Red Robin Gourmet Burgers, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 29, 2013 (52 weeks). The comparison year ended December 30, 2012 had 53 weeks, including an extra week in Q4; this affects year-over-year comparisons. Red Robin operated 361 company-owned restaurants and franchised 134, for 495 locations across the system.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $1,017.2 million | $977.1 million |
| Operating income | $43.8 million | $45.2 million |
| Net income | $32.2 million | $28.3 million |
| Diluted EPS | $2.22 | $1.93 |
| Cash from operations | $113.5 million | $94.4 million |
| Cash and equivalents at year-end | $17.1 million | $22.4 million |
| Total debt and capital lease obligations | $88.7 million | $135.0 million |
Revenue increased 4.1%, while operating income declined 3.1%; operating margin was 4.3%, versus 4.6%. Net margin improved to 3.2% from 2.9%. The company reported a $9.0 million income-tax provision and a 21.8% effective tax rate. Management cited $2.37 of diluted EPS excluding a $0.06-per-share noncash impairment charge and a $0.09-per-share nonrecurring special bonus.
Restaurant operating costs fell to 78.3% of restaurant revenue from 79.3%, with lower other operating costs and modest reductions in food and labor cost ratios. SG&A rose 12.2% to $124.3 million, including higher salaries and benefits, incentive compensation, and gift-card-related costs. Fiscal 2013 included a $1.5 million noncash impairment charge for four restaurants.
Comparable restaurant sales increased 4.0%, reflecting a 4.3% increase in average guest check partly offset by a 0.3% decrease in guest counts. Q4 revenue was $241.9 million, operating income $8.1 million, net income $7.0 million and diluted EPS $0.48. Q4 2013 comprised 12 weeks versus 13 weeks in Q4 2012, when revenue was $240.7 million, operating income $12.2 million, net income $6.5 million and diluted EPS $0.45.
Year-end current assets were $80.6 million and current liabilities were $139.9 million; management says the working-capital deficit is typical for its cash-and-card restaurant model. The $225 million revolving credit facility had $78.5 million drawn and $8.1 million in letters of credit reducing availability. The company was in compliance with debt covenants. Cash used for capital investment was $78.9 million; operating cash flow was $113.5 million. Contractual obligations totaled $527.5 million, including $390.9 million of operating lease commitments.
Changes versus the prior year
- Reported revenue growth of 4.1% includes the effect of one fewer fiscal week; FY2012’s extra week contributed about $21 million of restaurant revenue, $3.1 million of net income and $0.21 of diluted EPS. Excluding that week, management described FY2013 restaurant revenue as up about $60 million.
- Net income and diluted EPS increased despite lower operating income, supported in part by lower interest expense ($2.7 million versus $5.7 million) and a lower effective tax rate.
- Cash from operations increased by $19.1 million, while investing outflows rose to $78.2 million, primarily due to new restaurants and remodels. Debt and capital lease obligations declined by $46.3 million.
- The company opened 22 company-owned restaurants, relocated two and remodeled 19 during the year; its system grew from 472 to 495 restaurants.
Outlook, risks and other notable matters
- For FY2014, management planned 20 new company-owned Red Robin restaurants, five Burger Works locations and 50 remodels; projected capital expenditures were approximately $85–$90 million, potentially higher if remodels expand.
- Management expected operating cash flow to cover debt service, capital expenditures and working capital needs for at least the next 12 months. It expected ground beef costs to rise 4–5%; about 46% of estimated FY2014 food and beverage purchases were covered by fixed-price contracts, most expiring during FY2014. Management anticipated continued inflationary pressure.
- Key risks include commodity and labor-cost increases, consumer traffic and discretionary-spending trends, intense competition, concentration of company-owned restaurants in the western U.S., and execution of restaurant growth and remodeling plans. The filing also highlights delays and additional costs in upgrading IT systems, and potential operational, reputational and financial impacts from system failures or data breaches.
- Performance at Burger Works locations was mixed: central business district and lifestyle locations met expectations, while college-campus sites underperformed; management planned to focus development on central business districts.
- Ordinary-course employment, customer and other claims were disclosed; management said provisions were adequate and did not expect a material adverse effect. The auditor gave an unqualified opinion on the financial statements and internal controls; management reported disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Assess comparable-sales quality: guest-check growth was offset by slightly lower traffic, and reported annual comparisons are affected by FY2012’s extra week.
- Track whether planned openings, remodels and IT-system upgrades deliver expected returns within the stated capital budget.
- Monitor food, wage, healthcare and other operating-cost trends, particularly ground beef as fixed-price contracts expire.
- Review liquidity, covenant headroom and the impact of substantial lease commitments alongside the company’s expansion and repurchase plans.
- Evaluate whether the operating-income decline, higher SG&A and nonrecurring bonus spending recur or reverse in subsequent periods.