Red Robin Gourmet Burgers, Inc. — Q1 2016 Form 10-Q
Business context and period: The filing covers the 16 weeks ended April 17, 2016, compared with the 16 weeks ended April 19, 2015. Red Robin operated 454 company-owned restaurants and had 86 franchised restaurants at period-end, for 540 locations in total. It reports one operating and reportable segment.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $402.1 million | $394.9 million | +1.8% |
| Restaurant revenue | $396.8 million | $388.5 million | +2.1% |
| Operating income / margin | $20.2 million / 5.0% | $23.8 million / 6.0% | Lower |
| Net income / net margin | $14.2 million / 3.5% | $16.6 million / 4.2% | -14.1% |
| Diluted EPS | $1.03 | $1.16 | -11.2% |
| Operating cash flow | $42.5 million | $36.0 million | +$6.5 million |
| Investing cash flow | -$92.1 million | -$37.3 million | Higher outflow |
| Cash at period-end | $25.2 million | $21.4 million | Year-over-year comparison |
| Credit facility borrowings | $253.5 million | $202.0 million at Dec. 27, 2015 | +$51.5 million |
Restaurant operating costs rose to 77.5% of restaurant revenue from 77.0%. Food cost improved to 23.3% of restaurant revenue from 25.2%, primarily from ground-beef deflation, favorable menu mix, and pricing. Labor increased to 33.5% from 32.0%; other operating costs rose to 12.5% from 12.0%, and occupancy to 8.2% from 7.8%. The effective tax rate was 23.3%, versus 27.3%.
Material changes and unusual items
- Comparable restaurant revenue fell 2.6%, with guest counts down 4.1% and average guest check up 1.5%. Growth from new and acquired restaurants more than offset the comparable-sales decline and other offsets, including unfavorable foreign exchange.
- Franchise royalties, fees, and other revenue declined 16.2% to $5.4 million, principally reflecting lower gift-card breakage revenue, including a prior-year $1.4 million benefit from a change in estimate, and royalties lost as franchised restaurants were acquired.
- Net income included $3.9 million of litigation contingencies for employment-related claims and $0.8 million of asset impairment associated with relocating a restaurant. Management reported diluted EPS of $1.27 excluding those Q1 2016 items, compared with $1.03 reported; it reported prior-year EPS of $1.10 excluding a $0.06-per-share gift-card breakage estimate change.
- On March 21, 2016, the company acquired 13 franchised restaurants for approximately $40.0 million cash. Investing outflows also reflected restaurant development and remodels. The acquisition’s pro forma and operating results were not separately presented because management considered the impact immaterial.
Liquidity, debt, and cash flow
Cash increased by $2.5 million from fiscal-year-end. Operating cash flow was $42.5 million; investing outflows were $92.1 million, including $40.0 million for acquired restaurants and $52.1 million for property, equipment, and intangible assets. Financing provided $52.0 million, primarily from net borrowing. Current assets were $83.6 million and current liabilities $168.9 million; the company states that it typically operates with a working-capital deficit, supported by cash/credit-card sales, rapid inventory turnover, and its revolving facility.
The $325 million revolving credit facility matures July 2, 2019. At April 17, borrowings were $253.5 million and letters of credit were $8.3 million, leaving approximately $63.2 million of stated capacity before considering any other facility terms. The company was in compliance with debt covenants. Borrowings are variable-rate; a 1 percentage-point rate change would affect annualized pretax interest expense by approximately $2.5 million. Total debt and capital lease obligations were approximately $262.2 million.
Outlook, commentary, and risks
- Management expected 2016 total revenue growth of approximately 8%, with comparable revenue flat to slightly negative and the balance from additional operating weeks, openings, and acquired restaurants.
- Expected 2016 capital investment was approximately $190 million, including the first-quarter acquisition. Plans included at least 20 additional Red Robin openings during the remainder of 2016, 70 remodels for the year, and substantial completion of the company-owned brand transformation by year-end.
- Management anticipated a full-year 2016 effective tax rate of approximately 23% and expected inflation, particularly higher wages, to remain a negative factor for the rest of the year.
- Key stated risks include comparable-sales and traffic trends, competition and discounting, food and labor cost inflation, execution of expansion and remodel plans, legal claims, technology effectiveness, and access to credit. The filing reported no material changes to previously disclosed risk factors.
- The company recorded a $4.0 million liability for legal matters at April 17, 2016, versus $0.1 million at December 27, 2015; management said it had made adequate provision, while noting litigation outcomes remain uncertain.
- The company expected adoption of the new lease accounting standard to significantly increase reported assets and liabilities. It was evaluating the effects of other recently issued accounting standards.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improve, and whether the projected approximately 8% revenue growth is achieved.
- Whether labor, occupancy, and other operating-cost pressure continues to offset food-cost savings and weigh on margins.
- Execution and funding of the approximately $190 million capital plan, remodel program, restaurant openings, and integration of the 13 acquired restaurants.
- Credit-facility headroom, variable-rate exposure, covenant compliance, and the company’s ability to fund investment while managing increased debt.
- Developments in employment-related litigation and any further changes in legal accruals.