Red Robin Gourmet Burgers, Inc. — Q3 2023 Form 10-Q
Reporting period: Third quarter ended October 1, 2023 (12 weeks), compared with the 12 weeks ended October 2, 2022. Year-to-date figures cover 40 weeks. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Red Robin operates and franchises full-service restaurants as one reportable segment. At quarter-end it had 508 restaurants: 417 company-owned and 91 franchised. The company described its North Star strategy as focused on improving the guest experience and restaurant execution.
Key financial results
| Metric | Q3 2023 | Q3 2022 | 40 weeks 2023 | 40 weeks 2022 |
|---|---|---|---|---|
| Total revenue | $277.6 | $286.8 | $994.0 | $975.9 |
| Operating income (loss) | $(1.9) | $(8.1) | $12.5 | $(17.6) |
| Net loss | $(8.2) | $(12.7) | $(7.5) | $(34.2) |
| Diluted loss per share | $(0.52) | $(0.80) | $(0.47) | $(2.16) |
| Adjusted EBITDA (non-GAAP) | $6.8 | $3.9 | $58.3 | $43.7 |
Q3 restaurant revenue fell 3.3%, while total revenue declined 3.2%. Comparable restaurant revenue decreased 3.4%; comparable dine-in sales increased 0.5%. Management attributed the comp decline primarily to a 10.4% drop in guest count, partly offset by a 7.0% increase in average check. The check increase reflected menu pricing, partly offset by mix and discount changes. Year-to-date restaurant revenue rose 2.3%, with comparable restaurant revenue up 2.9%.
Q3 restaurant-level operating profit, a non-GAAP measure, was $30.4 million, or 11.1% of restaurant revenue, versus $35.6 million, or 12.6%, a year earlier. Food cost improved to 23.8% of restaurant revenue from 25.0%, but labor rose to 38.0% from 35.6%; occupancy rose to 8.6% from 8.1%. Year-to-date restaurant-level operating profit was $127.2 million, or 13.1%, versus $127.9 million, or 13.4%.
Operating cash flow was $17.4 million for the 40 weeks, versus $38.8 million in 2022. Capital expenditures were $37.1 million. Investing cash flow was $19.0 million, including $58.8 million of sale-leaseback proceeds; financing cash outflow was $33.7 million, including debt repayments and $10.0 million of share repurchases. Cash, cash equivalents and restricted cash totaled $60.8 million at quarter-end, including $48.6 million of cash and cash equivalents.
Gross debt was $190.0 million at October 1, down from $214.9 million at December 25, 2022; reported long-term debt, net of discounts and issuance costs, was $182.1 million, including $0.9 million current. The term loan carried a 12.16% variable rate at quarter-end. The company reported $25.0 million of available revolver capacity and approximately $73.6 million of liquidity. Stockholders’ equity was a deficit of $8.7 million, compared with positive equity of $1.8 million at year-end.
Material changes and unusual items
- Q3 included a $14.9 million net gain from a sale-leaseback of nine restaurant properties; year-to-date, two transactions involving 18 properties generated $58.8 million of net proceeds and a $29.4 million net gain. The transactions also increased lease obligations and contributed to higher fixed rent expense.
- The company repaid $24.9 million of debt year-to-date and repurchased $10.0 million of stock, including $5.0 million in Q3.
- Q3 other charges included $3.6 million for litigation contingencies and $4.8 million of impairment charges. Year-to-date impairment charges were $7.2 million and litigation contingency expense was $9.1 million.
- Prior-year comparative results were corrected for an immaterial gift-card revenue recognition error. The correction reduced 2022 revenue by $0.1 million for Q3 and $0.6 million year-to-date; management said the cumulative adjustment would have significantly affected those periods’ results if recorded entirely then.
Management outlook, risks and contingencies
The filing provides no specific numeric revenue, earnings or margin guidance. Management said it chose not to repeat the prior-year deep-discount “$10 Meal Deal” promotion and discontinued virtual brands to reduce complexity and support an improved guest experience, with the expectation that this may support traffic and profitability over time. It also cited investments in hourly and management labor for service improvements. These are expectations, not assured outcomes.
Risks highlighted include weak consumer spending, execution of strategic initiatives, food and labor inflation, interest-rate exposure, and the ability to pass cost increases through menu pricing. Debt is variable-rate and secured by substantially all assets; the company reported compliance with its debt covenants at quarter-end. A 1% rate change would affect annualized pretax interest expense by approximately $1.9 million; a 1% increase in food and beverage costs would add approximately $3.1 million to annualized cost of sales.
Loss contingency accruals were $13.7 million, including employment, guest, lease and other claims; management cautioned actual outcomes could differ from estimates. Non-cancellable vendor commitments were reported at $216.6 million in the financial-statement note. The MD&A separately reports $223.7 million of system-wide fixed-price purchase obligations, including $43.3 million due in 2023; the filing text does not clearly reconcile the two figures. The company also cited seasonal sales fluctuations and a working-capital deficit as normal features of its operating model.
Important facts for investors to verify
- Whether the improvement in reported losses and adjusted EBITDA is sustainable apart from sale-leaseback gains and other excluded items.
- Guest-count trends and whether labor investments and the strategy to improve the guest experience can restore traffic while protecting restaurant margins.
- Variable-rate debt costs, covenant headroom, liquidity, and the effect of additional sale-leasebacks on rent and long-term obligations.
- The status and potential range of litigation losses, and the scope and reconciliation of the $216.6 million and $223.7 million purchase-commitment disclosures.
- Gift-card revenue recognition and the corrected comparative figures; the company reported disclosure controls were effective and no material change in internal control over financial reporting.