Red Robin Gourmet Burgers, Inc. — Q2 2012 Form 10-Q
Reporting period: The 12 weeks ended July 8, 2012; year-to-date figures cover 28 weeks. Comparisons are with the corresponding 2011 periods. The company operated 331 company-owned restaurants and franchised 131 locations at quarter-end.
Financial performance
| Metric | 12 weeks ended July 8, 2012 | Change vs. 2011 | 28 weeks ended July 8, 2012 | Change vs. 2011 |
|---|---|---|---|---|
| Total revenue | $223.7 million | +3.7% | $523.1 million | +4.1% |
| Operating income | $11.4 million | $9.1 million in 2011 | $27.2 million | $20.3 million in 2011 |
| Net income | $7.7 million | $6.9 million in 2011 | $18.3 million | $15.6 million in 2011 |
| Diluted EPS | $0.52 | $0.44 in 2011 | $1.23 | $1.00 in 2011 |
| Cash provided by operations | Not separately reported for the quarter | $50.1 million | $54.2 million in 2011 |
Operating margin improved to 5.1% from 4.2% for the quarter and to 5.2% from 4.0% year to date. Net margin was 3.5% versus 3.2% for the quarter and 3.5% versus 3.1% year to date. Restaurant cost of sales increased as a share of restaurant revenue to 25.4% from 25.2% for the quarter and to 25.4% from 25.1% year to date. Labor and operating costs improved as a share of restaurant revenue, while occupancy costs rose.
Balance sheet, cash flow, and debt
- Cash and cash equivalents were $29.9 million at July 8, 2012, down from $35.0 million at December 25, 2011. Total assets were $582.7 million and total liabilities were $272.7 million.
- Operating cash flow was $50.1 million year to date. Investing activities used $27.9 million, including $24.6 million for property and equipment and $3.2 million for a franchise restaurant acquisition. Financing activities used $27.2 million, including $21.6 million of debt payments and $7.7 million of share repurchases.
- Total debt outstanding was $135.0 million, down $21.9 million from year-end; the credit facility balance was $124.7 million. There were no revolving-facility borrowings and $8.2 million of standby letters of credit. The facility matures in 2016; the company reported compliance with its covenants.
- The company had a $69.8 million interest-rate swap notional amount at quarter-end. A 1 percentage-point change in rates on $54.8 million of variable-rate borrowings would change annualized pretax interest expense by approximately $548,000.
Material changes and operating trends
- Comparable company-owned restaurant sales increased 0.8% in both the quarter and year-to-date period. Quarterly growth reflected a 0.9% increase in guest count, partly offset by a 0.1% lower average check. Year-to-date, a 2.5% higher average check offset a 1.7% decline in guest count.
- Quarterly restaurant revenue rose 3.7%; management attributed growth to comparable sales, menu pricing, marketing initiatives, and newer restaurants. Non-comparable restaurants contributed $6.1 million of year-over-year quarterly revenue growth.
- Commodity costs, particularly potatoes, ground beef, and fry oil, pressured food margins. Management said inflation materially negatively affected Q2 results and expected food-cost inflation to continue to weigh on results.
- Income tax expense increased; the effective tax rate was 23.7% for the quarter and 24.0% year to date, versus 8.8% and 10.3% in 2011. Management attributed the higher rate mainly to higher earnings and lower tax credits as a share of pretax income.
- The company acquired one franchised restaurant for approximately $3.2 million, closing June 19, 2012, and closed one restaurant in each of Q1 and Q2. No restaurant impairment was recorded in either 2012 quarter.
Outlook, risks, and contingencies
Management planned to open up to 10 additional company-owned restaurants in 2012, including two Burger Works locations, expected to be funded from operating cash flow. It anticipated a full-year 2012 effective tax rate of approximately 24% and expected inflation, especially food costs, to have a negative impact during 2012. The filing provides no specific full-year revenue or earnings guidance.
Key risks include commodity, labor, energy, and construction-cost volatility; seasonal sales fluctuations; execution of restaurant openings and infrastructure investments; and interest-rate exposure. The company reported ordinary-course employment, guest injury, illness, and food-quality claims, but management believed adequate provisions were recorded and did not expect their resolution to materially adversely affect financial position or results. The filing reported no material changes to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Whether comparable-sales momentum and guest counts improve, particularly given the year-to-date guest-count decline.
- Whether higher commodity prices continue to pressure restaurant margins and how much pricing or cost controls offset that pressure.
- Progress and funding for planned 2012 restaurant openings, alongside capital spending, debt repayments, and share repurchases.
- Debt covenant headroom and interest-rate exposure, including the remaining protection and terms of the interest-rate swap.
- The sustainability of earnings growth given the higher effective tax rate and the seasonal nature of the business.