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Red Robin Gourmet Burgers Inc. (RRGB 3.75%)
Q1 2019 Earnings Call
May 30, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers, Incorporated. First quarter 2019 earnings call. Please note that today's call is being recorded. During the course of this conference call, management 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 management'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 measures are not prepared in accordance with the generally accepted accounting principles, but are intended to illustrate an alternative measure of the company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its fiscal first quarter 2019 earnings release and supplemental financial information related to the results on its website at www.redrobin.com in the Investors Section.
Now, I would like to turn the call over to Red Robin's Interim CEO Pattye Moore. Please go ahead, Pattye.
Pattye L. Moore -- Interim President, Chief Executive Officer
Hello, everyone, and thank you for joining us. With me this afternoon are Lynn Schweinfurth, our Chief Financial Officer; and Guy Constant, our Chief Operations Officer; Jonathan Muhtar, our Chief Concept Officer is also with us to help answer questions you may have during the call. I'm pleased to be speaking with all of you as interim CEO.
Let me start by saying that, I continue to serve Red Robin with a real passion for this brand and this uniquely fun and welcoming environment, as well as for the casual dining industry. To provide a bit of background about me, in addition to serving as a director of Red Robin, I previously had a 12 year career at Sonic where I served in a number of senior management roles. Overseeing marketing, brand development, franchise relations, company store operations and as President and Board member, during which time average unit volumes and profits more than doubled.
I'm looking forward to bringing this experience to bear in this interim period, as I support our executive team and our great team members across the organization to focus our efforts and return the business to sustainable growth and profitability.
As our financial results demonstrate, there is still much work to be done on the turnaround, and I can assure you we are moving with urgency. The Board has engaged The Elliot Group, which has deep experience in our industry, to assist in the CEO search and the Search Committee has already begun the interview process. At the same time, in the nine weeks since I became Interim CEO, I worked closely with the management team to narrow the list of critical initiatives and simplify our focus. We are actively working with The Cypress Group on refranchising and reassessing our real estate portfolio, and today we announced the closure of 10 underperforming units. We have hired an experienced industry leader as our new VP of Consumer Insights and we are continuing our deep dive into all aspects of our business.
These efforts are designed to improve the customer experience, significantly improve cash flow, increase profitability and ultimately drive shareholder value. We are confident our initiatives will steadily improve our financial and operational process and that our search process will identify a leader who can accelerate this turnaround.
As we have outlined previously, we are very focused on five key strategic priorities. Strengthening and stabilizing the dine-in business, continuing to build our off-premise and catering business, improving guest experiences and recapturing our Gift of Time, implementing digital platforms and technology solutions and selectively refranchising and evaluating our real estate portfolio. Guy, Lynn and I will share specifics around these initiatives and the progress and positive momentum we are beginning to see.
With that, I'd like to turn the call over to Guy, who I want to remind you, took over full time this Chief Operating role at the end of January. Guy is going to talk about one of our most important priorities and that's returning the business to sustainable profitable growth by improving the dine-in experience for our guests. Guy?
Guy Constant -- Executive Vice President and Chief Operating Officer
Thank you, Pattye. And good afternoon, everyone. As Pattye said, our first and foremost priority is stabilizing and strengthening the dine-in experience. In order to do so, we are focused on four primary areas for operations that will provide the needed focus we require to execute on our operational turnaround. First is hire, train and retain.
Improving the experience starts with hiring the right people, training them properly and being fully staffed, as well as, reducing turnover, particularly at the General Manager level. Our operations leadership team is making real progress against these objectives. While broader industry turnover and staffing challenges have increased in Q1 overall, Red Robin experienced reductions in our hourly Manager and General Manager turnover from Q4 of 2018 to Q1 this year. And all are at better levels than the average for the casual dining industry. In fact, our Manager and General Manager turnover levels are closer to best-in-class than they are even to the average. We've also been able to bring our Manager staffing levels to 96.8%, a meaningful improvement over where we ended 2018. Having better staffed restaurants and stable management teams is a very important part of any sustainable improvement in operational execution.
Next is Manager Front Of House engagement. We know we can improve the overall guest experience, shorten wait times, reduce walkways, have cleaner dining rooms and effectively identify and resolve potential issues by continuously getting our Managers on the dining room floor, and at the host end during peak hours. And our efforts are delivering results.
Overall satisfaction scores improved throughout the first quarter, reversing a trend that saw a decline throughout 2018 to a low point at the end of Q4. Year-over-year walkways are down 4.2%, wait times are shorter, guest complaints on cleanliness and wait times have declined meaningfully and guests have told us that they have seen marked improvements in problem resolution when there is an issue.
Next is Managing the Shoulders to Peak the Peaks. By shifting the labor investment from overstaffed shoulder hours during the day to understaffed peak hours, we are able to improve throughput on our busiest shifts, thereby capturing the greater sales opportunity that is available during those peak times without having to make incremental investment in labor expense. Our continued focus on staffing has yielded improved guest scores for taste of food, temperature of food, speed of service and execution of our bottomless promise during the first quarter.
And last is Delivering on the Promise of Maestro. This effort focuses our kitchen managers on the active coordination of the fast and accurate delivery of high quality food at the proper temperature. And as an added benefit, ticket times have shown continuous improvement, benefiting speed of service. We have also started to reduce our menu complexity, while still providing guests the options they desire and we have narrowed our culinary focus to concentrate on improving the consistency and quality of our core menu products. These include, of course, our gourmet burgers, chicken, buns and, of course, our signature Bottomless Steak Fries. We look forward to updating all of you on the continued progress on these key priorities and their impact on operational execution over the coming weeks and months.
With that, I'll turn the call back over to Patty.
Pattye L. Moore -- Interim President, Chief Executive Officer
Thank, Guy. I want to reiterate that an important theme through all the operations focused efforts and an important learning from us from last year is making sure that we are setting our operators up for success as we implement operational changes and technology improvements. As we mentioned in the press release, our updated guidance reflects among other reasons a deliberate decision to delay the roll-out of some restaurant level technology to ensure that we're giving our operators the sufficient time to absorb the technology initiatives being implemented now and that we are able to maintain the momentum that Guy talked about that we're currently seeing in operations. Lynn will be talking about the updated guidance in more detail.
I'd also like to touch briefly on marketing efforts. The first half of the year is focused on our high quality gourmet burger line, featuring new products, including our Porkiyaki burger and the latest in our Burger Master Series, Zita's Chicky 'Cado. This product celebrates the talent of another of our heart of house restaurant cooks, Zita Martinez who's been with us for over 19-years. Early results indicate that our featured items are outperforming expectations.
With respect to media and creative. First, I want to tell you that we've been pleased to see increased positive fan engagement from our social channels throughout the quarter. We're also in final development stage of a new omni-channel creative campaign, which we will launch in July. The new campaign has tested very well with consumers, connecting on an emotional level and conveying what our guests love most about Red Robin. We are confident that this omni-channel campaign will help us elevate the conversation about our brand, both internally and with our guests. We also shifted media weight from the first quarter to the third quarter to ensure we were ready from an operations and staffing perspective and to solidify restaurant routines and processes in preparation for the new marketing campaign. And we will begin utilizing technology enhancements as they roll out late this year and into 2020 to better target and segment our 8.5 million royalty members.
Finally, we are pleased to announce the hiring of a new Vice President of Consumer Insights and Loyalty, Cyrus Kelley, who joins us from Darden Restaurants. Cyrus and his team aimed to greatly enhance our data and insights capability which will guide all guests facing activity going forward. So that's a brief update on our first priority, stabilizing dine-in operations. Our second area of focus is to continue building off-premise and catering. Our total off-premise business is now mixing at 11.6% of total revenues, with a growth rate of 20.6% year-over-year at the end of the first quarter. We are also focused on continuing to improve the to-go experience by implementing improved operational processes and tools, and we are looking to increase our reach with additional third party delivery partners.
Catering now represents 1.2% of company sales through the first quarter of 2019 or growth of 220% compared to last year. We believe catering continues to represent a big opportunity for us, essentially all incremental. We also believe it increases brand awareness and relevancy. In 2018, we built a strong foundation for catering that included building out our strategic leadership and infrastructure. We began adding sales team members supported by targeted marketing. In 2019, we are building on that momentum from the back half of 2018. We are continuing to enhance our sales team and focusing on building both local and national accounts.
Our third priority, which involves both the operations improvement that Guy talked about, but also technology is to improve the guest experience and recapture the Red Robin gift of time convenience as a differentiator, which simply means allowing customers the gift of getting in and out of our restaurants at their own pace. In addition to improving ticket times and reducing wait times as Guy talked about, we are beginning to see customer satisfaction improvements on pace of experience. We are also looking forward to adding more improvements to speed up throughput with menu simplification and with technology investments that are beginning to roll out in the back half of the year.
Speaking of technology, our fourth priority is implementing digital platforms and technology solutions. We completed the roll-out of headsets to our restaurants this month to enhance communication among our managers and certain team members. While this may seem like a minor point to some, it has allowed our operators to turn tables faster and to stay more engaged during a busy shift. Additionally, we expect to roll-out portable POS terminals to our servers by the end of the third quarter. This will enable our team members to take an input and order at the table, improving not only accuracy, but ticket time.
Our fifth and final area of focus is on selectively refranchising and real estate -- and assessing our real estate portfolio. As I mentioned earlier, The Cypress Group is helping us focus our refranchising efforts and work is well underway. Lynn will discuss this and our most recent assessment of our real estate portfolio including our mall strategy. We believe that the momentum we're beginning to see will continue and lead to improved financial results and drive shareholder value. Thank you.
Now let me turn the call over to Lynn.
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Thank you, Patty. And good afternoon, everyone. Let me begin by first reinforcing the intensity of focus we share to transform our business and to deliver value to our shareholders. We are acting decisively to make changes in the business that will put us in a stronger position. We are also taking a disciplined approach to prioritizing and spending capital and G&A, while strategically refining our portfolio through recent store closures and our enhanced refranchising program.
As I walk you through the Q1 highlights, please note that the quarter includes the first four periods or 16-weeks of our fiscal year. Q1 total company revenues decreased 2.8% to $409.9 million, down $11.7 million from a year ago. Comparable restaurant sales declined 3.3%, driven by a 5.5% decline in guest traffic, partially offset by a 2.2% increase in average check.
Overall net pricing after taking into account discounting was 1.9%, while the 0.3% mix increase was driven by lower Tavern mix and higher entrees mix. Dine-in sales were down 5.5% partially offset by off-premise growth. Off-premise growth continues to be meaningful and rose 20.6% in Q1. Off-premise now represents 11.6% of total food and beverage sales. Traffic at enclosed mall locations, representing 76 restaurants in our system, continue to perform worse than the balance of our company owned locations by approximately 300 basis points. As we previously disclosed, we experienced severe winter weather that we estimate negatively impacted Q1 sales by approximately 80 to 100 basis points.
Q1 restaurant level operating margin was 18.3%, down 170 basis points versus a year ago, driven by the following factors. Cost of sales of 23.4% was favorable 40 basis points versus a year ago, due primarily to favorable food waste, as measured by actual versus theoretical performance and lower Tavern mix. Restaurant labor costs of 35.7% were unfavorable 120 basis points versus a year ago, due primarily to higher wage rates, increased management headcount, associated with our focus on being fully staffed to provide quality execution and sales deleverage. Other operating costs increased 60 basis points to 13.9%, due primarily to increases in third party delivery fees and equipment repairs and maintenance. Occupancy costs increased 30 basis points to 8.7%, due primarily to sales deleverage.
G&A costs increased 50 basis points to 7.3% of total revenues, due primarily to increases in professional services and travel related expenses, associated with training managers related to our focus on fully staffed -- on being fully staffed to provide quality execution and higher salaries, partially offset by lower incentive and equity based compensation. Selling expenses increased 20 basis points to 4.4% of total revenues, due primarily to project related spending. Pre-opening costs decreased $0.8 million, due primarily to the suspension of restaurant openings for the foreseeable future, as we continue to work on improving our four wall economics.
Net interest expense and other was $0.2 million lower versus the prior year, due primarily to a gain in our deferred compensation plan assets. Our weighted average interest rate was 5%. Our effective tax rate was 291% benefit and better than the prior year, due primarily to lower income. During the quarter, we recognized other charges of $2.4 million, due primarily to executive transition costs and costs associated with previously closed locations. Q1 adjusted EBITDA was $34.3 million as compared to $42.4 million in Q1 2018. Q1 adjusted earnings per diluted share were $0.19, as compared to $0.69 in Q1 2018.
Now, turning to the balance sheet. We invested $10.2 million in CapEx in Q1, which was primarily related to facilities and improvements and investments in information technology. We ended the quarter with $23 million in cash and cash equivalents. Our lease adjusted leverage ratio was 4.23 times and we were in compliance with all debt covenants. During the quarter we paid down $10 million on our revolving credit facility, resulting in a quarter and outstanding debt balance of $183.4 million in addition to letters of credit outstanding of $7.4 million. We also bought back approximately 31,200 shares for a total of approximately $1 million. This is consistent with our initial goal of offsetting the dilutive effect of our equity compensation program over the course of four quarters, as we utilize cash flow primarily to reinvest in our business and to reduce debt, while we return the business to sustainable growth.
Let me turn next to the fifth key strategic priority, selectively refranchising and reassessing our portfolio. In our press release today, we announced that we will be closing 10 locations, including seven enclosed mall locations. These restaurants have an average unit volume or AUV of $1.8 million and in Q1 generated a total of $4.5 million in restaurant revenue. Pre-tax operating losses for these restaurants in Q1 totaled $0.9 million, including an immaterial amount of depreciation expense. All related leases allow us to go dark and we will pursue all sublease and lease termination options as quickly as possible.
We also continue to focus on improving the financial performance of other under performing mall and non-mall locations through negotiated rent concessions, catering and targeted marketing and sales building strategies for restaurants once they improve their operations. As Patty noted, we have engaged The Cypress Group to help facilitate our franchising program. We have been diligently working with them to refine our process, related financial, real estate and other transaction related material, restaurant portfolio strategy, buyer sourcing and next steps. We will continue to pursue the markets, which includes approximately 100 existing Red Robin locations previously targeted, along with any other locations that we determine to be viable geographies for future refranchising purposes.
Turning to our 2019 expectations. We have recently made the decision to delay or defer certain items, so we can focus on improving our operational execution and dine-in guest experience through better pacing the field initiatives. We understand that last year we rolled out too much at once to our operators and we learned a lot from that experience.
Based on that learning and our desire to capitalize on the momentum that we are beginning to see with improved operational execution, we are taking a very disciplined approach. We are beginning to see improvements in core business KPIs being driven by execution against a specific plan. And while there is more work to do, we believe we will build a strong foundation for a brighter future. We continue to expect an improving trajectory of comp store sales in the back half of 2019.
More specifically, we are expecting comparable sales of down 1% to up 1%, lower than previous guidance due to lower dine-in sales, partially offset by higher off-premise sales. Third party delivery sales are expected to increase due to higher organic growth, added delivery coverage to more restaurants and added service partners. We have reduced our selling, general and administrative expenses from $160 million to $164 million, to $156 million to $159 million, as we identified opportunities to reduce spending, while sustain focused on delivering our 2019 objectives.
We have also shifted to adjusted EBITDA and adjusted earnings per diluted share guidance to exclude various non-recurring charges, including executive transition, restaurant closures, certain professional fees and impairment. We now expect adjusted EBITDA of $117 million to 100 -- We now expect adjusted EBITDA of $107 million to $117 million. In addition to the pacing of field initiative, we are expecting a continuation of higher wage inflation than what we originally expected and are proactively addressing these cost pressures through programs to reduce turnover and better manage wages at a market level to mitigate the impact of a competitive labor environment.
Lastly, the increase of third party delivery sales, while still profitable, include incremental commission costs that will impact flow through on these sales category. We are expecting adjusted earnings per diluted share of $1.14 to $1.77, which includes the positive impact associated with an estimated tax benefit of $0.73 to $0.96. These updated ranges include both the benefit of the 10 restaurant closures. They do not, however, currently reflect the impact of any refranchising transactions. We have also lowered our 2019 capital expenditures range to $44 million to $55 million, which is down from earlier expectations of $50 million to $60 million. These will -- this lowered range still primarily consists of facilities improvements, technology and other investments and reflects the delay of some elements of restaurant and guest technology. And as Patty mentioned, we have just rolled out headsets to the field to help us better achieve the gift of time for our guests and handheld POS terminals will be completely rolled out by August.
Before I close, let me recognize the efforts of a collaborative organization that has rallied behind our five areas of strategic focus driving visible improvements in our business. We believe continued operational progress will translate into ongoing improvement in guest satisfaction and in conjunction with focused and impactful marketing, core product focus and technology enhancements, we can successfully improve the trajectory of our business results.
With that, I will turn the call back over to Patty.
Pattye L. Moore -- Interim President, Chief Executive Officer
Thank you, Lynn. Let me wrap up by reiterating that the entire Red Robin team is acting with urgency on the five key priorities that are critical to this turnaround. Within those priorities, we have narrowed the focus to the critical few initiatives that will have the most impact in stabilizing the business. I believe that we will show progress every quarter, but it is going to take time to get to where we need to be in improving our operational, financial performance. But I'm very energized by the progress we are beginning to see in the dine-in business and across all of the initiatives. I'm proud of the focus and determination of our team members. And I'm confident we are focused on the right things and now moving in the right direction. Thank you for your interest in Red Robin.
And now, we would be happy to take any questions.
Questions and Answers:
Operator
Thank you very much. (Operator Instructions) We will take our first question from Gregory Frankfurt with Bank of America. Your line will be open in just a moment, go ahead.
Gregory Francfort -- Bank of America Merrill Lynch -- Analyst
Hey, thanks for the question. Just maybe one -- on that tax benefit comment you put in the guidance. Is that a one-time tax benefit or is that just quantifying the overall, where you expect, I guess, the tax rate to be for the year?
Pattye L. Moore -- Interim President, Chief Executive Officer
It's the latter, Greg.
Gregory Francfort -- Bank of America Merrill Lynch -- Analyst
Got it. Okay. And then, just on the improvement in second half comps, are you seeing, I guess, you talk a lot about traction you're seeing in the guest metrics. Are you seeing an improvement in sales where you're running so far this quarter or is this more of an expectation that with some added marketing in the third quarter and some changes to the business and maybe a little bit better industry dynamic in the back half of the year, that you're going to see a lift in sales that can get you into the full year guidance range? Or are you seeing evidence of that playing out so far in the second quarter?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
What I will say is, we have seen some sequential improvement in May. However, we're still early in our turnaround, but we do have initiatives and items that we addressed during our prepared remarks that we believe will drive the business with improving trajectory in the second half of the year.
Gregory Francfort -- Bank of America Merrill Lynch -- Analyst
Got it. And then, maybe, I'll sneak one last one in. Just around the management headcount, I think you made a comment about increasing or investing back into management headcount. When did that change go into effect and what were you seeing in the business that sort of prompted that move or that change in terms of how you're running the operational model of the stores?
Guy Constant -- Executive Vice President and Chief Operating Officer
Yeah, Greg, this is Guy. So that change was added to the budget and it's part of the overall expected performance in 2019, which was an investment in us getting to higher staffing levels at the management level within the restaurant. We like many other organizations have been battling staffing challenges for some time and we've been kind of leveling out and been at the same point for quite a while. So we made a conscious effort at the start of 2019 to say that we wanted to get to better manager staffing levels and we've seen that progress happen throughout the first quarter.
Gregory Francfort -- Bank of America Merrill Lynch -- Analyst
Thank you. Appreciate it.
Operator
We will now take our next question from Will Slabaugh with Stephens Inc. Your line will be open in a moment. Go ahead.
Will Slabaugh -- Stephens Inc -- Analyst
Yeah. Thank you. You're doing better on average on many of the metrics that you mentioned earlier and in fact improving in a number of them. So I was hoping to take a step back and talk about where you see the key issues that maybe drove sales below your expectations in the first quarter and where the confidence comes that those are going to improve as the year goes along?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Well, I will start and then Pattye and Guy if you want to chime in. I think we are in the beginning stages of improving our operational execution. And so it does take time for that to really impact our guest experience and increase the next visit. And so, I think that's part of the reason behind why we're seeing a slow beginning to the year.
Pattye L. Moore -- Interim President, Chief Executive Officer
Yeah. And I would just add to that. Again, it all starts with the guest experience and improving the customer experience and the return of sales and return of customers won't happen in a straight line. But we do have marketing initiatives that as we talked about will kick off in the second half of the year. And we are continuing to see the improvements in the operations being fully staffed, reducing turnover, but those will not all happen in a straight line.
Gregory Francfort -- Bank of America Merrill Lynch -- Analyst
If I could follow-up on value. We didn't talk much about that. I think you guys didn't talk much about that in your prepared comment. Can you talk about your -- your approach to value during the first quarter? And how you're thinking about that for the rest of the year? I know, after the fourth quarter you talked a bit about the $10 initiative versus more historically consistent focus on the Tavern platform. So if you could go into any additional thoughts around that or just in general, how you plan to address value?
Pattye L. Moore -- Interim President, Chief Executive Officer
I'm going to ask Jonathan Muhtar to address that for you.
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
Yeah, thanks. Yeah, so we did make a pivot in the first quarter away from featuring our 699 Tavern as our primary message out there externally with guests and move toward focusing on our core Gourmet line. And we're pleased with what we saw there. We do -- as mentioned, we did also feature our $10 bundle in local markets and we were pleased with the results there as well. But going forward into the second quarter, we are continuing our national focus on a full price Gourmet burger without a value offer and featuring that $10 Gourmet bundle more at the local level.
In terms of the new campaign that's going to be launching in the third quarter. We're not commenting on the value message associated with that, but it will communicate our great value to our guests which exists across our entire menu.
Will Slabaugh -- Stephens Inc -- Analyst
Got it. Thank you.
Operator
We will now take our next question from Alex Slagle, with Jefferies. Your line will be open in a moment. Go ahead -- right ahead.
Alex Slagle -- Jefferies -- Analyst
Thanks for the questions. One was a clarification on the mall units. I missed the comments on the lease exit flexibility. It sounds like there'll be 66 remaining mall locations after these 10 are closed and if you could just clarify sort of what portion either have the leases terminating or some flexibility for you to be able to get out of those if you need to?
Pattye L. Moore -- Interim President, Chief Executive Officer
Well, you are correct. There are 66 remaining mall locations. But not all mall locations are bad locations. So, there is a subset of malls that were continuing to work with our landlords to try and achieve some rent concessions. And then, in other cases we may just naturally exit upon the expiration of the term. But we will proactively look at exiting those locations that make sense to do so.
Alex Slagle -- Jefferies -- Analyst
Okay. Thanks. And then on the refranchising, I don't know if there is some more granularity you could provide, just sort of what's changed since we first started talking about this at the Analyst Day and how to think about potential range of scenarios. How it might impact the P&L and priorities for use of proceeds?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Well, I would say we have recently engaged The Cypress Group. I won't go back a couple of years. But we've engaged with this group. We've been developing packages related to transactions. We're working with them on our portfolio evaluation in case we want to think about our portfolio a little bit differently. So we're making good progress along those lines. And we'll be meeting with them and having a more strategic meeting so that we can make some progress and hopefully report in the coming months.
Alex Slagle -- Jefferies -- Analyst
Okay. Thank you.
Operator
We will now take our next question from John Glass with Morgan Stanley. Your line will be open in just a moment.
John Glass -- Morgan Stanley -- Analyst
Hey, thanks. Good afternoon. First, if I could just come back to this pivot away from value or a different way of looking at value. So I think you were dialing it back in the fourth quarter and you said you were more focused on premium or full price burgers or premium whatever it was. Why -- what gives you the confidence that's the right strategy when your direct peers seem to still be focused on that or are they pulling back on that and that's giving you some headroom to pivot away from that? Do you think some of the decline in traffic incrementally this quarter did have to do with the fact that you would be a pullback on emphasizing the Tavern number for example?
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
So to be clear, in the fourth quarter we did still feature the Tavern Double. We -- the messaging was changed a bit from the previous quarter. So that was a shift that took place in Q1. There's multiple ways that we communicate value to our guests and we're confident that with the current strategy we're doing a good job of that. And that's the feedback we've been getting from our guests. Our royalty program plays a big role as well. And so we're continuing to use that and we're enhancing our capabilities there. So that'll become even more powerful for us as the year goes on and we'll be leveraging that even more.
John Glass -- Morgan Stanley -- Analyst
Okay. And then secondly on the menu -- you talked about menu simplification. Is that something you're testing now or you've done or how sweeping or broad is the initiative to simplify the menus as a way to improve speed of service?
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
Yeah. Sure, so I can chime in and I invite Guy as well if he has anything to add to my comments. But menu simplification is something that we have been focused on over the past couple of years and we've been following a consistent process of testing in markets and then rolling out the kind of the winning initiatives nationally. And so, over the past couple of years we've reduced our menu by about 10% on net and then we have some more simplification being rolled out later this year, in the second half of the year, we're removing a few more items that tested well for us.
John Glass -- Morgan Stanley -- Analyst
Okay. I then just two, maybe, more store related questions. Are the closures this quarter a result of an entire portfolio review and you found that just 10 needed to be closed or is this the first of -- there is a rolling kind of review process and you think over time there's probably more that need to be closed, you just haven't identified those specific stores yet?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Well, I think it's more of a rolling review process. We are continuing to negotiate with landlords. So hopefully we can come to an agreement with them on some of the locations that were borderline most recently.
Pattye L. Moore -- Interim President, Chief Executive Officer
Right. And as Lynn commented, The Cypress Group is just in and they've been reviewing things and we're looking forward to sitting down with them and going over their review in the coming days.
John Glass -- Morgan Stanley -- Analyst
Okay. And then just last question for me. I think last quarter you got the question about the profitability or what the margin structure would look like in the stores you're contemplating refranchising and sometimes company is going through refranchising do sort of hold that out as if we were to take those stores out of the base. Today, here is how much better or how different our margin structure would be? Do you have that figure or could you provide what you think, maybe the profitability of the business would look like without those 100 stores?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Well because it's a little bit influx currently, I'm going to hold off providing that information. But it's certainly something we'll consider in the future as we refine the portfolio strategy.
John Glass -- Morgan Stanley -- Analyst
Okay. Thank you.
Operator
We'll take our next question from Chris O'Cull with Stifel. Your line will be open in just a moment. Go right ahead.
Chris O'Cull -- Stifel Nicolaus -- Analyst
Thanks. Good afternoon, guys. Lynn, I apologize if I missed it, but did you say what our hourly wage inflation was during the quarter and what you expect it to be for the year?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
I don't believe I did, wage inflation was 5.5% in the first quarter and we do expect that -- to continue that wage inflation through most of the balance of the year with the caveat that we are trying to proactively address wages and try to get the inflation factor down on a go forward basis.
Chris O'Cull -- Stifel Nicolaus -- Analyst
And is that the hourly wage inflation or the total wage inflation for the restaurants?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
It's the hourly wage inflation.
Chris O'Cull -- Stifel Nicolaus -- Analyst
Okay. And then just as a follow up on labor cost. It looks like the labor cost dollar spend per operating week was relatively flat year-over-year. So what was the dollar offset or where were the opportunities you realized to offset that higher wage?
Guy Constant -- Executive Vice President and Chief Operating Officer
Not sure I understand your question, Chris. Can you repeat it?
Chris O'Cull -- Stifel Nicolaus -- Analyst
If you just look at the dollar per operating week that was spent in terms of labor cost per operating week it looked like it was relatively flat year-over-year. And so I'm just trying to understand, was it just a reduction in hours because of the declining in traffic or were there other changes like management structure to the stores that help offset that hourly wage inflation?
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
No, in fact as we talked about earlier, Chris we're more staffed at the manager level than we were before. So that actually would have been a drag in the other direction. No, I think some of the earlier points that Lynn made about the composition of sales coming with more PPA this year and less traffic, where last year it came with more traffic and less PPA. Most labor models understandably, base the hours that you assigned the restaurant on the traffic levels and the traffic levels are down. So we're not using as many labor hours in the restaurant as we would have in an environment where PPA was not up as much as it is.
Chris O'Cull -- Stifel Nicolaus -- Analyst
Okay, fair enough. And then, can you give us some color on what changes were the most impactful in terms of improving staffing levels and retention?
Guy Constant -- Executive Vice President and Chief Operating Officer
Well, staffing is something that you always hear restaurant companies talk about. It's a constant battle that you're working on, especially in this tougher labor environment to deal with staffing. But what we said is that, it's not a problem that we want to see continue. And so we have to make a conscious effort to make a change in how we approach it. And it comes on a lot of different levels. But starting by getting your managers as staffed as we have is certainly benefiting that. But giving real prescriptive tools to our managers to help them to get to higher staffing level, peaking the peaks is, of course, driving them to higher staffing levels because you need more people to peak out those peak hours and then, obviously, that gives you more people available to staff the remainder of the shifts during the week.
But we basically said that it's going to be very hard for us to execute on what we're doing in the restaurant, particularly at the very good productivity we have versus most of casual dining if we're not able to get us fully staffed as we are. And so, it was a conscious change, a conscious difference in how we approach staffing to make sure that we've bent the curve and made a real difference in where we've been for some time.
Chris O'Cull -- Stifel Nicolaus -- Analyst
Okay, that's helpful. And then, Lynn, can you give us a breakdown on the CapEx budget for this year, maybe a little bit more detail on how much is maintenance and any other item?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Yeah. Our expectation for the current year is $45 million to $55 million. I think around $30 million represents ongoing systems capital maintenance as well as restaurant maintenance and the balance are really some of our discrete projects.
Chris O'Cull -- Stifel Nicolaus -- Analyst
Great. Thanks, guys.
Operator
We'll take our next question from Jeff Farmer with Gordon Haskett. Your line I'll be open in just a moment Jeff.
Jeff Farmer -- Gordon Haskett -- Analyst
Great, thank you. Just one more labor question. I think last year you guys delivered 8% to 9% improvement in that labor productivity metric. Do you expect to see any carryover benefit into '19 from those efforts?
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
No, we expect it to be pretty flat, in fact, it was down a little bit in the first quarter. Some of that is sales driven, Jeff, because, of course, while hourly labor is generally considered to be variable, and it is mostly, there's just some hourly labor you need to open the restaurant to close the rest on a regular basis. So if your sales are down you lose a little bit of leverage on that. But no, on the backs of 8%, 9%, 10% productivity which we saw last year, we're expecting the productivity to be flattish to maybe slightly down, but still very good to where we were before we started the effort last year to improve our productivity.
Jeff Farmer -- Gordon Haskett -- Analyst
Okay. Then different topic, what's the casual dine-in sector performance assumption that you guys have embedded for lack of a better word in your down 1% to up 1% same store sales guidance for '19. What are you expecting to see from the casual dining sector over the next seven months or so?
Pattye L. Moore -- Interim President, Chief Executive Officer
Well, there's the casual dining sector and then there's our business. And so, what I probably just really focused on is our expectation for our business, which is in a different place than I think the casual dining index. And again, while we're in the early stages of a turnaround we do have the items that we've already talked about on the call that we believe will start to build a positive trajectory as we get to the end of this year and then into 2020.
Jeff Farmer -- Gordon Haskett -- Analyst
Okay. And just last question. I appreciate that you guys do not provide operating cash flow guidance, but a lot of investors on this name are focused on free cash flow. So again, understanding that you don't provide the operating cash flow guidance, is there any reason to think that it would not directionally trend with the lowered EBITDA guidance?
Pattye L. Moore -- Interim President, Chief Executive Officer
I'm not sure I understand the question, but we will have I think sizable cash flow being generated this year, which we intend to greatly spend on our investments, as well as paying down our debt.
Jeff Farmer -- Gordon Haskett -- Analyst
Okay. Thank you.
Operator
We will take our next question from Stephen Anderson with Maxim Group. Your line will be open in just a moment.
Stephen Anderson -- Maxim Group -- Analyst
Okay. Thank you for taking the call. Just wanted to ask (Technical Difficulty) basically the --
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
Hi, Stephen. Sorry about that, can you just restart your question? The line cut out the tiniest bit, very sorry about that.
Stephen Anderson -- Maxim Group -- Analyst
Okay. Going to the comp question, you saw -- you mentioned you expect comps to essentially turn positive by second half of the year, but what do you think are really the drivers you mentioned, maybe pivoting away from the Tavern Double's but what do you see -- do you see anything specific like an increase in the Red Robin's finest? Or what else do you see specifically that gives you the confidence or is it something you're seeing in traffic that gives you the confidence that maybe that guest is coming back? You mentioned, Guy, also about the decrease in walkways, is this trend you are seeing continuing into the second quarter?
Pattye L. Moore -- Interim President, Chief Executive Officer
Well, this is Pattye. One thing, we continue to see an increase in off-premise sales, as I think Lynn mentioned we are leaning into more third party delivery as well as catering continues to grow. And then, Jonathan, if you want to add any color on as the dine-in business improves and as you turn on marketing?
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
Yeah. I think in addition to that off-premise growth we're looking at both some PPA improvements with the mix and the focus on some of those more premium items, but also traffic improvements through the year with the new campaign and highlighting those things that our guests know and love about our brand, building off of those improved service experiences that they will be having throughout the year that we expect.
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
And then as it relates to some of the technology investments we're rolling out to the field. Some of those investments should improve throughput, which we think will have an added benefit in addition to the improved quality of execution.
Stephen Anderson -- Maxim Group -- Analyst
Now that technology improving, you're talking about the server POS specifically as in is leading to throughput improvement?
Pattye L. Moore -- Interim President, Chief Executive Officer
That's correct. Because the servers will actually take the order at the table and it will immediately be fired into the kitchen, which speeds up the experience.
Stephen Anderson -- Maxim Group -- Analyst
Now, have you allocated any kind of expense associated with the roll-out of POS -- with the POS system that's specifically regard to labor?
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
No, Stephen, we should be able to utilize the new server technology at existing labor levels. I expect it will help it. We think be a lot more efficient and provide a better guest experience. And as Lynn mentioned throughput. So during those peak periods in those restaurants that are running good volumes, we should be able to improve the number of guests that we're able to accommodate. But the server handheld is helping us do that.
Stephen Anderson -- Maxim Group -- Analyst
Right. Thank you.
Operator
(Operator Instructions) We will take our next question from Brian Vaccaro with Raymond James. Please go ahead Brian.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Thank you, and good evening. Just want to go back to the server handhelds and maybe if you could share a little bit more about the expected benefits or what you saw in tests as it relates to ticket times, average server station sizes or any other productivity benefits you'd be willing to quantify? And then also can you just confirm that, that is expected to be rolled out to all company units by the end of the third quarter?
Guy Constant -- Executive Vice President and Chief Operating Officer
Hey, Brian, this is Guy. So we expect to roll them out by the end of the year. We're hopeful that we're able to do that by the end of the third quarter. But, let's say, solidly that we expect it to be a 2019 roll-out system. Well I wouldn't want to get into the specifics of the benefits because it is a two stage roll-out that we are contemplating, there's a technology itself and then there's what we can do with the labor and support model inside the restaurant after the technology is rolled out. But as you might imagine, just on the surface, Lynn made the reference to better pacing of items to the kitchen. That's a huge benefit as many of you who have watched the industry for some time may understand that often servers take multiple orders, while they're out on the floor and then return to the point of sale system and enter them all at one time which then, of course, overwhelms the kitchen by having a server handheld, we're able to pace the orders to the kitchen. And as a result, get much more effective delivery in the kitchen which should help on all those other metrics that we've talked about.
And then as the servers become more proficient with the technology model and this leans into comments of both Pattye and Lynn have made about how we want to be really careful when we roll out things to operations that we do it in a way that they're successfully rolled out before we move on to the next initiative. We can then look at the support model that would allow servers to take on larger table stations and provide an even better guest experience and what that could provide for us at that time. But we're not ready at this point to comment on what that might mean specifically.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Okay. And shifting to the closed units. And I just wanted to ask, first, a numbers question. Lynn, the $0.9 million loss on those units, is that after or I guess burdened with selling costs, the 4% or 4.5% of sales?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
No, it's not. Those are the operating losses.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Okay. So, that's pre advertising. Okay. And maybe we could take a step back and maybe just level set how the group of mall units are performing versus non-mall units. I heard the commentary in your prepared remarks. But could you high level, I guess, we'll have 66 or 68 left. But maybe high level where the AUVs and store level EBITDA is relative to the non-mall units, maybe on the four months or trailing 12, whatever you might have handy?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Yeah .We quantified I believe in the opening remarks that traffic was down 300 basis points versus the non-mall locations. We'll have 66 mall locations after we closed the 10 that we talked about. Overall, AUVs I think are in the neighborhood of 1.9, give or take. So they are lower performing in some cases. And so those are the ones that we're focused on.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Okay and just to be clear, that's the 66 -- the total 66 -- the AUV on those 66 is 1.9?
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
Those are the closed locations.
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Those are the closed locations.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Those are the closed ones, right. We have it for the rest of the ones that are the 66 or perhaps off line you could provide that?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Well, we'll think about providing that on a go forward basis, Brian.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Okay. All right, understood. And then --
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
Historically, Brian, though, when we had talked about that historically now obviously in the past few quarters, mall performance has been poor. But historically when we refer to that, the average unit volumes were not dramatically different at malls than they were in the rest of the system. But occupancy levels and costs were much higher. So the profitability was much poorer at mall locations. But that comment was 9 to 12 months ago, in the past three quarters mall comps, as you know, from following our calls have been poor than non-mall comps. So that gap is -- there's been a little gap down (inaudible) before.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Okay. Great. And then just two last quick numbers questions for me. You set off-premise I think it was 11.6% of sales. How much of that was the third party delivery?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
About 3 percentage points.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Okay. Great. And then on the G&A guidance, I just wanted to confirm or the SG&A guidance, the selling cost your old guidance had selling at $64 million, any change to that in the new guidance?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Right now, we're expecting it to be about the same.
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
All right. Great. Thank you very much.
Operator
We will now take our next question from Jon Tower with Wells Fargo. Your line will be open in just a moment, Jon. Go right ahead.
Jon Tower -- Wells Fargo -- Analyst
Great. Thank you. Excuse me. Just on the traffic side, the equation is been, I think, five quarters now of sequential deceleration in traffic and given that you do have a loyalty database of 8.5 million members, is there anything you can discern from where that traffic is going?
Pattye L. Moore -- Interim President, Chief Executive Officer
No, I mean, one of the technology enhancements that we're putting in later -- beginning later in the year and into next year is to better be able to segment and target and talk to our royalty members, so we will continue to get better at that data analytics. But at this time we don't have an answer on that.
Jon Tower -- Wells Fargo -- Analyst
Okay. And then, just switching to commodity expectations for the year, obviously, pork is rising and there's fear in the market that that's going to have an impact on the rest of the protein structure. So what's embedded for commodity costs for the balance of '19?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Yeah, we do expect as a percent of restaurant sales to still be favorable this year compared to last year. And right now our pricing is roughly 2% for the company.
Jon Tower -- Wells Fargo -- Analyst
And how much is locked?
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
There is about 80% of our commodities are locked in. That's not for the entirety of the year in some cases. So in the middle of the year we will look at additional contracts for forward-looking periods.
Jon Tower -- Wells Fargo -- Analyst
Okay. And then, just lastly on the marketing spend. I know it sounds like it's evolving quite a bit or not the spend, but I guess the spend going into omni-channel versus traditional. Are you also thinking about spending more dollars year-over-year? Or are you allocating more towards higher TRPs relative to quarters and years past. Just kind of curious to have flesh that out a little bit more?
Guy Constant -- Executive Vice President and Chief Operating Officer
Yeah. Overall, we're not looking at any significant change in spend year-over-year in total. We are -- we have, as mentioned, shifted some dollars from the first quarter to the third quarter, second and fourth, right now are planned to be about consistent year-over-year. We also have made some additional investment and shift into digital and social and we've actually been really pleased with the engagement levels that we've seen which have grown significantly in the first quarter of the year through those channels.
Jon Tower -- Wells Fargo -- Analyst
All right. Thank you.
Operator
We will take our last question from Stephen Anderson with Maxim Group. Please go ahead. Stephen.
Stephen Anderson -- Maxim Group -- Analyst
Just a follow-up question to something you have in 10-K report about your owned properties. And just want to see if the -- the number -- the 37 restaurants that you own outright, including the real estate, is it a good number to still go by or if there's anything you've asked the consulting group that you may look at when you are evaluating those properties.
Pattye L. Moore -- Interim President, Chief Executive Officer
Well, if we're refranchising some of those owned properties we will offer to sell the properties along with every franchising transaction. If that's your question.
Stephen Anderson -- Maxim Group -- Analyst
Yes, it is, yes. Thank you.
Operator
And it appear there are no further questions at this time. I'd like to turn the call back over to Pattye Moore for any additional or closing remarks.
Pattye L. Moore -- Interim President, Chief Executive Officer
All right. Thanks, again, everyone for joining us today. We look forward to sharing our second quarter results with you in August. Thank you.
Duration: 58 minutes
Call participants:
Pattye L. Moore -- Interim President, Chief Executive Officer
Guy Constant -- Executive Vice President and Chief Operating Officer
Lynn Schweinfurth -- Chief Financial Officer, Executive Vice President
Gregory Francfort -- Bank of America Merrill Lynch -- Analyst
Will Slabaugh -- Stephens Inc -- Analyst
Jonathan Muhtar -- Executive Vice President and Chief Concept Officer
Alex Slagle -- Jefferies -- Analyst
John Glass -- Morgan Stanley -- Analyst
Chris O'Cull -- Stifel Nicolaus -- Analyst
Jeff Farmer -- Gordon Haskett -- Analyst
Stephen Anderson -- Maxim Group -- Analyst
Brian M. Vaccaro -- Raymond James & Associates -- Analyst
Jon Tower -- Wells Fargo -- Analyst
