Good afternoon, everyone, and welcome to Red Robin Gourmet Burgers Incorporated Second Quarter 2021 Earnings Call. Please note that today's call is being recorded. During today's conference call, management will be making forward looking statements about the company's business outlook and expectations. These forward looking statements and all other statements that are not historical facts reflect management's beliefs and predictions as of today and therefore are subject to risks and uncertainties as described in the Safe Harbor discussion found in the company's SEC filings. During today's conference call, management will also discuss non GAAP financial measures.
These non GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended to illustrate an alternative measure of the company's operating performance that may be useful. A reconciliation 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 fiscal 2nd quarter 2021 earnings release and supplemental Financial information related to the results on its website at ir.redrobbin.com. And now, I would like to turn the call over to Red Robin's CEO, Paul Murphy?
Good afternoon, and thank you all for joining us today. Here with me is Lynn Schweinfurt, our Chief Financial Officer, who will review our 2nd quarter results in detail after my prepared remarks. But first, let me briefly recap recent sales trends before updating you all on our strategic progress across the business initiatives that position Red Robin for long term success. While we did not meet our own expectations in the 2nd quarter, We generated sequential improvement in average weekly net sales each period during the 2nd quarter. Despite operating under varying jurisdictional restrictions and reduced operating hours throughout the majority of the quarter, We believe these issues are timing related, not brand related and are temporary in nature.
Our largest West Coast markets where we operate 105 of our 430 corporate owned locations We're subject to jurisdictional capacity restrictions and were not lifted until mid June to early July during the last fiscal period of Q2. As a result of these capacity limitations, we utilized a more targeted marketing approach during the Q2 at reduced spending levels. To ensure a quality guest experience and to build loyalty beyond the pandemic, and restaurant management retention. Staffing is our number one priority and our plan is to achieve staffing levels above 2019, supporting elevated demand compared to 2019. As we make progress and achieve those targets, The results are strong.
By the end of the 2nd fiscal quarter, restaurants that were able to operate at 100% indoor dining capacity and with full hours delivered a comparable restaurant revenue increase of 7% compared to 2019 and restaurant margin of 19.5%, representing an increase of 1.8% compared to 2019. We have supported our staffing efforts through technology enhancements to the application and hiring process, held 2 national hiring days and deployed internal and external resources to augment recruiting, hiring and training efforts. These efforts enabled us to hire approximately 1900 hourly team members. Additionally, Supply chain and inflation are highly topical issues in the current environment. The challenges in hiring and retention have also affected our suppliers, resulting in some intermittent product and distribution shortages.
Overall, we are mitigating supply chain disruptions by expanding the number of suppliers we purchased from and approving substitute products that meet our high quality specifications. We also took proactive steps to ensure we had our equipment sourced to remain on track for the rollout of Donato's in 2021 and 2022. Now I'd like to provide a more detailed review of our transformation strategy, including the results that we are seeing from our key growth initiatives. Let's begin with Donato's Pizza. In Q2, we added Donato's to 41 locations and are on track to complete approximately 80 additional locations in the back half of twenty twenty one, bringing our total to approximately 200 company owned restaurants.
Recall that we believe Donato's will generate annual company pizza sales of more than $60,000,000 and profitability of more than $25,000,000 by 2023 when we expect to have completed our rollout to approximately 400 company owned restaurants. We are pleased that restaurants that added Donatos Their menus are continuing to grow incremental sales beyond the 1st year, with average weekly pizza sales up 4.2% compared to 2019 in these original locations. Donato's Pizza generated sales of $2,900,000 in the quarter And our restaurants that offered Donato's outperformed the rest of the system by 5.50 basis points as compared to 2019, exceeding our original sales target by approximately 2 50 basis points. In March, We launched 3 virtual brands, which are now live system wide across all delivery platforms. These brands incrementally bolster our off premises business by featuring a mix of our high quality menu items for which Red Robin is not typically known, as well as new menu items that are variations on core products.
Given the low operational complexity and lack of additional SKUs, executing these virtual brands is seamless for our team members. While still early, we are excited about the performance to date. So far, the data indicates approximately 70% Of our virtual brand guests have never ordered online from Red Robin before, demonstrating that we are reaching and activating an entirely new audience through this channel. During Q2, these brands contributed $5,100,000 to our restaurant sales or approximately 6 orders per restaurant per day on average. We look forward to during Q2 and continue to generate off premises sales that are more than double 2019 levels, even as dining room restrictions have been removed.
Note that we intend to maintain our off premise stickiness by delivering an elevated experience. This is being accomplished through modifications to our processes, staffing, floor plans and technology that will enable our team members to execute more effectively and accurately. As part of these efforts, we are increasing dedicated Floor plan space to support our off premises and catering orders without impacting the dine in business. We are on track to complete these reconfiguration efforts in 2022. Our revamped Red Robin royalty program continues to positively impact our business with enhanced segmentation and personalized targeting in place since Q4 of last year.
We continue to bring back lapsed guests and increase the visit frequency of our most loyal guests compared to 2019 levels. We have also expanded our loyalty program to 9,900,000 current members, which is up from 9,700,000 as of Q1. In addition to the benefits of loyalty related to amplifying guest engagement, we have moved away from broad discounting initiatives to targeted royalty offers. This shift better positions us to drive stronger profitability results over the long term. We are also setting the foundation for a loyalty integration with our upcoming app and enhanced website, creating a more user friendly and efficient online ordering platform.
In Q2, Our pivot to digital marketing once again proved beneficial as we were able to target our efforts to support fully staffed and open restaurants. Our analysis indicates that our digital marketing campaign is driving increased traffic and a return on our investment, while continuing to exceed our impression and engagement goals. The Red Robin brand is better positioned today because we truly understand our primary demographic of Gen X, millennials and centennials. We reached these digitally active guests where they consume media with highly relevant messaging, such as our Q2 Bacon Bash promotion, which exceeded our volume expectations. Building on our enhanced segmentation capabilities, Our loyalty engagement hit a new high in the quarter.
Over the remainder of this year, We will continue to be nimble and efficient with the bulk of our marketing investment in digital. We will also add broadcast TV to select local markets to support strategic initiatives like our Donato's rollout. On the last Call, we discussed our enthusiasm for returning to menu innovation. Our featured Q3 limited time offer is the summer heat wave. And our new Scorpion Burger has outperformed our sales expectations by 3 times to date.
This follows up 2 consecutive quarters of limited time offers outperforming our expectations, including our bacon bash lineup to route Q2 and our plant based limited time offer items in Q1, including cauliflower wings and cauliflower pizza crust in our Donatos locations. Before I turn the call over to Lynn, let me leave you with some additional thoughts on why we believe our future is so bright. First, we know that Red Robin can be a leading choice for guests by upholding our brand promise of creating memorable moments, connecting family, friends and fun. There is certainly a lot of pent up demand for restaurant experiences during this recovery and coupled with fewer restaurants in operation since last year positions us to both expand our market share and build 2nd, the strategic initiatives we are executing are meaningfully impacting our brand by enabling us to earn and perpetuate our guest trust and in doing so foster royalty and frequency for the benefit of our shareholders. These include: 1, continued off premises strength through operational and technology improvements 2, enhancing our online ordering experience to create an improved and engaging digital presence for our brand 3, Consistent execution of our TGX hospitality stands, so that our guests can capture memorable moments of connection.
4, menu innovation that supports sales growth concurrent with a higher dine in mix and 5, expanding our Donato's footprint, building an ancillary sales channel with our 3 virtual brands and growing our nascent Catering business as people return to office environments. Let me now turn the call over to Lynn to review our Q2 results.
Thank you, Paul. I share Paul's excitement for the future. Our improving dine in sales trajectory, improved business model incremental off premises sales channels and continuation of our transformation strategy together will drive meaningful long term shareholder value. Turning to high level second quarter results. The 66.3% increase in Compared to the Q2 of 2019, comparable restaurant revenue was down 2.4%.
Importantly, sequential average weekly sales continued to build each period through the second quarter and into the first fiscal period of Q3. We continue to deliver strong off premises sales comprising 30 2.8% of total food and beverage sales compared to 63.8% and 12.5% In 2020 2019, respectively. Notably, total sales driven through digital channels represented 85.3% of off premises sales. As a percentage of total off premises sales, 3rd party delivery represented 49.3%, to represented 42.7 percent and catering and Red Robin delivery each represented 4%. Net cash provided by operating activities was $37,200,000 while cash used in investing Activities was $10,800,000 and cash used in financing activities was $16,900,000 We ended the quarter with liquidity of approximately $117,000,000 including approximately $25,600,000 A cash and cash equivalents and available borrowing capacity under our revolving line of credit.
As Paul mentioned, at the end of the 2nd fiscal quarter, restaurants that were able to operate at 100% indoor dining capacity and with full hours Delivered a comparable restaurant revenue increase of 7% compared to 2019 and a restaurant margin of 19.5 an increase of 1.8% compared to 2019. Additionally, we are confident in the future of Red Robin As we continue to execute on our transformation strategy and initiatives, our plan prioritizes strategic initiatives that delivered strong financial returns while maintaining our diligence on cost management and liquidity. As the restaurant industry continues to navigate the impact of the pandemic. We intend to continue to effectively manage our bottom line and dedicate our free cash flow over the next several quarters to delevering our balance sheet, while maintaining to pursue strategic growth initiatives that will grow profitable sales going forward. Now turning to some of the Specifics related to the fiscal Q2, Q2, 2021 comparable restaurant revenues increased 66.3%, driven by a 47.7% increase in guest traffic and an 18.6% increase in average guest check.
The increase in average guest check resulted from a 3% increase in pricing, a 14.9% increase in menu mix and a 0.7% increase from lower discounts. 2nd quarter total company revenues increased 71.9% to $277,000,000 up $115,900,000 from a year ago, Driven by operating our restaurants at increasing capacities in Q2 and lapping prior year sales impacted by the COVID-nineteen pandemic. Total company revenues decreased by 10.1% compared to the same period in 2019, primarily due to lower comparable restaurant revenue due to pandemic related indoor dining capacity limitations and unprofitable Closed restaurants. Dine in sales were up 210.9% in the 2nd quarter, Further enhanced by off premises sales representing 32.8% of total food and beverage sales. Our continued focus on our off premises service model, technology and incremental sales initiatives allowed us to capture meaningful growth in the in the Q2 of 2019.
Restaurant level operating profit as a percentage of restaurant revenue was 15.7 percent, an improvement of 13.7 percentage points compared to 2020, primarily
due to
the following. Restaurant revenue increased by $112,000,000 primarily driven by increased guest traffic due to the continued lifting of jurisdictional restrictions. Cost of goods sold decreased by 140 basis points, primarily driven by pricing, favorable mix shifts and discounts, partially offset by Of incremental labor costs were incurred due to increased hiring adds, incremental hiring and training resources And retention and sign on bonuses to support our staffing initiatives. Other operating expenses decreased by 4.40 basis points, Primarily driven by lower supplies, 3rd party delivery fees due to lower off premises sales volumes and sales leverage And occupancy costs decreased by 510 basis points, primarily driven by savings from permanently closed restaurants and restructuring of lease Payments, rent concessions and sales leverage. We plan to increase pricing to help offset inflationary commodity and wage pressures that we are experiencing or expect to experience in the foreseeable future, including increased hiring, training and retention costs extending beyond The second fiscal quarter, we currently expect full year commodity inflation in 2021 will be driven by increases in beef costs In the second half of twenty twenty one, that will more than offset decreases in year over year beef costs in the first half of the year.
At the end of the Q2, hourly wage increases were in the mid single digits, partially offset by a favorable increase in front of house hours. Full pricing this year is currently expected to be between 3.5% 4% to offset these headwinds. Restaurant level operating profit as a percentage of restaurant revenue was 18.2% in Q2 2019 and higher than 20 1 by 2 50 basis points, driven by lower sales and higher third party delivery related costs, partially offset by lower occupancy costs. General and administrative costs were $17,700,000 An increase versus the prior year of $3,600,000 primarily driven by increased team member benefits And salaries lapping temporary salary reductions in 2020, partially offset by lower professional services spend. General and administrative costs were $21,800,000 in 20.19.
Selling expenses were 10 $6,000,000 an increase versus the prior year of $5,100,000 primarily driven by lapping the significant reduction spend in 2020 due to the COVID-nineteen pandemic. Selling expenses were $13,400,000 in 20.19. We recognized a tax benefit of $400,000 in the 2nd quarter and our effective tax benefit for the quarter was 6.6 The company has filed federal and state cash tax refund claims totaling approximately $16,000,000 during 2021 from net operating loss carrybacks. While we expect to receive a portion of these refunds in 2021, Due to government delays in processing these claims, we do not expect to receive the majority until 2022. As a result of these cash tax refund delays, we proactively sought and received a waiver from our banks for our CCR covenant for the 3rd and 4th quarters of 2021.
During the quarter, we recognized other charges of Closures $200,000 for COVID-nineteen related costs, including purchasing personal protective equipment for our restaurant team members and guests And providing emergency sick pay to our restaurant team members, dollars 0.1000000 related to asset impairments and $100,000 related to litigation contingencies. 2nd quarter adjusted EBITDA was $19,000,000 as compared to an adjusted EBITDA loss of $15,300,000 in Q2 2020. Q2 adjusted loss Per diluted share was $0.22 as compared to adjusted loss per diluted share of $3.31 in Q2 2020. Adjusted EBITDA was $25,500,000 in the Q2 of 2019 and adjusted earnings per diluted share were $1.03 At quarter end, our outstanding debt balance was $154,800,000 and letters of credit Outstanding were $8,600,000 Guidance for 2021 is as follows: capital expenditures of 45 $1,000,000 to $55,000,000 including continued investment in maintaining our restaurants and infrastructure with maintenance and systems capital, Donato's expansion to approximately 120 restaurants, including approximately 80 in our 3rd and 4th fiscal quarters, Digital guest and operational technology solutions and off premises execution enhancements cost between $125,000,000 $135,000,000 Before I conclude, I'd like to Thank our entire Red Robin team for the results they are generating. We are confident in our ability to deliver long term value for all of our With that, I will turn the call back over to Paul.
Thank you, Lynn. Let me wrap up things with a few thoughts before we take your questions. The growth and profitability drivers that we have articulated over our past several calls are firmly in place and are the foundation upon which we can create and grow long term value for our shareholders. Despite increased staffing and retention costs and other inflationary pressures, we remain confident that the business recovery will continue and that our diligent focus on our robust business model We'll deliver more than 100 basis points of enterprise margin improvement as sales reach 2019 levels. Of course, our expectation of greater normalcy over the next few months as more adults return to their workplaces And children return to school in person assumes that the Delta variant does not dramatically affect or force a return to mandated restrictions and thereby impede our current trajectory.
Red Robin's positioning as a playful, family friendly atmosphere, Enabling people to connect while enjoying Gourmet Burgers and other mainstream favorites or enjoying our great food outside of our restaurants resonates so well today. This is because the need to be with others and spend quality time with them will endure as What they expect from a Red Robin experience has also never been greater. And while we have already made great progress in elevating Our level of engagement, there is still greater opportunity for us to do so, particularly through digital channels as we augment our online presence. Let me wrap up by expressing my appreciation for our great team and all of their accomplishments, their passion for the brand and know how
At this time, we will be conducting a question and answer session. Our first question is from Alex Slagle with Jefferies. Please proceed.
Thanks. Hey, Paul, Lynn. Good afternoon.
Hi, Alex.
How are you today, Alex?
I'm good. A little tired. I might have missed this. Did you provide any July or August in store sales trends for the whole System versus 'nineteen, I know some of the industry data we've been looking at and some peers are noting some choppiness into August.
Yes. What we did provide is an indication that our fiscal 8th period did see sequential Improvement off of our Q2 trend.
Okay. And that was average weekly sales?
That's correct.
Okay. And then the strong metrics that you mentioned recorded at the end of the quarter, specifically what period was that the one where the Full indoor capacity, we're generating 7% comps versus 19?
Yes. We saw sequential improvement throughout the quarter. And during the 7th fiscal period, we were opening several Western jurisdictions In terms of indoor dining. So we definitely saw momentum through the entire quarter, certainly with the strongest performance in the last period.
Okay. And then on labor, maybe if you could kind of help me out, kind of walk through some pieces here. It's a little higher than expected, but realize there's Just a lot going on there with additional hiring and training and overtime and then the limited operating hours. Maybe you could just kind of walk through those various dynamics a bit more and kind of curious what labor As a percentage of sales would have looked like if you had full staffing and operating hours?
Yes. So what we did provide is we did isolate the the incremental hiring and training costs that were non recurring in nature during the quarter of 1,600,000 Our wage rates had a couple of things going on. By the end of the quarter, we were generating mid single digit wage rate Inflation, but that inflation was partially offset by the increased mix of front of house hours. And yes, we did see benefits associated with some staffing vacancies during the quarter.
Okay. And then finally on Donato's, the outperformance of those stores was very nice in the second quarter, Good reacceleration. As you dissect that improved performance just relative to the Q1, is all that sort of marketing support or do you see some other factors behind that behind that driving the performance?
Well, I think it's a combination, Alex. I do think it's we did elevate some marketing support, Especially in the back half. I think what I'm especially pleased with is As we look at the Donato's restaurants that are in their 2nd year performance that we've seen the growth year over year that incrementality I think it was roughly 4.2%. And I think that's something that Really speaks to our commitment to the growth of that. Also quite honestly, one of the drivers of mix, I mean our PPA was an increase in appetizer sales and the Donato's Pizza plays well from a dine in perspective in terms of appetizers.
So very pleased with the performance of the restaurants that have it, pleased to see that year over year That we're seeing growth and that versus our initial modeling is performing at about 2 50 basis points better Than we originally thought the piece of wood.
Great. Thanks.
Our next question is from Brian Vaccaro with Raymond James. Please proceed.
Thanks and good evening. I was hoping to circle back on the sales cadence and Would you be willing to provide sort of a sense of monthly comps versus 'nineteen that you saw through the period? Just given how significant the West Coast is to your system and The capacity restrictions that he is very late in the period, I'm just trying to get a sense of the magnitude of improvement that you saw kind of moving through the period.
Sure, Brian. Our comps compared to 2019 started at down 3.7% in the 1st period of the quarter And ended the quarter at a positive 2.2%.
Okay, great. And that positive 2 point 2 would be the P7?
Correct.
And the units that you highlighted at Full capacity and hours, those up 7% and nearly 20% margin units. How many units are in that bucket? Anything else we're talking about there?
About over 150.
Over 150. Okay, great.
And then just thinking about the commodity inflation outlook, Lynn, I'm sorry if I missed it in your prepared remarks, but Where do you expect what was commodity inflation in the second quarter? And what are your expectations for the second half of the year?
Yes. So commodity inflation, we've actually maybe I'll point to 8% of restaurant sales in terms of food and beverage costs. And we did See improvements compared to the prior year, certainly in the Q1, which carried forward in the Q2. However, we do believe that increasing beef costs through the second half of the year will greatly offset the benefits we saw in the first half of the year. And we're currently expecting approximately 50 basis points or better compared to 2019 for the full year.
Okay. 50 basis points are better versus the low 23% range in 2020?
Correct.
Okay, great. Great. And then on the labor line, I appreciate the $1,600,000 that you called out. I'm curious, just give us a sense of where average staffing levels are versus pre COVID levels or Perhaps how many additional employees you need to hire to hit your targeted levels? And then I sorry if I missed it, but How much was overtime up versus normal in the second quarter?
Well, A lot of questions inside that one question. But given the strength that we are seen in the stickiness of the off premise at the about 30%, 32% level versus 12% in the same quarter last year. Our goal is not only get to 2019, but To get above 2019 in the staffing levels, we We'll be continuing to hire and train and have some costs against that continuing into The Q3, but on average, I'd say probably, I think it's 5 more per restaurant. So roughly about another 2,000 people That we would need to bring on board to get to elevated above 2019, which is the goal.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And this will conclude today's conference. You may disconnect your lines at this time.