Motley Fool Hidden Gems Investing - A Burger Turnaround?

Episode Date: November 15, 2023

Sometimes in this business, you need to get your hands a little greasy. We go hands-on and one-on-one with Red Robin’s CEO to see what they’re cooking up. (00:21) Tim Beyers and Dylan Lewis discuss: - The stunning revelation that Apple earns 36% of Google search revenue from safari as part of their default agreement. - Target’s efficient quarter and product mix decisions for the holiday quarter. - Airbnb’s $200M acquisition ot AI company GamePlanner.AI (16:28) Ricky Mulvey talks with Red Robin CEO GJ Hart about how he’s trying to turn the 54-year-old burger chain into a premier fast casual dining destination. Companies discussed: GOOG, GOOGL, AAPL, TGT, ABNB, RRGB Host: Dylan Lewis Guests: Tim Beyers, Ricky Mulvey, GJ Hart Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

From morning hockey with a cup of coffee, to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash triangle for details. Who says expert testimony isn't interesting? Motley Fool Money starts now. Dylan Lewis I'm Dylan Lewis, and I'm joined over the

airwaves by Motley Fool analyst Tim Beyers. Tim, has the caffeination train left the station? Tim Beyers It has, and we are reaching the caboose stage. I'm getting my caffeine injection. Love it. We're going to need that energy, because the antitrust battle between Google and the Department of Justice rages on. Tim, we don't always have really compelling, scintillating expert testimony when it comes to antitrust cases and the looks at some of these monopolistic businesses. Not the case this week, though. We wound up hearing that Apple earns 36% of Google search revenue from Safari as part of their default search agreement when there

was an expert testifying in the trial this week. This seems like a meaningful and pretty attention-worthy piece of news. For sure. We found out from the expert witness here that Google pays Apple 36%. Let me say that again, 36% of Safari search revenue. that is extraordinary. You're paying over a third of your revenue from Safari for Google searches to Apple because Apple controls the Safari browser on its iDevices, on iPhones specifically. That's an extraordinary number. Then CEO Sundar Pichai confirmed that under questioning from a, I guess this was under cross-examination. I can't say that for sure, Dylan. But boy, this is an extraordinary revelation. But it does get complicated very quickly. And I don't know

how much you want to dig in on this, but when asked how this is different from what Google pays Samsung, and in this case, the allegation is that Google pays Samsung less than half of that 36% to Samsung, another key partner of theirs. Pichai said on the stand, it's like apples and oranges. I'm not sure how, but that seems like a heck of a cop-out. It does. Let's dig into some of the dynamics in the overall market share for browsers. Because if you look, Safari generally has 20% to 30% of browser market share. Chrome is far and away the leader in market share. I've estimates of 50% to 60%. The apples and oranges here to me, Tim, is, we are looking to lock in as much market share as possible. That 36% is us saying, yeah, we're pretty good with this 80% to

90%. You're a valuable partner, and we're going to make it worth your while. Absolutely. Apparently, Pichai also said that they compete fiercely with Apple. But I'm not so sure that's true either here, Dylan, because it's hard to say that you're competing fiercely with a partner with whom you pay what is essentially a tax of 36% just to be on that device. That tells you that Google says, you know what? The iDevice is really important. You tell us what you need, and that's the check that we will write. That's how this comes off here. I think Google is very happy to pay this. And frankly, if you took the government out of it, I think Google should absolutely be thrilled to pay this because the most important thing is to

be on that device, to be the default search engine on that device and not cede ground anywhere because the number one business that Google is in, let's remember, is search advertising. And so anything they can do to maintain their lead as the default search engine on what is arguably the most popular and the most fruitful device in the leading economies in the world is super important. You write that check, and they write it 99 times out of 100, independent of what the government thinks. Now, the government has other opinions about this, but I think this is a smart deal, independent, all else being equal. It's a smart deal, but it may get Google in trouble here. Yeah, I was thinking, Tim, the only reason

this deal exists is because it's mutually beneficial. The only way that they're comfortable with that 36% is because they know their ad business generates margins that make that worthwhile. On Apple's side, they're essentially getting what some people have estimated to be about $20 billion in revenue annually to not do very much. This would be pretty high-margin revenue for them to have coming in through this deal. There's no question. And for these attorneys, and particularly for the government, you can see how they can make a, I'm not going to use any legal terms here, but you could see how they could make an argument that feels a little evocative of like, boy, it'd really be a

shame if your search engine wasn't on our device. You know what I mean here? It has shakedown sort of vibes to it. I don't think that's even remotely what's happening. But if you were an attorney and you were in that courtroom and you were trying to make a case, that's a little bit what it sounds like in terms of making this case. I don't think that's what's happening here. But I could see how the attorneys are making that argument that this is a little bit of a shakedown. Because look, for Apple, to your point here, Dylan, This is incredibly high margin revenue. It is incredibly fruitful. It's a small piece of the overall Apple business, but it's a key portion of the Apple business. What it

does is it shows the leverage that Apple as a company has by virtue of the power of the Apple Store. The Apple Store is incredibly powerful. It gives Apple a huge amount of leverage and the attorneys to their credit are saying, hey, look at what they can extract by virtue of this power that they've got. All to say, I think Alphabet and Apple shareholders probably would be happy to see this deal continue. Folks that are proponents of an open internet maybe have other opinions. If you're looking at the antitrust side of things, you might have other opinions as well. Tim? Yeah, there is no question. What I would also say is that for Google, the problem for them is that what may feel like a shakedown

to another company to them is just another check that they have to write, and the fact that they can do that, it's just a bad look for Google. I can't comment on the legalities of all this, but I know it doesn't look good, Dylan. For investors, the fact that this is, so many numbers, the kinds of numbers that are involved in this, and the fact that it is mutually beneficial still says a lot about the market power of both companies, Google and Apple. Alright, Tim, we're going to head over to retail. We saw earnings results from Target shares up 15% after the company's fiscal Q3 report. Top line, bottom line, both came in ahead of expectations. That top line down

year over year, but some meaningful movement, especially on earnings per share. When you look at the results from Target, Tim, is this more of the year of efficiency playing out? There's no question it's the year of efficiency. I mean, it sure looks like it. Just notice the difference. In terms of earnings per share, I believe it was up close to, yeah, earnings grew by 36% to $971 million during the quarter. That is way above what analysts had expected, which is much closer to $685 million. Let's be clear here, Dylan, this is on top-line results where comparable sales, same-store sales down 4.9%, store-level comparable sales down 4.6%, digital comparable sales down 6%. This is an extraordinary story of Target managing

its inventory incredibly well, reducing the value of its inventory by 14% and improving its operating margin as a result to 5.2% year over year, up from 3.9% here. There is a huge amount of efficiency here. This is something the market seems to be willing to pay up for. Like you said, Target is up massively today in terms of trading in the stock. Last I saw here, Dylan, as we're taping, it's up about 17%. That is because Target, despite some of the unwillingness of consumers to spend, and they are holding back a little bit going into the shopping season. We don't know what that's going to mean for the holiday shopping season. But I can't say, no one should be surprised by this. A lot of these stores are generating

meaningful amounts of revenue and even operating profit from things like grocery. And food prices up 25%. Of course, spending is going to be depressed in some areas here. So, Target has to get the mix right. And the fact that they got the mix right during this quarter, and is just absolutely enormous. I think it was surprising to some investors here, and delightfully so, which is why we're seeing the stock rally as much as we are. Yeah, it's tough to know exactly where we'll be heading going into that critical holiday season, but the market reaction here seemed to be rewarding a lot of what they were doing. I think management on the call, you were talking about product mix, talked about how for the

upcoming quarter, they are looking to bring thousands of gift-type SKUs down under that $25 mark to try to be a little bit more attractive to consumers. Do you feel like we've finally maybe hit the bottom of the Target pessimism? I mean, shares are down nearly 30% year-to-date, Tim. I mean, maybe. I'm going to say maybe, but I think what Target is doing is getting focused. And so, there is a little bit of an underlying tech story here in that what they're trying to do is streamline operations, identify their most valuable customers, and get those customers into the store or onto the site more often. Another thing they reported here, and I thought this was interesting, Dylan, so their Target Circle members, so this is their loyalty

program here, more than 1 million new loyalty members enrolled during the July and October Target Circle Week events. If I have this right, I don't know if it's the exact comparable here, but it feels a little bit like Prime Day. Amazon's doing more Prime Days. Circle Week feels a little bit similar to this. Circle Week members now, what Target is reporting, they took five more trips and spent nearly $300 more than non-Circle guests. What they're trying to do in addition to driving efficiency on the back end. So, in other words, moving inventory faster, getting bigger inventory turns, not taking on too much inventory too soon in the buying cycle, and then getting your loyal members into the store and moving more inventory through those members,

that's a pretty good funnel that leads to just a leaner and better experience that generates margin for Target. I think it's way too soon to say whether it's hit bottom, but I do like that. I think investors are rightly rewarding Target for being more efficient in how it's thinking about moving product, particularly going into the busiest shopping season of the year. We have one more story that I want to get your take on this episode, Tim. It's in the world of tech, and it comes from Airbnb. Airbnb acquired Game Planner AI for $200 million. This is a relatively secretive startup. We don't have a ton of details there, but we're in an environment where AI gets rewarded, as a buzzword. What do you make of this for Airbnb?

Well, I think it just highlights that it's very easy to forget. We think about Airbnb is a hospitality company. Let's be clear about this. Airbnb is not a hospitality company. I cannot say this strongly enough. That is not who they are. You should not think of them as comparable to hotels. That is not what Airbnb does. Airbnb is a software company. Let me say that again. Airbnb is a software company. Do not forget this. Do not forget this because I think it's very easy to forget, Dylan, because we think about Airbnb in terms of the commercials and the branding of Airbnb. It's like, you're going to get these amazing destinations at cheaper prices because people are lending out, they're opening their homes to you in incredible destinations

around the world, and then you get to meet Sven or whoever it is who's going to take you around Amsterdam and show you all the hidden spaces. Yes, Airbnb is that. But really what Airbnb is, is a software company. They have a huge number of open source software projects that they invest in. And the product of Airbnb is the thing that you see on your phone. And it is designed to make the experience, it's designed primarily to reduce friction between a property owner that wants to rent out their property, trying to get that in front of potential renters, potential visitors and travelers. Anything they can do to make that easier is good for the Airbnb business. We don't know the price of this, but Game Planner AI is apparently a specialist here.

We don't really know what this is going to be, but we know that one of the co-founders is, I believe, this man named Adam Shire, who is a co-creator of Siri, which we know about Siri. You may love Siri, you may hate Siri, but we know that Steve Jobs really valued Siri and thought of it as an interface and a way to get to things that mattered inside the Apple ecosystem faster through a voice interface. I think there's still work to do to make Siri be that kind of interface. But this is probably something we're going to see from Airbnb. What is this AI machine? We don't know, but we probably can expect this is a way to get to Airbnb properties and maybe destinations or deals that you would like a lot faster.

And that's interesting. So the name of the game with Airbnb is reducing friction. Sounds like we might have some AI helping them do that soon, Tim. Well, we hope that some AI is helping them do this. But Airbnb is very good at updating its software consistently. They just had their 2023 winter release. They release software to update their platform a few times a year. And so we're going to see this GamePlanner.ai product introduced into a new release. Maybe it'll be spring 2024. We don't know, but it is coming, Dylan. And that is very interesting

for Airbnb shareholders. Tim Byers, thanks for helping me wade through it all. Thanks, Dylan. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region. In seconds, you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted.

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dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. Coming up, what's the secret sauce for a restaurant turnaround? Motley Fool Money's Ricky Mulvey recently took a field trip to the Red Robin headquarters out in Colorado to taste test some burgers and sit down with CEO G.J. Hart. The chief burger meister talked about turning around the 54-year-old brand, gamification in dining, and how to cook the perfect burger. One of your first goals as a part of turning around Red Robin is to make this into an operations-focused company, which for a layman outside of it, it seems like every Every restaurant is exactly that. It is an operation, and you have to focus on that.

So, what does this look like for someone who doesn't really understand the restaurant industry? How can they understand that goal and maybe measure it? Well, it goes back to every decision in a restaurant business ends up that the operator has to implement that change, for the most part. And so, wouldn't it make sense that they have a seat at the table and have the input in terms of what they are going to be expected to do? And so, that's the first step of being an operations focused company, that you don't make a decision without an operator having input or operators having input. So, that's one. Number two is, again, companies tend to, I think, make decisions and not understand just how difficult those decisions are if you take it all the way down

to that single unit that they have to implement. And so I think what we're trying to do is make sure that we all understand the elements of what makes a restaurant tick. If you give them so many initiatives, they want to do them well, but they can't do them all well. And so what's better, to stay very focused, do a limited number, or to do a whole bunch of things halfway? And the former is the better answer to that question. And so, for a layperson, I think it's just understanding that that individual restaurant manager has an input into the decisions that are being made on how we operate that restaurant, the hospitality that we create, all those things, the execution of the food level, that they have an input on it.

So, when you talked about a few things, I tried some of the newer burgers earlier, and essentially changing the way burgers are cooked at Red Robin, I imagine, is quite an undertaking. When you said you got to focus on a few changes at a time, what are a few changes you're focused on right now? Well, let me back up to mid-year when we changed from a conveyor belt type cooking system that had been around in Red Robin for 20 plus years to a flat top, which to me, when you think about gourmet burgers, gourmet burgers, in my mind, and I think Chef Brian would tell you the same, are done on a flat top. That was an initiative, yes, that was difficult, but We communicated it. We had the proper training around it. Many of our cooks around our system

are familiar with that because they have other jobs. They work on flat tops. That was a real challenging initiative, but done very successfully because everyone was on board because it's improving the quality. It improves the efficiency, all those kinds of things. Right now, we just launched some of the food that you just had a few weeks ago. And what we did is we have to have everyone understand what those food elements are. We brought all of our multi-unit folks in and actually had them execute and train on the food. And then we have our training folks out in the field that support the efforts in terms of making sure we execute. So, that's been an initiative that we needed to do well, and I think we've done it pretty well, and it's being

received incredibly well. So, that's just one big initiative that we've got going on right now. As you talked about the brand, over 50 years old, there was a long period of decline in sales and guest satisfaction. That's something you've been blunt about dealing with. What do you think created that, and what are you doing to fix it? Well, what created it is a lack of execution and a lack of resources to be able to execute. That's what created that. If you go to a model where a server has, you know, 10 tables versus three to five tables, which is going to give more hospitality, the three to five. So putting those resources back start to help improve overall satisfaction of the guests. By the way, it also helps execution within the restaurants and turning

tables faster, which is the key to being able to drive sales, et cetera, et cetera. And so that That is what really, I think, hurt the company during that period of time, as well as taking away food quality by going to prepackaged frozen products. All those kinds of elements were detriments to the brand. What we're doing now, I think you've seen some of it today, we're going back to really cooking food. We're going back to having quality ingredients. That's an investment, but we believe it's the right investment because that's what the elements of this brand were all about for so long. But you also have to reset guest expectations.

So one of the things from this quarter is that you're essentially faced against this big, it was a $10 meal deal for, what was it, a cheeseburger, fries, and a drink. And that brings a lot of people in the door. And so now you're trying to not do away with discounts, but reduce them. And that changes expectations for the people coming into Red Robin. How are you focused on changing those expectations? Well, it's communicating with them and letting them know, first of all, that there's something new at Red Robin. And we're doing that to our loyalty base. We're doing that through social

media. We're doing it through some limited, but very specific and targeted marketing efforts that we're going on. But we needed to be able to ensure that our execution is at a high level. In terms of discounting as a normal course of business in casual dining, I don't believe that this brand can continue to perpetuate just by having these deep discounts. As I stated on the earnings release, it's 30% to 40% less margin, etc. It's just a difficult one for a brand long-term to be able to sustain that. We're not in the fast food business. We're in an experience business where you come in and you enjoy a meal. So, yeah, it's a different tact, but I believe to be able to build a sustainable brand, that you do limiting discounting

to target something you want to do, but you don't do it just full stop in every single channel that you're in business in, be it off-premise, on-premise. All the channels are fed with these deep discounts. So, when you go into a Red Robin, speaking of the experience, this is, I would say, one of the few restaurant chains where automation is very visible to the customer at the table. So, you have a member of the wait staff, they'll come up and take your order, but you can also do it on an iPad. The bill transaction, there's no back and forth. It's on the same iPad. So, how do you think about automation and balancing that with a guest experience that

is human first? It's one of the oldest professions in the world is bringing food to people and then they eat it. So, to be clear, for me, technology should be an enabler to do a better job of what we're in business to do. To your point, it's a human interaction business. It's a casual dining experience. It is not in the realm of what, if you're in a hurry, you line up and you get your food, whether it be fast casual or whether it be QSR. So, technology is an enabler. From my perspective, the current tabletop technology that we have, what it's really used for the most is checkouts to make it easier. So, you don't have to wait on your check. You can move on and go on. That works fine. Longer term, it's using technology to be able to enable,

hey, recognize that guest, know when they were in, what are their likes, what are their dislikes, and be able to make that experience that much more personable from the server to the family or to the guest or whoever it might be. We're continuing to think about how do we target that? How do we get to the next stage of technology? But again, it is not to be the forefront. It's to enable us to do a better job of what we do, which is the experience business. So, I'm going to stay focused on the tech part for a sec. I'm going to take off my Motley Fool hat, investor hat, whatever, because I went to a Red Robin a few days ago in preparation for this. And one of the things I would say I had a difficult experience with is the games. So,

you have an iPad, and then there's a game option. And then when you click the game option, it brings up a $3 charge that's not visible before you hit the game option. And I think that's tough for me, because I have the thing in my brain that menu games tend to be free, or if it's an arcade game, you know the price of it going in. So, I wanted to bring that up with you, because now I'm talking as a hamburger consumer, not an investor. I got the chance to talk to the CEO of Red Robin, and this is my feedback. This is my wish, is that either the games are free or you know what price it is up front. Yeah, that's fair. And to be candid, the gamification piece of that technology is not used that often. And we do need to do a good job

of communicating that. And we're open to that feedback. We hear that feedback. And candidly, we're evaluating all those technologies right now and do they make sense. And I don't disagree. It's either you're told right up front, or it's a free. Yeah, because right now, you have to cancel the transaction afterwards. But I appreciate you hearing me on that. I'll put the investor hat back on. We'll talk more directly to the people here for stocky stock stuff. But you're upgrading restaurants.

This is about capital allocation. So, I want to know how you think about it as a leader. You're upgrading restaurants. You're buying back some stock. What should Motley Fool folks know about your general philosophy towards capital allocation? Yeah. So, the philosophy is first things first. And the first thing that we have to do is make sure that our restaurants are in decent shape, to make sure that if there's deferred maintenance, that we bring it up to speed. Through COVID, as many restaurant companies

really challenged, every business was challenged for capital because they just weren't making the kind of money. And so, the first thing that we're trying to do is bring our restaurants up to where they should be, providing the environment where our team members can execute at a high level. That's first and foremost, and that's the work that we're doing. There's always more capital requested than you have the capital to spend, so you have to prioritize that. What I would tell investors is, we're going to make sure that we protect the mothership, which is the Red Robin brand, and make sure that we can execute at a high level. All right. I've had Red Robin twice this week. I've had it at the wonderful headquarters, and I had it on Sunday. I think I'm

going to cook a burger for myself tonight. As much as I love the restaurant, three times in one week is a little tough for me. What's your advice as I go to the grocery store and I get ready to cook myself a burger? Well, make sure you get a good fresh burger that's got enough fat content in it to provide flavor, number one. Number two, make sure you season that burger. Don't just put it on a grill by itself. Whatever your favorite seasonings are. It could be very simple, salt, pepper, not too much salt, of course. And then make sure that when you do cook it, that you don't flip it too many times. You allow each side to cook properly, depending on the temperature you want to cook it to.

As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening! We'll be back tomorrow. you