RED ROBIN GOURMET BURGERS INC annual report, FY2020

Red Robin Gourmet Burgers, Inc. — 2020 Form 10-K

Business context and reporting period. The filing covers the 52 weeks ended December 27, 2020, and compares results with the 52 weeks ended December 29, 2019. Red Robin operated 443 company-owned and 103 franchised restaurants at year-end. COVID-19 restrictions, dining-room closures and limited capacity materially affected operations; off-premise sales became a larger part of the business.

Key financial metrics

Metric	2020	2019
Total revenue	$868.7 million	$1,315.0 million
Net loss	$276.1 million	$7.9 million
Diluted loss per share	$19.29	$0.61
Cash from operations	$20.2 million	$57.9 million
Capital expenditures	$22.1 million	$57.3 million
Cash and cash equivalents at year-end	$16.1 million	$30.0 million
Total debt at year-end	$170.6 million	$206.9 million

Restaurant revenue fell 33.8% to $854.1 million. Comparable restaurant revenue declined 28.5%, reflecting a 27.7% decrease in guest count and a 0.8% decline in average guest check. Franchise revenue fell 49.4%, partly because royalty and advertising payments were temporarily abated and not collected.
Restaurant operating costs rose to 93.2% of restaurant revenue from 82.1%. Labor was 39.0% of restaurant revenue, other operating costs 19.3%, occupancy 11.7%, and cost of sales 23.2%.
Operating loss was $275.1 million, or 31.7% of total revenue. Other charges totaled $153.9 million; these included a $95.4 million goodwill impairment and $26.9 million of asset impairment charges. The company recorded no goodwill impairment in 2019.
Operating cash flow declined by $37.7 million year over year. Year-end current assets of $86.9 million were below current liabilities of $202.6 million. The company reported approximately $128 million of liquidity at year-end, including available credit capacity.
At year-end, $169.8 million was outstanding under the credit facility, with $111.8 million of available borrowing capacity; letters of credit also reduced availability. The company reported $122 million of liquidity as of February 21, 2021, after the $8.5 million settlement payment noted below.
Contractual operating lease payments totaled $720.0 million, undiscounted, as of year-end. These are future lease commitments, not debt principal.

Material changes versus the prior comparable period

COVID-19 drove a steep sales decline and substantial fixed-cost deleverage. Off-premise sales increased 136.2% and accounted for 41.1% of food and beverage sales, compared with approximately 14% in the fourth quarter of 2019.
Restaurant operating costs as a share of restaurant revenue increased 11.1 percentage points, despite lower absolute costs. The company cited lower sales, higher delivery fees and occupancy deleverage among the causes.
The company permanently closed 11 company-owned restaurants during 2020 and ended the year with 10 fewer total restaurants than in 2019. It also substantially completed its exit from company-owned restaurants in Canada.
Red Robin received $49.4 million in federal cash tax refunds, including interest, and expected approximately $16 million more within 12 months. It deferred approximately $18 million in payroll taxes for payment in 2022 and 2023.
The company issued approximately 2.6 million shares through an at-the-market offering, generating $28.7 million net proceeds, and repaid $36.2 million of debt on a net basis.
Fourth-quarter comparable restaurant revenue weakened as COVID-19 restrictions tightened: reported 28-day-period declines for the periods ended November 1, November 29 and December 27 were 15.4%, 28.8% and 39.5%, respectively.

Outlook, management commentary and risks

Management expected significant comparable-sales growth in 2021 from recovery in western markets, pent-up demand, higher checks as dine-in returned and restaurant industry closures. It also expected enterprise pricing, outdoor seating, restored operating hours and Donatos expansion to add mid-to-high-single-digit comparable-sales growth beyond recovery effects. These are management expectations, not guarantees.
Planned 2021 capital expenditures were $45 million to $55 million. The company planned to add Donatos pizza to approximately 120 more restaurants in 2021, targeting about 200 locations by year-end and approximately 400 by 2023. Management projected more than $60 million of annual pizza sales and more than $25 million of profitability by 2023; those targets depend on rollout and execution.
Management said permanent cost reductions were expected to improve enterprise-level margins by more than 100 basis points once sales returned to pre-pandemic levels. Actions included a menu reduction, a revised restaurant management labor model, lease negotiations and lower general and administrative costs.
On February 25, 2021, the company amended its credit facility. The amendment provided near-term covenant relief but raised borrowing costs, shortened maturity to January 10, 2023, reduced revolving commitments and imposed liquidity and other restrictions. The company said it expected cash flow and available borrowing capacity to cover obligations and planned spending for at least 12 months.
Key risks include the duration and effects of COVID-19, the pace of dining-room recovery, execution of cost and growth initiatives, staffing, competition, food and labor inflation, lease obligations, borrowing capacity and covenant compliance. Management’s impairment estimates depend on forecasts that may change.
A class-action employment settlement of $8.5 million was accrued in 2020 and paid in January 2021. Total recorded loss contingencies were $10.5 million at year-end. The filing also identifies potential additional restaurant impairments and other legal claims as uncertainties.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Impairment of long-lived assets was identified as a critical audit matter, involving subjective cash-flow and valuation assumptions.

Important facts for investors to verify

Whether sales recovery, dining-room reopening and off-premise demand support management’s 2021 outlook and margin targets.
Actual Donatos rollout pace, incremental sales and profit, capital requirements and projected payback.
Available liquidity, borrowing capacity, covenant compliance and the cost and maturity terms under the amended credit facility.
Whether further restaurant or goodwill-related impairments, lease concessions or closures arise as forecasts and operating conditions change.
Receipt of the expected additional tax refunds, the tax asset valuation allowance and timing of deferred payroll tax payments.
Final settlement and other litigation exposure, including whether recorded contingency accruals prove adequate.