Red Robin Gourmet Burgers (RRGB) Stephen E. Carley on Q2 2016 Results - Earnings Call Transcript

| About: Red Robin (RRGB)

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

Q2 2016 Earnings Call

August 09, 2016 8:30 am ET

Executives

Stephen E. Carley - Former Chief Executive Officer & Director, Red Robin Gourmet Burgers, Inc.

Pattye L. Moore - Chairman

Denny Marie Post - Chief Executive Officer & Director

Terry D. Harryman - Interim Chief Financial Officer

Ted Watson - Senior Director of Planning and Analysis, Red Robin Gourmet Burgers, Inc.

Analysts

Will Slabaugh - Stephens, Inc.

Joseph Terrence Buckley - BofA Merrill Lynch

John Glass - Morgan Stanley & Co. LLC

Brian M. Vaccaro - Raymond James & Associates, Inc.

Jeff D. Farmer - Wells Fargo Securities LLC

Peter Saleh - BTIG LLC

Chris O'Cull - KeyBanc Capital Markets, Inc.

Stephen Anderson - Maxim Group LLC

Operator

Please standby. We're about to begin. Good morning, ladies and gentlemen, and welcome to the Red Robin Gourmet Burgers Incorporated Second Quarter 2016 Earnings Call. Today's call is being recorded.

During the course of this conference call, the company may make forward-looking statements about the company's business outlook and expectations. These forward-looking statements and all other statements that are not historical facts, reflect the company's beliefs and predictions as of today and therefore are subject to risks and uncertainties as described in the Safe Harbor discussion found in the company's SEC filings.

During the call, the company will also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with the Generally Accepted Accounted Principals, but are intended to illustrate an alternative measure of the company's operating performance that maybe useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the company's earnings release available on its website.

The company has posted its fiscal second quarter 2016 press release and supplemental financial information related to the quarter's results on its website at www.redrobin.com in the Investors' section.

Now, I would like to turn the call over to Mr. Steve Carley of Red Robin. Please go ahead, sir.

Stephen E. Carley - Former Chief Executive Officer & Director, Red Robin Gourmet Burgers, Inc.

Thank you, Lauren, and thanks everyone for joining us today. We have a unique set up for our call today, based on last night's announcement of my retirement and our President, Denny Post being named as the new CEO of Red Robin. Before turning the call over to our Chairman, Pattye Moore, I would like to thank the board and the entire Red Robin team for six great years at the company. I've had the pleasure of assembling a fantastic talented team at Red Robin over that time period. Today, we have a deep bench of exceptional executive talent. And we've worked, worked hard, had fun and I am so proud of what we have accomplished. Of course, part of my responsibility working with the board has been executive succession planning to identify and plan for the next CEO of Red Robin. And I couldn't be more pleased to say there is no one that I believe is better suited to succeed me than, Denny.

She has a true passion for the brand, and a deep understanding of our guests' wants and needs. Since joining Red Robin in 2011, as Chief Marketing Officer, she was promoted to Chief Concept Officer in 2015 and then promoted again to President of the company in February of this year. She has proven herself as an effective leader, who knows how to set goals for the entire organization and achieve them, all while fostering collaboration and motivating and inspiring others. I wish her the best in leading this very special Red Robin brand. It's been a pleasure working with you all.

I would now like to turn the call over to Pattye Moore, our Chairman.

Pattye L. Moore - Chairman

Thank you, Steve, and good morning. On behalf of the board, I would like to take a moment to thank Steve Carley for his passion and commitment to Red Robin. During his six years as CEO, Steve led brand transformation and market share growth and brought enhanced discipline and accountability to this company. One of his greatest accomplishments, however, has been people development and succession planning. Steve has assembled a strong senior executive team with deep industry leadership experience. The board has also worked closely with Steve over the last couple of years on developing and implementing the succession plan we just announced. Steve, we wish you all the best in your retirement.

I also speak for the entire board in expressing how delighted we are in Denny taking over as CEO and joining the board effective yesterday. Denny has proven that she has been innovative and transformative leader and we absolutely believe that she is the right person to guide Red Robin's growth and ensure we are meeting consumers' ever evolving needs.

No one knows the Red Robin brand better than Denny, and no one is better suited to innovate in what is a challenging and disruptive climate. We are also pleased to announce the appointment of Kalen Holmes and Steve Lumpkin to the board of directors. Kalen brings us deep experience in people development, having most recently served as an Executive Vice President of Partner Resources at Starbucks, prior to who retirement in February 2013. And Steve brings strong industry strategy and financial expertise, including having served as Executive Vice President, Chief Financial Officer and a Director at Applebee's until his retirement in 2007. We believe their strategic leadership and financial expertise will enhance our corporate governance and reinforce the skill set in our boardroom. We welcome them to the Red Robin family.

I would now like to turn the call over to Denny.

Denny Marie Post - Chief Executive Officer & Director

Thank you, Pattye and thank you to the board of directors for your confidence and support. I'd also like to welcome Kalen and Steve. I also want to thank Steve Carley for his coaching, leadership and advocacy. I have had the opportunity to work with some of the best leaders in the industry, and you Steve, are at the very top.

I know I speak for the entire Red Robin team by wishing you and Lois a wonderful retirement. We look forward to getting texts of beautiful sunrises from that deck in Idaho. I step up to CEO after five years here with the good fortune of a very talented leadership team, EVP and Chief Operating Officer, Carin Stutz; Chief Marketing Officer, Jonathan Muhtar; Chief People Officer, Cathy Cooney; Chief Legal Officer, Michael Kaplan; CIO, Michael Furlow, SVP Development, Les Lehner; and our Acting Chief Financial Officer, Terry Harryman who joins me on the call today.

Together we are charting a confident course forward with the support of our home office, field and franchise teams in the Unites States and Canada. We can and we will regain momentum and take share again. We will do so by setting a new pace for innovation in service models, menu and experience.

These are challenging times for restaurants overall and causal dinning in particular, but we have faced challenging times before and we have prevailed. As a team, we're up for this new challenge. Red Robin is at an inflection point requiring objectivity and openness, as we consider innovative new approaches to everything we do. We will focus on addressing our known shortfalls, the things we can control and on getting better, smarter and more inventive every day in the key areas that matter most to our guests.

Red Robin has tremendous brand advantages to leverage. We are the Burger Authority, having passed much larger casual dining chains to become number one in burger servings over three years ago, and need I remind you, burgers are still the number one menu item. We are also the home of bottomless fries and bottomless fun. No one, no one serves the needs of families, be they friended, blended or extended, better than we do. We have a great brand, a great team and a future full of possibilities with lots of room left to grow.

While we have much to be proud of and much to build on, we also have a lot of work to do. In the last two months, we did deep dive research with potential and loyal guests and identified three immediate areas for improvement.

First, we have to improve our speed-to-table and total dining time. We have addressed the pain point of payment through our on-tabletop device we call Robin, and are getting credit from our guests for putting them in control at the end of the meal, but we have lost reliability as the place to go for quick lunch or dinner on the run. Carin and the entire operations team are focused on fulfilling that promise, using the Kitchen Display and table management systems to improve throughput and seating efficiency. Experience reigns supreme and our guest counts on Red Robin to be friendly, fun and fast.

Second, value; value as the guest defines it, quality, quantity and price. Families are facing higher demands on stagnant incomes. Our PPA has increased as our guests have opted into our Finest Burgers, which are now mixing at our highest levels ever. To attract new guests and increase frequency of use, we need to bring everyday value back to the forefront to take full advantage of our barbell of burger options from $6.99 up.

The third area for improvement, marketing breakthrough; when guests think of us, when we are top-of-mind, we convert to a purchase at a rate others would, frankly, kill for. We must improve our top-of-mind awareness; we must up our game across all media vehicles to increase timely reach. When we are considered, we win. We have to increase consideration; we have to break through the clutter.

All three opportunities relate to our traditional business of full-service dining, but restaurants are shifting from dine-in destination to source of food at home. The pace of change is picking up quickly. We have to get ahead of that curve.

Over the past five years, we've had to catch up on fundamental systems and technology after a decade of zero investment. We have prioritized non-guest-facing foundational systems such as labor scheduling, human capital management, Kitchen Display and table management. The new food cost and supply chain management team is now in a single store pilot, and is the last key fundamental investment. All of these tools, all of them, are critical to streamlining the daily workload for our restaurant managers, so we can get them out of the office and on to the floor, where they can interact positively with guests and coach team members real-time.

Now that the foundation is set to support staffing, service and speed, we can turn our attention to guest-facing technology. Recent research tells us today's Red Robin guest wants the option to control the dining occasion by choosing first whether to order online and carry out or dine in. And if they chose to dine in, they want the certainty that they can be seated, and potentially even order their meal ahead. The days of waiting patiently with a buzzer in hand outside the front door of a crowded restaurant are long gone. We are moving quickly, and with the full power of the organization behind us to not only catch up, but ultimately lead in this arena. Just lifting our carry-out mix to average in the category, just average, will generate the organic sales growth equivalent of over 25 new locations.

So the bottom-line, we are going to immediately refresh and update our equities in speed and value. We're going to go all-in on multiple to-go, catering and delivery pilots to set ourselves up for next year, and we'll support it all with targeted, higher-impact marketing. It will take a few months to fully regain momentum, but I'm pleased to say that we have taken steps already, steps that I will share after Terry reviews Q2 and update guidance for the remainder of the year. Terry?

Terry D. Harryman - Interim Chief Financial Officer

Thanks, Denny, and good morning, everyone. I would like to start by referring you to our earnings release and supplemental package for complete information on our results, as I will only be hitting the highlights, discussing key trends and other business matters in my prepared remarks.

Earnings per diluted share in the second quarter were $0.55 on a GAAP basis. After adjusting for a restaurant impairment charge of $3.9 million that was recorded in the second quarter of 2016, earnings per share were $0.75, a decrease of 3.8% from $0.78 in the second quarter a year ago. Adjusted EBITDA for the second quarter of 2016 decreased 1.6% to $34.5 million, compared to $35 million in the prior year.

Q2 marked the second consecutive quarter of negative comp sales for the restaurant industry as a whole, which hasn't happened in over two years. Additionally, traffic for the casual dining sector, which has been trending down since the first quarter of 2015, has been negative for six consecutive quarters. Red Robin's comparable restaurant revenues declined 3.2% on a constant-currency basis during the second quarter of 2016 compared to an increase of 2.9% in the prior year.

While our traffic performance improved 20 basis points compared to the first quarter, it was still down 3.9% in the second quarter, which was softer than we expected. Relative to our casual dining peers, we underperformed 60 basis points in the second quarter according to Black Box.

Although, we continued closing the GAAP with a 30 basis point improvement compared to the first quarter of 2016. Average check increased 0.7% during the second quarter of 2016, compared to 2.4% in the prior year. We did see an impact on average check as we continued to invest in initiatives designed to deliver value for our guests and drive traffic. These included bring back happy hour, increased offers for our Red Robin royalty members and taking less price in the second quarter. Our second quarter restaurant-level operating margins were 20.9% compared to 22.5% in the prior year, driven by higher labor and other operating costs, partially offset by a lower ground beef costs. We have and are continuing to invest in additional labor, as we focus on improving our service and enhancing the guest experience.

We believe this investment will pay dividends as our guests consider Red Robin for future meal occasions. We also invested in incremental local restaurant advertising, which is a component of other restaurant operating costs to test new initiatives in local markets. As we continue down the P&L, general and administrative costs were down $3.1 million or 13.3% in the second quarter of 2016 compared to the prior year, primarily as a result of lower incentive compensation and to a lesser extent, stock compensation. However, we also realized savings in travel, professional services and other areas, which accounted for 30 basis points of the reduction as a percentage of total revenues.

We remain committed to taking cost out of the business and have a great track record of achieving this through our long-running Blueprint program, in which we engage our team members to help identify and implement cost savings. Pre-opening costs increased $0.9 million compared to the prior year, primarily due to an increase in the number of restaurants under construction versus a year ago. We expect these costs to increase in the third quarter on an absolute dollar basis before moderating in the fourth quarter, as we plan to complete most of our 2016 new restaurant openings by the end of the third quarter.

We reported an impairment charge of $3.9 million, primarily related to two restaurants that we continue to operate. These restaurants were opened in 2014 and have had site and operational challenges.

The second quarter income tax rate of 15.4% was favorable to our outlook, mainly due to lower pre-tax profitability, including the impact of the impairment, which had not been forecasted.

Next, I'd like to spend a few minutes focusing on liquidity and capital allocation. The business is healthy and has generated $152 million of adjusted EBITDA over the trailing four quarters. We invested $44 million in capital expenditures during the second quarter, of which $19 million was invested in brand transformation remodels, $18 million in new restaurants, with the remainder in technology and restaurant maintenance.

As we substantially complete the brand transformation remodels by the end of the year, we will see an incremental increase in free cash flow of approximately $30 million in 2017. New restaurant openings are a core part of our strategy to grow EBITDA over the long-term and provide value to shareholders. While the operating environment remains challenging, we continue to see bright spots that reinforce our belief that there is room to grow the brand and demonstrate there are opportunities to wisely invest and generate attractive returns on invested capital.

We are achieving just under 30% cash-on-cash returns and driving towards an 18% IRR with our 2015 restaurant class, and while still early in the year, our 2016 class, gives us continued confidence in our restaurant opening plans. We continue to be very selective and disciplined about restaurant development. We also continue to think critically about our capital allocation.

Our goal is to remain flexible and adjust our allocation as markets warrant, to return more capital to the shareholders when it provides a better return, like we did in the second quarter with $20 million of share repurchases. Our board authorized $100 million for share repurchases at the beginning of the year and we currently have $80 million remaining under that authorization.

At the end of June, the company entered into a new credit agreement with our bank group. The new five-year agreement provides a $400 million revolving line of credit and subject to lenders' participation, gives us the ability to increase the amount available by up to an additional $100 million if needed.

We appreciate and thank our banking partners as this new agreement gives us the ability to increase leverage as needed and be responsive to opportunities to return capital to shareholders as they arise. In addition, we have evaluated our real estate portfolio and believe we can create more value for shareholders by redeploying our capital to investments that provide a better return, and are accretive to earnings per share. We currently own 36 properties and plan to monetize properties that make sense from a strategic perspective, and have a high tax basis, which would allow us to maximize the capital harvested from the transactions.

Before I turn the call back over to Denny, I'd like to provide an update on our outlook for the year. Due to the challenges we've seen in the first half of the year, we are now expecting total revenues to grow around 5% for the year, with a growth rate of 7.5% to 8.5% in the latter half of the year. The third quarter will be challenging as we comp over a strong 3.5% in comparable restaurant revenues in the prior year. We expect comparable restaurant revenues to be down almost 2% in the third quarter, with traffic decreasing between 2% and 2.5%. However, we anticipate improvement in Q4 as we cycle over softer comparable restaurant revenues and initiatives such as our value menu, Kitchen Display System, and the new marketing program begin to gain traction. For the full year, we expect comparable restaurant revenues to down almost 2%, with traffic decreasing in a range of 2.5% to 3%. Our industry traffic expectations remain at a 3% decline, and we now anticipate that it'll take longer for our meaningful outperformance relative to the industry to return. However, relative performance should continue to improve as we move through the second half of the year.

We expect restaurant operating profit margins to be around 21% for the year, primarily due to continued pressure in labor, due to increasing wage rates and training to support restaurant initiatives. Labor cost as a percentage of restaurant revenue should peak in the third quarter as we invest in training to deploy our Kitchen Display and table management systems and pilot our new food cost system. We're also planning for increases in other operating costs as we invest in local restaurant marketing. We continue to believe that the benefit we've seen from commodity deflation, particularly ground beef, will moderate and become inflationary as we cycle over the large decrease in prices at the end of Q3 last year.

General and administrative costs are expected to be between $94 million and $96 million, while selling expenses are expected to be approximately 3.2% of sales. Pre-opening expense is expected to be around $8.5 million and depreciation and amortization is projected to be between $83 million and $85 million. We expect the tax rate to be in the range of 20% to 21% for the back half of the year; however, our tax rate is fairly sensitive due to employment tax credits that amplify increases and decreases in pre-tax income for the year.

Given our performance in the first half of the year and the likelihood of continued negative industry trends, we have reduced our 2016 adjusted EBITDA guidance to a range of $145 million to $150 million. Despite the industry trends and a challenging first half of 2016, we believe, we will finish the year with a solid fourth quarter, which will carry over into 2017 based on the strong lineup of tactics and initiatives that Denny will now describe.

Denny Marie Post - Chief Executive Officer & Director

Thank you, Terry. Here are the immediate steps we have taken to impact the remainder of this year and set us up for 2017. On the value front, last Monday we launched three new Tavern menu items, each priced every day at $6.99 with choice of bottomless sides. This is our first news at that price point in four years. It's anchored by the amazing new Buzz Mac 'N' Cheese Tavern Double and the line-up was tested successfully in spring.

We have more value menu news and tactics queued up to follow. Guests are demanding value and menu news, particularly at lunch. We back loaded the majority of our media in Q3 to September to increase weight behind us new news and are adding media weight in Q4 in select high-penetration markets.

Next, on the value front, we introduced happy hour in over half of our locations to further incentivize off-hour visits with $1 off our everyday value pricing on beer, wine and mixed drinks and half prices on some of our most popular appetizers.

We are monitoring this carefully to ensure we are getting the profitable, incremental traffic we need before we expand or extend it. Third, on value, we continue to deliver value via Red Robin Royalty. We now have 5.8 million registered members and still growing. We are also successfully segmenting the base on usage and affinity. As just one example, we honor active and retired military members and their families with special offers all year long. Red Robin Royalty remains profitable and impactful.

And fourth, on the value front, we have renewed our focus on bottomless, Bottomless Fries or broccoli or one of the other great sides we currently offer and bottomless beverage delivery to ensure that every guest gets offered refills and those that want more, get more and get them fast. We are now measuring delivery of this promise at the server and shift level. Despite numerous competitive attempts at limited-time "endless offerings," our guests continue to give Red Robin credit for originating and keeping bottomless sides and beverages as a key part of the value proposition.

In addition to those four steps on value, we have also taken two steps to improve service. We began investing in incremental labor in Q2, and we will continue to do so in Q3 to lift peak-hour performance on high-volume weekend days. We have seen week-over-week improvement in our guest voice ratings and in peak-hour volumes, modest but steady and building in the right direction as we head into fourth quarter peak seasonality.

The Kitchen Display rollout will be complete by the end of August. We saw dramatic improvements in speed to table in our pilot locations, and we are targeting and expecting similar improvement nationally. While it's hardly sexy, I cannot reiterate enough how important this system is to speed of service, order ahead, carry out, catering and delivery down the road.

We are also on the last front improving our marketing efforts. One example, where we were recently cited by TechCrunch as the best at capturing the Pokémon GO craze with our quick turnaround, and I'm talking less than 36 hours, social media offer. We have a new agency partner KBS New York and a new campaign, which will begin to air in Q4, backed by the incremental media we mentioned earlier.

We have also selected a new media-buying agency that is now hard at work, in concert with KBS and our team, on a high impact plan for 2017.

Improvements in value, speed and top-of-mind awareness are all coming together now through the end of Q3 and into Q4, as we expect to regain traffic and sales momentum. We will be simultaneously innovating and testing multiple to-go, catering and delivery programs to ensure we remain relevant for guests who prefer to dine at the office or at home. As I stated earlier, we successfully prevailed in challenging times before and we will do so again. We know what we need to do get our winning edge back.

Last, I want to reinforce one of Terry's key messages. We will be disciplined in allocation of capital to ensure we are building shareholder value. Our strong cash flow gives us the opportunity to invest and to improve performance and continue to open new restaurants, while also investing in innovation for the future.

With that, let's turn to Q&A. Pattye, Terry and I are happy to take questions and we have asked Ted Watson, VP of Finance, to join us as well.

Question-and-Answer Session

Operator

Thank you. Our first question comes from Will Slabaugh with Stephens, Incorporated.

Will Slabaugh - Stephens, Inc.

Thank you very much and congrats to Denny and Steve. A question on those changes at the C level, can you talk a little bit more about the progression there? This comes fairly quickly after Stuart's departure, which I know was unrelated, but now we are seeing two additional board members along with the CEO change. So I am curious, if there was anything internal or external that may have contributed to what, at least from the outside, looks like a fairly quick change or if this is something that's been in the works for a while?

Pattye L. Moore - Chairman

This is Pattye Moore and this really is the culmination of a multi-year succession planning effort. So, it has been in the works for a while. The final pieces of that effort were ensuring that Denny had a strong team to support her with the hiring of Jonathan Muhtar as CMO earlier this year, and most recently as Carin Stutz as the Chief Operating Officer, both of who are experienced industry executives, the final pieces of that plan were together, and we felt it made sense to move forward. We have a strong bench in the financial area with Terry as acting CFO, and the timing with the kick-off planning and strategy sessions made a lot of sense, the board believed, to move forward at this time, also makes sense for Denny to take the lead on the CFO search.

Will Slabaugh - Stephens, Inc.

Great. Thank you. And as a quick follow-up here on the comment on labor, are you able to quantify the labor investments that you've already made or will be making and what that might look like on an annualized basis?

Ted Watson - Senior Director of Planning and Analysis, Red Robin Gourmet Burgers, Inc.

Yeah. Hey, Will, this is Ted. As far as the labor investments are concerned, we've had a particular emphasis on focusing on investing in the weekend to making sure we're providing the service there. From a dollar standpoint, you're probably looking in the neighborhood of a couple hundred thousand dollars a quarter, give or take.

Will Slabaugh - Stephens, Inc.

Great, thank you.

Operator

Our next question comes from Joseph Buckley with Bank of America.

Joseph Terrence Buckley - BofA Merrill Lynch

Hi, thank you. And Denny, congratulations, and, Steve, I wish you the best. A couple of questions, the plan has a lot of action-oriented parts to it, but one of the tough things, it seems, for you to achieve, given your marketing budget is top-of-mind awareness, so can you talk a little bit about that, like how you're going to call attention to these changes to make it more effective?

Denny Marie Post - Chief Executive Officer & Director

Absolutely. Thanks, Joe. First, we're going to be using the same creative that we used in test markets, which was very successful and made a real difference there. So we're sticking with the plan. We also have moved weight as I mentioned to increase our media weight behind the announcement of these post Olympics. So, while the new items are already in restaurants, we will not be promoting them until the Olympics are over and we'll do so at higher levels than we have traditionally used.

Then third, we have decided to invest in key markets. As you well know, we have some high-penetration, high-opportunity markets. So, in addition to the national plan, as a company we are investing behind those with local restaurant marketing in Q4. So, the combination will drive up the overall media levels and awareness and we're also going to be using some tactics that we tested successfully earlier this year to draw attention and draw new guests into the restaurant.

Joseph Terrence Buckley - BofA Merrill Lynch

Okay. And then going in a different direction, on the capital allocation front you mentioned you think it still makes sense to open restaurants. But as you think about 2017, do you think that opening pace will slow and will you shift more capital to share buyback?

Denny Marie Post - Chief Executive Officer & Director

We certainly have that option and we've looked at the possibility depending on what happens with industry trends, et cetera, of taking our foot off the pedal a bit. That said, our new restaurant openings are continuing to perform to our expectations and even in a world where guests are using restaurants as source of food as opposed to destination, getting kitchen closer to guests is pretty important for us. So, there is a lot of white space left out there and as long as we continue to see the returns on the selections we are making with real estate, no reason for us to back down.

Joseph Terrence Buckley - BofA Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from John Glass with Morgan Stanley.

John Glass - Morgan Stanley & Co. LLC

Thanks very much. First, just on the speed-of-service question, one of the core equities of the brand over the years was this notion of the gift of time. What happened to that, has the speed-of-service gotten slower or have the peers gotten better? And if it's gotten slower, is it a source – has the source been sort of menu expansion or how do you identify what's happened with speed-of-service?

Denny Marie Post - Chief Executive Officer & Director

Yeah, great question. No, the peers have not gotten better, we've got slower. And this is something that we're keenly aware of. With Carin's arrival, she said, she is to have speed envy when she was a competitor of ours. What we did is we added – not – we had gourmet burgers, if you remember, five years ago, basically that was the center of our menu and everything was a gourmet burger.

We in expanding the barbell to things that cooked faster and cooked longer, we put a lot of pressure on the Heart of House to be able to deliver those all at the table in the same period of time and we've suffered for that. We also, as Ted mentioned, have looked at some strategic investments in terms of brining some labor back into the restaurants to make sure that we're able to get those things out to the guests promptly, but the key here is the Kitchen Display System. I can tell you that in pilot, we went from four in 10 of our items being delivered over 16 minutes to zero – 0% over 16 minutes. So Kitchen Display is a key to our – getting our speed back.

John Glass - Morgan Stanley & Co. LLC

Okay. That's helpful. And then I guess, just on the value maybe this relates to the same question, but on the value front, I mean I think it's been no secret that your check has gone up much faster than the industry's for a long time and I think the question has come up multiple times is that too much and it's been – the answer has been no and now it's yes. So does the check have to come down, do you think you actually have to manage the overall check down versus just maybe working on value? And do you think part of that is just eliminating some of those more expensive items on the menu in order to create a better perception of value? How do you achieve the better value?

Denny Marie Post - Chief Executive Officer & Director

Yeah. It's a great question again. We've been cautious and when you look at the check increase, it hasn't really been about pricing, we've taken only 1.5% last year and less than 1%, as we mentioned, this year. Our PPA has increased significantly over the past couple of years because the guest has opted into the Finest Burgers. And also some of the add-ons like desserts and appetizers that we've added.

I think you will see some PPA decline as we drive more traffic in on average for $6.99 offers, but I don't see any need for us to take any of those Finest Burgers off the menu, if they are doing very well. I fact, our latest LTO the MadLove is so popular, it may well earn its way on to the menu. So, we have more of a challenge of making sure that once the guest is in the restaurant, we don't obscure the value that exists there by only promoting Finest.

So, you are going to see a much more of balanced merchandising of everything from $6.99 through our gourmet burgers up to our $14.99. And we believe showing that range will recapture the perceived value and still allow the guests to make the choices they are going to make.

John Glass - Morgan Stanley & Co. LLC

Okay. Thank you.

Operator

Our next question comes from Brian Vaccaro with Raymond James.

Brian M. Vaccaro - Raymond James & Associates, Inc.

Thanks and good morning. And Steve just echo the congrats on your retirement, wish you all the best for the next chapter, and Denny also congrats on the promotion. A quick just follow-up on the speed-of-service improvement that you've seen in test. Denny, can you give us a sense of sort of the overall improvement you've seen in average table turn and believe can be replicated across the systems?

Denny Marie Post - Chief Executive Officer & Director

We – one of the things Carin has observed as she has been in the restaurants is the importance of having a targeted table time for whatever the order for that table. If you have a couple of Tavern Double, you should be able to get your food to the table in less than six minutes or seven minutes.

If you're ordering a couple of Finests, it's going to take a bit longer. So, I really appreciate her focus on what's the right table turn for that order at the table.

But again, as I mentioned, we've seen a complete takeaway of anything over 16 minutes, which is certainly egregious. And over 75% of our meals in the KDS units are now being delivered in less than 11 minutes. So again, rapid improvement and that's a dramatic improvement versus where we were prior to rolling this out.

And again, this will take a little time to build, those were the pilot locations who had the program in for a while. The impact, Steve has shared, I know when we were together at ICR, about the impact of speed and how much upside we would have in terms of our turn and it's significant. If we can bring our table turn time down from an average of 55 minutes to 45 minutes and better utilize the seats we have because this isn't just KDS, it's also table management, we can take that up from 70% to 80% in our peak hours that could be worth upwards of $50 million, as we share in our presentation. So, we're very focused on both seating utilization and speed and table turn.

Brian M. Vaccaro - Raymond James & Associates, Inc.

All right. Thank you. Shifting gears to the comps, if we could. Can you talk about day part trends during the second quarter, anything that might shed some light on the competitive or broader consumer backdrop? And Terry, could you also remind us the menu pricing that was in the second quarter and how we should think about pricing in the back half of the year?

Terry D. Harryman - Interim Chief Financial Officer

Hi, Brian. Our mix really remained pretty constant, about a 50%-50% mix between lunch and dinner. In terms of menu pricing, we took 50 basis points in February, so in Q1, and another 50 basis points in Q2, so 100 basis points so far this year and we have no further planned price increases for the balance of the year.

Brian M. Vaccaro - Raymond James & Associates, Inc.

All right. And then just one last one, if I could, appreciate the third-quarter comp guidance, I think you said of down almost 2%. Obviously that's improvement versus the second quarter trend, the question, I guess, is that consistent with what you're currently seeing or does that assume an improvement with the new media spend coming, I think you said in September after the Olympics wrap up?

Denny Marie Post - Chief Executive Officer & Director

Brian, we don't have the habit of giving any quarter guidance. So, I think we've given you about as much as we're going to. I will tell you that, we have been tracking Black Box. And if you remember, fourth quarter last year, we were down 150 basis points relative to competition. First quarter, we were down 90 basis points; second quarter, we were down 60 basis points. We watch that carefully and we're intense on going positive again.

Brian M. Vaccaro - Raymond James & Associates, Inc.

All right. Fair enough. Thank you.

Denny Marie Post - Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from Jeff Farmer with Wells Fargo.

Jeff D. Farmer - Wells Fargo Securities LLC

Thanks. Again, congratulations to all and yet another question on speed of service, but on this one, I'm just curious. What percent of your sales occur during capacity-constrained periods, and is that the right way to think about it? That, ultimately, in terms of increasing throughput, it is really only going to be an opportunity in those time periods where you have a wait, or am I thinking about that incorrectly?

Denny Marie Post - Chief Executive Officer & Director

I understand why you're approaching it that way, and certainly, there is a greater upside when you have guests on wait. And it's hard for me to say what percentage, because it varies tremendously by location, time of year, et cetera. We do know that we skew toward weekends, not surprisingly. Families come out on weekends, which is why, as Ted mentioned, we've been investing against our service and our guest experience, particularly on weekends to make sure it's great. But I guess I would say the bigger opportunity is for us to get, if I would call it, our mojo back and for guests to be able to trust us, particularly at lunch, to be able to get in and out in less than 45 minutes or even shorter, and that will take some time.

I don't see us doing any kind of public guarantee, but that's something that guests will come to know us for again as they come in to try the $6.99 new items, and realize that they are able to enter, get fed, close out their check on Robin on the table top and be back out the door in a very prompt period of time.

Jeff D. Farmer - Wells Fargo Securities LLC

And then I think Joe asked about slowing unit developments, but I wanted to take a chance to ask about potential re-franchising. So at least to the best of my knowledge, you guys have acquired roughly 50 restaurants over the last two and a half years, haven't actually sold company restaurants in a very long time, if at all, so I'm just curious if that's on the radar for the management team and the board. Is that a conversation that you guys are willing to have?

Terry D. Harryman - Interim Chief Financial Officer

Hey, Jeff, we don't currently have any plans to refranchise any company restaurants.

Jeff D. Farmer - Wells Fargo Securities LLC

Okay. Keep it simple like that. And then just final question on the balance sheet, so I heard you on the, I think it's the increased facility, but I'm curious what your adjusted debt to EBITDA ratio was at the end of Q2, or whatever leverage metric that your facility lender looks at, curious what that ratio was, and how much more room you have on that in terms of borrowing capacity.

Terry D. Harryman - Interim Chief Financial Officer

Yes. It was 3.8 times at the end of Q2, and our threshold is 4.75 times.

Jeff D. Farmer - Wells Fargo Securities LLC

Okay. Thank you very much.

Operator

Our next question comes from Peter Saleh with BTIG.

Peter Saleh - BTIG LLC

Great. Thanks and congrats, Denny and Steve. I just wanted to ask, given the slowdown that you're seeing, I know there's lots of restaurants have talked about this, but where do you think the customer is going? Are they eating more at home? Or where is the customer going, given that the traffic is down so much?

Denny Marie Post - Chief Executive Officer & Director

It's so hard to say. I'm not sure I'm going to have a lot to add to the other restaurant leaders that have commented on this, and spoken to it on their calls. It does seem to us that the consumer has gone home and has pulled the blanket over their heads. You can blame stagnant incomes. You can blame whether they've got some increased big ticket purchase debt, politics, whatever it is. But it's really clear that the economic recovery has been far from even across the population. And particularly the middle income guest, who has traditionally driven casual dining, is disproportionately affected by that.

I would say that even the winners in this quarter, they have driven top line more through pricing than traffic, so it's something that we've been trying to avoid so that we can stay a good value. And returning to a strong value news message, we believe, will bring some of those guests back out. That also said, there is a lot of activity going on in on-premise and we are not actively participating in that and that's one of our opportunities for the future and one that we're getting after immediately.

Peter Saleh - BTIG LLC

Can you give us a little bit more detail on what you guys are going to do on delivery or take-out in the back end of the year, and what we should expect into 2017?

Denny Marie Post - Chief Executive Officer & Director

Well, we're going to have multiple pilots going on. I'd say it's way too early to discuss or commit on delivery. As you all know, there is a number of emerging approaches to this. We're looking at all options. We've got at least three queued up to pilot from a delivery standpoint.

Beyond that, we're going to focus on getting our online ordering up and we've taken the time to make sure our online ordering system is completely integrated with Red Robin Royalty. Red Robin Royalty is, again, the little engine that could for our business and if a guest has earned a free burger, they don't want to hear that they can't redeem that online.

So it's been important for us to work closely with our provider to get that done. We will have a 32-store pilot up and running no later than November, for our online ordering and carry out. And we're looking at a number of ways to make sure that the guest has the same great experience they have inside our restaurant when they carry out from us.

Peter Saleh - BTIG LLC

Great. And then, just last question on labor, how is your labor turnover recently versus historical? Have you seen an increase in labor turnover?

Ted Watson - Senior Director of Planning and Analysis, Red Robin Gourmet Burgers, Inc.

Yeah, Peter, this is Ted, great question. I'm sure you've heard it through others in the industry, but certainly a tight labor market. We have seen turnover tick-up a little bit. And we've talked about labor pressure of being 5%, some of that is due to overtime hours and staffing. So, the short answer is yes.

Peter Saleh - BTIG LLC

Great. Thank you very much.

Operator

Our next question comes from Chris O'Cull with KeyBanc. Chris, your line is open.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Sorry about that. I was on mute. Good morning, guys. I had a few questions regarding the additional advertising. First, can you help put, Denny, can you help put in the additional media in perspective for us, in terms of just maybe the additional weeks that you're going to be on air versus last year? And then are you concerned at all about launching this campaign in the fall, alongside with the presidential election competing for advertising?

Denny Marie Post - Chief Executive Officer & Director

The way that we are going at this, Chris, on the national media again from the – from what I've seen traditionally politics, it's become a state-by-state battle. So, we are actually staying out of local investments up until November. So, the incremental investment you'll see will be post-election. I don't want to disclose exactly which weeks or how many dollars, but I will tell you that it has been proven in test marketing earlier this year that this type of investment, be it in television and other vehicles, will make a difference in terms of bringing new guests in.

We're also continuing to invest incrementally in Hispanic marketing, which is beginning to make a difference and we are supporting that with just having rolled out our full Spanish language website. So, it's a variety of tools, but again we will avoid the election in terms of investment in local markets because our high penetration markets often overlap areas where the election will be heavily contested.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Right. That's helpful. And then, how does the push of $6.99 burgers affect profit contribution?

Denny Marie Post - Chief Executive Officer & Director

Well, the good news is, all of these burgers have been built with very excellent margins, I guess, I would say from that standpoint. So, we're not discounting down other items to the $6.99 price point. We're offering menu items that we have created to be profitable at $6.99. So, just as we did when we dropped Tavern Double into the market four years ago, I think you'll continue to see that the guest takes the option of enjoying $6.99 and often adds some other things to it. It also supports our beverage marketing and other reference along that way. So, we continue to feature beverages on our promo part as well.

Chris O'Cull - KeyBanc Capital Markets, Inc.

The $6.99, the focus on the $6.99 platform, though, does it have a similar margin percent profile as the other items? Just a lower margin dollar profit contribution?

Denny Marie Post - Chief Executive Officer & Director

It has a similar profile. You want to say, Terry? Do you want to go further?

Terry D. Harryman - Interim Chief Financial Officer

No, no. It does have a similar profile and while we may see some decline in our PPA.

Denny Marie Post - Chief Executive Officer & Director

Yeah.

Terry D. Harryman - Interim Chief Financial Officer

We're expecting an offset in that will drive incremental traffic.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Okay, great. And then lastly, do you expect media spending to be up next year, and will it or will it be more evenly distributed next year than it was this year?

Denny Marie Post - Chief Executive Officer & Director

We're still in the process of planning 2017. We'll talk more about details on that when we talk to you in the next call and of course the one going into next year.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Fair enough Thanks guys.

Denny Marie Post - Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from Stephen Anderson with Maxim Group.

Stephen Anderson - Maxim Group LLC

Yes. I've got a quick question on the to-go program, and you've been hearing it a lot in the industry, particularly in casual dining, about some of these participants, ramping up their to-go efforts and what do you see in your program that stands out among the peer group?

Denny Marie Post - Chief Executive Officer & Director

Well, first, we are the Burger Authority and some of the third party groups that we're aware of told us that the second most searched item behind pizza is burgers. So, we think we can stand apart there. We also have done research with our guests to tell us that a carried out Red Robin Burger is like as much or even better than one that, that may have chosen to come into the restaurant for because they love the option of enjoying our burgers at home. So, we're confident about our product quality and lots of opportunities there in terms of being the leader in burgers for carry out, catering and delivery.

Stephen Anderson - Maxim Group LLC

And have you done any testing with it I mean in terms of keeping the product fresh through delivery?

Denny Marie Post - Chief Executive Officer & Director

Yes, we – well, through delivery we actually have – we have restaurant in the Bay Area that's doing $17,000 of pure history door dash, and we haven't done anything with them and I can tell you we've been tracking and our guest is just as happy with that and they are to other things. So, again, guest expectations around something that's delivered to them are a little bit different than what they expect to get at the table in the restaurant, but there is no reason to believe that there is any decrement to the quality of our product.

Stephen Anderson - Maxim Group LLC

All right. Thank you.

Denny Marie Post - Chief Executive Officer & Director

Thank you.

Operator

That concludes today's question and answer session. At this time, I'd like to turn the conference back to Ms. Denny Post for any closing or additional remarks.

Denny Marie Post - Chief Executive Officer & Director

Thank you, Lauren and thank you all for joining us today. I also want to thank the entire Red Robin team for your support and for continuing to work so hard to get our mojo back by meeting the needs of our guests, our team members, and our shareholders. Together, we're going to set a new course forward that's optimistic, objective and open. I look forward to sharing more details about decisions and plans, which will drive 2017 on our next call.

Have a great day, everyone. And I suggest you go have a $6.99 Buzz Mac 'N' Cheese Tavern Double, I can assure you, you will not go home hungry. Thank you.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

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