Red Robin Gourmet Burgers, Inc. — Q2 2020 Form 10-Q
Business context and period. The quarter ended July 12, 2020 and covered 12 weeks; year-to-date results cover 28 weeks. Red Robin operated 450 company-owned and 102 franchised restaurants. COVID-19 restrictions sharply reduced dine-in activity; reopened dining rooms were limited to no more than 50% capacity.
Financial performance and liquidity
| Metric | 12 weeks ended July 12, 2020 | Comparable 2019 period | 28 weeks ended July 12, 2020 | Comparable 2019 period |
|---|---|---|---|---|
| Total revenue | $161.1 million | $308.0 million | $467.2 million | $717.8 million |
| Net income (loss) | $(56.3) million | $1.0 million | $(230.6) million | $1.6 million |
| Diluted EPS | $(4.09) | $0.08 | $(17.38) | $0.12 |
| Operating cash flow | Not separately presented for the quarter | $(18.6) million | $41.7 million |
Q2 restaurant revenue fell 47.0%; comparable restaurant revenue declined 41.4%, reflecting a 38.5% decrease in guest count and a 2.9% decrease in average guest check. Off-premise sales rose 208.7% and represented 63.8% of food and beverage sales. Franchise and other revenue fell 82.4%, principally because franchise royalty and advertising payments were temporarily abated.
Restaurant operating costs rose to 98.0% of restaurant revenue in Q2, from 81.8% a year earlier. Labor was 39.2% of restaurant revenue, other operating costs 21.6%, and occupancy 13.0%. The company reported an operating loss of $50.6 million in Q2 and $208.8 million year to date. Year-to-date other charges were $133.9 million, including $95.4 million of goodwill impairment and $20.8 million of restaurant asset impairment.
At July 12, cash was $26.1 million; current assets were $106.9 million and current liabilities $205.0 million. Operating cash flow was negative year to date, while investing cash outflow was $11.4 million. Total borrowings were $207.5 million, including $9.7 million classified as current; lease liabilities were $517.4 million. The company reported $81.1 million of available revolver capacity at July 12 and more than $103 million of total liquidity as of August 9.
Material changes and financing
- Revenue and earnings deteriorated substantially year over year, driven by pandemic-related closures, capacity limits, lower traffic, and sales deleverage across restaurant costs.
- The company impaired all goodwill in Q1 2020 and recorded restaurant asset impairments at 34 company-owned restaurants year to date. Restaurant asset fair value estimates relied on Level 3 inputs.
- On June 17, the company issued 2.6 million shares and raised $28.7 million net of issuance costs. This met the $25 million capital-raise condition in its May credit amendment and resolved management’s previously disclosed substantial doubt about going concern. Management expected covenant compliance for at least 12 months from the filing date.
- The May amendment waived specified debt covenants for the remainder of 2020 and adjusted covenant terms for the first three quarters of 2021, while increasing borrowing costs and imposing additional requirements.
Outlook, commentary, risks, and unusual items
Management expected COVID-19 to continue negatively affecting the business through the remainder of fiscal 2020. Its estimate of average cash burn was approximately $2 million per week in Q3, including higher occupancy payments than in Q2. Preliminary weekly average net sales per restaurant were $38,031 for the week ended August 9; the comparable figure for restaurants with reopened indoor dining was $39,808. These post-quarter figures were preliminary. Management said the company was resuming selected strategic initiatives, including its TGX hospitality model, Donatos pizza rollout, and digital capabilities.
Beginning April 1, the company stopped making full lease payments while continuing to recognize lease expense and liabilities; it was negotiating concessions and had obtained certain deferrals, abatements, and lease modifications. The filing reports lease default notices and, in a small number of cases, eviction notices or proceedings. Pandemic-related dining restrictions, possible further closures, liquidity needs, covenant compliance, landlord negotiations, commodity and labor costs, and the timing of recovery remain material risks. The company warned that worsening conditions could require additional impairments or threaten covenant compliance and access to undrawn borrowing capacity.
A tentative $8.5 million settlement of two California employment class actions remained subject to finalization and court approval; $4.5 million was accrued in Q1 to reach the settlement amount. The company also recorded a $79 million valuation allowance against FICA tip-credit carryforwards. CARES Act NOL carrybacks were expected to generate $14 million to $17 million of cash tax refunds within 12 months. Q2 adjusted diluted loss per share was $3.31, a non-GAAP measure excluding specified charges; GAAP diluted loss per share was $4.09.
Important facts for investors to verify
- Whether sales, dining-room capacity, and cash burn developed in line with the preliminary August 9 metrics and Q3 estimate.
- Whether the company maintains credit-covenant compliance and how much revolver capacity remains available after subsequent borrowing or repayment.
- Progress on rent concessions, lease defaults or eviction proceedings, and the company’s resumption of lease payments.
- Whether the $8.5 million employment settlement receives court approval and whether other claims require additional accruals.
- Whether projected tax refunds are received and whether future taxable-income estimates support deferred tax assets and FICA tip credits.