Red Robin Gourmet Burgers - Earnings Call - Q2 2020

Transcript

Speaker 0

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated Second Quarter twenty twenty 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 twenty twenty 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.

Speaker 1

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 Schweinfurt, our Chief Financial Officer, who will 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: one, secure the long term viability of Red Robin through increased liquidity two, ensure the health and safety of all team members and guests three, leverage our off premise channel to drive sales and opportunistically reopen our dining rooms four, reduce expenses and improve flow through on lower sales and five, position Red Robin for recovery and future growth.

Preserving liquidity and the long term viability of Red Robin included several immediate and, in some cases, difficult actions, reducing salaries, eliminating a material number of corporate positions, significantly reducing spending at both the restaurant and corporate levels, renegotiating our credit agreement, raising approximately 30,000,000 in capital through our at the market equity offering and within the next twelve months generating significant cash tax refunds. As a result, as of August 9, we have substantially improved our liquidity since last quarter to more than $103,000,000 between cash and cash equivalents and available borrowing capacity. I am confident that we have the liquidity capacity to emerge from this period a stronger, more profitable enterprise. Red Robin has not only persevered over the past several months, we have used the focus created by the pandemic to improve the quality of our operations and build trust and loyalty with our guests that will pay dividends long into the future. Even with all the past and recent volatility created by COVID-nineteen, our hard work and dedication to delivering best in class hospitality that includes stringent health and safety standards has resulted in record high dine in and off premise guest satisfaction scores.

This focus on health and safety has also extended to our restaurant support center team members who are now effectively working remotely to support our restaurants. Importantly, data has shown that our guests clearly see and appreciate what we are doing because they feel safe bringing their families to Red Robin versus other brands. We are committed to this continuing to be a strength along with exceptional hospitality, which we believe will enable us to take market share as we get through this pandemic and beyond. We are pleased that our business trajectory has exceeded our expectations, including generating meaningful off premise sales of 208.7% growth in Q2 as compared to the prior year. In March, we had to pivot to an off premise only operating model and gradually opened our dining rooms beginning in mid May with an increasing sales trajectory.

Then in early July, we had to pivot again to address a resurgence of the pandemic and the requirement to close our indoor dining rooms in California, our largest state. However, we have regained momentum in our business since the resurgence with sequential improvement in average weekly net sales per restaurant over the last five weeks. Resetting our operational focus in a dynamic environment has been a strategic imperative. Our second quarter off premise sales performance was driven by our focus on all off premise sales channels, carryout, third party and Red Robin delivery or last mile. These channels have benefited from the rollout of our simplified menu of one third fewer items and refined operating processes.

This smaller menu has resulted in faster ticket times and improved consistency and quality of food while enabling our back of house to realize greater efficiencies. We have also enhanced the process flow of off premise orders, dedicated more space for order assembly, and more recently implemented improvements in the accuracy of promised times. We have made it easier for guests to enjoy our food outside of our restaurants through increased curbside and delivery options, including the implementation of Red Robin delivery across all company operated restaurants and third party delivery across the entire system. We believe we can further enhance the off premise experience over time and have completed much of the foundational work that has greatly improved our execution. And through focused collaboration across the company, we have seen record high off premise guest satisfaction scores.

As dining rooms began to reopen, we opportunistically accelerated the implementation of our new hospitality model, TGX, or total guest experience. This system wide rollout had been planned pre COVID and was a major strategic initiative designed to holistically improve our guest experience. Dining room reopenings provided us the opportunity to accelerate this rollout and focus on system wide implementation and execution. We believe the TGX model will continue to improve our guest experience and are currently enjoying record high dine in guest satisfaction scores. With these successful operational enhancements now integral to our service model, we are expanding outdoor seating beyond our patios in the majority of our system, including California.

We are also piloting the implementation of partitions inside our restaurants to ensure that we are developing a holistic solution for both our guests and our operating teams that we believe will be utilized for the foreseeable future. These initiatives will allow us to safely enhance seating capacity while delivering a consistent great guest experience whether dining inside or outside our restaurants. Cost reductions at both the corporate and restaurant levels are providing immediate benefits to our P and L with positive restaurant level profitability in the second quarter. This positions our business for long term sustainable cost reductions. In addition to reductions in restaurant level and corporate costs, we have shifted our focus to digital marketing, which has proven to be an efficient medium for engaging with guests during the pandemic.

Also, as Lynn will speak about further, we are expecting significant cash tax refunds over the next twelve months and continue to make good progress restructuring our leases in partnership with our landlords. As a result of the focus on the priorities we set for the business, Red Robin is strongly positioned to emerge from the pandemic and resume our strategic plan, thereby transforming the business for future growth. Our plan includes delivering best in class execution through our TGX hospitality model, rolling out Donato's Pizza, continuing to reduce costs and improve efficiency at both the restaurant and corporate levels, redesigning our restaurant prototype and remodels to enhance the off premise experience and post pandemic reality, and generate cash flow to ensure liquidity and financial security. We are collecting learnings from our implementation of TGX and intend to continue to enhance it so that our engagement and ability to offer guests a quality dining experience is continuously improving. Before the end of the year, we expect to roll out Donatos to 31 restaurants in the Seattle market with the majority of the equipment purchased prior to COVID nineteen.

As we have said in the past, the 48 restaurants that added Donatos Pizza prior to the onset of the pandemic have been consistently outperforming restaurants without Donatos from a comp sales standpoint by approximately 700 basis points. We therefore look forward to resuming our Donatos rollout given its proven and compelling return on investment. We are dedicated to further enhancing our technology and digital capabilities in 2021 and beyond. And while enhancements are on the way, it is important to acknowledge that our digital channels, including online ordering through our Red Robin website and third party marketplaces, are already driving approximately 80% of our off premise sales. We also plan to refine our restaurant prototype in 2021 to more effectively balance and address quality of execution for both off premise and dine in channels in a post pandemic world, while providing the ability to leverage a projected favorable real estate environment.

We will also use this initiative to influence our restaurant remodels going forward in 2022 and beyond. Finally, we are committed to generating positive cash flow before the end of the year. In addition to cost reductions, cash management and tax refunds, we expect to build sales through increased seating capacity with expanded outdoor dining and indoor table partitions, continue to deliver a great guest experience through sustained guest satisfaction across all channels and effectively drive trial and frequency through digital outreach. Now I'll turn the call over to Lynn, and we'll wrap up before we take questions with some final thoughts. Lynn?

Speaker 2

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 $103,000,000 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 refunds, seating capacity expansion currently underway, improved flow through due to reduced restaurant level and corporate costs 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 am 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 approximately $2,000,000 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-nineteen 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 twenty twenty one. In addition, we filed a $40,000,000 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 $25,000,000 by 11/13/2020. This condition was satisfied within the first day of our at the market equity offering in June when the company raised almost $30,000,000 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 carryback, which could generate between $14,000,000 and $17,000,000 of cash tax refunds within the next twelve months. Now in terms of the fiscal second quarter, Q2 twenty twenty 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-nineteen. Q2 total company revenues decreased 47.7% to $161,100,000 down $146,900,000 from a year ago, driven by operating our restaurants at a reduced capacity in response to the COVID-nineteen 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 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 $14,100,000 a decrease versus the prior year of $7,700,000 primarily driven by lower team member salaries and wages, benefits and lower travel and related expenses and professional costs due to cost reduction initiatives post COVID-nineteen. Selling expenses were $5,600,000 a decrease versus the prior year of $7,900,000 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-nineteen pandemic while taking advantage of our access to the over 9,000,000 members of our royalty program as well as reduced expenses associated with our gift card program. We recognized a tax expense of $3,700,000 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 $79,000,000 carryforward balance within the related twenty year period. During the quarter, we recognized other charges of $14,500,000 primarily triggered by the COVID-nineteen pandemic. These charges included $7,600,000 related to restaurant closures and refranchising costs, dollars 5,300,000.0 related to restaurant asset impairments, dollars 1,000,000 in board and stockholder matter costs and $700,000 for COVID-nineteen 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 $15,300,000 as compared to positive adjusted EBITDA of $25,500,000 in Q2 twenty nineteen.

Q2 adjusted loss per diluted share was $3.31 as compared to adjusted earnings per diluted share of $1.03 in Q2 twenty nineteen. Now turning to the balance sheet. At quarter end, our outstanding debt balance was $206,600,000 and letters of credit outstanding were $7,500,000 In early January, we refinanced our credit agreement with our lenders, securing a $300,000,000 credit facility, which provides liquidity through early twenty twenty five. As previously mentioned, on May 29, we further amended our credit agreement to ease financial covenant requirements through the third quarter of twenty twenty one, and our recent capital raise requirement hadn't been fulfilled in June. We ended the quarter with $26,000,000 in cash and cash equivalents, and our cash burn rate was at the low end of our previously disclosed range at $1,000,000 per week with partial occupancy payments.

Our weighted average interest rate was 4.2%. In response to the uncertainty related to the COVID-nineteen 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 results 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, landlords, suppliers and shareholders.

With that, I will turn the call back over to Paul.

Speaker 1

Thank you, Lynn. Before we take your questions, let me leave you with the following thoughts. Before the crisis, there were already headwinds challenging casual dining brands to evolve and raise their game from demographic and lifestyle shifts to increased pressure to innovate while driving convenience and value. The pandemic has created a laboratory with extreme circumstances for accelerating changes, changes that are already underway at Red Robin. I am confident we have the liquidity capacity to emerge from the crisis with a more robust business model and strong brand position that will deliver long term sustainable shareholder value creation.

While the pandemic is certainly not yet behind us, our confidence is based upon the results produced by our incredible Red Robin team members prior to and during this crisis. Thank you for your time today and interest in Red Robin, and we would now be happy to take your questions.

Speaker 0

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

Speaker 3

Hey, good afternoon. Thanks for the question. Just wondering if you guys could, update us on the progress of configuring your dining rooms to handle 75% capacity levels. I believe you've 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?

Speaker 1

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 that 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 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 small patio that a 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.

Speaker 3

Okay. How much have you added in terms of incremental new patio space thus far and other sort of outdoor Frankly, dining

Speaker 1

we've added very few so far. We just really launched it about ten days ago. And that's why we see it will 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.

Speaker 0

Thank you. That's helpful.

Speaker 1

Great.

Speaker 0

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

Speaker 4

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's closing and dining rooms hurt you? Maybe some color on outside of that in some states where you haven't had closures maybe by the increased cases.

How much dispersion is there in terms of the comp performance really over the last six or eight weeks?

Speaker 2

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 four percent 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 occurrence.

Speaker 4

Thanks for that. And then, Lynn, what 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 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 cost opportunities have been and maybe the order of magnitude that maybe get preserved post COVID?

Speaker 2

Well, was a pretty large question, Dawn. I mean, as you can see from our second quarter results, we did generate operating profit of 3,200,000 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 some 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 to 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.

Speaker 4

Okay. Thank you.

Speaker 0

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

Speaker 5

Thanks. This is actually John Michael on for Greg. Thanks for taking my question. I wanted to ask on labor. It's been a lot more variable than we would have expected.

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?

Speaker 1

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 in, the number of tipped employees who are 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 premise 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.

Speaker 5

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?

Speaker 1

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 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. 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.

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 in the back of the house, we see ongoing savings really in all three areas.

Speaker 5

Got it. Thank you very much.

Speaker 1

Thank you. Our

Speaker 0

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

Speaker 3

Thanks and good evening. I wanted to circle back to the sales mix. And looking at the three fifty or so company units with reopened dining rooms, curious where the off premise sales mix has settled out in recent weeks I guess the AWS in that kind of $3,839,000 a week range. How much is off premise? And then could you break that down further between, takeout versus delivery?

Speaker 2

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?

Speaker 3

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

Speaker 1

Well, I mean, 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, I mean, you're seeing it across the industry. But in our own research, we're seeing that our guests certainly that the research we're doing have said that 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 the early results in the few restaurants that we have opened that up so far.

Speaker 3

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

Speaker 1

capacity to unlock? Well, 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.

Speaker 3

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

Speaker 1

That's a good question. I'll be honest, I'll take a guess, but I could get back to you at the more specific answer in the future. But I'd say about 30, 30% to 40%.

Speaker 3

Okay. Okay, great. And then last one for me. The weekly burn rate of $2,000,000 a week, could you decompose that a bit and remind us sort of what the weekly G and A run rate you expect in Q3 and then the interest costs or any other cost assumptions that are embedded into that $2,000,000 weekly burn rate for Q3?

Speaker 2

Sure, Brian. And let me circle back to your first question. As our current off premise sales when dining rooms open, about 40% are carryout and 20% are third party. And then in terms of our ongoing G and A assumption and our cash burn calculation, the G and A assumption is about $1,250,000 per week. And the interest expense expected is roughly $2,000,000 a quarter.

Speaker 0

Okay. Okay. Okay, thank you. I'll pass it along. There are no further questions in the queue.

And with that, I would like to conclude the call and thank you for joining Red Robin's conference call today. You may disconnect your lines at this time and have a great evening.