Red Robin Gourmet Burgers, Inc. — Q3 2022 Form 10-Q
Reporting period: The 12 weeks ended October 2, 2022; year-to-date figures cover 40 weeks. Comparatives are the corresponding periods ended October 3, 2021. Dollar amounts below are in millions unless noted.
Business context
Red Robin operates and franchises full-service restaurants in North America. At quarter-end, it had 424 company-owned and 101 franchised locations. It reports one operating and reportable segment.
Financial and operating results
| Metric | 12 weeks ended Oct. 2, 2022 | 12 weeks ended Oct. 3, 2021 | 40 weeks ended Oct. 2, 2022 | 40 weeks ended Oct. 3, 2021 |
|---|---|---|---|---|
| Total revenue | $286.9 | $275.4 | $976.5 | $878.7 |
| Operating loss | $(8.0) | $(12.1) | $(17.0) | $(19.0) |
| Net loss | $(12.6) | $(15.0) | $(33.6) | $(28.7) |
| Diluted loss per share | $(0.79) | $(0.95) | $(2.12) | $(1.83) |
- Q3 restaurant revenue increased 4.5% to $282.4 million; comparable restaurant revenue rose 5.3%. Average guest check increased 9.0%, while guest count fell 3.7%. Higher pricing and menu mix drove the check increase. Dine-in represented 72.3% of food and beverage sales, versus 69.2% a year earlier.
- For the 40-week period, restaurant revenue increased 10.5% and comparable restaurant revenue rose 11.2%; average guest check increased 10.6% and guest count increased 0.6%.
- Q3 restaurant operating costs were 87.4% of restaurant revenue, compared with 87.5% a year earlier. Food cost rose to 25.0% from 23.2%, primarily due to commodity inflation; labor improved to 35.6% from 36.9%. For the 40 weeks, restaurant operating costs increased to 86.5% of restaurant revenue from 85.3%, with food cost inflation the main pressure.
- Q3 GAAP net loss narrowed year over year, but adjusted diluted loss per share was $(1.03), compared with $(0.88). For the 40 weeks, adjusted diluted loss per share was $(1.90), versus $(1.40). Adjusted results are a non-GAAP measure and exclude specified items.
Cash flow, debt and liquidity
- For the 40 weeks, operating cash flow was $38.8 million, investing cash outflow was $18.3 million, and financing cash inflow was $14.9 million. Cash and restricted cash totaled $58.1 million at period-end, including $50.0 million of cash and $8.1 million of restricted cash.
- Capital expenditures were $27.0 million, primarily for restaurant improvements, technology and infrastructure, Donatos expansion, and new restaurants and refreshes.
- Gross debt was $199.9 million, up from $177.0 million at fiscal year-end 2021. The company had a $200 million term loan and $25 million revolving facility, with no revolver borrowings and $25 million of available capacity. The term loan’s variable rate was 10.31% at quarter-end; weighted-average credit facility rates were 9.7% for Q3 and 8.7% year to date.
- Management reported approximately $75 million of liquidity, including cash and available borrowing capacity, and said it was in compliance with debt covenants. Current assets of $109.1 million were below current liabilities of $205.6 million; the company describes this as its typical working-capital deficit and relies on restaurant cash receipts and credit availability.
Material changes and unusual items
- March 2022 refinancing replaced the prior facility with a five-year, $225 million credit agreement maturing in March 2027. Debt is secured by substantially all assets of the borrower and guarantors; the rate is variable and tied to SOFR or an alternate base rate.
- Q3 other charges included a $9.2 million gain on sale of restaurant property, $2.2 million of asset impairment, $1.8 million of executive transition costs, and $1.0 million of other financing costs. The gain helped reduce the reported quarterly loss; it is not a recurring operating result.
- A revised gift-card redemption estimate added $5.9 million of revenue in Q1 2022, net of $0.6 million of associated commissions, reducing the 40-week net loss by $5.2 million, or $0.33 per share. Management does not expect a material future impact from this estimate change.
- For the 40 weeks, restaurant impairment charges were $13.0 million, compared with $1.4 million in the prior-year period. Interest expense and other increased to $16.2 million from $10.0 million, reflecting higher average debt, higher interest rates, and a $1.7 million write-off of prior-facility financing charges.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings, or margin guidance. Management anticipated inflation would continue to negatively affect labor and commodity costs for the remainder of 2022 and said restaurant operating cash flows and remaining credit capacity should support working capital and planned capital expenditures.
- Key risks discussed include food, labor, energy and construction-cost inflation; interest-rate increases; staffing and retention; competition and consumer spending; supply availability; execution of strategic, technology and Donatos initiatives; and COVID-19 effects.
- The company had $4.5 million accrued for loss contingencies and $128.4 million of non-cancellable vendor purchase commitments. Management believes current legal provisions are adequate, but outcomes may differ and greater claims could adversely affect results and cash flows.
- A 1% increase in the interest rate on variable-rate borrowings would increase annualized pretax interest expense by approximately $2.0 million; a 1% increase in food and beverage costs would raise annualized cost of sales by approximately $3.0 million.
Most important facts for investors to verify
- Whether guest-count trends, pricing, and comparable sales can be sustained without further pressuring traffic.
- Whether food and labor inflation, interest costs, and cash generation affect margins, debt service, and liquidity.
- The extent to which reported earnings depend on the property-sale gain and gift-card estimate change, versus recurring restaurant performance.
- Compliance with credit covenants and availability of the revolver, especially given variable-rate debt and the working-capital deficit.
- Potential changes in litigation exposure, vendor commitments, and restaurant impairment or closure costs.