Business Context and Reporting Period
Company: Red Robin Gourmet Burgers, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Twelve weeks ended October 5, 2003 (Third Quarter 2003) and forty weeks ended October 5, 2003.
Operations: As of October 5, 2003, the Company operated 110 company-owned restaurants in 14 states and 101 franchise-operated restaurants in 18 states and two Canadian provinces. The Company opened six new company-owned restaurants during the third quarter of 2003.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended Oct 5, 2003 | 40 Weeks Ended Oct 5, 2003 |
|---|---|---|
| Total Revenues | $79,320 | $247,804 |
| Net Income | $3,975 | $11,541 |
| Diluted EPS | $0.26 | $0.75 |
| Operating Cash Flow | N/A | $31,597 |
| Cash and Equivalents (End of Period) | $3,222 | $3,222 |
| Total Debt (Long-term + Current) | $51,543 | $51,543 |
| Restaurant Operating Margin | 19.2% (approx.) | 19.2% (approx.) |
Note: Operating margin calculated as (Restaurant Sales - Total Restaurant Operating Costs) / Restaurant Sales.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 22.8% ($14.7 million) for the quarter and 18.7% ($39.0 million) for the forty-week period compared to the prior year. Growth was driven by 13 new company-owned restaurants and a 6.0% increase in comparable restaurant sales for the quarter.
- Profitability: Net income surged 919% for the quarter ($3.6 million increase) and 106.2% for the forty-week period ($5.9 million increase). This was largely due to higher pre-tax earnings and a significant reduction in "Loss on extinguishment of debt" compared to the prior year ($150k vs. $4.3 million in the quarter).
- Cost Pressures: Cost of sales as a percentage of restaurant sales increased to 23.5% (from 22.7% prior year) due to rising food costs (produce, pork, hamburger) and a product mix shift toward salads.
- Debt Structure: The Company amended its revolving credit facility, increasing capacity from $40.0 million to $85.0 million. Borrowings under the facility increased to $33.7 million to fund property purchase options and prepayments of other loans.
Guidance, Outlook, and Risks
- Expansion Plans: Management intends to open two additional company-owned restaurants in the remainder of fiscal 2003, totaling 18 new units for the year. Franchisees are expected to open one additional unit.
- Capital Expenditures: The Company expects to spend $10.5 million to $12.0 million on new restaurant construction and $2.0 million to $3.0 million on remodels and maintenance for the remainder of fiscal 2003.
- Liquidity: Management believes available borrowings, cash on hand, and operating cash flows will fund expansion plans through at least the end of fiscal 2005.
- Risks: Key risks include seasonality (higher sales in summer/winter), food commodity price volatility, the ability to manage rapid expansion, and compliance with credit facility covenants (leverage ratio, fixed charge coverage, and EBITDA requirements).
Investor Verification Checklist
- Comparable Sales Sustainability: Verify if the 6.0% comparable restaurant sales growth is sustainable given the noted decrease in average guest check (-0.7%) offset by higher guest counts (+6.7%).
- Food Cost Inflation: Monitor the trend of food costs (produce, pork, hamburger) which drove the cost of sales percentage up to 23.5%.
- Debt Covenants: Confirm continued compliance with the amended credit facility's EBITDA requirements (minimum $32 million for the period ending Dec 28, 2003) and leverage ratios.
- Capital Lease Conversions: Review the impact of converting capital leases to owned properties (Highlands Ranch, Issaquah, Grapevine) on future depreciation and interest expenses.
- Related Party Transactions: Note the $5.3 million outstanding in full recourse notes from officers and the $600,000 note from the CEO, recorded as a reduction of equity.