Red Robin Gourmet Burgers, Inc. (RRGB) Earnings Call Transcript & Summary

Hi, everyone. Thank you for joining the final session of the first day of our management access forum. I guess, certainly, I've been happy to get to -- get reacquainted with Red Robin over the past year and listen to their dynamic story. Really, what was -- first, it was a situation of survivorship and the significant work that they have done to not only stabilize the company but obviously position themselves for improved results in the very near term. Joining from the company today is their Chief Executive Officer, Paul Murphy, and Lynn Schweinfurth, who is their Chief Financial Officer. So thank you both very much for joining us, and we obviously look forward to a dynamic conversation.

So first, let me ask about where we kind of ended February, where we are currently; 87% of the store base had dining rooms open in some capacity. Could you remind us of what the sales trends have been in that 87%? And how much capacity -- seating capacity exists within those restaurants? And if you have a sense of whether current seating capacity would potentially meet current demand in those markets? Or what additional seating capacity being added, but by definition, driving pre-sales as your current demands not be met?

Well, John, certainly the latest week that we disclosed, we were negative 13% across the board in the restaurants that had dining rooms open, and they were open at roughly mid- to high 40s capacity and negative 9%. So what we're beginning to see is that a few states have opened up to 100% capacity, but we're not necessarily quite there. But in those states, we're seeing basically a bit of a surge. People are wanting to go back in. We're seeing waits in those restaurants. I think that's what's particularly gratifying for us is that even as we're 75% plus up to 100% capacity, our off-premise business has held that over 2x the pre-pandemic kind of the 27% to 30% range. And I don't know if people remember our pre-pandemic. We were 13% to 14% in terms of off-premise mix. So we are just nothing but encouraged and excited about what we've seen as a kind of sequential continuation of the increase in capacity, and we think it just bodes well for the future of the brand. 2019, our average unit volume was 2.2 million. Resuming that dining rooms get back just to where they were then, but if you're able to double your off-premise capacity, our average unit volumes will be in the 3 million range, just kind of almost out of the gate. So we're pretty excited. And we have a lot of growth initiatives on top of that, but just Donatos that we know can help drive the next 2 or 3 years of continued growth for the brand.

So yes. I didn't mean to cut you off if I just did.

John, I was going to say one more, I think, really encouraging data point and so the restaurants with the open dining rooms, they were only down 9% in the latest that we reported and that was with indoor dining capacity of around 45% so bear in mind that we've had to grow sales.

And I would think that your restaurants were previously utilizing more than 45% of your dining rooms, your dining rooms' capacity when they were fully opened. So I would think if you add 10 points of dining room capacity, one would think sales go up as a function. I think there's a number when -- if you go from 90 to 100, it probably doesn't matter, maybe the number is 80 to 90, it doesn't matter. So there'll be a point of diminishing returns, but I would imagine that you're still in that sweet spot of more seats equals more sales.

Yes.

You're correct on that.

Yes. Based on how I've seen -- especially during the busy time periods, which you have many. Okay. So a couple of major things that are Red Robin specific that I'd like you to elaborate on is one, kind of TGX, which especially had to do with handheld servers and it was a very substantive change of the way the restaurants were run, including some reallocation of management labor, what have you. Can you give us an update of the perceived success of that kind of on a post-COVID basis if we can make that and make that call and what changes that we may see in the second half of '21 and '22 operationally?

Well, the TGX model, which is the new service model for Red Robin brand. John, quite frankly, it was addressing some of the sins of the past where the brand had eliminated bussers, our service had become, I would say, inconsistent, and that was fully reflected in our satisfaction ratings. We tested it at the end of 2019 in about 40 restaurants, which is one market for us. It's based on a -- the technology of the server having a handheld device, able to take the order at the table, rinse the drinks to the beverage station, a service partner that's aligned with that server would take the drinks and bring it out. It moves out more that's into the kitchen. I think that the main thing is the server is able to be in their station about 70% of the time versus in a more traditional model, it's kind of 30% or 35% of the time. So they're available, they're attentive. They're able to anticipate needs. We made the decision in the pandemic as dining rooms reopened to go ahead and institute the new service model. We are currently in the process of as we're starting to see capacity ramp up, we have instituted a ready, set, reopen game plan. We don't want to assume that -- it's been a year now since restaurants have had full capacity. So we're not assuming that anybody really remembers it. So we have a very prescriptive game plan. And one of the components of that is we're actually retraining the service model. And again, as we're going through the spring, as we're increasing our hiring and our staffing levels, we want to be ready. And we think it not only addresses the needs because we see that in our guest satisfaction scores. We ended the year with historical highs and are continuing to increase. But the drink times are better, the food times are better, just the overall experience. So not only in our data, but anecdotally, people are recognizing the difference at Red Robin.

Yes. Understood. You mentioned the game plan to retrain servers and we ready, set, reopen. I mean, that does suggest to some extent costs slightly ahead of revenue, it's probably better to be slightly overstaffed now than it is to be understaffed because customers are going to make their opinions based on whether they have a good experience or bad based on what they what they repeat. So can you comment on the brand's ability to attract and retain? I mean this is considering our unemployment rate or our total unemployment year-over-year, we're in an unusually tight labor market for a lot of different reasons, and some people are going to be compensated to stay unemployed through the end of August. So I'm not judging. It's just that -- but it's the one thing that all economists agree on. So basically, don't incentivize people not to work because they won't work. I mean this is like it doesn't matter where you are in the spectrum. But anyway, but the point is, can you talk about your ability to attract [ more cadence ] and whether you're seeing any of the markets that you are in, which isn't a national -- which is not a national footprint, as being particularly challenging.

So far, we're -- we feel really good about things. Honestly, our retention rate, when I say retention, returning, is about 80%. Now, regards to that, we feel really good about that. And that tells me we have a good culture and good connection with the brand. We -- in actuality, we're actually raising the number of people that we would have had on staff pre-COVID. And the reason for that is, as capacity returns, we want to make sure that we're doing a great job of dine-in, but also ensure that we're properly staffed to maintain the off-premise. And with the additional off-premise, that is calling for more staffing that's dedicated to the off-premise. And one thing that we believe is we think it's an opportunity to take certainly maintain market share in the off-premise as we go forward. But it'll only happen, to your point, if you're properly staffed. So we've already begun that. We are investing in that, but we obviously have been over the -- probably started about a month ago. So it's slower or faster, certainly depending on the different geographies. California, you can only still to do off-premise, and they just opened outdoor seating. So that will be a slower progress. But in Florida, it's all guns blazing. We're hard at work.

Yes, it's true. I mean it's -- I see people sitting back-to-back all the time, yes, it is like the wall of worry has been climbed certainly in Florida. It's -- one of the ways that many companies are bringing customers back, maybe to some extent employees back, is through their digital program that they had been working on for a couple of years leading up to the pandemic. I think it's fair to say that you guys are late to digital and late to loyalty and -- or, excuse me, late to digital. I know you have loyalty but your -- you are late to app in digital, but you do have people in your e-mail database. So kind of talk about, I guess, the challenges that being late to digital may present you, but also the opportunities as you have a chance to launch version 1 of your app, launch version 2 of your app and how you could necessarily be, I guess, at the front end of technology as opposed to the back end of the technology. I can reword that question if helpful. That was not well asked at all.

We're going to just health check, and we'll go from there.

Okay. Thank you. Man, I know it's the one that everybody is talking about. So my point is you were late in digital, you were late in loyalty. You don't yet have an app. There's a number of things that you take granted at some of your larger competitors that you don't yet have. So that presents challenges and it presents opportunities. So just let's talk about digital and the path forward for Red Robin. How about that? A little bit of focus.

I'm going to start with a positive, and that's our loyalty program. We have over 9 million members in our royalty programs. So we got that early. So that's been a benefit. And then, of course, we can really market to that group, whether through text or e-mails and things of that nature. At the end of last year, we rolled out an ability to better segment those guests. So based on their purchasing behavior, we can now target offers to those signed early members. So that's been a real benefit. And we expect that to continue to drive traffic as we move forward. The opportunities herein lie the company does not have an app today. So we are planning to roll out an app likely in the third quarter of this year. And we'll get an app out there. Speed to market is important and then we'll version from there. So let's get something out there. Let's get feedback from the guests that are using it, and let's just make it more and more applicable to them. And therefore, they will become more engaged and hopefully, frequency will follow. In addition to that, we want to make sure that all of our digital channels have a similar look and feel because right now, that isn't the case. And so I think having a more effective way to order, fewer clicks, the ability to convert an order more efficiently will result in traffic and then next generation going forward. So all of those things we're working on this year, and then we'll continue to version as we move beyond 2021.

One thing, John. Q1 of this year, at least for Red Robin, is then the first quarter where our outreach, our marketing has been 100% digital, social. And obviously, with some of that, you have video [ capture ]. But Red Robin in the past has been a brand that would side a bit more to national broadcast media. We're so far, at least what we're seeing through this first quarter, happy with how it's more cost effective, it's more targeted and we think that it may be the right way for the brand to go in the future. Broadcast media being a bit more targeted to specific objectives, say if we -- as we're rolling out Donatos, we go to a particular market, we can use broadcast TV to quickly introduce it, give it a pop, but then we don't necessarily have to be across the country in every market with broadcast TV. So we think it will really lead to a much higher degree of efficiency and targeted messaging.

And at what point -- because it's -- the e-mail loyalty, I mean, whether they have to show you a code or maybe print out an e-mail or what have you is one thing. But once you do loyalty on the app, that's presumably when customers can start ordering on the app, it's when perhaps you could get -- whether for takeout, potentially for delivery, potentially for payment, there's so much you can do when you digitize loyalty with those 9 million members. I mean, so when -- that's not going to be a version 1, which -- in the third quarter, which is fine, but when might some of that additional functionality on the app happen?

Shortly thereafter.

Okay. I -- yes. It's more important to get it right than to just get it out and have bugs in it. So yes, I understand.

Well part of our philosophy, John, is let's get the one out there. And then let the kids give us -- they'll give us immediate feedback about what they -- how they prioritize what they want and we'll be right at it.

Okay. That sounds good. You have -- you're not doing Donatos as a virtual brand. You're doing it -- I don't even know what you'd call it, a brand within a brand or you're co-branding, if you will. I mean it seems it means a couple of different things. Firstly, is that going to be part of the signage? I think you're in -- you're in 79 units currently? I mean like is it Red Robin Donatos? Is it going to get explicitly co-branded on the outside? Your consumers find out about it when they open the menu, where, obviously, your e-mail loyalty base can hear about Donatos, but that's not all of your customer base certainly.

Well, we're in 79 locations. In conjunction with those locations, we have a version of a virtual concept that is Donatos, you click on it, and it's -- it does reference Red Robin, but it's Donatos Pizza. So it's a hybrid virtual concept. We just announced yesterday that we've launched 3 other virtual concepts. And those are a bit more stand alone, have their own websites and are, I guess, what you would call more of a traditional virtual concept.

Okay. And can you -- before we get back to the Donatos, I mean, can you talk about those 3? And what you think your opportunities are? And if there's any at least thought of how they could be rolled out?

Well, we've tested them. We've already -- we're pretty much now in every restaurant, we're with 1 of the DSPs right now. And we'll be adding the 2 other major DSPs over the next 45 days to get it up and running. We were very happy with the test results. In the 3 brands, there's a mixture of actually Red Robin menu items and then some distinct menu items through that brand. How I view a virtual concept is that you're making use of an existing asset, with the kitchen that's basically already has some costs. So the ability to drive top line and bottom line, frankly juices the return on that. And I'm not going [indiscernible]. So far, it's performing actually better than we thought it would.

Okay. And it is -- I had a conversation just the previous call. It is always difficult to juxtapose, simplicity, menu reduction, focus, consistency, speed to table, what have you, with additional concepts that are being added. And even if the concept is take-out, off-premise only, the fact is they still can use someone's in the kitchen's time and take them away from fulfilling an on-premise order, for example. So how do you balance those competing factors?

Well, I think you balance it in a number of -- couple of ways. One, as we're doing it, we're making sure that it comes in through our KBS, through the [indiscernible]. So it's not having to be a tablet or having to run and train for an order. So it's labeled what it is. A lot of the items are already existing items. So it's not that they're having to do it. It just basically has its own packaging. So I view it as the ability to maintain the degree of off-premise that we've seen during the pandemic, to be able to hold that from a high as the capacity increases. So we did not see a test that it was adding any operational complexity to the restaurants. And that's probably the #1 thing that we're looking at, was it getting in the way of our core concept, which is Red Robin. If there was any way of denigrating our ability to deliver that, we wouldn't be doing it.

Okay. And the rollout of Donatos is -- obviously, with capital being associated with it, is decidedly slower and more deliberate, but so fast relative to really pursuing a co-branded strategy. Units by year-end. So you expect -- approximately 79 units at the end of '20, 120 more units by the end of fiscal '21 and 400 by the end of fiscal '22. So that -- and at that point, you'll be done at least the majority, 90% or so of our company stores. Discuss why that rollout timing for Donatos is right. what are the constraining factors of doing that even faster? And once you have an entire -- not just a store within a market, but the entire market done, I mean, are you noticing an awareness lift that allows you to communicate what that brand is and to further sales up from what you initially see?

Well, a few questions there. I think number one is that the gating factor is we want to make sure that we do a good job with the rollout. We do a great job of training and executing it. A bit of it, we're not quite through the pandemic yet. So as people are having to travel and do the scope in each restaurant and we'll get the permits and that sort of thing, so we're -- our view is that we're going to crank that up in Q2 of this year and basically, just start running through the end of 2022, which if there's a gating factor, it's being able to travel and make those things happen.

That makes sense.

Yes. And I don't necessarily think we have to do it all 1 year because it gives you incrementality over 2 or 3 years and by 2023, I think as we said in our release, that we see it contributing over $60 million top line, over $25 million on the bottom line. And I think there's nothing wrong with having initiatives that can give you 2%, 3%, 4% each year, than spending time doing everything at once.

For sure. Yes. And by the way, that's obviously, COVID travel permits, I mean all that makes sense. And just even -- but basically, you're doing the vast majority of it over 18 months, which is not a long time by any means. Of those 79 units, I mean, how disparate is the sales performance either as a percentage of sales or on an absolute sales dollars per store? I mean, what's the range?

Yes. In the latest quarter, it was 500 basis points better than restaurants, a same-store sales standpoint versus restaurants without Donatos.

That's not exact -- it's not exactly what I asked. So, but is it -- if you were to look at that range of Dominos (sic) [ Donatos ] relative to their control set, the units that have it versus the units that don't. I mean there's some like up 200 basis points and some up 900 basis points. Like how wide is that range of Donatos' contribution?

It's not too high. I mean it's --

Yes, it's pretty tight.

Okay. That's important, obviously. Have you taken it into any markets with Donatos' brand recognition?

Yes. We -- in test, we took it. To be honest, when we took it to more markets that did not have Donatos Pizza, it's going to perform. And obviously, the good news is it's done really well because it's a quality product. And I think in the end, that's what matters is the quality product. And quite honestly, Donatos has a wonderful production method that we use in the kitchen that they really had that figured out very tight. But yes, certainly, at least we're seeing in markets in Donatos it gets out of the gate faster, certainly. But we see in the non-Donatos markets, it catches up over time, and then they kind of build at the same rate.

Okay. I understand that. You had gone through a number of different lease negotiations. It's interesting. You've been looking at -- I guess, at the end of the year, you were at approximately 75% of units had gone through a lease negotiation. You're currently at about 85%. Is there still opportunity for the remaining 15%, I guess, is the first question. And secondly, when we talk about these lease negotiations, is it -- like how much of it is a -- again, if it's fair to talk about lease terms or you want to talk about lease terms, how much is abatement versus how much is timing/deferral?

Right. So the opportunity for the remaining 15%, I'll just take it as an addition to what we've already accomplished, but I think it's not going to be a huge amount because if we haven't gotten there yet. And the practical performance continues to improve, and we need to just move on. And then in terms of the makeup of what we've been able to achieve, I mean, between restructuring leases, with savings and abatement, those encompass about 60% of what we've been able to negotiate. And then the others are either no concession or deferrals.

Okay. All right. But obviously, 60% is a big number. Your CapEx for this year was guided at $45 million to $55 million after the $22 million that you spent in fiscal '20. I mean I have my notes in front of me, so I'm just reading it, $20 million of that $45 million to $55 million is maintenance, $18 million is Donatos and the remaining is off-premise modifications. If you weren't capital constrained, maybe at some point in '21, you will not be, what do you think the right amount of CapEx in the business is? I mean if you were -- I mean it's all hard to imagine, it sounds like, hey, if I got to -- we have exactly the company with exactly the CapEx and exactly the G&A that I could have, what would that look like? Because I think it's important to consider that in '22 and '23.

I think for '22 and '23, it's probably a $50 million to $70 million range, definitely leaning for a more capital-intensive year. If we're rolling out 200 -- Donatos to 200 additional restaurants, [ and those ] happen in 2022, so that'd be one of the years where there's a higher level of [ CapEx ].

Okay. And that includes 0 new unit development?

No, it could include a few new restaurants. We have a relocated restaurant this year that we're actually going to implement a new prototype. And then we'll see how that does. But we have an eye toward maybe adding a few units in 2022.

Okay. A lot of your system, specifically in the Pacific Northwest that I actually remember visiting your company in Denver, I'm going to say it was 2002, so like your brand's been around. I mean it has longevity, but it also has some assets that have been in place for a while, a couple of decades, several decades in some cases. So where are you in terms of the total asset base? I mean where -- what percentage of the units would you say are current to your standards versus how many of your units do you still might require some -- not just refresh capital but true remodel capital?

Well, we do think we'll pick back up some remodel capital next year as well and just bring it to more of a kind of 7-year convention, so doing kind of a consistent number of stores over the years so that we are refreshing over, say, 7-year cycle.

Okay. And I mean I don't want to put words in your mouth, but like what percentage of your system would you say is current versus -- current/on-schedule versus how much catch-up? Maybe it's just a year or 2 of catch-up, which wouldn't be a lot.

Yes. I think it's probably a year or 2 catch-up because the [indiscernible] program already in place, and then we suspended that with COVID.

Okay. Okay. Well -- and -- but you were caught up like -- you were caught up until the point of COVID.

Correct.

Okay. All right.

I think, John, the way to characterize it, we basically have a regular schedule that we've just been adhering to and suspended it in '20, we're picking it up. So it's not like this big shot of capital is needed.

Okay. And that's where it might be my lack of recent history with your company matters, it's like, okay, where are we on the cycle? And sometimes the cycles -- it's always never like 1/7. I mean, somehow it's 30-30 that it dips down and it just kind of has -- I won't name names with the companies, but there's always peaks and valleys in that. But I got that. I understand. So you did mention recently that you're cash flow positive in the first quarter after making a couple of adjustments. $16 million cash as part of $128 million of liquidity. I mean, remind us what level of debt you want to get to? And have you communicated with investors how long it may take for you to convert your cash flow into lower debt?

Yes. I think currently at 3.5x lease-adjusted leverage ratio is what we've kind of targeted. And I think we can get there at some point in the next 1.5 years, 2 years, probably closer around the [indiscernible].

Okay. And is 3.5 your target, where you can consider capital return to shareholders? Or might you want to take that 3.5 even lower? In other words, is that step one? Or is that the final step of what you think for your weighted average cost of capital is [ optimized ]?

Yes. I think right now, that is the target, and then we'll look at returning the cash to shareholders again.

Okay. So that's great. And in terms of competition in your markets and in your trade areas, I mean there've been different numbers that have come out. Cheesecake Factory said on the conference call that they believe 70% of their restaurants have near and relevant competition that is closed. So that's a very specific number. You can do that maybe with the 200 restaurants. I mean do you have a sense of -- or do you have a belief of how many restaurants around you, your competing restaurants up close in the near term? And if you do have a view of the $28 billion restaurant package -- restaurant relief package, I'd obviously love to hear that.

I really don't know what kind of [ buyer ] restaurant is.

Well, that's an exotic way of saying. But you could say 10 or 15 or whatever number.

Yes. My opinion is that we're going to see -- earlier on, you were seeing numbers, 20%, 30%. I think it's now about 10% is where we think it's going to land. When you look at the relief package that came out, I think it's going to help with some of the smaller brands and dependents there. When I say small, I think the cap, at least for franchisees with 20 restaurants.

Or if they remain part of a restaurant group that has 20 restaurants, which -- yes.

Oh yes. Yes. That and so it's -- listen, I think with the restaurant industry with [indiscernible] I think those people went and got it done but for a brand like Red Robin, it's not going to make a huge difference, but if you were a small independent, it's going to make a difference.

Yes. And that is the kind of the point that I'm getting to is maybe that 10% actually turns into in 5% because this is kind of money that couldn't have come any later, but the fact that it's going to come at last, [indiscernible] run credit cards up for a couple of months until that check comes. But it's not a small number. I mean it's only small relative to $1.9 trillion. But like we're now on like levels of 0, didn't even know how to count before. So it's definitely a different environment. So congratulations on stabilizing the business and seeing improvement kind of across the system, whether it's now 9% or 13%. Hopefully, you guys can feel good about that. Stock's in a very different position than when we at least first started talking. So congratulations on that. And I hope you guys have a great spring.

Okay, John.

Thank you so much, John.

Yes. Thank you.

This is a fun day. It's a great way to end. Take care.