UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended July 14, 2019
or
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34851
RED ROBIN GOURMET BURGERS, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 84-1573084 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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6312 S. Fiddler’s Green Circle, Suite 200 N | | |
Greenwood Village, CO | | 80111 |
(Address of principal executive offices) | | (Zip Code) |
(303) 846-6000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | | Accelerated filer ý |
Non-accelerated filer o | | Smaller reporting company o |
| | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.001 par value | | RRGB | | NASDAQ (Global Select Market) |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 21, 2019, there were 12,967,566 shares of the registrant's common stock, par value of $0.001 per share outstanding.
RED ROBIN GOURMET BURGERS, INC.
TABLE OF CONTENTS |
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| Condensed Consolidated Statements of Stockholders' Equity | |
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PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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| | | | | | | | |
| | (Unaudited) | | |
| | July 14, 2019 | | December 30, 2018 |
Assets: | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 26,194 |
| | $ | 18,569 |
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Accounts receivable, net | | 12,978 |
| | 25,034 |
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Inventories | | 27,428 |
| | 27,370 |
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Prepaid expenses and other current assets | | 15,005 |
| | 27,576 |
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Total current assets | | 81,605 |
| | 98,549 |
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Property and equipment, net | | 527,789 |
| | 565,142 |
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Right of use assets, net | | 448,352 |
| | — |
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Goodwill | | 96,453 |
| | 95,838 |
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Intangible assets, net | | 32,071 |
| | 34,609 |
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Other assets, net | | 73,665 |
| | 49,803 |
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Total assets | | $ | 1,259,935 |
| | $ | 843,941 |
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Liabilities and stockholders’ equity: | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 32,037 |
| | $ | 39,024 |
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Accrued payroll and payroll-related liabilities | | 37,863 |
| | 37,922 |
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Unearned revenue | | 39,723 |
| | 55,360 |
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Short-term portion of lease obligations | | 42,136 |
| | 786 |
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Accrued liabilities and other | | 43,899 |
| | 38,057 |
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Total current liabilities | | 195,658 |
| | 171,149 |
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Deferred rent | | — |
| | 75,675 |
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Long-term debt | | 181,375 |
| | 193,375 |
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Long-term portion of lease obligations | | 503,030 |
| | 9,414 |
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Other non-current liabilities | | 10,158 |
| | 11,523 |
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Total liabilities | | 890,221 |
| | 461,136 |
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Stockholders’ equity: | | | | |
Common stock; $0.001 par value: 45,000 shares authorized; 17,851 and 17,851 shares issued; 12,985 and 12,971 shares outstanding | | 18 |
| | 18 |
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Preferred stock, $0.001 par value: 3,000 shares authorized; no shares issued and outstanding | | — |
| | — |
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Treasury stock 4,866 and 4,880 shares, at cost | | (200,428 | ) | | (201,505 | ) |
Paid-in capital | | 212,059 |
| | 212,752 |
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Accumulated other comprehensive loss, net of tax | | (4,724 | ) | | (4,801 | ) |
Retained earnings | | 362,789 |
| | 376,341 |
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Total stockholders’ equity | | 369,714 |
| | 382,805 |
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Total liabilities and stockholders’ equity | | $ | 1,259,935 |
| | $ | 843,941 |
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See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 | | July 14, 2019 | | July 15, 2018 |
Revenues: | | | | | | | | |
Restaurant revenue | | $ | 302,418 |
| | $ | 310,392 |
| | $ | 702,902 |
| | $ | 725,094 |
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Franchise and other revenues | | 5,563 |
| | 4,996 |
| | 14,945 |
| | 11,813 |
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Total revenues | | 307,981 |
| | 315,388 |
| | 717,847 |
| | 736,907 |
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Costs and expenses: | | | | | | | | |
Restaurant operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | |
Cost of sales | | 72,387 |
| | 74,874 |
| | 166,102 |
| | 173,389 |
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Labor | | 106,538 |
| | 106,476 |
| | 249,432 |
| | 249,491 |
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Other operating | | 43,000 |
| | 42,668 |
| | 98,565 |
| | 97,693 |
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Occupancy | | 25,458 |
| | 26,460 |
| | 60,478 |
| | 61,470 |
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Depreciation and amortization | | 21,369 |
| | 22,323 |
| | 49,807 |
| | 51,516 |
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Selling, general, and administrative expenses | | 35,234 |
| | 35,617 |
| | 83,350 |
| | 81,935 |
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Pre-opening costs | | — |
| | 569 |
| | 319 |
| | 1,706 |
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Other charges | | 16,847 |
| | 10,615 |
| | 19,245 |
| | 16,902 |
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Total costs and expenses | | 320,833 |
| | 319,602 |
| | 727,298 |
| | 734,102 |
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(Loss) income from operations | | (12,852 | ) | | (4,214 | ) | | (9,451 | ) | | 2,805 |
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Other expense: | | | | | | | | |
Interest expense, net and other | | 2,153 |
| | 2,385 |
| | 5,391 |
| | 5,792 |
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Loss before income taxes | | (15,005 | ) | | (6,599 | ) | | (14,842 | ) | | (2,987 | ) |
Income tax benefit | | (15,986 | ) | | (4,725 | ) | | (16,462 | ) | | (5,493 | ) |
Net income (loss) | | $ | 981 |
| | $ | (1,874 | ) | | $ | 1,620 |
| | $ | 2,506 |
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Earnings (loss) per share: | | | | | | | | |
Basic | | $ | 0.08 |
| | $ | (0.14 | ) | | $ | 0.12 |
| | $ | 0.19 |
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Diluted | | $ | 0.08 |
| | $ | (0.14 | ) | | $ | 0.12 |
| | $ | 0.19 |
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Weighted average shares outstanding: | | | | | | | | |
Basic | | 12,970 |
| | 12,982 |
| | 12,969 |
| | 12,979 |
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Diluted | | 13,043 |
| | 12,982 |
| | 13,047 |
| | 13,080 |
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Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustment | | $ | 406 |
| | $ | (497 | ) | | $ | 77 |
| | $ | (770 | ) |
Other comprehensive income (loss), net of tax | | 406 |
| | (497 | ) | | 77 |
| | (770 | ) |
Total comprehensive income (loss) | | $ | 1,387 |
| | $ | (2,371 | ) | | $ | 1,697 |
| | $ | 1,736 |
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See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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| | Common Stock | | Treasury Stock | | | | Accumulated Other Comprehensive Loss, net of tax | | | | |
| | Paid-in Capital | | | Retained Earnings | | |
| | Shares | | Amount | | Shares | | Amount | | | Total |
Balance, December 30, 2018 | | 17,851 |
| | $ | 18 |
| | 4,880 |
| | $ | (201,505 | ) | | $ | 212,752 |
| | $ | (4,801 | ) | | $ | 376,341 |
| | $ | 382,805 |
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Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — |
| | — |
| | (32 | ) | | 1,344 |
| | (1,204 | ) | | — |
| | — |
| | 140 |
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Acquisition of treasury stock | | — |
| | — |
| | 31 |
| | (974 | ) | | — |
| | — |
| | — |
| | (974 | ) |
Non-cash stock compensation | | — |
| | — |
| | — |
| | — |
| | 477 |
| | — |
| | — |
| | 477 |
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Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 639 |
| | 639 |
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Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | (329 | ) | | — |
| | (329 | ) |
Topic 842 transition impairment, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (15,172 | ) | | (15,172 | ) |
Balance, April 21, 2019 | | 17,851 |
| | $ | 18 |
| | 4,879 |
| | $ | (201,135 | ) | | $ | 212,025 |
| | $ | (5,130 | ) | | $ | 361,808 |
| | $ | 367,586 |
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Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — |
| | — |
| | (30 | ) | | 1,208 |
| | (907 | ) | | — |
| | — |
| | 301 |
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Acquisition of treasury stock | | — |
| | — |
| | 17 |
| | (501 | ) | | — |
| | — |
| | — |
| | (501 | ) |
Non-cash stock compensation | | — |
| | — |
| | — |
| | — |
| | 941 |
| | — |
| | — |
| | 941 |
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Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 981 |
| | 981 |
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Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 406 |
| | — |
| | 406 |
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Balance, July 14, 2019 | | 17,851 |
| | $ | 18 |
| | 4,866 |
| | $ | (200,428 | ) | | $ | 212,059 |
| | $ | (4,724 | ) | | $ | 362,789 |
| | $ | 369,714 |
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See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
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| | Common Stock | | Treasury Stock | | | | Accumulated Other Comprehensive Loss, net of tax | | | | |
| | Paid-in Capital | | | Retained Earnings | | |
| | Shares | | Amount | | Shares | | Amount | | | Total |
Balance, December 31, 2017 | | 17,851 |
| | $ | 18 |
| | 4,897 |
| | $ | (202,485 | ) | | $ | 210,708 |
| | $ | (3,566 | ) | | $ | 382,760 |
| | $ | 387,435 |
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Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — |
| | — |
| | (26 | ) | | 1,042 |
| | (1,167 | ) | | — |
| | — |
| | (125 | ) |
Non-cash stock compensation | | — |
| | — |
| | — |
| | — |
| | 1,287 |
| | — |
| | — |
| | 1,287 |
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Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,380 |
| | 4,380 |
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Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | (273 | ) | | — |
| | (273 | ) |
Balance April 22, 2018 | | 17,851 |
| | $ | 18 |
| | 4,871 |
| | $ | (201,443 | ) | | $ | 210,828 |
| | $ | (3,839 | ) | | $ | 387,140 |
| | 392,704 |
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Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — |
| | — |
| | (22 | ) | | 961 |
| | (545 | ) | | — |
| | — |
| | 416 |
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Non-cash stock compensation | | — |
| | — |
| | — |
| | — |
| | 1,069 |
| | — |
| | — |
| | 1,069 |
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Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,874 | ) | | (1,874 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | (497 | ) | | — |
| | (497 | ) |
Balance, July 15, 2018 | | 17,851 |
| | $ | 18 |
| | 4,849 |
| | $ | (200,482 | ) | | $ | 211,352 |
| | $ | (4,336 | ) | | $ | 385,266 |
| | $ | 391,818 |
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See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| | | | | | | | |
| | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 |
Cash flows from operating activities: | | | | |
Net income | | $ | 1,620 |
| | $ | 2,506 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 49,807 |
| | 51,516 |
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Gift card breakage | | (4,320 | ) | | (1,673 | ) |
Unpaid other charges | | 15,964 |
| | 14,537 |
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Deferred income tax (benefit) provision | | (21,526 | ) | | (7,766 | ) |
Stock-based compensation expense | | 1,415 |
| | 2,356 |
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Other, net | | 560 |
| | 709 |
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Changes in operating assets and liabilities: | | | | |
Accounts receivable | | 12,132 |
| | 14,070 |
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Prepaid expenses and other current assets | | 3,459 |
| | 13,744 |
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Trade accounts payable and accrued liabilities | | (7,388 | ) | | (732 | ) |
Unearned revenue | | (11,343 | ) | | (13,591 | ) |
Other operating assets and liabilities, net | | 1,366 |
| | 1,344 |
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Net cash provided by operating activities | | 41,746 |
| | 77,020 |
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Cash flows from investing activities: | | | | |
Purchases of property, equipment, and intangible assets | | (21,168 | ) | | (27,319 | ) |
Proceeds from sales of real estate and property, plant, and equipment and other investing activities | | 178 |
| | 115 |
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Net cash used in investing activities | | (20,990 | ) | | (27,204 | ) |
Cash flows from financing activities: | | | | |
Borrowings of long-term debt | | 162,000 |
| | 160,500 |
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Payments of long-term debt and finance leases | | (174,464 | ) | | (205,870 | ) |
Purchase of treasury stock | | (1,475 | ) | | — |
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Proceeds from exercise of stock options and employee stock purchase plan | | 693 |
| | 732 |
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Net cash used in financing activities | | (13,246 | ) | | (44,638 | ) |
Effect of exchange rate changes on cash | | 115 |
| | (996 | ) |
Net change in cash and cash equivalents | | 7,625 |
| | 4,182 |
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Cash and cash equivalents, beginning of period | | 18,569 |
| | 17,714 |
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Cash and cash equivalents, end of period | | $ | 26,194 |
| | $ | 21,896 |
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Supplemental disclosure of cash flow information | | | | |
Income taxes paid | | $ | 2,742 |
| | $ | 991 |
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Interest paid, net of amounts capitalized | | $ | 5,482 |
| | $ | 5,411 |
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Change in construction related payables | | $ | 1,883 |
| | $ | 2,127 |
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See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin” or the “Company”), primarily develops, operates, and franchises full-service restaurants in North America. As of July 14, 2019, the Company owned and operated 472 restaurants located in 39 states and two Canadian provinces. The Company also had 90 franchised full-service restaurants in 16 states as of July 14, 2019. The Company operates its business as one operating and one reportable segment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Red Robin and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for any interim period are not necessarily indicative of results for the full year.
The accompanying condensed consolidated financial statements of Red Robin have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of December 30, 2018 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements. For further information, please refer to and read these interim condensed consolidated financial statements in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on February 27, 2019.
The Company’s quarter that ended July 14, 2019 is referred to as second quarter 2019, or the twelve weeks ended July 14, 2019; the first quarter ended April 21, 2019 is referred to as first quarter 2019; and together, the first and second quarters of 2019 are referred to as the twenty-eight weeks ended July 14, 2019. The Company’s quarter that ended July 15, 2018 is referred to as second quarter 2018, or the twelve weeks ended July 15, 2018; the first quarter ended April 22, 2018 is referred to as first quarter 2018; and together, the first and second quarters of 2018 are referred to as the twenty-eight weeks ended July 15, 2018. The Company’s fiscal year 2019 comprises 52 weeks and will end on December 29, 2019.
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform with the current period presentation. For the fiscal year ended December 30, 2018, the Company reclassified unfavorable lease rights of $1.4 million from Deferred rent to Other non-current liabilities on the condensed consolidated balance sheets. Management believes this presentation better reflects the nature of these liabilities subsequent to the adoption of Topic 842, as defined below.
2. Revenue
Disaggregation of revenue
In the following table, revenue is disaggregated by type of good or service (in thousands):
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 | | July 14, 2019 | | July 15, 2018 |
Restaurant revenue | | $ | 302,418 |
| | $ | 310,392 |
| | $ | 702,902 |
| | $ | 725,094 |
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Franchise revenue | | 4,389 |
| | 4,006 |
| | 9,752 |
| | 9,449 |
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Other revenue | | $ | 1,174 |
| | $ | 990 |
| | $ | 5,193 |
| | $ | 2,364 |
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Total revenues | | $ | 307,981 |
| | $ | 315,388 |
| | $ | 717,847 |
| | $ | 736,907 |
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Contract liabilities
Unearned gift card revenue at July 14, 2019 and December 30, 2018 was $29.4 million and $45.3 million. Deferred loyalty revenue, which was also included in Unearned revenue in the accompanying condensed consolidated balance sheets, was $10.3 million and $10.0 million at July 14, 2019 and December 30, 2018.
Revenue recognized in the condensed consolidated statements of operations and comprehensive income (loss) for the redemption of gift cards that were included in the liability balance at the beginning of the fiscal year was as follows (in thousands): |
| | | | | | | | |
| | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 |
Gift card revenue | | $ | 18,380 |
| | $ | 16,269 |
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3. Leases
Adoption of Financial Accounting Standards Board (“FASB”) ASU 2016-02
On January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842),” along with related clarifications and improvements using the modified retrospective approach without application to prior periods. This guidance requires the recognition of liabilities for lease obligations and corresponding right-of-use assets on the balance sheet and disclosure of key information about leasing arrangements. We applied the practical expedients that do not require us to reassess existing contracts for embedded leases, to separate lease and non-lease components for our population of operating assets, or to reassess lease classification or initial direct costs.
The effect of the changes made to our consolidated December 31, 2018 balance sheet as a result of the adoption of Topic 842 was as follows (in thousands):
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| | | | | | | | | | | | |
| | Balance at December 30, 2018 | | Adjustments due to Topic 842 | | Balance at December 31, 2018 |
| | | |
Balance sheet | | | | | | |
Non-current assets | | | | | | |
Right of use assets, net | | $ | — |
| | $ | 478,268 |
| | $ | 478,268 |
|
Prepaid expenses and other current assets | | 27,576 |
| | (6,592 | ) | | 20,984 |
|
| | | | | | |
Current liabilities | | | | | | |
Short-term portion of lease obligations | | 786 |
| | 40,606 |
| | 41,392 |
|
Non-current liabilities | | | | | |
|
Deferred Rent | | 75,675 |
| | (75,675 | ) | | — |
|
Long-term portion of lease obligations | | 9,414 |
| | 506,745 |
| | 516,159 |
|
| | | | | | |
Stockholders’ equity: | | | | | | |
Retained earnings | | $ | 376,341 |
| | $ | (15,172 | ) | | $ | 361,169 |
|
This change did not have any impact on our consolidated statement of operations or consolidated statement of cash flows.
Leases
The Company leases land, buildings, and equipment used in its operations under operating and finance leases. Our leases generally have remaining terms of 1-15 years, most of which include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.
We determine if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. We estimate this rate based on comparable company and credit analysis, prevailing financial market conditions, comparable company and credit analysis, as well as management judgment.
Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
Some of our leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Leases are included in right-of-use assets, net, short-term portion of lease obligations, and long-term portion of lease liabilities on our condensed consolidated balance sheet as of July 14, 2019 as follows (in thousands):
|
| | | | | | | | | | | | |
| | Finance | | Operating | | Total |
Right of use assets, net | | $ | 8,878 |
| | $ | 439,474 |
| | $ | 448,352 |
|
| | | | | | |
Short-term portion of lease obligations | | 931 |
| | 41,205 |
| | 42,136 |
|
Long-term portion of lease obligations | | 10,459 |
| | 492,571 |
| | 503,030 |
|
Total | | $ | 11,390 |
| | $ | 533,776 |
| | $ | 545,166 |
|
We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.
The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, are included in occupancy on our condensed consolidated statement of operations as follows (in thousands):
|
| | | | | | | | |
| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 14, 2019 |
Operating lease cost | | $ | 17,442 |
| | $ | 41,114 |
|
Finance lease cost | | | | |
Amortization of right of use assets | | 193 |
| | 441 |
|
Interest on lease liabilities | | 125 |
| | 294 |
|
Total finance lease cost | | 318 |
| | 735 |
|
Variable lease cost | | 6,647 |
| | 15,532 |
|
Total | | $ | 24,407 |
| | $ | 57,381 |
|
Maturities of our lease liabilities as of July 14, 2019 were as follows (in thousands):
|
| | | | | | | | | | | |
| Finance Leases | | Operating Leases | | Total |
Remainder of 2019 | $ | 626 |
| | $ | 32,754 |
| | $ | 33,380 |
|
2020 | 1,396 |
| | 78,506 |
| | 79,902 |
|
2021 | 1,437 |
| | 77,773 |
| | 79,210 |
|
2022 | 1,283 |
| | 75,260 |
| | 76,543 |
|
2023 | 1,220 |
| | 72,931 |
| | 74,151 |
|
Thereafter | 8,828 |
| | 469,432 |
| | 478,260 |
|
Total future lease liability | 14,790 |
| | 806,656 |
| | 821,446 |
|
Less imputed interest | 3,400 |
| | 272,880 |
| | 276,280 |
|
Fair value of lease liability | $ | 11,390 |
| | $ | 533,776 |
| | $ | 545,166 |
|
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting guidance, maturities of lease liabilities were as follows as of December 30, 2018 (in thousands):
|
| | | | | | | | |
| | Capital Leases | | Operating Leases |
2019 | | $ | 1,234 |
| | $ | 80,367 |
|
2020 | | 1,242 |
| | 76,936 |
|
2021 | | 1,240 |
| | 70,419 |
|
2022 | | 1,063 |
| | 61,649 |
|
2023 | | 1,019 |
| | 54,121 |
|
Thereafter | | 7,552 |
| | 206,879 |
|
Total | | 13,350 |
| | $ | 550,371 |
|
Less amount representing interest | | (3,150 | ) | | |
|
Present value of future minimum lease payments | | 10,200 |
| | |
|
Less current portion | | (786 | ) | | |
|
Long-term capital lease obligations | | $ | 9,414 |
| | |
|
Supplemental cash flow information related to leases is as follows:
|
| | | | |
| | Twenty-Eight Weeks Ended |
| | July 14, 2019 |
Cash paid for amounts included in the measurement of lease liabilities (in thousands): | | $ | 40,129 |
|
Right of use assets obtained in exchange for operating lease obligations following the adoption of Topic 842 (in thousands): | | $ | 7,022 |
|
Right of use assets obtained in exchange for finance lease obligations following the adoption of Topic 842 (in thousands): | | $ | 1,669 |
|
| | |
Other information related to operating leases as follows: | | |
Weighted average remaining lease term | | 11 years |
|
Weighted average discount rate | | 7.35 | % |
| | |
Other information related to financing leases as follows: | | |
Weighted average remaining lease term | | 12 years |
|
Weighted average discount rate | | 4.74 | % |
4. Goodwill and Intangible Assets
The following table presents goodwill as of July 14, 2019 and December 30, 2018 (in thousands): |
| | | | |
Balance, December 30, 2018 | | $ | 95,838 |
|
Foreign currency translation adjustment | | 615 |
|
Balance, July 14, 2019 | | $ | 96,453 |
|
The Company recorded no goodwill impairment losses in the period presented in the table above or any prior periods.
The following table presents intangible assets as of July 14, 2019 and December 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | July 14, 2019 | | December 30, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Intangible assets subject to amortization: | | | | | | | | | | | | |
Franchise rights | | $ | 53,736 |
| | $ | (34,580 | ) | | $ | 19,156 |
| | $ | 54,404 |
| | $ | (33,160 | ) | | $ | 21,244 |
|
Favorable leases | | 13,001 |
| | (8,490 | ) | | 4,511 |
| | 13,001 |
| | (8,136 | ) | | 4,865 |
|
Liquor licenses and other | | 10,730 |
| | (9,786 | ) | | 944 |
| | 10,810 |
| | (9,770 | ) | | 1,040 |
|
| | $ | 77,467 |
| | $ | (52,856 | ) | | $ | 24,611 |
| | $ | 78,215 |
| | $ | (51,066 | ) | | $ | 27,149 |
|
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Liquor licenses and other | | $ | 7,460 |
| | $ | — |
| | $ | 7,460 |
| | $ | 7,460 |
| | $ | — |
| | $ | 7,460 |
|
Intangible assets, net | | $ | 84,927 |
| | $ | (52,856 | ) | | $ | 32,071 |
| | $ | 85,675 |
| | $ | (51,066 | ) | | $ | 34,609 |
|
5. Earnings Per Share
Basic earnings per share amounts are calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share amounts are calculated based upon the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares are excluded from the computation in periods in which they have an anti-dilutive effect. Diluted earnings per share reflect the potential dilution that could occur if holders of options exercised their options into common stock.
The Company uses the treasury stock method to calculate the effect of outstanding stock options. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
|
| | | | | | | | | | | |
| Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
| July 14, 2019 | | July 15, 2018 | | July 14, 2019 | | July 15, 2018 |
Basic weighted average shares outstanding | 12,970 |
| | 12,982 |
| | 12,969 |
| | 12,979 |
|
Dilutive effect of stock options and awards | 73 |
| | — |
| | 78 |
| | 101 |
|
Diluted weighted average shares outstanding | 13,043 |
| | 12,982 |
| | 13,047 |
| | 13,080 |
|
| | | | | | | |
Awards excluded due to anti-dilutive effect on diluted earnings per share | 378 |
| | 344 |
| | 457 |
| | 298 |
|
6. Other Charges
Other charges consist of the following (in thousands): |
| | | | | | | | | | | | | | | | |
| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 | | July 14, 2019 | | July 15, 2018 |
Asset impairment | | $ | 14,064 |
| | $ | 9,643 |
| | $ | 14,064 |
| | $ | 9,643 |
|
Executive transition and severance | | 370 |
| | — |
| | 2,364 |
| | — |
|
Restaurant closure costs | | 1,001 |
| | — |
| | 1,305 |
| | — |
|
Board and shareholder matter costs | | 1,152 |
| | — |
| | 1,152 |
| | — |
|
Litigation contingencies | | — |
| | — |
| | — |
| | 4,000 |
|
Reorganization costs | | — |
| | 466 |
| | — |
| | 2,753 |
|
Spiral menu disposal | | — |
| | 506 |
| | — |
| | 506 |
|
Executive retention | | 260 |
| | — |
| | 360 |
| | — |
|
Other charges | | $ | 16,847 |
| | $ | 10,615 |
| | $ | 19,245 |
| | $ | 16,902 |
|
In second quarter 2019, the Company determined 29 Company-owned restaurants were impaired and recognized a non-cash impairment charge of $14.1 million. In second quarter 2018, the Company determined eight Company-owned restaurants were impaired and recognized a non-cash impairment charge of $9.6 million. The Company recognized the impairment charges resulting from the continuing and projected future results of these restaurants, primarily through projected cash flows.
7. Borrowings
Long-term debt as of July 14, 2019 and December 30, 2018 was $181.4 million and $193.4 million.
On June 30, 2016, the Company entered into a credit facility (the “Credit Facility”), which provides for a $400 million revolving line of credit with a sublimit for the issuance of up to $25 million in letters of credit and swingline loans up to $15 million. On August 19, 2019, the Company entered into a second amendment (the “Amendment”) to the Credit Facility. The Amendment increases the lease adjusted leverage ratio to 5.0x through December 29, 2019 before returning to 4.75x thereafter. In addition, the Amendment revises the definition of permitted acquisitions under the Credit Facility to correspond with the change to the lease adjusted leverage ratio and clarifies the classification of existing capital and operating leases. A copy of the Amendment is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.
The Company’s lease adjusted leverage ratio was 4.30x as of July 14, 2019. The lease adjusted leverage ratio is defined in Section 1.1 of the Company’s credit facility, which is filed as Exhibit 10.32 to the Annual Report on Form 10-K filed on February 21, 2017.
The Credit Facility matures on June 30, 2021. As of July 14, 2019, the Company had outstanding borrowings under the Credit Facility of $180.5 million, in addition to amounts issued under letters of credit of $7.4 million, which reduced the amount available under the facility but were not recorded as debt. As of December 30, 2018, the Company had outstanding borrowings under the Credit Facility of $192.5 million, in addition to amounts issued under letters of credit of $7.8 million.
Loan origination costs associated with the Credit Facility are included as deferred costs in Other assets, net in the accompanying condensed consolidated balance sheets. Unamortized debt issuance costs were $1.3 million and $1.7 million as of July 14, 2019 and December 30, 2018.
8. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short term nature or maturity of the instruments.
The following tables present the Company’s assets measured at fair value on a recurring basis as of July 14, 2019 and December 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | July 14, 2019 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Investments in rabbi trust | | $ | 6,808 |
| | $ | 6,808 |
| | $ | — |
| | $ | — |
|
Total assets measured at fair value | | $ | 6,808 |
| | $ | 6,808 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
| | December 30, 2018 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Investments in rabbi trust | | $ | 8,198 |
| | $ | 8,198 |
| | $ | — |
| | $ | — |
|
Total assets measured at fair value | | $ | 8,198 |
| | $ | 8,198 |
| | $ | — |
| | $ | — |
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
As of July 14, 2019 and December 30, 2018, the Company measured non-financial assets for impairment using continuing and projected future cash flows, as discussed in Note 6, Other Charges, which were based on significant inputs not observable in the market and thus represented a level 3 fair value measurement.
Disclosures of Fair Value of Other Assets and Liabilities
The Company’s liabilities under its Credit Facility and finance leases are carried at historical cost in the accompanying condensed consolidated balance sheets. Both the Credit Facility and the Company’s finance lease obligations are measured using level 2 inputs. The carrying value of the Credit Facility approximates fair value as the interest rate on this instrument approximates current market rates. For disclosure purposes, the Company estimated the fair value of the finance lease obligations using discounted cash flow analysis based on market rates obtained from independent third parties for similar types of debt.
The following table presents the carrying value and estimated fair value of the Company’s finance lease obligations as of July 14, 2019 and December 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | July 14, 2019 | | December 30, 2018 |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Finance lease obligations | | $ | 11,405 |
| | $ | 10,977 |
| | $ | 10,200 |
| | $ | 10,143 |
|
9. Commitments and Contingencies
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. These include employment-related claims and claims alleging illness, injury, or other food quality, health, or operational issues. Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. We review the adequacy of accruals and disclosures pertaining to litigation matters each quarter in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the consolidated financial statements. While it is not possible to predict the outcome of these claims with certainty, management is of the opinion that adequate provision for potential losses associated with these matters has been made in the condensed consolidated financial statements.
During the twenty-eight weeks ended July 15, 2018, the Company recorded $4.0 million of litigation contingencies for employment-related claims.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying condensed consolidated financial statements. All comparisons under this heading between 2019 and 2018 refer to the twelve and twenty-eight week periods ending July 14, 2019 and July 15, 2018, unless otherwise indicated.
Overview
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin,” “we,” “us,” “our” or the “Company”), primarily develops, operates, and franchises full-service restaurants with 562 locations in North America. As of July 14, 2019, the Company operated 472 Company-owned restaurants located in 39 states and two Canadian provinces. The Company also had 90 franchised full-service restaurants in 16 states as of July 14, 2019. The Company operates its business as one operating and one reportable segment.
The following summarizes the operational and financial highlights during the twelve and twenty-eight weeks ended July 14, 2019:
| |
◦ | Restaurant revenue decreased $8.0 million, or 2.6%, to $302.4 million for the twelve weeks ended July 14, 2019, as compared to the twelve weeks ended July 15, 2018, due to a $4.4 million, or 1.5%, decrease in comparable restaurant revenue, and a $4.2 million decrease from closed restaurants, partially offset by a $0.6 million increase in revenue from late 2018 new restaurant openings. Restaurant revenue decreased $22.2 million, or 3.1%, to $702.9 million for the twenty-eight weeks ended July 14, 2019, as compared to the twenty-eight weeks ended July 15, 2018, due to a $16.8 million, or 2.4%, decrease in comparable restaurant revenue, a $7.1 million decrease from closed restaurants, and a $0.9 million unfavorable foreign currency exchange impact partially offset by a $2.6 million increase in revenue from late 2018 new restaurant openings. |
| |
◦ | Restaurant operating costs, as a percentage of restaurant revenue, increased 110 basis points to 81.8% for the twelve weeks ended July 14, 2019, as compared to 80.7% for the twelve weeks ended July 15, 2018. For the twenty-eight weeks ended July 14, 2019, restaurant operating costs, as a percentage of restaurant revenue increased 140 basis points to 81.7%, as compared to 80.3% for the same period in 2018. The increase was due to higher labor and other operating costs, offset by a decrease in food and beverage costs as a percentage of restaurant revenue. |
| |
◦ | Net income was $1.0 million for the twelve weeks ended July 14, 2019 compared to a net loss of $1.9 million for the twelve weeks ended July 15, 2018. Diluted earnings per share were $0.08 for the twelve weeks ended July 14, 2019, as compared to diluted loss per share of $0.14 for the twelve weeks ended July 15, 2018. Excluding charges of $0.80 for impairment expenses, $0.07 for board and shareholder matter costs, $0.05 for restaurant closure costs, $0.02 for executive transition and severance, and $0.01 for executive retention, adjusted earnings per diluted share for the second quarter ended July 14, 2019 were $1.03. Excluding charges of $0.54 for asset impairment, $0.03 for spiral menu disposal, and $0.03 for reorganization costs, adjusted earnings per diluted share for the second quarter ended July 15, 2018 were $0.46. Net income was $1.6 million for the twenty-eight weeks ended July 14, 2019 compared to net income of $2.5 million for the twenty-eight weeks ended July 15, 2018. Diluted earnings per share were $0.12 for the twelve weeks ended July 14, 2019, as compared to diluted earnings per share of $0.19 for the twenty-eight weeks ended July 15, 2018. Excluding the impact of $0.80 per diluted share for impairment expenses, $0.13 for executive transition and severance, $0.08 for restaurant closure costs, $0.07 for board and shareholder matter costs, and $0.02 for executive retention, net income per diluted share for the twenty-eight weeks ended July 14, 2019 was $1.22. Excluding the impact of $0.54 per diluted share for asset impairment, $0.23 per diluted share for litigation contingencies, $0.16 per diluted share for reorganization costs, and $0.03 per diluted share for the disposal of spiral menus, net income per diluted share for the twenty-eight weeks ended July 15, 2018 was $1.15. |
| |
• | Marketing. Our Red Robin Royalty™ loyalty program operates in all our U.S. and Canadian Company-owned Red Robin restaurants and has been rolled out to most of our franchised restaurants. We engage our guests through Red Robin Royalty with offers designed to increase frequency of visits as a key part of our overall marketing strategy. We also inform enrolled guests early about new menu items to generate awareness and trial of these offerings. Our media buying approach is concentrated on generating significant reach and frequency while on-air. In addition, we use digital, social, and earned media to target and more effectively reach specific segments of our guest base. |
Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:
|
| | | | | | | | | | | | |
| | Twelve Weeks Ended | | Twenty Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 | | July 14, 2019 | | July 15, 2018 |
Company-owned: | | | | | | | | |
Beginning of period | | 483 |
| | 484 |
| | 484 |
| | 480 |
|
Opened during the period | | — |
| | 2 |
| | — |
| | 6 |
|
Closed during the period(1) | | (11 | ) | | (2 | ) | | (12 | ) | | (2 | ) |
End of period | | 472 |
| | 484 |
| | 472 |
| | 484 |
|
Franchised: | | | | | | | | |
Beginning of period | | 89 |
| | 87 |
| | 89 |
| | 86 |
|
Opened during the period | | 1 |
| | 1 |
| | 1 |
| | 2 |
|
End of period | | 90 |
| | 88 |
| | 90 |
| | 88 |
|
Total number of restaurants | | 562 |
| | 572 |
| | 562 |
| | 572 |
|
_________________________________________________________
(1) Restaurants closed during the twelve weeks ended July 14, 2019 include the permanent closure of ten restaurants and the temporary closure of one restaurant. Restaurants closed during the twenty-eight weeks ended July 14, 2019 include the permanent closure of eleven restaurants, and the temporary closure of one restaurant. Restaurants closed in the twelve and twenty-eight week periods ended July 15, 2018 consisted entirely of permanently closed restaurants.
Results of Operations
Operating results for each fiscal period presented below are expressed as a percentage of total revenues, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue.
This information has been prepared on a basis consistent with our audited 2018 annual financial statements, with the exception of changes made due to the adoption of Topic 842, and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our operating results may fluctuate significantly as a result of a variety of factors, and operating results for any period presented are not necessarily indicative of results for a full fiscal year.
|
| | | | | | | | | | | | |
| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 | | July 14, 2019 | | July 15, 2018 |
Revenues: | | | | | | | | |
Restaurant revenue | | 98.2 | % | | 98.4 | % | | 97.9 | % | | 98.4 | % |
Franchise royalties, fees, and other revenues | | 1.8 |
| | 1.6 |
| | 2.1 |
| | 1.6 |
|
Total revenues | | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
| | | | | | | | |
Costs and expenses: | | | | | | | | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | |
Cost of sales | | 23.9 |
| | 24.1 |
| | 23.6 |
| | 23.9 |
|
Labor | | 35.2 |
| | 34.3 |
| | 35.5 |
| | 34.4 |
|
Other operating | | 14.2 |
| | 13.7 |
| | 14.0 |
| | 13.5 |
|
Occupancy | | 8.4 |
| | 8.5 |
| | 8.6 |
| | 8.5 |
|
Total restaurant operating costs | | 81.8 |
| | 80.7 |
| | 81.7 |
| | 80.3 |
|
Depreciation and amortization | | 6.9 |
| | 7.1 |
| | 6.9 |
| | 7.0 |
|
Selling, general, and administrative | | 11.4 |
| | 11.3 |
| | 11.6 |
| | 11.1 |
|
Pre-opening costs | | — |
| | 0.2 |
| | — |
| | 0.2 |
|
Other charges | | 5.5 |
| | 3.4 |
| | 2.7 |
| | 2.3 |
|
Income from operations | | (4.2 | ) | | (1.3 | ) | | (1.3 | ) | | 0.4 |
|
| | | | | | | | |
Interest expense, net and other | | 0.7 |
| | 0.8 |
| | 0.8 |
| | 0.8 |
|
Income before income taxes | | (4.9 | ) | | (2.1 | ) | | (2.1 | ) | | (0.4 | ) |
Income tax benefit | | (5.2 | ) | | (1.5 | ) | | (2.3 | ) | | (0.7 | ) |
Net income | | 0.3 | % | | (0.6 | )% | | 0.2 | % | | 0.3 | % |
___________________________________
Certain percentage amounts in the table above do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues.
Revenues |
| | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(Revenues in thousands) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Restaurant revenue | | $ | 302,418 |
| | $ | 310,392 |
| | (2.6 | )% | | $ | 702,902 |
| | $ | 725,094 |
| | (3.1 | )% |
Franchise and other revenue | | 5,563 |
| | 4,996 |
| | 11.3 | % | | 14,945 |
| | 11,813 |
| | 26.5 | % |
Total revenues | | $ | 307,981 |
| | $ | 315,388 |
| | (2.3 | )% | | $ | 717,847 |
| | $ | 736,907 |
| | (2.6 | )% |
Average weekly sales volumes in Company-owned restaurants(1) | | $ | 52,907 |
| | $ | 53,266 |
| | (0.7 | )% | | $ | 52,272 |
| | $ | 53,470 |
| | (2.2 | )% |
Total operating weeks | | 5,716 |
| | 5,827 |
| | (1.9 | )% | | 13,447 |
| | 13,544 |
| | (0.7 | )% |
Restaurant revenue per square foot | | $ | 102 |
| | $ | 104 |
| | (1.9 | )% | | $ | 236 |
| | $ | 243 |
| | (2.9 | )% |
_________________________________________________________
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(1) | Calculated using constant currency rates. Using historical currency rates, the average weekly sales per unit for the twelve and twenty-eight weeks ended July 15, 2018 for Company-owned restaurants was $53,268 and $53,536, respectively. The Company calculates non-GAAP constant currency average weekly sales per unit by translating prior year local currency average weekly sales per unit to U.S. dollars based on current quarter average exchange rates. The Company considers non-GAAP constant currency average weekly sales per unit to be a useful metric to investors and management as they facilitate a more useful comparison of current performance to historical performance. |
Restaurant revenue for the twelve weeks ended July 14, 2019, which comprises primarily food and beverage sales, decreased $8.0 million, or 2.6%, as compared to second quarter 2018. The decrease was due to a $4.4 million, or 1.5%, decrease in comparable restaurant revenue and a $4.2 million decrease from closed restaurants, partially offset by a $0.6 million increase in revenue from late 2018 new restaurant openings. The comparable restaurant revenue decrease was driven by a 6.4% decrease in guest counts offset by a 4.9% increase in average guest check. The increase in average guest check resulted from a 2.6% increase in pricing and a 2.3% increase in menu mix. The increase in menu mix was primarily driven by our current menu and promotional strategy, resulting in lower Tavern burger sales and higher Finest burger and entrée sales.
Restaurant revenue for the twenty-eight weeks ended July 14, 2019, decreased $22.2 million or 3.1%, as compared to the twenty-eight weeks ended July 15, 2018. The decrease was due to a $16.8 million, or 2.4%, decrease in comparable restaurant revenue, a $7.1 million decrease from closed restaurants, and a $0.9 million unfavorable foreign currency exchange impact partially offset by $2.6 million increase in revenue from late 2018 new restaurant openings. The comparable restaurant revenue decrease was driven by a 5.9% decrease in guest counts offset by a 3.5% increase in average guest check. The increase in average guest check resulted from a 2.2% increase in pricing and a 1.3% increase in menu mix. The increase in menu mix was primarily driven by our current menu and promotional strategy, resulting in lower Tavern burger sales and higher Finest burger and entrée sales.
We are focusing on opportunities to improve our service execution, which we believe will drive increased guest counts and comparable restaurant revenue.
Average weekly sales volumes represent the total restaurant revenue for all Company-owned Red Robin restaurants for each time period presented, divided by the number of operating weeks in the period. Comparable restaurant revenues include those restaurants that are in the comparable base at the end of each period presented. New restaurants are restaurants that are open but not included in the comparable category because they have not operated for five full quarters. Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes as well as the performance of new and acquired restaurants during the period and the average square footage of our restaurants.
Franchise and other revenue increased $0.6 million for the twelve weeks ended July 14, 2019 compared to the twelve weeks ended July 15, 2018 and increased $3.1 million for the twenty-eight weeks ended July 14, 2019 compared to the twenty-eight weeks ended July 15, 2018, primarily due to an increase in gift card breakage. Our franchisees reported a comparable restaurant revenue decrease of 2.8% for the twelve weeks ended July 14, 2019 compared to the twelve weeks ended July 15, 2018 and a decrease of 2.2% for the twenty-eight weeks ended July 14, 2019 compared to the twenty eight weeks ended July 15, 2018.
Cost of Sales
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(In thousands, except percentages) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Cost of sales | | $ | 72,387 |
| | $ | 74,874 |
| | (3.3 | )% | | $ | 166,102 |
| | $ | 173,389 |
| | (4.2 | )% |
As a percent of restaurant revenue | | 23.9 | % | | 24.1 | % | | (0.2 | )% | | 23.6 | % | | 23.9 | % | | (0.3 | )% |
Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales volume. Cost of sales as a percentage of restaurant revenue decreased 20 basis points for the twelve weeks ended July 14, 2019 as compared to the same period in 2018, and decreased 30 basis points for the twenty-eight weeks ended July 14, 2019 as compared to the same period in 2018. The decrease was mainly driven by reduction in waste and lower Tavern mix.
Labor
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(In thousands, except percentages) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Labor | | $ | 106,538 |
| | $ | 106,476 |
| | 0.1 | % | | $ | 249,432 |
| | $ | 249,491 |
| | — | % |
As a percent of restaurant revenue | | 35.2 | % | | 34.3 | % | | 0.9 | % | | 35.5 | % | | 34.4 | % | | 1.1 | % |
Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. For the twelve weeks ended July 14, 2019, labor as a percentage of restaurant revenue increased 90 basis points compared to the same period in 2018. The increase was primarily driven by sales deleverage.
For the twenty-eight weeks ended July 14, 2019, labor as a percentage of restaurant revenue increased 110 basis points compared to the same period in 2018. The increase was primarily driven by increases in minimum wage rates in certain jurisdictions, increased management headcount to allow our restaurants to become fully staffed in support of our focus on operational execution, and sales deleverage.
Other Operating
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(In thousands, except percentages) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Other operating | | $ | 43,000 |
| | $ | 42,668 |
| | 0.8 | % | | $ | 98,565 |
| | $ | 97,693 |
| | 0.9 | % |
As a percent of restaurant revenue | | 14.2 | % | | 13.7 | % | | 0.5 | % | | 14.0 | % | | 13.5 | % | | 0.5 | % |
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. For the twelve and twenty-eight week periods ended July 14, 2019, Other operating costs as a percentage of restaurant revenue increased 50 basis points as compared to the same periods in 2018. The increase was primarily due to higher costs of third-party delivery fees, partially offset by a decrease in restaurant supplies.
Occupancy
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(In thousands, except percentages) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Occupancy | | $ | 25,458 |
| | $ | 26,460 |
| | (3.8 | )% | | $ | 60,478 |
| | $ | 61,470 |
| | (1.6 | )% |
As a percent of restaurant revenue | | 8.4 | % | | 8.5 | % | | (0.1 | )% | | 8.6 | % | | 8.5 | % | | 0.1 | % |
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. Occupancy costs incurred prior to opening our new restaurants are included in pre-opening costs. For the twelve and twenty-eight week periods ended July 14, 2019, occupancy costs as a percentage of restaurant revenue remained flat over the same periods in 2018. Our fixed rents for the twelve weeks ended July 14, 2019 and July 15, 2018 were $17.0 million and $17.7 million, a decrease of $0.7 million due to 10 net locations permanently closed during the period. Our fixed rents for the twenty-eight weeks ended July 14, 2019 and July 15, 2018 were $40.2 million and $41.2 million, a decrease of $1.0 million due to 11 net locations permanently closed during the period.
Depreciation and Amortization
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(In thousands, except percentages) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Depreciation and amortization | | $ | 21,369 |
| | $ | 22,323 |
| | (4.3 | )% | | $ | 49,807 |
| | $ | 51,516 |
| | (3.3 | )% |
As a percent of total revenues | | 6.9 | % | | 7.1 | % | | (0.2 | )% | | 6.9 | % | | 7.0 | % | | (0.1 | )% |
Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of acquired franchise rights, leasehold interests, and certain liquor licenses. For the twelve and twenty-eight week periods ended July 14, 2019, depreciation and amortization expense as a percentage of revenue remained flat over the same periods in 2018.
Selling, General, and Administrative
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(In thousands, except percentages) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Selling, general, and administrative | | $ | 35,234 |
| | $ | 35,617 |
| | (1.1 | )% | | $ | 83,350 |
| | $ | 81,935 |
| | 1.7 | % |
As a percent of total revenues | | 11.4 | % | | 11.3 | % | | 0.1 | % | | 11.6 | % | | 11.1 | % | | 0.5 | % |
Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include marketing and advertising costs; corporate, regional, and franchise support salaries and benefits; travel; professional and consulting fees; corporate information systems; legal expenses; office rent; training; and board of directors expenses.
Selling, general, and administrative costs in the twelve weeks ended July 14, 2019 decreased $0.4 million, or 1.1%, as compared to the same period in 2018. The decrease was primarily due to lower media spend, partially offset by increases in professional and legal fees. For the twenty-eight weeks ended July 14, 2019, selling, general, and administrative costs increased $1.4 million, or 1.7%, as compared to the same period in 2018. The increase was primarily related to an increase in professional services and higher wages.
Pre-opening Costs
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| | Twelve Weeks Ended | | Twenty-Eight Weeks Ended |
(In thousands, except percentages) | | July 14, 2019 | | July 15, 2018 | | Percent Change | | July 14, 2019 | | July 15, 2018 | | Percent Change |
Pre-opening costs | | $ | — |
| | $ | 569 |
| | (100.0 | )% | | $ | 319 |
| | $ | 1,706 |
| | (81.3 | )% |
As a percent of total revenues | | — | % | | 0.2 | % | | (0.2 | )% | | — | % | | 0.2 | % | | (0.2 | )% |
Pre-opening costs, which are expensed as incurred, comprise the costs of labor, hiring, and training the initial work force for our new restaurants and new initiatives; occupancy costs incurred prior to opening; travel expenses for our training teams; the cost of food and beverages used in training; licenses and marketing; supply costs; and other direct costs related to the opening of new restaurants. Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants. Pre-opening costs for any given quarter will typically include expenses associated with restaurants opened during the quarter as well as expenses related to restaurants opening in subsequent quarters.
We incurred no pre-opening costs during the twelve weeks ended July 14, 2019. Pre-opening costs decreased $1.4 million for the twenty-eight weeks ended July 14, 2019 as compared to the same period in 2018. The decrease was primarily due to fewer openings during the twenty-eight week period ended July 14, 2019 as compared to the same period in 2018.
Interest Expense, Net and Other
Interest expense, net and other was $2.2 million for the twelve weeks ended July 14, 2019, a decrease of $0.2 million, or 9.7%, from the same period in 2018. Interest expense, net and other was $5.4 million for the twenty-eight weeks ended July 14, 2019, a decrease of $0.4 million, or 6.9%, from the same period in 2018. The decrease was primarily related to recognizing a gain on the Company’s deferred compensation plan assets compared to a loss the same period a year ago. Our weighted average interest rate was 5.2% and 5.0% for the twelve week and twenty-eight weeks ended July 14, 2019, as compared to 4.5% and 4.3% for the twelve and twenty-eight weeks ended July 15, 2018.
Provision for Income Taxes
The effective tax benefit for the twelve weeks ended July 14, 2019 was 106.5%, compared to 71.6% benefit for the twelve weeks ended July 15, 2018. The effective tax benefit for the twenty-eight weeks ended July 14, 2019 and July 15, 2018 was 110.9% and 183.9%. The change in both the twelve and twenty-eight week effective tax benefits are primarily due to the decrease in income compared to the same period a year ago.
Liquidity and Capital Resources
Cash and cash equivalents increased 7.6 million to $26.2 million at July 14, 2019, from $18.6 million at the beginning of the fiscal year. We expect to continue to reinvest available cash flows from operations to pay down debt, maintain existing restaurants and infrastructure, execute our long-term strategic initiatives, and repurchase our common stock.
Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands):
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| | Twenty-Eight Weeks Ended |
| | July 14, 2019 | | July 15, 2018 |
Net cash provided by operating activities | | $ | 41,746 |
| | $ | 77,020 |
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