Red Robin Gourmet Burgers, Inc. — Q3 2013 Form 10-Q
Reporting period: Third quarter, the 12 weeks ended October 6, 2013; year-to-date, the 40 weeks ended October 6, 2013. Comparisons are with the corresponding 2012 periods. Unless otherwise stated, financial amounts below are in millions.
Business context
Red Robin operated 350 company-owned restaurants and had 135 franchised locations across the U.S. and Canada, for 485 total restaurants. The company reports one operating and reportable segment.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 40 weeks 2013 | 40 weeks 2012 |
|---|---|---|---|---|
| Total revenue | $230.7 | $213.3 | $775.3 | $736.5 |
| Operating income | $6.8 | $5.8 | $35.7 | $33.0 |
| Net income | $4.7 | $3.5 | $25.3 | $21.8 |
| Diluted EPS | $0.32 | $0.24 | $1.75 | $1.48 |
| Operating margin | 2.9% | 2.7% | 4.6% | 4.5% |
| Net margin | 2.0% | 1.7% | 3.3% | 3.0% |
Q3 revenue increased 8.1%; comparable restaurant sales rose 5.7%, driven by a 4.6% increase in average guest check and 1.1% higher guest counts. Year-to-date revenue increased 5.3%, with comparable sales up 4.2%. Growth also reflected new restaurant openings. Q3 restaurant-level cost of sales increased to 25.2% of restaurant revenue from 24.8%; labor improved to 33.8% from 34.2%, and other operating costs improved to 13.0% from 13.5%. SG&A and pre-opening costs increased as a share of revenue.
Operating cash flow for the 40 weeks was $82.2, versus $72.3 a year earlier. Investing cash use was $50.4, primarily capital spending; financing cash use was $36.3. Cash declined $4.5 from year-end to $18.0. At October 6, total debt, including capital leases, was $90.9, down $44.1 from year-end; credit-facility borrowings were $81.5. The $225 revolving facility matures in December 2017. Current liabilities of $122.9 exceeded current assets of $68.2; management said cash-based restaurant sales and operating cash flows support the resulting working-capital deficit.
Changes versus prior period
Q3 net income rose about 32% and diluted EPS increased from $0.24 to $0.32. For the 40-week period, net income rose about 16% and diluted EPS increased from $1.48 to $1.75. Interest expense declined, reflecting lower average debt and borrowing rates: the weighted-average rate was 2.6% for Q3 and 2.7% year to date, versus 4.2% and 3.8%, respectively, in 2012. Year-to-date operating cash flow improved, though management attributed part of the increase to timing of vendor payments and higher construction and payroll accruals.
Capital spending increased to $50.4 from $43.0, mainly for new restaurants and remodels. Debt payments and borrowings were both substantial during the period: $148.6 of payments and $104.5 of borrowings. The company repurchased $2.5 of stock year to date, with approximately $47.5 remaining under its $50 million authorization.
Outlook, commentary and risks
- Management planned 10 additional Red Robin openings and one Burger Works opening in Q4 2013, targeting 22 restaurant openings for fiscal 2013; it expected to fund openings from operating cash flow. It planned 20 Red Robin openings in 2014, plus several Burger Works locations.
- Management expected a fiscal 2013 effective tax rate of approximately 24%. It anticipated continued pressure from food and beverage inflation in 2013, and wage, commodity and utility inflation in 2014.
- Brand initiatives included testing remodels at 24 company-owned restaurants and introducing new plating and menu presentation standards system-wide. Burger Works results were mixed: central business district and lifestyle locations performed well, while college campus sites underperformed.
- Key disclosed risks include food and commodity prices, labor and energy costs, competition and discounting, consumer spending, execution of marketing and business initiatives, restaurant development, technology implementation, and legal claims. Approximately 70% of estimated food and beverage purchases for the remainder of fiscal 2013 were covered by fixed-price contracts.
- The company reported compliance with debt covenants and effective disclosure controls. It reported routine employment, guest injury, food-quality and operational claims; management believed adequate provisions were recorded and did not expect a material adverse effect. No material changes to the 2012 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether comparable-sales growth, guest counts and check increases continued beyond Q3, and how much growth came from new units.
- Whether restaurant-level cost improvements can offset food, wage and other inflation, while SG&A and pre-opening expenses remain elevated.
- Actual opening pace, capital requirements and returns from new restaurants and remodels, including the performance of Burger Works locations.
- Available liquidity and revolver capacity after any letters of credit or other commitments, debt repayments, and continued stock repurchases; the filing does not state net availability after such items.
- Execution and control implications of the multi-year ERP implementation, and developments in disclosed legal claims and commodity-price exposure.