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

Thank you. Good afternoon. Welcome to the Red Robin Gourmet Burgers Incorporated Second Quarter 2026 Earnings Call. This conference call is being recorded. During management's presentation and 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 as 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 are intended to illustrate alternative measures of the company's operating performance be useful. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. company has posted its second quarter 2026 earnings release on its website at ir.retrobin.com. On today's call are Dave Pace, President and Chief Executive Officer, and Mark Graff, Chief Financial Officer. Now, I would like to turn the call over to Dave Pace.

Good afternoon everyone and thank you for your interest in Red Robin. I'm pleased to report that our momentum continued in the second quarter with significant progress across the business as we execute against our priorities under the first choice plan. We've taken deliberate steps over the past year to strengthen the guest experience, improve hospitality and execution, and invest behind traffic driving platforms that we believe can increase frequency over time. We're seeing those actions translate into increased guest engagement, elevated satisfaction scores, and improved restaurant-level profitability. We also took major steps this quarter towards strengthening our balance sheet. We announced three re-franchising agreements that will collectively generate approximately $96 million in gross proceeds upon closing. Our partners are seasoned, multi-concept operators who bring meaningful operating capabilities and resources, and who share our hospitality-first mindset and core values. The proceeds received from these transactions, which we expect to receive during the third quarter, will provide us with greater financial flexibility to refinance our existing debt and support our long-term strategic priorities. This represents a step forward for our company, and I appreciate the significant efforts expended by everyone on our team to drive this to a successful outcome. Taken together, the results in the quarter give us greater confidence and reinforces that the first choice plan is working. We've made substantial and consistent progress across the business over the last year, and the underlying fundamentals continue to move in the right direction. We remain laser focused on executing against our strategy and positioning the business for sustainable results. Let me now walk through the quarter in more detail and update you on each of our first choice priorities. Same-store sales grew 1.3% in the quarter, with traffic effectively flat at down 20 basis points. This trend is a good example of how the market is changing. This traffic result performed the industry by 40 basis points as measured by Black Box, and for the second quarter in a row, represented our best traffic performance since Q1 of 2023. In addition, we increased our share of visits by 80 basis points in trade areas where competitors are located. Our team has been working toward this inflection point for some time, and it's encouraging to see it build and show up in the results. Value remains a key driver of this traffic performance, and the Big Yum offer is delivering as expected. The platform continues to resonate with guests, especially against an economic backdrop where consumers are more discerning about where they spend. Big Yum gives guests a clear, accessible entry point while preserving the full Red Robin experience that guests have come to expect. Combined with our targeted first choice marketing efforts, we're improving both reach and brand awareness, helping us to engage guests more effectively to drive frequency. At the same time, we've remained disciplined on pricing. Our goal is to build traffic and frequency while protecting the value guests associate with Red Robin. Q2 was the fourth consecutive quarter in which our average check increase was below the industry. Turning to profitability, the top-line momentum, combined with disciplined cost management, enabled us to drive four-wall efficiency, including a 20 basis point increase in restaurant-level operating margin to 14.7%. This represented the highest second quarter margin in four years. Adjusted EBITDA was in line with our high expectations and sets us up well to deliver against full-year financial commitments. With that as the backdrop, let me walk you through where we stand on each of our first choice priorities and how we're thinking about our strategic focus for the balance of the year. First, let's start with hold serve. Our hold serve pillar is about sustaining the operational progress we've made and then building on it. And that's exactly what our team continued to do in the second quarter. Our labor efficiency initiatives delivered approximately 50 basis points of year-over-year savings. A key enabler has been the accountability and ownership embedded in our managing partner model, which rewards our partners directly for the improvements they drive in their own restaurants. We're continuing to achieve these efficiencies while still providing high satisfaction scores that remain at the strong levels we've established over the past year. This continues to demonstrate that operational discipline and genuine hospitality reinforce one another. Our operators keep finding smarter ways to run efficient shifts while providing great hospitality, and that discipline has been showing up quarter after quarter. Moving to our Drive Traffic Pillar, our value and innovation platforms continue to gain traction with guests, and Big Yum remains central to that story. The platform is mixing at healthy levels and strengthening our relevance with value-seeking guests. We continue to see improving traffic in trials since it launched last year. Importantly, every Big Yum meal still includes our signature bottomless sides and beverages, contributing to the compelling value our guests are asking for. Our objective is to generate traffic through attractive platforms rather than depend on broad-based discounting. We continue to use a deliberate barbell approach to the menu, pairing accessible value with more premium and indulgent options. So guests can choose Red Robin across different occasions and spending levels. We believe this approach is building a more sustainable foundation for long-term traffic generation. To that end, we introduced our towering double cheeseburger sliders LTO during the quarter, giving guests a more indulgent option. We also recently broadened our bone-in chicken wing lineup with new 8, 12, and 16-count options. That expansion was paired with the nationwide launch of Garage Beer, making Red Robin the first national restaurant chain to offer the Kelsey Brothers-owned brand across its system. Together, we see wings and beer as a natural fit for the social occasions our guests already come to Red Robin for. While it's still early, the reception so far has been encouraging. On the marketing front, our data-driven first choice strategy continues to see the benefit of a more precise, locally relevant approach to how we reach guests in each trade area. This has improved the efficiency of our spend and helps build awareness and frequency over time. We expect to keep iterating and building on that discipline as the year progresses. Turning to our Find Money pillar, I'm pleased to update you on the progress we've made on our balance sheet objectives. As I mentioned at the beginning, since our last call, we've announced three re-franchising agreements. pop burgers with 69 restaurants across eight states in the southeast mid-atlantic and midwest Green Dining with 30 restaurants in Washington and western Idaho, and Cooper Dining with 17 restaurants in Oregon and Washington. Altogether, we expect to receive roughly $96 million in proceeds following the close of these transactions, which we will use to pay down debt. and further strengthen our balance sheet. We're excited about the new franchise partners we've gained through this process and we're confident they'll be strong stewards of the Red Robin brand in their respective markets. In parallel with the signing of these transactions, we've further advanced our efforts to refinance our existing debt, which comes current later this year. We continue to work with an experienced group of advisors to facilitate this process and have made considerable progress. Well, I don't have any additional details to provide at this point in time. I can tell you that we see this as an important step in giving the company more financial flexibility over the long term and will keep you updated as the process progresses. Turning to our fixed restaurants pillar, we continue our 2026 light touch refresh program. The goal is straightforward. Improve the guest-facing elements that matter most to the dining experience while maintaining a disciplined approach to capital. We recently refreshed seven restaurants in the St. Louis market. The updated elements modernize the ambiance and aesthetics and are designed to complement the improvements we've made in food, hospitality, and service execution. In addition to our facility refreshes, we're in the middle of rolling out replacement devices for our server handhelds, and we'll shortly introduce an upgraded version of our Xeos tabletop devices. We believe these investments will improve order accuracy, server efficiency, and overall speed of service, helping us return the gift of time that has historically been an important part of the Red Robin experience. Lastly, I'll address the win together pillar. I continue to be proud of the sense of ownership and pride I'm seeing across our restaurants and our support center. Our team members are rising to the occasion, putting guests first in everything we do, and actively bringing forward ideas that improve both restaurant operations and the guest experience. We continue to see strong adoption of the enterprise version of ChatGPT that we rolled out last fall across the organization. Adoption has been particularly strong in the field where our managing partners are putting these tools to work to optimize labor scheduling, manage food costs, and improve how we deliver guest service. We view this as one more tool that can help our operators make faster, better informed decisions, all of which is showing up in the operational efficiencies behind our results. On the people side, our commitment to building a supportive work environment continues to pay off. and restaurant management turnover remain at historically low levels. And employee engagement scores are tracking above industry benchmarks. That stability matters because experienced, engaged team members are better positioned to deliver a consistent guest experience. In addition, greater stability means lower recruitment and training costs, further contributing to our improving restaurant-level operating profits. As we move through 2026, we remain focused on building an environment where great people can grow meaningful careers while helping us strengthen execution and differentiate Red Robin in the marketplace. To the entire Red Robin team, thank you for your continued commitment to our guests and to each other. Your friendship. The focus, discipline, and guest-first mindset are the foundation of the progress we're making. With that, I'll turn the call over to Mark to review our second quarter financial results.

Thanks, Dave, and good afternoon, everyone. I'd like to start by providing a recap of our financial performance for the fiscal second quarter of 2026. Total revenues in Q2 were $278 million, a decrease of $6.1 million from the prior year. This change in revenue was primarily due to the impact of restaurant closures offset by an increase in comp sales. Comp sales, excluding the impact of deferred loyalty revenue, were up 1.3% in the quarter. Q2 comp sales included a 1.5% increase in average check offset by flat traffic. This was our best traffic performance since Q1 2023. The 1.5% increase in average check consisted of a 3.3% increase in price offset by a 1.8% decrease in mix and discounts driven largely by the impact of our big yum value offerings. This is consistent with our strategy of maintaining compelling value while pricing prudently. As it relates to other aspects of our Q2 financial performance, restaurant-level operating margin was 14.7%, an increase of 20 basis points compared to the second quarter of 2025. Benefits from average check, cost savings, and labor efficiencies were partially offset by inflation. As it relates to our commodity basket, as of the end of second quarter, we were approximately 60% locked on our 2026 commodity needs. General and administrative costs were 17.6M dollars as compared to 17.4M dollars in the prior year quarter. The 0.2M dollar increase is primarily due to stock based compensation partially offset by reduced people costs from our corporate efficiency initiatives. Selling expense was $10.4 million compared to $6.4 million in the second quarter of 2025. The increase reflects our decision to invest behind the Big Yum value platform and our personalization efforts to improve local market awareness and reach. Adjusted EBITDA was $18.9 million, down $3.5 million versus the second quarter of 2025. This was primarily driven by the $4 million year-over-year increase in marketing spend. We view that spend as an intentional investment behind the traffic driving initiatives Dave discussed. As it relates to our balance sheet and capital structure, we ended the second quarter with $23 million of cash and equivalents and $10 million of restricted cash. liquidity was $48 million, consisting of cash and equivalents plus $25 million of available borrowing capacity under our revolving credit facility. Turning to our outlook, we are maintaining our 2026 guidance. First, we expect comparable restaurant revenues to be between 0.5% and 1.5%, excluding the impact of deferred loyalty revenue. Second, restaurant-level operating margin of approximately 13%. Third, we expect adjusted EBITDA between 70 million and $73 million. we expect capital expenditures to be between $25 million and $30 million. Please note that our outlook does not include any impact from the tactical re-franchising initiatives Dave discussed earlier. In summary, our second quarter performance reflects continued improvement in the core operating fundamentals of the business. As we look ahead to the remainder of 2026, our priorities remain disciplined and executing against the first choice plan, prudent investment behind traffic driving initiatives, and continued progress strengthening the company's financial foundation. Dave, I'll now turn the call back to you.

Thanks, Mark. Second quarter results reinforce our belief that the first choice plan is working. It's working because our team is executing on it with focus and discipline. Our labor efficiencies have continued and guest satisfaction has remained strong right alongside them. That combination continues to demonstrate that hospitality and operational discipline reinforce each other rather than compete with each other. Big Yum keeps performing as designed, and we supplemented it this quarter with real menu innovation. Combined with the continued sharpening of our first choice marketing, we believe we now have multiple layers of comp driving initiatives rather than relying on a single platform to carry the load. As we look forward, we also feel good about our new product development pipeline and ideas that we have for 2027. As we referenced, we've made real progress on our balance sheet initiatives with our three new refranchising agreements in the process we're engaged in to complete a refinancing and reduce our level of outstanding debt. Our restaurant refresh program and our technology implementations are showing up in the guest experience, and our team continues to execute across the system every single day. Putting it all together, we believe Red Robin has built real momentum. But we still have work ahead of us. We like the direction we're headed, and we believe the plan we have in place will make Red Robin a place that guests choose first, team members are proud to be a part of, and shareholders can count on. With that, we're happy to take your questions. Operator, please open the lines.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Start 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. one moment please while we poll for questions. First question is from Ted Brooks with Stonex. Please proceed with your question.

Hey, thank you. And congratulations on a really solid quarter. It was great to see. So well done. Thank you. If I could dig in on a few questions, then I can jump back in queue, but I've got a number of them for you. Mark, can you give us any sense of how SAM store sales progressed across the quarter? And I don't know if you want to frame up any qualitative or quantitative commentary about how huge that is.

three has started from the same store sales standpoint? Yes, sure. So as we think about the quarter, we continue to see progression specifically on traffic as we got to the quarter where we ended our last period seven with actually positive traffic in the period. So we felt like that had really good momentum. As a reminder, We're kind of coming up on the expiration of our big yum platform that we launched last year. So we feel like, you know, the marketing, the personalization was very much working behind that. So love to see that momentum. As it relates to, you know, the quarter, obviously, we're, you know, we're a little gun shy and just given intra quarter results. but I think it's fair to say at a high level we like the momentum we're seeing as you see that reflected in the guidance.

Okay, great. And was there any meaningful lift in the business from the World Cup in.

No, we didn't see much change in the business from the World Cup.

I just wanna, I was just reading the release and I just wanted to see the language. With the upside results in the quarter, the only reason that you're not raising guidance at this point is just the outstanding refranchising transaction, right? It's not commentary about forward outlook for the second half. It's just you're in this weird place waiting for the transaction to close, and that's what's keeping the guidance reaffirmed.

Yes, look, I think it's a little bit of that. We're trying to be cautious about what we put out given where we are. We're close to having all that resolved, and so I'd like to keep the focus on getting that resolved. as Mark said, second half of the year, we start to lap our Big Yum initiative that we introduced last year in the middle of the year. So, you know, I think what we see we feel good about, but we don't want to get over our skis, quite frankly.

Understood, understood. And I was a little conservative in my modeling on the selling cost side, and it seems like you had good results from the investment. in Q2. Is there any thoughts or any way to frame that up for how we should be thinking about selling costs in the second half of the year?.

Yes, I mean look, I think selling costs will be relatively consistent as we think about the second half of the year, but if you, just for context on this, if you go back, if you recall in Q2 of 25 we were basically without a chief marketing officer for most of that quarter and so we kind of dialed back spend as a result. And that's when Russ came in. And Russ and I actually both came in and we kind of sorted out what do we want to do, where do we want to put our intention, and where do we want to put our focus. And while we were doing that, we were kind of putting any of the planned spending on hold. just to keep the dry powder for what we wanted to do. So that was a little bit of the overlap there.

Okay, and then a final one for me and I'll jump back in. Obviously great success, three partners, $96 million in gross proceeds once the deals close. Dean, if you think about a digestion period where you you and the team are going to have to really focus on those transactions going well and those restaurants transitioning. seamlessly to the new partners. Do you think we've created a pause here before we see further refranchising activity where we need to digest? Or what do you think is that? When should we be looking for kind of further activity beyond this first three deals? Thank you.

Yes, look, thanks. I think you nailed it. I mean, our focus is on making sure we do these right. So our teams are engaged right now, both getting to the finish line on closing the transactions and then setting up the transitions with the new partners so that we can kind of have as much of a seamless handoff as we can. Yes. What I would tell you is there is a lot of expressed interest from the outside that we've kind of said, look, let's just kind of get through this. Let's make sure we hand these over the right way and then revisit this. So exactly what you said, which is, you know, I think the pause is to ensure that we execute the right way.