Business Context and Reporting Period
Company: Red Robin Gourmet Burgers, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Twelve weeks ended July 9, 2006 (Second Quarter) and twenty-eight weeks ended July 9, 2006 (Year-to-Date).
Operations: As of July 9, 2006, the Company operated 180 company-owned restaurants and 142 franchised restaurants across 35 states and Canada. The Company operates as a single reportable segment.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended July 9, 2006 |
12 Weeks Ended July 10, 2005 |
28 Weeks Ended July 9, 2006 |
28 Weeks Ended July 10, 2005 |
|---|---|---|---|---|
| Total Revenues | $135,860 | $114,104 | $306,393 | $255,313 |
| Net Income | $7,194 | $7,423 | $14,549 | $15,386 |
| Diluted EPS | $0.43 | $0.45 | $0.87 | $0.93 |
| Operating Cash Flow | N/A | N/A | $42,549 | $37,391 |
| Cash & Equivalents (End) | $5,609 | $7,030 | $5,609 | $7,030 |
| Total Debt | $65,833 | $58,524 | $65,833 | $58,524 |
| Operating Margin | 8.6% | 10.6% | 7.8% | 9.8% |
Note: Operating margins are calculated as Income from Operations divided by Total Revenues.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19.1% for the quarter and 20.0% year-to-date. Restaurant revenue grew 19.2% (quarter) and 20.1% (YTD), driven by a 3.3% increase in comparable restaurant sales and the addition of new units.
- Profitability Decline: Despite revenue growth, Net Income decreased 3.1% for the quarter and 5.5% year-to-date. Operating income declined due to increased costs.
- Cost Pressures:
- Labor: Increased 21.5% (quarter) and 23.6% (YTD) due to higher salaries, bonuses, and the adoption of SFAS 123R (stock-based compensation).
- General & Administrative: Increased 37.2% (quarter) and 39.5% (YTD), primarily driven by stock-based compensation ($1.2M in G&A for the quarter) and legal fees.
- Operating Costs: Increased due to higher energy, maintenance, and supply costs.
- Debt Increase: Total debt rose to $65.8 million from $58.5 million at year-end 2005, funded by borrowings for new restaurant construction and acquisitions.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Expansion: The Company plans to open 30-32 new company-owned restaurants in fiscal 2006 (excluding acquisitions). Franchisees are expected to open 15-17 new units.
- Capital Expenditures: Expected to be $100 million to $105 million for fiscal 2006, excluding the acquisition of franchised restaurants.
- Recent Acquisition: On July 10, 2006 (post-period end), the Company acquired 11 franchised restaurants in Washington for approximately $33.5 million, funded by the revolving credit facility. Two additional units are expected to close later.
- Commodity Costs: Management notes improvements in food commodity prices (meats, dairy, produce) but expects offsetting increases in fuel surcharges and delivery costs.
Risks and Contingencies
- Legal Proceedings:
- SEC Investigation: A formal order of investigation was issued on February 1, 2006, regarding an internal investigation into travel and entertainment expenses by the former CEO. The Company is cooperating.
- Class Action Lawsuits: Consolidated complaints (Andropolis/Baird) allege securities violations related to financial reporting and the departure of former executives. Motions to dismiss are pending.
- Derivative Suit: The Wilster case was dismissed by the court on August 3, 2006, for failure to plead demand futility.
- Wage and Hour Lawsuit: The Huggett lawsuit alleges violations of California wage and hour regulations; the case was removed to federal court.
- Accounting Changes: Adoption of SFAS 123R in Q1 2006 significantly increased stock-based compensation expense, impacting reported net income and EPS.
- Market Risks: Exposure to variable interest rates on $55.7 million of debt and inflationary pressures on food, labor, and energy costs.
Investor Verification Checklist
- Stock-Based Compensation Impact: Verify the specific impact of SFAS 123R adoption on future quarters, as it added $1.4 million in pre-tax expense for Q2 2006.
- Legal Exposure: Monitor the status of the SEC investigation and the consolidated securities class action lawsuits for potential settlement costs or reputational damage.
- Debt Covenants: Confirm continued compliance with the $200 million revolving credit facility covenants, especially given the recent $33.5 million draw for the Washington acquisition.
- Comparable Sales Sustainability: Assess whether the 3.3% comparable sales growth can be maintained amidst rising labor and energy costs.
- Acquisition Integration: Track the financial performance of the 11 newly acquired Washington restaurants and the status of the remaining 2 units.