Red Robin Gourmet Burgers' Management Presents at 2013 Consumer & Retail Conference (Transcript)

| About: Red Robin (RRGB)

Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB)

March 13, 2013 1:30 pm ET

Executives

Stuart B. Brown - Chief Financial Officer and Senior Vice President

Ted Watson

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

I'm Bank of America Merrill Lynch's restaurant analyst. I'm very pleased to have Red Robin present as the next part of our restaurant sleeve of the consumer conference.

Representing the company today are Ted Watson, Vice President of Finance; and Stuart Brown, Chief Financial Officer.

Stuart, I'm going to turn it over to you.

Stuart B. Brown

Thank you, Joe, and thank you, everybody, for joining us today.

How many people have been to Red Robin before? If you could just raise your hands. Great, if you sort of look at the title slide, I mean, one of the things we're trying to show people is, we think about Red Robin really as a classic American brand. And we think about Red Robin having been around for 40 years, continuing to build, really specializing and known for gourmet burgers, that's something we continue to lean into and continues to be a differentiator for Red Robin.

As Joe mentioned, Ted Watson is up here. He will join me for Q&A. Our obligatory forward-looking statements, I'll refer you to our 10-K for our risk factors, as well as overview of all of our forward-looking statements, if you'd like to read those upclose and personal.

And clearly, if you look at just a quick overview of Red Robin and our leadership position, again, specializing in gourmet burgers, really what we're known for, differentiated for, but a broad enough menu to where any family, person who wants to come in, there's flexibility in what they want to get, between salads and chicken. And we were founded over 40 years ago in Seattle, so the company has been historically a really strong base in the Pacific Northwest, in California, has built out over those 40 years in the East Coast. And we'll talk about the real estate strategy a little bit. The one thing I think that differentiates us in our real estate strategy is we build out probably slower in markets than some of our peers do, as we really focus on the prime locations and not just coming in and growing market share by taking any locations available.

Been recognized by guests as well as Zagat for our craveable burgers. As we do market research and things like that, we're differentiated from a lot of the other casual dining chains, which is, as you may know, there's -- a lot of us see a sameness if you look at sort of who our competitive set is.

We're family-focused, really own segment families with kids, but what most people forget is 60% of our parties are adults only. And so we're really making sure that we got a balanced appeal towards families where we do a great job; adults, where we have been working on the areas like the bar and making it a more adult-friendly environment and continuing to make progress on that front.

And if you look at sort of significant improvement and profitability, it's the track record the company has had over the last few years on taking costs out of the middle of the P&L. This was an initiative we sometimes refer to as blueprint to take expense out. But also initiatives that we've been testing and rolling out to drive guest engagement and sales in the top line.

What is the Red Robin difference? What does differentiate us from the rest of the peer group? And over the last few quarters, certainly, on a traffic standpoint, it has helped us separate from the rest of the pack. A few different things: again, known for gourmet burgers and brews, and in an environment that people are looking for something different and unique. And so we've been rolling out unique burgers, unique beverages and things like that, that make Red Robin a special, fun place. When you walk into Red Robin, one of the biggest complaints that we get from guests and feedback is it's noisy. It's one of the things that we understand when it's you and your family making it, it's good noise and if it's somebody else's family it's bad noise. And so as we think about how we seat guests and things like that, being much more thoughtful about sorting at the door as, okay, you're an adult-only party so let's steer that towards the bar or other areas and not make sure sure that, okay, Stuart Brown and his wife are coming in for a relaxing burger. I don't necessarily want to sit next to a 12-year old soccer team. And so getting much more thoughtful about how we separate the guests within the restaurant and that's sort of part of the brand transformation that eventually I will talk about.

Red Robin Royalty program, we rolled out about 2 years ago, clearly, a differentiator in casual dining. We've learned a lot from other retail concepts that are out there, right. The supermarkets have had their loyalty cards and have been using those heavily for over 10 years. And that's clearly been a differentiator for us. Again with 75% of the chain company-owned, we've been able to roll that out to all of the company-owned units and a majority of the franchise units already. And we'll have it in almost all our franchised units by the end of this year. It lets us engage in our guests in a very different way than another casual diners do, and really leverage that strong brand recognition that we have, along with social media and guest interaction with everything from discounts to sneak peaks and differentiating how we communicate with our guests.

From a real estate standpoint, compelling demographics. Our average household income of our guest is $72,000 and it's really been focused on regional shopping malls and power centers and movie theaters. So we're not trying to necessarily always be the destination, but we want to be convenient to where our guests are. And so that will be a mix of a strong daytime population. We do about 50% of our business at lunch, as well as in a strong dinner population.

In new unit performance, we've talked about our -- all the units we've opened in 2010 and '11 and '12, on average cash-on-cash returns are almost 35% so putting capital to work in new units is continuing to work for us.

Q4 highlights, it's hard to imagine it's the beginning of March and this is almost old news already. Comp traffic, comp sales in the first quarter up 1.4%. Comp traffic up 0.3%, which doesn't sound like an outstanding number, but if you compare it to what's going on in the rest of the industry, comp traffic was 390 basis points above the casual dining peer group.

And if you think back of what that was during the second quarter, we outperformed the peer group by 90 basis points. In the third quarter, we outperformed the casual dining sector by over 250 basis points. And so that outperformance continued to improve from second to third to the fourth quarter. And what caused that? Well, you question a lot, what's causing us to really differentiate ourselves now from the peer group on the traffic standpoint? A couple of things, we rolled out our Tavern Double platform. Tavern Double for us is an everyday value item we added to our menu and it's sort of a traditional double patty burger and it's $6.99 with bottomless fries or bottomless broccoli, if somebody wants broccoli instead of fries, and other bottomless sides. It's really a great value perception because the sides are bottomless, so you get as much as you want. And it's $6.99, I feel like I can come in and get what I want. But then to protect profitability and margin, what we've done is we've created sort of a style platform above it, so you can style that up with ghost pepper or a -- one that's got the bacon and bacon aioli. And so there's premium toppings that you can add to the Tavern Double for just $1 more. And so for just $1 more -- so it lets our guests manage their way through the check themselves, so if they feel like, "Hey, it's a certain time of the month and I don't feel like I can afford a premium burger. I just want to come in and get something smaller today, or it's late night. Or I want something smaller for lunch." The Tavern Double is one of our biggest barriers to repeat guest visits. And so when we rolled that out we've continued to see that as one layer, as well as then using our loyalty program very effectively to keep our relationships with our guests on an ongoing basis. But then do targeted promotions during certain times of the year, like during the Olympics, we did a special promotion around lunch. Again, we don't have to offer it to all of our guests, so we don't have to do some broad-based couponing and put a $5-off coupon at lunch in the Sunday insert to drive traffic. We can do a very targeted, either certain markets or certain day parts or certain days of the week, to our loyal guests and drive traffic that way and reward them for being loyal guests.

Restaurant level operating profit up 70 basis points to 20.6% Q4 '12 to Q4 '11. If you go back over 2 years, Q4 2010, up from 17%, so 260-basis-point increase in operating margins over 2 years. Going back to the effectiveness of project blueprint and taking expense out of the middle of P&L, as well as driving the top line.

And earnings per share in the fourth quarter, $0.59 versus $0.28 was helped by the extra week. If you strip out the $0.21 from the extra week and the EPS in the fourth quarter was up 36%, even excluding the extra week that we had in the fourth quarter.

Red Robin roadmap. We've got lot of initiatives going on at Red Robin on a number of different fronts. And as we try to sit down and think about how do we communicate that to investors as to what we're working on and how we're prioritizing, we've come up to what we've basically said, there's 3 different pieces of it. The first piece is really guest engagement and guest relationship. And I'll differentiate that from just sales, for a second. If you wanted us to drive sales, we could drive sales through couponing and discounts and things like that. It may not be profitable sales but if I just wanted to drive sales, I could do that. But what we want to do is drive guest engagement. We'll talk about that and go through some examples. But it has to do with utilizing the Red Robin Royalty program, enhancing the presentation of our food, enhancing the service environment that the guests have in terms of the way that our team members interact with them. There's some training we're doing around that. So the guest engagement, I'll go into that in a little bit of detail. The other piece we'll talk about is operating efficiency. So what's going on that doesn't touch the guest, and how do we improve our business there to leverage our scale? Take more than a squeezed cost out of the business and some of this cost savings that we get we'll reinvest that back into the guest engagement, and that includes a technology infrastructure. So we've just replaced our financial systems that were 20 years old. We went live on our new financial systems in January. We got some supply chain systems, labor management system. We've done some kitchen equipment changes. Further out on the horizon is table management, and we've got some other things going on in the operating efficiency side, either in test or in concept or in rollout that will roll out over the next few years. And the last piece is the footprint expansion. When you think back about -- we're getting the best returns from new units, we want to keep putting capital back into the growing sales, either within the 4 walls of our existing footprint and also then expanding that footprint as well. So that's continuing to expand new restaurants. We've been testing a mid-sized prototype. I'll talk about that a little bit more, Burger Works. And then also our next-generation prototype, because our current generation of Red Robin design and build is over 10 years old, so it's time to sort of freshen that up a little bit as well. So I'll talk about this in a little bit more.

And if you think about it just from a timing perspective, we're not doing all of these things over the next 12 months. We want to be sure that we're not trying to do 5 years of change in 18 months and then we end up, from a system standpoint or guest standpoint, that we lose touch with what's going on. So we're trying to be very, very thoughtful, planful, disciplined about things that are critical and there's other things that may be critical where we actually want to be very nimble and roll out very quickly. And so things that you need to roll out very quickly, if there's some great new flavor profile or something really neat that you can do from a marketing standpoint. Like Colin Kaepernick from the San Francisco Giants, when he comes down to the New York Daily News, that his favorite restaurant is Red Robin, we can move very quickly. We put an ad in the San Francisco Chronicle within 3 days saying "Hey, Colin. If you win we'll give everybody in San Francisco a Tavern Double for half off". This then creates other social media buzz from the Ravens going "Hey, why don't we get that for our fans". So we can be very, very nimble and react very quickly to changes in the marketplace when we need to. And other things, about a new IT system for all of our restaurants, we're going to test it and go live in 2 restaurants out of the 335 and be sure that works and test that out for 2 or 3 months until we know that's working before we roll that out. So we can operate at different paces. So we've got initiatives that are going to go out to 2013, '14 and '15 and beyond.

On guest engagement we've been talking to guys about brand transformation, so brand transformation is more than just a remodel program. It includes a remodel program but also service changes within the restaurant. We've got some of our team members that actually need to reinterview for their jobs, so we'll go back and revalidate that we've got the right bartenders behind the bar, that we've got the right host at the hostess stand and so that brand transformation was tested in 21 restaurants. We tested started it in the fourth quarter. We will read that out for the next 6 months and going back to be very thoughtful, so from a financial standpoint looking at everything from sales and gross margin, labor impact, supplies impact. And then from a guest standpoint, we've been doing guest dine-alongs, we've been doing guest surveys, feedback to understand before we roll this out any further, what's working, where are we getting the most value, what's not working. And we feel like the first time we've sort of gotten this out there, you're going to typically get 65% to 75% of it right and then you go back and fix it for brand transformation 2.0. So we're in that evaluation phase right now. We expect sort of early summer, midsummer to sort of have that finalized, figure out what the next version of that is and we'll be rolling out in some brand transformation. We don't have any in our guidance for this year, but we expect to hopefully get sort of 10% to 20% of brand transformation 2.0 tested later this year. If that's successful, then we'll be able to roll that out over the next few years.

Elevating service, the spiral menu which you sort of see in the picture in the center, in the new plating and presentation, we'll be moving away from the red basket and the wrapped burger to really highlight the quality of the food and the way we present it. And also the menu going away from sort of a trifold plastic menu to more of a spiral, little bit more directionally towards a polished casual, but the same menu items. And also, the same menu items and the same pricing. And so from a guest standpoint, hey, I feel like I'm getting more value here. We'll be able to picture items much better in a spiral menu than we can picture them on a trifold. And so from a value perception standpoint, is really what the plating and presentation is about. We've seen other chains do this very, very successfully. We've been testing this in about 35 restaurants total up until now and this is something that we anticipate rolling out by the end of the year.

Exploring premium segments, this is something that we'll actually probably be a little bit more thoughtful and testful about. This is really then positioning a lot of our menu. We've got the -- if you think about it more from a barbell strategy perspective, we've got the Tavern Double on the value end. The premium end, what we've learned from concept testing with our guests, is the guests will allow us and we've got permission to go to a $14, $15 Black Angus or Kobe or really high-end burger with special toppings and special buns. We've been doing some concept testing around that. We're starting to do some product testing internally now. Then we'll go through and do sensory testing and probably test this on a regional basis before we roll anything out. That's in process.

What that really does is it helps position the middle of the menu very, very well. Royalty Red Robin. Royalty, we've talked about and team member foundations is a whole new training program that we've rolled out for all of our team members across the country. It's a fully iPad-based system and when you think about the majority of our team members is 25 to 35, they want something that's more interactive. They don't want to pick up a manual and read it any more. This is a sort of a very interactive training program that as we hire people, either for a bartender position, waitstaff, busser, kitchen, we've got a whole new training platform that we just rolled out. And that's under guest engagement because that has to do with how we treat our guests, how we continue to sort of elevate that experience. So when a family comes in with small kids, how do we want you to treat those -- treat the children, interact with the children to make them feel special. But if it is an adult-only party that you interact with them differently. If they're in a hurry because they've got 30 minutes to make a movie versus no, I'm really here to have an appetizer and a drink and watch a baseball game.

Operating efficiency. And on the operating efficiency standpoint, again, we've had a great track record on this on project blueprint. This is the supply chain management, which is sort of a procure-to-pay system that we're rolling out in the restaurants during this year. Again, we'll be piloting -- going live in 2 restaurants here in the first quarter. But the easiest example on this is labor management. Our current labor management system is really a labor scheduling system, homegrown, 15 years old. To call it a labor management system is an insult to real labor management systems. So we've selected the software provider. We have done the labor engineering standards, the time and motion studies so we know how long it should take to do everything from making a milkshake to build every build of our hamburgers. And so we've done the time and motion studies and have been testing that. We're in the process now of launching and sort of building what we call sort of labor engine and the manager tools. And the real goal of this at the end of the day is right people, right place, right time. Because we know while some of our general managers do a great job with scheduling and know exactly what time people should be on and when they should be rolling off, and can manage it really well, we have others who may overstaff during the week, so to make my productivity number for the week I'd better -- I'm going to cut back on labor during the weekend when I'm not busiest. And so this will really help provide them the tools to do the scheduling better upfront. And then during the day, as things are going on, they'll have, live using their smartphone, as to here is where my sales are, here's how many people are in the restaurant, I can start letting people go at this time. So we'll be able to schedule in 15 minute increments. And what we'll do is, we'll have a centralized labor engineer to help do it, and then each general manager locally can then come up with a localized customized solution for them so if there's a little league tournament going on, they can make their tweets to it locally or if there's a sporting event or an entertainment event, they'll be able to tailor that labor schedule to them and then we'll be able to come back later on to say how good was their tailoring? Did they tailor effectively or not effectively and then go back and sort of make corrections in training and things like that around that. At the end of the day -- and then on the team members side, again, knowing that the generation of members that we have -- today if somebody can't make their schedule they've got to come in and see their schedule on the wall, wait that day doesn't work for me. The general manager has to go, "Okay, wait. Who else can come do it? Let me call around to see what other team members can take their schedule." Going forward, we'll be able to say, online be able to go look and see online what their schedule is and say, "No, Stuart Brown, I can't work Friday from 5 to 7." You sort of reject that shift and the system will automatically suggest, based on a server scorecard that we've already built, who else can take that shift. And it will reach out to those 2 or 3 people who else wants to take it. So that then frees up the general manager time, so the general manager can be taking care of guests versus calling on the phone to see who can take the shifts. And we think it will help increase the team member satisfaction as well. So a couple of examples of things we've got in the pipeline. Labor management, we expect to be rolled out by the end of the year and then really be fully solidified next year.

Footprint expansion, again, new restaurants. And we opened 12 new restaurants in 2012, including 4 Burger Works. 2013, we expect to grow that to 20 new restaurants. Again, we're getting great returns. We've been building our cadre of general managers and restaurant managers capable of taking new restaurants over. We'll be building those and filling in, in existing markets, still some in the Pacific Northwest; in Baltimore, Maryland, in the Baltimore market where we've got some great sites lined up, as well as in new markets. So in all of Florida, we've just opened up within the last 2 months, our first restaurant in the Orlando market. Red Robin, with a family -- strong family brand, you think Orlando would be great for us. We got our first restaurant opened there. We got 11 in the entire state. We're underpenetrated in New York and New Jersey. Texas, we've got about 14 franchise restaurants in all of Texas. We're going to move and build some corporate restaurants in Texas as well.

And on top of that, then to fill in, in central business districts, nontraditional locations with Burger Works. So we think we've got a long, long road with Burger Works. Where are we going to develop again? We've had the same real estate strategy of focus on high-end sort of high traffic shopping malls and power centers for well over a decade and it's worked for us very very well. Trade area population, over 72,000. And again, from a branding perspective, balance sheet perspective, we are a preferred tenant for landlords. So if you think about who we partner up with for a lot of these locations, the Simon properties, General Growth, Westfield, Telvent [ph] all the top name brands. If there's another retailer or restaurant company whose not doing as well and their lease is up, we are a preferred tenant for them. And that's worked for us and we work very hard to keep those relationships very strong. The reimage program is important from a development standpoint because as we think about what the next-generation Red Robin looks like, it's really being informed by the brand transformation initiative. So we'll be testing that later this year with our first new prototype that we've had in over 10 years. That will be -- the first one of those will be in Texas and we'll try to get a second one of those open this year as well. And then Burger Works again for urban and fill-in locations.

Burger Works is very consistent from a branding perspective with Red Robin. We've taken the best things off the Red Robin menu. We have decoupled burgers with fries, so you order those separately so that guests can manage their own check. But great burgers, you can also build your own, so from a customization standpoint -- and it is a different occasion. It's a different type of location, central business districts, airports, sort of nontraditional. It's going to be more skewed towards lunch. Speed is obviously much more important. While at Red Robin we've always focused on the gift of time with our guests, here, ticket times and getting the efficiency at those peak hours because you're going to do 70% of your sales in, call it, a 15-hour time frame during the week. So you have to be sure you get a very efficient cooking platform and model to be able to do that.

The culture and service will be very consistent with Red Robin, a higher touch than what you get at some other fast casual, and a contemporary atmosphere. We're really, then, leveraging the brand, products and supply chain. So we've gotten 5 of those opened up last year. We said we're going to take a little bit of an optimization phase right now. We've done that. We've changed a little bit of the kitchen equipment out. We've made some additions to our menu as well as some deletions from our menu before we then sort of put the foot on the gas to sort of open up the next-generation or the next set of Burger Works restaurants. We expect to open up to 5 of those this year.

Really quickly, from a cash flow generation standpoint, if you look at over the last few years, a couple of years we've generated almost $95 million in operating cash flow. Maintenance CapEx is average $11 million or $12 million. For 2013, we expect the maintenance capital to be around $15 million, that does include upgrading audio visual in about 75 restaurants. And so if you look at the cash flow that's remaining, how are we putting that to work from a capital structure? Again, expanding the footprint, opening up the 20 new restaurants. If we get the brand transformation, maybe 10 to 20 units on brand transformation. Technology infrastructures, we're continuing to invest in getting business intelligence. We'll continue to do that for the next couple of years. And then any excess cash flow, we've -- last year we've been buying back stock opportunistically and paying down debt a little bit.

Again, why Red Robin? Again clearly differentiated, it is, we believe an American classic and we want to keep sort of elevating that differentiation from the rest of the peer group. We've had a strong track record in terms of creating value for guests, shareholders and team members. It is something we believe is a big differentiator for us. There is clearly a strong growth opportunity just in the current Red Robin, traditional Red Robin along with the midsize we've been testing in, Burger Works. We've got a strong balance sheet, cash flow generation. The beverage picture I haven't -- we're getting some questions as to the alcohol mix and things like that, continuing to emphasize that. Red Robin's alcohol mix back at the peak was 13%, 14%. Over the years, it dropped down to a little over 6% alcohol mix. We're back up to mid-7% in terms of mix, and we've got a number of new things. That's actually a picture of some new glassware we'll be rolling out this summer with the new plating and presentation, along with some new beverages. There's always something new and fresh at Red Robin when our guests come in and with that, I'll turn it over and we'll take some questions.

Question-and-Answer Session

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay, we encourage -- am I on? Can you hear me okay? Okay. We encourage questions from the audience. I'm going to kick off with a couple of questions and please just wait till the microphone reaches you to ask your question. So Stuart, I'd like to talk a little bit more about the brand transformation and the 21 restaurants that you're testing, if I understand correctly, sort of different elements that might meet that brand transformation within those restaurants. And I guess I'm sort of curious the ultimate goal here, what will sort of determine what elements of that you'll keep and try to apply?

Stuart B. Brown

I think typically when you think about sort of a brand transformation or reimaging project, it's really -- a lot of it is around the interior, the 4 walls and the decor package. To some degree, it sort of starts around that. Our current decor package again is over 10 years old. It probably skews a little bit too sort of kid friendly from family friendly and so we'll tone down some of the kids' cues without isolating the guest. So we're not taking balloons away, which is sort of the key part of what attracts kids to our restaurants. But we're going to put balloons now in a balloon corral so they're still sort of there but they're not in your face when you walk into the restaurant and if you don't want to see those things. And we also want to be sure that we're creating sort of different customized environments within the restaurant, because the same user can come into the restaurant on different occasions and want to have a different experience. So when I come in with my 7-year-old daughter and she wants to hear the birthday song and all of her friends are there, you want to be able to have that type of environment. We do a great job with families. W we do great job with big groups and we score really well on that, so we want to be sure we're keeping that. At the same time, there's times when we've gotten -- my wife and I have a babysitter and we do -- we just want to go have a beer, have a burger and watch the game in the background. So the same person but a different environment, a different experience I want have. And so, while not having sort of distinct environments so much within the restaurants, we've got sort of a family dining section where the servers and the menus and you'll see more highchairs and kids menus in that section. It's not so isolated that it feels like, wait a minute, I'm in a different restaurant than the bar or sort of the area, the flex area, that we're sort of calling the gathering area, which is carpeted, a little bit more quiet. But by making it a little bit more like a theater to where you can sort of change the environment during different times of the day and night, what we've been experimenting with is we've got sliding glass panels. So if there is a big party or a lot of noise, you can close it off so there's less noise. We're using louvres and things like that so that we can change the environment during -- depending on what's going on in the restaurant, the time of day and those are the types of things we're experimenting with. It's part of the brand transformation. Again, there's not going to be a one-size-fits-all. So we've been experimenting with sort of an interior and exterior remodel which is about $400,000, all the way down to a bar only to see what type of financial impact that would have. And then together with the environment, we're are also changing some things around the server sequence. So today, we take orders and when we bring you your food, we basically sort of auction the food off. Who had the Royal burger? Who has the cod? And we sort of auction it off that way. So we're going to go to a formal pivot seating to where we know exactly who has what and we'll be able to place the food down. And so that again is sort of a little bit higher service touch to our guests and it actually will cut down a little bit on the noise. We're trying to keep a lot of the great elements that work and make us who we are today, with just making a little bit more -- towards polished, is what I'll say. We want to keep it fun. We want to continue to be irreverent and those are the things that differentiate us.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Are the 21 test restaurants -- could they be categorized into 3 or 4 different buckets or is it really 21 different themes being tested?

Stuart B. Brown

No, it's 3 buckets. It's basically a full transformation, which is interior and exterior; a bar only; and then sort of a bar-plus, which has got some tests in between. So again it's -- the least expensive one is sort of $150,000 bar remodel. We are testing in different types of markets as well, so it is Northern California, Northern Colorado, Ohio and Maryland, so we can understand is there any geographic differences and things like that as well. And it's going to take us 6 months to read it out. We can learn pretty quickly what happens from a sales perspective, from a mix perspective, because we're also testing our new spiral menu. But what takes longer is to make sure from a -- what's a honeymoon period, right. If you looked at what happens when you -- right when you remodel, you may them feel really, really good. We want to be sure the sales are sustainable, the team members like it because if the team members don't like the changes, they are going to feel differently when they interact with our guests. And it's really, at the end of the day, about guest frequency. And so in casual dining, it takes a little while longer to really measure guest frequency, how often they're coming in. But between card credit data and loyalty data, we can measure that very, very closely.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

We have one here.

Unknown Analyst

Can you just talk about -- you have a lot of exposure to beef costs given the hamburger concept. Can you talk about I guess longer term, the next few years, what your outlook is and how are you going to mitigate those costs?

Stuart B. Brown

Ted, do you want to touch on that?

Ted Watson

Yes. I mean, we gave a guidance, the original guidance at the beginning of the year of 5% inflation. We've since dropped that down to 4%, primarily being beef coming in a little lower the first couple of months of the year. Having said that, we still expect beef to increase 8% to 10% for the year. When you talk further out, it's hard for us to hedge beef given that we're fresh. It's just -- the yield curve is inverted so it just doesn't make sense financially to hedge out. So I think you're more, then, in the herd cycle and the cattle cycle looking out 2 to 3 years if the herd's rebuilt where you're really going to get some relief there.

Stuart B. Brown

Keep in mind that ground beef is about 14% of our COGs too, sort of overall picture.

Unknown Analyst

And I guess one more. On the goals to get the alcohol mix higher, what are you guys -- what are the specific sort of plans there and how much do you think you can recover back to the 13%, 14%?

Stuart B. Brown

I think if you look at some of our best-in-class peers on this and you think about sort of the Texas Roadhouse or some other chains that do very well with families, but also have a better alcohol mix. Certainly, burgers and beers are a great combination, right. So we're not going to try to lean real heavily into wine. We want to have good quality sort of wine selection for people who want it. But we do a great job today, starting off actually with non-on alcoholic beverages. Our Freckled Lemonade program that we have today is -- we've had very, very strong penetration on. And it is very much also on the drink side and innovation within casual dining because most people just sort of have straight iced tea. The sort of flavored iced teas we've been doing for a long time and we're going to keep building on that. And from a profit and mix standpoint, actually I'd rather sell a Freckled Lemonade than a beer. But then on the beer side, we continue to do some of the things that we have done already is, a, we've brought back drinks and dessert menus that had gone away, so that's been back in the restaurants for about 1.5 years, I guess. We've stopped seating children in the bars. We've create more of an adult space in the bar. We're leaning more heavily into craft beers and regional craft beers, going back to something that we're behind on, quite frankly, versus some of the other people. And I don't think that's -- we're not doing anything groundbreaking, but we think that will continue to differentiate us. We're working on a couple of new drink platforms. And if you think about things that we've done like the beer shakes that we rolled out late last year, we may not sell a lot of beer shakes, but the amount of publicity, taste tests going on, on radio drive shows. CNBC did a live taste test of our Samuel Adams beer shake last year. We were on the morning shows on the trending item. So creating some unique sort of buzz items out there that, hey, let me go in and try that, and they're great products. So with the Sam Adams beer shake, we saw not just the sale of these beer shakes sort of when we launched it, but the sale of Sam Adams beer also got a halo so we sold more Sam Adams beer. So if you look at the sales growth numbers that we've had last year and the share that we've taken, we've actually -- we've taken it on food and beverage, we've actually taken more on beverage. So in the industry overall where beverage sales have been declining, we've been outpacing significantly.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Stuart, can you talk about the technology infrastructure? And you -- I'm considering the labor management is part of that. I think that's probably correct. Are there -- that seems like a margin opportunity for you when that's fully implemented. Are there other margin opportunities or efficiency opportunities around the new technology infrastructure?

Stuart B. Brown

Yes. I think we'll learn over time. I mean, with some of these things the supply chain infrastructure today, when you think about how manual we are, is an opportunity just to improve the time that our general managers are interacting in the store, and where they're spending time in the back office doing work, either ordering or making prep schedules or doing labor schedules versus being out interacting with the guests. So our primary is to improve guest experience. That said, we will clearly learn some of things about waste. So we inventory all of our restaurants every week now. So we know from a week to week basis, we manage COGS overall very well. But if there's unique items at restaurants -- so going back to the wine example, there's white zinfandel that we've got in our restaurants that don't sell very well. The individual general managers will know pretty well. Wait a minute, I know every week I'm throwing out 4/5 of a bottle of wine because one person is ordering white zinfandel. We can't aggregate that data today. So I can't go across the whole chain and easily see on an item basis what my waste is. Our new system will let us -- we'll be scanning waste even going forward, so we'll get some improvements out of it. But we're being fairly modest I think in our expectations to that. Right now, it's really about guest experience, labor management the same way.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Over here.

Unknown Analyst

You're entering the third year of the loyalty program, so I was just wondering if you could share some of your learnings from it and what you've learned about your heaviest users? Are you still adding also to the program as well and has there been check as well as traffic benefits to it?

Stuart B. Brown

Yes it's -- a, I'll give you enough to make you feel good but not enough that our competitors can learn. And what we're learning is, is that our most frequent guests really want to have a different -- we have -- there are raving Red Robin fans out there. And the way that they want to be interacted with from a social media standpoint, from a product standpoint, they don't necessarily just want a $3-off coupon at lunch. That may make them feel better, but not near as much as a, okay, this summer we're going to be rolling out this great new premium LTO. But to send out a message to them saying, look, be the first one to come in and try this, and help us test it out and let us know what you think, those types of ways to, again, building the relationships with our guest where they're helping us improve it. We did something really unique in December and January which was "Bring My Burger Back" campaign all through social media, which is, hey, all you Red Robin raving fans out there, tell us what the greatest burgers were of the past and we'll bring them back for you. So we brought back the Chili Chili Cheeseburger. We got another one potentially lined up later this year from that campaign. Because they want to have a voice, they want to say, wait a minute, we want to interact with the brand. And this is where we really outpunch our weight class from a brand recognition standpoint, social media standpoint. We do much more and much greater recognition than you'd expect from a company our size. On the low-frequency guest, if you get a lapsed user, which we all get lapsed users -- somebody moves away or whatever else. There, we can use a coupon so after 120 days, let's see if we can get them to come back in. Or if you get a guest who comes in and says, "Hey, I only want to come in during dinner." Can't we change that behavior and get him to come in to make one extra visit and get him to come in during lunch by giving him some special offer during lunch. The other thing we've got going on right now is something we call Savor the Dates. This is a little bit fun where you come in, I think it's 9 different dates throughout the first quarter and if you come in on Elvis Presley's birthday and get a Burnin' Love Burger, you get badge. And if you get, I think it's 7 badges, at the end of that you'll get a $30-off coupon. And if you get 2 badges or 4 badges, you get different discounts. We don't expect people to come in 7 out of 9 of those days, but it's a fun way to interact with some -- we know that some people will try to get 7 badges and won't get there, right? So in terms of what the cost and the financial benefit is, it's a way for us to build that relationship with guests and do some sort of fun things that nobody else can do out there.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

As the case, anybody struggling with what to do on Elvis' birthday?

Stuart B. Brown

Yes, exactly.

Unknown Analyst

If I compare your total CapEx in 2012 to the maintenance CapEx figure you showed earlier, I calculate a delta of almost $50 million. And I think you only rolled out 14 growth stores last year -- I'm sorry, on a gross basis, you rolled out 14 stores. So I'm just wondering what the components are of your growth CapEx, what else fits in there?

Stuart B. Brown

So last year, the other big items where we spent money was the brand transformation, the testing of the 21 restaurants, as well as in the technology infrastructure. So we got about $10 million of capital last year just on the technology infrastructure. And brand transformation last year was also...

Ted Watson

$5 million, $4 million to $5 million.

Stuart B. Brown

Was $4 million to $5 million. And then we had another $2 million I think on audiovisual upgrades in our restaurants.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

I had an email question before the presentation today asking me to ask about Burger Works and...

Stuart B. Brown

Which competitor was that?

Joseph T. Buckley - BofA Merrill Lynch, Research Division

An investor. So I wanted to -- have you discussed unit economics and the specific question was about the middle of the income statement for Burger Works. Don't ask me to elaborate. That was kind of the question and I think it was based on maybe some things that you might have said in conferences or ITR or something.

Stuart B. Brown

I think people have a little bit of the impression, "Well, wait a minute, you've taken a pause here. Is there something not working at Burger Works here a little bit." And really what we want to be sure of is -- we don't feel like there's a burning platform that we need to go, rush forward with this. Because what you've learned when you've got -- I think about this like pharmaceutical research and development. We're putting something in the ground, doing research and development today for us to penetrate -- so we've got strong markets today, but you can't put a full-size Red Robin in a central business district of a Seattle or a Portland or a Denver, so what does that format look like and how do you make sure that, that is successful? So as we tested a 2,000 square-foot Red Robin and what does that look like, is borne out of a real estate strategy. And you know that, again, you're going to do really -- it's a different occasion. It's more of a fuel occasion. I've got 20 minutes to eat. And I've got to go, get in line, get my food, eat and be back at my desk, or get to a movie or whatever else. So we've tested different types of locations for central business district. We tested a lifestyle center and a college -- 2 college locations, basically, and then also 1 in Boulder, which is a mixed college campus and downtown. And we -- the middle of the P&L works pretty well. It's not that complicated from that standpoint. We've brought in somebody from the outside who has a lot of experience in fast casual to run it for us. And we want him to treat it a little bit like an incubator, right. It's R&D, go figure it out, play with it. From a branding perspective, here's where your limits are, but from everything else, go play. And you can't have a 6 to 8 minute ticket time in fast casual and do the sales you need to do during the peak hours. And so, we've been fine-tuning kitchen equipment so we can improve ticket times. We've been fine-tuning menu. Again, going back to what's working at Red Robin that we can actually easily roll out to Burger Works, so we've added onion rings. We've added pretzel bites. And so we're making some changes like that. We may take a couple of things off the menu that today are not big sellers and also slow the ticket times down. So it's really the middle of P&L works from an overall return in margin standpoint. Once you hit breakeven sales, the flow through in fast casual is really, really good and we want to be sure we get that right before we move into high-rent districts in a Washington, D.C. or a Chicago or other markets. So we don't feel like we're in a big rush. We want to get it right before we open up the next 5.

Ted Watson

But the model is, I think you can build those for $500,000 to $600,000. You ought to be able to do $20,000 a week in sales and then with high teens margins, that get you to the returns that you would expect.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Thank you. Stuart, Ted, thank you very much.

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