Red Robin Gourmet Burgers, Inc. — Q3 2020 Form 10-Q
Business context and period: The 12-week third quarter ended October 4, 2020; year-to-date (“YTD”) covers 40 weeks. Red Robin operated 444 company-owned and 103 franchised restaurants. COVID-19 restrictions materially affected dining-room capacity and restaurant sales.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 40 weeks 2020 | 40 weeks 2019 |
|---|---|---|---|---|
| Total revenue | $200.5 million | $294.2 million | $667.7 million | $1,012.1 million |
| Operating loss | $24.6 million | $5.2 million | $233.4 million | $14.7 million |
| Net loss | $6.2 million | $1.8 million | $236.7 million | $0.2 million |
| Diluted loss per share | $0.40 | $0.14 | $16.98 | $0.02 |
- Q3 restaurant revenue was $197.0 million, down 32.0%; comparable restaurant revenue fell 25.1%, reflecting a 24.6% decline in guest count and a 0.5% decline in average check. YTD restaurant revenue fell 33.7%, with comparable sales down 28.3%.
- Off-premise sales increased 127.2% year over year and represented 40.7% of food and beverage sales in Q3. Restaurant operating costs rose to 91.4% of restaurant revenue from 83.9%; higher labor, other operating, and occupancy costs as a share of sales outweighed lower food costs.
- Q3 net loss included $4.4 million of other charges. YTD other charges were $138.3 million, including $95.4 million of goodwill impairment and $20.8 million of restaurant asset impairment. YTD adjusted loss per diluted share, a company-reported non-GAAP measure, was $9.64.
- YTD operating cash flow was negative $22.4 million, versus positive $41.6 million in 2019. Investing cash outflow was $14.1 million, and financing cash inflow was $34.0 million. Cash declined $2.7 million to $27.4 million.
- At October 4, total borrowings were $216.1 million, including $215.2 million under the credit facility; available facility capacity was $69.6 million. Lease liabilities totaled $512.8 million. Total current liabilities exceeded current assets by approximately $67.5 million.
- YTD capital expenditures were $14.9 million, down from $33.1 million. Management reported approximately $97 million of liquidity at October 4, comprising cash and available borrowing capacity; this excludes subsequent tax refunds.
Material changes and unusual items
- The company issued common stock through an at-the-market offering, generating $28.9 million net cash during the 40-week period. Shares outstanding increased; the share repurchase program was suspended.
- Following the CARES Act tax-loss carryback, Red Robin recorded additional federal tax receivables. After quarter-end it received $49.4 million in cash tax refunds, including interest, and expected another $12–$15 million within 12 months. On October 30, it repaid $42 million on its credit facility.
- Red Robin stopped making full lease payments beginning April 1 while continuing to recognize lease expense and liabilities. By quarter-end it had completed rent-concession negotiations for approximately 50% of leases, with discussions ongoing for others.
- The company recorded a $67.1 million valuation allowance against deferred tax assets. It also accrued an additional $4.5 million for a tentative $8.5 million settlement of two employment cases; court approval is required.
Outlook, management commentary, and risks
- No formal earnings or revenue guidance was provided. Management said improved weekly sales and guest satisfaction, dining-room and outdoor seating expansion, and retained off-premise demand supported recovery, while emphasizing ongoing uncertainty from COVID-19.
- For the period ended November 1, preliminary comparable sales were down 15.4% across all comparable company-owned restaurants and down 13.7% at restaurants with reopened dining rooms. Management cited renewed restrictions and rising cases, partly offset by outdoor seating, booth partitions, off-premise sales, and average-check growth. About 89% of currently open company-owned restaurants had reopened indoor dining rooms as of November 1; 18 restaurants remained temporarily closed as of the filing date.
- Management planned to use available operating cash flow for debt reduction, restaurant maintenance, and strategic initiatives, including its Total Guest Experience model, Donatos pizza, portfolio optimization, and digital capabilities. The Donatos rollout was expected to resume in 2021.
- COVID-19, possible renewed closures and capacity limits, consumer demand, labor and supply costs, and weather affecting outdoor seating remain significant risks. The company disclosed lease default notices and a small number of eviction notices or proceedings. It also warned that further covenant noncompliance could trigger a credit-facility default; covenant relief was in place through fiscal 2020, with adjustments through the third quarter of 2021.
Important facts for investors to verify
- Whether sales recovery and dining-room capacity continued after the preliminary November 1 results, particularly as restrictions changed.
- Receipt and use of the expected additional tax refunds, and the effect of the $42 million debt repayment on borrowing capacity and liquidity.
- Compliance with amended credit covenants and progress in resolving landlord negotiations, lease defaults, and eviction proceedings.
- Final court approval and payment timing for the proposed $8.5 million employment-case settlement.
- Whether impairment assumptions, the tax valuation allowance, and management’s estimates of future restaurant cash flows remain appropriate.