When sales and traffic turned negative for Red Robin in the fourth quarter of 2015, the casual dining chain looked to its most loyal guests for answers. Research within its Red Robin Royalty base showed four major concerns: Speed and quality of service; value perception; ineffective advertising; and, lastly, the absence of carryout and delivery.
Since then, by understanding “what holes not to step into again,” CEO Denny Marie Post and Red Robin have swung the 558-unit chain back into positive territory. For the first time in more than a year, comparable same-store sales reported green in the second quarter, as numbers grew 0.5 percent coupled with a 1 percent increase in traffic. This places Red Robin 460 basis points above its casual dining peers, Post said in a conference call Tuesday afternoon.
“I feel like we've done our due diligence around what was dragging us down,” Post said. “We've made significant progress on all those points.”
Shares of Red Robin surged more than 2 percent in after-hours trading following the news, which surpassed Wall Street expectations for the second straight quarter. They climbed 10 percent Wednesday morning. Red Robin’s adjusted earnings per share of 61 cents topped the Zacks Consensus Estimate of 51 cents by a healthy 19.6 percent. Revenues increased 3.3 percent year-over-year to $315.8 million, beating Zacks’ predications of $315 million by 0.3 percent. Restaurant revenues rose 3.4 percent in the quarter versus the prior year quarter to about $312.4 million thanks to new restaurant openings and improved comps.
Shares jumped more than 15 percent in May after Red Robin’s first-quarter review, which reported same-store sales declines of 1.2 percent and improved guidance.
Post said Tuesday’s results showed consumer sentiment is steadily improving. The brand’s net promoter scores—a metric that measures customer satisfaction—have risen to a “consistent 70 or better, in large part by reducing those vocal detractors to 7 percent or less,” Post said. 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.
However, the news was not entirely rosy for Red Robin. Rising labor and food costs resulted in a loss of profit. The chain reported net income of $6.9 million compared to $7.6 million year-over-year. The adjusted earnings per share of 61 cents was also down from 75 cents.
“ … the top-line and traffic growth momentum is still not enough with labor cost rising 6 percent or more,” she said. “We must control what we can control, and our priority for margin improvement is on rethinking how we invest in labor.”
Post said Red Robin implemented six labor pilots in the first quarter. Three were quickly eliminated and the others are still be optimized. One, dubbed “Maestro” by the team, is being deployed nationally in the coming months. It eliminates the expeditor role on the line in favor of supervision by a manger. Locations piloting the program have seen improved guest scores on hot food, speed of service, and server knowledge, Post said.
Red Robin also has plans to shift to-go accountability from the bar area to the designated podium by the host stand, which will free up the bartender to seat tables. Post expects this to be rolled out by November and both initiatives to reduce total labor by about 12 hours daily. More models are being tested as well but Red Robin wouldn’t elaborate for now.
The chain won’t, however, “price ourselves to prosperity,” Post said.
“The guests will not bear the rising cost of labor with menu price increases,” she added.
Value perception has been a key driver for Red Robin’s revival. The expanded Tavern menu now features eight items, including six burgers, starting at $6.99. This is a shift from Red Robin’s previous emphasis on its more expensive Finest premium burger line.
The gap in check has been worth the increased visits and customer response, Post said.
Red Robin’s marketing efforts were bolstered by the Let’s Burger campaign, which Post said “appeals to a broader spectrum of guests than our past campaigns.”
Red Robin invested incrementally in select local markets to complement national media, using TV, radio, and print advertising.
The off-premise conversation has played a sizable role. Red Robin’s off-premise mix moved from 5.2 to 7 percent year-over-year, including a 70 basis point uptick from the first quarter. Online ordering, which has spread nationally, now represents about 20 percent of off-premise sales, Post said. Third-party delivery accounts for nearly 10 percent of total off-premise traffic despite being at only 118 locations. Red Robin announced it is expanding the service to 198 restaurants.
Curbside service and call center support is debuting where possible as well. By early quarter four, Post said all corporate stores will feature the call center and have designated in-store pickup areas, and roughly two-thirds of all locations will feature curbside.
Red Robin expects to open about 17 stores and close nine in the year.