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Inflation was a two-headed monster for Red Robin Gourmet Burgers in the second quarter.
On one hand, rising inflation cost the chain sales as customers pulled back on spending. Same-store sales fell each month of the period, from 11.6% in May to 1.7% in July, for a total increase of 6.7%. Traffic declined 2.9% during the quarter, which ended July 10.
At the same time, Red Robin paid more for food than it was expecting to, with commodity costs up 19% year over year.
The dual pressures forced the Englewood, Colo.-based chain to make some quick adjustments as it headed into the second half of the year.
In late June, it aimed to give sales a jolt with the launch of a $10 Gourmet Meal Deal that featured a burger along with bottomless fries and drink.
“We thought that as we saw traffic slowing we needed to, frankly, address the value part, because we thought that consumers were feeling pinched from inflation,” CEO Paul Murphy told analysts Wednesday afternoon.
The lower-priced offering proved effective. Orders for the Gourmet Meal Deal were higher than expected, Murphy said, and it improved Red Robin’s value perception among guests. Same-store sales growth rebounded to 4% year over year to start the third quarter.
Red Robin will extend its focus on value in the coming months. It’s rolling out a happy hour drink special later in August and lunch specials in the fall to offer customers value in different dayparts.
But the chain will have to strike a balance between generating sales and making money. Its restaurant-level profit margins fell 2 points year over year, to 13.6%, and it posted a net loss for the quarter of $17.9 million—a $12.9 million year-over-year increase.
Executives emphasized that the value offers are intended to be margin-friendly and offset by an equal focus on higher-priced limited-time offers.
“We’re not giving away the farm,” Murphy said. “Even in the happy hour, increasing the liquor sales should help us overall from a margin standpoint.”
To further help the bottom line, Red Robin raised prices by just over 2% early in Q3. That was a few months earlier than it had planned and brings its total pricing for the year to about 8%.
Murphy, during his last earnings call as Red Robin’s CEO, acknowledged that the quarter was “a bit disappointing.”
“We saw the same softening through the quarter that a lot of other brands did,” he said.
The results prompted Red Robin to adjust some of its expectations for the rest of the year. Most dramatically, it lowered its adjusted EBITDA forecast to $65 million, down significantly from its previous range of $80 million to $90 million. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)
“It’s primarily commodities and sales caution, and the related flowthrough associated with that sales caution,” CFO Lynn Schweinfurth said.
Red Robin’s stock price fell more than 17% in after-hours trading following the update.
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