Business context and reporting period
Red Robin Gourmet Burgers, Inc. operates and franchises casual-dining and fast-casual restaurants. This unaudited Form 10-Q covers the 12 weeks ended October 2, 2016 (third quarter) and the 40 weeks ended October 2, 2016, compared with the corresponding 2015 periods. At quarter-end, the company had 462 company-operated and 86 franchised restaurants.
Financial performance
| Metric | Third quarter 2016 | 40 weeks 2016 |
|---|---|---|
| Total revenue | $297.3 million, up 4.9% | $1,005.0 million, up 3.5% |
| Operating income (loss) | $(4.2) million; operating margin (1.4)% | $26.4 million; operating margin 2.6% |
| Net income (loss) | $(1.3) million; diluted EPS $(0.10) | $20.5 million; diluted EPS $1.50 |
| Operating cash flow | Not separately reported | $94.7 million, versus $101.4 million |
| Investing cash flow | Not separately reported | $(172.5) million, versus $(123.1) million |
Restaurant operating costs were 81.4% of restaurant revenue in the quarter, up 3.0 percentage points, and 79.1% for the 40 weeks, up 1.5 points. Food costs improved as a share of restaurant revenue, but labor, other operating and occupancy costs increased. Management reported adjusted diluted EPS, excluding impairment/closure charges and, for the 40-week period, litigation contingencies, of $0.38 and $2.42, respectively; these are management-presented adjusted figures, not GAAP EPS.
At October 2, cash was $15.5 million. Total debt and capital lease obligations were $316.5 million, including $304.0 million drawn on the revolving credit facility; letters of credit of $8.8 million further reduced facility availability. Current liabilities exceeded current assets by approximately $70.1 million. The company said its cash-based restaurant sales and operating cash flows, together with remaining facility capacity, were expected to support working capital and planned capital spending. Debt covenants were in compliance.
Material changes versus the prior comparable periods
- Restaurant revenue rose, largely from new and acquired locations, while comparable restaurant revenue declined 3.6% in the quarter and 3.1% year to date. Quarterly comparable sales fell with guest counts down 2.4% and average check down 1.2%; for the 40 weeks, guest counts fell 3.5%, partly offset by a 0.6% higher average check.
- Quarterly results swung from $8.3 million net income in 2015 to a $1.3 million loss. Forty-week net income declined from $36.0 million to $20.5 million, and diluted EPS fell from $2.52 to $1.50.
- Restaurant operating costs rose as a percentage of restaurant revenue, while selling, general and administrative expense declined. Interest expense increased, primarily due to higher average debt.
- Cash from operations declined by $6.7 million year to date. Investing outflows increased, including $40.0 million to acquire 13 franchised restaurants and higher spending on openings and remodels. Debt and capital leases increased by $105.7 million from year-end 2015.
Outlook, commentary, risks and unusual items
- Management expected 2016 revenue growth of around 5%, driven by added operating weeks and partly offset by comparable restaurant revenue lower by almost 2%. It planned $190–$195 million of 2016 capital investments, five additional Red Robin openings and one relocation during the remainder of the year, and substantial completion of the company-owned restaurant transformation initiative by year-end.
- Nine underperforming Red Robin Burger Works restaurants closed on September 30, 2016. The company recorded $5.5 million of closure costs; it also recorded impairment and closure charges totaling $9.3 million in the quarter and $14.0 million year to date.
- The company recorded $3.9 million of employment-related litigation contingencies during the 40 weeks and had $2.9 million of legal contingency liabilities at quarter-end. Management said adequate provision had been made, while noting outcomes remain uncertain.
- Labor costs, including minimum-wage increases, were expected to remain inflationary. Other stated risks include weaker consumer spending, competition and discounting, food and commodity prices, staffing, legal claims, weather, and execution of expansion and remodeling plans. A 1 percentage-point change in rates on variable-rate borrowings would change annualized pretax interest expense by approximately $3.0 million.
- The new $400 million revolving credit facility matures June 30, 2021, is secured by substantially all company assets, and has customary covenants. Management also noted that adoption of the new lease accounting standard was expected to significantly increase reported assets and liabilities.
Important facts for investors to verify
- Whether comparable-sales and guest-count declines continued after the reported quarter, and how much revenue growth depends on new and acquired restaurants.
- Whether labor and other operating cost pressures persist, and whether food-cost deflation continues to offset them.
- The cash-flow and return implications of planned capital spending, restaurant remodels, and the franchise-restaurant acquisition strategy.
- Debt levels, remaining borrowing capacity, variable-rate exposure, and continued compliance with credit-facility covenants.
- The final costs and operating effects of the Burger Works closures, impairment charges, and employment-related litigation matters.