The Donatos rollout is headed to locations next year.
Red Robin CEO Paul Murphy called Q3 an “inflection point.” The best evidence can be found in the 547-unit burger chain’s trajectory. Instead of playing defense, the company is reigniting pre-COVID-19 initiatives and expanding others.
The rollout of Donatos Pizza as a nested brand within existing stores, for one, was arguably the buzziest topic headed into 2020. But it took a COVID-19 backseat to survival tactics in March. Red Robin diverted plans from reinvigoration to pivot—as nearly every restaurant was forced to—focusing efforts on off-premises, slimming its menu by a third, and anchoring all of it with enhanced technology to simply get food to guests, such as curbside and delivery, direct and via aggregators.
Murphy called Donatos a “proven growth catalyst both top and bottom line, which we’ll bring to bear on the business over the next two to three years.”
Red Robin getting back on the front foot starts with ground-level performance. Comparable same-store sales grew from negative 41.4 percent in Q2 to negative 13–14 percent at Q3’s close, with per person average (PPA) turning positive, “closing the gap from our competitive set,” Murphy said.
Additionally, he noted, Red Robin structurally improved restaurant and enterprise-level margins and expects a full percentage point of improvement once sales normalize to pre-COVID levels. Red Robin also projected neutral to positive free-cash flow in Q4.
Murphy said Red Robin’s liquidity concerns are behind the brand thanks to improving business performance, coupled with a $49.4 million tax refund. The company expects to generate between $12 million to $15 million of additional cash tax refunds within the next 12 months, too.
THE COVID-19 ROAD FOR RED ROBIN SO FAR
There are multiple drivers, but three stand out. The first is Red Robin’s improved year-over-year trends as dine-in capacity loosens. The second is outdoor expansion and the company’s efforts to add seats into the equation. Lastly, Red Robin’s aforementioned Donatos initiative.
Same-store sales declined 25.1 percent in Q3, yet sequentially improved throughout the quarter, which ended October 4. In the fiscal periods that ended August 9, September 6, and October 4, comps declined 34.2 percent, 24.9 percent, and 14.9 percent, respectively. This as off-premises sales jumped 127.2 percent, year-over-year, to 40.7 percent of total F&B sales. In comparison, Red Robin’s business outside its four walls accounted for 14 percent of take prior to the pandemic.
Traffic slid 24.6 percent in Q3 versus year-ago levels. Average check decreased 0.5 percent. Mix fell 3.6 percent, thanks to lower sales of beverages and Finest Burgers due to higher off-premises sales (people don’t order drinks for delivery or takeout nearly as much). Red Robin took 2.2 percent in price and also reported a 0.9 percent increase from lower discounting. Dine-in sales were down 49.7 percent.
As a percentage of restaurant revenue, store-level operating profit was 8.6 percent and improved across Q3, CFO Lynn Schweinfurth said. It was 16.1 percent last year.
Red Robin’s revenues were $200.5 million, a decrease of 31.9 percent from Q3 2019. Net loss was $6.2 million compared to net loss of $1.8 million.
Six of 35 temporarily closed company stores reopened during the period as well, with five shuttering permanently. Six more have reopened in Q4 thus far.
As of October 4, Red Robin had 444 corporate locations and 103 franchises for a total of 547 units. A year ago, the figures were 471 and 90, respectively. Meaning Red Robin slimmed 14 locations. The brand closed 10 company-run stores in the 40-week period ending October 4. It shuttered 13 in the same timeframe ending October 6, 2019.
Murphy credited some of Red Robin’s growth from laminated menus and family bundles. But obviously the biggest lift resulted from dine-in service.
As of November 1, Red Robin had 379 total indoor dining rooms operating with limited capacity, representing about 89 percent of currently open corporate locations. These restaurants have maintained, on average, off-premises sales in the 35 percent range of total sales.
Here’s a breakdown:
Reopened company-owned restaurant indoor dining rooms
Period ended August 9
- Net same-store sales: –29.1 percent
- Average weekly net sales per restaurant: $38,779
- Number of comparable company-owned restaurants: 340
Period ended September 6
- Net same-store sales: –20.1 percent
- Average weekly net sales per restaurant: $41,272
- Number of comparable company-owned restaurants: 347
Period ended October 4
- Net same-store sales: –9.5 percent
- Average weekly net sales per restaurant: $43,034
- Number of comparable company-owned restaurants: 381
Period ended November 1
- Net same-store sales: –13.7 percent
- Average weekly net sales per restaurant: $42,778
- Number of comparable company-owned restaurants: 362
The reason the last block slid compared to the previous one, Red Robin said, was due to rising COVID cases resulting in new restrictions on dining-room capacity. Additionally, Halloween shifting from a Thursday to a Saturday, which brought comps down 1–2 percent.
However, there’s no question it’s a vast improvement over earlier metrics.
March-April same-store sales
- Week ending March 1: 0.9 percent
- Week ending March 8: –3.7 percent
- Week ending March 15: –26.3 percent
- Week ending March 22: –72.7 percent
- Week ending March 29: –70.5 percent
- Week ending April 5: –63.9 percent
- Week ending April 12: –65.2 percent
On the outdoor dining boost, which centers on tents, umbrellas, and all-weather tents, the effort increased capacity by about 10–15 percent range and lifted comps 4 percent, Murphy said. The company’s outdoor updates will be in 150 restaurants, or 38 percent of the system. The all-weather tents themselves are rolling out in the Northern tier of the country, like Seattle. There are also tents (not all weather) being added in the Southern belt as temperatures moderate.
“So far, the feedback actually has been very good with the all-weather tends,” Murphy said. “But it’s really in conjunction with the partitions that we’ve been adding to the stores.”
Red Robin will have those in every location before Thanksgiving. “It really gives people the opportunity to dine in, because partitions enable us to push the indoor capacity closer to the 70 percent range,” Murphy said. “But the people who do not want to dine indoors, so far, have been really pleased with the tents. Having heaters, having lights out there. We have the same service model. So knocking on wood, it’s really performing well right now.”
From an average revenue performance standpoint, Red Robin still has room to climb.
Twelve weeks ended October 4
Average weekly sales per unit
- Company owned total: $39,418
- Company owned comparable: $39,616
- Franchised units comparable: $46,964
Total operating weeks
- Company owned units: 4,998
- Franchised units: 1,237
Twelve weeks ended October 6, 2019
Average weekly sales per unit
- Company owned total: $51,221
- Company owned comparable: $52,904
- Franchised units comparable: $52,023
Total operating weeks
- Company owned units: 5,659
- Franchised units: 1,080
Red Robin recently added Donatos to 31 restaurants in the Seattle market and is in the process of bringing the menu add-on to about 120 locations in 2021. In venues with the product, comp sales growth is 600 to 700 basis points higher. It’s coming at a good time with the heightened off-premises push, Murphy said.
In late Q3, the company virtually trained teams to prepare Donatos products and placed already purchased equipment in those Pacific Northwest locations. In total, 79 Red Robins serve pizza today.
Donatos, founded in 1963, has 166 restaurants in Ohio, Indiana, Kentucky, Virginia, South Carolina, Alabama, Tennessee, Georgia, Pennsylvania, and Florida. It’s also served in 14 sports and entertainment venues.
The quick-serve opened its latest store in Sarasota, Florida, November 5 and has opened eight locations since April. Donatos was once acquired by McDonald’s Corporation in 1999 and then sold back to founder Jim Grote and his daughter, Jane Abell, in 2003.
Another example of Red Robin’s recovering business is an upcoming marketing test. Red Robin has not run a national TV campaign since Q1 of this year. On November 16, it will return with a TV flight the company views as a pilot of sorts, and a way to consider next year’s mix between digital and traditional media spend. It will focus on driving business into less-capacity periods, Monday through Friday.
In recent months, the company found success with digital, social, and messaging to its 9 million-member loyalty base. Murphy expects additional resources to funnel to digital going forward. Red Robin’s upcoming national campaign will determine how much.
G&A costs were $15.2 million in Q3, a decrease of $4 million, year-over-year. This was primarily driven by lower employee salaries and wages, benefits, and lower travel and related expenses due to cost-reduction initiatives post COVID. Selling expenses were $6.1 million, or 3 percent of total revenues, compared to $17.6 million (6 percent of total revenues) this time last year. The drop came from pivoting to local media to digital marketing from national, “which has proven to be an effective and efficient medium for interacting with our guests during the COVID-19 pandemic … as well as reduced expenses associated with our gift-card program,” Schweinfurth said.
Getting that aligned for a world after COVID could represent big savings for Red Robin.
The brand also restructured leases for roughly 50 percent of the system and said it took a $4 million loss due to restaurant closures. It spent $400,000 on COVID-related costs, including PPE and providing emergency sick pay to employees as well.