Red Robin Gourmet Burgers, Inc. — Q1 2013 Form 10-Q
Reporting period: Sixteen weeks ended April 21, 2013; comparisons are with the sixteen weeks ended April 15, 2012. Amounts are in U.S. dollars. The company operated 342 restaurants and franchised 133, for 475 locations overall.
Financial results
| Metric | Q1 2013 | Prior period | Change |
|---|---|---|---|
| Total revenue | $306.3 million | $299.5 million | +2.3% |
| Operating income | $13.5 million | $15.7 million | −14.0% |
| Net income | $9.5 million | $10.6 million | −10.2% |
| Diluted EPS | $0.66 | $0.71 | −7.0% |
| Operating margin | 4.4% | 5.3% | −0.9 percentage points |
| Net margin | 3.1% | 3.5% | −0.4 percentage points |
Comparable restaurant sales increased 2.2%, driven by a 2.8% rise in average guest check, partly offset by a 0.6% decline in guest count. Cost of sales improved to 24.9% of restaurant revenue from 25.5%, benefiting from lower hamburger and cheese costs and favorable mix. Labor rose to 33.8% from 33.5%; occupancy rose to 7.5% from 7.2%. SG&A increased 11.0% to $37.6 million, or 12.3% of revenue versus 11.3%, primarily due to higher salaries, benefits, staffing and incentive compensation.
Operating cash flow was $40.4 million, compared with $29.6 million; investing cash outflow was $13.6 million versus $9.6 million; financing cash outflow was $31.8 million versus $17.0 million. Cash declined $5.1 million to $17.4 million. Management attributed much of the operating cash flow increase to timing of vendor payments and higher accrued payroll and marketing liabilities, partly offset by lower tax liabilities.
At April 21, 2013, total assets were $576.7 million and total liabilities were $256.8 million. Current assets of $57.1 million were below current liabilities of $102.3 million, a working capital deficit of $45.2 million; management said this is typical for its cash-and-card restaurant model. Credit-facility borrowings were $90.5 million and capital lease obligations were $9.7 million, or $100.2 million of total debt, down $34.8 million from year-end. The new $225 million revolving facility matures in 2017; the company was in compliance with its covenants. The filing reports $25 million of variable-rate borrowings for market-risk purposes.
Material changes and management commentary
- Revenue grew, but operating income, net income, EPS and margins declined as higher labor, occupancy, depreciation and SG&A costs offset improved food and other operating cost ratios.
- The company opened three company-owned restaurants in the period. Management planned 20 additional company-owned openings and several Burger Works locations during 2013, expected to be funded from operating cash flows.
- Brand transformation work was complete at 21 restaurants; management planned remodeling at an additional 20 during the remainder of 2013. Its Royalty loyalty program operated at all company-owned locations and 69 franchised locations.
- Interest expense and other fell to $1.1 million from $1.8 million, primarily following the December 2012 refinancing. The effective tax rate was 23.9%; management anticipated approximately 24% for fiscal 2013.
- The company expected inflation to remain a headwind in 2013, citing supplies, food commodities, energy, wages and construction materials. Results are subject to seasonality and may fluctuate.
Risks, contingencies and unusual items
Key disclosed risks include food and commodity costs (particularly ground beef), labor and energy expenses, competition and discounting, consumer spending, restaurant traffic, execution of marketing and business initiatives, information technology implementation, access to credit, and legal claims. Certain food and labor costs are covered by fixed-price arrangements, but coverage may expire during 2013. The company reported ordinary-course employment, illness, injury, food-quality and operational claims; management believed adequate provisions were recorded and did not expect a material adverse effect. No material change to the risk factors in the 2012 Form 10-K was reported.
The company reported no first-quarter share repurchases; its authorization had $50 million remaining. Disclosure controls were considered effective. The first phase of a multi-year ERP implementation was completed, with continued monitoring and testing planned. No significant implementation difficulties were reported. No subsequent events requiring disclosure were identified.
Important facts for investors to verify
- Assess whether comparable-sales growth can persist given the decline in guest count and pressure on operating and net margins.
- Monitor planned restaurant openings, remodeling spending, cash balances, debt repayment and available capacity under the revolving facility.
- Review the timing-driven components of operating cash flow and the working capital deficit when evaluating cash generation.
- Reconcile the interest-rate swap notional amount: the notes report $65.5 million remaining, while the market-risk discussion reports $68.4 million at April 21, 2013.
- Track inflation, commodity and wage trends, legal claims, ERP implementation, and the execution of management’s 2013 plans; the filing provides no specific full-year revenue or earnings guidance.