Red Robin Gourmet Burgers, Inc. — Q3 2017 Form 10-Q
Business and period: The company operates and franchises full-service restaurants. At October 1, 2017, it had 479 company-operated and 86 franchised restaurants. The quarter was 12 weeks; year-to-date results cover 40 weeks. Fiscal 2017 comprises 53 weeks and ends December 31, 2017.
Financial performance
| Metric | 12 weeks ended Oct. 1, 2017 | Prior-year 12 weeks | 40 weeks ended Oct. 1, 2017 | Prior-year 40 weeks |
|---|---|---|---|---|
| Total revenue | $304.2 million (+2.3%) | $297.3 million | $1,038.6 million (+3.3%) | $1,005.0 million |
| Comparable restaurant revenue | +0.1% | Not separately stated here | -0.2% | Not separately stated here |
| Operating income (loss) | $4.1 million | ($4.2) million | $30.9 million | $26.4 million |
| Net income (loss) | $2.7 million | ($1.3) million | $21.2 million | $20.5 million |
| Diluted EPS | $0.21 | ($0.10) | $1.63 | $1.50 |
| Restaurant operating costs / restaurant revenue | 82.6% | 81.4% | 80.5% | 79.1% |
Q3 restaurant revenue growth reflected new restaurants; comparable sales rose just 0.1%, including a favorable Canadian currency effect, while the average guest check declined 0.1%. Year-to-date comparable revenue fell 0.2%, with both guest counts and average check down 0.1%. Franchisees’ comparable sales declined 3.0% in Q3 and 2.8% year to date.
Cost pressure weighed on margins: labor and other operating costs rose as a share of restaurant revenue, while Q3 food costs also increased. Labor pressures included minimum-wage increases and manager bonuses; other operating costs included local marketing, technology, and third-party delivery fees. Q3’s return to profitability also compares against $9.3 million of other charges in the prior-year quarter. Excluding that period’s impairment impact, the filing reports prior-year Q3 diluted EPS of $0.38, versus $0.21 in Q3 2017.
Cash, debt, and liquidity
- Forty-week operating cash flow was $121.6 million, versus $94.7 million. Investing cash outflow was $60.9 million, versus $172.5 million; financing cash outflow was $58.1 million, versus $70.4 million of financing inflow in the prior period.
- Capital expenditures were $61.0 million year to date. Cash increased $3.3 million from fiscal year-end to $15.0 million at October 1, 2017.
- Total debt and capital lease obligations were $287.7 million, down from $347.8 million at December 25, 2016. Credit-facility borrowings were $275.9 million, with $7.6 million of letters of credit outstanding against the $400 million revolver.
- The company reported a 4.20x lease-adjusted leverage ratio and compliance with all debt covenants. It typically operates with a working-capital deficit and says operating cash flow and remaining revolver capacity should fund liquidity needs and planned capital spending.
Outlook, risks, and other notable items
- Management expected 2017 revenue growth of 6%–8%, comparable revenue growth of 0%–0.5%, capital investments of $80–$85 million, and interest expense of approximately $10 million. It planned two additional restaurant openings in the remainder of 2017.
- Management anticipated labor and commodity inflation would continue to pressure costs, particularly minimum wages and food costs. A 1% increase in food costs would increase annualized cost of sales by approximately $3.0 million; a 1% change in the effective rate on variable-rate borrowings would change annualized pretax interest expense by approximately $2.8 million.
- The company recorded $1.6 million of year-to-date restaurant impairment charges, with none in Q3. It disclosed ordinary-course claims, including employment-related and food, health, injury, and operational matters; management believed provisions were adequate, but outcomes remain uncertain.
- The April 2017 credit-facility amendment temporarily raised the permitted lease-adjusted leverage ratio and established higher pricing tiers above 4.75x. The $275.9 million of facility borrowings carry variable rates. The company cited competition, traffic, consumer spending, commodity and labor costs, execution of expansion and marketing plans, technology/cybersecurity, and legal claims among forward-looking risks.
- Management expected adoption of the new lease standard to significantly increase balance-sheet assets and liabilities. It expected no material financial-statement effect from adopting the new revenue standard.
Important facts for investors to verify
- Whether comparable sales and guest traffic improve, given modest Q3 comparable growth and a year-to-date decline.
- Whether labor, food, delivery, and other operating-cost inflation continues to erode restaurant margins.
- Progress against revenue, capital-spending, and restaurant-opening guidance, and the effect of the 53rd fiscal week.
- Debt repayment, variable-rate exposure, revolver availability, and continued compliance with leverage covenants.
- Potential outcomes and accrual adequacy for litigation and other contingencies, and the eventual balance-sheet effect of lease-accounting adoption.