Red Robin Gourmet Burgers Inc (RRGB) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Red Robin Gourmet Burgers, Inc.

Second Quarter 2017 Earnings Conference Call.

Please note that the content of this call are being recorded.

And I would now like to turn the call over to Terry Harryman, Vice President of Finance, Planning and Investor Relations.

Please go ahead, Mr. Harryman.

Good afternoon, everyone.

During the course of this conference call, we may make forward-looking statements about our business outlook and expectations.

These forward-looking statements and all other statements that are not historical facts reflect our 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 the call, we 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 our operating performance that may be useful.

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release available on our website.

We have posted our fiscal second quarter 2017's earnings release and supplemental financial information related to the results on our website at www.redrobin.com in the Investors section.

Now I'd like to turn the call over to our Chief Executive Officer, Denny Post.

Thank you, Terry.

Good afternoon, everyone, and thank you for joining me and our Chief Financial Officer, Guy Constant, today.

We are pleased to be back in positive sales and traffic territory, with same-store sales up 0.5% and traffic up 1%, putting us 360 basis points above casual dining peers.

Best of all, we outperformed our peer set in 10 of 11 Black Box regions, representing all but 2 comparable corporate locations.

When we entered negative territory on both sales and traffic in Q4 2015, we set out to understand what was driving the declines by doing research with our most loyal guests, our Red Robin Royalty members who had lapsed in their visits.

We learned that 4 key things had contributed to this downturn.

The first was the experience in our restaurants had declined mostly in speed to table; secondly, guests perceived we have become more expensive because we have been emphasizing our finest line over either our Gourmet or Tavern; our advertising was not breaking through was the third point; and last, we were not a player in carryout or delivery, which had become more important to our guests.

We were well behind the competition in mix and capability.

The Red Robin team took on all 4 issues, and we have begun to see the benefit.

Our operations team dramatically improved their level of service, raising the Net Promoter Score, or NPS, to a consistent 70 or better, in large part by reducing those often vocal detractors to 7% or less.

They accomplished this by honing in on those days and shifts where we fell short through our win the weekend tracking and coaching.

We remain focused on driving performance because we see a clear connection between locations with highest Net Promoter Scores and higher comps.

On the value front, the marketing team tested and thoughtfully rolled out an extended Tavern menu, which now features 8 items, including 6 burgers starting at $6.99.

This new product news has us back in the value game with the Tavern menu mixing at 12% to 13%.

We have chosen to play the game a bit differently than some of our peers by consciously trading off PPA, and the guest is rewarding us with more visits.

They appreciate the consistent value Red Robin delivers every day and in all day parts.

And as a result, we have regained our edge on value as measured by Technomic, with a 47.5% top box rating or provides value through high-quality menu items.

This equals best-in-class competitors.

This value position is further bolstered by top box performance of 56% for a portion size for price paid.

10-plus years of offering bottomless fries has paid off for us.

For further evidence that our Everyday Value focus is resonating with guests, we can look to our relative outperformance on traffic.

Since we launched the Tavern Cheese Lovers Lineup just over a year ago, our gap to Black Box has tripled from a 120 basis point outperformance to the 360 basis point improvement I cited in Q2.

We launched the Sir Acha Tavern Double in May, and it rapidly became the third most popular in the lineup, and we have more news coming in fall.

Improvements in guest experience and perceived value are important, but what about our advertising effectiveness and our off-premise performance?

Have we moved the needle on those?

Well, briefly on brand awareness and advertising effectiveness, our less burger ads breakthrough because they speak to craving burgers and fun, and they appeal to a broader spectrum of guests than our past campaign.

We have chosen to invest incrementally in select high penetration local markets to complement our national media using spot TV, local radio and/or prints to raise our profile.

We have seen higher increases in sales and traffic where we have done so, and we will continue to invest incrementally in future quarters.

So what has happened in our off-premise business?

Year-over-year, off-premise mix move from 5.2% to 7%, including a 70 basis point uptick in Q2 over Q1.

This growth was driven by the launch and adoption of online ordering nationally, which now represents approximately 20% of off-premise sales.

Third-party delivery also represents a significant amount of sales, almost 10% of total off-premise traffic despite being in only 118 of our locations.

We are continuing to roll out curbside to locations where it is possible and to add call center support.

By early in Q4, all corporate restaurants will be on the call center and have designated in-store pickup areas.

Roughly 2/3 of all of our units will have curbside delivery.

As I shared on the last call, we have been cautious about expansion of third-party delivery services based on their high cost and uneven guest experience.

That said, guests are clearly interested in more delivery options.

To understand what we could do, what we could control to improve the delivery experience, we conducted research with third-party users and found that our biggest opportunity was an accuracy of order.

We are pushing our third-party services to integrate with our KDS system to avoid mistakes in reentering the guest order, but that will take time.

Immediately, the off-premise team partnered with operations to develop and train in new procedures for double checking orders at pickup.

This check, double-check and hand off benefits both guests who carryout and those who choose to order through third-party delivery.

If it gets home and it's missing something, it's hard to recover.

As a result of strong guest demand and higher confidence in our ability to deliver at accurate order, we have decided to expand to a total of 198 unique locations with the 3 services we already use: Amazon, DoorDash and GrubHub.

To qualify, all of the 80 new locations we have added had to have high guest experience scores.

These operators have demonstrated that they are ready to capture more sales.

In summary, the team's thorough tested responses to the 4 issues we identified way back in 2015: speed, value, advertising breakthrough and off-premise shortfalls, have us back on the upswing.

As gratifying as that is, the top line and traffic growth momentum is still not enough with labor costs rising 6% or more.

We must control what we can control, and our priority for margin improvement is on rethinking how we invest in labor.

The field leadership team implemented 6 labor pilots of varying impacts back in Q1.

We quickly eliminated the 3 least promising and are continuing to optimize the others, one of which will be deployed nationally in the coming months.

Dubbed maestro, and it eliminates the expedited role on the line in favor of supervision by one of the managers on duty who conducts, thus the maestro name, the heart of house pace and the servers who now select and trade the food themselves.

We are encouraged that guest scores are on hot food, speed of service and server knowledge went up in even the busiest locations who piloted maestro.

It appears to be a true win-win.

We have identified further labor savings for the fourth quarter this year as we shift to-go accountability from the bar area to the designated podium by the host stand, freeing up the bartender to take tables in the bar.

Both maestro and the to-go accountability shift will be phased in with investment and training over the next few months and will be completely rolled out by November.

This reduces total labor hours by about 12 or so daily, depending on the site.

Of the other labor models we are testing, one is teed up for the second phase launch in early 2018 and the other, which is technology-dependent, will take a bit more time.

Setting aside continuing improvements in the existing model for a moment.

With the wage environment expected to be a significant headwind in the future, we know we cannot rely only on traditional levers.

We cannot price our sales to prosperity.

The guests will not bear the rising cost of labor with menu price increases.

They will seek other options if we price ourselves out of consideration.

Real and more radical innovation on guest service models will be required in the future, and we are on the case, investing to ensure we find new solutions that work for us.

The goal for future innovation is to take what has become a larger and larger investment in labor and reduce it in those areas that matter least to guests.

Guests have already shown their eagerness to control payment.

What else can we put in their control?

By reducing investment where it doesn't matter as much, we can continue to deliver high-quality burgers with attentive service and speed at an affordable price.

We believe that that's the winning formula for Red Robin moving forward.

With that, let's hear from Guy on the details of Q2 and the outlook for the next 2 quarters.

Guy?

Thank you, Denny, and good afternoon, everyone.

As I walk you through the highlights of our financial results for the second quarter, please note that the numbers I present are on a recurring basis, excluding special items.

As Denny outlined, the second quarter of 2017 built solidly on the momentum that we first generated a quarter ago and represents continued progress on the journey towards delivering reliable and sustainable performance into the future.

And while the further continuation of such performance would allow us to separate ourselves from the overall casual dining category, we are not there yet.

As we discussed last quarter, there are a handful of outstanding peers who have already created that separation, and their performance is often differentiated from the rest of the category.

We remain focused on the goal of joining them in that separation.

However, relative outperformance is only a first step.

We need to reach a point where our absolute performance is strong and we fully capitalize on the differentiated position that Red Robin holds with the restaurant consumer by generating absolute earnings growth and returns that one would associate with high-performing organizations.

As Denny referenced in her remarks, Q2 total company revenues increased 3.3% to $315.8 million, up from $305.5 million a year ago, driven primarily by new restaurant openings and a 0.5% increase in company-owned comparable restaurant sales.

The 0.5% increase in comps comprises a 1% increase in guest traffic and a 0.5% decline in average guest check.

Overall price, which for Red Robin includes the impact of discounting, increased 1.7% in the quarter.

Mix decreased 2.2%, primarily driven by the expansion of our Tavern value menu, which occurred in the third quarter of 2016.

Overall restaurant capacity as measured by operating weeks was up 2.7% in Q2 as compared to the second quarter of 2016.

Noncomp revenues, primarily the 2016 class of new restaurant openings, generated revenues that were about $2 million below our expectations, limiting our overall revenue growth.

However, our recent performance is more encouraging as the 9 locations we have opened in 2017 are seeing revenue trends that are more in line with historical norms and our overall expectations.

Franchise and other revenues were flat as compared to a year ago.

Second quarter restaurant level operating margins were 19.9%, down 100 basis points versus a year ago, driven by the following factors: cost of sales increased 30 basis points to 23.7% driven primarily by the sharp increases in ground beef prices in the early part of the second quarter, which we discussed on our last call.

While this increase is now not as pronounced as it was earlier in the second quarter, it remains elevated versus our initial projections at the start of 2017.

We also project that beginning in Q4, we will see the negative impact of inflation on potato prices as well.

We now estimate that cost of sales for the full year 2017 will range from down 25 to up 25 basis points versus the 25 to 75 basis point improvement we projected at the start of the year.

Restaurant labor costs increased 70 basis points to 34.7% driven mostly by minimum wage increases and higher restaurant bonuses, partially offset by reductions in training costs and benefits expense.

This continues the narrowing of the gap that started last quarter.

And with the onset of phase 1 of our labor model changes being implemented later in the third quarter, that narrowing will continue.

We now project full year labor expense to be flat to up 50 basis points, better than the 25 to 75 basis point increase we projected at the start of the year.

Other operating costs increased 30 basis points to 13.7% due to higher local restaurant marketing expense, partially offset by lower repair and maintenance expense.

Occupancy costs were favorable by 30 basis points due to the benefit of lower general liability premiums and lower property taxes.

General and administrative expense increased 40 basis points, or $2 million, to 6.9%.

Most of the year-over-year increase in G&A was due to higher incentive compensation, professional services expenses and project costs, partially offset by a decrease in salaries and benefits and lower travel expenses.

Selling expenses were down 40 basis points as a percent of revenue to 3.2% due to timing.

Preopening expenses were down 30 basis points due to the number of restaurant openings.

Q2 adjusted EBITDA was $32.3 million, down 3.6% or $1.2 million compared to a year ago.

Depreciation and amortization increased 40 basis points to 6.7% related to new restaurant openings and the remodels associated with the brand transformation initiative.

Interest expense was $2.5 million, an increase of $1 million versus the prior year, driven by increased interest rates on our revolving credit facility and a higher average debt balance.

Our second quarter tax benefit was 0.3% compared to a 15.4% expense in the prior year.

Adjusted earnings per diluted share were $0.61 as compared to $0.75 in the second quarter of 2016 or a decline of 18.7%.

During the quarter, we also recognized an impairment charge of $1.6 million related to 5 existing restaurant locations.

Now turning to the balance sheet.

We invested $17.3 million in CapEx in the second quarter, primarily related to new restaurant openings, restaurant maintenance capital, investment in technology products, projects and restaurant remodels.

As we outlined in our annual guidance, we did not repurchase any shares in the quarter and do not expect to do so in 2017.

We ended the quarter with $20.2 million in cash and cash equivalents, up $8.4 million versus where we ended 2016, and we finished the quarter with a lease adjusted leverage ratio of 4.18x.

While we have made better-than-expected progress on our leverage ratio through the end of the second quarter, we expect it to remain elevated for one more quarter before we make more meaningful progress in reducing the ratio as we get to the end of the year.

Lastly, we now project our 2017 earnings per diluted share to approximate the low end of the $2.80 to $3.10 range we outlined last quarter.

This will include expected Q3 earnings between $0.20 and $0.30 per share.

As Denny outlined earlier, reaching critical mass on the various off-premise work streams will create a step change in the fourth quarter but will add approximately $500,000 of additional training and G&A costs in Q3.

And as said earlier, we now expect to see full year cost of sales down 25 to up 25 basis points due to the ground beef and potato price increases I referenced earlier.

However, we also expect full year labor expense to run flat to up 50 basis points, a slight improvement versus our original guidance.

In addition, we now expect our full year tax rate to fall between 15% to 20% and we expect our 2017 G&A expense to be slightly less than our original estimate of $100 million.

I want to thank our operators in our restaurants for continuing to deliver a great guest experience while also being good stewards of our company resources over the first half of 2017.

And I want to recognize their creativity and persistence in creating new labor model improvement opportunities that will begin to mitigate the challenging wage environment for many years to come starting in the back half of 2017.

As we stated earlier, we have a great deal of work to do to reach the performance goals we expect for our organization, and we believe we have the team that can deliver a great experience for both our team members and our guests as the cornerstone for a high-performing organization.

And as we have repeatedly committed to in our remarks since the start of the year, we will prioritize our capital and operating investments based on the incremental returns on capital that these investments will create.

Whether to drive sales, improve margins, reduce expenses, generate EBITDA or distribute capital to shareholders, the overriding filter will be the expected return of that incremental capital or an improved return on capital already invested.

We will not grow for growth's sake, rather we will focus on growing our overall returns as this is what is most highly correlated to overall improvements in total shareholder return.

With that, I'll turn the call back to Denny for a few final comments before we take your questions.

Thanks, Guy.

We are very fortunate to have many talented leaders on our team in the field and the home office who are capable of maximizing the existing business model and creating entirely new approaches for the future.

Much of that innovation will require a new level of technology.

To that end, I am very pleased to announce that Dean Cookson, formerly the CTO at Virgin America Airlines, will be joining our team September 5 as SVP and Chief Information Officer.

We specifically reached outside our industry to find a partner of Dean's caliber and experience to help us break through to new ways of being and interacting with the guest.

Before we take questions, a big shout-out to the entire Red Robin organization for pulling together this last year to get our positive momentum back and for everything, everything you do every day to keep us there.

With that, let's take questions.

(Operator Instructions) We will move to Alex Slagle with Jefferies.

So how much of the cost of goods on favorability in the second quarter and the change to the guidance is due to the increased discounting or the mix shift versus the beef and potato cost increases?

Almost all of it is due to the beef and potato cost increases.

Okay.

And then on the negative mix component of the check in the second quarter, how is that versus your expectations?

And how should we look at that for the third quarter and fourth quarter?

I know it's supposed to improve, but how does that look at this point?

Yes.

As we've discussed a couple of times, Alex, previously, we expected to have negative mix in the front half of the year because of the expansion of the Tavern menu that we did in the third quarter last year.

When we talked early in the year, I think the expectation was that we felt like that negative mix would reverse and be closer to flat.

That probably won't be as true as we thought at the start of the year given that our Tavern mix is up a little bit, as Denny mentioned earlier.

But we still expect to -- the negative mix drag to be significantly less than it has been in the front half of the year.

We will now move to Will Slabaugh with Stephens.

On the positive comps and traffic, was the Tavern mix in the 12% or 13% range around where you anticipated or kind of as you referenced, it sounds like it might have been slightly above?

And was there anything else that you would call out that help lead to that positive comp, which has been a little tough to come by this earnings season?

No.

I mean, it was just a bit above what we saw in test market because we've been testing these new options, Will.

And so perhaps a little bit higher, but that, again, speaks to how well it's resonating with guests.

And I'm sorry, the second part of your question I missed?

Sure.

Anything else that you'd call out that helps lead to that positive comp?

I mean, again, I just think it's -- Everyday Value is really bringing our guests in, and we've also held our liquor mix.

Black Box is showing most casual diners down I would think about 3% or more and actually, we've held our liquor mix pretty well.

So I think it's good.

Off-premise, obviously, starting to build, still relatively small impact in our business, but that certainly bodes well for the back half of the year.

Great.

And then if I could ask about the 3Q guide as well, should we assume that, that guide has primarily to do with the training costs you mentioned and then a little bit of cost of sales or are there any other pressures either top line for middle of the P&L that you would call out as well?

No.

I think it's those 2 factors you mentioned, Will, and the fact that Q3 tends to be on a seasonal basis, a low revenue quarter compared to the first 2 quarters.

So perhaps the mix of where people expected earnings to come in Q3 to Q4 was a little bit off.

And this is probably more consistent with what we typically see with revenue levels in the third quarter.

We will now move to Peter Saleh with BTIG.

Great.

Just want a little housekeeping, if I could.

Same-store sales guidance is unchanged, is that correct?

That's correct.

Okay.

And then Denny, I think you've mentioned the labor hours and the new labor model would be down about 12 hours or so.

Can you remind us or give us a little bit more color on how many labor hours you're referring to in the actual store?

Is that a weekly number, a daily number?

What are you referring to there?

Yes, I was going to say, I mean, it's on a base of about 163 a day.

So I think we're looking at something in the neighborhood of a 7% reduction.

Now again, that's front of house labor for the most part.

The expedited role, I guess, is technically a heart of house role.

So it's a little bit about half-and-half in terms of how we're taking it out.

But again, based on what we've seen, pretty confident that those -- that combination will work for us as we move to more off-premise and specifically that we eliminate the expedited role.

Does that help?

Yes, definitely.

And then just my last question would be on the overall promotional environment.

Have you guys seen any sort of change in the promotional environment recently?

It seems like there's been a lot more price point advertisements going on or at least over the past couple of weeks from what I've noticed.

Peter, I really haven't seen that.

Again, we're kind of sticking to our knitting with staying on the $6.99 Everyday Value and avoiding a lot of that.

We have the occasional Surprise & Delight out to our Red Robin Royalty members, but for the most part, we're seeing pretty much the same thing.

I don't know that I've seen a big uptick recently.

It's a competitive environment, no doubt about it.

We will now hear from John Glass of Morgan Stanley.

Just going back to the labor question.

Denny, what are the big ideas around labor?

I understand the expeditor and that's a piece of it.

But is it the whole labor flat in an inflationary environment?

Is it to drive labor lower?

And do you think about this as just a reinvestment opportunity?

So if you save in one place, you need to put money back in another as you had this quarter or next quarter?

Would you think about training and staffing up for some of the new initiatives?

Well, I mean -- Guy, do you want to take the first?

Yes, John, I think we believe there's an opportunity to make absolute progress on labor savings in the restaurant, not just sort of try to offset inflation, although inflation certainly is a big headwind.

When you talk about reinvestment, we sort of think of that a lot more broadly, John.

And Denny made this reference in her comments that there's a lot of places in the business where we're making investments, right, and all sorts of lines across the P&L.

Some matter more to customers and guests than others do.

And so I think what we're really honing in on is finding out those things that matter less to the guests, whether that's labor food costs or other costs around the P&L and turn around and invest that back in places that matter more to the guests.

And that's where you get the momentum in the positive direction.

And so -- look we're in an environment where we know maybe perhaps the alternative in the past has been to take price to offset some of this cost, and that ability just doesn't exist, probably hasn't in casual dining for a long time.

And so now our opportunity is instead of depending on price to do that, is hold on for dear life to the value and capitalize on the positive momentum it's given us and look for other ways to fund the opportunity to offset those increases.

Yes.

I'd say, John, I'm really confident in Carin and the team to continue to be very thoughtful about this.

This may not be a one-size-fits-all opportunity.

As you know, we have a high degree of exposure to some more expensive Western states.

So there's some things we might try to do in some of those areas, but we'll always keep the guest experience front and center in what we're doing.

But I'm confident they'll find ways to mitigate in the near term and then we'll start working on some innovative models that might work in various locations.

And then just a follow-up on your experience with the delivery to date, you're encouraged because you're expanding it to more stores.

Can you talk about your -- the data you have on the incrementality of delivery?

Talk about out-the-door margin versus the dine-in, now that you've got some more experience, if you've got some numbers behind those 2 things, both margin and incrementality?

Yes.

I mean, it is highly incremental.

We're certainly finding.

And it's hard for us to say obviously because we don't have access to their guest data and we do not offer our Red Robin Royalty program to third-party delivery because we don't have the integrations we would need to do that.

So we don't have as much visibility, which is why we went out and did our own research to try to get at it.

But I will say that if the -- obviously, the incrementality has to remain very high for an average cost of between 15% and 30% to us for the privilege of delivering that food.

But the guest is demanding it.

And if we're not there, we're seeing an awful lot of folks show up there, a lot of indies and in the burger market in particular.

So I think it's a good way for us to hold our own in delivery while we explore other options.

At this time, we'll move to Jeff Farmer with Wells Fargo.

Just following up on John's delivery learnings question.

So day part or week part usage, average check, anything else you guys can share about what you're seeing with delivery?

We're definitely seeing it as a more evening event, so that's actually skewing.

Because we've been traditionally a 50-50 brand, lunch, dinner, and we're seeing a little more skewed toward dinner.

It's nice because it is coming in earlier in the week, so whatever -- people are still going out on the weekend.

It tends to be a nice complement to some other day period -- time period.

Based on our pilot testing last year, I'll be interested to see how we go through football season in some markets this year because traditionally, in a market like Seattle where everyone stays home to watch the Seahawks, they may well get Red Robin delivered in.

So we're seeing some nice complementary, which, again, makes it highly incremental.

And then following up on some of the earlier Tavern questions.

How did you guys promote that offer in the 2Q when you were sort of emphasizing it.

As we look into the back half of '17, do you expect to maintain at least a comparable level of promotional focus on value?

Yes.

I mean, the spot is -- the television commercial for the most part is very focused on $6.99 and with the addition of the sriracha, Sir Acha in our case, we made it 4 item -- 4 burgers at $6.99.

So strong focus on the product quality and food.

It's also on the promo card much more prominently than what we have done in the past.

We've kind of buried Tavern in the menu.

So the guest now sees a nice range on the promo card, including Finest, Gourmet, and Tavern.

So I would expect, again, those ads are working and now the team has shot a few more for fall.

We've got some product news coming and it will be about the same kind of level of promotion.

All right.

Just one more.

So in order to hit the low end of the guidance range, based on what you've already delivered in EPS this year, on the first half of the year plus the 3Q guidance, you guys know where I'm going with this, there's a lot of work to be done in the fourth quarter in terms of earnings.

Clearly, I think you guys called out a $0.10 tailwind from the 53rd week benefit, but what gives you visibility, confidence, whatever words you want to use into hitting at least $1 of EPS in the fourth quarter of '17?

Well, Jeff, the biggest part of it, clearly, is the, where we're going to be with our off-premise revenue streams by the time we get to the fourth quarter.

You can see, especially if you go look at the supplemental financials, you'll see a time line as to how we're rolling out on each of those revenue streams.

And there's -- we expect by the fourth quarter to make significantly more progress on having those streams in place.

For example, call center everywhere in addition to the fact that we have online ordering everywhere, curbside much more prominent throughout the system, the expansion of delivery that we just talked about and yet even with that, we've already made some dramatic moves in our off-premise mix from where we were a year ago.

And so doing it in a sense with kind of one hand tied behind our back because we haven't got all the locations rolled out.

When we get to that point in the fourth quarter, we only then can provide some significant momentum, that's the top line side.

If you have add to higher NPS scores, better speed of service, all the things that Carin's team had been delivering.

And then if you go on the other side, the phase 1 of the labor model rollouts that we talked about will be fully implemented by the time we get into the fourth quarter or at least shortly into the fourth quarter.

So we expect to see that momentum on the bottom line as well.

The combination of the 2 with our fairly small share count, as you know, allows us to get a lot of leverage.

Brian Vaccaro with Raymond James has the next question.

Sorry about that.

So I had a question on the annual guidance.

Guy, I believe by your prior guidance assume the slightly negative industry comp environment sort of sustaining through the year.

Has that changed?

Has your second half sort of expectation around the industry changed maybe in light of what's happened in the last month or so?

No, not really.

It does feel like at least in this season that sales don't appear to be the issue, it appears to be what people's expectations are for the balance of the year.

But of course, that's just what everybody's speculating right now.

So as we've talked about before, until we see it, and we see it improve more than what we've seen today, I think it's hard to weigh in that we think it's going to be any different than what it has been.

Okay.

And just to be clear, on the guidance, you expressed comfort at the lower end of your EPS range, but you didn't add that sort of qualifier to your top guidance, is that correct?

That's correct.

Okay.

And then I wanted to circle back on the labor initiative comments.

Denny, you alluded to another phase hitting in early '18.

Can you give some, I guess, color and perspective on sort of what those changes entail?

I'd rather the hold off a little bit on that, Brian.

I'm expecting that Carin's going to join us on the next call, and she'll be able to do that so we have a sense of not only what we've rolled out and achieved, but what we've got planned.

It's still in test and pilot and kind of being shaken out.

So let's hold off and talk about that next quarter.

Okay.

Fair enough.

And then last one for me.

Just back to the second half comps.

Had a question on pricing specifically.

I believe you rolled off a little bit of price in June.

Did you replace that or maybe you could just give some color on what you expect net pricing to be in the back half of the year?

Yes.

Brian, I don't think we'll provide any more color on that.

We have not taken any price since we took the price earlier in the year.

So absent that, we're not going to provide any more color on pricing moving forward.

(Operator Instructions) We'll now move to Howard Penney with Hedgeye Risk Management.

Momentum shifts are critical inflection points in this business, and this quarter clearly was an inflection point for you.

And I'm just wondering, I know it's difficult to turn the ship around when it's going negative, but now it's gone positive.

Do really feel that this is an inflection point for you and that the momentum you have, with everything you've described to answers to the other questions about the comps, will continue into the back half of the year and then to 2018?

Howard, we don't comment in the quarter, but I will tell you that I feel like we've done our due diligence around what was dragging us down.

We've made significant progress on all those points.

We've got just about everything working as hard as it can.

I think the biggest unknown for us is going to be the adoption of off-premise and how quickly that comes together for us.

But certainly, all the things that we've laid in place, whether it's now being well past the completion of BTI, the addition of KDS, everything from labor model testing, they'll inform us going forward, to local marketing and the things the team is doing, tell me that we've got it firing on all cylinders and have a good shot at continuing this kind of momentum.

So that's certainly our goal.

And I think we also -- we know what holes not to step into again.

So we've certainly learned some of those lessons.

And that's why we're so cautious about keeping our guest experience positive about continuing to deliver speed that surprises people and also delivering great experience in off-premise.

So let's hope we all look back at this and say that was the beginning of a great trend.

We'll now move to Gregory Francfort with Bank of America.

Just the first one.

Are there any big swings from last year to this year in costs, or I guess maybe was there anything specific to the cadence of costs last year that is going to change this year that's driving the quarterly EPS guidance, or is that primarily sales driven?

No, it's not primarily sales driven.

As we mentioned, Greg, the expectations around sales are unchanged from where we assumed we would be at the start of the year.

What you're seeing is really the impact of a little bit of cost of sales headwind that we perhaps didn't anticipate at the start of the year.

So we moved that range about 50 basis points to the negative from where we thought at the start of the year.

But then on the flip side, we've moved the labor range 25 basis points positive based on some of the early traction that Carin and her team are getting in some of the labor savings.

There always are year-over-year things like corporate bonus accruals and things like that, that swing back and forth.

But for the most part, this -- and I think what you're trying to get at is third quarter in particular has to do more what the cost of sales trends we've been seeing and just the fact that as you come off the first and second quarter and go into the third, just seasonally, it's a much lower revenue quarter.

And I don't know that, that was taken into account with some of the expectations to the extent that it should have been.

Got it.

Got it.

Yes, my question was, I guess, more between 3Q and 4Q, which makes sense.

And then maybe just one other one.

I think California as a whole for the industry has slowed somewhat from, I guess, being one of the top performers to being more middle of the pack.

And are you seeing anything like that in your business?

And if so, do you have a sense for what may be driving that?

Are the consumers starting to push back on the level of pricing that was taken, it's sort of following the minimum wage changes or is there something else that maybe going on in the California economy?

Any perspective on that will be helpful.

Well, maybe this is evidence that the guests is turning toward our value because we're not seeing that in our business.

We are actually outperforming the competition by a significant amount in the California region on Black Box.

So again, a testament to great service, great value and the Red Robin brand and what it stands for with our guests because we're not seeing any kind of issue in California.

And at this time, we have no further questions in the queue.

I'll turn it back over to management for any additional or closing remarks.

Great.

Well, thank you very much for participating in the call today.

And to the Red Robin members out there, let's stay focused on the first R in burger values, relentless focus on improvement and don't forget to have some bottomless fun at the same time.

So we'll get it all done, and we'll keep this momentum going.

Great job, team.

Take care.

Once again, this does conclude your conference call.

Thank you all for your participation.