Red Robin Gourmet Burgers, Inc. — FY2017 Form 10-K
Business context and reporting period
Red Robin operates and franchises casual-dining restaurants across North America. At December 31, 2017, it had 566 restaurants: 480 company-owned and 86 franchised. Fiscal 2017 ended December 31 and included 53 weeks; fiscal 2016 included 52 weeks. The extra week contributed approximately $29.8 million of restaurant revenue and $4.1 million of net income, so reported annual growth is not directly like-for-like.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $1,380.9 million | $1,296.4 million |
| Restaurant revenue | $1,365.1 million | $1,280.7 million |
| Operating income | $39.0 million | $11.6 million |
| Net income | $30.0 million | $11.7 million |
| Diluted EPS | $2.31 | $0.87 |
| Cash from operations | $156.6 million | $99.0 million |
| Cash and cash equivalents | $17.7 million | $11.7 million |
| Total debt and capital leases | $277.3 million | $347.8 million |
Total revenue rose 6.5%; restaurant revenue rose 6.6%, including the additional week. Comparable restaurant sales increased 0.7%, with guest counts up 0.4% and average check up 0.2% (including 0.1% favorable currency impact). Restaurant operating costs increased to 79.6% of restaurant revenue from 79.1%; labor rose to 34.8% from 34.3%, and cost of sales to 23.5% from 23.3%. Operating margin was 2.8%, versus 0.9% in 2016.
Investing activities used $83.3 million, including $83.5 million of capital expenditures. Financing activities used $67.9 million, primarily reflecting net debt repayments. The company reported a working-capital deficit as a typical feature of its restaurant cash cycle; current assets were $104.8 million and current liabilities $160.3 million. Its $400 million revolving facility had $265.5 million outstanding and $7.6 million in letters of credit at year-end. Covenant ratios were 4.04x lease-adjusted leverage (maximum 5.0x at year-end) and 2.04x fixed-charge coverage (minimum 1.25x).
Material changes versus the prior comparable period
- FY2017 net income increased to $30.0 million from $11.7 million, but the comparison is affected by the extra week and FY2016’s larger impairment and closure charges.
- FY2017 included $6.9 million of non-cash impairment charges for 13 restaurants, compared with $24.4 million of restaurant impairments, $2.5 million of software impairment, and $6.7 million of Burger Works closure costs in 2016. FY2016 also included litigation contingencies and reorganization costs.
- Excluding specified items, management reported diluted EPS of $2.49 for 2017, including a $0.40-per-share impairment impact and a $0.22-per-share tax-remeasurement benefit. Its comparable adjusted 2016 EPS was $2.78 after excluding impairment and closure costs, litigation contingencies, and reorganization costs. These are management-adjusted figures, not GAAP EPS.
- Comparable sales improved from a 3.3% decline in 2016 to a 0.7% increase in 2017. Franchise comparable sales nevertheless declined 1.6% in 2017.
- Debt and capital leases declined by $70.5 million year over year. Interest expense increased to $11.0 million from $7.2 million, and the weighted-average borrowing rate increased to 3.7% from 2.4%.
Fourth-quarter 2017 revenue was $342.4 million, operating income $8.2 million, net income $8.8 million, and diluted EPS $0.68. Fourth-quarter 2016 revenue was $291.5 million, with an operating loss of $14.8 million and net loss of $8.8 million. The 2017 quarter had 13 weeks versus 12 in 2016 and included $5.3 million of restaurant impairment charges.
Outlook, commentary, and risks
For 2018, management expected comparable sales growth of 50–150 basis points, operating weeks to decline 1%, and total revenue to range from a 50-basis-point decline to a 50-basis-point increase. It planned approximately nine company-owned openings, capital expenditures of $65–75 million, depreciation and amortization of approximately $95 million, and an annual tax rate of 0%–5%. Management expected operating cash flows and credit-facility access to fund debt service, capital spending, and working capital for at least the next 12 months.
Management cited rising labor and commodity costs, especially wages, ground beef, and potatoes, as pressures on margins. Approximately 59% of estimated 2018 food and beverage purchases were covered by fixed-price contracts, most expiring during 2018. Principal risks include intense competition and discounting, consumer traffic and spending trends, labor-cost inflation and staffing, commodity supply and prices, execution of delivery and digital initiatives, cybersecurity, restaurant lease obligations, and the company’s geographic concentration. The company disclosed ordinary-course legal claims and stated that it had provided for potential losses; management did not expect their resolution to materially harm financial position or results.
The 2017 statements received an unqualified audit opinion, and the auditor and management reported effective internal control over financial reporting.
Important facts for investors to verify
- Separate the 53rd-week contribution from underlying sales and earnings trends; compare quarterly periods with their differing week counts.
- Assess whether comparable-sales gains and guest traffic can continue, and monitor cost inflation against pricing and productivity.
- Review debt repayments, variable-rate exposure, covenant headroom, facility availability, and substantial lease commitments.
- Track the 2018 sales, opening, and capital-spending outlook against actual results, including the performance of impaired restaurants.
- Evaluate adjusted EPS alongside GAAP results, particularly the impairment adjustments and one-time tax benefit.