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RRGB > SEC Filings for RRGB > Form 10-Q on 4-Nov-2011All Recent SEC Filings

Show all filings for RED ROBIN GOURMET BURGERS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RED ROBIN GOURMET BURGERS INC


4-Nov-2011

Quarterly Report


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 2011 and 2010 refer to the twelve and forty week periods ending October 2, 2011 and October 3, 2010, respectively, unless otherwise indicated.

Overview

Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin" or the "Company"), develops and operates casual-dining restaurants. At October 2, 2011, the Company operated 323 company-owned restaurants located in 32 states. The Company operates its business as one operating and one reportable segment. The Company also franchises its restaurants, of which there were 137 restaurants in 21 states and two Canadian provinces as of October 2, 2011.

We have identified and continue to examine opportunities that will drive strong financial performance through both revenue growth and improved expense management. We also see opportunities in both the short and long term to optimize the allocation of our capital. We have built key short and long-term strategies and initiatives around these opportunities, which we have named collectively "Project RED".

The following summarizes the operational and financial highlights during the twelve and forty weeks of fiscal 2011:

† New Restaurant Openings. We opened two and nine company-owned restaurants during the twelve and forty weeks ended October 2, 2011, respectively. We plan to open up to three additional company-owned restaurants in 2011 which we expect to fund from our operating cash flows.

† Comparable Restaurant Sales. Comparable restaurants include those Company-owned restaurants that have achieved five full quarters of operations during the periods presented. For those restaurants that entered the comparable restaurant pool during the current year, comparable sales on a year to date basis are calculated only for the period of time the restaurant reaches the full five quarters. Therefore, sales for such a restaurant can be split between comparable and non-comparable for year to date comparisons. For the twelve weeks ended October 2, 2011, the 306 restaurants in our comparable base experienced a 2.1% increase in gross sales from these same restaurants in the same period last year. This increase was driven by a 5.3% increase in average guest check, offset by a 3.2% decrease in guest count. For the forty weeks ended October 2, 2011, the restaurants in our comparable base experienced a 2.3% increase in gross sales from the same period last year, which was driven by a 3.3% increase in average guest check, offset by a 1.0% decrease in guest count.

† Marketing Efforts. We have executed a variety of revenue growth programs during the first forty weeks of 2011. During the first quarter of 2011, we launched our Red Royalty ™ loyalty program in all of our company-owned restaurants. We also implemented certain beverage programs including happy hour and beverage menu promotions that are aimed at increasing beverage sales, in particular alcohol beverages, in our restaurants. In the second quarter of 2011, we completed a nationwide roll-out of our new tri-fold menu, which included an estimated 1.5% price increase and new features. Finally, we have continued our limited time offer ("LTO") programs supported by national television media campaigns through the spring, summer and fall of 2011. We believe many of these activities have resulted in increases in our average guest check and sales of items per guest. At the beginning of fourth quarter 2011, we launched a new menu with a 0.9% price increase.

† Food Costs. As a percentage of restaurant revenue, we have seen an increase in cost of goods during the twelve and forty weeks ended October 2, 2011 compared to prior year. In particular, the cost of ground beef, which comprises approximately 12% to 13% of our cost of goods has increased approximately 5.5% and 11.5% for the twelve and forty weeks ended October 2, 2011, respectively, compared to the prior year and we expect ground beef pricing will continue to increase throughout 2011 and 2012. In addition, national and international supply-demand imbalances and other factors continue to increase commodity prices, which will have a negative effect on our costs of sales.

† Labor. Labor costs as a percentage of restaurant revenue decreased 200 basis points and 170 basis points for the twelve and forty weeks ended October 2, 2011 from the same periods in 2010. These decreases were primarily driven by the leverage from our higher average guest check, lower average rate per hour and increased productivity.

† Operating Expense Initiatives. Other operating expense categories saw declines as a percent of restaurant revenue through a variety of initiatives undertaken to reduce our operating costs and operating expenses as a percent of restaurant revenue in third quarter 2011 primarily due to improvements in expense management and leverage from higher revenues. We expect, in general, to see lower expenses as a percent of restaurant revenue throughout 2011 compared to 2010.


Table of Contents

Restaurant Data



The following table details restaurant unit data for our company-owned and
franchise locations for the periods indicated.



                                            Twelve Weeks Ended          Forty Weeks Ended
                                         October 2,    October 3,    October 2,    October 3,
                                            2011          2010          2011          2010
Company-owned:
Beginning of period                             321           309           314           306
Opened during period                              2             3             9             7
Closed during period                              -             -             -            (1 )
End of period                                   323           312           323           312

Franchised:
Beginning of period                             137           134           136           133
Opened during period                              -             -             2             3
Sold or closed during period                      -            (1 )          (1 )          (3 )
End of period                                   137           133           137           133

Total number of Red Robin restaurants           460           445           460           445


Table of Contents

Results of Operations

Operating results for each 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 2010 annual financial statements 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          Forty Weeks Ended
                                           October 2,    October 3,    October 2,    October 3,
                                              2011          2010          2011          2010
Revenues:
Restaurant                                       98.3 %        98.3 %        98.2 %        97.8 %
Franchise royalties and fees and other
revenues                                          1.7           1.7           1.8           2.2
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                                    25.5          24.4          25.2          24.4
Labor (includes 0.1%, 0.1%, 0.1%, and
0.1% of stock-based compensation
expense, respectively)                           33.6          35.6          33.8          35.5
Operating                                        14.4          15.2          13.9          14.7
Occupancy                                         7.6           7.3           7.2           7.4
Total restaurant operating costs                 81.2          82.5          80.2          82.0

Depreciation and amortization                     6.3           6.8           6.0           6.5
Selling, general, and administrative
(includes 0.3%, 0.7%, 0.2%, and 0.5% of
stock-based compensation expense,
respectively)                                    11.1          11.6          11.2          10.9
Pre-opening costs                                 0.3           0.4           0.4           0.3
Asset impairment                                  0.9           3.1           0.3           0.9
Income (loss) from operations                     1.6          (3.1 )         3.3           1.2

Interest expense, net and other                   0.8           0.6           0.6           0.6
Income (loss) before income taxes                 0.8          (3.7 )         2.7           0.5
Income tax expense (benefit)                     (0.2 )        (1.5 )         0.2          (0.2 )
Net income (loss)                                 1.0 %        (2.2 )%        2.5 %         0.8 %

Certain percentage amounts in the table above do not sum due to rounding as well as the fact that restaurant operating costs are expressed as a percentage of restaurant revenue, as opposed to total revenues.


Table of Contents

Total Revenues



                            Twelve Weeks Ended                        Forty Weeks Ended
                        October 2,      October 3,    Percent     October 2,     October 3,    Percent
                           2011            2010       Change         2011           2010        Change
Restaurant revenue
(1)                    $     202,679   $    191,612       5.8 %  $    696,338   $    657,094        6.0 %
Franchise royalties
and fees and other
revenue (1)                    3,565          3,231      10.3 %        12,531         14,602      (14.2 )%
Total revenues (1)     $     206,244   $    194,843       5.9 %  $    708,869   $    671,696        5.5 %
Average weekly gross
sales volumes:
Total restaurants      $      53,966   $     52,295       3.2 %  $     56,286   $     54,480        3.3 %
Operating weeks                3,870          3,730       3.8 %        12,726         12,341        3.1 %



(1) In thousands, except percentages

Restaurant revenue during the twelve weeks ended October 2, 2011, which is comprised almost entirely of food and beverage sales, increased by $11.1 million compared to third quarter 2010. Gross sales in our comparable restaurant base experienced an increase of approximately $4.0 million or 2.1% during the third quarter 2011. This increase was primarily the result of a 5.3% increase in average guest check partially offset by 3.2% decrease in guest counts. We believe the gross sales increase was driven by a combination of our second quarter menu price increase, the nationwide rollout of our tri-fold menu, and the Red Royalty loyalty program. Discounts related to our Red Royalty loyalty program are accounted for as a reduction of sales so that our net comparable restaurant sales increased 0.8%. Sales for non-comparable restaurants contributed an increase of $10.3 million, primarily all of which was attributed to sales from restaurants opened since the end of the third quarter of 2010.

Restaurant revenue for the forty week period ended October 2, 2011, increased $39.2 million, or 6.0%, from the same period in 2010. This was primarily the result of a 3.3% increase in the average guest check partially offset by a 1.0% decrease in guest counts. These gross sale increases were partially offset by an increase in sales discounts driven primarily from frequency rewards redeemed by our Red Royalty™ members. Discounts related to our Red Royalty loyalty program are accounted for as a reduction of sales so that our net comparable restaurant sales increased 1.7%. Gross sales for non-comparable restaurants contributed an increase of $31.7 million in restaurant revenue.

Average weekly sales volumes represent the total restaurant revenue, before discounts, for a population of restaurants in both a comparable and non-comparable category for each time period presented, divided by the number of operating weeks in the period. Comparable restaurant average weekly sales volumes include those restaurants that are in the comparable base at the end of each period presented. At the end of the third quarter 2011, there were 306 comparable restaurants. Non-comparable restaurants are primarily restaurants that are open but by definition not included in the comparable category because they haven't yet reached the five full quarters of operation. At the end of the third quarter 2011, there were 17 non-comparable restaurants. Fluctuations in average weekly sales volumes for comparable restaurants reflect the effect of same store sales changes as well as the performance of new restaurants entering the comparable base during the period.

Franchise royalties and fees, which consist primarily of royalty income and initial franchise fees, increased 8.6% and 7.5% for the twelve and forty weeks ended October 2, 2011, respectively. The twelve and forty week increase is primarily attributable to the increased sales at franchise locations and six new franchise locations opened since October 3, 2010. Our franchisees reported that comparable restaurant sales increased 2.1% for U.S. restaurants and increased 4.7% for Canadian restaurants for the third quarter of 2011 compared to the third quarter of 2010. For the forty weeks ended October 2, 2011, our franchisees reported that comparable restaurant sales for U.S. restaurants increased 2.4% and Canadian restaurants increased 2.0% from the forty week period ended October 3, 2010.

Other revenue consists primarily of gift card breakage. We recognized $0.3 million and $0.2 million, respectively, of gift card breakage for the twelve weeks ended October 2, 2011 and October 3, 2010. For the forty weeks ended October 2, 2011 and October 3, 2010, we recognized $1.3 million and $4.2 million, respectively, of gift card breakage. During the first quarter 2011, we recognized $438,000 of third-party gift card revenue as an initial cumulative program adjustment for gift card sales sold in third party retail locations, while during the first quarter 2010, we recognized $3.5 million of breakage revenue as an initial cumulative program adjustment for gift cards sold in our restaurants.


Table of Contents

Cost of Sales



                                       Twelve Weeks Ended                    Forty Weeks Ended
                                     October 2,    October    Percent    October 2,     October 3,    Percent
(In thousands, except percentages)      2011       3, 2010    Change        2011           2010       Change
Cost of sales                        $    51,688   $ 46,723      10.6 % $    175,599   $    160,432       9.5 %
As a percent of restaurant revenue          25.5 %     24.4 %     1.1 %         25.2 %         24.4 %     0.8 %

Cost of sales, comprised of food and beverage expenses, are variable and generally fluctuate with sales volume. For the twelve weeks ended October 2, 2011, cost of sales as a percentage of restaurant revenue increased 110 basis points, or $5.0 million, compared to the same period in the prior year. This increase was driven by an approximate 70 basis points increase in commodity costs, in particular, ground beef, potatoes, cheese and fry oil and a 70 basis points increase in higher cost food items related to changes in product mix to higher cost menu items. These increases were partially offset by a 30 basis point decrease due to the leverage on our higher revenue.

For the forty weeks ended October 2, 2011, cost of sales as a percentage of restaurant revenue increased 80 basis points and $15.2 million from the forty weeks ended October 3, 2010; this increase was driven by a 70 basis points net increase in commodity costs, including ground beef, potatoes, cheese and produce and a 40 basis point increase related to change in product mix to higher cost menu items. These increases were partially offset by a 20 basis point decrease due to the leverage on our higher revenue.

Labor



                                         Twelve Weeks Ended                       Forty Weeks Ended
                                     October 2,     October 3,    Percent     October 2,     October 3,    Percent
(In thousands, except percentages)      2011           2010       Change         2011           2010       Change
Labor                                $    68,143   $     68,231      (0.1 )% $    235,588   $    233,080       1.1 %
As a percent of restaurant revenue          33.6 %         35.6 %    (2.0 )%         33.8 %         35.5 %    (1.7 )%

Labor costs include restaurant hourly wages, restaurant management salaries, stock-based compensation, variable compensation, taxes, and benefits for restaurant team members. For the twelve weeks ended October 2, 2011, labor costs as a percentage of restaurant revenue decreased 200 basis points. Approximately 150 basis points of this decrease was due to the leverage of our higher average guest check on our fixed labor costs, while approximately 80 basis points decrease was due to increased productivity and a lower average hourly rate. These decreases were offset by an approximate 40 basis point increase in payroll taxes specifically related to reduced HIRE Act payroll tax reductions realized in 2010.

For the forty weeks ended October 2, 2011, labor as a percentage of restaurant revenue decreased 170 basis points from the forty weeks ended October 3, 2010. This decrease is driven by the leverage of our higher guest check as well as increased productivity and a lower average hourly rate. These decreases were partially offset by higher payroll taxes, specifically related to reduced HIRE Act payroll tax deductions realized in 2010.

Operating



                                         Twelve Weeks Ended                      Forty Weeks Ended
                                     October 2,     October 3,    Percent    October 2,     October 3,    Percent
(In thousands, except percentages)      2011           2010       Change        2011           2010       Change
Operating                            $    29,226   $     29,080       0.5 %  $    96,968   $     96,695       0.3 %
As a percent of restaurant revenue          14.4 %         15.2 %    (0.8 )%        13.9 %         14.7 %    (0.8 )%

Operating costs include variable costs such as restaurant supplies and fixed costs such as energy costs and repairs and maintenance. For both the twelve and forty weeks ended October 2, 2011, operating costs as a percentage of restaurant revenue decreased 80 basis points over prior year. Contributing to the twelve week decrease as a percentage of restaurant revenue was primarily a combination of 60 basis points leverage from higher restaurant revenue and 30 basis points decrease in service costs.


Table of Contents

Contributing to the forty week decrease was a combination of 50 basis point leverage from higher restaurant revenue and a 20 basis point decrease in service and maintenance expenses.

Occupancy



                                       Twelve Weeks Ended                   Forty Weeks Ended
                                     October 2,    October    Percent   October 2,     October 3,    Percent
(In thousands, except percentages)      2011       3, 2010    Change       2011           2010       Change
Occupancy                            $    15,458   $ 14,074       9.8 % $    50,215   $     48,361       3.8 %
As a percent of restaurant revenue           7.6 %      7.3 %     0.3 %         7.2 %          7.4 %    (0.2 )%

Occupancy costs include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs. Our occupancy costs generally increase with increases in sales volume from contingent rents or the addition of new restaurants, but decline as a percentage of restaurant revenue as we leverage our fixed costs. Fixed rents for the twelve and forty weeks ended October 2, 2011 were $9.9 million and $32.4 million, respectively. The twelve week increase of occupancy costs as a percent of restaurant revenue related mainly to an increase in general liability insurance, partly offset by revenue.

Depreciation and Amortization



                                       Twelve Weeks Ended                    Forty Weeks Ended
                                       October     October    Percent    October 2,     October 3,    Percent
(In thousands, except percentages)     2, 2011     3, 2010    Change        2011           2010       Change
Depreciation and amortization        $    13,006   $ 13,341      (2.5 )% $    42,751   $     43,777      (2.3 )%
As a percent of total revenues               6.3 %      6.8 %    (0.5 )%         6.0 %          6.5 %    (0.5 )%

Depreciation and amortization includes depreciation of capital investments for restaurants and corporate assets as well as amortization of acquired intangible assets and liquor licenses. Depreciation and amortization expense as a percentage of revenue for the twelve and forty weeks ended October 2, 2011, decreased which was driven by leverage from higher restaurant sales volumes on these fixed expenses, as well as equipment reaching full depreciation for restaurants which were open during third quarters 2005 and 2006.

Selling, General, and Administrative



                                           Twelve Weeks Ended                      Forty Weeks Ended
                                       October 2,     October 3,    Percent    October 2,     October 3,    Percent
(In thousands, except percentages)        2011           2010       Change        2011           2010        Change
Selling, general, and administrative   $    22,926   $     22,612       1.4 %  $    79,508   $     73,455        8.2 %
As a percent of total revenues                11.1 %         11.6 %    (0.5 )%        11.2 %         10.9 %      0.3 %

Selling, general, and administrative costs include all corporate and administrative functions that support our existing restaurant operations, our franchises, and provide infrastructure to facilitate our future growth. Components of this category include compensation and benefits of corporate management, supervisory and staff, marketing and media costs, travel, information systems, training, office rent, franchise administrative support, board of directors expenses, legal, and professional and consulting fees. For the twelve weeks ended October 2, 2011, selling, general and administrative costs increased 1.4% due to a $1.8 million increase in accrued performance based compensation, and $0.4 million in expenses related to infrastructure investments, partly offset by a $1.8 million decrease in executive transition costs over third quarter 2010.

For the forty weeks ended October 2, 2011, selling, general, and administrative costs increased 8.2%, or $6.1 million, due to a $4.1 million increase in accrued performance based compensation and $1.8 million in expenses related to infrastructure investments.


Table of Contents

Pre-opening Costs



                                           Twelve Weeks Ended                            Forty Weeks Ended
                                       October 2,      October 3,      Percent       October 2,      October 3,      Percent
(In thousands, except percentages)        2011            2010         Change           2011            2010         Change
Pre-opening costs                     $        622    $        740        (15.9 )%  $      2,799    $      1,992         40.5 %
As a percent of total revenues                 0.3 %           0.4 %       (0.1 )%           0.4 %           0.3 %        0.1 %
Average per restaurant pre-opening
costs                                 $        254    $        247          2.8 %   $        281    $        257          9.3 %

Pre-opening costs, which are expensed as incurred, consist of the costs of labor, hiring and training the initial work force for our new restaurants, travel expenses for our training teams, the cost of food and beverages used in training, marketing costs, lease costs incurred prior to opening, and other direct costs related to the opening of new restaurants. Pre-opening costs for the twelve weeks ended October 2, 2011, and October 3, 2010, reflect the opening of two and one new restaurants, respectively. We opened two and nine company-owned restaurants during the twelve and forty weeks ended October 2, 2011, respectively, compared to three and seven company-owned restaurants during the twelve and forty weeks ended October 3, 2010, respectively.

Asset Impairment

During the third quarter of fiscal 2011, the Company determined that one company-owned restaurant was impaired. The Company recognized a pre-tax non-cash impairment charge of $1.9 million resulting from the continuing and projected future results of this restaurant, primarily through projected undiscounted cash flows, which indicated impairment. During the third quarter of fiscal 2010, the Company determined that four company-owned restaurants were impaired, and the Company recognized a pre-tax non-cash impairment charge of $6.1 million resulting from the continuing and projected losses of these restaurants. The Company compared the carrying amount of each restaurant to its fair value as estimated by management. The impairment charges represent the excess of each restaurant's carrying amount over its estimated fair value.

Interest Expense, net and other

Interest expense, net and other was $1.6 million and $1.1 million for the twelve weeks ended October 2, 2011, and October 3, 2010, respectively and $4.4 million and $4.2 million for the forty weeks ended October 2, 2011, and October 3, 2010, respectively. The increases for both the twelve and forty weeks ended October 2, 2011 were primarily due to the Company's higher average debt balances compared to the twelve weeks ended October 3, 2010. Our weighted average interest rate was 3.7% and 3.2% for the twelve and forty weeks ended October 2, . . .

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