Red Robin Gourmet Burgers, Inc. — Q2 2017 Form 10-Q
Business and period: The company operates and franchises full-service restaurants. At July 9, 2017, it had 472 company-owned and 86 franchised locations. The quarter covered 12 weeks; year-to-date results cover 28 weeks. Fiscal 2017 is a 53-week year ending December 31, 2017. Amounts below are in U.S. dollars.
Financial performance
- Q2 revenue: $315.8 million, up 3.3% year over year. Restaurant revenue was $312.4 million, up 3.4%; franchise royalties, fees and other revenue were $3.4 million, nearly flat.
- Q2 comparable sales: Company-owned comparable restaurant revenue rose 0.5%, with guest counts up 1.0% and average check down 0.5%. Franchisee comparable revenue declined 1.9%.
- Q2 profitability: Operating income was $9.4 million versus $10.4 million; operating margin was 3.0% versus 3.4%. Net income was $6.9 million versus $7.6 million, and diluted EPS was $0.53 versus $0.55. The 2017 quarter included $1.6 million of impairment charges; the company reported adjusted diluted EPS of $0.61 excluding the charge. The quarter’s income tax provision was an $18,000 benefit.
- Year-to-date: Revenue was $734.3 million, up 3.8%; company-owned comparable sales declined 0.4%. Operating income was $26.8 million versus $30.6 million, net income was $18.5 million versus $21.8 million, and diluted EPS was $1.43 versus $1.59.
- Restaurant costs and margins: Restaurant operating costs rose to 80.1% of restaurant revenue in Q2 from 79.1%, and to 79.7% year to date from 78.2%. Labor was the main pressure: 34.7% of restaurant revenue in Q2 versus 34.0%, and 35.0% year to date versus 33.7%. Q2 cost of sales rose to 23.7% from 23.4%, primarily due to ground beef prices; occupancy improved to 8.0% from 8.3%.
- Cash flow: For 28 weeks, operating cash flow was $104.7 million versus $67.1 million; investing cash outflow was $41.7 million versus $134.2 million; financing cash outflow was $54.7 million versus $70.2 million. Capital expenditures were $41.8 million. Cash increased $8.4 million from fiscal year-end to $20.2 million.
- Debt and liquidity: Total debt and capital leases were $291.3 million at July 9, down from $347.8 million at December 25, 2016; long-term debt on the balance sheet was $280.1 million. The $400 million revolving facility had $279.3 million drawn and $7.6 million in letters of credit. The company was compliant with debt covenants and reported a 4.18x lease-adjusted leverage ratio. Current liabilities exceeded current assets by $71.0 million; management said operating cash flows and remaining credit capacity would support working capital needs and planned investment.
Changes, outlook and management commentary
- Revenue growth reflected new restaurants, partly offset by closures and soft comparable sales. The company opened three restaurants during Q2 and planned nine more for the remainder of 2017.
- Management expected 2017 total revenue growth of 6%–8%, comparable revenue growth of 0.5%–1.5%, capital investment of $85–$95 million, and interest expense of approximately $10 million. It anticipated inflationary pressure on labor and commodity costs for the rest of the year.
- Interest expense rose to $2.5 million in Q2 from $1.5 million and to $5.4 million year to date from $3.1 million, reflecting higher borrowing rates and average debt. The reported weighted average rate was 3.7% for Q2 versus 2.5% in the prior-year quarter.
- The company recorded a non-cash $1.6 million impairment charge for five company-owned restaurants in Q2, including three nearing lease end. The comparable 2016 quarter had $3.9 million of impairment charges; 2016 year-to-date also included $3.9 million in litigation contingencies.
- A credit-facility amendment temporarily raised the maximum lease-adjusted leverage ratio to 5.25x through October 1, 2017, stepping down thereafter. Pricing tiers may increase borrowing costs if the ratio exceeds 4.75x.
- Management disclosed that cyber criminals were targeting restaurant companies, including Red Robin, and that the company was investigating whether guests were affected. It said litigation and other claims existed, but management believed provisions were adequate. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether comparable sales and guest traffic improve, and whether the full-year revenue and comparable-sales outlook is achieved.
- Whether labor, food, and other operating-cost pressures continue to compress restaurant margins.
- Progress against capital spending plans, debt reduction, interest expense expectations, and leverage-covenant thresholds.
- Updates on the cyber incident investigation and any resulting guest impacts, claims, or costs.
- Restaurant impairment assumptions and the potential for further closures or impairment charges.