RRGB’s 2Q09 same-store sales came in down 11.5%, representing a dramatic sequential fall off in sales on a both a 1-year and 2-year basis. Comparable sales growth trends deteriorated further during the first four weeks of Q3, -15.3% versus the +4.4% from the same 4-week period last year. Management stated that the most difficult comparisons of the year are now behind them, but as we have seen in this environment, easy comparisons no longer seem to matter.
RRGB continues to blame its sales weakness on both the macro environment and the company’s decreased level of YOY spending on national cable advertising. RRGB should never have invested in national cable advertising because its less than 500 unit store base does not warrant such a high level of spending. Since its inception, management was never able to quantify the advertising campaign’s returns, but based on management comments, guest count growth was directly related to the level of advertising spending in each quarter. More importantly, it was directly related to the incremental spending on a YOY basis, which means that the company had to spend increasingly more money to continue to drive traffic higher. This is an addictive type of spending, which does not yield the necessary returns because the incrementally higher level of spending does not typically generate incrementally higher growth. Instead, the increased spending is needed to maintain the same level of growth.
RRGB launched its national advertising campaign in April of 2007 and ran advertisements for 11 weeks in FY07. In 2008, the company increased this ad time to 23 weeks and its total spending to $18-$18.5 million from $11.5 million in 2007. In 2009, RRGB does not plan to do any national cable advertising and reduced its contribution to the national advertising fund to 0.25% of restaurant sales from 1.5% in 2008. The chart below shows the quarters when there was no advertising, increased, decreased or even advertising weeks versus the prior year (as shown by +, -,=) relative to reported traffic results.
Early on, RRGB's traffic growth benefited from this incremental spending (turning positive in 2Q07 and 3Q07) but went negative again in 4Q07 when the ads went off the air. There was some sequential improvement in 1Q08 traffic (still slightly negative) when there were incremental weeks of advertising relative to no advertising in 1Q07. In 2Q08, advertising levels were flat with the prior year and traffic continued to decline. Even with higher levels of advertising spending in the back half of 2008, traffic declines deteriorated further. Of course, the macro environment had a lot to do with the top-line weakness at RRGB and outweighed the benefit of having incrementally more television ad support in 2H08. Due to the decline in sales in 2H08, the company could not justify maintaining the same level of investment in national cable advertising in 2009.
Last year, we heard about top-line weakness despite increased spending in 2H08 so margins felt the impact of both declining sales and the incrementally higher costs. This year, RRGB continues to point to the decreased level of advertising as the reason why sales have continued to fall off so significantly. Most of the questions on the earnings call were focused on a national advertising campaign that does not even exist this year, which highlights the distraction it has become for the company even after the case.