Yahoo Finance Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) Q4 2023 Earnings Call Transcript
Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) Q4 2023 Earnings Call Transcript February 28, 2024
Red Robin Gourmet Burgers, Inc. misses on earnings expectations. Reported EPS is $-0.66 EPS, expectations were $-0.43. Red Robin Gourmet Burgers, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone and welcome to the Red Robin Gourmet Burger Incorporated Fourth Quarter 2023 Earnings Call. This conference 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 reflects management’s beliefs and predictions as of today and therefore are subject to risks and uncertainties as described in the company’s SEC filing. 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 that maybe useful.
Reconciliations 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 fourth quarter 2023 earnings release on its website at ir.redrobin.com. Now, I would like to turn the call over to Red Robin’s President and Chief Executive Officer, G.J. Hart.
G.J. Hart: Good afternoon, everyone, and thank you all for joining us today and your interest in Red Robin. 2023 marked the first year of our North Star Plan and was a successful transformational year for our iconic brand. Operationally, we made the necessary investments in what we serve and how we serve it to ensure that every guest experience at Red Robin is a memorable one, and we are seeing early signs of traction from these initiatives. Financially, we made substantial progress by delivering 1.6% increase in comparable restaurant sales, a 33% increase in adjusted EBITDA, and we strengthened our balance sheet supported by two sale-leaseback transactions, ultimately reducing our long-term debt by almost $25 million. I’d like to extend my heartfelt thank you to all of our more than 20,000 team members around the country.
The success of Red Robin in 2023 and in the future is due to your efforts and all of us working towards the same goals, all in this together. Before I dive into our plans for 2024, I want to take a look back on what we accomplished in 2023 through the framework of our North Star Plan. First, we transformed into an operations-focused restaurant company. Our achievements rest on the success of our managing partners and restaurant leadership teams. During the second quarter of 2023, we revamped our market partner compensation program for multiunit operators. Through this program, they now see themselves as owners of the restaurants. They oversee and are rewarded based on their profits. Said another way, our restaurant leaders are now incentivized to deliver strong financial results like never before with unlimited upside earnings potential for themselves.
We believe this has not only helped to recruit and retain the best talent available but also made the Red Robin experience come to life for both our guests and our team members. The multiunit rollout has gone exceedingly well and has informed the launch of our single-unit operator program to start 2024. The initial feedback has been positive, and we are thrilled to align the entire organization around a unified goal of driving traffic and ultimately profit dollars. One of the many signals we are monitoring is management turnover, which has improved by 5% in 2023 as compared to 2022. We believe this is a reflection of our team’s belief in the direction of the company under the North Star Plan and the attractiveness of the partner program. Second, we elevated the guest experience.
During the year, we made substantial investments and upgrades to the guest experience. On the labor front, it was a busy year with the return to an industry best practice staffing model, giving servers fewer tables, adding back busters and a dedicated expo and bringing back more than 250 dedicated kitchen managers. These investments have led to fewer false waits, increased cleanliness ratings, improved wait times and ultimately, better hospitality. On the food side of the equation, we were equally as busy as we rolled out flat top grills during the second quarter, which delivers a thicker, juicier and more flavorful burger. We also enhanced our food presentation by moving from wax paper wrapping in a basket to showcasing our burgers on beautiful new plate wear.
Next, we unveiled new and improved recipes in October for each of our more than 20 gourmet burgers now prepared with higher quality and more flavorful ingredients. And finally, we introduced new entrees, appetizers, beverages and seasonal additions to delight our guests with new innovation. In total, we made enhancements to approximately 85% of our menu. In terms of drinks, we upgraded our bar menu to include higher quality brands that our guests know and love while making quality upgrades to things like our margarita mix with fresh lime juice and agave. We’ve accomplished a lot and our guests are recognizing our efforts. As part of our best practices, we regularly survey our loyalty database, and we see a clearly favorable response. 52% indicated our burgers are better, in line with our third quarter measurements.
54% agree our food quality has improved, increased from 46% at the end of the third quarter. 59% indicate that our service and hospitality have improved, up from 48% at the end of the third quarter. Third, we removed cost and complexity. To help fund investments in guest experience, we continually identify and capture numerous non-guest-facing savings opportunities. These efforts have been centered around the fantastic work of our supply chain team, who have found smart saving levers and have been able to procure products from our vendors of the same or better quality at a lower cost. For example, in the fourth quarter, we changed from previously using a frozen pre-vetted chicken breast to now freshly hand battering in the restaurant. This change alone accounts for nearly $5 million annual savings and delivers a tremendous quality, flavor and helpful improvement for our guests.
This type of change illustrates how we think about cost savings as changes that are beneficial to both our guests and to Red Robin. Finally, as we’ve previously spoken in July, we made decisions to discontinue the virtual brands that we added in 2020. While this type of offering had a place at the time, multiple brands, product and procedures created unnecessary complexity for our operators. The economies of these virtual brands resulted in minimal profit, but creates a comparable restaurant sales headwind of 200 basis points to 250 basis points until we pass the anniversary of the elimination in the third quarter of 2024. Fourth, we optimize guest engagement. In our ongoing efforts to reinvigorate the Red Robin brand and enhance our restaurant experience, we have proactively been elevating our marketing capabilities.
Given the substantial digital traffic from our guests, we have and continue to rapidly improve our guest acquisition capabilities and capacity to target the right audience with timely and pertinent messaging. We significantly increased the efficiency of our paid media strategy through more precise targeting, which we expect will be beneficial to our upcoming marketing program, which I’ll speak to in just a moment. We have shifted towards more category-specific search strategies to capture the attention of guests seeking an experience like ours. Our investments in earned media and targeted social marketing initiatives have also positioned our brand in new consumer touch points, fostering engagements with guests eager to see Red Robin’s resurgence and explore our latest menu offerings.
As an example to our commitment to focus social engagement in October, we collaborated with Ariana Madix, a celebrity bar tender and influencer on our Burgertini collaboration, which generated over 500,000 views in the first few days. More recently, a partnership with Juicy Couture, we reimagined the iconic track suit to celebrate our juicier and more flavorful burgers. The social engaged response has been fantastic with over 800,000 impressions to date and counting, and we quickly sold out of the track suits themselves. Fifth, we drove growth in comparable restaurant revenue and profitability. We increased comparable restaurant revenue by 1.6% for the year. While we strive to drive growth in every quarter, the declines we experienced in the third and fourth quarter were not unexpected due to our intentional decision to remove the extreme deep discounting marketing programs.
The business was executing when I started in the second half of 2022. Overall, we are on track relative to the expected cadence of the North Star Plan. We’ve seen the tangible results of our work during 2023 as we drove an increase in comparable restaurant revenue invested approximately $24 million back into the guest experience through food and labor, increased guest satisfaction scores across multiple measurement tools, flushed out the excessive discounting and virtual brands decisions of years past, captured our targeted cost savings and delivered a 33% increase in adjusted EBITDA. 2024 will also be a transformational year as well as ensuring that our guests are aware of the improvements that we’ve made to drive traffic back into our restaurants.
Driven by the initiatives I will outline below, we fully intend to outpace the industry on traffic growth as we exit the year. Now let’s talk about how we plan to get there and the cadence you should expect to see. First, we’re in the process of launching our new marketing program. Starting in March and into the second quarter, you will begin to see our new marketing platform showcasing the work we’ve been doing to improve the guest experience and remind our guests about some of the unique aspects of Red Robin. For over 54 years, Red Robin has had bottomless sides and other menu items but has not done a good job historically of telling people that beginning in March that will change. On our menu, we have over 30 items that are bottomless, and we want to make sure our consumers know that.
From our fan favorite Steak Fries to our Freckled Lemonade and all the way down to our Root Beer Float. If you want another, the answer is yes. Additionally, guests can swap items between bottomless refills get broccoli with your burger and then fries with your milk shake. We want to ensure consumers know this core equity of Red Robin, a place for everyday value for your family. We’re excited to utilize our marketing program to get this message out and expect to invest an incremental approximately $3 million in selling expense to support this effort. Second, we plan to launch our new loyalty platform. The Red Robin Rewards program is an exceptionally strong asset at our disposal with over 13 million loyalty members. Historically, it has been more of a discount program rather than rewarding our guests for their loyalty to us.
We intend to transform our loyalty program into a VIP like experience, delivering more relevant messaging to our members and ultimately fostering a new generation of Red Robin ambassadors. We’re excited to transition to a points-based program that makes it easier for our most loyal guests to earn rewards, giving them incentive to visit us more often. We expect to launch the new program in the middle of this year, and we look forward to sharing additional details throughout the year. Finally, we plan to continue removing cost and complexity to strengthen our financial model. In addition to the rollover benefit of approximately $8 million from initiatives started in 2023, we expect to generate an additional $11 million of cost savings from new initiatives that we plan to launch in 2024 for a total of $19 million in targeted incremental cost savings.
We continue to see opportunities in our supply chain, and we have launched initiatives to support our operators through upgrades to tools like theoretical food costs and hourly labor and overtime management. With that, let me turn the call over to Todd to walk you through our financial performance for the quarter and year as well as our initial thoughts on 2024 guidance.
Todd Wilson: Thank you, G.J., and good afternoon, everyone. In the fourth quarter, total revenues were $309 million, an increase of approximately $19 million versus the fourth quarter of fiscal 2022. The increase in revenue was led by an additional operating week in the quarter, the 53rd week of our fiscal year. The additional week added approximately $24.5 million to restaurant revenue and was partially offset by a decrease in comparable restaurant revenue of 2.7%, driven by the removal of our previous deep discounting, marketing promotions and elimination of virtual brands. Restaurant level operating profit as a percentage of restaurant revenue was 12.2%, an increase of approximately 90 basis points compared to the fourth quarter of 2022.
The improvement was driven by cost-saving initiatives and cost of goods and other operating expenses, menu price increases and reduced discounting. Additionally, the inflation environment continues to improve. The rate of inflation across all major cost categories, including commodities, wages and operating expenses, was in line with or reduced from levels experienced during the third quarter. General and administrative costs were approximately $22.7 million versus the prior year of $20.2 million. The increase is led by approximately $1.7 million due to a 13-week quarter this year versus a 12-week quarter last year and an increase in incentive compensation expense due to the company’s improved performance in 2023. Selling expenses were approximately $12.1 million, a decrease versus the prior year of approximately $2.1 million, led by a strategic reduction in media spending on social and local channels.
Adjusted EBITDA was approximately $10.6 million compared to approximately $8.4 million in the fourth quarter of 2022. For the full 53-week fiscal year, adjusted EBITDA was $68.9 million and approximately $66 million on a 52-week basis. As we have previously discussed, we are taking actions to strengthen our balance sheet and in combination with gains in adjusted EBITDA, we’ll look to use that improved credit profile to refinance our debt with more favorable terms over time. As a reminder, our term loan matures in 2027. So this is an opportunistic effort. While we are in the very early stages of this process, we have been pleased with the initial engagement from potential lenders and look to recent refinancings from others in the industry as markers for what may be possible.
Our sale-leaseback transactions are in support of this ever. Following our 2 successful transactions in 2023, we marketed a third tranche of owned properties, received multiple bids from investors and have been working through diligence items with the winning bidder. I am pleased to share the diligence period is coming to a close, and we expect to complete this transaction in the first quarter. We expect the final transaction will include from 8 to 11 properties and generate gross proceeds of $20 million to $26 million with net proceeds used to repay debt. We ended the fourth quarter with approximately $23.6 million of cash and cash equivalents, $7.9 million of restricted cash and $25 million available borrowing capacity under our revolving line of credit.
At quarter end, our outstanding principal balance under our credit agreement was $189.1 million, unchanged from the end of the third quarter and letters of credit outstanding were $7.7 million. As a reminder, the 53rd week adds an additional payroll cycle to the fourth quarter. This has a short-term negative impact on our cash position at the end of 2023 that reverts as we move through 2024. Turning now our guidance for 2024 is as follows: total revenue of $1.25 billion to $1.275 billion, including comparable restaurant revenue of a low single-digit percentage decline. Restaurant level operating profit of 12.5% to 13.5%, inclusive of investments in the guest experience and rent expenses related to the sale-leaseback transactions, adjusted EBITDA of $60 million to $70 million, and capital expenditures of $25 million to $35 million.
The $65 million midpoint of our adjusted EBITDA range represents a modest increase year-over-year when adjusting for the benefit of the 53rd week in 2023 and the additional rent we will incur in 2024 due to the sale-leaseback transactions and compound annual growth of approximately 12% relative to 2022, the starting point of the North Star Plan. As added color for our 2024 financial guidance, we expect the following factors to influence our 2024 results. We will revert back to a 52-week fiscal year in 2024 as compared to 53 weeks in 2023. We expect this will result in an approximate $25 million reduction in restaurant sales and $3 million reduction in adjusted EBITDA as compared to 2023. The sale-leaseback transactions we completed in 2023 and the third tranche we expect to close during this first quarter will result in incremental rent expense of approximately $4 million in 2024 and a reduction of annualized interest of approximately $5 million to $6 million, driven by debt reduction.
We anticipate inflation will return to more normalized levels with inflation across our entire cost basket, including commodities, wages and operating expenses in a range of 3% to 4%. We expect total selling and general and administrative expenses to be relatively unchanged as compared to 2023. As G.J. mentioned earlier, this includes an increase of approximately $3 million in selling to support our marketing efforts. We expect an offsetting reduction in G&A expenses. We have included in our guidance the impact of adverse weather to start the year. Due to this impact, along with the lap of the strong results we had in the first quarter of 2023, we expect results will be particularly challenged in the first quarter of 2024. Our confidence in the balance of the year is driven by the significant investments we made in 2023 to enhance the guest experience and the ongoing improvements in guest satisfaction in response to those investments.
Our anticipated return on the investments we expect to continue to make in 2024 and levers we generally control, including cost savings measures and menu price increases. In summary, while we’ve made significant progress across all points of our North Star Plan, we are still at the start of year 2 of our multiyear comeback strategy. We remain on track to achieve our targets and are building this brand to be successful over the long-term. With that, I will turn the call back over to G.J.
G.J. Hart: Thank you, Todd. The comeback journey of Red Robin in building a long-term sustainable and growing business takes some time. We have used the analogy of a baseball game to measure our progress. I believe that we were in the second inning of a 9-inning game. This assessment reflects the fantastic foundational progress we made during 2023 at completion of the first inning, and the remaining 8 innings as the great opportunity we see ahead. Through our operations execution focus, increased marketing communication, the launch of our new loyalty program and continued cost savings, we look forward to demonstrating further step change progress in 2024 as we bring back guests back into our restaurants for moments of connection over craveable food that only Red Robin can provide. With that, we are now happy to open and take questions. Operator?
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