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

Hello, everybody, and welcome to the Red Robin Gourmet Burgers, Inc. Business Update Conference Call. This conference is being recorded. During management's presentation in response to your questions, they 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, including those described in the company's SEC filings. Management will also discuss non-GAAP financial measures as part of today's conference call. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but they are intended to illustrate alternate measures in the company's operating performance that may be useful. Additional information about our non-GAAP financial measures is included in the company's SEC filings. Now I would like to turn the call over to Red Robin's President and Chief Executive Officer, Dave Pace. Please proceed.

Good morning, everyone. Thank you for your interest in Red Robin. As I approach my 3-month mark as CEO, I'm even more confident in the potential for Red Robin and for our future. During my first 3 months, it's also become clear that to realize this potential, we must take bold actions across the business to make investments that drive sustainable growth in traffic, profits and cash flow enabled by a strengthened financial position. Yesterday, we unveiled our First Choice plan to address these opportunities head on. These actions are designed to position Red Robin for long-term success while strengthening our financial foundation. Underpinning all of this is our goal to make Red Robin the First Choice for guests searching for a differentiated restaurant experience, team members looking for a great place to work and investors seeking reliable returns on their investments. More specifically, the First Choice plan consists of the following: first, hold serve, protect and build on the foundations established under the North Star Plan; second, drive traffic, creatively engage with guests and inspire visitation; third, find money, manage expenses and assets to reduce debt and allow for critical investments; fourth, fixed restaurants, invest in the physical state to improve the overall dining experience; and fifth, win together, create a high-performance environment that attracts and retains the best industry talent. Let's start with holding serve and building on the foundations established under the North Star Plan. As we've spoken to extensively in the past, Red Robin is in a substantially better position now from a food quality and hospitality perspective relative to the start of the North Star Plan. When our team members execute the way we know they're capable of, our guests have a great experience at Red Robin. In fact, in the recent ACSI restaurant and food delivery study, Red Robin saw the largest improvement in customer satisfaction in the entire full service segment. That said, we know that we can still be more consistent across ships, restaurants and regions to deliver a great experience every time. At the same time, we must maintain the labor efficiencies that we've seen in the first quarter and ensure that we continue to improve overall restaurant profitability. A great dining experience is paramount to a growing restaurant brand and inspires guests to return more frequently, which leads us to our second pillar, drive traffic. Like many in casual dining and across our industry, Red Robin has experienced traffic declines over the past several years, while at the same time, reducing investments in messaging and promotion. We now need to reverse that approach to increase our creative engagement with guests, and we have a clear path to develop that engagement while generating the resources needed to make it happen. This starts with delivering value for the money to the guest every time through great food and great service, inclusive of everyday value. To address this opportunity, next Monday, July 21, we're launching our BIG YUMMM deal, which includes a Red's Double Tavern burger, a bottomless side and a beverage for $9.99. We know we can deliver a great experience to our guests across all areas of our menu. But in order to do so, we must get them through the front door. This new offer will work to drive near-term traffic as we bridge to other marketing efforts we have planned for later this year and beyond. From a high-level perspective, we need to continually identify and remove barriers to trial and repeat. And our team is hard at work on that as we speak, leveraging increasingly sophisticated data analytics to fully understand our challenge. Before the end of 2025, we plan to implement a much more targeted marketing plan to meet the most relevant needs and desires of our guests and deliver food, beverages, value and experiences that satisfy those needs and desires in a uniquely Red Robin way. In order to improve traffic, the objectives are simple and clear. First, inspire more guests to add Red Robin to their consideration when seeking a casual dining experience; and second, to inspire more guests considering a casual dining experience to make Red Robin their first choice. We're confident that our new analytical and performance marketing capabilities and innovative marketing approach will allow us to punch above our weight. In order to make the critical investments required in our business, it's essential that we strengthen our financial position and free up funds for investment, which leads us to our third pillar that we summarize as find money. This pillar centers around managing expenses and assets to reduce debt, improve free cash flow and allow for those critical investments back into the business. We'll work to find money through a combination of efforts. First, delivering consistent financial performance. Our operators have increasingly demonstrated their improved ability to effectively manage the business and deliver results at the restaurant level, and we need and expect that to continue. Second, we plan to reduce expenses across the system. This includes a continuation of our efforts to thoughtfully reduce restaurant-level costs through supply chain efficiency; technology, like our labor scheduling platform to have the right labor at the right time; and parity or better changes for the guest. In addition, we recently began implementing a series of corporate cost reductions that we estimate will reduce G&A expenses by approximately $10 million annually at their full run rate. Third, we're pursuing a tactical refranchising effort for a select number of company-owned restaurants in markets. I want to emphasize that this is a tactical maneuver to generate proceeds that we expect to use to reduce debt, facilitate a refinancing of the debt that remains and to reinvest back into the business. This is not a fundamental shift in our operating strategy to a more asset-light model. We see opportunity for current franchisees to gain a larger footprint in their Red Robin Holdings, and we partnered with Brookwood Associates to launch a broader marketing effort to bring proven operators into the Red Robin family. When complete, we expect to continue operating with the vast majority of our restaurants as company-owned. Finally, reducing our overall long-term debt and refinancing it at a more favorable interest rate is a tremendous opportunity to improve free cash flow and create shareholder value. Each element of this strategy has its own timeline as we work them in parallel, and we'll provide updates along the way. Our success in finding money will enable our fourth pillar, to fix restaurants. As we free up cash through the success of the previous elements of our strategy, we then expect to reinvest in the physical estate to improve the overall dining experience. Our initial efforts are already underway and will address deferred maintenance needs to achieve a competitive standard. In time, we anticipate this may evolve to a broader renovation effort to further improve the guest-facing surroundings. As part of this process, we also intend to upgrade and invest in new technology to support daily execution, the guest experience and further operating efficiencies. Our fifth pillar is winning together and is focused on creating a high-performance culture that attracts and retains the best talent in our industry. This pillar starts with a singular focus by the entire organization on continually improving the guest experience through everything we do. We must start with the guest in mind and work back to how we support and deliver a differentiated dining experience. Further, we'll build on the ownership mindset introduced previously through the managing partner program, where our managing partners share the success of their restaurants. As our operators have embraced the managing partner model, we've already begun to see the benefits through our improved profitability so far this year, while also improving the overall guest experience. Additionally, we're committed to building and maintaining a performance culture that focuses on achieving results and rewards performance against our goals, not only with our managing partners but throughout the organization. We'll cultivate an environment where our team members can continually grow and develop themselves in order to experience rewarding careers over many years and finally, we'll filter our most difficult decisions through a commitment to always do the right thing, to ensure that our actions find balance among the interests of guests, team members and investors. These 5 pillars of our First Choice plan will allow us to build upon our strengths and the progress that's been made while addressing our opportunities head on. With a focus that begins with the guest, more engaging messaging, improved cash flow and strategic investments in our restaurants, we're confident in our ability to be the first choice for our guests seeking a differentiated dining experience, for our team members who want a great place to work and for our investors who want to see sustainable growth and value creation. We look forward to updating you on our progress in the months ahead. And with that, Todd will now take you through a brief update on our expectations for the second quarter and the rest of the year.

Thank you, Dave, and good morning, everyone. For the second quarter, we now expect comparable restaurant sales to decrease approximately 4%, modestly below our previous expectations for a decrease of approximately 3%. As a reminder, these estimates include an approximately 240 basis point headwind resulting from overlapping a benefit in deferred revenue recognized in the second quarter of 2024, related to our loyalty program change that we expect will not recur this year. While we are not satisfied with our current traffic trends, we are optimistic the strategy laid out today will deliver sustainable traffic growth in time. Despite our current top line trends, we are very pleased with the progress we have made in managing the middle of the P&L and delivering profitability. We now expect our second quarter adjusted EBITDA to exceed our prior expectation of $13 million to $16 million. This represents a continuation of the positive momentum we have seen from our managing partner program and fostering an ownership mentality throughout the organization. As we look to the remainder of the year, I would call out a few items. First, we do not expect any material impact from refranchising in 2025 as we do not expect the transactions to be completed until early 2026. Second, we do expect to begin capturing the benefit in G&A from the corporate efficiency actions Dave mentioned earlier. Finally, we expect to reinvest the G&A savings and a portion of any EBITDA overdelivery in initiatives to drive traffic gains and address deferred maintenance in our restaurants. Overall, while we acknowledge we have more work ahead, we are confident we have the right strategy and team in place to deliver long-term shareholder value. Our significantly improved financial foundation provides us with the flexibility and resources needed to strategically invest in traffic-driving initiatives and accelerate the execution of our First Choice Plan. We are committed to being transparent and accountable for our progress as we move ahead and look forward to providing additional updates in the months ahead. With that, we are now happy to take your questions. Operator, please open the lines.

[Operator Instructions] Our first question is from Jeremy Hamblin with Craig-Hallum Capital Group.

Congrats on the momentum in profitability. I wanted to start with the BIG YUMMM deal and the launch for next week, clearly, an aggressive rollout. I wanted to understand what you expect the impact to be on your food costs, what the margin profile might look like? And if you've tested this at all, what type of results you're seeing in terms of driving average check?

Jeremy, Todd here. To start with one of your or a or piece of your question there, we did test this offer in a handful of markets through 2024 and the start of 2025. So it's an offer that we've tested. We have an expectation based on that. We did see a nice traffic lift in that test. And so obviously, that's what gives us confidence in moving forward here. In terms of check, I would share, we saw a, what I would describe as kind of a modest take rate, which I think is a good thing in this case, right, of the folks that found that offer compelling. It appears came in and got it. We didn't see significant trade down to the offer, which financially gives us some confidence as well. So I think it's the combination of, we saw it move the needle on traffic by a few percentage points, and we didn't see significant degradation in PPA or gross margin per guest. And so it's all of those factors that let us kind of take the step now. I think it's also an acknowledgment that the competitive environment, this puts us on a competitive playing field from a price point standpoint at least with a lot of the other competitors out there. And so we feel good with our product, our hospitality, as we've talked about, but we felt like price point was one that we could be more competitive with, and so that's what brings us forward.

Yes. Just to top that off, I mean, I agree with the last point that Todd made that we were hearing from our operators and from our guests about price point and the value competitiveness in the marketplace right now. And we felt we had something that we could respond to it with and we felt good about. And so we moved quickly to put it in place.

Great. And then just in terms of coming back to Q2 and providing a little bit of insight here on the upside in profitability despite a little bit of downside on the comp. You mentioned labor. Can you give us a sense, Todd or Dave, on what labor is going to look like here? I mean, are you going to be like sub 37% in Q2? And then just how sustainable is that on a go-forward basis?

So before Todd jumps in, let me just kind of say this is a function of the progress that our operators have made, and we feel really good about it that they have demonstrated their ability to get managed tightly in the middle of the P&L to deliver the results. And it kind of led to the first plank of the strategy of hold serve, which is they've shown us they can do it. And the point is, look, don't give it up and don't slide backwards. So I'll turn it over to Todd with the specifics. But we feel about -- your point about sustainability is that our operators are managing their forecast, they're managing their labor much more tightly, much more efficiently. And I think with that confidence, we can feel reasonably good about sustainability.

Yes. And Jeremy, just adding color to kind of our Q2 expectation. I'd call out labor and I'd actually call out cost of goods as well. I would agree with your characterization. As we sit here today, I do think we'll see an improvement in the overall labor percentage from where we were in Q1, which was 37.1%, I believe. And so I would expect a step down there. Relative to our internal expectations as well, we saw some favorability in some commodities. It wasn't necessarily what the commodities that we typically talk about. Egg prices, I'm sure, have been top of mind for many out there. We've seen some favorability in eggs and other areas that have given us some upside on cost of goods as well. And so I think those are the 2 areas that I would call out that are trending better than we expected.

Our next question is from Alex Slagle with Jefferies.

I guess the partner comp program, it does seem like that's really been a nice win so far. And I guess that's part of the labor piece or much of it. I mean, are there tweaks that you want to make to that at this point? Or how you envision that continuing to roll?

Yes. Look, I think the market managing partner program has definitely been a success. We feel good about it. I think as you heard, when it was first put in place, this takes some time to get traction, takes some time to get the right people in that are subject to that program, and it takes them time to learn their own restaurants in a different way and how to manage it. So as we've seen them kind of embrace the managing partner philosophy, we laugh a little bit, because I say I've got managing partners now pick up the phone and call and say, "Hey, I got this $500 invoice. Why do I want to pay this? Or why should I pay this?" Right? And in the past, those things would just get sent through the system. And now they're looking at it saying, watching every dollar because they know that the performance of the restaurant affects their earnings. And so we feel good about it, and I absolutely agree with you, Alex. I think it is a high -- a large contributor to some of the progress we've seen.

And on the people side, I guess, it probably links a little bit to that, just sort of the next step in raising the bar further for the team member experience and maybe is it some leadership changes, training changes or how you incentivize your team members? Just trying to think through how that evolves as well.

Yes, I think it's all of those things, right? I think in building the culture that you want to see, you've got to have everything reinforcing itself. So you've got to be clear with people what your expectations are. You've got to give them the tools to do their job. You've got to reward performance when they deliver. You've got to compensate them for that. And you've got to make sure you've got the right people in the right seats all the time. So it's a dynamic organism that you just have to keep adjusting to. But what we're starting with is this point of being a guest-facing culture, right? One of the things under the North Star plan, which I agree with, although I view it as a subtle difference. It's a little bit of a nuance. But under North Star, we talked about creating an ops-focused culture. I think that's good. I think the reality is we want a guest-focused culture. We want to deliver a great experience for the guests every time and helping the operators -- supporting the operators is the way that many people can do that within the company. But at the end of the day, this is about making sure the guest has a great experience. And so that's the culture that we're going to be creating and then setting up all the reinforcing mechanisms to support that.

Our next question is from Todd Brooks with The Benchmark Company.