Red Robin Gourmet Burgers, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks). The prior fiscal year had 53 weeks, including an additional fourth-quarter week. The filing also reports fiscal Q4 2018 as 12 weeks.
Business context
Red Robin operates and franchises full-service restaurants in North America. At year-end it had 573 restaurants: 484 company-owned and 89 franchised. Company-owned restaurant sales are the primary revenue source.
Financial and operating performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $1,338.6 million | $1,387.6 million |
| Restaurant revenue | $1,316.2 million | $1,365.1 million |
| Operating income (loss) | $(10.5) million | $39.0 million |
| Net income (loss) | $(6.4) million | $30.0 million |
| Diluted EPS | $(0.49) | $2.31 |
| Cash from operations | $126.3 million | $156.6 million |
| Capital expenditures | $50.3 million | $83.5 million |
FY 2018 restaurant revenue fell 3.6%; comparable restaurant sales declined 2.6%, reflecting guest counts down 1.5% and average check down 1.1%. The 2017 extra week contributed approximately $32.6 million in restaurant revenue and $4.1 million in net income, complicating year-over-year comparisons. FY 2018 restaurant operating costs rose to 81.0% of restaurant revenue from 79.6%; operating margin was (0.8)% and net margin was (0.5)%.
FY Q4: Revenue was $306.8 million, operating loss $15.1 million, net loss $10.6 million and diluted loss per share $0.82. In Q4 2017, revenue was $343.9 million, operating income $8.2 million, net income $8.8 million and diluted EPS $0.68. The periods were 12 and 13 weeks, respectively.
At December 30, 2018, cash was $18.6 million, total assets $843.9 million, and stockholders’ equity $382.8 million. Current assets of $98.5 million were below current liabilities of $171.1 million; management said the business typically operates with a working-capital deficit. Total debt and capital lease obligations were $203.6 million, down from $277.3 million. The company generated $126.3 million of operating cash flow and used $74.3 million in financing activities, primarily for debt repayment.
Material changes and unusual items
- Other charges totaled $39.1 million, including $28.1 million of noncash impairment charges at 41 restaurants, $4.8 million for litigation contingencies, $3.3 million of reorganization costs and $2.9 million for smallwares disposal. The filing reported adjusted diluted EPS of $1.73 after excluding specified items; this is a company-presented non-GAAP measure.
- Comparable sales worsened from a 0.7% increase in FY 2017 to a 2.6% decline in FY 2018. Average weekly sales per company-owned restaurant declined 4.1% to $52,303.
- The company repaid $73.0 million net on its revolving credit facility during 2018. Its $400 million facility matures June 30, 2021; borrowings were $192.5 million and letters of credit were $7.8 million at year-end.
- Management reported covenant compliance: lease-adjusted leverage was 4.08x against a 4.75x maximum, and fixed-charge coverage was 1.87x against a 1.25x minimum.
- Revenue standard Topic 606 was adopted retrospectively in 2018, reclassifying franchise advertising contributions as revenue and related advertising costs as expense; the adoption did not change previously reported net income.
Outlook, commentary and risks
For 2019, management expected comparable sales growth of 0 to 150 basis points, capital expenditures of $50–$60 million, and a pause in new company-owned restaurant growth while it works on operating performance and restaurant prototypes. It expected operating cash flow to cover debt service, capital expenditures and working capital needs for at least the next 12 months. Management anticipated continued pressure from labor and commodity inflation.
The company planned continued investment in digital and off-premise channels, technology and restaurant systems, and expected franchisees to open units. Risks highlighted include weak traffic and discretionary spending, competition and discounting, minimum-wage and labor-cost increases, volatile food costs (especially potatoes and ground beef), third-party delivery commissions and service quality, food safety, cybersecurity, long-term lease commitments, and exposure to regional trends in the western United States. About 62.3% of estimated 2019 food and beverage purchases were under fixed-price contracts, most expiring during 2019.
Operating lease obligations were disclosed at $550.4 million. Upon adoption of lease accounting in Q1 2019, the company expected to recognize operating lease liabilities of up to $700 million and corresponding right-of-use assets of up to $623.1 million. Management considered litigation provisions adequate and did not expect other existing claims to materially affect financial position or results. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting.
Leadership changes included Guy Constant’s transition to COO in January 2019 and Lynn Schweinfurth’s appointment as CFO, effective January 28, 2019.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, and whether the 2019 outlook is achieved.
- Whether restaurant-level cost inflation, delivery commissions and lower sales continue to pressure margins and cash generation.
- The performance of the 41 impaired restaurants and whether further impairment or closure charges arise.
- Debt, covenant headroom, borrowing availability and the company’s ability to fund planned capital spending and lease commitments.
- The amount and outcome of employment-related litigation and other contingencies, and the balance-sheet effects of adopting lease accounting.
- Progress on off-premise initiatives, technology upgrades, and the planned pause in company-owned restaurant growth.