Red Robin Gourmet Burgers, Inc. — Q2 2016 Form 10-Q
Reporting period: Twelve weeks ended July 10, 2016; year-to-date figures cover 28 weeks. Comparisons are with the periods ended July 12, 2015. The company operated 460 restaurants and had 86 franchised locations at quarter-end.
Financial performance
| Metric | Q2 2016 | Q2 2015 | 28 weeks 2016 | 28 weeks 2015 |
|---|---|---|---|---|
| Total revenue | $305.5 million | $293.0 million | $707.7 million | $687.9 million |
| Operating income | $10.4 million | $16.5 million | $30.6 million | $40.3 million |
| Net income | $7.6 million | $11.2 million | $21.8 million | $27.7 million |
| Diluted EPS | $0.55 | $0.78 | $1.59 | $1.94 |
- Q2 restaurant revenue increased 4.6%, but comparable restaurant revenue fell 3.2%, driven by a 3.9% decline in guest counts, partly offset by a 0.7% increase in average check. Year-to-date comparable revenue decreased 2.7%.
- Restaurant operating costs rose to 79.1% of restaurant revenue from 77.5% in Q2, and to 78.2% from 77.2% year to date. Food costs improved with beef-cost deflation, favorable mix and pricing; higher labor, other operating and occupancy costs offset some of that benefit.
- Cash from operations was $67.1 million for 28 weeks, essentially unchanged from $67.3 million. Investing used $134.2 million, including $96.2 million for property, equipment and intangibles and $40.0 million for acquired restaurants. Financing provided $70.2 million; cash increased $3.2 million to $25.9 million.
- At July 10, cash was $25.9 million, current assets $87.9 million and current liabilities $154.3 million. Long-term debt was $293.4 million; total debt and capital leases were $305.1 million, up from $210.8 million at fiscal year-end.
Material changes and unusual items
- Revenue growth reflected new and acquired restaurants, while comparable sales and franchise revenue declined. Average weekly sales volumes fell 3.9% in Q2 and 3.7% year to date.
- Q2 included a $3.9 million non-cash impairment charge for six restaurants. Year-to-date impairment charges totaled $4.7 million, including a first-quarter relocation charge. Management cited impaired restaurant performance and projected cash flows.
- The company recorded $3.9 million in employment-related litigation contingencies year to date, versus $0.1 million of legal-contingency liabilities at December 27, 2015. Management said it had made adequate provision, while noting outcomes remain uncertain.
- On June 30, the company replaced its credit facility with a secured $400 million revolving facility maturing June 30, 2021, with an option to increase capacity by up to $100 million. Borrowings were $292.5 million and letters of credit $8.5 million; the company reported covenant compliance.
- The company acquired 13 franchised restaurants for approximately $40.0 million in March and repurchased $20.0 million of stock year to date. The remaining authorization was $80.0 million.
- After quarter-end, CEO Stephen E. Carley resigned on August 8, 2016; Denny Marie Post was appointed CEO and joined the board.
Outlook, commentary and risks
- Management expected 2016 revenue growth of about 5%, with comparable restaurant revenue down almost 2%. It projected a full-year effective tax rate of 20%–21% and capital investment of $190–$195 million, including the acquired restaurants.
- Management planned 14 Red Robin openings and one Red Robin Burger Works opening, plus one relocation, during the remainder of 2016. It had completed 30 remodels in Q2 and aimed for 70 remodels in 2016, with the company-owned brand transformation substantially complete by year-end.
- The company expects operating cash flows and remaining facility capacity to fund working-capital needs and planned investment. It typically operates with a working-capital deficit, relying on cash/credit-card sales and the timing of gift-card receipts and payables.
- Management warned that wage inflation had negatively affected results and expected inflation to remain a headwind for the rest of 2016. Other stated risks include commodity and labor costs, competition and discounting, consumer demand, restaurant traffic, execution of expansion and remodel plans, legal claims, and variable-rate debt exposure. A 1 percentage-point change in rates on $292.5 million of variable-rate borrowings would change annualized pretax interest expense by about $2.9 million.
- Management attributed Q2 diluted EPS of $0.55 to $0.20 per share of restaurant impairment; excluding that impact, it reported $0.75. Year-to-date EPS excluding impairment and litigation contingencies was reported as $2.03.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improve, and whether planned new openings and remodels deliver expected revenue and returns.
- Whether labor, occupancy and other restaurant costs continue to outpace sales, and whether lower food costs persist.
- Cash generation and capital spending needs, debt levels, borrowing availability and compliance with credit-facility covenants.
- The assumptions behind restaurant impairment charges and the eventual outcome or cost of employment-related litigation claims.
- Progress against management’s revenue, comparable-sales, tax-rate, capital-investment and development outlook; these are forward-looking expectations, not guarantees.