Red Robin Gourmet Burgers, Inc. — Q2 2021 Form 10-Q
Business context and period: The quarter ended July 11, 2021 and comprised 12 weeks; year-to-date results cover 28 weeks. Red Robin operated 430 company-owned and 101 franchised restaurants. Nearly all locations were operating without restrictions by quarter-end, as dining rooms reopened and capacity expanded.
Financial and operating results
| Metric | Q2 2021 | Q2 2020 | 28 weeks 2021 | 28 weeks 2020 |
|---|---|---|---|---|
| Total revenue | $277.0 million | $161.1 million | $603.3 million | $467.2 million |
| Operating loss | $2.6 million | $50.6 million | $6.9 million | $208.8 million |
| Net loss | $5.0 million | $56.3 million | $13.7 million | $230.6 million |
| Diluted loss per share | $0.32 | $4.09 | $0.88 | $17.38 |
| Operating cash flow | Not separately provided | Not separately provided | $37.2 million | $(18.6) million |
Revenue and margins: Q2 restaurant revenue rose 69.9% year over year, including a 66.3% increase in comparable restaurant revenue, driven by guest count growth of 47.7% and average check growth of 18.6%. Revenue was still 10.0% below Q2 2019. Off-premises sales were 32.8% of food and beverage sales versus 63.8% a year earlier. Year-to-date revenue increased 29.1% year over year but was 15.9% below the comparable 2019 period.
Restaurant operating costs were 84.3% of restaurant revenue in both Q2 and year-to-date 2021, compared with 98.0% and 93.6%, respectively, in 2020. Q2 cost of sales was 22.8% of restaurant revenue and labor was 36.4%; labor benefited from sales leverage and staffing shortages, partly offset by wage and hiring costs. The company reported a 1.8% net loss margin for Q2 and a 2.3% net loss margin year to date, versus 34.9% and 49.4% losses in 2020.
Cash, debt and liquidity: Cash was $25.6 million at July 11, up from $16.1 million at fiscal year-end. The company reported approximately $117 million of liquidity, including cash and available credit-facility capacity. Debt totaled $154.8 million, down $15.8 million from year-end; $9.7 million was current. Available borrowing capacity was $91.4 million, alongside $8.6 million in letters of credit. Cash used in investing was $10.8 million, primarily capital expenditures. Lease liabilities had a $508.9 million carrying value. Current liabilities exceeded current assets by $124.5 million.
Material changes and unusual items
- Results improved substantially against 2020, when pandemic-related traffic restrictions and impairments weighed heavily on results; 2021 remained below 2019 revenue levels.
- Q2 other charges were $2.2 million, including restaurant closure and refranchising costs, impairment, litigation contingencies and COVID-related costs. Year-to-date charges were $7.7 million. By comparison, 2020 year-to-date charges included a $95.4 million goodwill impairment.
- The weighted-average borrowing rate was 7.4% in Q2, compared with 4.2% in Q2 2020; the company cited higher rates under its credit agreement amendment. Year-to-date interest expense also included approximately $1.2 million of deferred financing charge write-offs.
- The company filed approximately $16 million of federal and state tax refund claims based on net operating loss carrybacks. It expected some refunds in 2021, with the majority delayed until 2022.
Outlook, commentary and risks
No formal financial guidance was provided. Management said off-premises sales remained more than double pre-pandemic levels even as dining rooms reopened, and planned to continue the Donatos rollout to approximately 80 restaurants in the second half of 2021. Staffing and retention were identified as priorities; hiring challenges also contributed to intermittent supplier product and distribution shortages. Management anticipated inflation would negatively affect labor and commodity costs for the remainder of 2021.
COVID-19’s future effects on operations and performance remained uncertain. Other identified risks include workforce availability, food and supply inflation or disruption, competition and consumer spending, execution of operating and technology initiatives, and the adequacy and cost of liquidity. The company was in compliance with applicable credit covenants at quarter-end; lenders waived application of the fixed-charge coverage covenant for Q3 and Q4 2021. Share repurchases were suspended, and lender terms prohibited them before Q1 2022 at the earliest and until specified covenant conditions were met. Management stated that litigation provisions were adequate and did not expect pending matters to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether guest traffic and comparable sales can sustain recovery, particularly against pre-pandemic levels.
- Whether labor availability, wage inflation, commodity costs and supplier disruptions pressure restaurant margins.
- Timing and receipt of the approximately $16 million in tax refunds and their effect on liquidity and covenant calculations.
- Credit-facility terms, borrowing costs, covenant waivers and the company’s capacity to manage debt and substantial lease obligations.
- Progress and economics of planned Donatos expansion, restaurant closures and other operating initiatives.