Red Robin Gourmet Burgers, Inc. — Q2 2014 Form 10-Q
Reporting period: Twelve weeks ended July 13, 2014; year-to-date figures cover the twenty-eight weeks ended July 13, 2014. Comparisons are with the corresponding 2013 periods. The company operated 372 restaurants and franchised 130 at quarter-end.
Financial results
| Metric | Q2 2014 | Q2 2013 | 28 weeks 2014 | 28 weeks 2013 |
|---|---|---|---|---|
| Total revenue | $256.1 million | $238.3 million | $596.6 million | $544.6 million |
| Operating income | $13.5 million | $15.4 million | $30.5 million | $28.9 million |
| Net income | $9.5 million | $11.1 million | $21.4 million | $20.6 million |
| Diluted EPS | $0.65 | $0.77 | $1.47 | $1.43 |
| Restaurant operating costs as % of restaurant revenue | 77.8% | 76.7% | 77.7% | 77.7% |
| Operating margin | 5.3% | 6.5% | 5.1% | 5.3% |
| Net margin | 3.7% | 4.7% | 3.6% | 3.8% |
Q2 revenue grew 7.5%; comparable restaurant revenue rose 1.2%, reflecting a 3.7% higher average guest check and 2.5% lower guest counts. Year-to-date revenue grew 9.5%, with comparable restaurant revenue up 3.6%. New and acquired restaurants contributed materially to revenue growth. Q2 net income fell 15.0%, mainly due to higher food costs, acquisition costs, and a higher effective tax rate; year-to-date net income increased 3.9%.
Q2 cost of sales increased to 25.3% of restaurant revenue from 24.7%, principally due to higher ground beef, seafood, and bar-supply costs. Q2 labor was 32.8% of restaurant revenue versus 32.7%; year-to-date labor improved to 33.0% from 33.3%, helped by productivity and sales leverage. The year-to-date effective tax rate was 27.1%, versus 24.1%.
Cash flow, liquidity, and debt
- Cash from operations was $56.1 million for the 28 weeks, down from $71.0 million. Management cited incentive-compensation payouts, higher tax payments, marketing-fund contributions, salaries and benefits, and acquisition costs; higher restaurant operating profit partly offset these outflows.
- Investing cash outflow was $56.6 million, including $28.3 million for new restaurants, $12.8 million for remodels, and $7.9 million for acquired franchise restaurants. Financing provided $43.9 million. Cash increased $43.4 million to $60.5 million.
- Total debt and capital lease obligations were $137.3 million at July 13, versus $88.7 million at December 29, 2013. Credit-facility borrowings were $127.5 million; $69.4 million was subject to variable rates. A 1 percentage-point rate change would affect annualized pretax interest expense by approximately $0.7 million.
- The July 2 replacement credit facility provides a $250 million revolving commitment, with potential increases of up to $100 million, and matures July 2, 2019. It is secured by substantially all company assets. The company was in compliance with its covenants at quarter-end.
- Current liabilities exceeded current assets by $14.5 million. Management said the business typically operates with a working-capital deficit because sales are generally collected before related obligations are due, and expects future cash flows to cover working-capital needs.
Material changes, outlook, and risks
- On July 14, immediately after quarter-end, the company completed an approximately $40 million acquisition of 32 franchised restaurants in the U.S. and Canada. The company had borrowed $40 million before quarter-end to fund it; that borrowing is included in reported cash. Initial purchase accounting was still in process, and pro forma results were not yet presented.
- The company acquired four franchise restaurants in March for $7.9 million. It opened five company-owned restaurants in Q2, including two Burger Works locations, and closed two restaurants during the first 28 weeks.
- Management planned 13 additional Red Robin openings and two to three Burger Works openings for the remainder of 2014. It targeted 95 fully remodeled company-owned restaurants by year-end; 52 interiors had been remodeled by July 13. Management expected a full-year 2014 effective tax rate of approximately 26%.
- Inflation was reported to be pressuring results, especially through wages, supplies, and food commodities; management anticipated continued negative inflation effects in 2014. About 66.8% of estimated annual food and beverage purchases were covered by fixed-price contracts, mostly expiring by year-end.
- Key disclosed risks include food and commodity prices, labor and energy costs, competition and consumer spending, execution of expansion and remodel plans, weather, credit availability, and legal claims. The company added risks associated with international operations following its Canadian restaurant acquisition. Routine employment, injury, food-quality, and operational claims were disclosed; management did not expect them to materially affect results.
- The company repurchased $8.1 million of stock during the 28-week period and had approximately $36.9 million remaining under its authorization. It also reported no material change to internal control over financial reporting and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether lower Q2 guest counts and higher food costs persist, and how they affect comparable sales and restaurant margins.
- The completed 32-restaurant acquisition’s final purchase accounting, operating contribution, integration costs, and effect on leverage.
- Execution and returns on planned openings and remodels, alongside the company’s cash needs, debt levels, and share repurchases.
- Progress toward the approximately 26% full-year tax-rate expectation and exposure to variable interest rates, commodity prices, and international operating risks.