Business context and reporting period
Red Robin Gourmet Burgers, Inc. operates and franchises full-service restaurants in North America. This unaudited Form 10-Q covers the 12-week second quarter and 28 weeks year to date, both ended July 9, 2023; comparisons are with periods ended July 10, 2022. At quarter-end, the company operated 418 restaurants and had 91 franchised locations, for 509 total.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | 28 weeks 2023 | 28 weeks 2022 |
|---|---|---|---|---|
| Total revenue | $298.6 | $294.1 | $716.5 | $689.1 |
| Operating income (loss) | $10.3 | $(13.4) | $14.4 | $(9.5) |
| Net income (loss) | $3.9 | $(18.0) | $0.7 | $(21.5) |
| Diluted EPS | $0.24 | $(1.13) | $0.04 | $(1.37) |
| Adjusted EBITDA (non-GAAP) | $15.5 | $11.9 | $51.5 | $39.8 |
| Restaurant-level operating profit (non-GAAP) | $36.9 | $39.3 | $96.9 | $92.4 |
| Restaurant-level operating margin | 12.6% | 13.6% | 13.8% | 13.8% |
Q2 comparable restaurant revenue increased 1.5%, while comparable dine-in sales rose 5.9%. Higher average checks (up 7.5%) were partly offset by guest counts down 6.0%; menu pricing increased 8.8%. Year-to-date comparable revenue rose 5.5%, with average checks up 7.7% and guest counts down 2.2%.
Q2 restaurant-level margin declined 100 basis points: labor rose to 37.4% of restaurant revenue from 35.2%, partly offset by cost of sales improving to 24.3% from 25.2%. For the 28-week period, labor was 36.4% of restaurant revenue versus 35.8%; cost of sales was 24.4% versus 24.5%. Q2 operating income included a $14.6 million sale-leaseback gain; reported profitability therefore benefited materially from this unusual item.
Cash flow, debt and liquidity
For the 28 weeks, operating cash flow was $18.2 million, compared with $36.4 million a year earlier. The company attributed the decline primarily to a prior-year income-tax refund, severance payments and higher interest payments in 2023. Investing cash flow was $(0.1) million, including $25.8 million of capital expenditures and $28.5 million of sale-leaseback proceeds. Financing cash flow was $(20.1) million, including debt and finance-lease payments and $5.0 million of share repurchases.
Cash and cash equivalents were $44.0 million and restricted cash was $12.2 million at July 9, 2023. Reported liquidity was approximately $69.0 million, including cash and available borrowing capacity. Current assets of $109.7 million were below current liabilities of $204.3 million. Gross borrowings were $198.4 million, down from $214.9 million at December 25, 2022; the term loan carried a variable rate of 12.12% at quarter-end. The company had $25.0 million of available revolver capacity and reported compliance with debt covenants. Total operating lease obligations were approximately $440.6 million.
Material changes, outlook and risks
- In Q2, the company sold nine restaurant properties in a sale-leaseback, receiving $28.5 million and recording a $14.6 million gain. It used sale proceeds in part to repay debt. A July 17, 2023 credit-agreement amendment removed the prior sale-leaseback cap and set reinvestment and mandatory debt-prepayment terms for proceeds, with a reduced prepayment premium in specified circumstances.
- The company resumed share repurchases in May 2023. It bought 382,017 shares during Q2 for $5.0 million, at an average $13.19 per share; $63.4 million remained under the authorization at July 9.
- The filing reports no numeric full-year revenue or earnings guidance. Management said operating cash flows and remaining credit capacity were expected to fund working-capital needs and planned capital expenditures.
- Interest expense increased with higher rates and average debt. All $197.5 million of term-loan principal was variable-rate debt; a 1 percentage-point rate change would affect annual pretax interest expense by about $2.0 million. A 1% increase in food and beverage costs would increase annual cost of sales by approximately $3.2 million.
- Litigation reserves were $10.1 million; the company increased estimated litigation liabilities by $5.5 million year to date. Management cautioned that actual outcomes may differ from accruals. Non-cancellable vendor purchase commitments were $127.7 million.
- The company identified an error in gift-card revenue recognition, primarily involving breakage on bonus and discounted cards. It concluded prior-period misstatements were not material individually or in aggregate, but corrected comparative figures in this filing; the cumulative correction increased December 2022 unearned revenue by $3.6 million and reduced equity by the same amount. Further comparative corrections were planned in future filings. Management reported disclosure controls were effective.
- Other notable costs included $2.4 million of year-to-date asset impairment charges and $2.9 million of severance and executive-transition costs. Management cited consumer demand, wage and commodity inflation, interest rates, execution of strategic initiatives, and legal claims among key uncertainties. Results are seasonal and interim performance may not indicate full-year results.
Important facts for investors to verify
- Whether comparable-sales growth can persist while guest counts are declining and labor costs are pressuring restaurant margins.
- How much reported earnings and cash generation depend on asset-sale proceeds and other unusual items, versus recurring restaurant operations.
- Future variable borrowing rates, debt repayment requirements, covenant headroom, and liquidity after planned capital spending and any share repurchases.
- The scope, timing, and impact of the gift-card accounting corrections in subsequent filings, and developments in litigation reserves and vendor commitments.
- Whether management’s stated liquidity expectations and strategic initiatives remain achievable under changing consumer, labor, commodity, and financing conditions.