Todd Brooks. I'm the restaurant and packaged food analyst at The Benchmark Company. I'm very pleased to be hosting today's fireside chat with the team from Red Robin. We've got CEO G.J. Hart with us and CFO Todd Wilson. G.J., Todd, and the entire team have done an amazing job over this past year, really transforming and revitalizing the Red Robin brand and positioning it now to get to a position of more relevance with customers, meaningful traffic growth. So there's a lot of good things to watch for in 2024 here. G.J., I'd like, I'd like to kick it off with you. We've gone through year one of the North Star transformation plan that you announced last year at the conference.
Would love to know your thoughts on the year, what you got accomplished, and what we could be looking forward to in 2024?
Sure. Well, first of all, good morning, Todd. How are you?
Good.
Good morning, everybody. In advance, my friend over here doesn't have much of a voice, so give him a break. But no, look, we introduced the North Star Plan beginning of last year here at ICR, and we'd been working on it during my first few months and got input from every walk of life from stakeholders of Red Robin. As I look back through the year, we've accomplished a tremendous amount. You know, from hiring a whole new executive team to the five-point plan within the North Star Plan, becoming an operations-driven company, hiring and bringing back some of the key positions that the decisions that were made at Red Robin that really changed the course of the brand from the iconic nature of what it was in the past.
And so, you know, things like hiring almost 300 kitchen managers and putting them back and training them, and it's not easy, but we did it. So executive team, management team, putting those positions back, a lot of movement there. And then from a guest experience perspective, we had to start with people and culture first, because as I walked into the brand, one of the biggest challenges was false waits, and so really worked on those and you do that through getting your teams up to speed and staffing with enough folks and all those kind of things. Then we started to say, challenge. I challenged the whole gourmet burgers. It's on every sign in our 511 locations, and I'm like: Are we really producing a gourmet burger that we're proud of?
And so we started to work and cook, and the biggest change in midsummer was changing our cooking platform to getting rid of the Nieco ovens, to flat top cooking, and really getting back to the real cooking of a gourmet burger. And so pleased, really pleased with that. And then as we went through the year, in October, we had talked about, and as you know, launched our whole new ingredient upgrades on 85% of our menu, things like vine-ripened tomatoes, real fresh sliced pineapple, bacon, all. It goes down the list, and almost everything was touched. And so we launched that in October. So it's hospitality, food, and really, really pleased from where the progress that we made.
In addition to all of that, we talked about the third point of our plan was about really building partnerships with our, all of our vendor community and going back to giving them an inside track and helping us to be able to get to a good place. So with significant cost savings that were smart cost savings, 'cause everything that we did was it had to be equal quality or better, and so really made great progress there and feel great about that. We've talked about it before in terms of the dollars. We'll end up investing back into business this year through savings on an annualized rate, over $20 million. We still have more to go, and as we go into 2024.
Then, from a financial perspective, and you know this better than anyone, you know, one of the things we wanted to do is work on earn and respect back of yourself and other analysts and stakeholders and shareholders. You know, the only way you do that is you know, perform based on what you say you're gonna do. And I think we've done a reasonably good job. It's early, but we've done a real good job of that as well. Then from a financial perspective, you know, we strengthened our balance sheet. We went into the year with debt four times, and we're gonna end the year somewhere, you know, around two. I think as you know, we did a couple of sale-leaseback transactions.
The third one that we're working on now, we're real close on, so feel really good about that. So, you know, long answer, but, a lot of progress and we feel great. And I would tell you that, you know, these things take some time, and I would say that we're a little bit ahead of schedule in terms of, having the teams come on board and do what we need to do. So, so far, so good.
So as we turn the corner here into 2024, some more menu improvements on some key platforms. The chicken sandwich, which I had, which I had the chance to taste when I visited you guys. But a little bit more of a broadening of the menu and upgrade of kind of the salad and dessert platforms. But is the offering where you both want it now that you can really start to go out and message customers that basically stimulate trial so that they can feel all the improvement that you've-
Yeah. Well, so let me start with the menu. First, say that no, we're not quite finished yet. This year we're really focused on, you know, seasonal type opportunities and LTOs, but we, we've got those planned and feel great about that. But to your second point is, as with hospitality, food, the financial picture, as we go into 2024, now it's time to really start to tell guests, because our frequency is low.
Mm-hmm.
We've got to work on that, and so, yes, we will in fact be investing in marketing in 2024. We'll start sort of the back half of the first quarter and then go on through the year. And I'll just tell you, you know, we're gonna be screaming everyday value. You know, the one thing this company has had for 54 years is bottomless sides, and we're gonna talk about that. I don't think we've done a good job historically about telling people. They know about fries, but they don't know about all the other items.
Mm-hmm.
And so, yeah, we'll ramp up marketing, and we'll do that in multiple facets, from digital to social, to all the things that you would normally do. But also, as you know, we've really made an effort to go back to the community, being parts of the community, and that's a big part of our marketing platform with the help of our operators and feel like we've made some really good progress. In fact, I would tell you that just the little things from a local store marketing perspective, towards the end of last year, we were back at a rate of fundraisers within our restaurants. I know it sounds crazy, but they...
We averaged 75 people at a fundraiser, and we had as many booked in the last part of the year as we did back 10 years ago when the company was really rocking and rolling, and really was best in class at that. So, so we really do have our marketing platform ready to go. Now, that said, the second part is we have a loyalty base of 13 million members. We have, we are revamping that whole program because historically it's been more of a discount program than rewarding our guests for their loyalty to us. And so you'll see that change happening in the beginning of the second quarter. So really excited, because I think that's a great opportunity for us to personalize and communicate with our guests on what's new here at Red Robin.
You know, candidly, what we've learned is a lot of our guests are sitting back saying, "You know, just get your act together and we'll give you a try again." So I think we're set up, and it's been a nice kind of progression of things and where we're going, and so far, so good, and we feel good going into 2024.
Those customers that are coming into the restaurant now, are you seeing the fruits of your labor and customer satisfaction? How much are those scores improving? And that's probably the meaningful metric for looking at the success of what you want-
Yeah, we're seeing, we're seeing. You know, look, we measure it like lots of folks measure it. Well, you know, it's, SMG's is one data point. We, we measure all the social platforms and bring those integrations into telling us what the overall guest sentiment is. And I will tell you that, our overall hospitality sentiment is up significantly, and that's good news because that's really the first thing we worked on. And, from a food perspective, we're up as well, and not as much as hospitality, but we're continuing to improve, and we feel good about that. But remember, that's gonna take a little longer, and it's gonna have a longer tail because of the frequency rate of our guests. So it's gonna take a while for them to come in if they're, you know, in a couple of times a year.
I would tell you that we're pleased of the progress that we've made.
One of the challenges of a multi-stage effort for a brand revitalization is when to judge the success of the program, and I have a lot of investors talking to me about traffic. When are we going to see the traffic? I'd argue that you had a couple company-specific strategic headwinds that you created by not repeating a profitless promotion that was in the second half of 2022 and exiting your virtual brands. I believe we're seeing the traffic, but just your thoughts. I know that you guys are looking for that as well, and then there's a point when we get into 2024 that really starts to flow through into the results.
Well, yes, for sure. And when I think about doing... We call our situation a comeback because we're bringing back Red Robin to really relevant to the positioning it had back in its heyday. But, you know, you know, in terms of guest traffic, we first had to go back and really analyze, say, "This is an iconic brand, 54 years, that had done a bunch of different things to try to drive traffic." And as you're right, they got into the virtual brand business, which, you know, at the time during COVID, made a ton of sense. But if you were really gonna position and focus on a brand and make it sustainable over the test of time, you've got to be focused on that brand. And so that's first things first, and that's what we've been doing.
And so exiting the virtual brand, it's a headwind, as you know, but we fully anticipate that's the right decision. And then the other piece is that Red Robin has been a value play for a long time, and it didn't... You know, the deep discounting for a $10 burger deal all on the back half of last year and all those investments without a whole lot of profit, and getting consumer trained to that mentality, is something that I think was a mistake. Because if you're gonna build a brand, you can't do it on discounting every single day unless that's your total positioning. So, so making those decisions is the right, I believe, the right decisions for Red Robin. And so traffic, yeah, we've got the headwinds in the back half that we've talked about.
Now, these type of transformations take some time, and as I said, so I normally haven't done this before. I think it's 18-24 months, but that would suggest that I'm in month 15, that, you know, we're getting close. So you're right, you know, we would fully anticipate that, that's. We'll start to see that growth in 2024.
That's great. Can we spend a little time on marketing and the loyalty program? And something that struck me in conversations with both you and the team is what an underutilized asset that 13 million member loyalty base is. How much low-hanging fruit is there on the marketing side, from professionalizing, fixing platforms, engaging those customers that you already have in your base, and then how do you go out and draw new customers to the brand, somebody that hasn't has lapsed for a while or has never really tried Red Robin, and it's a new offering for them that you could get them into the restaurant.
Well, let me split it out into two situations. From a loyalty platform, that our loyalty platform has a tremendous amount of members for the size of our brand.
Mm-hmm.
But the brand had really, as I said earlier, focused on using it as a discount. 78% of the communications to our loyalty members in 2022 were deep discounts. I don't think that's the right thing, versus rewarding a loyal guest for their frequency and giving them surprise and delights, and communicate with them, and develop a relationship with them. So that's what we're doing now with the platform that you'll see us come out in the beginning of the second quarter. We do believe it's a big asset, and, you know, can I quantify that today? We're working on that, but we do think it's a huge opportunity to tell our guests that know about us to come back and try us, and really, tell them what's new at Red Robin.
Mm.
So yeah, that's for sure. As I mentioned earlier, from a marketing perspective, one of the things that we're doing here is not only the local community, which is a longer tail and a lot more work and all those kind of things, but that's one component. The second component is, you know, today's media, to be effective, to draw new guests in with trial, I believe, has to be more about personalization and understanding how do you make the dollars go the maximum benefit for you? And, you know, our CMO, Kevin Mayer, is doing a phenomenal job really figuring that out. And in addition to that, what we've done, we've just finished on a project that will be a component to develop the creative for this strategy.
We call it a brand essence project, which is really about understanding what are those key emotional traits throughout all the different types of guests that frequent us? What can we learn about that to be able to drive a new message and have some breakthrough marketing? And so, versus just showing a bunch of food and things like that. So, so as we finish that project, that will inform what we're doing in this creative and marketing platform in 2024. And so that's the way I think that we'll be able... And we're doing some cool things outside of that as well, that we'll, we'll break through some of the clutter around there.
Mm.
Because we don't have the kind of dollars to compete against some of the other big brands.
Right. But there, there's opportunities too, around this new platform as far as-
Yeah
The data that you're collecting on your customers, and I don't think that Red Robin's ever really had the capability to segment those customers and promote in a more targeted fashion. How much of an unlock? It seems like a quiet unlock, but the ability to promote more effectively.
Yeah, look, understanding our guests and more segmentation, we're definitely doing that, and that's exactly how we're going to personalize the messages. Yeah, it is a quiet unlock, and we're not saying a lot about that yet, but we, we're very hopeful.
Great. Okay, we gave you some time for your voice to rest here. So, G.J. touched on it in his introduction, but any update you can give us on the final leg of the sale-leaseback process here?
Yep. We'll give this a try. So we're happy. As you alluded to, we completed two sale-leasebacks in 2022, or excuse me, 2023. Used those proceeds to pay down a lot of debt, accelerate some of our investments, and in addition, we did buy back $10 million of stock. For Tranche Three, we have been marketing that in the second half of 2023. As G.J. alluded to, we have a handshake agreement in place that we're just working through the final diligence on, the paperwork on, to get what we are targeting as 11 additional properties through a sale-leaseback transaction. As many of you probably know, cap rates have increased through the last several months.
and through the process, we had great interest, but we also took the opportunity to reduce the ongoing rent burden on those properties. So I would expect, if we're able to get this across the finish line, somewhere in the neighborhood of $25 million-$26 million of proceeds that would be used to pay down debt, and really would be the final tranche that we expect in the sale-leaseback process.
Okay, I'm gonna go for a second one. You, you made it through that one. Second stage of kind of the balance sheet transformation. You have some high-cost debt out there. Fundamentals of the business are improving with the work that you're all doing. Is there a window that we should be looking for a rework of that debt deal, and a minimum target? I mean, if we're getting into an easing environment with the Fed, does that actually make you a little more patient before doing it or just thinking about timing on reworking the debt?
Yeah, I, I'll take this, that last part first, because I think that's important of, hey, if interest rates do decline as people expect, right, we'll see that benefit under the current agreement. So there's a natural benefit we'll get there. In terms of timing, you know, the timing is really our own, right? We, we have, the current credit agreement matures in 2027, so there's not a time pressure to do this. It's really the opportunity. G.J., I think, said this earlier. We. If you rewind 12 months, we had roughly $200 million of debt outstanding. 2022, Adjusted EBITDA was a little over $50 million, so we were roughly 4x levered. Fast forward to the other side of the sale-leaseback. If we get Tranche Three across the finish line, we'll be roughly $165 million of debt.
You know, our guidance for 2023 is in the mid-70s, and so that starts to approach 2x. We're proud of the progress we've made there. I began conversations with lenders in the latter half of 2023. We've continued that dialogue this year. There's been a lot of, you know, people see the progress with the North Star Plan. They see the progress in our financials. There's certainly interest there. Admittedly, we have more work to do, but very much 2024 will be a timeframe of continue the progress in the business, get the third tranche of the sale-leaseback across the finish line, and then we'll be active in the market, looking at options.
To your point on a minimum threshold, you know, the framework that we've been working under mentally is, gosh, looking for at least 200 or 300 basis points of savings, which on a $165 million that would remain, you know, that's a nice cash pickup for our business.
Right. G.J., mid-2023, rolled out the market partner program to the multi-unit operators for the brand. We're a couple quarters into that now. I know that's a process, but it seems like the early embrace of the program was strong from the multi-unit operators. Just wondering, as the program ages, what benefits do we see profitability-wise, but also that concept of really driving your top line for your own stores?
Yeah. So the market partner is a multi-unit operator in our system, and we decided that putting in this partnership program made sense to do it there. And essentially, why it works is because their base salary has been lowered, and they get a percentage of the restaurants that they operate, a portion of their restaurant-level profitability. And so now, all of a sudden, they've gone from being just a restaurant operator to a business operator, and really start to be focused on every line on the P&L, not just the things that might be the focus of the day, and I'm talking in history. And so one of the goals of this is to really educate our operators, and our best operators have adopted to this really, really well.
The benefit over time is we're totally aligned on what we're doing.
Mm-hmm.
From the North Star Plan to our mission, vision, values, and ultimately, how does that drive profitability and good profitability? So yeah, we've had it in place for a couple of quarters at the multi-unit level. We did that largely to learn and test. I've never put in a partnership program in a company quite this big, with 500+ restaurants. At Roadhouse, when we did it, it was a very small company, so at CPK, it was an adjustment with a lot less units and of course, Torchy's was a small company. So, I would tell you that long term, we're gonna see the benefits because we're totally aligned, and it's aligned for the right reasons.
Mm-hmm.
And again, we're becoming an operations-driven company, that their voice matters, that every decision we make has an operator at the table, and so it's again, it just totally aligns with where we need to go.
And-
We will launch our managing partner, our single unit operator program, we're launching it this month.
Okay.
We're very excited about that. I will tell you, backing up, both on the market partner, it was really cool because on the market partner level, if you're in the top quartile of the restaurants, you just got a humongous raise.
Mm-hmm.
So you got a windfall, but we need to move, continue to push forward. If you're on the bottom, we protected them for some period of time, and we need to weed out. If they're not going to make it, then we've got to make changes. But, but overall, I would tell you that really helped us because they had a lot of success with that.
Mm-hmm.
And so, we feel good about that, the learnings. So as we launched the management partner program here in January, as we rolled it out to all these operators, you know, there's apprehension and nervousness, but excitement. We went around and did rallies all over this country, talking about it and, you know, it's exciting to see that they're excited versus the fear of, "Oh my gosh, I'm not gonna be able to make what I used to make." So, it's unlimited and, the upside is tremendous.
So very, very, very, happy where we sit today and excited to see what the longer term results, and we'll measure those results and be able to talk about it with the likes of you and, you know, "Hey, here's what we were, and here's where we're going." And, you know, the proof's in the pudding.
Great. Todd, margin improvement, and I think to get to the high teens, there's two components. There's the controllables, which you guys have done a great job with, and I think there's still cost-saving efforts that you're trying to extract from the business. Of that journey to 18, how much of it do you control through your efforts on the cost side of the base? And then when does the baton have to be passed to traffic growth?
Yeah. It's a great question, Todd. The framework is exactly as you said. There's two parts to it. If you rewind, when we rolled out the North Star Plan a year ago, we had just printed a 13% restaurant-level profitability. And if you go back and read Red Robin's history, the company consistently produced 18%-21% restaurant-level. That initial benchmark that we've set is how to get to 18%. So that 500 basis point journey, roughly half of that comes from cost savings, the other half comes from traffic. So what's that mean? The cost savings, you do the math on that, it's roughly $30 million of cost savings to bridge the first part of that gap. The traffic is 2, 3, 4 points a year for the next couple of years to bridge the remainder.
And so, you know, if you start to look at our history, what we did in 2023, we've talked about expecting $12 million of savings in 2023. Those initiatives alone that we implemented in 2023, as G.J. said earlier, are worth roughly $20 million. The team, really across the board, our supply chain team, our operations team, and others, we've got a good pipeline for 2024 and beyond, in addition to that. So good traction on the cost save side. And then the traffic side, as you alluded to earlier, right? We were in the early stages of that journey, but we've certainly seen positive proof points that, especially given the challenges of the past five or six years, make us think there's plenty of share that we had at one time, that we can quickly get back.
Right. Final one. We're running short on time, but I wanted to squeeze this one in. If we're sitting up here a year from now... and you look back on kind of year two of the North Star Plan, what are the one or two things that you really want to execute against this year that we could be celebrating at this conference in a year?
Well, Todd, you know me a little bit, so I would tell you the first one is having a culture that is totally aligned on our overall plan to, to achieve for our team members to be very happy in what they're doing and, and, you know, just one example is our internal 501(c)(3), to take care of our own team members, helping team members. The participation rate has doubled in one year.
Hmm.
- so now we're running into 60% of all employees that contribute to that. That culturally tells me we're heading in the right direction. So getting, getting the team members aligned, because ultimately that's what's going to drive our financial results. So, so I, I would tell you that I - if we're really aligned that way, and we'll know based on, you know, feedback from our guests, and I won't - you know, we don't have enough time to talk about all the different programs we have to be able to measure that, but, but that would be number one. And number two, to come back to ICR, sitting here a year from now, is have investors that took the ride with us to say, "You know what? You guys did what you said, what you're going to do.
In fact, you over delivered, and we're really happy to see that." That would be a lot because Red Robin has not had a good history doing that, and so we're working, and as you know, that's the fifth point of our plan. And if we could sit there and say, "Look, you know, we're proud of that." So the last thing I would say is that, you know, and I think I talked about this on one of our earnings calls. The other point there is that this company has broken, in 2022, over 1,000 sales records within restaurants, from hourly to weekly, to monthly to yearly. That tells me again that we're heading in the right direction. And so, you measure those two things together, and I'd be pretty happy.
That's great. I do want to preview for people. Tonight, you're going to be feeding us at the event, correct? We've got a-
Yeah. So tonight at the networking, we're going to be showcasing our new burgers in terms of everything I just talked about. We'll also be featuring our new margaritas, so-
Hmm
... come, come, ready to drink. And, although lots of people were drinking a lot last night, as I noticed. I did not, by the way. So, but anyway, yeah, it's exciting. Please come by and see us.
Okay. Red Robin does have a breakout session at 10:00 A.M. in the Mets Salon Seven, if you want to get some more time with the team. Thanks, everybody, for coming.
Thanks, guys. Appreciate it.