Red Robin Gourmet Burgers Inc (RRGB) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Red Robin Gourmet Burger Second-Quarter 2012 Conference Call.

At this time, all participants have been placed in a listen-only mode, and the lines will be opened for your questions following the presentation.

As a reminder, part of today's discussion will include forward-looking statements within the meaning of federal security laws.

These statements are commonly identified by words such as continue, plan, expect, will, and other terms with similar meaning.

These statements will include, but will not be limited to -- statements that reflect the Company's current expectations with respect to the financial condition of the Company; results of operations; plans, objectives, future performance and business, including the Company's traffic and revenue-driving initiatives; intentions with respect to expense management; and plans for deployment of capital; and other expectations discussed during the course of this call.

Although the Company believes the assumptions upon which preliminary or initial results, financial information, and forward-looking statements are based are reasonable as of today's date, these forward-looking statements are not guarantees of future performance, and therefore, investors should not place undue reliance on them.

Also, these statements are based on facts known and expected as of the date of this conference call, and the Company undertakes no obligation to update these statements to reflect events or circumstances that might arise after this call.

Participants on the call today should refer to the Company's Form 10-K and other filings with the SEC for a more detailed discussion of the risks, uncertainties, and other factors that could impact the Company's future operating results and financial conditions.

The Company has posted its fiscal second-quarter 2012 press release and supplemental financial information related to the quarter's results on its website, www.redrobin.com in the investor section.

I will now turn the call over to Mr. Steve Carley, Chief Executive Officer of Red Robin.

Thanks, Dana, and thanks, everyone, for joining us on our call today.

Joining me are Eric Houseman, our President and Chief Operating Officer; Denny Post, our Chief Marketing Officer; and Stuart Brown, our Chief Financial Officer.

After Stuart and I deliver our prepared remarks, Eric and Denny will be available for Q&A at the end of the call.

Let's start with a few financial headlines.

As we shared in our earnings release, and as you can see on slide 3 of the supplemental information, our fiscal second-quarter highlights include our total revenues increasing to $223.7 million, or 3.7% over the second quarter last year, as our Company-owned comparable net restaurant sales increased 0.8%, driven by a 0.9% increase in guest traffic.

Our restaurant level operating profit margin increased to 21.1% from 20.8%, driven by sales leverage and lower other operating costs.

This was partially offset by increases in food costs and occupancy expenses.

And our restaurant level operating profit was $46.4 million or 5.2% higher than a year ago.

Earnings per diluted share growth of 8.3% to $0.52, compared to adjusted earnings per diluted share of $0.48 a year ago.

During the second quarter, we were encouraged by the significant sequential improvement in guest count from a decrease of 3.6% in Q1 to an increase of 0.9% in Q2.

Slides 4 and 5 include key areas of focus during the second quarter.

One of these was our launch of Red's Tavern Double and our Tavern styles.

This is just one example of how we're driving craveability, reinforcing our burger authority with our guests, and laying the foundation for everyday value.

I'll remind everybody, this everyday value issue is our number-one barrier to trial and to increasing frequency at Red Robin.

The Tavern double is a tasty fire-grilled classic one-third pound beef burger at a $6.99 everyday value price point, and that includes bottomless fries.

But it's more than that; it's also a great platform to deliver unique flavor combinations in our burgers in a way that only Red Robin can do.

Our introductory Tavern styles included the southwest-inspired Cantina Jack, the bacon lover's Pig-Out, and the bleu cheese and buffalo sauced Buzzalo, all of which were hits with our guests.

We continue to bring news to this platform with the Fiery Ghost, featuring the ghost pepper, and the Cry Baby with both spicy sauteed and fried onions, in late June.

We can clearly gauge preference in the styles by tracking their sales mix individually.

This was the single most successful introduction in recent Red Robin history, at over 2 times the peak mix of our recent champ, the Oktoberfest burger.

It sustained a double-digit mix for the entire second quarter.

In June, we addressed the number-one guest request by adding a bigger Tavern style with our new Red's Big Tavern burger.

In summary, we've now introduced everyday value at Red Robin at a powerful price point that is driving trial, and is anticipated to build frequency over time.

It's designed from a cost of goods perspective to drive profits, too.

Our quarter-over-quarter restaurant level operating profit is evidence of this very positive impact.

Through the collaboration of our culinary and ops teams, we already have in the pipeline new Tavern double styles that we believe our guests will love.

So, there's much more to come with this platform as it continues to drive craveability, cement Red Robin's reputation as the burger authority, and provide value day in and day out.

We will continue to use a media strategy similar to what we've done in the past to drive news and guest interest.

But with everyday value represented by the Tavern Double, we'll focus our media to drive awareness of everyday value, and then share news about our really great gourmet burger seasonal offerings at full retail price.

Moving on to another initiative, which is taking back the bar, this continues to outpace prior year's performance in both the alcohol and non-alcohol categories, with our alcoholic beverage mix increasing to 7.2% in the second quarter, up from 6.5% a year ago.

Our beverage PPA event days, like our Cinco de Mayo program, and stronger merchandising of happy hour during off-peak periods are helping us increase awareness of our adult beverage offerings, and increasing alcohol beverage sales as a percentage of total sales, while beginning to address a great adult experience in the bar.

During last quarter's call, we talked about the addition of our master mixologist, Donna Ruch, to our culinary team.

Since then, Donna has been fully engaged, looking not only at new beverage innovation, and ways to make our signature beverages more appealing to guests, but also exploring creative presentation of our beverages, experimenting with glassware packages, and even testing new bar equipment.

All of this not only helps us drive beverage sales in our total system in the short term, but it also supports our longer-term strategy to reclaim our heritage as a great place for adults, as well as families.

Regarding efforts to dramatically enhance the guest experience at Red Robin, which we're putting under the title of brand transformation, after thoughtful exploration and testing, we've locked down design concepts to create a fresh and more relevant restaurant environment for all of our guests.

These include exciting plating and presentation changes, and enhanced service.

We expect to implement the first wave of transformation in about two dozen of our existing restaurants by the end of the year.

Any future refinements to our brand transformation plan will be based on a thorough financial return analysis, and comprehensive guest feedback.

This, as they say, is truly a marathon, and not a sprint.

Stuart will provide a little more detail on planned expenditures for the brand transformation initiative.

Let's move on to Red Royalty -- remember, our goal for this best-in-class loyalty program is not only to increase the frequency of guest visits through Red Royalty membership, but to drive repeat visits that are profitable.

About a year after our system rolled out the program, we did a complete review of how it's working.

We analyzed the reward structure, and examined what we're learning about guest behavior to determine if the program is delivering the expected outcomes.

Based on the incremental visits we're seeing from our highest frequency guests, and the impact on our profitability, we continue to optimize the program with refinements that will expand membership in Red Royalty, and further increase profitability, including the use of expanded surprise and delight programs such as day-part-specific offers and the rollout of our Red Royalty mobile app this Fall.

Let me touch quickly on social media -- during Q2, we increased our Facebook followers by over 140% over last year, and we recently surpassed the 0.5 million follower mark.

With this growing presence in social media, it's becoming easier for our guests to find us and learn about what's going on at Red Robin.

There was a lot of great conversation on Facebook around our Tavern Double and styles, especially the Fiery Ghost and Cry Baby.

Our ability to have an ongoing dialogue with our guests is why we'll continue to leverage social media strategically as part of our overall marketing mix.

Regarding new unit growth, we opened a Red Robin's Burger Works in downtown Denver during the second quarter, and they have nine NROs planned for the back half of the year.

Of those nine, so far in the third quarter we've opened two full-size Red Robin restaurants in Pembroke Pines, Florida and Riverside, California, and a new Red Robin's Burger Works in Boulder, Colorado, which is our fourth Burger Works location.

We expect to have 10 new full-size units and four additional Burger Works added to our restaurant base in 2012, plus the franchise restaurant that we recently acquired in Clifton, New Jersey.

As you saw in our press release, we did close one restaurant in Del Mar, California in Q2 due to the lease expiration.

Also, two franchise restaurants in Texas temporarily closed during the second quarter as another franchisee takes over.

Both of these Texas restaurants are expected to reopen this month.

In Canada, one franchise restaurant closed in early Q2 due to a lease termination, and another closed for remodeling and reopened early in Q3.

I wanted to share an update on our Burger Works strategy.

While we're still testing this new Red Robin service model, we are very, very pleased with the early results, and we are capturing the learnings from a diversity of locations that we've opened to-date, in an outdoor lifestyle center, in the heart of a college campus, and in a downtown urban setting.

We've also successfully applied to Burger Works the same NRO discipline that we use to get our full-size units off to a strong start, and normalized as quickly as possible.

As a reflection of our confidence in the potential for Burger Works, we recently hired an experienced and seasoned restaurant industry leader to serve as the Vice President of Operations for Burger Works.

Rob Geresi joined us after a successful career in restaurant operations at Sonic.

Rob has extensive experience in QSR, in addition to have founded a start-up restaurant chain, New York Bagel and Deli, which he built from the ground up to more than 60 locations.

We believe Rob has the depth and diversity of experience to help us refine and expand Burger Works, and we're very excited to have Rob on the team.

Before I turn the call over to Stuart, I'd like to make clear that we're thoughtfully assessing the impact that healthcare reform will have on costs, benefit programs, and operating policies at Red Robin.

Currently at Red Robin, just over 40% of our eligible team members participate in our healthcare plans today, and we offer a richer array of benefits than the minimum required by the new legislation.

While the rules are still being written, what this will eventually cost and who ultimately pays will vary given many assumptions.

Key variables include how many additional team members would participate in the plan, changes in benefit levels, as well as changes to the part-time/full-time team member mix, and of course, turnover numbers.

We intend to provide additional information in the future, but our preliminary estimates show this to be equivalent to an incremental 1% to 2% sales tax beginning in 2014, and assuming Red Robin made no changes to its current plan design or labor practices.

We'll be trying to work collaboratively with our peers in the restaurant industry on a comprehensive approach to addressing the cost challenges affecting all of us.

But given the recent Supreme Court ruling, we wanted to be as forthright as we can in addressing this very timely issue.

Here's Stuart to give you more perspective on our operating results, and our outlook for the balance of the year.

Thank you, Steve.

I appreciate everyone taking the time to join us on the call this morning.

As Steve touched on, and as outlined in our press release, we performed very well this quarter in a number of fronts, including trends in guest counts, expansion of our operating margins, and growth in EBITDA.

For the second quarter, our total revenues increased 3.7%, due primarily to a 3% increase in operating weeks and a 0.8% increase in comparable restaurant sales.

Net income was $7.7 million, or $0.52 per diluted share, which represents an 8.3% increase over last year's adjusted earnings.

Year-to-date adjusted earnings per share has increased 16% to $1.23 per share.

Looking at the top line, as you can see on slide 7 of our supplemental reporting information, comparable restaurant sales growth of 0.8% resulted from a 0.9% increase in guest counts and a slight decrease in average check.

The April menu introduced our everyday value Red's Tavern Double, which achieved great acceptance, as Steve discussed, leading to higher guest counts and profitability.

However, average check decreased with the loss of some appetizer sales, mainly offset by higher beverage instances.

With the new culinary team we announced last quarter, we are in the process of revamping our appetizer offerings, which will come in several steps over the coming year.

As shown on slide 8, our restaurant margins were 21.1% in the second quarter, or 30 basis points higher than a year ago.

The 20 basis point increases in both cost of sales and occupancy costs were more than offset by lower expenses in a number of areas, including transaction fees and utilities, as well as the leverage of higher sales on labor.

Our cost reduction program is truly ingrained.

In this quarter, we began implementing several new initiatives, including reusable kids' cups, as well as switching an equipment vendor from fixed fee to a time-and-materials contract, which together will save in excess of $500,000 annually.

Below restaurant level operating profit, selling, general, and administrative costs were in line with expectations, and $1 million higher than last year, due to costs related to our new IT systems and increased amortization of equity-based compensation, partly offset by lower severance costs, which we incurred last year.

The implementation of our new financial and supply chain IT systems, which we have talked about on previous calls, has been delayed following quality assurance testing.

We are now planning for implementation of our financial systems in the fourth quarter, along with piloting of our supply chain system.

But as an early adopter of the program, we are prepared for additional delays until testing is satisfied.

Our EBITDA continued to grow strongly versus a year ago, increasing $2.3 million, or over 10%, to $24 million in the [fourth] quarter.

Year-to-date, our EBITDA was $56.4 million, an increase of 12.7% compared to 2011.

We invested $17.4 million during the quarter, including approximately $6 million in new restaurants, $4 million for maintenance capital, $3.2 million for the restaurant we acquired in Clifton, New Jersey, and $4 million in our IT systems and corporate overhead.

Our capital structure remains in good shape, with $29.9 million of cash on hand, and $135 million of debt.

During the quarter, we used excess cash to repurchase 255,000 shares for $7.7 million.

As of the end of the second quarter, $40 million remained under the Board authorization for share repurchases this year.

Looking ahead, our guidance for the rest of the year has been revised to reflect the slowing consumer demand, which you have heard about from our peers and industry research.

As you see in our press release and on slide 13 of our supplemental information, we now expect comparable restaurant sales growth for the year to be near 0.5%.

While we had comparable sales growth of 0.8% in the first half of the year, casual dining traffic nationally was negative in June and July, according to Blackbox.

On top of that, remember the traffic is reduced during the Olympics, particularly at dinner.

During the last Summer games, Red Robin sales were 3% to 5% below trend.

With limited to no national growth, and a decrease for the three weeks of the Olympics, one would expect negative same-store sales growth in the third quarter versus last year.

We have, of course, though, undertaken promotional initiatives to blunt the impact of the slowing demand generally, and of the Olympics specifically, but our competitors are surely taking action as well.

Marketing steps during the remainder of the year include continuing to emphasize our successful Tavern Double with our unique styles, offering premium seasonal items, using targeted promotions to our Red Royalty members, and other actions.

While we expect comparable restaurant sales growth to be negative in the third quarter, it should turn positive again in the fourth quarter, with continued success of our everyday value platform, supported by the October menu, which includes exciting and popular seasonal items, additional drinks and beverages, and a modest price increase.

We will open nine additional restaurants in the second half of 2012, resulting in an increase in operating weeks of almost 4%, excluding the impact of the extra operating week we have this fiscal year.

Further, Steve covered, we will test several different levels of remodels across over 20 restaurants in five markets.

Investments in the remodels are expected to be $5 million to $6 million, plus we will be spending another $3 million to upgrade audio/visual packages in an additional 100 restaurants.

There will be some accelerated depreciation and costs related to this part of brand transformation, which we will detail in our next call.

Despite this slowing consumer demand, we have raised our targets for restaurant level operating margins to increase about 50 basis points from the 19.8% achieved in 2011.

This is 30 basis points better than our original guidance, as a result of favorable cost of sales and operating expenses more than offsetting the leverage lost from the lower than expected sales.

Guidance for selling, general, and administrative costs is being raised to range from $108 million to $109 million, or about $1 million higher than our original guidance, due to the expensing of our investments in our IT system and brand transformation initiatives.

We have received a number of concessions from our IT vendors that offset a majority of the impact of the system implementation delays, but a higher portion of the projected costs will be expensed.

Of the remaining $50 million or so of expense this year in G&A, the third quarter is expected to be about $1 million higher than the fourth quarter.

Depreciation and amortization expense has been trending lower in recent quarters, due to five- and seven-year assets becoming fully depreciated, but it will begin to tick up in Q3 and Q4, related to our brand transformation initiative.

Before turning the call back over to Steve, I want to remind you that while we are taking steps to ensure short-term performance of the brand, the entire team is working very diligently in putting the pieces in place to ensure an even strong future.

We spent the better part of last week together with our senior leadership team and our Board, working through our strategic objectives, including strengthening our value proposition for guests, differentiating ourselves further from mainstream casual and fast casual competitors, and accelerating our organic growth.

With that, I'll hand the call back over to Steve for some final comments before taking your questions.

Thank you.

Thanks, Stuart.

Before we close, I want to take a moment to acknowledge the outpouring of support the Red Robin family received after the recent theater shootings in Aurora, Colorado.

As you probably know, many team members in the Red Robin family were affected by this tragedy.

But I'm very proud to say that Red Robin team members, guests, suppliers, and others from across the country pulled together to help our people with emotional, spiritual, and financial support in their time of need.

And we wanted to thank everybody for their thoughts and generosity.

To recap our Q2 call this morning, in addition to the year-over-year growth in our bottom line results, we were encouraged by the significant improvement in our guest counts from the late first-quarter level.

The guest response to our new menu, and the introduction of Tavern Double Burger platform, has given us solid momentum as we head into the back half of the year.

We've said during recent conversations with our shareholders that if 2011 was the year to harvest some low-hanging fruit, then 2012 is a foundational year for Red Robin, and we believe our business is already getting stronger and our financial performance is improving.

Again, this is a marathon and not a sprint, so we remain focused on our long-term growth and prosperity.

As always, I appreciate all the support and hard work of the many Red Robin team members who take care of our guests everyday and contribute to our continued success.

What that, operator, we'd be happy to take questions.

(Operator Instructions) Joe Buckley, Bank of America Merrill Lynch.

Just trying to put some of the guidance in perspective.

The SG&A coming in a little bit higher, do have a sense yet how that's going to play out next year?

Will the IT-related expense continue through 2013?

Joe, this is Stuart, good morning.

I think year-over-year should be coming down as we get our financial and supply chain systems rolled out to the restaurants.

Again, it's going to depend on the exact timing of that.

Assuming we get the financials in the fourth quarter and can get the supply chain piloted, you'll continue to see some implementation costs in the first half and then it will really start to trend down strongly in the second half.

The next key piece of our store supply chain system that we have in the pipeline is labor management, which will drive some real results.

Some of the drop-off you'll see from the supply chain system will be offset by our cost and labor management roll out.

Okay.

Just on sales, the third quarter caution, I'm a little bit surprised, the 3% to 5% number related back to the 2004 Summer Olympics experience.

Is that correct?

That's correct.

I'm not trying to signal that that's exactly what's going to happen this time.

That was 2008 when the economy was already pretty weak.

But sequentially, you've got to remember opening and closing nights of the ceremonies, everybody is sitting at home watching TV.

You're losing about 10% of sales during those nights and you've got three weekends.

I know Blackbox actually put in a piece with their July numbers that they're expecting a pretty meaningful slowdown for casual dining across.

We've some marketing steps to offset some of that, but naturally, it's what we should expect walking in.

Okay.

Are your thoughts more Olympic-focused as opposed to we've heard lots of companies talk about slowing sales.

You're a few weeks into your quarter, including a little bit of Olympics experience under your belt.

Is it more Olympics-focused or more generally?

You've got 12 weeks, so if you've got three weeks that are down because of the Olympics, that's the biggest thing that's weighting it down.

Most of our peers have all reported there's definitely some national slowing.

When we put our original plan together, we built that on GDP growth of 2.5%.

That GDP growth is going to be 20% below that, it's going to be under 2% probably for the year.

There's definitely some national slowing, but the biggest impact in Q3 is the Olympics.

It also gives us confidence more in the trend versus Q4.

Just one more, just on food costs, lots of noise out there, what are you experiencing currently?

Is 2012 coming in maybe a little better than you thought?

Any preliminary thoughts on 2013?

Yes, it is coming in better than we thought, even ground beef is coming in a little bit better, which is really the result of the drought and farmers sending more cattle to slaughter, so you're getting an unnatural supply coming on to the market, which is going to hurt us next year.

We're watching the markets for next year and trying to understand how strong is the reaction to what's going on today.

Ground beef has been higher and what you've seen beef actually coming down a little bit over the summer.

Chicken, we're contracted, really, for the rest of the year.

We're slightly higher on chicken than we were last year.

With the grain prices, you'll see chicken prices go up, but our initial expectations are for last year, so that's not going to be a meaningful increase.

Fries, they'll go up, but that's also seems like that's going to be a fairly moderate increase.

Those are our biggest items.

It's too soon to tell right now on where beef prices are going to come out.

We'll talk about that more on the next call.

Okay.

Thank you.

Jeff Omohundro, Davenport & Company.

Just a question on efforts to maintain this traffic momentum.

It was mentioned earlier about media to drive awareness of your everyday value.

I'm just wondering with the crowding out effect that we would expect this fall from the Olympics, from the elections, maybe you can address media plans, LTOs, and communications of how you'll communicate that value.

Thanks.

Good morning, Jeff.

This is Denny.

Great question.

We have an advantage in the fact that we're a national cable buyer.

Where you're going to see a lot of crowding out is going to be at the local level, primarily and then, of course, the risk that people may just turn away from viewing.

We have scheduled the same amount of media this fall and very much lined up with last year, which was, of course, our successful Oktoberfest promotion.

We got off to a great start in Q2 with the Tavern Double.

We still have a lot of opportunity to drive awareness around that everyday value proposition and also to continue to layer in the premium seasonal burgers that we've talked about.

I feel like the media that we've got set is going to do a great job of driving in the folks and continuing to drive trial and awareness of Tavern Double.

Beyond that, we'll be using our social media, I think, continually more and more effectively, which is a great tool for us and then you couple that with our Red Royalty program membership and we continue to find that our ability to speak directly to them in a relationship messaging way not just a deal way, is making a real difference underneath some of these promotions.

I'm pretty confident we've got a good mix.

On the seasonal premium end, will the pricing be somewhat similar year-over-year?

We're going to actually have an opportunity on our premium end to take full margin this year.

The nice thing about the Tavern Double is it's been engineered at everyday value at $6.99 to be more penny profitable than a discounted LTO in the way we've been going to market before.

From that standpoint, I think we have a lot of opportunity and profitability as well as trade up to the seasonal offering.

Without giving away exact details, hopefully you can read through all that.

Thank you.

Jeff Farmer, Wells Fargo.

You did touch on this, but how did traffic play out through the quarter?

Was it much stronger when you were on air with the Tavern Double or did it pretty much hold up, even when you went dark?

Going back and looking at our numbers and trying to compare those also to Blackbox in terms of how we did versus the market, clearly, as Steve talked about, the Tavern Double really had a strong impact in terms of driving guests into our restaurants.

That was the whole point of the media plan and everything else is to create awareness of this great value.

We talked about $6.99, I want to add in, with the styles, which is mixing really well, you're at $7.99.

For $1 more, you get this great flavor profile.

Now we've rolled out the Big Tavern, which is even a full price point as well.

Total mix of these things is mixing it in at higher than the $6.99 that you may think.

From a traffic perspective, we clearly took a lot of share early in the quarter when were rolling this out and we've continued to, although the media certainly helped.

As relates to day part, you had mentioned last quarter that you were seeing a lot of pressure at the lunch day part.

In terms of that traffic improving, was it fairly evenly distributed across lunch and dinner or more heavily weighted toward lunch?

I will say that we have more to give at lunch than most people because we've always had a more balanced business than most of the mainstream casual competitors in any case.

They've been very aggressive about lunch deals, but we have seen increase in dinner day parts, as well as some at lunch, associated with Tavern.

If you go back to the fundamental work that we did to get after this kind of menu engineering, it was clear that affordability and food prices are an issue across day parts.

For us, this is not just a lunch play by any means, it is one that we believe will drive traffic across the day.

Jeff, just to correct one thing, while we've had some moderate decrease in the lunch mix, it's not been substantial.

No.

We're not.

Okay.

Obviously, it's very clear, obviously Tavern Double is moving the needle for you, you've been able to build off that platform a little bit.

But what's next?

I assume you're not just going to hang your hat on Tavern Double and continue to use that as a primary platform.

What other type of things can you pursue?

Even getting outside of hamburgers, is there anything --

As Stuart mentioned, we're doing a great deal of work around PPA builders, particularly appetizers, beverage, all the things that round out a meal, what goes with a burger.

We've got great news in shakes.

If you haven't tried our salted caramel shake, I highly recommend it.

We launched that at the same time as Tavern Double and saw some terrific take there.

Again, one of the things that we found time and again with our Red Royalty guest is, when they come in, they don't necessarily come in to spend less money, they come in to get more for their dollar.

We see them add on, trade up and we want to give them more and more reasons to do that and then desserts will follow.

We have a lot of opportunity to build out around our core menu items.

We also have a pipeline of specialty burgers and a tremendous pipeline of Tavern styles, which, as Stuart mentioned, only builds margin further on each one of those Tavern Doubles sold.

Okay.

You've answered this question a couple times in the past, but if you were to achieve cost savings above and beyond that $16 million to $18 million you've already pointed out, you've been saying that, again, you'd be investing that back into the business.

But given the top line trends you're seeing from an industry perspective, are you any more likely to let some of that flow to the bottom line given the environment?

This is Stuart, Jeff.

No.

Again, we want to keep improving for our guests, is it worth the value that I pay?

We want to continue to differentiate ourselves from our peer group and really stand out on that.

As much as we can reinvest back and we've talked about brand transformation in terms of the environment, product, plating, presentation, that is the right long-term investment to be making.

All right.

Thank you.

David Dorfman, Morgan Stanley.

I wanted to follow up on your comment that when your original plan was made in your mind, you had a 2.5% GDP or a stronger macro than what ultimately we were experiencing and just how that has changed either your pace of rollout or even your strategy altogether.

Specifically, if you can just comment on the timing of the various pieces of the menu rollout and the brand transformation and especially on what enhanced service includes as well?

Thank you.

This is Stuart.

I view those as two different things.

One of them, when you're looking at what's going on with the guests this week, which I think everybody wants to talk about, there's a number of short-term things we can do.

The huge advantage we have there is Red Royalty.

We've got over 1.7 million, 1.8 million registered users of that, so we've got an audience between that and Facebook that we can really talk to the raving Red Robin fans.

We can do some short-term tactics that are a little bit stealth, you don't have to offer it to everybody, so you can really manage your margin and really drive impact that way.

Long-term, in terms of how we're investing in the business, menu changes, as we touched on, the brand transformation is physical as well as menu.

We talked about it at our investor day we had earlier in the year, so we are in the process of thoughtfully testing a number of those initiatives.

We will be testing a number of those this fall, reading the results through the winter and early spring and we will continue to evolve the menu, continuing to make impacts.

I would say the one on this fall will be more minor, with anticipation of more major menu changes in terms of the enhancement that Denny talked about in terms of burgers, appetizers, desserts, in the spring.

Then we'll get the reads from the almost two dozen restaurants that we're testing brand transformation on and can roll that out in the back half.

I'd jump in one thing on that, David.

I heard you ask about brand transformation.

Let me also just reinforce, we are testing a ton of things this fall.

We're trying to be very informed about how we move forward and we're going to have some considerable options for next year.

You asked specifically about brand transformation and what we meant by the service standards.

Again, one of the goals of brand transformation is to make Red Robin a great place for adults, as we traditionally were, as well as families.

That requires a different sense of how do we zone the restaurant, how do we talk to our guests and staffing and approach there.

We're really looking at all of that, we have a cross functional team now, led by a dedicated VP over brand transformation and we are taking on all of the challenges in working with our ops partners.

It's not just about redesigning the box that we're in.

It's about all the elements and I think we're being very thoughtful about that and have some good opportunities.

Thanks.

On the macro question as well, the last time we saw the big dip, parties with children was one of the categories of diners that was hit hardest and that affected Red Robin disproportionately.

Is that something you're seeing the beginning of again or is there a way to judge how your guests are bringing children or not?

I think that continues to be a challenge.

When you look at the uncertainty and the consumer uncertainty out there, it certainly disproportionately affects middle income families and that's where we do a lot of our business.

We're also looking at how do we reinvest in our approach to families and children and not just chase the adult crowd, because we want to keep a nice balance in our business and we believe we can do that.

You're looking at the second quarter, the ratio of kids meals that we have in our menu is down a little bit, very slightly of year-over-year.

More than anecdotally, that data is showing is actually some of that is teens, who before would be looking at the kid's menu are actually trading up to the Tavern Double.

Got you.

Thanks very much.

Will Slabaugh, Stephens.

I wanted to follow-up on the menu in general and where you feel like you are in that evolution.

You've talked about how successful the Tavern Double was in the bottom end and I know you've talked in the past about eventually getting something else on the higher end.

Two questions here, where do you feel like you are percentage-wise on the evolution of where you think the menu can go?

Secondly, as far as you want to talk about, when we should expect to see things on the higher end of the menu?

I'll take that one.

We've talked about a barbell menu approach, you asked for a percentage.

We're 40% of the way there, if at all.

Lots of opportunity that remains and part of the testing and development that we're doing is how do we address the higher end of the barbell as well?

We're just not ready to speak specifically about that yet.

It's one of those things we want to be obviously thoughtful about, along with the others.

I feel really great about the start that we've gotten with Tavern Double.

I think it's actually given us a little bit of pricing power to stretch out the middle of the menu, too, in terms of our specialty burgers.

We're looking at that in terms of new presentation and some other things that will help us really start to range our all of our burger offerings.

We're also actively looking to improve some of our entree offerings and of course, as I said before, round out things like appetizers and desserts.

Long way to go on this, but we've got a great team in place and a lot of tests starting and I'm very confident that we're going to have a lot of pipeline activity in the menu format to support that.

Good to hear.

Then on the big positive swing to traffic this quarter from last quarter, wondering how much that new, more nimble way of approaching marketing that you talked about last quarter affected that or if at all.

If you could speak to that a little more or was it more just the everyday value of the Tavern Double with a kick from alcohol sales, et cetera?

Yes.

Any color there?

Things are starting to work better, we're getting smarter.

A lot of it was Tavern Double.

Okay, thanks.

We have a lot of interest in coming back to Red Robin with the right proposition.

Thank you.

Lastly for me, pricing, I know that rolled off and you mentioned you'd be taking some additional pricing in October with the new menu rolling out.

But looking at corn up, et cetera, wondering if you had any range of what that might look like, what you're most comfortable with?

I know you've roughly 2% rolling on the menu in the past.

Will, this is Stuart.

It's going to be modest and again, we would have liked to have not have taken any.

We're looking the same things you are in terms of the impact of the drought and what it's going to do to commodities next year, as well as minimum wage increases and just trying to get a little bit ahead of that.

We're still finalizing numbers, but it's not going to be a major price increase.

It'll be modest.

Great, thank you.

Steve Anderson, Miller Tabak.

Can you give an exact number on your mix in terms of the Tavern Double and where mix has been on some of your previous LTOs?

As I said in my prepared remarks, we're not going to give a specific mix.

We think that's proprietary for us, but we can tell you that, of our most successful promotions in the past, upon introduction at its peak, the Tavern Doubles were more than 2x the product mix of anything we've done in the past.

Even more importantly, they still sustained at a double-digit level of price mix for the entire second quarter.

We're very encouraged and very pleased.

On top of that, the take on the styles is higher than we had anticipated from our concept research, which is why we remain so certain about doing that.

But things like this summer, where we were able to market without television, Fiery Ghost and Cry Baby and get some considerable attention in the worlds of public relations, where we haven't traditionally done well on social media.

Again, Red Robin historically had a great attitude, it had a swagger, it had indie cred, if you will.

We think we can bring some of that back and we're certainly doing that with the Tavern Double and the styles.

Thank you.

Conrad Lyon, B. Riley & Company.

Steve, I think you alluded to this with your last comment there.

Really it's just repeats visitation, do you have a handle on that and how that's trending with your LTO?

Conrad, one of the things that I want to reinforce is that our average user comes to Red Robin about once every three months.

When we talk about a marathon and talk about continuing to tell the same story, talk about having to continue to talk about everyday value, that's one of the reasons.

As opposed to a quick pop that's going to fade, we think this is going to be a nice initial pop and a really nice slow continued build as people continue to discover that we're not taking that price point away, that it's there every day and that they can get it anytime they want.

This is going to take some continued communication with our guests and it's going to take some time for even our existing user base to wander in and discover it, but we're really excited about its initial traction.

Got you.

Okay.

Conrad, it is actually a value.

Yes, I realized that after I said that.

Thanks.

I want to do that because we're not trying to play the limited time deal game, we're really starting to engineer the menu for maximum reach.

We see very strong repeat intent on these products.

Okay.

That leads into this one.

I know you touched upon the commodity outlook and it's hard to gauge what that's going to be, but let me ask about levers you might pull to overcome any commodity inflation?

Obviously, there's pricing and you're pretty clear about that, but might you play with more LTOs or alter the SKUs on the menu?

Conrad, this is Stuart.

We're not looking too much at that, actually.

We're looking at if we should be looking at some different hedging strategies out there for a couple of our different commodity items, particularly fuel.

I know a few of our peers are out there doing that, we have not played a lot in that.

But given where oil is and things like that, there may be some opportunities for us to lock in there.

But again, these are things that we're working with our suppliers.

Potatoes, obviously, is a big piece; it's about 10% of our purchases.

We are finalizing negotiations on that now for basically all of next year.

We're doing the things that we think we can be doing.

Could we be more aggressive?

Yes.

I think where you'd be more aggressive, the premium you'd be paying to lock in price today, in some cases, may not be worth it.

It's like a steep, inverted yield curve and if you go out too far or try to get too aggressive, you're going to end up paying more than you should in the long-term.

Got you.

Okay, final question, just a macro thing and maybe directed towards Steve.

The competitive environment, you've been pretty straight about your thoughts about that.

How do you feel you're stacking up against both QSR, fast casual?

Do you think you're maintaining your share, taking share, losing share?

Conrad, we did the math on Tavern Double.

At $6.99 with bottomless fries, you add a Coke and a 15% tip and you're at $10.98.

If you happen to wander into Five Guys, get their burger, their fries, and their Coke, you're at about $10.97.

We're feeling very good about having a terrific, fire-grilled, unique product that gives our guests everyday value, is a powerful tool to protect our share from fast casual, and that's really what we're really focused on and we think we're getting really close.

Okay.

It sounds like you're maintaining share.

We did a good job in Q2.

Yes, you did.

Thank you.

Nicole Miller, Piper Jaffray.

On the Tavern Double, I was wondering if that and maybe perhaps in conjunction the loyalty program, can you tell yet if you're driving the frequency of guests or if you're getting a new guest in the restaurant?

It's really too early to tell from that standpoint.

I would tell you that my gut says, and we have tracking in place to start to learn this, that this definitely drove trial of guests who were positive toward Red Robin, but just simply had not been in, in a while.

I think it probably is affecting more of our last user and appealing to a different user than our most loyal guest, who is represented in Red Royalty.

Okay.

Also, the pipeline -- with the focus on value, I'm just wondering what is the length of the pipeline?

In terms of the products you want to promote and then the marketing to back it up, is it 9 months, 12 months, 18 months?

Where do you stand today?

I would say certainly the focus on value in terms of Tavern Double styles, they almost write themselves.

They're quite easy to do.

In fact, I followed Stuart's contest with a $1,000 challenge to our team members.

We'll be announcing the award this week, with a very unique burger built with all existing ingredients.

Again, a great way for us to do some things.

But from a pipeline standpoint, I'd say we're well out into next year in terms of the development and testing that we've got going on across the menu.

Not just in the value area, Nicole, but across the menu, because we continue to want to balance the value traffic driving potential with our specialty burgers and where we've traditionally done so well in that $10 range.

You'll continue to see items in both sides.

Nicole, this is Steve.

To give Denny some cred, when she came, we were about 12 weeks out on our new product pipeline and now we are 12 months-plus out, not only on Tavern Double and styles, but across the entire menu.

Excellent.

Thank you very much.

Chris O'Cull, KeyBanc.

I had a follow-up question, Stuart, regarding the pricing.

What pricing did you average during the second quarter and what will you be rolling off on the back half of this year?

Last October on the October menu, we had about a 0.9% price increase and probably about 0.7% or so flowed through from that.

That's what you'll be cycling over versus last year.

I missed it, what was the second quarter pricing?

Last year in the April menu, we had about 1.2% price increase net, after flow through, so that rolled off in April.

The average increase in the second quarter was?

About 1%.

About 1%, great.

I had another question regarding your comparable sales guidance for the fourth quarter.

I think you suggested that it should turn positive in the fourth or that's the implied guidance.

Yes.

What gives you confidence that's going to occur given the comparisons are harder and sales seem to be slowing?

Some of it is some of the items that we've got stacked up for the promotional activity.

Again, if you look at the success that we had with the Tavern Double and the initial media, the media that we'll have on -- the next round of media that will be rolling out the last two weeks of Q3, the first two weeks of Q4, which is the same cycle that we had last year, we think that'll continue to resonate.

Again, I would say, absent the Olympics, we would be flat to positive probably in Q3.

In Q4, then you've got a little bit of the price increase as well.

Should the gift card program help in the fourth quarter at all, you think?

It will to some degree.

The last major piece of the roll out that we had expand our gift card program happened last year.

It was sort of late in the year last year for the holiday season.

That was the other major third party distributor.

Year-over-year, you may get some growth, but it won't be huge.

Okay.

Great.

Thanks, guys.

(Operator Instructions) Peter Saleh, Telsey Advisory Group.

Just wanted to ask about the alcohol mix, it seems like it was up nicely from last year, but it looks like it's pretty flat to the first quarter.

Just wondering, the new menu that's going to be rolling out in October, is that going to feature more alcohol?

Is that what you guys are hinting at in terms of the push in October, given that more of the appetizers and the main entrees won't start until some time next year?

We're doing a number of things, Peter.

This is Denny.

From incentives and also getting much more active about promoting alcohol, alcoholic beverages as an alternative and as a complement to our burgers.

You'll actually see a fun piece of news that will be coming with our fall promotion that puts us squarely, certainly in the beer business, which there's a lot of opportunity to sell a beer with a burger.

It is certainly a focus of the organization to continue to drive this over fall.

Again, without giving away too much, we have a number of tests that I think will help us create organic growth, as well as pipeline that will help us drive more and more conversation about Red Robin as a place to enjoy an adult beverage along with your burger.

We're definitely working on it.

Remember, Peter, as we're going to be rolling out dramatically enhanced audio visual packages to over 100 restaurants this year alone, as the first of a wave of dramatic improvements in both the dining room, particularly the bar, to make it a much more welcoming, warm, and interesting place for adults to gather.

Changing that environment is also going to help.

On the commodity side, I know you had mentioned you're seeing ground beef prices coming down a little bit from the early slaughter.

How long do you expect that to last?

Granted it may be short-lived, but are there opportunities to lock in a little bit more today for next year?

Peter, this is Stuart.

No, it's probably not going to be really long-lived.

Because we buy all fresh, we buy it on the spot market, and so there's not an opportunity for us to lock in.

There are some people out there, obviously, who will stick it in their freezer for a long time.

We don't do that.

Great.

Thank you.

With no further questions in the queue, I'd like to turn the call back to Mr. Carley for any additional or closing remarks.

We appreciate everybody's interest.

Thank you so much.

With that, we will wrap our call up.

Again, that does conclude today's presentation.

We thank you for your participation.