Business context and reporting period
Red Robin Gourmet Burgers, Inc. operates and franchises casual-dining and fast-casual restaurants. This unaudited 10-Q covers the 16 weeks ended April 19, 2015, compared with the 16 weeks ended April 20, 2014. At period-end, the company operated 418 restaurants and had 99 franchised restaurants.
Financial performance and liquidity
| Metric | Q1 2015 | Prior comparable period |
|---|---|---|
| Total revenue | $394.9 million | $340.5 million |
| Operating income | $23.8 million; 6.0% of revenue | $17.0 million; 5.0% |
| Net income | $16.6 million | $11.9 million |
| Diluted EPS | $1.16 | $0.82 |
| Cash from operations | $36.0 million | $36.0 million |
| Cash and equivalents at period-end | $21.4 million | $22.4 million at December 28, 2014 |
| Long-term debt | $135.9 million | $139.4 million at December 28, 2014 |
| Debt and capital lease obligations | $144.2 million | $147.9 million at December 28, 2014 |
Restaurant revenue rose 16.0%, including $43.5 million from acquired and new restaurants, net of closures, and $10.0 million from comparable restaurant growth. Comparable sales increased 3.1%, reflecting a 2.0% higher average guest check and 1.1% higher guest counts. Franchisees reported comparable sales growth of 7.2%.
Restaurant operating costs were 77.0% of restaurant revenue, down from 77.6%. Cost of sales increased to 25.2% from 25.1%; labor improved to 32.0% from 33.1%; occupancy rose to 7.8% from 7.3%. Cash used in investing was $37.3 million, including $37.1 million of capital expenditures; financing provided $0.4 million. Working capital was negative $58.2 million, a condition the company says is typical of its cash-based restaurant model. The $250 million revolving facility had $135.0 million borrowed and $9.0 million in letters of credit outstanding; the company reported covenant compliance.
Material changes and unusual items
- Net income increased 38.7% and diluted EPS increased from $0.82 to $1.16. Excluding the gift-card estimate change, Q1 2015 diluted EPS was $1.10.
- A revised estimate of gift-card redemption patterns added $1.4 million of breakage revenue and increased net income by $0.9 million, or $0.06 per diluted share.
- Labor cost leverage reflected lower health-insurance and workers’ compensation claims; management expects those costs to return to normal levels. Higher ground beef and poultry costs raised food-cost pressure, while new and acquired restaurants increased occupancy costs.
- Investing cash use increased from $32.3 million to $37.3 million, primarily due to remodels, maintenance, equipment, and technology investment. Debt and capital lease obligations declined $3.7 million from year-end.
Outlook, commentary, and risks
Management expected a fiscal 2015 effective tax rate of approximately 27.5%. Plans included remodeling approximately 150 company-owned Red Robin restaurants, opening 19 Red Robin restaurants and relocating three during the remainder of 2015, and opening two additional Red Robin Burger Works locations. Two Burger Works campus locations were performing below expectations; results at central-business-district and lifestyle locations were described as mixed or as expected. The company authorized up to $50 million in share repurchases but made none during the quarter.
Management cited inflationary pressure from wages, supplies, food commodities, and construction materials and expected inflation to continue to weigh negatively in fiscal 2015. Other disclosed risks include commodity and labor-cost changes, consumer spending and competition, execution of restaurant openings and remodels, availability of credit, seasonality, and legal claims. Approximately 57% of estimated annual food and beverage purchases were covered by fixed-price contracts, mostly expiring during 2015. A 1 percentage-point change in rates on $82.5 million of variable-rate borrowings would change annualized pretax interest expense by approximately $0.8 million. The interest-rate swap was due to mature June 30, 2015. Management said pending claims were not expected to materially affect results; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much comparable-sales growth and margin performance persist as health-insurance and workers’ compensation costs normalize.
- The underlying earnings trend excluding the $0.06-per-share gift-card breakage estimate benefit.
- Whether planned remodels, openings, and equipment spending deliver expected returns and remain within funding capacity.
- Debt availability, covenant headroom, interest-rate exposure, and refinancing or borrowing costs after the swap’s June 2015 maturity.
- Whether food, labor, and occupancy inflation and seasonality affect the company’s stated expansion and cash-flow plans.