Red Robin CEO Paul Murphy told investors in late May he was confident about the labor shortage being “put to bed” in short order.
He also noted the situation wasn’t as dire as other brands had experienced. Three months and two national hiring days later, Red Robin has brought on roughly 1,900 team members. But the chain is still 2,000 short of its goal to elevate above 2019 staffing levels, which equates to about five team members per store. A few months ago, Murphy said Red Robin needed six workers per location. The company spent $1.6 million in incremental labor costs in the second quarter due to increased hiring adds, incremental hiring and training resources, and retention and sign-on bonuses.
Some stores reduced hours of operations, resulting in a slower sales recovery. It also didn’t help that 105 of Red Robin’s 430 corporate units were still under capacity restrictions until mid-June to early July. The chain’s same-store sales dropped 2.4 percent in the second quarter compared to Q2 2019, a period in which the brand saw comps decrease 1.5 percent.
However, there is room for optimism. Red Robin began the second quarter with same-store sales sinking 3.7 percent and exited with an increase of 2.2 percent. Roughly 150 restaurants that were able to operate at 100 percent capacity and full operating hours saw same-store sales grow 7 percent against 2019 and posted a restaurant margin of 19.5 percent, 1.8 percent better than two years ago.
Red Robin’s comps increased 66.3 percent year-over-year, fueled by a 47.7 percent lift in guest traffic and an 18.6 rise in average guest check. The growth in average guest check resulted from a 3 percent uptick in pricing, a 14.9 percent increase in menu mix, and a 0.7 percent lift from lower discounts. Dine-in sales skyrocketed 210.9 percent year-over-year.
While Murphy acknowledged Red Robin did not meet expectations in the second quarter, the data tells him that headwinds are timing-related, and not brand-related.
“Despite increased staffing and retention costs and other inflationary pressures, we remain confident that the business recovery will continue and that our diligent focus on our robust business model will deliver more than 100 basis points of enterprise margin improvement as sales reach 2019 levels,” Murphy said during the company’s Q2 earnings call.
Red Robin plans to increase pricing to help offset inflationary commodity and wage pressures, including more hiring, training, and retention costs extending beyond the second quarter. At the end of Q2, hourly wage increases were in the mid-single digits, partially offset by a favorable lift in front-of-house hours. Full pricing this year is currently expected to be between 3.5 percent and 4 percent.
As Red Robin approaches pre-pandemic sales, its transformation strategy continues, namely the ongoing integration of Donatos Pizza. In the second quarter, the brand added Donatos to 41 locations and is on track to complete 80 additional stores in the latter half of 2021. That would bring the total to roughly 200 company-owned restaurants. Red Robin expects Donatos to be in 400 corporate locations by 2023 and generate more than $60 million in annual sales and more than $25 million in profitability.
The pizza product generated 2.9 million in sales in the quarter, and helped units outperform the rest of the system by 550 basis points compared to 2019, exceeding the original goal of 250 basis points. Stores that rolled out Donatos in 2019 saw average weekly pizza sales rise 4.2 percent in Q2 versus two years ago.
Another piece of Red Robin’s overall strategy, growth in off-premises and digital, is progressing, as well. In March, Red Robin launched virtual concepts Chicken Sammy’s, The Wing Dept., and Fresh Set, and those are now live systemwide across all delivery platforms. The brands have little operational complexity and don’t require many additional SKUs, making them a seamless transition in the back of the house. The virtual restaurants contributed $5.1 million to restaurant sales in Q2, or roughly six orders per restaurant per day on average. Much of that is incremental as 70 percent of virtual brand customers have never ordered online from Red Robin before.
Off-premises mixed 32.8 percent in the second quarter, which is more than double 2019 levels—even with the removal of dining restrictions. Of those off-premises sales, 85.3 percent came through digital channels. Third-party delivery mixed 49.3 percent, while takeout accounted for 42.7 percent and catering represented 4 percent.
After adding enhanced segmentation and personalized targeting in Q4 2020, Red Robin’s loyalty program has continued to bring back lapsed guests and increase frequency of core customers above 2019 levels. The program now includes 9.9 million members, up from 9.7 million in the first quarter. To position itself for strong profitability over the long-term, Red Robin shifted from broad discounting initiatives to targeted loyalty program offers. The brand is also in the process of integrating loyalty with its upcoming app and improved website to create a more user-friendly and efficient online ordering platform.
To maintain the stickiness of off-premises, Red Robin plans to increase space inside restaurants for takeout, delivery, and catering orders without impacting the dine-in business. Murphy said the brand is on track to complete these reconfigurations in 2022.
“The strategic initiatives we are executing are meaningfully impacting our brand by enabling us to earn and perpetuate our guest trust,” Murphy said. “And in doing so, foster loyalty and frequency for the benefit of our shareholders.”
Red Robin finished Q2 with 531 restaurants systemwide, including 430 company-run units and 101 franchises. That’s down from 552 total locations in the year-ago period. The chain earned revenue of $272.2 million in the second quarter, compared to $302.4 million in 2019. Restaurant level operating profit as a percentage of restaurant revenue was 15.7 percent, versus 18.2 percent two years ago.