Red Robin Gourmet Burgers, Inc. — Q1 2017 Form 10-Q
Reporting period: Sixteen weeks ended April 16, 2017, compared with the sixteen weeks ended April 17, 2016. Red Robin operated 469 company-owned and 87 franchised restaurants at quarter-end.
Financial performance
| Metric | Q1 2017 | Prior period |
|---|---|---|
| Total revenue | $418.6 million | $402.1 million |
| Operating income / margin | $17.5 million / 4.2% | $20.2 million / 5.0% |
| Net income | $11.6 million | $14.2 million |
| Diluted EPS | $0.89 | $1.03 reported |
| Operating cash flow | $70.0 million | $42.5 million |
| Capital expenditures | $24.5 million | $52.1 million |
Revenue rose 4.1%, driven mainly by new and acquired restaurants; comparable restaurant revenue fell 1.2%, reflecting a 1.7% decline in guest counts partly offset by a 0.5% increase in average check. Average weekly sales per company-owned restaurant declined 1.1%.
Restaurant operating costs increased to 79.3% of restaurant revenue from 77.5%. Labor rose to 35.2% of restaurant revenue from 33.5%, while cost of sales improved to 22.9% from 23.3%, primarily due to beef and poultry deflation. Net margin declined to 2.8% from 3.5%. Reported prior-period EPS included litigation and restaurant-relocation impairment charges; excluding those items, prior-period diluted EPS was $1.27.
Operating cash flow increased by $27.5 million, attributed principally to lower vendor payments and bonus payouts. Investing cash outflow was $24.4 million, compared with $92.1 million, which included franchise-restaurant acquisitions in the prior period. Financing cash outflow was $35.1 million; the company repaid approximately $35.5 million of credit-facility borrowings during the quarter.
Liquidity and debt
Cash was $22.2 million at April 16, 2017, up from $11.7 million at fiscal year-end. Current assets were $82.8 million and current liabilities $150.7 million, a working-capital deficit of approximately $67.9 million. Management said the cash-oriented restaurant model and expected operating cash flows, together with remaining credit capacity, should support working capital and planned capital spending.
Credit-facility borrowings were $300.0 million; total debt and capital leases were $312.2 million, down from $347.8 million at December 25, 2016. The $400 million revolving facility also had $7.4 million of letters of credit outstanding. The facility is secured by substantially all company assets and matures June 30, 2021. The company reported compliance with covenants. An April 13 amendment temporarily raised the lease-adjusted leverage covenant limit to 5.25x through October 1, 2017, then steps it down; higher pricing tiers apply if leverage exceeds 4.75x.
All $300 million of facility borrowings were variable-rate. Management estimated that a 1 percentage-point rate change would alter annualized pretax interest expense by $3.0 million. First-quarter interest expense was $3.0 million, up from $1.6 million; management expected approximately $10 million for fiscal 2017.
Outlook, developments, and risks
- Management forecast 2017 total revenue growth of 6%–8%, including comparable revenue growth of 0.5%–1.5%, additional operating weeks from openings, and a 53rd fiscal week.
- Management planned 11 additional company-owned restaurant openings during the remainder of 2017 and forecast capital investment of $85–$95 million for the year.
- Management anticipated inflation would pressure labor and commodity costs for the remainder of 2017. Minimum-wage increases were a key labor-cost driver in the quarter. Sales are seasonal, historically stronger in summer and the winter holiday period.
- The company disclosed that law enforcement had warned of cybercriminal targeting of restaurant companies and that Red Robin was investigating whether guests were affected. A material change to the risk factors was added concerning cybersecurity, payment-card data, potential claims, reputational harm, and possible costs or penalties.
- The company faced ordinary-course litigation and contingencies, including employment-related and food-quality, health, injury, or operational claims; management stated that it believed provisions were adequate.
- The company opened six restaurants and relocated one during the period; franchisees opened one. It did not repurchase shares in Q1; $53.9 million remained under its share-repurchase authorization.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improve, and whether the 2017 revenue outlook is achieved.
- Whether labor, other operating costs, and inflation continue to pressure restaurant margins.
- Debt covenant headroom, variable-rate exposure, and the effect of the amended leverage thresholds and pricing tiers.
- The outcome of the cyber investigation, including whether guest data was affected and any resulting costs, claims, or regulatory consequences.
- Execution of planned restaurant openings and capital spending, alongside cash generation and debt repayment.