Red Robin Gourmet Burgers, Inc. — Q3 2012 Form 10-Q
Business context and period: The filing covers the 12 and 40 weeks ended September 30, 2012; comparable periods ended October 2, 2011. Red Robin operated 336 company-owned restaurants, including five Burger Works locations, and had 132 franchised restaurants. Results are unaudited and the company reports one operating segment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 40 weeks 2012 | 40 weeks 2011 |
|---|---|---|---|---|
| Total revenue | $213.3m | $206.2m | $736.5m | $708.9m |
| Operating income | $5.8m | $3.3m | $33.0m | $23.5m |
| Operating margin | 2.7% | 1.6% | 4.5% | 3.3% |
| Net income | $3.5m | $2.1m | $21.8m | $17.7m |
| Diluted EPS | $0.24 | $0.14 | $1.48 | $1.15 |
| Operating cash flow | — | $72.3m | $73.1m |
- Q3 revenue grew 3.4%; restaurant revenue rose 3.5%. Comparable restaurant sales increased 1.1%, reflecting guest count growth of 0.8% and average check growth of 0.3%; the check increase included an estimated 0.5% effect from Red Royalty deferred-revenue changes.
- For the 40-week period, revenue grew 3.9% and comparable sales increased 0.9%, as average check growth of 1.9% was partly offset by a 1.0% guest-count decline. New and non-comparable restaurants contributed materially to sales growth.
- Q3 restaurant cost of sales improved to 24.8% of restaurant revenue from 25.5%; labor worsened to 34.2% from 33.6%, operating costs improved to 13.5% from 14.4%, and occupancy rose to 7.8% from 7.6%. For the 40 weeks, cost of sales was 25.3% versus 25.2%, labor 33.6% versus 33.8%, and operating costs 13.1% versus 13.9%.
- Cash and equivalents were $26.9m at September 30, down from $35.0m at fiscal year-end. Total current assets were $68.2m and current liabilities $107.2m.
- Total debt was approximately $132.0m, down from $156.9m at December 25, 2011, including $121.9m under the term loan and $10.1m in other debt and capital leases. No revolver borrowings were outstanding; $8.2m of letters of credit reduced capacity under the $100m revolver. The company reported compliance with all debt covenants.
- Forty-week investing cash use was $43.0m, including $39.7m in property and equipment purchases and $3.2m for a franchise restaurant acquisition. Financing cash use was $37.5m, including $24.4m of debt repayments and $15.7m of share repurchases.
Changes, outlook and risks
- Profitability improved versus the prior-year periods; Q3 operating income increased by $2.6m and 40-week operating income by $9.5m. The prior-year comparison included a $1.9m impairment charge, absent in 2012.
- Management attributed sales growth to menu pricing, menu changes, the Red Royalty program and new restaurants. The company opened 11 company-owned restaurants during the 40 weeks and planned to open up to three more in 2012, funded from operating cash flow.
- Management expected the full-year 2012 effective tax rate to be approximately 24%. No specific revenue or earnings guidance was provided.
- Management cited higher potatoes, ground beef and fry-oil costs, drought and supply-demand pressures as risks to food costs, with a moderate negative effect expected for the remainder of 2012 and into 2013. Inflation was expected to continue negatively affecting results. Q3 food-cost percentage improved year over year, but 40-week food-cost percentage increased slightly.
- The company planned continued investment in restaurant development, existing locations, brand transformation and technology, while also paying down debt and retaining the option to repurchase shares. It repurchased $15.7m of shares during the 40 weeks; $32.0m remained under the authorization, scheduled to expire December 31, 2012.
- Risks include commodity, labor and energy inflation; seasonality and guest-count trends; execution of new restaurant openings and technology initiatives; and variable-rate debt exposure. A 1 percentage-point rate change on the $53.4m of variable-rate borrowings would change annualized pretax interest expense by about $0.5m. The interest-rate swap hedged $68.4m of debt notional. Ordinary-course legal claims were described as adequately provided for, with no expected material adverse effect; no material changes to previously disclosed risk factors were reported.
Investor facts to verify
- Whether comparable-sales gains and guest-count trends persisted after Q3, particularly given the loyalty-program accounting effect in average check.
- Whether commodity inflation, labor costs and restaurant occupancy continued to pressure margins.
- Debt repayment, covenant headroom, revolver availability and interest-rate exposure, including the swap’s coverage and expiration terms.
- Cash deployment among new-store openings, technology and brand initiatives, debt reduction and share repurchases.
- The assumptions behind gift-card breakage and Red Royalty deferred-revenue recognition, which affected reported revenue and comparable sales.