Red Robin Gourmet Burgers, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 25, 2016 (52 weeks). The fourth quarter comprised 12 weeks. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context
Red Robin operates and franchises full-service casual dining restaurants focused on burgers. At year-end it had 551 restaurants: 465 company-owned and 86 franchised. Fiscal 2016 included 26 company-owned openings, 13 franchise acquisitions, and two relocations. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $1,296.4 | $1,257.6 |
| Operating income | $11.6 | $67.0 |
| Operating margin | 0.9% | 5.3% |
| Net income | $11.7 | $47.7 |
| Diluted EPS | $0.87 | $3.36 |
| Cash from operations | $99.0 | $140.9 |
| Cash and equivalents at year-end | $11.7 | $22.7 |
| Total debt and capital leases | $347.8 | $210.8 |
- Total revenue grew 3.1%, with restaurant revenue up 3.4%; the increase reflected new and acquired locations, partly offset by lower comparable sales.
- Comparable restaurant sales declined 3.3%, driven by a 3.4% decrease in guest counts; average guest check increased 0.2%. Average weekly sales per company-owned restaurant fell 4.5%.
- Restaurant operating costs rose to 79.6% of restaurant revenue from 77.7%. Food costs improved to 23.3% from 24.6%, but labor increased to 34.3% from 32.6%, other operating costs to 13.6% from 12.4%, and occupancy to 8.4% from 8.1%.
- Operating income and profit fell sharply. FY2016 included $24.4 million of restaurant impairment charges, $6.7 million of closure costs for nine Red Robin Burger Works locations, $2.5 million of software impairment, and $3.9 million of employment-litigation contingencies. Management cited $2.78 adjusted diluted EPS excluding specified impairment and closure, litigation, and reorganization costs; this is a company-presented adjusted measure, not GAAP EPS.
- Cash from operations declined $41.9 million, while investing activities used $199.4 million, including $203.7 million of capital expenditures and acquisitions. The company repurchased $46.1 million of stock.
- Current assets were $92.8 million and current liabilities $141.0 million, a working-capital deficit of $48.2 million. Management said operating cash flow and the revolving facility should meet requirements for at least the next 12 months.
- The $400 million revolving facility matures June 30, 2021; borrowings were $335.5 million and letters of credit reduced availability by $8.8 million. The facility is secured by substantially all company assets. Year-end lease-adjusted leverage was 4.35x against a maximum below 4.75x; fixed-charge coverage was 2.11x against a 1.25x minimum. The company reported covenant compliance.
Outlook, commentary, and risks
- Management forecast 2017 total revenue growth of 6%–8%, including comparable revenue growth of 0.5%–1.5%, additional operating weeks from new restaurants, and a 53rd fiscal week. It planned approximately 17 company-owned openings.
- Expected 2017 capital expenditures were $85–$95 million; depreciation and amortization was projected to be slightly below $95 million; interest expense $7–$8 million; and the annual tax rate 20%–22%.
- Priorities include restoring operational performance, improving profitability and cost efficiency, expanding digital ordering, to-go, catering and third-party delivery, and investing in technology. Company-owned brand-transformation remodels were substantially completed; franchisee remodels were expected through 2018.
- Key risks include sustained traffic or comparable-sales weakness, wage and labor inflation, commodity-price volatility (especially beef), competitive discounting, execution of new service channels and technology investments, restaurant impairment, and lease and debt obligations. About 60% of estimated 2017 food and beverage purchases were covered by fixed-price contracts, most expiring during 2017.
- The company disclosed ordinary-course litigation and recorded $3.9 million of 2016 employment-claim contingencies; it said adequate provision had been made and did not expect other matters to materially affect results. A material adverse outcome remains uncertain.
Investor verification checklist
- Track comparable sales and guest counts against the 2017 forecast, and distinguish underlying performance from growth due to openings and the 53rd week.
- Review whether labor, occupancy, and other operating costs stabilize, and whether restaurant-level margins recover.
- Verify the nature and recurrence of impairment, closure, litigation, and other adjustments underlying reported and adjusted earnings.
- Monitor debt, cash generation, revolver availability, and covenant headroom, particularly if comparable sales or operating cash flow weaken.
- Assess execution and returns on planned openings, remodels, and digital/off-premise initiatives, alongside commodity-contract expirations and lease commitments.