Red Robin Gourmet Burgers, Inc. — Q1 2019 Form 10-Q
Business context and period. The filing covers the 16 weeks ended April 21, 2019, compared with the 16 weeks ended April 22, 2018. Red Robin operated 483 company-owned restaurants and had 89 franchised restaurants (572 total). The company reports one operating and reportable segment.
Financial performance
| Metric | Q1 2019 | Prior period |
|---|---|---|
| Total revenue | $409.9 million | $421.5 million |
| Restaurant revenue | $400.5 million | $414.7 million |
| Operating income | $3.4 million | $7.0 million |
| Net income | $0.6 million | $4.4 million |
| Diluted EPS | $0.05 | $0.34 |
| Operating cash flow | $25.3 million | $57.0 million |
| Capital expenditures | $10.2 million | $15.9 million |
Restaurant operating costs rose to 81.7% of restaurant revenue from 80.0%; reported operating margin was 0.8% of total revenue versus 1.7%. Labor was 35.7% of restaurant revenue, up 1.2 percentage points, while cost of sales improved to 23.4% from 23.8%. Net margin was 0.2% versus 1.0%. The income tax benefit was $0.5 million; the effective tax rate was a 291.4% benefit, which management attributed primarily to lower income.
Cash and cash equivalents were $23.0 million at April 21, 2019, up from $18.6 million at fiscal year-end. Long-term debt was $183.4 million, down from $193.4 million; $182.5 million was outstanding on the revolving credit facility. The $400 million facility matures June 30, 2021, with $7.4 million of letters of credit reducing availability. The company reported covenant compliance. Current assets of $85.9 million were below current liabilities of $195.6 million; management says its cash-sales model, operating cash flow and available credit support working-capital needs. Adoption of lease accounting resulted in $555.6 million of recognized lease obligations at quarter-end.
Material changes versus prior period
- Total revenue declined 2.8%; restaurant revenue fell 3.4%. Comparable restaurant revenue decreased 3.3%, driven by guest counts down 5.5%, partly offset by average guest check up 2.2% (pricing up 1.9%). Franchise and other revenue increased 37.6%, primarily due to gift-card breakage.
- Net income decreased to $0.6 million from $4.4 million. Restaurant operating costs increased as a share of revenue, with higher labor, other operating and occupancy costs partly offset by lower food and beverage costs.
- Operating cash flow fell $31.8 million, to $25.3 million. Management cited higher vendor payments, lower operating profit, lower vendor deposits received, higher prepaid expenses and income-tax payments, partly offset by lower bonus payouts.
- Interest expense and other was $3.2 million, down $0.2 million, while the weighted-average interest rate rose to 5.0% from 4.1%.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing right-of-use assets and lease liabilities. Adoption produced a $15.2 million after-tax opening retained-earnings impairment associated with 11 previously fully impaired restaurants; it did not affect the period’s statement of operations or cash flows.
Outlook, commentary and risks
The filing provides no specific numerical revenue or earnings guidance. Management said it expects to use available operating cash flow for debt repayment, restaurant and infrastructure investment, strategic initiatives and potential share repurchases, and believes operating cash flows plus remaining credit capacity will fund working-capital needs and planned capital expenditures. Management expects labor-cost inflation to remain a negative factor for the remainder of 2019. The company is focusing on service execution to improve guest counts and comparable sales.
Key risks discussed include traffic and competition, effectiveness of service and marketing initiatives, food and labor inflation, availability and cost of commodities, manager and employee retention, technology and cybersecurity, and legal claims. A 1% increase in food costs would raise annualized cost of sales by approximately $3.1 million; a 1 percentage-point change in variable borrowing rates would change annualized pretax interest expense by approximately $1.8 million. The company disclosed ordinary-course claims, including employment and food-quality or operational matters, and said it believes it has made adequate provision; outcomes remain uncertain. No material change to previously disclosed risk factors was reported.
Other unusual items included $2.0 million of executive-transition and severance costs, $0.3 million of costs for previously closed restaurants and $0.1 million of executive retention costs. Management presented diluted EPS of $0.19 excluding these items, compared with $0.69 excluding specified litigation and reorganization costs in the prior period; these are company-presented adjusted figures, not reported GAAP EPS. The board’s $75 million share-repurchase authorization remained in effect; $2.4 million had been used since authorization through the reported period.
Investor verification priorities
- Verify whether the decline in comparable sales and guest counts is stabilizing, and whether service initiatives improve traffic.
- Track labor, delivery fees, repairs and occupancy costs against restaurant sales and margins.
- Assess the drivers and sustainability of the sharp decline in operating cash flow and the company’s debt-repayment capacity.
- Review credit-facility availability, covenant headroom, variable-rate exposure and the substantial lease obligations recognized under Topic 842.
- Distinguish reported GAAP EPS and the one-time lease-adoption impairment from management’s adjusted EPS presentation; monitor litigation and other contingencies.