RED ROBIN GOURMET BURGERS INC annual report, FY2011

Business context and reporting period

Red Robin Gourmet Burgers, Inc. operates a casual-dining restaurant chain. This Form 10-K reports fiscal 2011, the 52 weeks ended December 25, 2011; quarterly figures below identify the 12-week fourth quarter. At year-end, the system had 464 restaurants: 327 company-owned and 137 franchised.

Financial and operating performance

FY 2011 restaurant revenue rose 6.2%; comparable restaurant net sales increased 2.3%, reflecting a 3.3% higher average check and 1.0% lower guest count. Cost of sales rose to 25.3% of restaurant revenue from 24.4%, while labor improved to 33.8% from 35.5% and operating costs improved to 13.8% from 14.8%.

In Q4 2011, revenue was $206.0 million versus $192.6 million in Q4 2010; operating income was $4.5 million versus $1.9 million, and net income was $2.9 million versus $2.2 million. Diluted EPS was $0.20 versus $0.14.

Material changes and unusual items

• Operating income and net income improved substantially year over year, although 2011 included $4.3 million of non-cash impairment charges for three restaurants; 2010 included $6.1 million for four restaurants and a $2.6 million CEO-transition charge.
• FY 2011 SG&A increased 11.4% to $99.0 million, including higher performance compensation, infrastructure investment and legal expenses. Gift-card breakage revenue fell to $1.7 million from $4.3 million, including a $3.5 million initial adjustment in 2010.
• Ground beef costs, representing about 13% of cost of goods, increased approximately 17% in 2011. Comparable guest count declined despite higher average checks.
• The company repurchased approximately 1.2 million shares for $33.0 million in 2011. No cash dividends were paid.

Liquidity, debt and outlook

Operating cash flow was $95.7 million; capital expenditures were $44.1 million and share repurchases used $33.0 million. Year-end debt included $146.3 million of term-loan borrowings and $10.7 million of capital leases; the $100 million revolving facility had no borrowings and $7.4 million of letters of credit outstanding. The company reported compliance with debt covenants. Its credit facility matures in 2016 and is secured by substantially all company assets. Current liabilities exceeded current assets by approximately $25.8 million.

Management expected FY 2012 capital expenditures of $50–$60 million, funded from operating cash flow, and planned 12–15 net new company-owned restaurants (other filing passages state 13–15), including four Burger Works locations. Franchisees were expected to open one or two. Fiscal 2012 comprises 53 weeks. Management expected ground beef prices to be 10–15% above 2011 levels and anticipated additional labor-cost pressure from minimum-wage increases; it also expected inflation to weigh on results. A major data-infrastructure and operational/financial systems upgrade was planned.

Risks, contingencies and other disclosures

• Key risks include commodity inflation, especially beef; wage and energy costs; economic weakness and discretionary spending; competition and discounting; weather and supply disruptions; and the company’s concentration in Western states.
• Execution risks include new-restaurant profitability, the smaller Burger Works concept, marketing and loyalty initiatives, and the planned IT overhaul. Management identified uncertainty around implementing the systems upgrade.
• Three California wage-and-hour class actions were disclosed. The company said it intended to defend them; outcomes and potential costs were uncertain. Management stated other claims were adequately provided for and not expected to materially affect results.
• Goodwill was not impaired at year-end; estimated fair value exceeded carrying value by approximately 39%. The company recorded restaurant impairments of $4.3 million in 2011.
• The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.

Important facts for investors to verify

• Whether comparable-sales growth can persist if guest counts remain negative, and how much growth reflects pricing versus traffic.
• Actual 2012 beef and labor inflation, and the degree to which menu pricing and productivity offset those costs.
• Restaurant-level returns, opening cadence and capital needs, including the Burger Works test and the filing’s differing 2012 opening ranges.
• Cash generation, capital spending, share repurchases and covenant headroom relative to debt maturities and substantial lease commitments.
• Progress, cost and operational impact of the planned IT systems replacement, and developments in the California employment litigation.