Red Robin Gourmet Burgers Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 5 speakers on the call.

Operator

Afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Incorporated Third 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 filings. Management will also discuss non GAAP financial measures as part of today's conference call.

Operator

These non GAAP measures are not prepared in accordance with the generally accepted accounting principles that are intended to illustrate alternative measures of the company's operating performance that may be 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 Q3 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 CEO, G.

Operator

J. Hart. Please go ahead.

Speaker 1

Good afternoon and thank you all for your interest in Red Robin. I'm joined today by Chief Financial Officer, Todd Wilson, who will review our financial results for the Q3 and annual financial guidance after I concludes my opening remarks. A little more than a year ago and after having served on Red Robin's Board for 2 years, I agreed to take on the President and CEO roles because I believed and strongly believe today in the great potential of this iconic brand. And in January, we articulated our North Star plan to restore Red Robin to growth and align and enable all key stakeholders will be available to measure our progress against these strategic priorities. I will provide an update on each of the 5 pillars of our plan in a moment and what we have accomplished so far.

Speaker 1

But to begin, we need to revamp our leadership team, bringing on human capital that shares my own passion for Red Robin and has the experience and skill set to nurture a stronger brand, create a better future and build long term and Substantial shareholder value. We now have new leaders in place across every discipline of our leadership team. Additionally, we have highly experienced and capable Board of Directors and recently welcomed Nicole Miller Ragan is our newest Director, someone I am sure many of you already know from her many years covering the industry. Across the organization, we have blended very talented and long tenured Red Robin team members with new talent from across the industry. This combination of internal and external talent provides tremendous expertise to Red Robin and positions us well to establish ourselves has the most loved restaurant brand within the communities that we serve.

Speaker 1

As I shared in January at the ICR Conference, We have identified course corrections that are necessary for many of the decisions that were made under previous leadership, undoubtedly You had the best intentions of mind at the time. In the Q3, comparable restaurant revenue declined 3.4%. This result was in line with our range of expectations and it is important to understand it with full context. In the second half of twenty twenty two, Red Robin heavily promoted a combo meal deal significant with national media that offered guests a burger bottomless side and non alcoholic beverage for $10 a 30% to 40% discount to retail prices. This promotion drove traffic and sales, but the economics were quite penalizing to profitability.

Speaker 1

In 2023, as we upgrade all aspects of the guest experience, we have intentionally shifted away from national deep discount promotions and broad loyalty offers to build a healthier, more sustainable and ultimately more profitable traffic base. However lapping this 2022 promotion is a headwind we expected for our comparable restaurant revenue and related metrics. Additionally, we made the decision to discontinue the virtual brands that were added in 2020. While this type of offering had its place during the depths of COVID, multiple brands, products and procedures created unnecessary complexity for our operators and distracted the focus of executing a great Red Robin experience. The economics of virtual brands also resulted in minimal profit contribution.

Speaker 1

Eliminating these virtual brand offerings in July of this year was the right change for the long term success of Red Robin despite short term optics of a comparable restaurant sales headwind of approximately 200 basis points. Finally, We experienced and we observed industry results for sales and traffic, weaken particularly in the back half of the third quarter. We are pleased to see trends improving at the start of the Q4. Through the 1st 4 weeks of the Q4, comparable restaurant traffic trends have improved 300 basis points as compared to the final 4 weeks of the 3rd quarter led by dining traffic. In a few moments, I'll discuss the ongoing proof points of greater guest satisfaction that we expect will lead to traffic growth.

Speaker 1

We also continue to print proof points we are creating a healthier business with greater profitability. During the Q3, we generated $6,800,000 in adjusted EBITDA compared to $3,900,000 last year. On a year to date basis, we have generated $58,300,000 in adjusted EBITDA compared to $43,700,000 last year, a 33% increase. We have delivered these increases in profitability while making substantial improvements and investments will be back into the guest experience. The total investment in the 3rd quarter was approximately $8,000,000 and the year to date totals approximately We are making this substantial investment to deliver a great guest experience and increases in guest traffic in time.

Speaker 1

I'm incredibly proud and thankful for the work of all Red Robin team members. Because of your work and effort, We are making great progress towards each of the five points of our North Star plan that I will now review. 1st, we are transforming into an operations focused company. Our success rests on the success of our operating partners and restaurant leadership teams. They are leaders of their restaurant and make the Red Robin experience come to life for their guests and team members.

Speaker 1

Our operations leaders now have expanded decision making authority and are actively involved in our entire decision making process. They will then share in the rewards of the positive impact of these decisions as they are made. It has now been 2 full quarters since we revamped our market partner compensation program for multi unit operators. They now rightfully see themselves as owners of the restaurants they oversee And are rewarded based on their profits. They are incentivized to deliver strong financial results like never before And have unlimited upside earnings potential.

Speaker 1

This helps to recruit and to retain the best talent available. The multi unit operator rollout has gone exceedingly well and we are currently preparing to launch the single unit operator Managing Partner Program in early 2024. 2nd, we are elevating the guest experience. The feedback we have received from guests throughout the year is clear. They are more and more satisfied with the Red Robin experience and recognize and appreciate the changes that we have made in quality of staffing, upgrades to our food and unbridled hospitality.

Speaker 1

We continue to measure increases in guest satisfaction across all guest feedback mechanisms, including overall satisfaction for dine in, which is where most of the guests experience our improvements and total net sentiment and service net sentiment across our Google, Yelp and TripAdvisor reviews compared to last year. Returning to Red Robin's traditional and an industry best practice staffing model provides our servers with fewer tables so they can provide a great experience to every guest and minimize false rates. We have also added back buses, driving increases in cleanliness ratings, are better staffed at staffing at the host stand, which has improved wait times brought back the Dedicated Expo, who is responsible for the in restaurant execution of every order. Finally, we have added more than 250 dedicated kitchen managers and expect to substantially complete our manager complement investments by year end. Speaking of food and food quality, recall that we successfully completed the system wide rollout of flat top grills during the Q2.

Speaker 1

This upgraded platform seasoned the burgers juices delivering a thicker, juicier and more flavorful burger and will serve as the foundation for future innovation. Team member and guest feedback has been resoundingly positive. Flat Top Cooking has returned our Burger Chefs to real cooking, while being simpler to execute and enabling them to deliver a tastier product is according to our guests. We have also enhanced our presentation by moving away from wrapping our burgers in wax paper and presenting in a basket to a showcase on a beautiful new plateware. In early October, we took our commitment to returning our burgers to true gourmet status to the next level unveiling new and improved recipes for each one of our more than 20 gourmet burgers is now prepared with higher quality and more flavorful ingredients to deliver on our guest promise and a competitive elevated burger experience.

Speaker 1

We began communicating these improvements to guests under the banner of Turn Up the Yum! That builds on the tremendous consumer recognition of our long term Yum! Tagline. In addition to our relaunched burger lineup, will introduce new entrees, appetizers, beverages and seasonal additions to delight our guests with new innovation will provide optionality within the key menu categories that help build check. With this launch, We have now upgraded ingredients including mayonnaise, vine ripened tomatoes, buns, pickles, fresh pineapple, our sauces and many other items.

Speaker 1

In total, we have made enhancements to 85% of our menu. The new menu includes the first executions of our strategy will broaden both the offerings of menu items and the price points under our barbell pricing strategy. And we have added new proteins with the tsunami shrimp and the Whiskey River barbecue ribs. Our culinary has also developed an amazing barbecue Burt's Inn's Bacon Burger, smashed avocado and bacon burger And we return to fan favorite Burning Love. While only in place for a few weeks, we have is as part of our regular practices, we regularly survey our loyalty database and amongst the most dedicated guests who have dined with us over the last quarter, we're seeing positive sentiment.

Speaker 1

46% agree our food quality has improved, 52% acknowledge that our burgers are better, 48% agreed that our service and hospitality has improved. These figures have continually increased as we implement additional changes to improve the guest experience. We've also upgraded our bar menu to include high quality brands our guests know and love, La Casa Amigos, Angel's Envy and Kendall Jackson in our wine and spirit offerings. While making quality upgrades to things like our margarita mix with fresh lime juice and agave, Alcoholic beverages are a tremendous opportunity for our business, currently representing only 6% of sales versus a competitive average of over 10%. These changes are the first steps to reinvigorate our bar business and capture this opportunity.

Speaker 1

Having achieved great gains in staffing levels, hospitality and food quality, we are finalizing preparations for an Alpha Test Group of Restaurant Renovations I announced last quarter. We plan to have these restaurants operate without interruption through the busy end of year holiday period then begin construction right after the New Year. The initial test restaurants are located in Washington, California and Colorado and will provide a good sampling of our West Coast footprint to learn from. Renovations are planned to upgrade the interior ambiance and exterior fuel to match the food and hospitality upgrades. In doing so, we are bringing all elements of the guest experience together.

Speaker 1

3rd, we are removing costs and complexity. To help fund our investments back into the guest experience, we have been identifying and then capturing numerous is non guest facing savings opportunity. These efforts have been centered in the fantastic work of our supply chain team We have found smart saving levers and have been able to produce products from our vendors of the same or better quality at a lower cost. Year to date, we have saved approximately $7,000,000 and expect the savings to total approximately $12,000,000 in 2023. The initiatives implemented in 2023 total an annualized run rate that exceeds $20,000,000 And will carry into the benefit of 2024.

Speaker 1

The final key initiative planned to launch in the 4th quarter is a change from frozen to fresh chicken breast. The move to fresh chicken breast is a tremendous quality, flavor and helpful improvement for our guests and one we expect to result in approximately $5,000,000 annualized savings is on that product itself. This type of change illustrates how we think about cost savings as changes that are both good for our guests and for Red Robin. The team continues to do great work capturing these opportunities in 2023 and building a robust pipeline of initiatives To continue this progress in 2024 and beyond. I discussed the complexity aspect earlier As that was the driving force that led to our decision to exit virtual brands.

Speaker 1

4th, We are optimizing guest engagement. In our ongoing efforts to reinvigorate the Red Robin brand and enhance our restaurant experience, We have been proactively elevating our marketing capabilities. 1st, given the substantial digital traffic from our guests, We are rapidly improving guest acquisition capabilities and our capacity to target the right audience will timely and pertinent messages. We've significantly increased the efficiency of our paid media strategy Through more precise targeting, allowing us to reach more guests with the same dollars and serve up more purposeful messaging. Will be shifted towards more categories specific search strategies to capture the attention of guest seeking experiences like ours.

Speaker 1

And on top of that, we have tackled both technical and content related search engines optimization, resulting in a notable 30% surge is inorganicsearchtraffic. These efforts have restored growth to the web traffic trend that had been declining. 2nd, our investments in earned media and social marketing initiatives have positioned our brand and new consumer touch points, fosters engagement with guests eager to see Red Robin's resurgence and explore our latest menu offerings. We've had success garnering coverage in both the trade and consumer media space. And a small example of our commitment to social engagement, our Bergatini collaborations with Ariana Mattox, a celebrity bartender influencer and U.

Speaker 1

S. Weekly's Reality TV Star of the Year generated over 500,000 views in just the 1st few days showcasing our brand in a compelling manner. 3rd, we are committed to forging strong connections with the communities we serve through localized marketing initiatives that support the local community. This approach is not only building goodwill, but driving revenue. Additionally, we executed a nationwide Summer of Yum!

Speaker 1

Promotional tour, offering tastings of our improved burgers, opportunities to win prizes and enjoyable experiences. The response is overwhelmingly positive building excitement around our new gourmet burgers and other menu additions. Finally, as we continue to invest in our hospitality model and culinary offerings, we are in the process of refining our loyalty program. Our goal is to deliver more relevant messaging to our over 13,000,000 members, transforming the program into a VIP like experience, then acquiring new members to foster a new generation of Red Robin Ambassadors. Our strategy is to shift away from heavy discounting is in favor of rewarding our most loyal guests.

Speaker 1

The formal launch of the revamped loyalty program is scheduled in early 2024. 5th, driving growth in comparable restaurant revenue and unit level profitability to deliver financial commitments. We are taking a holistic approach to our decision making engineering the comeback of Red Robin to create a healthy, sustainable and growing business for the long term. While comparable restaurant revenue declined in the Q3, we expected that outcome and the decisions that led to it as I discussed earlier are the absolute right decisions to set Red Robin up for long term success. Todd will review the details in a few moments and you will hear that our adjusted EBITDA guidance for 2023 is significantly improved from 2022 results and well above our initial guidance for 2023.

Speaker 1

Now let me turn the call over to Todd. Thank you, G. J, and good afternoon, everyone. I will begin with a recap will be

Operator

recorded in our Q3 financial

Speaker 1

performance and then discuss our financial guidance for 2023. Total revenues were $277,600,000 a decrease of $9,200,000 versus the Q3 of fiscal 2022. The decline in revenue was led by a decrease in comparable restaurant revenue of 3.4% due to moving away from the deep discounting marketing promotions and elimination of virtual brands that G. J. Discussed earlier.

Speaker 1

Dine in sales increased 0.5% as compared to the Q3 of 2022. The dine in experience is where guests experience all of the hospitality and food investments we have made. We believe the continued sales growth and relative strength of the dine in business is another data point confirming the changes and investments we have made are right. As a percentage of restaurant sales, Dine in represented 75.6 percent of sales in the 3rd quarter, up from 72.4% in the same quarter last year. This consumer shift back to dine in is a broad trend experienced by many in the industry and is accentuated further Robin as we discontinued virtual brands that were only available for off premise consumption.

Speaker 1

Off premise sales declined 15.1% as compared to the Q3 of 2022. Approximately half of that decline is due to the elimination of virtual brands. We have launched initiatives to enhance the off premise guest experience and promote this offering to become more prominent and visible is for those guests looking for a pickup or delivery option. Within off premise, catering remains a bright spot, is increasing 27% as compared to the Q3 of 2022. Catering is a fast growing segment and the team is doing great work to capture this opportunity.

Speaker 1

Restaurant level operating profit as a percentage of restaurant revenue was 11.1%, a decrease of approximately 150 basis points compared to the Q3 of 2022. The reduction was driven will be recorded by our intentional investments back into the guest experience through both staffing levels and food quality and the deleveraging impact of Comparable restaurant sales decline. The substantial investment that G. J. Referenced earlier is necessary to restore the overall guest experience to levels that made Red Robin so successful in the past.

Speaker 1

As we have previously discussed, in recent years, well intentioned but misguided cost savings decisions hampered the guest experience and negatively impacted guest traffic. With the changes we have implemented this year, we already see gains in guest satisfaction and This reinvestment will ultimately result in increased guest traffic counts and higher levels of restaurant level operating profit. The investment includes additional restaurant level management, which is fixed in nature and therefore deleverages with the lower sales in the Q3 increased hourly team member staffing levels in both the front and the back of the house includes food quality upgrades and finally improved execution by our operational teams to our operating standards. Inflationary pressure continues to moderate. While inflation is present, we see what we consider to be much more normalized levels.

Speaker 1

Commodity inflation was approximately 3% in the 3rd quarter, improved from 5% in the 2nd quarter. We experienced cost increases in beef, potatoes and bread, mostly offset by favorability in other proteins and fry oil. Hourly wage inflation was approximately 4%, also improved from 5% in the 2nd quarter and utility inflation blended across gas and electric was approximately 3%. General and administrative costs were approximately $19,200,000 a decrease versus the prior year of $2,300,000 will decrease results from various initiatives we enacted to reduce overhead costs. Additionally, Red Robin held its Annual Leadership Conference in Q3 of 2022 and did not hold an annual conference in the Q3 of 2023.

Speaker 1

Instead led by G. J, the leadership team met with our managing partners and operations leaders in multiple Town Hall rally settings is now available earlier in 2023 to celebrate and communicate with them. We intentionally reduced marketing and promotional activity in 2023 compared to 2022 to support our hospitality investment. Selling expenses were approximately $8,800,000 a decrease versus the prior year of approximately $5,400,000 led by reduced media spending on social and local channels. We expect a sequential increase in spend from the Q3 to the Q4 of approximately 30% to promote this new news.

Speaker 1

Discounts represented 3.7% of revenue, a decline of 2 30 basis points compared to the Q3 of 2022. Adjusted EBITDA was approximately $6,800,000 compared to approximately $3,900,000 in the Q3 of 2022. In August, We completed a second sale leaseback transaction with Essential Properties Realty Trust to sell and simultaneously leaseback 9 owned properties. The transaction generated gross proceeds of approximately $30,400,000 which was used to pay down debt and accelerate investments to drive growth. Also during the Q3, we marketed a 3rd tranche of owned properties and received positive interest and multiple bids from investors.

Speaker 1

We continue to engage with our top bidders and may select a winning bid in the Q4. If completed, we expect net proceeds will be used to repay debt is pursuant to the credit agreement. The sale leaseback transactions completed to date have allowed us to repay approximately $25,000,000 of debt, is carrying an interest rate that would have exceeded 12% during the Q3. Our goal as we continue to improve the profitability of the company is to reduce our debt and leverage metrics to levels that allow us to refinance the remaining debt at more favorable interest rates, further freeing cash that is currently allocated to interest payments. We ended the 3rd quarter with approximately $48,600,000 of cash and cash equivalents, dollars 12,300,000 of restricted cash and $25,000,000 available borrowing capacity under our revolving line of credit.

Speaker 1

At quarter end, our outstanding principal balance under our credit agreement was $189,100,000 was down from $197,500,000 as of the end of the second quarter and letters of credit outstanding were $11,700,000 During the Q3, among other items, will use cash to repay $8,400,000 of debt, purchase $5,000,000 of stock and deploy $11,300,000 for capital expenditures. With respect to our 2023 financial guidance metrics, We reiterate our revenue guidance of at least $1,300,000,000 and comparable restaurant revenue guidance increase of 1% to 3%. As texture for the Q4 portion of this guidance, we would point out a few items. First, Q3 of 2022 is the largest promotional hurdle to lap from last year because it marked the launch of the $10 meal deal And saw the greatest guest response. Comparable restaurant sales from 2022 are progressively easier comparisons through the Q4.

Speaker 1

2nd, our traffic trends relative to 2019 have been consistent for the past 5 months and we expect will continue through the Q4. 3rd, as I mentioned earlier, we have intentionally kept powder dry on the selling or marketing front. We anticipate this added sequential investment in the 4th quarter will further support and drive sales. Finally, as we have noted previously, Fiscal 2023 is a 53 week year. We will experience the benefit of the added week during the Q4 with a 13 week quarter this year versus our typical 12 weeks.

Speaker 1

We expect the added week will benefit sales by approximately $28,000,000 and adjusted EBITDA by approximately $4,000,000 We expect restaurant level operating profit is between 13% 13.5 percent of restaurant sales. We previously guided to at least 13.5%. The change is primarily due to additional investments in the guest experience, primarily related to food and timing changes in our cost save estimates. We now expect selling and general and administrative costs between $123,000,000 $127,000,000 revised from our prior range of $127,000,000 to $132,000,000 This change is due to cost savings opportunities we expect to capture and revised estimates for annual incentive compensation program expenses. Will reiterate our capital expenditure guidance of $45,000,000 to $50,000,000 Our adjusted EBITDA guidance has been tightened to a range of $72,500,000 to $77,500,000 compared to $72,500,000 to $72,500,000 and our actual adjusted EBITDA last year in fiscal 2022 totaled $52,100,000 In summary, the quarter demonstrated strategic, operational and financial progress against our objectives and we look forward to finishing the year strong and preparing for a successful 2024.

Speaker 1

With that, I will turn the call back over to G. J. Thank you, Todd. As our North Star plan implementation rolls on, Red Robin's comeback will advance. In summary, we are executing against our strategic vision with an enhanced guest experience through investments in labor and food are expected to drive long term traffic growth.

Speaker 1

We are taking action to improve our margin structure will reduce discounting and smart cost savings that will benefit our profitability in 2024 and beyond. And we are strengthening our balance sheet with adjusted EBITDA far exceeding 2022, allowing for debt reduction And incremental free cash flow to reinvest in the business. We are truly eager to continue on this journey, builds an incredible brand history that goes back more than 5 decades and ensuring that we will have a successful and sustainable business for many years to come. I feel very fortunate to be leading this incredible group of dedicated people who are committed to serving our guests and enhancing long term value for our shareholders. We would now be happy to take your questions.

Speaker 1

Operator, please open the lines.

Operator

Before pressing the star keys. Our first question is from Todd Brooks, Bath Benchmark Company. Please go ahead.

Speaker 2

Hey, good evening, everyone. Thanks for taking my questions. Two questions for you, if I may. 1, I'm just thinking about the pressure that the full service group saw from a traffic standpoint in August September And lapping some of the post Omicron strength from the prior year. If I put that headwind together with that And the 500 basis points that you talked about for lapping the $10 meal

Speaker 1

deal and then

Speaker 2

a couple of 100 basis points from the exit of the virtual brands. I know we're not seeing traffic increases, but do you believe that you're seeing traction from your initiatives that muted what if the industry slowdown has been mirrored at Red Robin probably would have been led to lower numbers. My sense is there may be traffic improvements that are hidden in the reported numbers for the quarter.

Speaker 1

Hey, Todd Wilson here. Good to talk to you. We have the same broad interpretation. We tried to call out through the prepared comments The headwind of the virtual brands discontinuation and we had talked as you mentioned about the $10 meal deal lap, Both the offer itself being such a discount as well as all of the marketing activity that supported it last year as a 300 to 500 basis point headwind. So We interpret it the same way and part of the internal analysis that we've done, we evaluated Q2 trends to Q3 trends And we walk away very comfortable with the track that we're on, encouraged with the improvements that we're seeing in guest satisfaction as well as what we interpret as the underlying traffic trend.

Speaker 1

So yes, I think your call is spot on of there are Very intentional decisions that we've made that are right for the long term of the business that are resulting in these figures. But we think it sets us up very well as we turn the corner both in Q4 and turning the corner into next year.

Speaker 2

That's great. Thanks, Todd. And then my second question and then I'll get back in queue. You talked about keeping your powder dry on the marketing side of things. And now having the platform and the menu expansion, the ingredients on 85% of the items where you want them in the service model, right?

Speaker 2

When do we start seeing more aggressive efforts on the selling expense side When we're looking at Q4 here, is it across a holiday window? When are you guys thinking that you'll start to really go and start to push on messaging the new experience at Red Robin. Thanks.

Speaker 1

Hey, Todd, it's Jujai here. Look, first of all, when you make this many changes, you want to make sure that execution is at a high level, so it takes a little bit of time. And so what I would say to you is that we'll be ramping up that investment throughout the quarter. And I wouldn't say that it's heavily back loaded towards the holiday season. I would tell you it's sooner than that.

Speaker 1

But we wanted to make sure that we were executing at a is executing at a high level and get comfortable with that. Is that helpful?

Speaker 2

Yes, that is. Thanks, TJ.

Speaker 1

I'll go back in the queue. Concludes today's conference call. Thank you. The next question is from Alex Slagle of Jefferies. Please go ahead.

Speaker 3

Thank you. I appreciate all the details and color you guys gave in the prepared remarks. That was very helpful Trying to look through things. One thing I wanted to clarify was maybe walk through the areas of incremental year over year investment in the guest experience In the quarter, I think you mentioned $8,000,000 number and maybe talk about the expectations for the 4Q, what that looks like. I don't know if this timeline has evolved at all.

Speaker 3

And then on the other side, the incremental cost benefits you realized, it sounds like The quarter, it was maybe a $3,000,000 incremental benefit or so. And I guess if you could just kind of clarify What the outlook is, the timeline for getting

Operator

to that

Speaker 3

$20,000,000 savings run rate, sort of what the cadence looks like will not end?

Speaker 1

Yes. Hey, Todd here. Alex, good to talk to you as well. Yes, I'll start with the first part of your question on the investment itself. The $8,000,000 at this point we view as a wholesome run rate.

Speaker 1

We may make tweaks here and there, but I think as you think about Q4 and then we have some of that investment baked into the 1st part of 'twenty three that will lap next year. But The $8,000,000 you can think of as effectively fully loaded. So we would said plainly, we would expect probably another 8,000,000 in Q4, the investment itself, the bulk of it I would tell you is in labor. There's a meaningful investment we've made in food, But we're also seeing things like the cost saves that I'll get into next, right. We're making investments in food, but we're also able to make some pretty significant upgrades to our food Like the chicken that G.

Speaker 1

J. Talked about as well as saving money. So there is some net investment in the food, but it's the minority of that 8,000,000 As it relates to the cost saves, just to ensure clarity, we measure about $4,000,000 On the quarter, we had talked about $7,000,000 year to date $3,000,000 year to date through Q2. So on the quarter it was about $4,000,000 We do expect that to step up in Q4 to about $5,000,000 that gets you to the $12,000,000 for the year. The big initiative that gets us there that incremental step up is the chicken change that G.

Speaker 1

J. Talked about. That is already partially implemented through the system and just working its way through the supply chain. So obviously a high degree of confidence that we'll capture that save. The last part of your question, I think about the $20,000,000 I think maybe I'd frame it this way of all of the things that we'll implement this year, a full 12 month run rate would be $20,000,000 We think we'll capture $12,000,000 of that this year, which leaves an $8,000,000 benefit that we would expect to capture in 2024 only from the things that we've implemented this year.

Speaker 1

Obviously, the team is working and we'll have a pipeline to plus that up further, But that's the way to dimensionalize the run rate of what we've done this year.

Speaker 3

Perfect. That clarifies it greatly. Also question on labor and sort of how we think longer term about getting back towards historical run rate labor as a percentage of sales and what would kind of need to happen. I'm sure a lot of that's really just driving traffic, but thoughts there, what that might look like? And then Any thoughts on the California minimum wage rules, although not directed at casual dining, could have an impact and sort of implications you would see for inflation or pricing next year related to that.

Speaker 1

Yes, I'll start and G. J. May chime in as well. The labor side itself, we've been 37% to 38% between Q2 and Q3. And I think in the near term, that's a Fair way to think about our near term run rate.

Speaker 1

In time, we certainly expect that to get back to the 35% to 36% range in part with traffic growth and leveraging those sales, but quite frankly there's near term opportunities there. 1, We've brought on a number of new team members as they gain experience and mastery of their jobs. We certainly expect that there would be efficiency there. And 2, we're looking at things like overtime, where we want our restaurants to have the right amount of labor, and so it's not an hour reduction, But saving that half time of pay is a meaningful number for us. And so there are things that we can do in the near term to manage that number appropriately while still giving a great guest

Speaker 3

So anything on the California?

Speaker 1

Yes, I'll take that. Look, at the end of the day, the California situation, there will be some of that affects us. We're not quite sure how much of that yet. We've obviously sized that up and candidly we're going to have to really evaluate that if we need takes additional price in the state of California or not, which we're not alone in that. But so we're watching it really, really close and we do expect a little bit of creep.

Speaker 3

Got it. Thank you.

Speaker 1

Thank you. The next question is from Andrew Wolf of C. J. King. Please go ahead.

Speaker 4

Hi. Thank you, C. L. King actually. Just wanted to on the same store on the traffic improvement you've had so far in this quarter, The 300 basis points in traffic, is that did check hold the same?

Speaker 4

So is that also could we also assume that the same store sales sequentially from September to October improved about the same time as that?

Speaker 1

Yes. Andy, that's a fair way to think about it. We're is very focused on traffic internally and so that's part of the reason we framed it up that way. But that's the right assumption is both traffic and sales have seen the improvement.

Speaker 4

Okay. Thank you. And I don't know if you went over this, but in terms of like cadence, How would that 3% compare to the numbers you gave us, the very detailed information you gave on the quarter? In In other words, was September much lower or similar to the quarter? So we could try to translate that to sort of what your comp is running at?

Speaker 1

Yes. I think I'd frame it this way, Andy. Yes, within Q3, the G. J. Referenced it, the back half of the quarter was the softer part of the quarter.

Speaker 1

As we look at that 300 basis point improvement, That has us better than the Q3 results, and we are very optimistic when we look at Especially the multi year trends of where the quarter could end up, I imagine that the group can triangulate We have seen from Q4 from some of the guidance figures, but we think that there is a path to flat to potentially even positive same store sales within Q4.

Speaker 4

And that would be somewhat the comparisons against last year's promotionality easing and also obviously All the changes you've done for the guest experience?

Speaker 1

That's right. The comparisons versus 2022 are Lighter, when we look at the comparisons versus 2019, we feel very comfortable with that track there. And then you add on the incremental investment, the sequential investment from Q3 to Q4, all of those, we believe point to that type of outcome.

Speaker 4

And kind of last thing I just wanted to ask was focusing on the selling expense. And I'm not saying in a guidance way because we're in a not a great period for the industry. But If we were in a normal period, what would then what are you guys thinking about for like a normal selling expense annualized or do You like where it's at or do you think there's more to is it should it be higher in a better environment where you can fund it internally or I guess option 3 is, are you going to find out if you sort of test things in the market?

Speaker 1

It's really option 3. I'm sorry to be That way about it, but we're going to learn here. And we definitely need to get our news out there in a creative way And to be able to generate some excitement. So we're going to learn here and we are going to test different ways and different levels to really see what makes

Speaker 4

Okay. But I mean clearly you've come to the judgment. I mean you've said this, but I don't underline it And a lot of the prior spend was just ineffective. You're not just sort of looking at a big bucket of cost savings with wide eyes

Speaker 1

No. And that's a great point. I mean, as I pointed out, it's just being a lot more focused and using making the dollars go a lot further and we're already seeing some progress there and a lot of learning. So we are very hopeful that we'll continue to be way more efficient than what was done in the past. Concludes today's conference call.

Speaker 1

Thank you very much. We have no further questions at this time.

Operator

And and I would like to turn the call back over to DJ Hart for some closing comments.

Speaker 1

Thank you all for joining us. We appreciate your interest in Red Robin. We're excited about our future and look

Operator

ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Red Robin Gourmet Burgers Q3 2023
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