Red Robin Gourmet Burgers, Inc. — Q1 2014 Form 10-Q
Reporting period: Sixteen weeks ended April 20, 2014, compared with the sixteen weeks ended April 21, 2013. The company operated 367 company-owned restaurants and had 129 franchised restaurants, for 496 total locations.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $340.5 million | $306.3 million | +11.1% |
| Comparable restaurant revenue | +5.4% | Guest check +4.9%; guest counts +0.5% | |
| Operating income | $17.0 million | $13.5 million | Operating margin 5.0% vs. 4.4% |
| Net income | $11.9 million | $9.5 million | +26.0% |
| Diluted EPS | $0.82 | $0.66 | +24.2% |
| Operating cash flow | $36.0 million | $40.4 million | Down $4.3 million |
| Cash capital investment and acquisitions | $32.3 million | $13.6 million | Cash used in investing |
Restaurant operating costs declined to 77.6% of restaurant revenue from 78.5%, primarily due to labor productivity and fixed-cost leverage. Cost of sales rose to 25.1% from 24.9%, reflecting higher costs for certain burger, seafood, and prepared-food items. SG&A rose to 12.5% of total revenue from 12.3%, driven by compensation, advertising, and professional services. The effective tax rate was 27.0%, versus 23.9%.
Cash and cash equivalents were $14.6 million at April 20, 2014, down from $17.1 million at fiscal year-end. Current assets were $63.0 million and current liabilities were $124.2 million; management said a working-capital deficit is typical for its cash-and-card restaurant model. Long-term debt was $78.4 million; total debt and capital lease obligations were $87.5 million, down from $88.7 million. The company had $77.5 million outstanding under its $225 million revolving credit facility and reported compliance with debt covenants. The facility matures in 2017.
Changes and notable developments
- Revenue growth reflected $16.0 million of comparable-store growth and $17.7 million from new and acquired restaurants. Company-owned average weekly sales volumes rose 4.3%.
- Operating cash flow decreased, largely because of incentive-compensation payments and higher payroll and marketing contributions; improved restaurant operating profit partly offset the decline.
- The company spent $7.5 million repurchasing shares during the quarter; approximately $37.5 million remained under its repurchase authorization.
- On March 24, the company acquired four franchised restaurants for approximately $8.0 million cash. It closed two restaurants during the quarter; both had been impaired in 2013.
- After quarter-end, Red Robin announced agreements to acquire 32 franchised restaurants in the U.S. and Canada for approximately $40 million, subject to closing conditions, with closing expected in late summer 2014. It recorded $0.5 million of related acquisition costs in the quarter.
Outlook, commentary, and risks
- Management planned 16 additional Red Robin openings and at least 50 company-owned restaurant remodels during the remainder of fiscal 2014; it also planned five Burger Works openings in central business districts. Franchisees were expected to open up to two restaurants.
- Management expected a fiscal 2014 effective tax rate of approximately 27.5% and anticipated inflation would continue to pressure results, particularly through wages, food commodities, supplies, utilities, and construction costs.
- Management cited mixed Burger Works performance: central business district and lifestyle locations were meeting expectations, while college campus locations were below expectations.
- Key disclosed risks include food and labor cost changes, competition and discounting, consumer spending, weather, execution of expansion and remodeling plans, acquisition closing conditions, access to credit, and legal claims. The company said it had made provision for ordinary-course claims and did not expect their resolution to materially affect results.
- Approximately 63% of estimated annual food and beverage purchases were covered by fixed-price contracts as of April 20, 2014; most were scheduled to expire at various times through fiscal year-end.
Investor facts to verify
- Whether comparable-store sales growth and guest-count trends persisted after the reported quarter.
- Completion, financing, and integration of the planned 32-restaurant acquisition, and its effect on debt and earnings.
- Whether cost inflation—especially food and labor—offset continued productivity and sales leverage.
- Actual restaurant openings, remodel returns, and performance of Burger Works locations against stated plans.
- Cash generation, capital spending, share repurchases, and covenant headroom under the revolving credit facility.