Red Robin Gourmet Burgers Inc (RRGB) Q3 2020 Earnings Call Transcript

Transcript

Speaker 0

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated Third Quarter twenty twenty Earnings Call. Please note that today's call is being recorded. During today's conference 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 third 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

Good afternoon, and welcome to our quarterly conference call. It is my hope that you and your families have been safe and healthy since our last business update. Joining me today is Chief Financial Officer, Lynn Schweinfurt, who will review the financial results after I wrap up my prepared remarks. Today, we are extremely encouraged by the continued strengthening in the trajectory of our business. This is reflected in the progress we achieved during the third quarter in four key areas: sales momentum, margin improvement, liquidity and our transformation strategy.

In terms of sales, we experienced improvement of our comparable revenue, both when compared to the previous quarter and within the third quarter itself. Third quarter comparable restaurant revenue improved 16.3% from down 41.4% in the second quarter to down 25.1% in the third quarter. As of late and excluding shifts related to the timing of the Halloween holiday, comparable restaurant revenue has improved to approximately negative 13 to 14%, with comparable restaurant revenue at locations with open dining rooms down 10 to 13%. Notably, we are closing the traffic gap with our casual dining peers despite having a restaurant footprint with a large West Coast presence where regulations have slowed the expansion of seating capacity. The main driver of this progress is the increase in sit down capacity, both outdoors and in our dining rooms.

Outdoor seating options now extend beyond our small patios to include tents, all weather tents, and extended seating where available. Partitions are also currently being installed in all of our dining rooms to safely optimize and expand indoor seating, enabling us to achieve approximately 70% capacity as we enter the colder weather. These capacity enhancements are coupled with digital marketing, which drove traffic in dine in and off premise occasions. Benefiting from our focus on consumer segmentation and targeting, we have seen significant increases in loyalty engagement and website traffic. In the fourth quarter, we will increase our national marketing with a TV message highlighting both our dine in and off premise experience while continuing to leverage digital and social media locally.

Additionally, we are rolling out further loyalty improvements, including upgrading guest segmentation capabilities we believe will lead to increased visit frequency. I'm also pleased to report Red Robin recently achieved positive PPA, marking the first time since the onset of the pandemic. PPA growth was aided by the rollout of a new laminated menu to the majority of our restaurants where allowed, with enhanced product and menu merchandising driving a higher sales mix. The introduction of family bundles for off premise occasions and pricing in the fourth quarter of approximately 1.5%. As our business has recovered, we resumed the implementation of Donatos, a proven growth catalyst for Red Robin.

In late q three, we virtually trained our teams to prepare Donatos products and placed already purchased equipment in 31 locations in the Pacific Northwest, bringing our total to 79 restaurants serving Donatos pizza. We have experienced an incremental sales lift of 600 to 700 basis points given our strong off premise mix and comparable restaurant revenue as compared to the balance of the system. Based on the proven success of Donatos in existing markets, we are planning to add it to over 100 additional locations in 2021. Turning to margins. Our top line momentum has been complemented by prudent cash management, resulting in not only immediate P and L benefits, but is also positioning Red Robin to achieve improved operating margins as sales recover to pre pandemic levels.

Actions such as a new restaurant management structure, significant menu reductions, renegotiation of leases, and the streamlining of corporate overhead have improved the cost structure of both the restaurant and enterprise levels. Based on our current projections, we anticipate our fiscal fourth quarter free cash flows to be neutral to positive, driven by our improving margin performance together with our strengthening sales momentum. Securing Red Robin's long term viability by increasing liquidity has been a strategic priority since the pandemic began. As Lynn will discuss later, we recently received a $49,400,000 tax refund from the IRS. We believe the tax refund coupled with our improving business performance and cost structure addresses any lingering concerns regarding our liquidity outlook.

We are confident in our ability to invest in the growth of Red Robin as we emerge from the pandemic. Recall that when we presented our transformation strategy in January, we were filled with optimism on the heels of the measurable progress in Red Robin's turnaround. There were six initiatives inside the strategy pertaining to 2020, a new service model, menu rationalization, the Donatos rollout, investment in technology, off premise growth, and portfolio optimization. With the onset of COVID nineteen, as other brands did, we paused, reprioritized, or suspended certain aspects of our plan. Off premise capability and execution became the number one priority.

We pivoted and supported it through enhanced operating procedures, IT upgrades, improved ordering capability, and importantly, it drove a substantial menu rationalization, reducing our menu by over one third. As dining rooms reopened, we made the decision to accelerate the implementation of our new service model, TGX. We virtually trained and opened each dining room with TGX and are continuing to embed it in our culture and are enjoying the highest overall guest satisfaction scores for dine in in Red Robin's history, boding well for a future at 100% capacity. Finally, in the third quarter, our real estate portfolio optimization continued with ongoing conversations with our landlords, which Lynn will speak further to, and the permanent closure of five restaurants that have been temporarily closed. In what has and continues to be a challenging time, the team at Red Robin has made substantial progress against our initiatives.

In many ways, COVID served as a catalyst to prioritize and accelerate some initiatives, but all remain relevant to the business today and for the future. Before I turn the call over to Lynn, I'd like to reiterate how much we accomplished in the third quarter. Sales momentum improved dramatically, operating margins continue to grow, liquidity concerns have been put to rest, and our transformation strategy is both relevant and accelerating. All this is possible due to a remarkable team, which exhibits steadfast resolve, continued engagement, unwavering commitment to our brand, and collective efforts to provide our guests a great Red Robin experience no matter the obstacle. 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 third quarter financials, I wanted to begin by reinforcing that in spite of the fact that the resurgence of the pandemic has recently resulted in the temporary closure of dining rooms located in markets where hotspots have been identified, we remain confident in our ability to effectively manage our business in the short and long term. Importantly, we have experienced many positive trends as you can see from our press release issued this afternoon. First, average weekly sales per restaurant has improved each of the last four fiscal periods, and we are closing the traffic gap versus our competition due to several factors that Paul outlined. Outdoor seating expansion, restoring restaurant operating hours, our growing dine in business, including the gradual opening of dining rooms in California, continued strong off premise sales, operational execution and marketing efforts.

In the most recent fiscal period ending November 1, these factors more than offset the negative dollar impact of recently reduced dining room capacity due to the resurgence of the pandemic and the impact of Halloween, which occurred on Saturday this year. Overall, as our dine in business continues to grow, we are flowing more dollars to the bottom line. Our comp PPA growth has been positive since the beginning of the fourth fiscal quarter, generating higher sales due to enterprise level pricing of approximately 1.5%, new laminated menus that are positively impacting sales mix and profitability, and increased on premise dining capacity. We will complete the rollout of booth divider panels by Thanksgiving, which will maximize indoor seating capacity in all locations. At our restaurants that have added booth divider panels, we are seeing seeing a meaningful sales lift on the weekend during peak dinner hours.

We are also strategically adding all weather tents to certain locations that will further expand outdoor seating through the winter months. We recently rolled out Donatos, our very profitable growth catalyst, in 31 restaurants in the Pacific Northwest. We are prudently resuming our strategic growth platforms as our business recovery continues. Our liquidity position is strong, and we currently expect to enter 2021 generating positive cash flow, including the restoration of salaries, lease payments, and franchise revenue. More specifically, excluding the recent inflow of material tax refunds, we expect to be cash flow neutral to positive in the fourth quarter, which includes the impact of certain deferred and other nonrecurring payments.

We ended the quarter with liquidity of approximately $97,000,000 including approximately $27,000,000 of cash and cash equivalents and available borrowing capacity under our revolving line of credit. Our liquidity position does not include $49,400,000 in cash tax refunds, inclusive of interest payments received after the third quarter balance sheet date as a result of the CARES Act net operating loss carryback provision. We believe our liquidity is more than sufficient given the receipt of our cash tax refunds, continued seating capacity expansion, improved flow through due to reduced restaurant level and corporate costs and continued cash management efforts. As we confirmed last quarter, we are taking advantage of the tax benefits and deferrals as allowed by the CARES Act. More specifically, we are expecting to defer between 12,000,000 and $18,000,000 in payroll taxes to be paid back in late twenty twenty one and 2022, and we currently expect to generate additional cash tax refunds between 12,000,000 and $15,000,000 in 2021 from net operating loss carrybacks.

During the third quarter, we continued to diligently engage with our landlords to restructure our leases. As of the end of the third quarter, we had completed negotiations on approximately 50% of our leases. We appreciate the long term strategic partnerships we have with our landlords as we continue to engage in ongoing discussions related to our remaining leases. In response to the COVID-nineteen pandemic, the company undertook several other measures to preserve liquidity and reduce costs, including meaningful permanent reductions. We currently expect these permanent cost structure reductions will deliver a full percentage point of enterprise margin improvement compared to 2019 once sales normalize, including a higher off premise sales mix.

Additionally, we are turning our attention to the future and continuing to pursue the key strategic initiatives that we introduced in early twenty twenty, as Paul mentioned. Prioritizing these strategic initiatives while maintaining our diligence on cost management and liquidity will position Red Robin for recovery and long term growth. We intend to continue to effectively manage our bottom line and dedicate a significant portion of our free cash flow over the next several quarters to delevering our balance sheet while maintaining flexibility to pursue strategic growth initiatives. Now in terms of the fiscal third quarter, Q3 twenty twenty comparable restaurant revenues decreased 25.1%, driven by 24.6% decline in guest traffic and a point 5% decrease in average check. Mix decreased by 3.6%, 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, partially offset by an increase in overall pricing of 2.2% and an additional 0.9% increase from our decision to lower discounting.

Q3 total company revenues decreased 31.9% to $200,500,000 down $93,700,000 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 49.7%, partially offset by off premise sales growth. Our continued focus on our off premise sales and service model drove meaningful growth in the channel, which rose 127.2 in Q3, representing 40.7% of total food and beverage sales for the quarter. This compares to off premise sales representing approximately 14% prior to the pandemic. We generated restaurant level operating profit in the third quarter.

As a percentage of restaurant revenue, restaurant level operating profit was 8.6% and improved through the quarter, coming in better than our internal projections with higher sales and continued focus on managing costs. Cost of goods sold decreased as a percentage of revenue driven primarily by lower promotional discounts and net favorable commodity prices. Labor costs increased as a percentage of restaurant revenue driven primarily by the impact of sales deleverage and increased hourly wage and benefit rates driven by shifting labor mix in support of our off premise operating model, offset by a lower restaurant management incentive cost. Occupancy costs increased as a percentage of restaurant revenues, driven by the impact of sales deleverage. Other operating costs included higher third party delivery fees and supply costs from increased sales in this channel and sales deleverage impact on restaurant utility costs, partially offset by reduced janitorial and maintenance spend.

We expect our restaurant level operating profit margin as a percentage of restaurant revenue to continue to improve from 8.6% in the third quarter to low double digits in the fourth quarter. General and administrative costs were $15,200,000 a decrease versus the prior year of $4,000,000 primarily driven by lower team member salaries and wages, benefits, and lower travel and related expenses due to cost reduction initiatives post COVID nineteen. Selling expenses were $6,100,000 a decrease versus the prior year of $11,500,000 primarily driven by pivoting from local and national media to digital marketing, which is proving to be an effective and an efficient medium for interacting with our guests during the COVID nineteen pandemic while taking advantage of our access to over 9,000,000 members of our royalty program as well as reduced expenses associated with our gift card program. We recognized a tax benefit of $20,700,000 in the third quarter, and the change in the effective tax benefit is due primarily to a decrease in income and the net release of $12,700,000 in a previously recognized valuation allowance. During the quarter, we recognized other charges of $4,400,000 primarily triggered by the COVID nineteen pandemic.

These charges included $4,000,000 related to restaurant closures and $400,000 for COVID nineteen related costs, including purchasing personal protective equipment for restaurant team members and guests and providing emergency sick pay to our restaurant team members. Q3 adjusted EBITDA was a loss of $700,000 as compared to adjusted EBITDA of $14,700,000 in Q3 twenty nineteen. Q3 adjusted loss per diluted share was $0.19 as compared to adjusted loss per diluted share of $0.24 in Q3 twenty nineteen. Now turning to the balance sheet. At quarter end, our outstanding debt balance was $216,100,000 and letters of credit outstanding were $7,900,000 Our cash burn rate was slightly below our previously disclosed range at less than $1,000,000 per week during the third quarter with partial occupancy payments of approximately 80%.

Our weighted average interest rate was 5%. 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 over to Paul.

Speaker 1

Thank you, Lynn. Let me conclude with a few key takeaways before we open the line for questions. The third quarter was a pivotal quarter for Red Robin, one we view as an inflection point for the business. Any liquidity concerns are behind us, driven by our improving business performance, coupled with the $49,400,000 tax refund recently received. We resumed the expansion of Donatos, a proven growth catalyst, both top and bottom line, which we will bring to bear on the business over the next two to three years.

Comparable sales grew from negative 41.4% in the second quarter to negative 13% to 14% exiting the third quarter with PPA turning positive, closing the gap on our competitive set. We have structurally improved our restaurant level and enterprise level margins and expect a full percentage point of improvement when sales normalize to pre COVID levels. Our improving margin performance together with strengthening sales gives us the confidence to reiterate our projection of generating neutral to positive free cash flow in the fourth quarter. And as we contemplate controlled capital spend, our focus will be on profitable revenue

Speaker 0

generation and key guest facing technology improvements. And finally, all of our great work and optimism for the future would not be possible without the incredible efforts

Speaker 1

we and accomplishments of our Red Robin team members. We cannot thank them enough for what they do on behalf of our company and the communities we serve. Let us now open the call for questions.

Speaker 3

Speaker 3

Our next question is from Gregory Francfort with Bank of America. Please go ahead. Your line is open.

Speaker 6

Hey, thanks for the question. I had a couple. But first, you talked a little bit about adding all weather tents to some of the restaurants. I guess I'm curious, is that going to be at most of them? Or can you frame up maybe what the plan is in terms of, rolling that out?

And and then and what they got if if you've rolled them out so far, what the cut customer feedback is between outdoor dining versus the all weather tents and if it's materially different? And any early thoughts would be great.

Speaker 1

Well, this is Paul. And kind of answer in order, we are almost complete with that. That will be in 150 of our restaurants out there, about 38% of the system. The all weather tents basically, obviously, in the more of the northern tier of the country, especially in markets like Seattle. And then we are adding it wouldn't be all weather, but we have been adding tents in the kind of the Southern Belt as the, you know, temperatures down there have moderated.

We're seeing that people are now dining outdoors a bit more in the Southern tier. So far, the feedback actually has been very good with the all weather tents. But it's really in conjunction with the partitions that we've been adding to the stores. We'll have them in every one of our locations before Thanksgiving of this year. So it really gives people the opportunity either dine in because partitions enable us to push the indoor capacity closer to the 70% range.

But the people who do not want to dine indoors, so far have been very pleased with the tents and having heaters, having lights out there. We have the same service model. So knocking on wood, it's really performing well right now.

Speaker 6

That's helpful perspective. And then I just had two others. The first is on the lease restructuring. I think you said you've you've done that at 50% of the restaurants. How much does that, help, I guess, your expenses on either an annualized basis or quarterly basis?

And is that deferrals, or is it permanent changes? And then the other question I had was just on on national advertising and, you know, it's down your advertising spend is down a lot. I'm curious what the plan is in terms of how much of that's permanent versus, what you might bring back, and and and that's it. Thank you.

Speaker 2

Okay. Greg, well, I'll start by answering your question around rent. Yes, as of the end of the third quarter, we had negotiated and completed all the legal requirements around amendments for 50% of our leases. Our discussions and negotiations continue. As I mentioned in my opening comments, I'm just really thankful for the landlords that we're working with and really their longer term perspective as we enter into these discussions and get to agreements on our leases.

That being said, I'm probably not comfortable sharing what we're expecting until we really get to conclusion on more leases. But I think in the upcoming quarter, we'll be able to share more information at that time. Paul?

Speaker 1

Yes, I'll answer the question on the marketing. Certainly, as other brands did, we pivoted once the COVID-nineteen hit and went far more towards the digital area out there and the social. However, we haven't been doing any national TV or local TV. But in about two weeks, we will do our first TV flight, our first campaign. And it's really a bit of a test.

We are balancing how that media is put out there during the week or presented, much more balanced approach looking to drive a business into the less capacity constrained kind of Monday through Thursday time frames in the restaurants, see how that works and how it could be potentially applicable to our media strategy for 2021. So excited about that, look forward to it. As I said, it'll be the first time we've been on since Q1 of this year.

Speaker 6

Thank you both.

Speaker 3

Great. Thanks, Greg. We do have a follow-up from the line of Daniel Dougherty with Raymond James. Please go ahead. Your line is open.

Speaker 4

Hi, guys. Thanks for taking the question. Just a follow-up on advertising. Could you talk a little bit about how you're thinking about bringing back advertising as sales recover and how that mix might differ versus pre COVID as as we exit COVID? And then, Lynn, any chance you could help us with some guide rails on modeling that line for 4Q so we're all on the same page?

Speaker 1

I'll start off with, how we're looking at it moving forward. As I just mentioned, I wanted to the media that we're about to run that launches the sixteenth of this month, we're really taking a hard look at how does TV impact the restaurants when there are some capacity constraints in them. We've been very pleased with the digital and social media efforts and the ability of us to access our guests through we have over 9,000,000 members of our loyalty program. So that's, we think, given us a strong ability to message. So out of this test, we'll be able to say what should the mix be in 2021 and how should that frankly, the amount of dollars be spent on that.

But we will continue to spend more and more money on the digital and the social media aspect because we're very happy with how the results of that have been.

Speaker 2

And then just in terms of our spend for the fourth quarter, we are anticipating spending about $5,000,000 more than what we spent in Q3, so about 11,000,000

Speaker 4

Got it. Great. Thank you, guys.

Speaker 2

Great. Thanks, Dan.

Red Robin Gourmet Burgers - Earnings Call - Q3 2020

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