Red Robin Gourmet Burgers, Inc. — FY2014 Form 10-K
Business context and period. The filing covers the 52-week fiscal year ended December 28, 2014; fiscal Q4 was 12 weeks. Red Robin operated 415 company-owned and 99 franchised restaurants across the U.S. and Canada. The company reports one operating segment.
Financial performance
| Metric | FY2014 | Prior comparable period |
|---|---|---|
| Total revenue | $1,146.1 million | $1,017.2 million; up 12.7% |
| Restaurant revenue | $1,129.1 million | $1,000.2 million; up 12.9% |
| Income from operations | $44.7 million; 3.9% margin | $43.8 million; 4.3% margin |
| Net income | $32.6 million; 2.8% margin | $32.2 million; 3.2% margin |
| Diluted EPS | $2.25 | $2.22 |
| Operating cash flow | $123.6 million | $113.5 million |
| Cash and cash equivalents | $22.4 million | $17.1 million |
| Total debt and capital leases | $147.9 million | $88.7 million |
Comparable restaurant sales rose 3.1%, reflecting a 3.7% increase in average guest check, partly offset by a 0.6% decline in guest counts. Restaurant operating costs increased to 78.6% of restaurant revenue from 78.3%; labor improved to 33.0% from 33.5%, while food cost, other operating costs, and occupancy costs rose as percentages of sales.
FY2014 investing cash outflow was $155.3 million, including $107.7 million for property, equipment and intangible assets and $47.5 million to acquire franchised restaurants. Financing activities provided $37.1 million. Cash increased $5.3 million year over year. Current liabilities exceeded current assets by approximately $63.7 million; management states operating cash flow and the revolving facility should meet expected needs.
Material changes and unusual items
- Revenue growth reflected $49.9 million from new restaurants net of closures, $49.4 million from acquired restaurants, and $29.6 million in comparable restaurant revenue growth.
- The company acquired 36 franchised restaurants for $47.5 million cash, including 18 in Canada; those restaurants contributed $49.4 million of revenue after acquisition through year-end.
- FY2014 included an $8.8 million non-cash pre-tax impairment charge: $7.6 million for ERP software in development and $1.2 million for three restaurants. It also included $1.8 million of acquisition costs. Reported operating margin and EPS include these items.
- Fourth-quarter revenue was $282.1 million, operating income $5.0 million, net income $3.9 million, and diluted EPS $0.28. The quarter included the $8.8 million impairment charge. In Q4 2013, revenue was $241.9 million, operating income $8.1 million, net income $7.0 million, and diluted EPS $0.48.
- The company repurchased $26.9 million of stock during FY2014. It replaced its revolving credit facility with a $250 million facility maturing in 2019; $138.5 million was outstanding at year-end, with $8.2 million of letters of credit reducing availability. The company reported compliance with debt covenants.
Outlook, management commentary and risks
For FY2015, management expected to open 20 full-service Red Robin restaurants and five Burger Works locations, remodel at least 125 restaurants, and spend approximately $100 million on capital expenditures excluding acquisitions (potentially more if remodels expand). Management expected overall commodity costs to increase about 4%. It stated cash from operations was expected to cover debt service, capital expenditures, and working capital requirements for at least the next 12 months.
Key risks include food and labor inflation, particularly ground beef and minimum-wage increases; consumer traffic and discretionary spending; intense competition and discounting; execution and returns on new restaurants and remodels; ERP implementation delays and additional costs; cybersecurity and food-safety events; and geographic concentration in the western U.S. About 43% of estimated FY2015 food and beverage purchases were covered by fixed-price contracts, most expiring during FY2015. The company also noted mixed performance among Burger Works locations, with college-campus units below expectations.
Management reported effective disclosure controls and internal control over financial reporting; Deloitte issued unqualified opinions on the financial statements and internal controls. The acquired Canadian restaurants were excluded from the year-end internal-control assessment because of acquisition timing, and were expected to be included in the 2015 assessment.
Important facts for investors to verify
- Whether comparable-sales growth can persist as guest counts declined despite higher average checks.
- Whether acquired restaurants deliver sustainable returns and whether acquisition-related debt remains manageable.
- Progress and future spending on replacement ERP systems after the $7.6 million software impairment.
- Actual commodity, labor, and occupancy cost trends compared with management’s FY2015 expectations.
- Available revolving-credit capacity, covenant headroom, and capital allocation among expansion, debt reduction, and repurchases.
- Results of integrating the Canadian restaurants and their inclusion in the 2015 internal-control assessment.