Red Robin Gourmet Burgers, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 29, 2019 (52 weeks); fiscal Q4 was 12 weeks. The company operates and franchises casual-dining restaurants. At year-end it had 556 locations: 454 company-owned and 102 franchised.
Financial and operating performance
- Revenue: Total revenue was $1.315 billion, down 1.8% from $1.339 billion in FY2018. Restaurant revenue fell 2.0% to $1.290 billion. Comparable restaurant revenue declined 0.6%, as Guest count fell 4.7%, partly offset by a 4.1% increase in average check.
- Profitability: Operating loss was $13.1 million versus $10.5 million in FY2018; net loss was $7.9 million, or $0.61 per diluted share, versus $6.4 million, or $0.49 per share. Restaurant operating costs rose to 82.1% of restaurant revenue from 81.0%. Labor and other operating costs each increased 70 basis points as a share of restaurant revenue; cost of sales improved 30 basis points.
- Q4: Revenue was $302.9 million and net loss was $7.7 million, or $0.60 per diluted share. FY2018 Q4 revenue was $306.8 million and net loss was $10.6 million, or $0.82 per diluted share.
- Unusual items: FY2019 other charges totaled $21.6 million, including $15.1 million of non-cash impairment charges on 29 restaurants, $3.5 million of executive transition and severance costs, $3.3 million of board and stockholder matter costs, and $1.0 million of executive retention costs; a $1.2 million gain related to closures and refranchising partly offset these costs. Management reported adjusted diluted EPS of $0.62, excluding specified items, versus $1.73 in FY2018.
- Cash flow and investment: Operating cash flow was $57.9 million, down from $126.3 million. Investing cash outflow was $57.0 million, including $57.3 million of capital expenditures; financing cash inflow was $9.7 million. Cash ended the year at $30.0 million, up from $18.6 million.
- Debt and liquidity: Debt was $206.9 million, up from $193.4 million, and the lease-adjusted leverage ratio was 4.72. The company reported $186.5 million of unused capacity under its then-existing facility and compliance with covenants at year-end. On January 10, 2020, it replaced that facility with a five-year agreement providing $300 million total capacity. Cash flows from operations and available borrowing capacity were expected to cover near-term needs.
- Leases: Adoption of lease accounting added $426.2 million of right-of-use assets and $508.1 million of lease liabilities at year-end. Contractual operating lease obligations totaled $739.8 million before imputed interest.
Changes, strategy, and outlook
- The company closed 18 company-owned restaurants, sold 12 Canadian locations to a franchisee, and ended the year with 17 fewer total restaurants than in FY2018. No company-owned restaurants opened in 2019.
- Management described 2019 as a period of foundational change, including the appointment of CEO Paul Murphy and three new independent directors. Its priorities include improving the service model, focusing the menu, strengthening brand marketing, and growing off-premise sales.
- Management planned to introduce Donatos pizza in approximately 100 restaurants in 2020 and 150 locations annually in 2021 and 2022; it did not expect to open new company-owned restaurants in 2020. It also planned new loyalty and digital-ordering experiences and company-platform last-mile delivery.
- 2020 outlook stated in the filing: low-single-digit comparable restaurant revenue growth; net income of at least $2 million, including a projected $10–$12 million tax benefit; adjusted EBITDA at least flat versus approximately $101 million in 2019; and capital expenditures of $50–$60 million. Management expected incremental restaurant-level operating profit to be offset by pre-opening, marketing, and growth-project costs.
Risks and contingencies
- Execution risks include reversing declining Guest traffic, delivering service improvements, growing off-premise sales, and implementing digital, menu, and Donatos initiatives. The filing cautions that third-party delivery commissions can pressure margins and that new menu offerings may not succeed.
- Higher wages and labor costs, commodity-price volatility, competition and discounting, and possible supply interruptions could pressure results. About 60% of estimated annual food and beverage purchases were covered by fixed-price contracts.
- Leverage, variable-rate debt, covenant requirements, and substantial long-term lease commitments are important financial risks. A 1% increase in borrowing rates was estimated to raise annualized pre-tax interest expense by about $2.1 million.
- Two California employment-related cases alleged meal/rest-break and expense-reimbursement violations; trials were expected in 2020. The company said it intended to defend the claims, but an adverse outcome could materially affect results in the period resolved.
- The reported 2020 outlook was issued in the filing dated February 25, 2020. It is management’s stated outlook at that time, not a guarantee of results.
Key facts for investors to verify
- Whether Guest counts and comparable sales improve, and whether average-check growth can continue without further traffic erosion.
- Whether cost inflation, staffing, delivery commissions, and investment spending allow restaurant-level margins and cash generation to recover.
- Execution and economics of the Donatos rollout, digital initiatives, and off-premise strategy.
- Current debt, leverage, covenant headroom, refinancing terms, and capacity to fund capital expenditures and lease obligations.
- Developments and potential exposure in the California employment cases, restaurant impairment trends, and realization of the projected tax benefit.