Red Robin Gourmet Burgers, Inc. — Q2 2011 Form 10-Q
Business context and period: Casual-dining restaurant operator and franchisor; the quarter covered 12 weeks ended July 10, 2011, and year-to-date covered 28 weeks. At quarter-end, Red Robin operated 321 company-owned and 137 franchised restaurants.
Financial performance
| Metric | Q2 2011 | Q2 2010 | 28 weeks 2011 | 28 weeks 2010 |
|---|---|---|---|---|
| Total revenue | $215.8 million | $201.3 million | $502.6 million | $476.9 million |
| Operating income | $9.1 million | $6.0 million | $20.3 million | $13.9 million |
| Net income | $6.9 million | $4.3 million | $15.6 million | $9.3 million |
| Diluted EPS | $0.44 | $0.28 | $1.00 | $0.59 |
| Operating margin | 4.2% | 3.0% | 4.0% | 2.9% |
| Net margin | 3.2% | 2.2% | 3.1% | 1.9% |
Cash flow and liquidity: For the 28 weeks, operating cash flow was $54.2 million, versus $34.9 million a year earlier; investing cash use was $19.5 million, including $19.5 million of property and equipment purchases. Financing cash use was $10.1 million. Cash rose to $42.5 million from $17.9 million at fiscal year-end. Current assets were $78.4 million and current liabilities $94.0 million.
Debt: Total debt, including capital leases, was $159.1 million, compared with $158.5 million at December 26, 2010. It included $148.1 million outstanding under the term loan, no revolver borrowings, and $11.0 million of capital lease obligations. The May 2011 amended facility provides a $100 million revolver and $150 million term loan, both maturing in 2016; $6.6 million of letters of credit reduced revolver availability. The company reported compliance with debt covenants.
Changes and operating drivers
- Q2 total revenue increased 7.2%; comparable restaurant sales rose 3.1%, reflecting a 4.5% increase in average guest check partly offset by a 1.4% decline in guest count. Year-to-date comparable sales increased 2.4%.
- Q2 cost of sales rose to 25.2% of restaurant revenue from 24.6%; management cited higher commodity prices, especially ground beef, and menu mix. It expected ground-beef prices to remain high through 2011.
- Labor costs improved to 33.3% of restaurant revenue from 35.1%, attributed to guest-check leverage and productivity. Operating and occupancy costs also declined as a share of restaurant revenue.
- Q2 SG&A increased 22.7% to $24.5 million; drivers included higher advertising, accrued performance bonuses, $0.9 million of leadership-transition severance, infrastructure investment, and legal and governance costs. Pre-opening costs rose to $1.5 million as six restaurants opened in the quarter.
- Other revenue comparisons were affected by gift-card breakage: year-to-date 2010 included a $3.5 million initial cumulative adjustment, while 2011 included a $0.4 million adjustment for third-party gift cards in Q1.
Outlook, risks, and notable items
- Management planned to open up to five additional company-owned restaurants in 2011, expected to fund remaining openings from operating cash flow, and said cash and operating flows were expected to cover debt service, capital spending, and working capital needs for at least 12 months.
- Management anticipated a fiscal 2011 effective tax rate of approximately 10%. It expected commodity inflation to continue weighing on food costs and profitability during 2011.
- Project RED initiatives included the Red Royalty loyalty program, menu and beverage promotions, a nationwide menu rollout with a 1.5% price increase, and advertising campaigns. Red Royalty had registered more than 750,000 guests after two quarters.
- The company repurchased $10.4 million of shares during the 28 weeks under a $50 million authorization. It subsequently repurchased another $5.3 million through August 10, 2011.
- In August 2011, after quarter-end, the company entered an interest-rate swap covering half of the remaining term loan, receiving variable-rate payments and paying a fixed rate of 1.135%.
- Risks include volatile food and commodity prices, seasonality, execution of restaurant growth and strategic initiatives, and integration of recently appointed executives. The company disclosed new and pending California wage-and-hour class actions; outcomes were uncertain, and management said other claims were not expected to materially affect results.
Important facts for investors to verify
- Whether pricing and guest-check growth can offset commodity inflation and continued declines in guest counts.
- Whether the improvement in operating margins persists after elevated SG&A, pre-opening, and leadership-transition costs.
- Debt-facility terms, covenant headroom, variable-rate exposure, and the effect of share repurchases on liquidity and leverage.
- The assumptions and future impact of gift-card breakage revenue, including the unusual prior-year cumulative adjustment.
- Developments in the wage-and-hour lawsuits and the company’s executive-transition and restaurant-opening plans.