Red Robin Gourmet Burgers, Inc. — Q2 2015 Form 10-Q
Business context and period. The quarter ended July 12, 2015 covered 12 weeks; year-to-date results cover 28 weeks. Red Robin operated 422 restaurants and had 99 franchised locations across North America. Comparisons below are with the corresponding 2014 periods.
Financial performance
| Metric | Q2 2015 | Q2 2014 | 28 weeks 2015 | 28 weeks 2014 |
|---|---|---|---|---|
| Total revenue | $293.0 million | $256.1 million | $687.9 million | $596.6 million |
| Operating income | $16.5 million | $13.5 million | $40.3 million | $30.5 million |
| Net income | $11.2 million | $9.5 million | $27.7 million | $21.4 million |
| Diluted EPS | $0.78 | $0.65 | $1.94 | $1.47 |
- Q2 revenue increased 14.4%; company-owned restaurant revenue grew 14.6%. Comparable restaurant revenue rose 2.9%, reflecting a 2.4% increase in average check and 0.5% higher guest counts. Growth also reflected acquired and newly opened restaurants.
- Q2 operating margin was 5.6% of total revenue, versus 5.3%; net margin was 3.8%, versus 3.7%. Restaurant operating costs were 77.5% of restaurant revenue, down from 77.8%. Lower food and labor costs as a share of sales were partly offset by higher occupancy costs.
- For the 28 weeks, operating cash flow was $67.3 million, compared with $56.1 million. Investing cash outflow was $70.0 million, including $31.0 million for remodels and $17.3 million for new restaurants. Cash increased $0.2 million from year-end to $22.6 million.
- At July 12, long-term debt was $136.9 million on the balance sheet; the credit facility balance was $136.0 million, and capital lease obligations totaled $8.2 million. Total debt and lease obligations were approximately $145.1 million, down $2.8 million from year-end. The $250 million revolving facility also had $9.4 million in letters of credit; borrowings were secured by substantially all company assets. The company reported compliance with debt covenants.
- Current assets of $93.3 million were below current liabilities of $157.3 million. Management said the business typically operates with a working-capital deficit and expects future cash flows to cover working-capital needs.
Material changes and unusual items
- Year-to-date revenue rose 15.3% and net income rose 29.5%. Restaurant revenue growth reflected acquired and new restaurants as well as comparable-sales growth.
- Restaurant operating costs improved as a percentage of restaurant revenue, notably labor (down 0.8 percentage points year to date). Occupancy rose 0.6 percentage points year to date, and depreciation and amortization increased as a share of revenue, reflecting restaurant openings, acquisitions, and remodels.
- A first-quarter change in the estimated gift-card redemption pattern resulted in $1.4 million of additional gift-card breakage revenue and increased net income by $0.9 million, or $0.06 per diluted share. This is a change in estimate, not a stated change in cash flows.
- Cash flow from investing increased versus the prior year, largely due to greater capital investment. Financing cash flow was $3.0 million, versus $43.9 million in the prior-year period, which included substantial net borrowing related to restaurant acquisitions.
Outlook, commentary, and risks
- Management expected a fiscal 2015 effective tax rate of approximately 27.5%. It targeted 150 restaurant remodels during 2015; 31 were completed in Q2, and management anticipated 295 restaurants meeting the new brand standards by year-end, including new openings.
- Plans included 16 Red Robin openings and three relocations in the remainder of 2015, plus one expected franchise opening. The company also planned at least one additional Red Robin Burger Works opening.
- Management expected inflation to continue to pressure 2015 results, citing wages, supplies, and food commodities. Ground beef and poultry costs, labor and energy costs, competition, consumer demand, execution of remodels and expansion, and access to credit were among the disclosed risks. Results are seasonal and interim results may not indicate full-year performance.
- The interest-rate swap matured June 30, 2015. All $136.0 million of credit-facility borrowings were then subject to variable rates; a 1 percentage-point rate change would alter annualized pretax interest expense by about $1.4 million. The company said it may use a new swap or other instruments to manage exposure.
- Management reported no material change to previously disclosed risk factors. Ordinary-course legal claims include employment and food-quality, health, or operational matters; management believed adequate provision had been made and did not expect resolution to materially affect results.
Important facts for investors to verify
- How much of revenue and comparable-sales growth reflects sustained customer traffic and pricing versus acquired and newly opened restaurants.
- Whether food, labor, and occupancy cost trends support continued margin improvement, especially amid expected inflation.
- The returns and funding requirements for restaurant remodels, new openings, and technology investments.
- Variable-rate debt exposure, facility availability after letters of credit and covenant requirements, and the company’s working-capital deficit.
- The effect of the gift-card breakage estimate change when assessing reported revenue, earnings, and year-over-year comparisons.