Red Robin Gourmet Burgers, Inc. — 2011 Third-Quarter 10-Q
Reporting period: Twelve weeks ended October 2, 2011; year-to-date comparisons cover forty weeks. Unless stated otherwise, amounts are in millions.
Business context
Red Robin operated 323 company-owned restaurants and franchised 137 locations at quarter-end, across 32 U.S. states and 21 states and two Canadian provinces, respectively. The company reported one operating and reportable segment.
Financial performance and liquidity
| Metric | Third quarter 2011 | Third quarter 2010 | Forty weeks 2011 | Forty weeks 2010 |
|---|---|---|---|---|
| Total revenue | $206.2 (+5.9%) | $194.8 | $708.9 (+5.5%) | $671.7 |
| Operating income (loss) | $3.3 | ($6.1) | $23.5 | $7.8 |
| Net income (loss) | $2.1 | ($4.2) | $17.7 | $5.1 |
| Diluted EPS | $0.14 | ($0.27) | $1.15 | $0.32 |
| Operating margin | 1.6% | (3.1%) | 3.3% | 1.2% |
Company comparable-restaurant gross sales rose 2.1% in the quarter, reflecting a 5.3% increase in average check offset by a 3.2% decrease in guest count; after loyalty-program discounts, comparable sales increased 0.8%. Year-to-date gross and net comparable sales increased 2.3% and 1.7%, respectively.
Quarterly restaurant cost of sales increased to 25.5% of restaurant revenue from 24.4%, as commodity costs and product mix outweighed revenue leverage. Labor improved to 33.6% from 35.6%, and operating costs improved to 14.4% from 15.2%. For the forty weeks, cost of sales was 25.2% versus 24.4%; labor was 33.8% versus 35.5%.
Operating cash flow was $73.1, compared with $51.6 in the prior-year period. Capital spending was $32.7; share repurchases used $30.7. Cash was $27.1 at October 2, up from $17.9 at fiscal year-end 2010. Current assets of $64.4 were below current liabilities of $96.2.
Total debt, including capital leases, was $157.1: $146.3 under the term loan, no revolving borrowings, and $10.8 in capital leases. The $100 revolving facility had $6.6 of letters of credit outstanding. The term loan’s effective rate was 3.37%; the company reported compliance with all debt covenants.
Changes, outlook, and risks
- Revenue growth reflected higher average checks and additional restaurants. The company opened two company-owned restaurants in the quarter and nine year to date; it planned to open up to three more in 2011.
- Management attributed higher checks to menu pricing, the new menu, Red Royalty loyalty program, beverage initiatives, and limited-time offers. A further 0.9% menu price increase was introduced at the start of the fourth quarter.
- The May 2011 refinancing extended the $150 term loan and $100 revolving facility to May 2016. The company said cash on hand and operating cash flows were expected to cover debt service, capital expenditures, and working-capital needs for at least twelve months.
- Management expected commodity and wage inflation to pressure costs through the remainder of 2011 and 2012. Ground-beef prices were reported up approximately 5.5% in the quarter and 11.5% year to date versus prior-year periods; management expected further increases. Guest-count declines and seasonal sales fluctuations are additional operating risks.
- One restaurant impairment generated a $1.9 non-cash charge, compared with $6.1 for four restaurants in the prior-year quarter. Gift-card breakage was $1.3 year to date versus $4.2 a year earlier; comparisons include prior-year and current-year initial cumulative adjustments, so the periods are not directly comparable.
- The company repurchased 1.1 million shares for $30.7 year to date. After quarter-end, the board authorized repurchases of up to $50.0 through December 31, 2012, including the remaining prior authorization.
- Executive departures and appointments resulted in $0.5 of transition expense in the quarter and $1.4 year to date. A California wage-and-hour class action filed in 2011 and an earlier California wage-and-hour class action remain unresolved; the company said outcomes could not be predicted. Management considered other ordinary-course claims adequately provided for and not expected to materially affect results.
Investor verification priorities
- Check whether guest-count trends improve and whether menu pricing and loyalty initiatives sustain comparable-sales growth.
- Monitor food, particularly beef, and wage inflation against the company’s cost-control and margin performance.
- Review debt, covenant headroom, borrowing availability, and the cash used for restaurant investment and share repurchases.
- Assess the comparability of gift-card breakage and tax benefits when evaluating earnings growth; quarter-specific EPS guidance was not provided in the filing.
- Track the California employment litigation and future restaurant impairment charges.