Red Robin Gourmet Burgers, Inc. — Q3 2014 Form 10-Q
Reporting period: Twelve weeks ended October 5, 2014; year-to-date figures cover the forty weeks ended that date. Comparisons are with the corresponding periods ended October 6, 2013. Red Robin operated 409 company-owned restaurants and had 98 franchised locations, for 507 total restaurants.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 40 weeks 2014 | 40 weeks 2013 |
|---|---|---|---|---|
| Total revenue | $267.4 million | $230.7 million | $864.0 million | $775.3 million |
| Operating income | $9.2 million | $6.8 million | $39.7 million | $35.7 million |
| Net income | $7.2 million | $4.7 million | $28.6 million | $25.3 million |
| Diluted EPS | $0.50 | $0.32 | $1.97 | $1.75 |
| Operating margin | 3.5% | 2.9% | 4.6% | 4.6% |
- Q3 restaurant revenue rose 16.3%; growth primarily reflected acquired and newly opened restaurants. Comparable restaurant revenue increased 0.9%, as average check rose 3.2% while guest counts fell 2.3%.
- For the forty weeks, restaurant revenue increased 11.5%, with comparable restaurant revenue up 2.9%; average check rose 4.0% and guest counts declined 1.1%.
- Restaurant operating costs were 80.5% of restaurant revenue in Q3, up from 79.6%; for the forty weeks they were 78.5%, versus 78.3%. Higher beef and other food costs contributed to pressure.
- Cash provided by operations was $82.9 million for the forty weeks, versus $82.2 million. Investing used $125.5 million, including $48.7 million for franchise acquisitions and substantial development, remodel, maintenance, and technology spending. Financing provided $45.5 million; cash ended at $19.9 million.
- At October 5, 2014, total debt and capital lease obligations were $156.1 million, compared with $88.7 million at fiscal 2013 year-end. Current assets were $74.1 million and current liabilities $131.5 million; management notes the company typically operates with a working-capital deficit. The company was in compliance with credit-facility covenants.
Material changes and unusual items
- Red Robin acquired 36 franchised restaurants during the first forty weeks of 2014 for $48.7 million in cash, including 18 Canadian locations. The acquired restaurants contributed $26.3 million of year-to-date restaurant revenue; their Q3 contribution was $23.1 million.
- The company replaced its credit facility in July with a secured $250 million revolving facility maturing July 2, 2019, with an option for up to $100 million in additional capacity subject to lender participation. Outstanding facility borrowings were $146.5 million, with $8.0 million in letters of credit.
- Q3’s 12.5% effective tax rate was below the prior-year 24.6%, primarily reflecting tax credits and tax true-ups. The company expected a full-year 2014 effective tax rate of approximately 24.5%.
- Q3 comparable sales growth came from higher average checks despite lower guest counts. For the forty weeks, net income growth was partly offset by higher advertising and acquisition-related costs.
Outlook, commentary, and risks
- Management planned six additional Red Robin restaurant openings in the remainder of 2014, expected 65 company-owned remodels for the year, and planned one additional Burger Works opening and one college-campus Burger Works closure. It expected franchisees to open one restaurant.
- Management said it expected operating cash flows to support working-capital needs and planned investment in development, remodels, infrastructure, acquisitions, debt repayment, and potential share repurchases. Approximately $19.3 million remained under the share-repurchase authorization at October 5.
- Management cited inflationary pressure from wages, food commodities, supplies, and construction materials. Approximately 74.7% of estimated annual food and beverage purchases were covered by fixed-price contracts, mostly expiring by fiscal year-end.
- Implementation delays in ERP supply-chain and human-resource modules could lead to additional costs or impairment of some of the $8.0 million software-in-development investment. The filing identifies this as a business risk; the company had completed an ERP upgrade after quarter-end to assess whether the modules meet operating requirements.
- Other stated risks include commodity-price and labor-cost changes, competition and discounting, consumer traffic and spending, technology reliability, execution of expansion and remodeling, and availability of credit. The company disclosed routine litigation and claims, with no material adverse effect expected by management.
Key facts for investors to verify
- Whether comparable-sales trends improve, particularly guest counts, and whether higher average checks can be sustained.
- Whether food-cost inflation—especially beef—and occupancy costs continue to pressure restaurant margins.
- Whether acquired restaurants and planned openings and remodels deliver the expected revenue and returns relative to added debt and capital spending.
- Progress and any impairment implications from the ERP implementation, and the company’s ability to maintain credit-facility covenant compliance.
- Whether the approximately 24.5% full-year tax-rate expectation and stated development plans remain current; this filing does not provide earnings guidance.