Red Robin is launching a new veggie burger.

Red Robin

Red Robin's traffic boost is giving the brand optimism heading into 2018.

Behind Off-Premise Growth, Red Robin Storms Back

The burger chain impressed in the fourth quarter.

Red Robin’s fourth-quarter performance caught executives a bit off guard—in a good way. The casual dining chain’s leaders weren’t the only surprised parties, either. Red Robin’s revenue of $342.4 million smashed the Zacks Consensus Estimate of $331 million, and company-owned same-store sales lifted 2.7 percent, year-over-year, against the prior-quarter comps decrease of 0.1 percent. This sent Red Robin shares climbing 2.3 percent in after-hours trading February 22 and up more than 3 percent early Friday to $54.75.

Red Robin’s adjusted earnings of 78 cents per share also sailed past the Zacks estimate of 55 cents by 41.8 percent, and jumped an impressive 122.9 percent, year–over-year.

“We closed 2017 stronger than we expected and are generally very pleased with trends and our team's success at controlling what we can. Even more importantly, we believe we have the fundamentals in place to carry us through 2018,” president and chief executive officer Denny Marie Post said.

This was quite a different vibe from November’s third quarter, where Guy Constant, executive vice president and chief finance officer, said Red Robin’s performance “didn’t go as well as we hoped, clearly.” It also came with the news that 566-unit chain would halt its growth after 2018.

Essentially, Red Robin hit the brakes to reevaluate what four-wall growth really should look like and to “reconsider what has traditionally worked in the past,” Post said. The chain also said shoring up operations, from labor to service to technology, was a more pertinent concern than present expansion.

Red Robin had several goals in mind to get this topic back to positive ground. It just appears some of those initiatives reaped rewards quicker than expected.

For the first time in Post’s tenure (she was appointed CEO in 2016 after working as CMO since 2011) Red Robin closed the books on a full year with positive traffic up 40 basis points, she said. That’s 300 basis points ahead of the casual dining category, as shown by TDn2K’s Black Box data. “This annual outperformance was the best in over five years and our fourth quarter marks six quarters in a row where we have outpaced competition and taken share,” she said.

Post was enthused about how Red Robin got there. Traffic outperformance is better than general outperformance, she said, since it comes amid a dining landscape that’s saturated with options across every service and price point. Comparable restaurant guest counts rose 1.9 percent in the fourth quarter versus the prior-year period and 0.4 percent for fiscal 2017, year-over-year.

Post credited this to Red Robin’s “multi-generational brand relevance and our agility to meet different guest needs while making changes to the operating model that benefit the middle of the P&L.”

As always, Red Robin measured consumer sentiment with net promoter scores. NPS scores are determined by a diner’s decision whether to recommend Red Robin to a friend or not, using a 0 to 10 scale. Red Robin takes the top two—9 and 10—eliminate 7s and 8s, and consider 6 a detractor. So the score is the 9s and 10s minus the 6 and under selections.

She said the chain is averaging over 70 with less than 7 percent detractors in 2017.

As for agility, Red Robin’s off-premise growth was significant in 2017. If you combine carry out, third-party delivery, and catering, Red Robin saw a 45 percent lift over the previous year, and recorded an 8.3 percent mix of sales in Q4 versus 5.7. Post said the brand hopes to get that mix in the low to mid-teens.

Currently, about 240 Red Robin locations, or roughly half of the corporate stores, have one or more tablets and partners in delivery, Post said. “We continue to see it as highly incremental. There seems to be a unique guest going to those sites and are open to the possibility of adding more this year. We'll see how it goes,” she said.

“Third-party delivery is huge and growing rapidly. And for the fact that it's only in about half of our locations, it's over-representing right now in terms of growth,” Post said later in the call.

The growth potential has Red Robin reevaluting what its next store iteration might look like. In November, the company unveiled a first-of-its-kind, delivery-only test concept in downtown Chicago. The test location features many of the brand’s signature items, including the Red's Tavern Double, Royal Red Robin, and Banzai burgers. Guests can also order from Red Robin’s full catering menu, which features its newly created Gourmet Burger Bar.

“We're continuing to look at ways that we can address the rising labor cost and find new ways in our existing four walls to help the guest. And so you'll hear a lot of that—that's what we consider transformation,” Post said.

“We're in the process of expanding the technology capacity in our current restaurants,” Constant added. “We're doing an upgrade to our current point-of-sale software and our food cost management system. We're putting catering software in our restaurants. We're going to put technology in the hands of our servers to improve their productivity, improve the guest experience. … Rather than building new four walls, we need to make the four walls that we've got operate much better.”

What the future holds exactly is a moving target. Post said the company knows it must improve returns “to earn the right to grow again.” And in this, the company doesn’t necessarily see traditional units as the best means to expand.

“Full service, as we have always defined it, likely won't hunt in the changing cost and operating environment ahead. We are actively exploring new ways for guests to experience Red Robin and we'll be ready to invest to capitalize on new opportunities if and when they are proven,” Post said.

Does this mean more delivery-only concepts? Something different? Post said Red Robin would share information as it developed.

In the interim, Red Robin continues to bolster its operating model, as Constant alluded to. In the past year, Post said the company’s leadership came together to reset the organization, “streamlining home office and field structure to free up resources, to fuel dedicated, transformation activities and reduce our committed expenses by over $14 million, year-over-year.” Red Robin is also planning to invest about half of its projected 2018 tax reform savings into accelerating initiatives.

One key change came with the implementation of Maestro to help cull mounting labor costs. The platform resulted in labor at 34.1 percent for Q4, down 100 basis points versus prior year, Post said.

“This is the level of executional precision and collective effort that we will need moving forward to successfully implement other service model solutions that work for our guests, our team members, and our shareholders,” she said.

On the value front, Red Robin is still pushing its $6.99 Tavern Double Menu. Fries, which are famously bottomless at the concept, moved to 14 percent menu mix by year’s end.

“We think everyday value is a place that we can win long-term,” Post said.