Red Robin Gourmet Burgers, Inc. — Q1 2012 Form 10-Q
Business context and period: Casual-dining restaurant operator and franchisor. The filing covers the 16 weeks ended April 15, 2012, compared with the 16 weeks ended April 17, 2011. At period-end, Red Robin operated 330 company-owned restaurants and had 136 franchised restaurants.
Financial performance
| Metric | Q1 2012 | Prior-year period | Change |
|---|---|---|---|
| Total revenue | $299.5 million | $286.8 million | +4.4% |
| Restaurant revenue | $294.6 million | $281.5 million | +4.7% |
| Operating income | $15.7 million | $11.2 million | +40.7% |
| Operating margin | 5.3% | 3.9% | +1.4 percentage points |
| Net income | $10.6 million | $8.7 million | +21.2% |
| Net margin | 3.5% | 3.0% | +0.5 percentage points |
| Diluted EPS | $0.71 | $0.56 | +$0.15 |
- Comparable sales: Company-owned comparable restaurant sales increased 0.5%, reflecting a 4.1% rise in average guest check offset by a 3.6% decline in guest count. Newer, non-comparable restaurants contributed $10.9 million of restaurant revenue growth.
- Costs and margins: Cost of sales rose to 25.5% of restaurant revenue from 25.0%, mainly due to higher beef, potato, and fry-oil costs and product mix. Labor declined to 33.5% from 34.4%, and operating costs declined to 12.7% from 13.8%. Occupancy increased to 7.2% from 7.0%.
- Cash flow: Operating activities provided $29.6 million, versus $29.9 million. Investing activities used $9.6 million, including $10.4 million of property and equipment purchases. Financing activities used $17.0 million, principally for debt repayment. Cash increased $2.9 million to $38.0 million.
- Debt and liquidity: Total debt outstanding was $137.9 million, down $19 million from year-end, including a $15 million early payment and scheduled repayments. The term loan balance was $127.5 million; there were no revolving borrowings and $7.8 million of standby letters of credit. The credit facility matures in 2016, and the company reported compliance with its covenants.
- Balance sheet: Total assets were $585.5 million and total liabilities were $277.0 million at April 15, 2012. Current assets were $76.3 million and current liabilities were $103.0 million.
Changes, outlook, and risks
- Four company-owned restaurants opened and one closed during the period. Management planned up to 11 additional net company-owned openings in 2012, expected to be funded from operating cash flows.
- Management expected the full-year 2012 effective tax rate to be approximately 24%.
- Management warned that commodity-price inflation, especially for food, was expected to pressure costs for the remainder of 2012. It also cited labor, energy, and construction-cost uncertainty.
- Management attributed lower guest counts to competitive discounting and promotional activity that performed less well than the prior-year efforts. It continued menu and marketing initiatives, including the Tavern Double offering and Red Royalty loyalty program.
- Interest expense increased to $1.8 million from $1.4 million; the weighted average interest rate was 3.6%, compared with 2.6%. A swap hedged part of the floating-rate term loan. A 1 percentage-point rate change on the $56.3 million of variable-rate borrowings would change annual pretax interest expense by approximately $563,000.
- The company reported routine employment, guest-injury, illness, and other operational claims; management considered its loss provision adequate and did not expect their resolution to materially affect financial position or results. One restaurant closure was recorded, with no restaurant impairment charges in either period.
- The 2011 comparative period included a $438,000 initial gift-card breakage adjustment, contributing to lower reported franchise royalties, fees, and other revenue in 2012. Gift-card breakage recognized was $224,000 in 2012 versus $757,000 in 2011.
- On April 9, 2012, the company agreed to buy one franchised restaurant for approximately $3 million, subject to customary closing conditions; closing was expected in Q2 or Q3.
Important facts for investors to verify
- Whether comparable-sales growth can continue if guest counts remain negative and competitive discounting persists.
- How commodity inflation affects food-cost percentages and operating margins over the rest of 2012.
- Whether planned restaurant openings and other capital needs can be funded while the company continues to repay debt.
- The distinction between no repurchases under the authorized plan and 1,707 shares recorded as purchased during the quarter; the filing says those shares were delivered for employee tax withholding, not bought under the plan.
- The 2012 tax-rate outlook, covenant headroom, and sensitivity of interest expense to rates; the filing does not provide a clear numerical covenant headroom value.