Red Robin Gourmet Burgers, Inc. — Q2 2019 Form 10-Q
Business context and period. The filing covers the 12 weeks ended July 14, 2019, and year-to-date results for the 28 weeks ended July 14, 2019, compared with the corresponding 2018 periods. Red Robin operated 472 company-owned and 90 franchised restaurants across North America at quarter-end, down from 572 total locations a year earlier.
Key financial results
| Metric | 12 weeks ended July 14, 2019 | 28 weeks ended July 14, 2019 |
|---|---|---|
| Total revenue | $308.0 million, down 2.3% year over year | $717.8 million, down 2.6% |
| Restaurant revenue | $302.4 million, down 2.6% | $702.9 million, down 3.1% |
| Operating income (loss) | $(12.9) million, versus $(4.2) million | $(9.5) million, versus $2.8 million |
| Net income (loss) | $1.0 million, versus $(1.9) million | $1.6 million, versus $2.5 million |
| Diluted EPS | $0.08, versus $(0.14) | $0.12, versus $0.19 |
- Restaurant-level costs and margins: Restaurant operating costs rose to 81.8% of restaurant revenue in Q2 from 80.7%, and to 81.7% year to date from 80.3%. Labor and other operating costs increased as a share of restaurant revenue; lower food costs partly offset the increase. Q2 operating margin was -4.2% of revenue, versus -1.3% a year earlier.
- Cash flow: Year-to-date cash from operations was $41.7 million, down from $77.0 million. Investing used $21.0 million, primarily for technology infrastructure and restaurant maintenance; financing used $13.2 million. Cash increased $7.6 million to $26.2 million.
- Debt and liquidity: Long-term debt was $181.4 million, down from $193.4 million at fiscal year-end. The company had $180.5 million drawn on its $400 million revolving facility, $7.4 million in letters of credit, and approximately $237.1 million of unused capacity. It reported compliance with debt covenants at July 14. Current liabilities exceeded current assets; management said restaurant cash receipts and available credit support working-capital needs.
- Lease obligations: The company reported $545.2 million of lease liabilities and $448.4 million of right-of-use assets at quarter-end. These balances reflect adoption of lease accounting standard Topic 842, which added lease assets and liabilities to the balance sheet. Adoption reduced retained earnings by $15.2 million but did not affect the income statement or cash flows.
Material changes and management commentary
- Comparable restaurant revenue fell 1.5% in Q2 and 2.4% year to date. Lower guest counts—down 6.4% and 5.9%, respectively—were partly offset by higher average checks. Management cited pricing and menu mix as contributors to the higher checks and said it was focused on improving service execution to increase traffic.
- Company-owned restaurants decreased by 12 year to date, including 11 permanent closures and one temporary closure; one franchised restaurant opened. Restaurant closures contributed to lower restaurant revenue.
- Q2 other charges were $16.8 million, including $14.1 million in non-cash impairment charges for 29 company-owned restaurants, plus closure, board/shareholder matter, and executive-related costs. Year-to-date other charges were $19.2 million. Management also presented adjusted diluted EPS of $1.03 for Q2 and $1.22 year to date; these are non-GAAP figures excluding specified charges.
- On August 19, 2019, after quarter-end, the company amended its credit facility to raise the lease-adjusted leverage limit to 5.0x through December 29, 2019, before it returns to 4.75x. The reported ratio at July 14 was 4.30x. The facility matures June 30, 2021.
- No numeric earnings or sales guidance is provided. Management expected labor inflation to remain a cost pressure for the rest of 2019 and described plans to use available cash for debt repayment, restaurant upkeep, strategic initiatives, and possible share repurchases.
Risks, contingencies, and unusual items
- Risks highlighted include declining traffic, competition and discounting, food and labor inflation, ability to execute service and other improvement initiatives, and reliance on access to credit and operating cash flow. A 1% increase in food costs was estimated to increase annual cost of sales by approximately $3.1 million; a 1% interest-rate change on variable-rate borrowings was estimated to change annualized pretax interest expense by approximately $1.8 million.
- The company disclosed ordinary-course claims, including employment-related and food-quality, health, or operational matters. Management said it had made adequate provision, but outcomes may differ from estimates.
- Q2 net income was reported despite an operating loss and pretax loss, alongside a $16.0 million income tax benefit. The filing attributes the unusually high effective tax benefit rate primarily to lower income; investors should consider this when assessing reported earnings.
- The company repurchased 48,100 shares during the quarter. Since authorization of its $75 million program, it had repurchased 90,700 shares for $2.9 million.
Most important facts for investors to verify
- Whether guest-count declines and comparable-sales weakness improve, and whether service initiatives can restore traffic.
- Whether labor, delivery, and other operating cost pressures continue to erode restaurant margins.
- The sustainability of earnings given operating losses, impairment charges, and the substantial income tax benefit.
- Compliance with the amended lease-adjusted leverage covenant, borrowing availability, and the company’s ability to service debt and lease obligations.
- The scale and outcomes of restaurant impairments, closures, and outstanding legal claims.