Red Robin Gourmet Burgers, Inc. — Q3 2019 Form 10-Q
Reporting period: Twelve weeks ended October 6, 2019; year-to-date figures cover forty weeks. Comparisons are with the periods ended October 7, 2018. Dollar amounts below are in millions unless otherwise noted.
Business context
Red Robin operates and franchises full-service restaurants. At quarter-end it had 471 company-operated and 90 franchised restaurants, or 561 locations total, compared with 574 total a year earlier. The company reports one operating and reportable segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 40 weeks 2019 | 40 weeks 2018 |
|---|---|---|---|---|
| Total revenue | $294.2 | $294.9 | $1,012.1 | $1,031.8 |
| Restaurant revenue | $289.9 | $290.2 | $992.8 | $1,015.3 |
| Operating income (loss) | $(5.2) | $1.8 | $(14.7) | $4.6 |
| Net income (loss) | $(1.8) | $1.7 | $(0.2) | $4.2 |
| Diluted earnings (loss) per share | $(0.14) | $0.13 | $(0.02) | $0.32 |
Operating margin was (1.8)% in Q3 versus 0.6% a year earlier, and (1.4)% year to date versus 0.4%. Restaurant operating costs rose to 83.9% of restaurant revenue in Q3 from 83.2%, and to 82.4% year to date from 81.1%. SG&A increased to $36.8 million in Q3 from $28.8 million, including interim CEO costs and higher brand-campaign media spending.
Q3 comparable restaurant revenue increased 1.6%, as a 4.7% higher average guest check offset a 3.1% decline in guest count. Year-to-date comparable revenue declined 1.2%, with guest counts down 5.1% and average check up 3.9%. Management attributed cost pressure chiefly to higher wages, increased manager staffing, and third-party delivery expense; lower occupancy and food costs partly offset those increases.
Cash flow, liquidity and debt
- Year-to-date operating cash flow was $41.6 million, down from $88.8 million. Investing cash outflow was $32.9 million, including $33.1 million of capital expenditures; financing cash outflow was $7.2 million.
- Cash was $20.2 million at October 6, 2019, versus $18.6 million at fiscal year-end. Current assets of $75.2 million were below current liabilities of $197.6 million; management says the business typically operates with a working-capital deficit.
- Credit-facility borrowings were $188.0 million, with $7.5 million of letters of credit and approximately $204.5 million of unused capacity. The $400 million revolving facility matures June 30, 2021. Total debt reported on the balance sheet was $188.9 million.
- The lease-adjusted leverage ratio was 4.55x. A credit amendment temporarily raised the maximum ratio to 5.0x through December 29, 2019, returning to 4.75x thereafter. The company reported compliance with all debt covenants.
- Adoption of lease accounting Topic 842 added $441.7 million of right-of-use assets and $524.6 million of lease obligations at October 6. The adoption also reduced retained earnings by $15.2 million at transition; it did not affect the income statement or cash flows.
Changes, outlook and risks
Year-to-date total revenue declined 1.9%, while net income shifted from $4.2 million to a $0.2 million loss and operating cash flow fell by $47.2 million. The company recorded $14.1 million of non-cash impairment charges in the first half for 29 company-owned restaurants. Q3 other gains and charges included a $3.9 million gain on lease terminations, partly offset by board and stockholder matter costs, executive transition and severance, and executive retention costs. Management’s adjusted earnings-per-share figures are non-GAAP measures and exclude specified items.
No specific full-year revenue or earnings guidance is provided in the filing. Management expects operating cash flows and remaining credit-facility capacity to fund working-capital needs and planned capital expenditures, and expects inflation to continue negatively affecting labor costs for the remainder of 2019. Management identified service execution and guest-count improvement as priorities. Risks include labor and commodity cost inflation, competition and discounting, traffic and guest-count trends, litigation claims, and the company’s ability to execute its strategy and maintain access to capital. The filing says there were no material changes to previously reported risk factors. Management reported adequate provisions for pending claims, including employment-related and food-quality or operational matters.
Important facts for investors to verify
- Whether guest-count declines and comparable-sales trends improve, and whether service initiatives translate into stronger traffic.
- Whether labor, delivery, and other operating costs continue to pressure restaurant-level margins.
- The basis and continuing implications of restaurant impairment charges and lease-termination gains.
- Credit-facility covenant headroom, leverage after the temporary covenant relief expires, and the pace of debt repayment.
- Cash generation relative to capital spending, lease obligations, share repurchases, and management’s liquidity expectations.