Hello, everybody, and welcome to the Red Robin Gourmet Burgers, Inc. business update conference call. This conference call is being recorded. During management's presentation in response to your questions, they will be making forward-looking statements about the company's business outlook and expectations. These forward-looking statements and all other statements that are not historical facts reflect management's beliefs and predictions as of today and therefore are subject to risk uncertainties, including those 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 they are intended to illustrate alternate measures in the company's operating performance that may be useful. Additional information about our non-GAAP financial measures is included in the company's SEC filings.
Now, I would like to turn the call over to Red Robin's President and Chief Executive Officer, Dave Pace. Please proceed.
Good morning, everyone. Thank you for your interest in Red Robin. As I approach my three-month mark as CEO, I'm even more confident in the potential for Red Robin and for our future. During my first three months, it's also become clearer that to realize this potential, we must take bold actions across the business to make investments that drive sustainable growth in traffic, profits, and cash flow, enabled by a strengthened financial position. Yesterday, we unveiled our first-choice plan to address these opportunities head-on. These actions are designed to position Red Robin for long-term success while strengthening our financial foundation. Underpinning all of this is our goal to make Red Robin the first choice for guests searching for a differentiated restaurant experience, team members looking for a great place to work, and investors seeking reliable returns on their investments.
More specifically, the first-choice plan consists of the following: first, hold serve, protect, and build on the foundations established under the North Star Plan. Second, drive traffic, creatively engage with guests, and inspire visitation. Third, find money, manage expenses and assets to reduce debt and allow for critical investments. Fourth, fix restaurants, invest in the physical estate to improve the overall dining experience. Fifth, win together, create a high-performance environment that attracts and retains the best industry talent. Let's start with holding serve and building on the foundations established under the North Star Plan. As we've spoken to extensively in the past, Red Robin is in a substantially better position now from a food quality and hospitality perspective relative to the start of the North Star Plan. When our team members execute the way we know they're capable of, our guests have a great experience at Red Robin.
In fact, in the recent ACSI restaurant and food delivery study, Red Robin saw the largest improvement in customer satisfaction in the entire full-service segment. That said, we know that we can still be more consistent across shifts, restaurants, and regions to deliver a great experience every time. At the same time, we must maintain the labor efficiencies that we've seen in the first quarter and ensure that we continue to improve overall restaurant profitability. A great dining experience is paramount to a growing restaurant brand and inspires guests to return more frequently, which leads us to our second pillar, drive traffic. Like many in casual dining and across our industry, Red Robin Gourmet Burgers has experienced traffic declines over the past several years, while at the same time reducing investments in messaging and promotion.
We now need to reverse that approach to increase our creative engagement with guests, and we have a clear path to develop that engagement while generating the resources needed to make it happen. This starts with delivering value for the money to the guest every time through great food and great service, inclusive of everyday value. To address this opportunity, next Monday, July 21, we're launching our Big Yum deal, which includes a Red's Double Tavern burger, a bottomless side, and a beverage for $9.99. We know we can deliver a great experience to our guests across all areas of our menu, but in order to do so, we must get them through the front door. This new offer will work to drive near-term traffic as we bridge to other marketing efforts we have planned for later this year and beyond.
From a high-level perspective, we need to continually identify and remove barriers to trial and repeat, and our team is hard at work on that as we speak, leveraging increasingly sophisticated data analytics to fully understand our challenge. Before the end of 2025, we plan to implement a much more targeted marketing plan to meet the most relevant needs and desires of our guests and deliver food, beverages, value, and experiences that satisfy those needs and desires in a uniquely Red Robin way. In order to improve traffic, the objectives are simple and clear. First, inspire more guests to add Red Robin to their consideration when seeking a casual dining experience. Second, inspire more guests considering a casual dining experience to make Red Robin their first choice. We're confident that our new analytical and performance marketing capabilities and innovative marketing approach will allow us to punch above our weight.
In order to make the critical investments required in our business, it's essential that we strengthen our financial position and free up funds for investment, which leads us to our third pillar that we summarize as find money. This pillar centers around managing expenses and assets to reduce debt, improve free cash flow, and allow for those critical investments back into the business. We'll work to find money through a combination of efforts. First, delivering consistent financial performance. Our operators have increasingly demonstrated their improved ability to effectively manage the business and deliver results at the restaurant level, and we need and expect that to continue. Second, we plan to reduce expenses across the system.
This includes a continuation of our efforts to thoughtfully reduce restaurant-level costs through supply chain efficiency, technology like our labor scheduling platform to have the right labor at the right time, and parity or better changes for the guest. In addition, we recently began implementing a series of corporate cost reductions that we estimate will reduce G&A expenses by approximately $10 million annually at their full run rate. Third, we're pursuing a tactical refranchising effort for a select number of company-owned restaurants and markets. I want to emphasize that this is a tactical maneuver to generate proceeds that we expect to use to reduce debt, facilitate a refinancing of the debt that remains, and to reinvest back into the business. This is not a fundamental shift in our operating strategy to a more asset-light model.
We see opportunity for current franchisees to gain a larger footprint in their Red Robin Gourmet Burgers holdings, and we've partnered with Brookwood Associates to launch a broader marketing effort to bring proven operators into the Red Robin Gourmet Burgers family. When complete, we expect to continue operating with the vast majority of our restaurants as company-owned. Finally, reducing our overall long-term debt and refinancing it at a more favorable interest rate is a tremendous opportunity to improve free cash flow and create shareholder value. Each element of the strategy has its own timeline as we work them in parallel and will provide updates along the way. Our success in finding money will enable our fourth pillar to fix restaurants. As we free up cash through the success of the previous elements of our strategy, we then expect to reinvest in the physical estate to improve the overall dining experience.
Our initial efforts are already underway and will address deferred maintenance needs to achieve a competitive standard. In time, we anticipate this may evolve to a broader renovation effort to further improve the guest-facing surroundings. As part of this process, we also intend to upgrade and invest in new technology to support daily execution, the guest experience, and further operating efficiencies. Our fifth pillar is winning together and is focused on creating a high-performance culture that attracts and retains the best talent in our industry. This pillar starts with a singular focus by the entire organization on continually improving the guest experience through everything we do. We must start with the guest in mind and work back to how we support and deliver a differentiated dining experience.
Further, we'll build on the ownership mindset introduced previously through the managing partner program, where our managing partners share in the success of their restaurants. As our operators have embraced the managing partner model, we've already begun to see the benefits through our improved profitability so far this year, while also improving the overall guest experience. Additionally, we're committed to building and maintaining a performance culture that focuses on achieving results and rewards performance against our goals, not only with our managing partners but throughout the organization. We'll cultivate an environment where our team members can continually grow and develop themselves in order to experience rewarding careers over many years. Finally, we'll filter our most difficult decisions through a commitment to always do the right thing to ensure that our actions find balance among the interests of guests, team members, and investors.
These five pillars of our first-choice plan will allow us to build upon our strengths and the progress that's been made while addressing our opportunities head-on. With a focus that begins with the guest, more engaging messaging, improved cash flow, and strategic investments in our restaurants, we're confident in our ability to be the first choice for our guests seeking a differentiated dining experience, for our team members who want a great place to work, and for our investors who want to see sustainable growth and value creation. We look forward to updating you on our progress in the months ahead. With that, Todd will now take you through a brief update on our expectations for the second quarter and the rest of the year.
Thank you, Dave, and good morning, everyone. For the second quarter, we now expect comparable restaurant sales to decrease approximately 4%, modestly below our previous expectations for a decrease of approximately 3%. As a reminder, these estimates include an approximately 240 basis point headwind resulting from overlapping a benefit in deferred revenue recognized in the second quarter of 2024 related to our loyalty program change that we expect will not recur this year. While we are not satisfied with our current traffic trends, we are optimistic the strategy laid out today will deliver sustainable traffic growth in time. Despite our current top-line trends, we are very pleased with the progress we have made in managing the middle of the P&L and delivering profitability. We now expect our second quarter adjusted EBITDA to exceed our prior expectation of $13 million - $16 million.
This represents a continuation of the positive momentum we have seen from our managing partner program and fostering an ownership mentality throughout the organization. As we look to the remainder of the year, I would call out a few items. First, we do not expect any material impact from refranchising in 2025, as we do not expect the transactions to be completed until early 2026. Second, we do expect to begin capturing the benefit in G&A from the corporate efficiency actions Dave mentioned earlier. Finally, we expect to reinvest the G&A savings and a portion of any EBITDA over delivery in initiatives to drive traffic gains and address deferred maintenance in our restaurants. Overall, while we acknowledge we have more work ahead, we are confident we have the right strategy and team in place to deliver long-term shareholder value.
Our significantly improved financial foundation provides us with the flexibility and resources needed to strategically invest in traffic-driving initiatives and accelerate the execution of our first-choice plan. We are committed to being transparent and accountable for our progress as we move ahead and look forward to providing additional updates in the months ahead. With that, we are now happy to take your questions. Operator, please open the lines.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For a participant choosing speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question is from Jeremy Scott Hamblin with Craig-Hallum Capital Group LLC. Please proceed.
Thanks and congrats on the momentum in profitability. I wanted to start with the Big Yum deal and the launch for next week, clearly an aggressive rollout. I wanted to understand what you expect the impact to be on your food costs, what the margin profile might look like, and if you've tested this at all, what type of results you're seeing in terms of driving average check.
Jeremy, hey, good morning. Todd here. To start with one of your questions or a piece of your question there, we did test this offer in a handful of markets through 2024 and the start of 2025. It's an offer that we've tested. We have an expectation based on that. We did see a nice traffic lift in that test, and that's what gives us confidence in moving forward here. In terms of check, I would share, we saw a, what I would describe as kind of a modest take rate, which I think is a good thing in this case, right? Of the folks that found that offer compelling, it appears came in and got it. We didn't see significant trade down to the offer, which financially gives us some confidence as well.
I think it's the combination of we saw it move the needle on traffic by a few percentage points, and we didn't see significant degradation in PPA or gross margin per guest. It's all of those factors that let us kind of take the step now. I think it's also an acknowledgment that the competitive environment, this puts us on a competitive playing field from a price point standpoint, at least with a lot of the other competitors out there. We feel good with our product, our hospitality, as we've talked about, but we felt like price point was one that we could be more competitive with. That's what brings us forward.
Yeah, just to top that off, I mean, I agree with the last points that Todd made. We were hearing from our operators and from our guests about price point and the value competitiveness in the marketplace right now. We felt we had something that we could respond to it with that we felt good about, and we moved quickly to put it in place.
Great. Thanks for the color. In terms of coming back to Q2 and providing a little bit of insight here on the upside in profitability despite a little bit of downside on the comp, you mentioned labor. Can you give us a sense, Todd or Dave, on what you know labor is going to look like here? I mean, you're going to be like sub 37% in Q2. How sustainable is that on a go-forward basis?
Before Todd jumps in, let me just kind of say this is a function of the progress that our operators have made, and we feel really good about it, that they have demonstrated their ability to get managed tightly in the middle of the P&L to deliver the results. It kind of led to the first plank of the strategy of hold serve, which is they've shown us they can do it. The point is, look, don't give it up and don't slide backwards. I'll turn it over to Todd with the specifics. We feel about your point about sustainability is that our operators, you know, are managing their forecast. They're managing their labor much more tightly, much more efficiently. I think with that confidence, we can feel reasonably good about its sustainability.
Yeah. Jeremy, just adding color to kind of our Q2 expectation, I'd call out labor, and I'd actually call out cost of goods as well. I would agree with your characterization. As we sit here today, I do think we'll see an improvement in the overall labor percentage from where we were in Q1, which was 37.1%, I believe. I would expect a step down there. Relative to our internal expectations as well, we saw some favorability in some commodities. It wasn't necessarily the commodities we typically talk about. Egg prices, I'm sure, have been top of mind for many out there. We've seen some favorability in eggs and other areas that have given us some upside on cost of goods as well. I think those are the two areas that I would call out that are trending better than we expected.
Great. Thanks for taking the questions. Congrats. I'll hop out of the queue.
Thanks, Jeremy.
Our next question is from Alexander Russell Slagle with Jefferies LLC. Please proceed.
All right. Good morning. Thanks.
Hey, Alex.
I guess the managing partner program does seem like that's really been a nice win so far. I guess that's part of the labor piece or much of it. I mean, are there tweaks that you want to make to that at this point, or how you envision that continuing to roll?
Yeah, look, I think the market managing partner program has definitely been a success. We feel good about it. I think, as you heard, when it was first put in place, this takes some time to get traction, takes some time to get the right people in that are subject to that program, and it takes them time to learn their own restaurants in a different way and how to manage it. As we've seen them kind of embrace the managing partner philosophy, we laugh a little bit because I say, you know, I've got managing partners now who pick up the phone and call and say, "Hey, I got this $500 invoice. Why do I want to pay this or why should I pay this?" In the past, those things would just get sent through the system.
Now they're looking at it, watching every dollar because they know that the performance of the restaurant affects their earnings. We feel good about it. I absolutely agree with you, Alex. I think it is a high, large contributor to some of the progress we've seen.
On the people side, I guess it probably links a little bit to that, just sort of the next step in raising the bar further for the team member experience. Maybe is it some leadership changes, training changes, or how you incentivize your team members, just trying to think through how that evolves as well.
Yeah, I think it's all of those things, right? I think in building the culture that you want to see, you've got to have everything reinforcing itself. You've got to be clear with people what your expectations are. You've got to give them the tools to do their job. You've got to reward performance when they deliver. You've got to compensate them for that. You've got to make sure you've got the right people in the right seats all the time. It's a dynamic organism that you just have to keep adjusting to. What we're starting with is this point of being a guest-facing culture, right? One of the things under the North Star Plan, which I agree with, although I view it as a subtle difference, it's a little bit of a nuance. Under North Star, we talked about creating an ops-focused culture. I think that's good.
The reality is we want a guest-focused culture. We want to deliver a great experience for the guest every time. Helping the operators, supporting the operators is the way that many people can do that within the company. At the end of the day, this is about making sure the guest has a great experience. That's the culture that we're going to be creating and then setting up all the reinforcing mechanisms to support that.
All right. Great, thanks.
Thank you.
Our next question is from Todd Brooks with The Benchmark Company. Please proceed.
Hey, good morning. Thanks for taking my questions. Todd, I wanted to lead off. I think if I heard you correctly, the $10 million in G&A expense savings and the adjusted EBITDA upside that is being generated in Q1, and we're seeing it again in Q2. The idea is that this goes into funding the strategies laid out in the first choice plan. Where are we funding the balance sheet improvements that you're talking about in kind of part of the find money pillar here? Does that come out of refranchising so we don't really start to see the balance sheet parts of the plan kick in until fiscal 2026? Just kind of walk me through maybe funds generated and when they go against the different initiatives if we could.
Yeah, Todd, this is Dave. I'm going to give you a little bit of the headline on this and how we're thinking about it, and I'll let Todd speak to some of the specifics. In terms of the deployment of funds that we create through all the vehicles that I mentioned in the first choice plan, this is going to be an allocation toggle, if you will, as we move forward. We'll see deployment against certain elements of the balance sheet, certain elements of the deferred maintenance that we've got, marketing spend. We'll be kind of putting those in at different points in time. Obviously, some of the big chunks in paying down debt will come through the refranchising efforts. We'll see that come probably a little later, given our expectations right now.
I think as we go forward, you know, if we see operating performance or we see other savings or we see things that give us the opportunity to reduce debt, we may do pieces of that along the way. I don't think it's linear. I think it's going to be fairly fluid. Obviously, the reason that we implement the refranchising tactic is to garner that bigger chunk that we can deploy against the balance sheet. I'll let Todd talk a little more about that.
Yeah, Todd, the only thing I might add, in terms of the specific G&A piece and maybe building on all of the parts, but focusing there, in the balance of the year, with the actions that we've implemented, we think there's $3 million- $4 million of favorability in G&A relative to our prior expectations. That's kind of the starting point. I think as we thought about it, we felt like the immediate opportunity wasn't driving top line. We think that the Big Yum is a part of that, getting that message out, getting that offer out was the immediate opportunity. In time, you saw the progress in Q1 that we did pay down some debts with cash from operations. Obviously, we'll go through the seasonality of the year here. I think we can continue to make progress there.
Obviously, the big unlock, though, is something like a refranchising that brings in a more substantial amount of money. As Dave said, it's the toggling that as these different pieces evolve, we'll have to evolve along with it.
Okay, great. That's really helpful. Maybe on a refranchising approach, I think you still said the vast majority would remain corporate stores. I think you're a little over 80% corporate-owned now. Do you have a sense that, like, is there a lower bound for how low you would go in the company franchise mix? Is there an approach where there are certain regions that you feel like are important to hold as corporate markets or higher volume markets that you would want to hold versus what you're looking to refranchise? Anything strategically that you can give us around the approach for how you're going to tackle refranchising here?
Yeah, I mean, look, obviously, we've had a lot of discussion internally about all of those trade-offs. Our objective is to, you know, get us to a point where we can significantly pay down debt, reduce the debt level, and then refranchise at a lower rate. I don't want to be dodging the question, but it's going to be a little bit fluid as well. What do I mean by that? As we open up and look at potential markets, potential restaurants to sell or refranchise, obviously, the ones that are most profitable, the highest performing ones, are going to garner the highest value. You have to sell fewer of those to secure greater proceeds. If you decide that you want to go down the path of selling your lower performing restaurants, then you're going to have to sell a lot of them.
We believe that, one, we can fix the business and fix the system and generate performance across the system. You don't want to kind of leave money on the table with restaurants that you believe you can improve the performance of, and you don't necessarily want to sell off your highest performers. I think as we speak with franchisees, as we speak with potential purchasers, it's going to be, what are you interested in? What are we interested in? What are we trying to solve for here, which is the proceeds generation? I think if we're at 80% now, I think it's not unreasonable to think the final range will be somewhere in the 65% - 75%. That's going to be dependent upon, you know, as you point out, which restaurants they are, what their performance is, what's the value of those, and what proceeds we can generate.
Okay, great. Just a final one. This gets to, I know the plan is in development, kind of talking about the marketing plan to support what you're trying to do with first choice, and you hope to have it in place by the end of the year. As you're thinking, I know you're saying we have to kind of punch above our weight to get that message out there from a consideration standpoint. What type of incremental marketing spend are you starting to frame up in your heads as you think about what the first choice marketing program needs to be to get you up that consideration scale? Thanks.
I'll give Todd a chance to answer that one in a second. What I do know is it's going to be a larger amount. It's that amount of money that we've historically been spending is, I think, suboptimized for what we need to do and what we can do to break through. The other thing I'll talk about with the first choice marketing plan that you'll hear more about as we get into this later on our next earnings call and beyond is that the first choice marketing plan we think is, and again, you'll hear more about this, is a very innovative, data-centric, analytical approach to approaching our guests.
We believe we've uncovered an approach that allows us to be highly laser-targeted on the guest to deliver, to, first of all, understand what goes into their decision tree about choosing where to dine and why to go to Red Robin Gourmet Burgers. Secondly, then what do we need to put in place in front of those guests to inspire traffic? As we are able to deploy that, we're going to figure out what does that mean, what do they want. We're still working right now on those data analytics to understand what do they want, what would drive them to come in, and then what do we have to do to deliver that. All of those things, again, are tied together.
As we get through this data analytics, which is a different algorithm than exists in the marketplace today, we'll understand more about what the cost is to deliver against those expectations. I will tell you it's a bigger number, but that's it.
Okay, great. Thank you both.
Yeah. Okay.
Our next question is from Mark Eric Smith with Lake Street Capital Markets LLC. Please proceed.
Hi guys. I wanted to dig in a little bit on the fixed restaurants part. As we think about this, will this be more of kind of a refresh rather than a reimage program?
Yeah. Hey, Mark. This will be more of a lighter touch than a full remodel reimaging program. This is not, "Hey, we've come up with a new design. You're going to see us implementing that design." This is looking at our current fleet and addressing issues that need to be addressed, that are customer-facing, that take away from, we believe, take away from the dining experience today and that we think we can address. I think as we get through this, we've got a big chunk of investments that we have to make in this area. As we get through this, I think we can then move to a more thoughtful approach to reimaging down the road. This will be more of a lighter touch update on existing design.
Okay. Second one for me is just as we think big picture here about consumer behavior and your marketing efforts, is how you weigh, you know, discounting, being promotional, without kind of training the consumer to just look for big deals in driving their traffic.
Yeah, great question. I mean, I think that's the challenge that we all have in this industry these days is that you're trying to provide a value offering to your guests that gets them a reason to come and visit you without kind of diluting the value of your menu. You've got to be fairly targeted about what are those things that connect with your consumer and inspire them to come in. This is not what you're seeing with us and with Big Yum, you know, is not an across-the-board return to heavy discounting. This is a very, very targeted messaging, targeted approach that has been tested that we think can get people into the restaurant. We hope that they'll, you know, continue to purchase across the menu.
I think, you know, the marketplace has an expectation right now that there are value offerings out there, and we've got to be able to play in that game and do it in a way that doesn't dilute our overall margins. I think that's what you're going to find us. I think probably what most of our competitors are doing is trying to find that balance.
Great. Thank you, guys.
Thanks, Mark.
With no further questions in the queue, I would like to turn the conference back over to management for closing remarks.
Okay. Thanks, everybody. I appreciate you jumping on the call. As you can hear, we're excited about the first choice plan. We feel great about the plan. We feel great about our ability to execute it. Feel great about the team that we have out there putting it forward every day. We'll talk more on our next earnings call, which is August 13th. Again, thanks for jumping on the call today.
Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.