Red Robin Gourmet Burgers - Earnings Call - Q1 2019
May 30, 2019
Transcript
Speaker 0
Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated First Quarter twenty nineteen 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 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. Company has posted its fiscal first quarter twenty nineteen earnings release and supplemental financial information related to the results on its website at www.redrobin.com in the Investors section. Now I would like to turn the call over to Red Robin's Interim CEO, Patty Moore. Please go ahead, Patty.
Speaker 1
Well, hello, everyone, and thank you for joining us. With me this afternoon are Lynn Swineford, our Chief Financial Officer and Guy Constant, our Chief Operations Officer. Jonathan Muthar, our Chief Concept Officer, is also with us to help answer questions you may have during the call. I'm pleased to be speaking with all of you as Interim CEO. Let me start by saying that I continue to serve Red Robin with a real passion for this brand and this uniquely fun and welcoming environment, as well as for the casual dining industry.
To provide a bit of background about me, in addition to serving as the director of Red Robin, I previously had a twelve year career at Sonic, where I served in a number of senior management roles, overseeing marketing, brand development, franchise relations, company store operations, and as president and board member, during which time average unit volumes and profits more than doubled. I'm looking forward to bringing this experience to bear in this interim period as I support our executive team and our great team members across the organization to focus our efforts and return the business to sustainable growth and profitability. As our financial results demonstrate, there is still much work to be done on the turnaround, and I can assure you we are moving with urgency. The board has engaged the Elliott Group, which has deep experience in our industry, to assist in the CEO search, and the search committee has already begun the interview process. At the same time, in the nine weeks since I became interim CEO, I've worked closely with the management team to narrow the list of critical initiatives and simplify our focus.
We are actively working with the Cypress Group on refranchising and reassessing our real estate portfolio. And today, we announced the closure of 10 underperforming units. We have hired an experienced industry leader as our new VP of Consumer Insights, and we are continuing our deep dive into all aspects of our business. These efforts are designed to improve the customer experience, significantly improve cash flow, increase profitability, and ultimately drive shareholder value. We are confident our initiatives will steadily improve our financial and operational process and that our search process will identify a leader who can accelerate this turnaround.
As we have outlined previously, we are very focused on five key strategic priorities: strengthening and stabilizing the dine in business, continuing to build our off premise and catering business, improving guest experiences and recapturing our gift of time, implementing digital platforms and technology solutions, and selectively refranchising and evaluating our real estate portfolio. Guy, Lynn, and I will share specifics around these initiatives and the progress and positive momentum we are beginning to see. With that, I'd like to turn the call over to Guy, who I want to remind you took over full time this, chief operating role at the January. Guy is going to talk about one of our most important priorities, and that's returning the business to sustainable profitable growth by improving the dining experience for our guests. Guy?
Speaker 2
Thank you, Patty, and good afternoon, everyone. As Patty said, our first and foremost priority is stabilizing and strengthening the dine in experience. In order to do so, we are focused on four primary areas for operations that will provide the needed focus we require to execute on our operational turnaround. First is hire, train, and retain. Improving the experience starts with hiring the right people, training them properly, and being fully staffed, as well as reducing turnover, particularly at the general manager level.
Our operations leadership team is making real progress against these objectives. While broader industry turnover and staffing challenges have increased in q one overall, Red Robin experienced reductions in our hourly manager and general manager turnover from q four of 2018 to q one this year, and all are at better levels than the average for the casual dining industry. In fact, our manager and general manager turnover levels are closer to best in class than they are even to the average. We also have been able to bring our manager staffing levels to 96.8%, a meaningful improvement over where we ended 02/2018. Having better staffed restaurants and stable management teams is a very important part of any sustainable improvement in operational execution.
Next is manager front of house engagement. We know we can improve the overall guest experience, shorten wait times, reduce walkaways, have cleaner dining rooms, and effectively identify and resolve potential issues by continuously getting our managers on the dining room floor and at the host end during peak hours. And our efforts are delivering results. Overall satisfaction scores improved throughout the first quarter, reversing a trend that saw a decline throughout 2018 to a low point at the end of Q4. Year over year, walkaways are down 4.2%, wait times are shorter, guest complaints on cleanliness and wait times have declined meaningfully, and guests have told us that they've seen marked improvements in problem resolution when there is an issue.
Next is managing the shoulders to peak the peaks. By shifting the labor investment from overstaffed shoulder hours during the day to understaffed peak hours, we are able to improve throughput on our busiest shifts, thereby capturing the greater sales opportunity that is available during those peak times without having to make incremental investment in labor expense. Our continued focus on staffing has yielded improved guest scores for taste of food, temperature of food, speed of service and execution of our bottomless promise during the first quarter. And last is delivering on the promise of Maestro. This effort focuses our kitchen managers on the active coordination of the fast and accurate delivery of high quality food at the proper temperature.
And as an added benefit, ticket times have shown continuous improvement benefiting speed of service. We have also started to reduce our menu complexity while still providing guests the options they desire, and we have narrowed our culinary focus to concentrate on improving the consistency and quality of our core menu products. These include, of course, our gourmet burgers, chicken, buns, and, of course, our signature bottomless steak fries. We look forward to updating all of you on the continued progress on these key priorities and their impact on operational execution over the coming weeks and months. With that, I'll turn the call back over to Patty.
Speaker 1
Thanks, Guy. I want to reiterate that an important theme through all the operations focused efforts and an important learning from us from last year is making sure that we are setting our operators up for success as we implement operational changes and technology improvements. As we mentioned in the press release, our updated guidance reflects, among other reasons, a deliberate decision to delay the rollout of some restaurant level technology to ensure that we're giving our operators the sufficient time to absorb the technology initiatives being implemented now and that we are able to maintain the momentum that Guy talked about that we're currently seeing in operations. Lynn will be talking about the updated guidance in more detail. I'd also like to touch briefly on marketing efforts.
The first half of the year is focused on our high quality gourmet burger line featuring new products, including our pork yaki burger and the latest in our Burger Master series, Zita's Chikikado. This product celebrates the talent of another of our heart of house restaurant cooks, Sita Martinez, who's been with us for over nineteen years. Early results indicate that our featured items are outperforming expectations. With respect to media and creative, first I want to tell you that we've been pleased to see increased positive fan engagement from our social channels throughout the quarter. We're also in final development stage of a new omnichannel creative campaign, will launch in July.
The new campaign has tested very well with consumers, connecting on an emotional level and conveying what our guests love most about Red Robin. We are confident that this omnichannel campaign will help us elevate the conversation about our brand, both internally and with our guests. We also shifted media weight from the first quarter to the third quarter to ensure we were ready from an operations and staffing perspective and to solidify restaurant routines and processes in preparation for the new marketing campaign. And we will begin utilizing technology enhancements as they roll out late this year and into 2020 to better target and segment our 8,500,000 royalty members. Finally, we are pleased to announce the hiring of a new Vice President of Consumer Insights and Loyalty, Cyrus Kelly, who joins us from Darden Restaurants.
Cyrus and his team aim to greatly enhance our data and insights capability, which will guide all guest facing activity going forward. So that's a brief update on our first priority, stabilizing dine in operations. Our second area of focus is to continue building off premise and catering. Our total off premise business is now mixing at 11.6% of total revenues with a growth rate of 20.6% year over year at the end of the first quarter. We are also focused on continuing to improve the to go experience by implementing improved operational processes and tools, and we are looking to increase our reach with additional third party delivery partners.
Catering now represents 1.2% of company sales through the 2019 or growth of 220% compared to last year. We believe catering continues to represent a big opportunity for us, essentially all incremental. We also believe it increases brand awareness and relevancy. In 2018, we built a strong foundation for catering that included building out our strategic leadership and infrastructure. We began adding sales team members supported by targeted marketing.
In 2019, we are building on that momentum from the back half of twenty eighteen. We are continuing to enhance our sales team and focusing on building both local and national accounts. Our third priority, which involves both the operations improvement that Guy talked about, but also technology, is to improve the guest experience and recapture the Red Robin gift of time convenience as a differentiator, which simply means allowing customers the gift of getting in and out of our restaurants at their own pace. In addition to improving ticket times and reducing wait times, as Guy talked about, we are beginning to see customer satisfaction improvements on pace of experience. We are also looking forward to adding more improvements to speed up throughput with menu simplification and with technology investments that are beginning to roll out in the back half of the year.
Speaking of technology, our fourth priority is implementing digital platforms and technology solutions. We completed the rollout of headsets to our restaurants this month to enhance communication among our managers and certain team members. While this may seem like a minor point to some, it has allowed our operators to turn tables faster and to stay more engaged during a busy shift. Additionally, we expect to roll out portable POS terminals to our servers by the end of the third quarter. This will enable our team members to take and input an order at the table, improving not only accuracy but ticket times.
Our fifth and final area of focus is on selectively refranchising and assessing our real estate portfolio. As I mentioned earlier, the Cypress Group is helping us focus our refranchising efforts, and work is well underway. Lynn will discuss this and our most recent assessment of our real estate portfolio, including our mall strategy. We believe that the momentum we are beginning to see will continue and lead to improved financial results and drive shareholder value. Thank you.
Now let me turn the call over to Lynn. Thank you, Patty, and good afternoon, everyone. Let me begin by first reinforcing the intensity of focus we share to transform our business and to deliver value to our shareholders. We are acting decisively to make changes in the business that will put us in a stronger position. We are also taking a disciplined approach to prioritizing and spending capital and G and A while strategically refining portfolio through recent store closures and our enhanced refranchising program.
As I walk you through the Q1 highlights, please note that the quarter includes the first four periods or 16 of our fiscal year. Q1 total company revenues decreased 2.8% to $409,900,000 down $11,700,000 from a year ago. Comparable restaurant sales declined 3.3%, driven by a 5.5% decline in guest traffic, partially offset by a 2.2% increase in average check. Overall net pricing after taking into account discounting was 1.9%, while the 0.3% mix increase was driven by lower tavern mix and higher entree mix. Dine in sales were down 5.5%, partially offset by off premise growth.
Off premise growth continues to be meaningful and rose 20.6% in Q1. Off premise now represents 11.6% of total food and beverage sales. Traffic at enclosed mall locations, representing 76 restaurants in our system, continued to perform worse than the balance of our company owned locations by approximately 300 basis points. As we previously disclosed, we experienced severe winter weather that we estimate negatively impacted Q1 sales by approximately 80 to 100 basis points. Q1 restaurant level operating margin was 18.3, down 170 basis points versus a year ago, driven by the following factors.
Cost of sales of 23.4% was favorable 40 basis points versus a year ago, due primarily to favorable food waste as measured by actual versus theoretical performance and lower tavern mix. Restaurant labor costs of 35.7% were unfavorable 120 basis points versus a year ago due primarily to higher wage rates, increased management headcount associated with our focus on being fully staffed to provide quality execution and sales deleverage. Other operating costs increased 60 basis points to 13.9% due primarily to increases in third party delivery fees and equipment repairs and maintenance. Occupancy costs increased 30 basis points to 8.7% due primarily to sales deleverage. G and A costs increased 50 basis points to 7.3% of total revenues due primarily to increases in professional services and travel related expenses associated with training managers related to our focus on being fully staffed to provide quality execution and higher salaries, partially offset by lower incentive and equity based compensation.
Selling expenses increased 20 basis points to 4.4% of total revenues due primarily to project related spending. Preopening costs decreased $800,000 due primarily to the suspension of restaurant openings for the foreseeable future as we continue to work on improving our four wall economics. Net interest expense in other was $200,000 lower versus the prior year due primarily to a gain in our deferred compensation plan assets. Our weighted average interest rate was 5%. Our effective tax rate was 291% benefit and better than the prior year due primarily to lower income.
During the quarter, we recognized other charges of $2,400,000 due primarily to executive transition costs and costs associated with previously closed locations. Q1 adjusted EBITDA was $34,300,000 as compared to $42,400,000 in Q1 twenty eighteen. Q1 adjusted earnings per diluted share were $0.19 as compared to $0.69 in Q1 twenty eighteen. Now turning to the balance sheet. We invested $10,200,000 in CapEx in Q1, which is primarily related to facilities improvements and investments in information technology.
We ended the quarter with $23,000,000 in cash and cash equivalents. Our lease adjusted leverage ratio was 4.23x and we were in compliance with all debt covenants. During the quarter, we paid down $10,000,000 on our revolving credit facility, resulting in a quarter and outstanding debt balance of $183,400,000 in addition to letters of credit outstanding of $7,400,000 We also bought back approximately 31,200 shares for a total of approximately $1,000,000 This is consistent with our initial goal of offsetting the dilutive effect of our equity compensation program over the course of four quarters as we utilize cash flow primarily to reinvest in our business and to reduce debt while we return the business to sustainable growth. Let me turn next to the fifth key strategic priority, selectively refranchising and reassessing our portfolio. In our press release today, we announced that we will be closing 10 locations including seven enclosed mall locations.
These restaurants have an average unit volume or AUV of $1,800,000 and in Q1 generated a total of $4,500,000 in restaurant revenue. Pretax operating losses for these restaurants in Q1 totaled $900,000 including an immaterial amount of depreciation expense. All related leases allow us to go dark, and we will pursue all sublease and lease termination options as quickly as possible. We also continue to focus on improving the financial performance of other underperforming mall and non mall locations through negotiated rent concessions, catering and targeted marketing and sales building strategies restaurants once they improve their operations. As Patty noted, we have engaged the Cypress Group to help facilitate our refranchising program.
We have been diligently working with them to refine our process, related financial, real estate and other transaction related materials, a restaurant portfolio strategy, buyer sourcing and next steps. We will continue to pursue the markets, which includes approximately 100 existing Red Robin locations previously targeted, approximately along with any other locations that we determined to be viable geographies for future refranchising purposes. Turning to our 2019 expectations. We have recently made the decision to delay or defer certain items so we can focus on improving our operational Turning execution and dine in guest experience through better pacing of field initiatives. We understand that last year we rolled out too much at once to our operators, and we learned a lot from that experience.
Based on that learning and our desire to capitalize on the momentum that we are beginning to see with improved operational execution, we are taking a very disciplined approach. We are beginning to see improvements in core business KPIs being driven by execution against a specific plan. And while there is more work to do, we believe we will build a strong foundation for a brighter future. We continue to expect an improving trajectory of comp store sales in the back half of twenty nineteen. More specifically, we are expecting comparable sales of down 1% to up 1%, lower than previous guidance due to lower dine in sales, partially offset by higher off premise sales.
Third party delivery sales are expected to increase due to higher organic growth, added delivery coverage to more restaurants and added service partners. We have reduced our selling, general and administrative expenses from $160,000,000 to $164,000,000 to $156,000,000 to $159,000,000 as we identified opportunities to reduce spending while staying focused on delivering our twenty nineteen objectives. We have also shifted to adjusted EBITDA and adjusted earnings per diluted share guidance to exclude various non recurring charges, including executive transition, restaurant closures, certain professional fees and impairment. We now expect adjusted EBITDA of 1 and $7,000,000 to $117,000,000 In addition to the pacing of field initiatives, we are expecting a continuation of higher wage inflation than what we originally expected and are proactively addressing these cost pressures through programs to reduce turnover and better manage wages at a market level to mitigate the impact of a competitive labor environment. Lastly, the increase of third party delivery sales, while still profitable, include incremental commission costs that will impact flow through on these sales categories.
We are expecting adjusted earnings per diluted share of $1.14 to $1.77 which includes the positive impact associated with an estimated tax benefit of $0.73 to $0.96 These updated ranges include both the benefit of the 10 restaurant closures. They do not, however, currently reflect the impact of any refranchising transactions. We have also lowered our 2019 capital expenditures range to $4,455,000,000 dollars which is down from earlier expectations of 50,000,000 to $60,000,000 This lowered range still primarily consists of facilities improvements, technology and other investments, and reflects the delay of some elements of restaurant and guest technology. And as Patty mentioned, we have just rolled out headsets to the field to help us better achieve the gift of time for our guests, and handheld POS terminals will be completely rolled out by August. Before I close, let me recognize the efforts of a collaborative organization that has rallied behind our five areas of strategic focus, driving visible improvements in our business.
We believe continued operational progress will translate into ongoing improvement in guest satisfaction. And in conjunction with focused and impactful marketing, core product focus and technology enhancements, we can successfully improve the trajectory of our business results. With that, I will turn the call back over to Patti. Thank you, Lynn. Let me wrap up by reiterating that the entire Red Robin team is acting with urgency on the five key priorities that are critical to this turnaround.
Within those priorities, we have narrowed the focus to the critical few initiatives that will have the most impact in stabilizing the business. I believe that we will show progress every quarter, but it is going to take time to get to where we need to be in improving our operational financial performance. But I am very energized by the progress we are beginning to see in the dine in business and across all of initiatives. I am proud of the focus and determination of our team members, and I am confident we are focused on the right things and now moving in the right direction. Thank you for your interest in Red Robin, and now we would be happy to take any questions.
Speaker 0
Thank you very much. We will take our first question from Gregory Francfort with Bank of America. Your line will be open in just a moment. Go ahead.
Speaker 3
Hey, thanks for the question. Just maybe one on that tax benefit comment you put in the guidance, is that a onetime tax benefit? Or is that just quantifying the overall where you expect, I guess, the tax rate to be for the year?
Speaker 1
It's the latter, Greg.
Speaker 3
Got it. Okay. And then just on the improvement in second half comps, are you seeing I guess you talk a lot about traction you're seeing in the guest metrics. Are you seeing an improvement in sales where you're running so far this quarter? Or is this more of an expectation that with some added marketing in the third quarter and some changes to the business and maybe a little bit better industry dynamic in the back half of the year that you're going to see a lift in sales that can get you into the full year guidance range?
Or are you seeing evidence of that playing out so far in the second quarter?
Speaker 1
Well, what I will say is we have seen some sequential improvement in May. However, we're still early in our turnaround, but we do have initiatives and items that we addressed during our prepared remarks that we believe will drive the business with improving trajectory in the second half of the year.
Speaker 3
Got it. And then maybe I'll sneak one last one in. Just around the management headcount, I think you made a comment about increasing or investing back into management headcount. When did that change go into effect? And what were you seeing in the business that sort of prompted that move or that change in terms of how you're running the operational model of the stores?
Speaker 2
Yes, Greg. This is Guy. So that change was added to the budget and is part of, the overall expected performance in 02/2019, which was an investment in us getting to higher staffing levels at the at the management, level within the restaurant. We, like many other organizations, have been battling staffing challenges for some time and we've been of leveling out and been at the same point for quite a while. So we made a conscious effort at the start of 2019 to say that we wanted to get to better manager staffing levels, and we've seen that progress happen throughout the first quarter.
Speaker 4
Thank you. Appreciate it.
Speaker 0
We will now take our next question from Will Slabaugh with Stephens Inc. Moment. Go ahead.
Speaker 5
Thank you. It sounds like you're doing better on average on many of the metrics that you mentioned earlier and in fact improving in a number of them. So I was hoping to take a step back and talk about where you see the key issues that maybe drove sales below your expectations in the first quarter and where the confidence comes that those are going to improve as the year goes along.
Speaker 1
Well, I'll start and then Patty and Guy, if want you to chime in. I think we are in the beginning stages of improving our operational execution. And so it does take time for that to really impact the guest experience and increase the next visit. And so I think that's part of the reason behind why we're seeing a slow beginning to the year. Yeah.
And I would just add that, again, it all starts with the guest experience and improving the customer experience. And the return of sales and return of customers won't happen in a straight line. But we do have marketing initiatives that, as we talked about, will kick off in the second half of the year. And we are continuing to see the improvements in the operations, being fully staffed, reducing turnover. But those will not all happen in a straight line.
Speaker 5
If I could just follow-up on value. We didn't talk much about that or you guys didn't talk much about that in your prepared comments. Can you talk about your approach to value during the first quarter and how you're thinking about that for the rest of the year? I know after the fourth quarter, you talked a bit about the $10 initiative versus the more historically consistent focus on the Tavern platform. So if you could go into any additional thoughts around that or just in general how you plan to address value.
Speaker 1
I'm going to ask Jonathan Muthar to address that for you.
Speaker 6
Yes, thanks. Yes, so we did make a pivot in the first quarter away from featuring our six ninety nine Tavern as our primary message out there externally with guests and move toward focusing on our core gourmet line. And we're pleased with what we saw there. We do as mentioned, we did also feature our $10 bundle in local markets and we were pleased with the results there as well. But going forward into the second quarter, we are continuing our national focus on a full price gourmet burger without a value offer and featuring that $10 gourmet bundle more at the local level.
In terms of the new campaign that's going to be launching in the third quarter, we're not commenting on the value message associated with that, but it communicate our great value to our guests, which exists across our entire menu.
Speaker 2
Got it. Thank you.
Speaker 0
We will now take our next question from Alex Slagle with Jefferies. Your line will be open in
Speaker 3
a moment. Go right ahead.
Speaker 4
Hey, thanks for the questions. One was a clarification on the mall units. I missed the comments on the lease exit flexibility. It sounds like there will be 66 remaining mall locations after these 10 are closed. And if you could just clarify sort of what portion either have the leases terminating or some flexibility for you to be able to get out of those if you need to.
Speaker 1
Well, you are correct. There are 66 remaining mall locations. But not all locations are bad locations. So there is a subset of malls that we're continuing to work with our landlords to try and achieve some rent concessions. And then in other cases, we may just naturally exit upon the expiration of the term.
But we will proactively look at exiting those locations that make sense to do so.
Speaker 4
Okay, Thanks. And then on the refranchising, don't if there's some more granularity you could provide just sort of what's changed since we first started talking about this at the Analyst Day and how to think about potential range of scenarios, how it might impact the P and L and priorities for use of proceeds?
Speaker 1
Well, I would say we have recently engaged the Cypress Group. I won't go back a couple of years, but we've engaged with this group. We've been developing packages related to transactions. We're working with them on our portfolio evaluation in case we want to think about our portfolio a little bit differently. So we're making good progress along those lines.
And we'll be meeting with them and having a more strategic meeting so that we can make some progress and hopefully report in the coming months.
Speaker 4
Okay. Thank you.
Speaker 0
We will now take our next question from John Glass with Morgan Stanley. Your line will be open in just a moment.
Speaker 7
Hey, thanks. Good afternoon. First, if I could just come back to, this pivot away from value or a different way of looking at value. So I think you were dialing it back in the fourth quarter and you said you were more focused on premium or full price burgers or premium, whatever it was. Why what gives you the confidence that's the right strategy when your direct peers seem to still be focused on that?
Or are they pulling back on that and that's giving you some headroom to pivot away from that? Do you think some of the decline in traffic incrementally this quarter did have to do with the fact that you pulled back on emphasizing the Tavern Double, for example?
Speaker 6
So to be clear, in the fourth quarter, we did still feature the Tavern Double. Messaging was changed a bit from the previous quarter. So that was a shift that took place in Q1. There's multiple ways that we communicate value to our guests. We're confident that with the current strategy, we're doing a good job of that.
And that's the feedback we've been getting from our guests. Our royalty program plays a big role as well. And so we're continuing to use that and we're enhancing our capabilities there. So that will become even more powerful for us as the year goes on, and we'll be leveraging that even more.
Speaker 7
Okay. And then secondly, on the menu you talked about menu simplification. Is that something you're testing now or you've done? Or how sweeping or broad is the initiative to simplify the menu as way to improve speed of service?
Speaker 6
Yes, sure. So I can chime in and I'll invite Guy as well if he has anything to add to my comments. But menu simplification is something that we have been focused on over the past couple of years, and we've been following a consistent process of testing in markets and then rolling out the of the winning initiatives nationally. And so over the past couple of years, we've reduced our menu by about 10% on net. And then we have some more simplification being rolled out later this year in the second half of the year where we're removing a few more items that tested well for us.
Speaker 7
Okay. And then just two maybe more store related questions. Are the closures this quarter a result of an entire portfolio review when you found that just 10 needed to be closed? Or is this the first of your there's a rolling kind of review process and think over time there's probably more that need to be closed, you just haven't identified those specific stores yet?
Speaker 1
Well, I think it's more of a rolling review process. We are continuing to negotiate with landlords, so hopefully we can come to an agreement with them on some of the locations that were borderline most recently. Right. And as Lynn commented, the Cypress Group is just in, and they've been reviewing things. And we're looking forward to sitting down with them and going over their review in the coming days.
Speaker 7
Okay. And then just last question for me. I think last quarter you got the question about the profitability or what the margin structure would look like in the stores you're contemplating refranchising. And sometimes companies going through refranchising do sort of hold that out as if we were to take those stores out of the base today. Here's how much better or different our margin structure would be.
Do you have that figure? Could you provide what you think maybe the profitability of the business would look like without those 100 stores?
Speaker 1
Well, because it's a little bit in flux currently, I'm going to hold off providing that information, but it's certainly something consider in the future as we refine the portfolio strategy.
Speaker 7
Okay. Thank you.
Speaker 0
We'll take our next question from Chris O'Cull with Stifel. Your line will be open in just
Speaker 3
a moment. Go right ahead.
Speaker 8
Thanks. Good afternoon, guys. Lynn, I apologize if I missed it, but did you say what hourly wage inflation was during the quarter and what you expect it to be for the year?
Speaker 1
You know, I don't believe I did. Wage inflation was 5.5% in the first quarter, and we do expect that to continue that wage inflation through most of the balance of the year with the caveat that we are trying to proactively address wages and try to get the inflation factor down on a go forward basis.
Speaker 8
And is that the hourly wage inflation or the total wage inflation for the restaurants?
Speaker 1
It's the hourly wage inflation.
Speaker 8
Okay. And then just as a follow-up on labor cost, it looked like the labor cost dollar spend per operating week was relatively flat year over year. So what was the dollar offset or where were the opportunities you realized to offset that higher wage?
Speaker 2
Not sure I understand your question, Chris. Can you repeat it?
Speaker 8
If you just look at the dollar per operating week that was spent in terms of labor cost per operating week, it looked like it was relatively flat year over year. And so I'm just trying to understand, was it just a reduction in hours because of the declining in traffic? Or were there other changes like management structure to the stores that help offset that hourly wage inflation?
Speaker 2
No. In fact, as we talked about earlier, Chris, we're more staffed at the manager level than we were before. That actually would have been a drag in the other direction. No, I think some of the earlier points that Lynn made about the composition of sales coming with more PPA this year and less traffic, where last year it came with more traffic and less PPA. Most labor models understandably base the hours that you assign the restaurant on the traffic levels, and the traffic levels are down.
So we're not using as many labor hours in the restaurant as we would have in an environment where PPA was not up as much as it is. Okay.
Speaker 8
Fair enough. And then, Dee, can you give us some color on what changes were the most impactful in terms of improving staffing levels and retention?
Speaker 2
Well, staffing is something that you always hear restaurant companies talk about. It's a battle that you're working on, especially in this tougher labor environment to deal with staffing. But what we said is that, you know, it's not a problem that we want to see continue. And so we have to make a conscious effort to make a change in in how we approach it. And it comes on a lot of different levels, but, starting by getting your managers as staffed as as we have is is certainly benefiting that.
But giving real prescriptive tools to our managers to help them to get to higher staffing level, peaking the peaks is, of course, driving them to higher staffing levels because you need more people to peak out those peak hours. And then, obviously, that gives you more people available to staff the remainder of the shifts during the week. But what we basically said was it's going to be very hard for us to execute on what we're doing in the restaurant, particularly at the very good productivity we have versus most of casual dining if we're not able to get as fully staffed as we are. And so it was a conscious change, a conscious difference in how we approach staffing to make sure that we bent the curve and made a real difference in where we've been for some time.
Speaker 8
Okay. That's helpful. Then, Lynn, can you give us a breakdown on the CapEx budget for this year, maybe a little bit more detail on how much is maintenance and any other item that's discretionary? Yes.
Speaker 1
We said, yes, our expectation for the current year is 45,000,000 to $55,000,000 I think around $30,000,000 represents ongoing systems capital maintenance as well as restaurant maintenance, and the balance are really some of our discrete projects.
Speaker 8
Great. Thanks, guys.
Speaker 0
We'll take our next question from Jeff Farmer with Gordon Haskett. Your line will be open in just a moment, Jeff.
Speaker 9
Great. Great. Thank you. Just one more labor question. I think last year you guys delivered 8% to 9% improvement in that labor productivity metric.
Do you expect to see any carryover benefit into 2019 from those efforts?
Speaker 2
No. We expect it to be pretty flat. In fact, it was down a little bit in the first quarter. Some of that is sales driven, Jeff, because of course, while hourly labor is generally considered to be variable and it is mostly, There's just some hourly labor you need to open the restaurant to close the restaurant on a regular basis. So if your sales are down,
Speaker 10
you lose a little bit
Speaker 2
of leverage on that. But no, yeah, on the backs of 8%, 9%, 10% productivity, which we saw last year, we're expecting the productivity to be flattish to maybe slightly down, but still very good to where we were before we started the effort last year to improve our productivity.
Speaker 9
Okay. Then different topic. What's the casual dining sector performance assumption that you guys have embedded, for lack of a better word, in your down 1% to up 1% same store sales guidance for 2019? What are you expecting to see from the casual dining sector over the next seven months or so?
Speaker 1
Well, there's the casual dining sector and then there's our business. So what I'd probably just really focus on is our expectation for our business, which is in a different place than, I think, the casual dining index. And again, while we're in the early stages of a turnaround, we do have the items that we've already talked about on the call that we believe will start to build a positive trajectory as we get to the end of this year and then into 2020.
Speaker 9
Okay. And just last question. I appreciate that you guys do not provide operating cash flow guidance, but a lot of investors on this name are focused on free cash flow. So again, understanding you don't provide the operating cash flow guidance, is there any reason to think that it would not directionally trend with the lowered EBITDA guidance?
Speaker 1
I'm not sure I understand the question, but, we will have, I think, sizable cash flow being generated this year, which we intend to greatly spend on our investments as well as paying down our debt.
Speaker 2
Okay. Thank you.
Speaker 0
We will take our next question from Steven Anderson with Maxim Group. Your line will be open in just a moment.
Speaker 11
Thank you for taking the call. Just wanted to ask, know, basically the time sorry
Speaker 0
about that. Can you just restart your question? The line cut out in tiniest bit. Very sorry about that.
Speaker 11
Okay. Going to the comp question, you saw you mentioned you expect comps to essentially turn positive by the second half of the year. But what do you think are really the drivers? You mentioned maybe pivoting away from the Tavern doubles, but what do you see do you see anything specific like an increase in the Red Robin's Finest? Or what else do you see specifically that gives you the confidence?
Or is it something you're seeing in traffic that gives you the confidence that maybe that guest is coming back? You mentioned, Guillaume, also about the decrease in walkaways. And is this a trend you're seeing continuing into the second quarter?
Speaker 1
Well, this is Patty. One thing, we continue to see an increase in off premise sales. As I think Lynn mentioned, we are leaning into, more third party delivery as well as catering continues to grow. And then, Jonathan, if you want to add any color on as the dine in business improves and as you turn on marketing.
Speaker 6
Yes. I think in addition to that off premise growth, we're looking at both some PPA improvements with the mix and the focus on some of those more premium items, but also traffic improvements through the year with the new campaign and highlighting those things that our guests know and love about our brand, building off of those improved service experiences that they will be having throughout the year that we expect.
Speaker 1
And then as it relates to some of the technology investments we're rolling out to the field, some of those investments should improve throughput, which we think will have an added benefit in addition to the improved quality of execution.
Speaker 11
Now that technology improvement, you talking about the server POS specifically as in is leading to throughput improvement?
Speaker 1
That's correct. Because the service will actually take the order at the table and it will immediately be fired into the kitchen, which speeds up the experience.
Speaker 11
Now have you allocated any kind of expense associated with the rollout of PBF with the POS system that specifically regard to labor?
Speaker 2
No, Stephen. We should be able to utilize the new server technology at existing labor levels. I expect it will help it, we think, be a lot more efficient and provide a better guest experience and as Lynn mentioned, throughput. So during those peak periods in those restaurants that are running good volumes, we should be able to improve the number of guests that we're able to accommodate, but the server handle is helping us do that. Great.
Thank you.
Speaker 0
We will take our next question
Speaker 7
from
Speaker 0
Brian Vaccaro with Raymond James. Please go ahead, Brian.
Speaker 10
Thank you and good evening. Just wanted to go back to the server handhelds. And maybe if you could share a little bit more about the expected benefits or what you saw in tests as it relates to ticket times, average server station sizes or any other productivity benefits you'd be willing to quantify? And then also, can you just confirm that, that is expected to be rolled out to all company units by the end of the third quarter?
Speaker 2
Brian, this is Guy. So we expect to roll them out by the end of the year. We're hopeful that we're able to do that by the end of the third quarter, but let's say solidly that we expect it to be a 2019 rollout system. While I wouldn't want to get into the specifics of the benefits, because it is a two stage rollout that we're contemplating, there's the technology itself and then there what we can do with the labor and support model inside the restaurant after the technology is rolled out. But as you might imagine, just on the surface, Lynn made the reference to better pacing of items to the kitchen.
That's a huge benefit as many of you who have watched the industry for some time may understand that often servers take, multiple orders, while they're out on the floor, then return to the point of sale system and enter them all at one time, which then, course, overwhelms the kitchen. By having a server handout, we're able to pace the orders to the kitchen and and as a result get much more, effective delivery in the kitchen, which should help on all those other metrics, that we've talked about. And then as the servers become more proficient, with the technology model, and this leans into comments that both Patty and Lynn have made about how we want to be really careful when we roll out things to operations that we do in a way that they're successfully rolled out before we move on to the next initiative. We can then look at the support model that would allow servers to take on larger table stations and provide an even better guest experience and what that could provide for us at that time, but we're not ready at this point to comment on what that might mean specifically.
Speaker 10
Okay. Shifting to the closed units, and I just wanted to ask, first a numbers question. Lynn, the the the 900,000.0 loss, on those units, is that after or or or I guess, burdened with selling costs, the four four and a half percent of sales?
Speaker 1
No. No. It's not. Those are the operating losses.
Speaker 10
Okay. Okay. So that's pre preadvertising. Okay. And maybe we could take a step back and maybe just level set how the group of mall units are performing versus non mall units.
I heard the comp commentary in your prepared remarks. But could you high level the, I guess, what we'll have 66 or 68 left, but maybe high level where the AUVs and store level EBITDA is relative to the non mall units, maybe on the four months or trailing 12, whatever you might have handy.
Speaker 1
Yeah. We quantified, I believe, in the opening remarks that traffic was down 300 basis points versus the non mall locations. We'll have 66 mall locations after we close the 10 that we talked about. Overall, AUVs, I think, are in the neighborhood of 1.9, give or take. So they are lower performing in some cases.
And so those are the ones that we're focused on.
Speaker 10
Okay. And just to be clear, the the that's the 66, the total 66, the AUV on those 66 is 1.9?
Speaker 2
Those are the those are the
Speaker 8
closed ones.
Speaker 2
Those are the closed ones. Those are the closed ones. Right. Do you have it for the
Speaker 10
rest of the ones that are the 66, or perhaps offline, you could provide that?
Speaker 1
Well, we'll think about providing that on a go forward basis, Brian.
Speaker 10
Okay. Alright. Understood. And then
Speaker 2
Historically, Brian, though, when we had talked about that historically now, obviously, in the past few quarters, mall performance has been poor. But historically, when we refer to that, the average unit volumes were not dramatically different at malls than they were in the rest of the system, but occupancy levels and costs were much higher. So the profitability was much poor at mall locations. But that comment was nine to twelve months ago. In the past three quarters, mall comps, as you know from following our calls, have been poorer than, non mall comps.
So that gap is Right. Because there's been a little gap down there was before.
Speaker 10
Okay. Great. And then just two last, quick numbers questions for me. You said off premise, I think, was 11.6% of sales. How much of that was the third party delivery?
Speaker 1
About, three percentage points.
Speaker 10
Okay. Great. And then on the g and a guidance, I just wanted to confirm or the s g and a guidance. The selling cost, your old guidance had selling at 64,000,000. Any change to that in the new guidance?
Speaker 1
Right now, we're expecting it to be about the same.
Speaker 10
All right. Great. Thank you very much.
Speaker 0
We will now take our next question from Jon Tower with Wells Fargo. Your line will be open in just a moment, Jon. Go right ahead.
Speaker 12
Great. Thank you. Excuse me. Just on the traffic side of the equation, it's been, I think, five quarters now of sequential deceleration in traffic. And given that you do have a loyalty database of 8,500,000 members, is there anything you can discern from where that traffic is going?
Speaker 1
No. I mean, one of the technology enhancements that we're putting in beginning later in the year and into next year is to better be able to segment and target and talk to our royalty members. So we will continue to get better at that data analytics. But at this time, we don't have an answer on that.
Speaker 12
Okay. And then just switching to commodity expectations for the year. Obviously, pork's rising, and there's fear in the market that that's going to have an impact on the rest of the protein structure. So what's embedded for commodity costs for the balance of 2019?
Speaker 1
Yes. We do expect, as a percent of restaurant sales, to still be favorable this year compared to last year. And right now, our pricing is roughly 2% for the company.
Speaker 12
And how much is locked?
Speaker 1
There is about 80% of our commodities are locked in. Now, that's not for the entirety of the year in some cases. So in the middle of the year, we will look at additional contracts for forward looking periods.
Speaker 12
Okay. And then just lastly on the marketing spend, I know it sounds like it's evolving quite a bit or not the spend, but I guess the spend going into omni channel versus traditional. Are you also thinking about spending more dollars year over year? Or are you allocating more towards higher TRPs relative to quarters and years past? Just kind of curious to flesh that out a little bit more.
Speaker 6
Yes. Overall, we're not looking at any significant change in spend year over year in total. We are we have, as mentioned, shifted some dollars from the first quarter to the third quarter. Second and fourth right now are planned to be about consistent year over year. We also have made some additional investment and shift into digital and social.
And we've actually been really pleased with the engagement levels that we've seen, which have grown significantly in the first quarter of the year through those channels.
Speaker 12
All right. Thank you.
Speaker 0
We will take our last question from Steven Anderson with Maxim Group. Please go ahead, Steven.
Speaker 11
Just a follow-up question to something you have in the 10 ks report about your own properties. And I just want to see if number the 37 restaurants that you own outright, including the real estate, that's a good number to still go by? Or if there's anything you've asked the consulting group that you may look at when you're evaluating those properties?
Speaker 1
Well, if we're refranchising some of those owned properties, we will offer to sell the properties along with the refranchising transaction, if that's your question.
Speaker 2
Yes, it is. Yes. Thank you. It would appear there are no further questions at this time. I'd like
Speaker 0
to turn the call back over to Patty Moore for any additional or closing remarks.
Speaker 1
All right. Thanks again, everyone, for joining us today. We look forward to sharing our second quarter results with you in August. Thank you.