Red Robin Gourmet Burgers, Inc. — Q2 2018 Form 10-Q
Reporting period: Twelve weeks ended July 15, 2018; year-to-date comparisons cover 28 weeks ended July 15, 2018, versus the periods ended July 9, 2017. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and results
Red Robin operates and franchises full-service restaurants. At July 15, 2018, it had 484 company-operated and 88 franchised locations. It reports one operating and reportable segment.
| Metric | Q2 2018 | Q2 2017 | 28 weeks 2018 | 28 weeks 2017 |
|---|---|---|---|---|
| Total revenue | $315.4m | $317.3m | $736.9m | $737.9m |
| Restaurant revenue | $310.4m | $312.4m | $725.1m | $725.8m |
| Operating income (loss) | $(4.2)m | $9.4m | $2.8m | $26.8m |
| Net income (loss) | $(1.9)m | $6.9m | $2.5m | $18.5m |
| Diluted EPS | $(0.14) | $0.53 | $0.19 | $1.43 |
Financial position, cash flow and operating trends
- Margins and costs: Restaurant operating costs rose to 80.7% of restaurant revenue in Q2 (79.2% prior year) and 80.3% year to date (78.9%). Food, other operating and occupancy costs increased as a share of sales; labor costs declined as a share. Q2 operating margin was approximately -1.3% of revenue, versus 3.0%; year-to-date operating margin was 0.4%, versus 3.6%.
- Comparable sales: Company restaurant comparable revenue fell 2.6% in Q2 and 1.7% year to date. Q2 decline reflected a 1.9% lower average guest check and 0.7% lower guest counts. Average weekly sales volume declined 3.5% in Q2 and 3.3% year to date.
- Cash flow: Year-to-date operating cash flow was $77.0m, down from $104.7m. Capital expenditures were $27.3m, versus $41.8m in the prior-year period. Financing cash outflow was $44.6m; cash increased $4.2m to $21.9m.
- Liquidity and debt: Current assets were $83.0m and current liabilities $151.8m, a $68.9m working-capital deficit. Management says cash-based restaurant sales, inventory turnover and gift-card receipts support operating with this deficit. Long-term debt was $221.4m; total debt and capital lease obligations were $231.9m, down $45.4m from year-end. Revolver borrowings were $220.5m, with $7.6m of letters of credit against a $400m facility. The company reported a 3.94x lease-adjusted leverage ratio and compliance with debt covenants.
Material changes, unusual items and outlook
- Q2 included $9.6m of non-cash asset impairment charges for eight company restaurants. Year-to-date other charges totaled $16.9m, including $4.0m for employment-related litigation contingencies, $2.8m in reorganization costs, and $0.5m for disposal of spiral menus.
- Management’s adjusted diluted EPS, excluding specified charges, was $0.46 for Q2 versus $0.61 in Q2 2017, and $1.15 year to date versus $1.50. These are management-adjusted figures, not GAAP EPS.
- 2018 guidance: Revenue of $1.350bn–$1.365bn, comparable restaurant revenue decline of 1.0%–2.0%, and diluted EPS of $1.80–$2.20. Management planned two company restaurant openings and two franchise openings in the remainder of 2018.
- Management cited affordability initiatives and service execution as priorities. It identified food and labor inflation as pressures; anticipated labor-cost inflation for the rest of 2018. Other disclosed risks include commodity prices, wage increases, competition and discounting, traffic and consumer spending, execution of improvement initiatives, and litigation.
- The board increased the share repurchase authorization to $75m on August 9, 2018; no shares were repurchased during Q2. The filing also describes a new executive change-in-control severance plan adopted in August 2018.
- The company adopted Topic 606 retrospectively; it changed presentation of franchise advertising contributions as revenue and related expenses, but did not affect previously reported net income. Management expected lease accounting adoption in 2019 to significantly increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improve and whether the full-year guidance remains achievable.
- Whether elevated restaurant operating costs, food and labor inflation, and restaurant impairment risk persist.
- Cash-flow generation, debt reduction, revolver availability and ongoing covenant compliance, particularly alongside planned repurchases and capital spending.
- The ultimate outcome and potential cost of employment-related litigation and other claims.
- The effects of the new lease standard and the timing and amount of any share repurchases under the expanded authorization.