Business context and reporting period
Red Robin Gourmet Burgers, Inc. operates and franchises full-service restaurants. This unaudited Form 10-Q covers the 12 weeks ended October 7, 2018 (third quarter) and the 40 weeks ended October 7, 2018; comparisons are with the periods ended October 1, 2017. At quarter-end, the company had 485 company-operated and 89 franchised restaurants. Fiscal 2018 ends December 30, 2018.
Financial performance and position
| Metric | Third quarter 2018 | 40 weeks 2018 |
|---|---|---|
| Total revenue | $294.9 million, down 3.5% | $1,031.8 million, down 1.1% |
| Restaurant revenue | $290.2 million, down 3.6% | $1,015.3 million, down 1.1% |
| Operating income | $1.8 million | $4.6 million |
| Net income | $1.7 million; diluted EPS $0.13 | $4.2 million; diluted EPS $0.32 |
| Operating cash flow | Not separately presented | $88.8 million, versus $121.6 million |
| Cash and cash equivalents | $20.4 million at October 7, 2018 | |
| Total debt and capital leases | $231.3 million at October 7, 2018 |
Third-quarter restaurant operating costs were 83.2% of restaurant revenue, up 170 basis points year over year; operating margin was 0.6% of total revenue versus 1.3%. For the 40-week period, restaurant operating costs rose 140 basis points to 81.1%, while operating margin fell to 0.4% from 3.0%. Working capital was negative: current assets were $83.9 million versus current liabilities of $142.2 million.
Material changes versus prior periods
- Comparable restaurant revenue fell 3.4% in the quarter, reflecting a 1.9% decline in guest counts and a 1.5% decline in average guest check. The check decline included a 3.0% unfavorable menu-mix shift, partly offset by 1.5% pricing.
- Average weekly sales volume at company-owned restaurants declined 5.5% in the quarter and 3.9% for the 40 weeks.
- For the 40 weeks, net income fell from $21.2 million to $4.2 million. Results included $9.6 million of restaurant impairment charges, $4.0 million of litigation contingencies, $3.3 million of reorganization costs, and $0.5 million related to spiral menu disposal. The prior-year period included $1.6 million of impairment charges.
- Operating cash flow decreased $32.8 million year over year. Capital expenditures were $39.8 million, down from $61.0 million.
- Total debt and capital leases decreased $46.1 million from year-end 2017, primarily due to net repayments on the credit facility. Credit-facility borrowings were $220.0 million; the company reported compliance with debt covenants and a 4.03x lease-adjusted leverage ratio.
Outlook, commentary, risks and unusual items
Management expected fiscal 2018 diluted EPS of $1.60 to $1.80. Excluding identified items, the filing reported 40-week diluted EPS of $1.31 for 2018 versus $1.71 for 2017; these are management-presented adjusted figures, not GAAP EPS. Management cited affordability initiatives and service execution as priorities, while noting that inflation was expected to pressure labor costs for the remainder of 2018.
Management attributed cost pressure to food and beverage, other operating, and occupancy costs; higher repair and maintenance and third-party delivery costs also weighed on margins. A 1% food-cost increase was estimated to raise annual cost of sales by about $3.2 million. The $220.0 million of variable-rate borrowings carried annualized sensitivity of about $2.2 million in pretax interest expense for a 1 percentage-point rate change.
The company recorded $4.0 million of employment-related litigation contingencies and said adequate provision had been made, while noting outcomes remain uncertain. It reported no material change in previously disclosed risk factors. Lease accounting standard adoption was planned for fiscal first quarter 2019 and was expected to significantly increase balance-sheet assets and liabilities. The company also increased its share-repurchase authorization to $75 million; $74.6 million remained available at October 7, 2018.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improve, and whether affordability efforts continue to depress average check or menu mix.
- Whether rising restaurant operating costs, commodity and labor inflation, delivery fees, and occupancy costs persist or are offset by pricing and operating changes.
- How the remaining fiscal-year results compare with the $1.60–$1.80 diluted EPS outlook, including the effect of unusual charges and the tax benefit.
- Operating cash generation, debt repayment, credit-facility availability and covenant headroom, alongside planned capital spending and repurchases.
- The ultimate cost and resolution of litigation claims, and the quantified balance-sheet impact of adopting lease accounting.