Business Context and Reporting Period
Company: Red Robin Gourmet Burgers, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 11, 2010 (Second Quarter of Fiscal 2010)
Operations: The Company operates 309 company-owned restaurants and 134 franchised restaurants across the U.S. and Canada. It operates as a single reportable segment focused on casual dining.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended July 11, 2010 |
28 Weeks Ended July 11, 2010 |
12 Weeks Ended July 12, 2009 |
28 Weeks Ended July 12, 2009 |
|---|---|---|---|---|
| Total Revenues | $201,343 | $476,853 | $201,088 | $471,901 |
| Net Income | $4,333 | $9,285 | $6,421 | $10,266 |
| Diluted EPS | $0.28 | $0.59 | $0.41 | $0.66 |
| Operating Cash Flow | N/A | $34,859 | N/A | $49,287 |
| Cash & Equivalents | $11,923 | $11,923 | $9,937 | $9,937 |
| Total Debt (Current + Long-term) | $113,865 | $113,865 | $123,474 | $123,474 |
| Operating Margin | 3.0% | 2.9% | 4.9% | 3.6% |
Note: Total Debt calculated as sum of current portion of term loan notes, current portion of long-term debt, long-term portion of term loan notes, and other long-term debt/capital leases.
Material Changes vs. Prior Period
- Revenue: Total revenue increased slightly by 0.1% ($255k) for the quarter and 1.0% ($4.95M) year-to-date compared to 2009. Restaurant revenue remained flat quarter-over-quarter.
- Profitability: Net income decreased 32.5% for the quarter and 9.6% year-to-date. Operating income declined significantly, dropping from $9.9M to $6.0M in the quarter.
- Comparable Sales: Comparable restaurant sales decreased 1.2% for the quarter and 1.8% year-to-date, driven by a decline in average guest check (down 2.1% and 2.2% respectively), partially offset by increased guest counts.
- Costs:
- Labor: Increased as a percentage of revenue (35.1% vs 34.2% in Q2) due to higher staffing for marketing campaigns and wage increases.
- Food Cost: Increased slightly (24.6% vs 24.4% in Q2) due to higher ground beef and produce prices.
- SG&A: Increased 8.1% quarter-over-year, primarily due to a $3.3M investment in television advertising for Limited Time Offer (LTO) promotions.
- Cash Flow: Operating cash flow decreased $14.4M year-to-date ($34.9M vs $49.3M), largely due to changes in operating assets/liabilities and lower net income.
Guidance, Outlook, and Risks
- Outlook: Management expects to open up to six additional company-owned restaurants for the remainder of 2010, funded by operating cash flows. They anticipate ground beef prices will decline in the second half of 2010 but remain above 2009 levels.
- Capital Allocation: The Company plans to use significant free cash flow to reduce outstanding indebtedness or opportunistically repurchase common stock. A share repurchase plan was extended to December 31, 2011, with up to $50 million authorized.
- Corporate Actions: On August 11, 2010, the Board adopted a Rights Agreement (poison pill) to protect against coercive takeover tactics, triggering if any person acquires 15% or more of outstanding stock.
- Risks & Contingencies:
- Legal: A class-action lawsuit (Moreno v. Red Robin) regarding wage and hour violations is pending; the case is stayed pending a California Supreme Court decision.
- Commodities: Exposure to inflationary pressures on food (beef, produce), labor, and energy costs.
- Market Risk: Interest rate risk on variable-rate debt, partially mitigated by an interest rate swap covering $70 million of debt.
Investor Verification Checklist
- Comparable Sales Trend: Verify if the 1.2% decline in comparable sales stabilizes in Q3, particularly in California and Arizona markets which underperformed.
- Marketing ROI: Assess whether the increased SG&A spend ($9.5M increase YTD) successfully drives sustained guest count growth post-promotion.
- Debt Reduction: Monitor the execution of the plan to pay down debt using free cash flow, given the current leverage ratio.
- Legal Exposure: Track the status of the Moreno class-action lawsuit and potential financial impact upon the lifting of the stay.
- Commodity Costs: Confirm if ground beef and produce costs trend downward as management anticipates for the remainder of 2010.