Red Robin Gourmet Burgers, Inc. — 10-Q Summary
Reporting period: Third quarter ended October 4, 2015 (12 weeks); year-to-date comparison covers 40 weeks. Comparative periods ended October 5, 2014. Financial amounts are in millions except per-share data.
Business context and performance
Red Robin operated 428 company-owned restaurants and had 99 franchised restaurants at quarter-end. It reported one operating and reportable segment.
| Metric | 12 weeks 2015 | 12 weeks 2014 | 40 weeks 2015 | 40 weeks 2014 |
|---|---|---|---|---|
| Total revenue | $283.4 | $267.4 | $971.3 | $864.0 |
| Operating income | $11.7 | $9.2 | $52.0 | $39.7 |
| Net income | $8.3 | $7.2 | $36.0 | $28.6 |
| Diluted EPS | $0.58 | $0.50 | $2.52 | $1.97 |
| Operating margin | 4.1% | 3.5% | 5.4% | 4.6% |
| Net margin | 2.9% | 2.7% | 3.7% | 3.3% |
Financial position, cash flow, and liquidity
- Cash was $21.8 million at October 4, 2015, versus $22.4 million at December 28, 2014. Current assets were $84.9 million and current liabilities $163.7 million; the company says it typically operates with a working-capital deficit, funded by restaurant cash receipts and, when needed, its revolving facility.
- For the 40 weeks, operating cash flow was $101.4 million; investing cash flow was negative $123.1 million; financing cash flow was positive $21.3 million. Capital expenditures were $123.3 million, including $53.4 million for remodels and $33.8 million for new restaurants. Operating cash flow less capital expenditures was approximately negative $21.9 million.
- Credit-facility borrowings were $164.0 million, with $8.9 million in letters of credit reducing availability. Total debt and capital lease obligations were reported at $172.9 million, up $25.0 million from year-end. The $250 million revolving facility matures July 2, 2019; the company was in compliance with its covenants.
- All $164.0 million of credit-facility borrowings were variable-rate. Management estimated that a 1 percentage-point rate change would alter annualized pretax interest expense by $1.6 million. The interest-rate swap matured in June 2015.
Changes and management commentary
- Quarterly revenue grew 6.0%; restaurant revenue rose 5.9%. Comparable restaurant revenue increased 3.5%, reflecting a 3.6% increase in average guest check and a 0.1% decline in guest counts. Year-to-date comparable restaurant revenue increased 3.2%, from a 2.5% higher average check and 0.7% higher guest counts.
- Quarterly restaurant operating costs improved to 78.4% of restaurant revenue from 80.5%; year-to-date they improved to 77.6% from 78.6%. Lower food costs and labor costs as a share of sales contributed. Occupancy costs, depreciation, and quarterly SG&A increased as a share of revenue.
- Year-to-date revenue growth included $80.3 million from new and acquired restaurants, net of closures, while foreign exchange reduced revenue by $5.3 million. Higher average debt balances contributed to increased year-to-date interest expense.
- The company changed its gift-card breakage estimate in the first quarter, recognizing $1.4 million of additional revenue and increasing first-quarter net income by $0.9 million, or $0.06 per diluted share. This estimate change contributed to the year-to-date increase in gift-card breakage revenue.
Outlook, plans, and risks
- Management planned 11 additional Red Robin openings in the remainder of 2015. It had completed 102 remodels in the first 40 weeks, against a 150-remodel fiscal-year goal, and anticipated more than 300 restaurants meeting the new brand standards by year-end.
- Management anticipated a fiscal 2015 effective tax rate of approximately 26.5% and expected inflation to continue negatively affecting results for the remainder of the year, particularly through wages, supplies, and food costs.
- Key risks identified include food and labor cost inflation, competition and discounting, consumer spending, attracting qualified staff, restaurant expansion and remodeling execution, interest-rate exposure, foreign currency movements, and legal claims. Management said pending claims were adequately provided for and were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether comparable-sales growth and guest-check trends continue, and whether guest counts recover.
- Whether restaurant-level cost improvements offset higher occupancy, depreciation, and corporate expenses.
- Funding needs and returns from remodeling, new restaurant development, and technology investment, given capital spending exceeded operating cash flow year to date.
- Debt capacity, covenant compliance, and the effect of variable interest rates; verify remaining revolver availability after letters of credit.
- The effect of the gift-card breakage estimate on reported revenue and earnings, and progress toward the 2015 opening and remodeling plans.