year, have been on the East Coast in the North Carolina Raleigh area. And then in the Phoenix area, that was purposeful just to make sure that, frankly, we were not testing in Donatos backyard certainly wanted to make sure that the Donatos Pizza resonated and would perform in areas that it might have a little bit less brand awareness. So we are very pleased to be rolling over to see the mix sustaining and that we are just – we are excited about the impact, both as I mentioned earlier, both the top line of about a 3.5% traffic lift and the influence on the average check.

[Chris O’Cull:]

Okay, great. And then just a follow-up Lynn, if you include the investments in the service model rollout and the Donatos introduction, do you expect restaurant margin to be flat for the year? And also, do you expect the timing of the investments to have any kind of outsized impact on margins or restaurant margin in any one quarter?

[Lynn Schweinfurth:]

Yes. I think we believe restaurant level margins can be actually a little bit better year-over-year. There are a few moving pieces to that. One is we did close 30 restaurants or re-franchised a total of 30 restaurants last year. So having those stores out of the system do help just overall margins from that standpoint. We also believe it or not from a cost of sales perspective, we’ve been able to lock in, and we expect our fixed contracts, pricing, lower waste and, again, the store closures I mentioned, to offset the higher costs we’re seeing in our ground beef and our bacon. So we will see pressures on our labor and on our other operating expenses. But going back to the closures that I mentioned initially, we will see a benefit on the occupancy expense line as well.

[Chris O’Cull:]

Should we expect any kind of variation or volatility in the margin performance in any one quarter?

[Lynn Schweinfurth:]

I think there maybe some pressures in the first two quarters of the year and that has to do with some of our initiative rollouts that we’ve been talking about primarily Donatos and then as we start to rollout the new service model in the middle part of the year, we will see some effect associated with that.

[Chris O’Cull:]

Great. Thanks, guys.

[Operator:]

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

[Brian Vaccaro:]

Thanks and good evening. I just wanted to circle back the press release talked about the quarter-to-date trends and characterized it as the momentum has continued. And I know you usually don’t get too specific, but hoping you might be a little bit this quarter, given some of the unique dynamics that you saw in the fourth quarter on the unwind of the discounts, which I assume negatively impacted traffic. So, would you be willing to be a little more specific on what you’re seeing quarter-to-date either from a comp or traffic perspective?

[Paul Murphy:]

I think the only thing I would say, as I mentioned in my remarks that the momentum has continued, and we’re pleased with how the results have responded to the initiatives that we put in place in terms of things that we are doing against the operating model and the overall operations of the company. So I think please is a word that shows I have a high degree of confidence in where we are going.

[Brian Vaccaro:]

Alright. Fair enough. And on the guidance, Lynn, I’m curious, what have you embedded in terms of G&A? And I know there are some investments in the initiatives and then some savings that I think are offsetting that, can you walk through some of the details within that?

[Lynn Schweinfurth:]

Yes, I’ll probably keep my comments a little bit more general, but we do believe that investments and initiatives inflation and variable-based compensation will be offset by savings initiatives within the corporate structure.

[Brian Vaccaro:]

Alright, I will pass it on.

[Paul Murphy:]

Thank you.

[Operator:]

[Operator Instructions] Our next questions come from the line of Gregory Francfort of Bank of America. Please proceed with your question.

[Gregory Francfort:]

Hey, guys. I just had an extra follow-up. I know you talked about the margin benefits next year of some of the closures and refranchising you guys have done. Can you maybe help quantify either what the margins were on those stores or what the margin benefit will be from sort of taking those out of the base? That would be helpful. Thanks.

[Lynn Schweinfurth:]

Yes. I’m not sure we are prepared to actually quote a number, but I will tell you that as you piece together some of the disclosures we made over 2019, we specifically provided numbers associated with the restaurant closures as we move throughout the year.

[Gregory Francfort:]

Okay, great. Thank you.

[Operator:]

Our next questions come from the line of Chris O’Cull of Stifel. Please proceed with your question.

[Chris O’Cull:]

Yes, I may have missed this and I apologize if I did. But did you see the Donatos agreement is that a licensing arrangement that you have with Donatos? And so what’s the rate or duration of the agreement?

[Paul Murphy:]

Yes, it is a licensing agreement, but we are not, right at this moment, prepared to give the rate on it. As for duration, I would have to refer to Lynn on that.

[Lynn Schweinfurth:]

Yes. It’s certainly a multiple year agreement and it really takes the form of kind of a more traditional franchise agreement, but we are unable to disclose the financial terms related to that agreement.

[Chris O’Cull:]

Okay, okay. Thanks.

[Operator:]

Our next question comes from the line of Jon Tower of Wells Fargo. Please proceed with your question.

[Jon Tower:]

Great, thanks. Just a couple for me first and I apologize if I missed this, but I was curious if you had provided the cadence for how we should think about the Donatos rollout, especially the impact on the pre-opening line related to the ovens being pushed to the stores? And then secondarily, when you were testing this product, what was the competitive response you were seeing in the markets? And what have you seen to date when you do advertise this in markets?

[Lynn Schweinfurth:]

Okay. Well, there were a few questions thrown out there. So maybe let me start with your first question on the cadence of the implementation of Donatos. We’ve begun to rollout Donatos in the Colorado area, generally. So that has begun in the past two weeks and then we will complete the rollout by early in the fourth quarter.

[Jon Tower:]

Okay. So in terms of thinking of pre-opening from a dollar standpoint, can you help us is it going to be front half weighted or back half, is there a way to frame it?

[Lynn Schweinfurth:]

Yes. I’m just kind of looking at my schedule here. Again, it’s a little bit lighter in the first quarter because we’ve just begun to roll out Donatos and then it gets to be fairly consistent in the following three quarters.

[Jon Tower:]

Okay. And in terms of competitive response?

[Paul Murphy:]

This is Paul. We really haven’t seen any repositioned as premium and really has been no noticeable competitor response either in the Phoenix market or in North Carolina. We haven’t noticed anything.

[Jon Tower:]

Okay, great. Thank you.

[Operator:]

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

[Paul Murphy:]

Yes. Thank you for attending. We appreciate the questions and appreciate you dialing into the call today and look forward to the Q1 call. Thank you very much.

[Operator:]

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.