Red Robin Gourmet Burgers, Inc. — Q1 2018 Form 10-Q
Business context and period: The filing covers the 16 weeks ended April 22, 2018, compared with the 16 weeks ended April 16, 2017. Red Robin operated 484 company-owned restaurants and had 87 franchised restaurants across North America. Fiscal 2018 is 52 weeks and ends December 30, 2018.
Financial performance
| Metric | Q1 2018 | Prior comparable period |
|---|---|---|
| Total revenue | $421.5 million | $420.6 million |
| Restaurant revenue | $414.7 million | $413.5 million |
| Operating income | $7.0 million; 1.7% of revenue | $17.5 million; 4.2% of revenue |
| Net income | $4.4 million | $11.6 million |
| Diluted EPS | $0.34 | $0.89 |
| Operating cash flow | $57.0 million | $70.0 million |
| Capital expenditures | $15.9 million | $24.5 million |
- Comparable restaurant revenue declined 0.8%; average guest check fell 1.0%, while guest counts increased 0.1%. Company-owned average weekly sales volume decreased 3.2% to $53,704.
- Restaurant operating costs increased to 80.0% of restaurant revenue from 78.7%. Food costs rose 90 basis points as a share of restaurant revenue, other operating costs rose 70 basis points, and occupancy costs rose 40 basis points. Labor improved 70 basis points.
- Cash and cash equivalents were $23.7 million at April 22, 2018, versus $17.7 million at year-end 2017. Current assets were $80.7 million and current liabilities were $154.3 million.
- Total debt and capital lease obligations were $242.1 million, down from $277.3 million at December 31, 2017. Credit Facility borrowings were $230.5 million, plus $7.5 million in letters of credit. The company reported a 3.96x lease-adjusted leverage ratio and compliance with debt covenants.
Material changes and unusual items
- Total revenue increased 0.2%, but net income fell to $4.4 million from $11.6 million. Restaurant revenue growth from new locations was largely offset by weaker comparable sales and revenue from closed restaurants.
- Q1 2018 included $4.0 million of employment-related litigation contingencies and $2.3 million of reorganization costs, recorded in other charges. No comparable charges were reported in Q1 2017.
- Operating cash flow declined $12.9 million, primarily reflecting higher vendor payments, lower cash generated from restaurant operations, higher bonus payments, and reorganization costs; the company cited offsetting vendor-deposit returns and additional receipts.
- The company adopted revenue standard Topic 606 retrospectively. It changed the presentation of franchise advertising contributions as revenue, with related expenses recorded in SG&A; adoption did not affect previously reported net income.
Outlook, management commentary, and risks
- Management expects to use operating cash flow for debt repayment, restaurant maintenance and infrastructure, new restaurant development, and strategic initiatives. It believes operating cash flow and remaining credit-facility capacity will support working capital needs and planned capital expenditures.
- No specific earnings or comparable-sales guidance is provided. Management anticipated inflation would pressure labor and commodity costs for the remainder of 2018, particularly food costs and wages.
- Commodity and rate sensitivities: a 1% increase in food costs would raise annual cost of sales by approximately $3.2 million; a 1% change in the effective rate on variable-rate borrowings would change annualized pretax interest expense by approximately $2.3 million.
- Other stated risks include competitive discounting, consumer spending and restaurant traffic, food and labor cost volatility, minimum-wage increases, execution of marketing and expansion plans, technology and cybersecurity, and litigation. The company reported no material change to its previously disclosed risk factors.
- Lease accounting standard Topic 842 was expected to be adopted in Q1 2019 and to significantly increase reported assets and liabilities. Management was still implementing a lease management system to quantify the impact.
Important facts for investors to verify
- Whether comparable-sales and guest-check trends improve, and whether pricing offsets food, wage, and other restaurant-cost inflation.
- The final amount and resolution of employment-related litigation claims, and the nature and ongoing impact of the reorganization costs.
- Debt repayment, variable-rate exposure, covenant headroom, and actual availability under the revolving credit facility.
- The expected balance-sheet effect and implementation status of Topic 842 lease accounting.
- Whether cash generation can support restaurant investment and other planned uses while current liabilities exceed current assets.