Business Context and Reporting Period
Company: Red Robin Gourmet Burgers, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 19, 2009 (16 weeks)
Business Overview: The Company operates casual-dining restaurants. As of April 19, 2009, it operated 298 company-owned restaurants in 31 states and 130 franchised restaurants in 21 states and two Canadian provinces. The Company operates as a single reportable segment.
Key Financial Metrics
| Metric | 16 Weeks Ended Apr 19, 2009 | 16 Weeks Ended Apr 20, 2008 |
|---|---|---|
| Total Revenues | $270.8 million | $255.6 million |
| Net Income | $3.8 million | $7.3 million |
| Diluted EPS | $0.25 | $0.43 |
| Operating Cash Flow | $25.8 million | $27.9 million |
| Cash and Equivalents (End of Period) | $8.6 million | $17.0 million |
| Total Debt (Current + Long-term) | $218.8 million | $222.5 million |
| Comparable Restaurant Sales | -8.1% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6.0% to $270.8 million, driven by the opening of seven new company-owned restaurants and prior year acquisitions. However, comparable restaurant sales declined 8.1% due to a 10.2% drop in guest counts, partially offset by a 2.1% increase in average guest check.
- Profitability Decline: Net income decreased 47.0% to $3.8 million. Operating income fell from $12.7 million to $7.3 million. This was primarily due to higher food costs (ground beef and potatoes), increased labor costs, and one-time charges.
- Cost Pressures: Cost of sales increased to 24.5% of restaurant revenue (from 23.7%) due to rising commodity prices. Labor costs rose to 34.6% of revenue (from 33.9%) due to minimum wage increases and stock-based compensation charges.
- One-Time Charges: The Company incurred a $4.0 million charge related to a cash tender offer for out-of-the-money stock options and a $0.6 million charge for closing four underperforming restaurants.
Guidance, Outlook, and Risks
- Outlook: Management expects overall comparable restaurant sales to decline for fiscal 2009 due to the macroeconomic environment and reduced national cable advertising. The Company plans to open an additional seven to eight company-owned restaurants in 2009, funded by operating cash flows.
- Cost Management: The Company is reducing national advertising spending to save approximately 1.25% of restaurant revenue. However, food cost pressures for ground beef and potatoes are expected to persist through 2009.
- Liquidity: The Company maintains a $150 million revolving credit facility and a $150 million term loan. Management expects cash flows from operations to be sufficient to meet debt service and capital expenditure requirements for the next 12 months. Excess cash flow will be used to reduce outstanding indebtedness.
- Risks: Key risks include the impact of the economic downturn on consumer discretionary spending, rising food and labor costs, and the effectiveness of the reduced advertising strategy.
Investor Verification Checklist
- Comparable Sales Trend: Verify the sustainability of the 8.1% decline in comparable sales and the impact of reduced advertising on future traffic.
- Commodity Pricing: Monitor the trajectory of ground beef and potato prices, as these are identified as the two largest cost pressures for 2009.
- Debt Reduction: Track the Company's ability to utilize free cash flow to pay down the $218.8 million in outstanding debt.
- Restaurant Closures: Assess the impact of the four restaurant closures and the $0.6 million charge on future operating margins.
- Stock-Based Compensation: Review the impact of the $4.0 million tender offer charge on future earnings, noting that this was a one-time acceleration of vesting.