Red Robin Gourmet Burgers - Earnings Call - Q4 2019
February 25, 2020
Transcript
Speaker 0
Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated Fourth 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. The company has posted its fiscal fourth quarter twenty nineteen earnings release and supplemental financial information related to the results on its website at 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 thank you for being with us today. I'm joined by Lynn Schweinfurt, our Chief Financial Officer, who will review our quarterly financial results and annual guidance. Let me begin by briefly addressing Q4 within the context of our strengthening business. We were encouraged to see our second consecutive quarter of positive comparable restaurant revenue. As anticipated, we achieved this top line performance while intentionally unwinding discounting and with reduced year over year marketing spend.
You may recall that we allocated more of our annual marketing spend to the third quarter in twenty nineteen when we launched our new omni channel creative campaign. You can see from our Q4 results that the campaign continues to resonate and drive sales momentum. Importantly, the sales momentum has continued into 2020. We also believe our core business and turnaround process is taking shape as evidenced by improvements in key performance indicators such as staffing, retention, ticket times, and ultimately our guest satisfaction scores. 2019 was a period of diagnosis, change and setting the foundation.
In 2020, we are executing our four point plan to accelerate our turnaround and drive long term value creation for all constituents. The elements of this plan are as follows: one, recapturing the soul of the Red Robin brand two, delivering the brand promise three, telling our story to reinforce emotional connections and core brand equities and four, accelerating profitable growth. Recapturing the soul of our brand is about clarifying Red Robin's positioning and ensuring that our guest experience aligns with why guests choose Red Robin for their meal occasion. What we learned in Q4 through our research is that our guests defined a Red Robin experience through four criteria that enable them to create memorable moments of connection. These are one, the flavor of Americana on the menu through gourmet burgers and other favorites two, the family friendly and playful atmosphere that connects people not only around the table, but also with team members.
Three, the spirit of sharing brought to life by our bottomless steak fries, towering onion rings, and more recently in test markets with Donatos Pizza. And four, engaged service that offers the gift of time, where guests have the ability to determine their pace of experience during a Red Robin visit. Importantly, these are all actionable items, which we are emphasizing to our general managers and field leadership must be delivered to our guests. When these items are executed consistently at a high level, our guests become our strongest brand advocates and in turn increase their frequency of dining at Red Robin. In delivering the brand promise and moments of connection, we are implementing a new service model in 2020, which is designed to improve the functionality of our service while elevating our hospitality.
SAMs, the handheld POS terminals are a foundational element of the new service model. In combination with the new service model, we are receiving positive feedback from our operators in test locations, including a reduction in ticket times and increasing our top line sales performance. Turning to menu rationalization, we believe that by rationalizing our menu size, we can improve both the ordering experience and overall guest satisfaction through reduced ticket times and consistent high quality execution in the heart of the house. Our investments in technology are critical to us connecting with our guests both in and outside of our restaurants and strengthening our ability to leverage Red Robin Royalty, which is already one of the largest loyalty programs in casual dining with more than 9,000,000 members. In Q4, we began testing marketing automation as part of our loyalty platform upgrade initiative.
With email offers targeted by visit frequency and purchase behavior. Initial results are very encouraging, and we continue to optimize the effectiveness and profitability of this functionality through testing. Finally, restaurant manager staffing remains above 98%. General manager, manager and hourly turnover are consistently trending downwards, and both general manager and manager turnover are now exceeding our best in class target benchmarks. These metrics correlate positively to guest satisfaction.
As retention and staffing improves, guest satisfaction rises. Telling our story to reinforce emotional connections and core brand equities, the third part of our plan is about aligning our messaging with the brand. In Q3 last year, we launched the All the Fools omni channel campaign, which is driving guest engagement and an emotional connection with Red Robin, as it showcases the Maricona aspect of our menu coupled with our family friendly and playful atmosphere. Previous to this campaign, our message was largely price driven. Yet in research, guests told us it was moments of connection that activated their use of Red Robin, not just price.
When we corrected this messaging misalignment, Red Robin scored as one of the top two brands for search engagement volume across all casual dining during our Q4 media flight. Notably, social engagement doubled year over year with increased positive sentiment, and therefore, we are allocating increased resources to social and digital channels in 2020. Accelerating profitable sales growth represents the fourth and final part of our plan. We will accomplish this through several means, beginning with growing our off premise business, including to go, catering, third party marketplaces with delivery services and Red Robin delivery. Red Robin delivery was rolled out nationally in January to the majority of our company operated restaurants.
Guests order directly from Red Robin, but the delivery is outsourced to a third party. And this offers us three advantages: one, the economics are favorable two, we retain guest data and three, guests can use the Red Robin Royalty program, which is particularly important as 30% of our business is driven through the loyalty program. Continued growth of our off premise business in the future will be supported by our new digital platform, which we believe will enhance the guest ordering experience and order completion rates, along with other initiatives and process focused on improving our to go and delivery execution within the restaurants. We are also enhancing our menu with the introduction of Donato's Pizza to our system over the next three years. We believe this menu enhancement will drive frequency, appetizer sales and delivery, as has been successfully demonstrated in our test markets.
And finally, we are developing a new restaurant prototype to drive profitable development in the future. We plan to open our first restaurant utilizing this new prototype design in early twenty twenty one. The new prototype will further inform our restaurant refreshes going forward as well. Before I turn it over to Lynn, I want to comment on our recent announcement appointing Alison Page to our Board of Directors. Alison is an accomplished industry executive and currently serves as the co founder and president of Seven Rooms.
She brings a unique consumer lens to revolutionizing the restaurant guest experience, and we look forward to benefiting from Allison's expertise. Finally, we are laser focused on maximizing value for all shareholders. We have identified significant and achievable opportunities, have a clear path forward, and our turnaround is already in process and building. Our top line momentum is continuing, our operational metrics are rising, our creative campaign is working, and we have proven and tested profitable sales catalysts to positively impact our business. With that, I'll turn the call over to Lynn.
Speaker 2
Thank you, Paul, and good afternoon, everyone. As we turn around our performance invest in the business, we are encouraged by our improving sales trajectory in the fourth quarter of twenty nineteen. Comparable restaurant revenues increased 1.3%, which as Paul mentioned, marked our second consecutive quarter of positive comparable sales growth. The Q4 improvement was driven by a 4.7% increase in average check, partially offset by a 3.4% decline in guest traffic. Overall pricing increased 1.8%, while we also realized an additional 1.8% increase from our decision to lower discounting.
Mix increased by 1.1% driven by our menu and promotional strategies put in place this year resulting in lower tavern mix and higher gourmet and finance mix. Q4 total company revenues decreased 1.2% to $302,900,000 down $3,800,000 from a year ago, driven primarily from 18 fewer restaurants due to closures during 2019. Dine in sales were down 3.8% partially offset by off premise sales growth. Off premise sales growth continues to be meaningful and rose 26.9% in Q4, representing 13.9% of total food and beverage sales. Catering continues to be an important growing sales category with material long term potential delivering approximately 12% growth in the fourth quarter over the same quarter in 2018.
Our sales team is focusing on among other things driving business to business national accounts, supporting recurring catering occasions and refining our core catering menu, including expanding our carbonated beverage offering. Q4 restaurant level operating profit as a percentage of restaurant revenue was 18.9%, down 50 basis points versus a year ago, driven by the following factors. Cost of sales of 23% improved by 60 basis points compared to a year ago and improved sequentially compared to anticipated, primarily driven by lower pork and steak fried costs, partially offset by unfavorable ground beef costs. Restaurant labor costs of 34.5% were favorable 20 basis points versus a year ago due primarily to lower group insurance costs in Q4, partially offset by higher average wage rates of approximately 5% and higher manager staffing levels within restaurant technology costs compared to a favorable adjustment in Q4 twenty eighteen. Occupancy costs increased 20 basis points to 8.9% due primarily to higher general liability costs in Q4 twenty nineteen, partially offset by decreases in rent due to fewer company owned restaurant locations since the fourth quarter of twenty eighteen.
General and administrative costs increased 40 basis points to 6.4% of total revenues, driven primarily by increased team member salaries and benefits, partially offset by decreases in miscellaneous corporate expenses. Selling expenses decreased 30 basis points to 5.4% of total revenues due primarily to a decrease in local media spend due in part to higher spending in Q3 to support the launch of our new creative campaign. Net interest expense in other was $900,000 lower versus the prior year due primarily to a higher gain in our deferred compensation plan assets compared to the same period a year ago as well as a reduction in interest expense. Our weighted average interest rate was 5.1%. The quarter over quarter unfavorable change in the effective tax rate is due primarily to GAAP requirements for calculating taxes on a quarterly basis.
This Q4 expense is in the range of where we expect it to be based on the tax benefit we booked Q3 year to date and where we expected our full year tax benefit to be. During the quarter, we recognized net other charges of $4,100,000 which included charges of $1,400,000 related to restaurant closures and refranchising costs, dollars 1,000,000 related to asset impairments, 800,000.0 in Board and stockholder matter costs, 500,000.0 in executive transition and severance costs and $400,000 in executive retention costs. Q4 adjusted EBITDA was $26,700,000 as compared to $28,400,000 in and Q4 adjusted loss per diluted share was $0.36 as compared to adjusted earnings per diluted share of $0.43 in Q4 twenty eighteen. Now turning to the balance sheet. We invested $24,200,000 in CapEx in Q4, which was primarily related to investments in information technology, facilities improvements and costs related to our rollout of Donatos.
In the fourth quarter, we completed the rollout of handheld POS terminals that along with headsets will enable our team members to deliver an even better guest experience fundamental to the rollout of our service model. We ended the quarter with $30,000,000 in cash and cash equivalents. Our lease adjusted leverage ratio was 4.72 times and we were in compliance with all debt covenants. During the quarter, we drew $18,000,000 on our revolving credit facility resulting in a quarter end outstanding debt balance of $2.00 $6,000,000 in addition to letters of credit outstanding of $7,500,000 In early January, we refinanced our revolving debt agreement with our lenders. We now have in place a five year $300,000,000 credit facility, which provides ample liquidity through early twenty twenty five to fund our operational and strategic capital needs and provides capital allocation flexibility and surety.
Our capital allocation strategy focuses on disciplined investment in growth projects, including Donatos, reinvestment in maintaining our restaurants and infrastructure, paying down debt and return of capital to our stockholders through increased share repurchases. We intend to use at least 50% of our free cash flow to delever our balance sheet and return capital to stockholders by increasing share repurchases under our existing $75,000,000 authorization. During the fourth quarter, we bought back approximately 34,800.0 shares for a total of approximately $1,000,000 Turning to our real estate portfolio. In the third quarter and during our earnings call, we announced strategic decision to exit company operations in Canada. As a result, during the fourth quarter, we closed our five remaining restaurants in the Edmonton area and refranchised the remaining 12 restaurants in British Columbia to an experienced restaurant operator.
In 2019, the Canada restaurants generated $38,600,000 in restaurant revenues and $500,000 in restaurant level operating profit. We continue to assess our restaurant portfolio and are continuing to develop a refined restaurant prototype that optimizes both the dine in and off premise restaurant experience for future development and restaurant refreshes and remodels. We have included our guidance for 2020 as published in our earnings release this afternoon. We expect to commit between 50,000,000 and $60,000,000 to CapEx spend in 2020 and expect adjusted EBITDA of at least $101,000,000 flat to 2019. Consistent with what we announced at the ICR Investor Conference in January, we expect low single digit positive comparable restaurant revenue growth in 2020.
We further expect that incremental restaurant level operating profit will be offset by pre opening expenses, marketing and project expenses associated with our growth initiatives. Before I conclude, I'd like to take a moment to thank our Red Robin team in the restaurants and at the restaurant support center for their significant contributions towards the improvements we are seeing in our business as we invest in and build a sustainable long term foundation to create value for our stockholders. With that, I will turn the call back over to Paul.
Speaker 1
Thank you, Lynn. To conclude, I'm even more encouraged now than when I first joined Red Robin about the company's potential. Our passion to succeed is contagious across the restaurant support center and in the restaurants. And I know that by remaining focused on initiatives I have articulated, we can transform the company, accelerate growth and maximize value for shareholders. The early indicators are positive and we are confident in our ability to deliver the plan.
Thank you. And with that, we would be happy to take your questions.
Speaker 0
Thank you. At this time, we will be conducting a question and answer a question, please press star one on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. A confirmation tone will indicate your line is in the question queue. Our first questions come from the line of Alex Lagell of Jefferies.
Please proceed with your question.
Speaker 3
Thank you. A question on Donatos and as you've continued to test there, I'm wondering how the operators have responded. I imagine it's operationally fairly straightforward. And also, could you remind us of the equipment upgrades needed?
Speaker 1
Well, so far, the operators have responded extremely well. In fact, we just had our general manager conference. And at that conference, every general manager actually had the opportunity to get their hands dirty and make a pizza and cook it through the oven and actually get to eat it after they made their own pizza. So the enthusiasm is high for it. General managers that already have it in their locations, very bullish.
They like the results that they're seeing from a top and bottom line in their locations, and they were great ambassadors for at the General Manager Conference to the other General Managers. So we're excited to begin that rollout, which is really going to be in just the next couple of weeks, beginning here in the Colorado market. I'm going turn it over to Lynn for the equipment side of it. Okay.
Speaker 2
And we will be incorporating into our kitchens a pizza oven and a make station and moving around some other parts of our kitchen to accommodate the implementation of Donatos. The capital spend is estimated at $145,000 per restaurant. And we also expect to incur about $20,000 in pre opening expense per restaurant.
Speaker 3
Okay. And in your initial test, have you seen any cannibalization to speak of? And if there's anything in terms of channel mix, whether it's dine in or delivery, where you're seeing something different?
Speaker 2
Yes. Alex, I'll start and then, Paul, if you'd like to chime in. We have seen the Donato sales to be highly incremental. And we do see a skew of delivery orders, but we also see dine in sales improving as well, including as an appetizer in the restaurant.
Speaker 1
Alex, we've been very pleased with the certainly the top line result. We're seeing that it's driving transactions into the restaurants. There's a high degree of incrementality to it. We see it, as Lynn mentioned, is fitting very well into the delivery side of the business and we're seeing it used very much as an appetizer, which we love from the spirit of sharing that we've seen as one of the criteria that guests say that the reason they use the brand. A cannibalization, it's been extremely minimal and we're pleased so far with the results that obviously we've committed to the rollout.
Speaker 3
Thanks. I'll pass it on.
Speaker 0
Our next questions come from the line of Gregory Francfort of Bank of America. Please proceed with your question.
Speaker 4
Hey, guys. Thanks for the questions. I had two. The first is just on the to go mix. Where do you envision that going?
Kind of how long do you think it will get there? Any sort of expectations on the longer term plan around that front? Thanks.
Speaker 2
Our current to go percent of sales is well, it represents about 6.7% of our sales today. We do expect that number to grow. I'm not sure we're prepared to provide a target today, but we have actually dialed back some of our marketing around to go as we were rolling out other initiatives and really stabilizing the business in 2019.
Speaker 4
Got it. Thanks. And then just the other question I had was just on labor. I think you had said in the prepared remarks, you're seeing wage rates up about 5%. And I think you've also been investing in labor hours, the labor cost as a percent of sales was down year over year.
Can you maybe talk about what are the biggest deltas of that? Is that anything on maybe health insurance? Or is it just kind of efficiencies you're finding? Kind of what are the biggest drivers? Thanks.
Speaker 2
Yes. As you mentioned, we are experiencing about 5% of wage rate inflation. Part of the benefits we saw that helped to offset that number included lower group insurance costs. And we also believe just having higher staffing levels in the restaurants are also helping turnover at the hourly level, which also reduces related training.
Speaker 4
Great. Thank you very much.
Speaker 0
Our next questions come from the line of Chris O'Cull of Stifel. Please proceed with your questions.
Speaker 5
Thanks. Could you guys describe the Donatos test? Maybe how many locations had to test for a year or more and what regions of the country had to test?
Speaker 1
Yes. We've had about 25 locations that have been in test. The regions that have been over a year have been on the East Coast in the North Carolina Raleigh area and then in the Phoenix area. That was purposeful just to make sure that frankly, we weren't testing in Donato's backyard. Certainly wanted to make sure that the Donato's Pizza resonated and would perform in areas that it might have a little bit less brand awareness.
So we're very pleased to be rolling over to see the mix sustaining and that we're we're excited about the impact both, as I mentioned earlier, both the top line, about a 3.5% traffic lift and the influence on the average check.
Speaker 5
Okay, great. And then just a follow-up. Lynn, if you include the investments in the service model rollout and the Donatos introduction, do you expect restaurant margin to be flat for the year? And also, do you expect the timing of the investments to have any kind of outsized impact on margins or restaurant margin in any one quarter?
Speaker 2
Yes. I think we believe restaurant level margins can be actually a little bit better year over year. There are a few moving pieces to that. One is we did close 30 restaurants or refranchise a total of 30 restaurants last year. So having those stores out of the system do help just overall margins from that standpoint.
We also believe it or not from a cost of sales perspective, we've been able to lock in and we expect our fixed contracts, pricing, lower waste and again the store closures I mentioned to offset the higher costs we're seeing in our ground beef and our bacon. So we will see pressures on our labor and on our other operating expenses. But going back to the closures that I mentioned initially, we will see a benefit on the occupancy expense line as well.
Speaker 5
Should we expect any kind of variation or volatility in the margin performance any one quarter?
Speaker 2
I think there may be some pressures in the first two quarters of the year, and that has to do with some of our initiative rollouts that we've been talking about, primarily Donatos. And then as we start to roll out the new service model in the middle part of the year, we'll see some effect associated with that.
Speaker 5
Great. Thanks, guys.
Speaker 0
Our next questions come from the line of Brian Vaccaro of Raymond James. Please proceed with your question.
Speaker 6
Thanks and good evening. I just wanted to circle back. The press release talked about the quarter to date trends and characterized that the momentum has continued. And I know you usually don't get too specific, hoping you might be a little bit this quarter given some of the unique dynamics that you saw in the fourth quarter on the unwind of the discounts, which I assume negatively impacted traffic. So would you be willing to be a little more specific on what you're seeing quarter to date either from a comp or traffic perspective?
Speaker 1
I think the only thing I would say is, as I mentioned in my remarks, that the momentum has continued and we're pleased with how the results have responded to the initiatives that we put in place in terms of things that we're doing against the operating model and the overall operations of the company. I think pleased is a word that shows I have a high degree of confidence in where we're going.
Speaker 6
All right. Fair enough. And on the guidance, Lynn, I'm curious, what have you embedded in terms of G and A? And I know there are some investments in the initiatives and then some savings that I think are offsetting that. Can you walk through some of the details within that?
Speaker 2
Yes. I'll probably keep my comments a little bit more general, but we do believe that investments in initiatives, inflation and variable based compensation will be offset by savings initiatives within the corporate structure.
Speaker 6
All right. I'll pass it along.
Speaker 1
Thank you.
Speaker 0
Our next questions come from the line of Gregory Francfort of Bank of America. Please proceed with your question.
Speaker 4
Hey guys, I just had an extra follow-up. I know you talked about the margin benefits next year of some of the closures and refranchising you guys have done. Just Can you maybe help quantify either what the margins were on those stores or what the margin benefit will be from sort of taking those out of the base? That would be helpful. Thanks.
Speaker 2
Yes. I'm not sure we're prepared to actually quote a number, but I will tell you together some of the disclosures we made over 2019, we specifically provided numbers associated with the restaurant closures as we move throughout the year.
Speaker 4
Okay, great. Thank you.
Speaker 0
Our next questions come from the line of Chris O'Cull of Stifel. Please proceed with your question.
Speaker 5
Yes. I missed this, and I apologize if I did, but did you say that the Donatos agreement is, is it a licensing arrangement that you have with Donatos? And if so, what's the rate or duration of the agreement?
Speaker 1
Well, yes, it is a licensing agreement, but we're not right at this moment prepared to give the rate on it. As for duration, I would have to refer to Lynn on that.
Speaker 2
It's certainly a multiple year agreement. And it really takes the form of a more traditional franchise agreement, but we are unable to disclose the financial terms related to that agreement.
Speaker 0
Our next question comes from the line of Jon Tower of Wells Fargo. Please proceed with your question.
Speaker 7
Great, thanks. Just a couple from me. First, and I apologize if I missed this, but I was curious if you had provided the cadence for how we should think about the Donatos rollout, especially the impact on the pre opening line related to the ovens being pushed to the stores. And then secondarily, when you were testing this product, what was the competitive response you were seeing in the markets? And what have you seen to date you do advertise this in markets?
Speaker 2
Okay. Well, there were a few questions thrown out there. So maybe let me start with your first question on the cadence of the implementation of Donatos. We've begun to roll out Donatos in the Colorado area generally. Generally.
So that has begun in the past two weeks. And then we'll complete the rollout by early in the fourth quarter.
Speaker 7
Okay. So in terms of thinking of preopening from a dollar standpoint, can you help us is it going be front half weighted or back half is the way to frame it?
Speaker 2
Yes, I'm just kind of looking at my schedule here. Again, it's a little bit lighter in the first quarter because we've just begun to roll out Donatos, and then it gets to be fairly consistent in the following three quarters.
Speaker 7
Okay. In terms of competitive response?
Speaker 1
This is Paul. We really haven't seen any. We've positioned it as premium and really has been no noticeable competitor response either in the Phoenix market or in North Carolina. Haven't noticed anything.
Speaker 7
Okay, great. Thank you.
Speaker 0
We have reached the end of the question and answer session. I will now turn the call back over to management for any closing remarks.
Speaker 1
Yes, thank you for attending. We appreciate questions and appreciate you dialing into the call today and look forward to the Q1 call. Thank you very much.
Speaker 0
This does conclude today's conference. You may disconnect your lines.