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 2012 and 2011 refer to the sixteen week periods ending April 15, 2012 and April 17, 2011, 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 April 15, 2012, the Company operated 330 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 136 restaurants in 21 states and two Canadian provinces as of April 15, 2012.

The following summarizes the operational and financial highlights during the first sixteen weeks of fiscal 2012 and our outlook for the remainder of 2012:

† New Restaurant Openings. We opened four Company-owned restaurants, including one Red Robin Burger Works™, a new non-traditional prototype, and closed one Company-owned restaurant, during the sixteen weeks ended April 15, 2012. We plan to open up to a net 11 additional company-owned restaurants in 2012 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 sixteen weeks ended April 15, 2012, the 310 restaurants in our comparable base experienced a 0.5% increase in net sales from these same restaurants in the same period last year. This increase was driven by a 4.1% increase in average guest check, offset by a 3.6% decrease in guest count. The year-over-year decrease in guest counts was largely attributable to heavy competitive discounting during the quarter and Company promotional activity that did not perform as well as promotional efforts in the same period a year ago.

† Marketing Efforts. We launched our Red Royalty ™ loyalty program in all of our Company-owned restaurants during first quarter 2011 and have since added 49 franchise locations to the program. We continued to enhance and add menu items including a new Tavern Double burger offering at an everyday starting price of $6.99 as well as offering limited time menu items, all supported with national television and social media campaigns.

† Food Costs. As a percentage of restaurant revenue, we have experienced an increase in cost of goods during the sixteen weeks ended April 15, 2012 compared to the prior year. In particular, the cost of potatoes, ground beef, and fry oil increased. In addition, national and international supply-demand imbalances and other factors continue to increase commodity prices, which we believe will have a negative effect on our costs of sales for the remainder of this fiscal year.

† Labor. Labor costs as a percentage of restaurant revenue decreased 90 basis points for the sixteen weeks ended April 15, 2012 from the same period in 2011. These decreases were primarily driven by the leverage from our higher average guest check, partly offset by merit increases for manager wages.

Restaurant Data



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



                                         Sixteen Weeks Ended
                                        April 15,   April 17,
                                          2012        2011
Company-owned:
Beginning of period                           327         314
Opened during period                            4           1
Closed during period                           (1 )         -
End of period                                 330         315

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

Total number of Red Robin restaurants         466         452

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 2011 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.

                                                           Sixteen Weeks Ended
                                                         April 15,      April 17,
                                                           2012           2011
Revenues:
Restaurant                                                     98.4 %         98.2 %
Franchise royalties and fees and other revenues                 1.6            1.8
Total revenues                                                100.0          100.0

Costs and Expenses:
Restaurant operating costs (exclusive of
depreciation and amortization shown separately
below):
Cost of sales                                                  25.5           25.0
Labor (includes 0.0% and 0.1% of stock- based
compensation expense, respectively)                            33.5           34.4
Operating                                                      12.7           13.8
Occupancy                                                       7.2            7.0
Total restaurant operating costs                               78.8           80.2

Depreciation, amortization and other                            5.6            6.0
Selling, general, and administrative (includes 0.4%
and 0.2% of stock-based compensation expense,
respectively)                                                  11.3           11.2
Pre-opening costs                                               0.3            0.2
Income from operations                                          5.3            3.9

Interest expense, net and other                                 0.6            0.5
Income before income taxes                                      4.6            3.4
Income tax expense                                              1.1            0.4
Net income                                                      3.5 %          3.0 %

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.

Total Revenues



                                          Sixteen Weeks Ended
                                      April 15,         April 17,         Percent
                                         2012              2011            Change
Restaurant revenue (1)              $      294,642    $      281,548             4.7 %
Franchise royalties and fees and
other revenue (1)                            4,817             5,282            (8.8 )%
Total revenues (1)                  $      299,459    $      286,830             4.4 %
Average weekly net sales
volumes:
Total restaurants                   $       56,303    $       55,885             0.7 %
Operating weeks                              5,225             5,038             3.7 %

Restaurant revenue during the sixteen weeks ended April 15, 2012, which is comprised almost entirely of food and beverage sales, increased by $13.1 million compared to first quarter 2011. Net sales in our comparable restaurant base increased approximately $1.4 million or 0.5% during the first quarter 2012. This increase was primarily the result of a 4.1% increase in average guest check, partially offset by 3.6% decrease in guest counts. We believe the sales increase was driven by a combination of our second and fourth quarter 2011 menu price increases, the nationwide rollout of our tri-fold menu, and the Red Royalty loyalty program. Net sales for non-comparable restaurants contributed an increase of $10.9 million, substantially all of which was attributed to sales from restaurants opened since the end of the second quarter of 2011.

Average weekly sales volumes represent the total restaurant revenue 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 first quarter 2012, there were 310 comparable restaurants. Non-comparable restaurants are primarily restaurants that are open but by definition not included in the comparable category because they have not yet operated for five full quarters. At the end of the first quarter 2012, there were 19 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, remained relatively flat for the sixteen weeks ended April 15, 2012. Our franchisees reported that comparable restaurant net sales increased 2.2% for U.S. restaurants and increased 7.2% for Canadian restaurants for the first quarter of 2012 compared to the first quarter of 2011.

Other revenue consists primarily 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. We recognized $0.2 million and $0.8 million (inclusive of the initial cumulative adjustment of $0.4 million), respectively, of gift card breakage for the sixteen weeks ended April 15, 2012 and April 17, 2011.

Cost of Sales



                                        Sixteen Weeks Ended
                                      April 15,      April 17,    Percent
(In thousands, except percentages)      2012           2011       Change
Cost of sales                        $    75,075    $    70,361       6.7 %
As a percent of restaurant revenue          25.5 %         25.0 %     0.5 %

Cost of sales, comprised of food and beverage expenses, are variable and generally fluctuate with sales volume. For the sixteen weeks ended April 15, 2012, cost of sales as a percentage of restaurant revenue increased 50 basis points, or $4.7 million, compared to the same period in the prior year. This increase was driven by an approximate 70 basis point increase in commodity costs, in particular, ground beef, potatoes, and fry oil; a 30 basis point increase due to changes in product mix to higher cost menu items; and a 10 basis point increase in alcohol costs. These increases were partially offset by a 60 basis point decrease related to produce costs due to favorable weather in the current year.

Labor



                                        Sixteen Weeks Ended
                                      April 15,      April 17,    Percent
(In thousands, except percentages)      2012           2011       Change
Labor                                $    98,606    $    96,871       1.8 %
As a percent of restaurant revenue          33.5 %         34.4 %    (0.9 )%

Labor costs include restaurant hourly wages, restaurant management salaries, stock-based compensation, variable compensation, taxes, and benefits for restaurant team members. For the sixteen weeks ended April 15, 2012, labor costs as a percentage of restaurant revenue decreased 90 basis points. Approximately 140 basis points decrease was due to the leverage of our higher average guest check on our fixed labor costs, offset with approximately 50 basis points increase in management salaries from merit increases.

Operating



                                        Sixteen Weeks Ended
                                      April 15,      April 17,    Percent
(In thousands, except percentages)      2012           2011       Change
Operating                            $    37,405    $    38,761      (3.5 )%
As a percent of restaurant revenue          12.7 %         13.8 %    (1.1 )%

Operating costs include variable costs such as restaurant supplies and fixed costs such as energy costs, and other costs such as service repairs and maintenance costs. For the sixteen weeks ended April 15, 2012, operating costs as a percentage of restaurant revenue decreased 110 basis points over prior year. Contributing to the decrease as a percentage of restaurant revenue was primarily a combination of 60 basis points leverage from higher restaurant revenue, a 30 basis point decrease in supplies costs, and a 20 basis point decrease in interchange fees due to legislative changes.

Occupancy



                                        Sixteen Weeks Ended
                                      April 15,      April 17,    Percent
(In thousands, except percentages)      2012           2011       Change
Occupancy                            $    21,114    $    19,828       6.5 %
As a percent of restaurant revenue           7.2 %          7.0 %     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 sixteen weeks ended April 15, 2012 were $13.5 million. The sixteen week increase of occupancy costs as a percent of restaurant revenue were primarily due to the increase in fixed rents related to the additional restaurants opened since first quarter 2011, partly offset by an increase in restaurant revenue.

Depreciation and Amortization



                                        Sixteen Weeks Ended
                                      April 15,      April 17,    Percent
(In thousands, except percentages)      2012           2011       Change
Depreciation and amortization        $    16,652    $    17,111      (2.7 )%
As a percent of total revenues               5.6 %          6.0 %    (0.4 )%

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 decreased 2.7% due, in part, by three and five-year depreciable equipment for restaurants opened in 2008 and 2006 becoming fully depreciated. Depreciation and amortization expense as a percentage of revenue for the sixteen weeks ended April 15, 2012 decreased, which was driven by leverage from higher restaurant sales volumes on these fixed expenses.

Selling, General, and Administrative



                                          Sixteen Weeks Ended
                                        April 15,      April 17,    Percent
(In thousands, except percentages)        2012           2011       Change
Selling, general, and administrative   $    33,877    $    32,042       5.7 %
As a percent of total revenues                11.3 %         11.2 %     0.1 %

Selling, general, and administrative costs include all corporate and administrative functions that support our existing restaurant operations, our franchisees, 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 sixteen weeks ended April 15, 2012, selling, general and administrative costs increased 5.7%, or $1.8 million, due to an increase of $1.0 million related to gift card fees to third party vendors and gift card production, an increase of $0.4 million related to consulting fees paid for information technology infrastructure changes, an increase of $0.4 in stock compensation, partly offset by a $0.8 million decrease in severance costs over first quarter 2011.

Pre-opening Costs



                                               Sixteen Weeks Ended
                                            April 15,       April 17,    Percent
(In thousands, except percentages)            2012            2011       Change
Pre-opening costs                          $       983     $       661      48.7 %
As a percent of total revenues                     0.3 %           0.2 %    (0.1 )%
Average per restaurant pre-opening costs   $       218     $       230      (5.2 )%

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 sixteen weeks ended April 15, 2012, and April 17, 2011, reflect the opening of four and one new restaurants, respectively.

Interest Expense, net and other

Interest expense, net and other was $1.8 million and $1.4 million for the sixteen weeks ended April 15, 2012, and April 17, 2011, respectively. The increases for the sixteen weeks ended April 15, 2012 were primarily due to the Company's higher average debt balances compared to the sixteen weeks ended April 17, 2011, as well as a higher interest rate. Our weighted average interest rate was 3.6% and 2.6% for the sixteen weeks ended April 15, 2012 and April 17, 2011, respectively.

Provision for Income Taxes

The effective income tax rate for the first quarter 2012 was 24.1% compared to 11.5% for the first quarter 2011. The 2012 effective tax rate increase over prior year is primarily due to general business tax credits, primarily the FICA Tip Tax Credit as a percent of current year income before tax. We anticipate that our full year fiscal 2012 effective tax rate will be approximately 24%.

Liquidity and Capital Resources

General. Cash and cash equivalents increased $2.9 million to $38.0 million at April 15, 2012, from $35.0 million at the beginning of the fiscal year. This increase in our cash position is primarily the net result of:

† $29.6 million of cash provided by operating activities; partially offset by

† $10.4 million used for the construction of new restaurants, expenditures for facility improvements, investments in information technology and other; and

† $18.8 million used for debt payments.

We expect to continue to reinvest available cash flows from operations to develop new restaurants or invest in existing restaurants and infrastructure, pay down debt, and maintain the flexibility to use excess cash to opportunistically repurchase our common stock and execute our long term strategic initiatives.

Credit Facility. On May 6, 2011, we amended and restated our existing credit facility to provide a more flexible capital structure and facilitate our growth plans. Borrowings under the amended credit agreement may be used by us for general corporate purposes including, among other uses, to repurchase shares of our capital stock, to continue to finance restaurant construction, and for working capital and general corporate requirements. The amended credit facility is comprised of (i) a $100 million revolving credit facility maturing on May 6, 2016 and (ii) a $150 million term loan maturing on May 6, 2016, both with rates based on the London Interbank Offered Rate (LIBOR) plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and
(c) LIBOR for an Interest Period of one month plus 1%). The amended credit agreement also allows us, subject to lender participation, to increase the revolving credit facility or term loan by up to an additional $100 million in the future. As part of the amended credit agreement, we may request the issuance of up to $20 million in letters of credit, the outstanding amount of which reduces the net borrowing capacity under the revolving credit facility. The amended credit agreement requires the payment of an annual commitment fee based upon the unused portion of the credit facility. The credit facility's interest rates and the annual commitment rate are based on a financial leverage ratio, as defined in the credit agreement. Our obligations under the amended credit agreement are secured by first priority liens and security interests in substantially all of our assets, which includes the capital stock of certain subsidiaries. Additionally, the amended credit agreement includes a negative pledge on all tangible and intangible assets (including all real and personal property) with customary exceptions.

With regard to the term loan facility, we are required to repay the principal amount of the term loan in consecutive quarterly installments which began June 30, 2011, and end on the maturity date of the term loan. At April 15, 2012, we had $127.5 million of borrowings outstanding under our term loan, and $7.8 million of standby letters of credit outstanding under our revolving credit facility. There were no borrowings on the revolving facility. Loan origination costs associated with the credit facility and the net outstanding balance of costs related to the original and subsequent amendments to the credit facility are included as deferred costs in other assets, net in the accompanying consolidated balance sheet.

In August 2011, we entered into a variable-to-fixed interest rate swap agreement with Rabobank to hedge the floating interest rate on a portion of the remaining term loan that was then outstanding under our amended and restated credit facility. Rabobank is rated AA by Standard & Poor's. The interest rate swap has an effective date of August 5, 2011. Approximately $1.9 and $0.9 million of the initial $74.1 million expired in 2012 and 2011, respectively, in accordance with its original terms. The notional amount of the hedge will decrease quarterly based on the required principal term loan payments in the original facility, and will expire on June 30, 2015 with a notional hedge amount of $50.6 million. We are required to make payments based on a fixed interest rate of 1.135% calculated based on the remaining notional amount. In exchange, we receive interest on the notional amount at a variable rate that was based on the 3-month LIBOR rate.

Covenants. We are subject to a number of customary covenants under our credit agreement, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments. In addition, we are required to maintain two financial ratios: a leverage ratio calculated by dividing our debt outstanding including issued standby letters of credit by the last twelve months' earnings before interest, taxes, depreciation and amortization (EBITDA) adjusted for certain non-cash charges that will not result in cash payments in a subsequent period, any prepayment penalties incurred as a result of extraordinary debt extinguishment, certain pre-opening costs, unusual or non-recurring cash losses, net proceeds received from business interruption insurance, pro forma costs savings in connection with an acquisition, divestiture, restructuring or reorganization occurring prior to the time that EBITDA is to be determined, cash or non-cash charges related to restructuring or cost reduction initiatives in an aggregate amount not to exceed a certain threshold, and non-cash gains and non-recurring or unusual cash gains for such period; and a fixed charge ratio calculated as our consolidated cash flow divided by our consolidated debt service obligations. As of April 15, 2012, we were in compliance with all covenants under our amended credit agreement.

Debt Outstanding. Total debt outstanding decreased $19 million to $137.9 million at April 15, 2012 from $156.9 million at December 25, 2011, primarily due to an early debt payment of $15 million and our scheduled debt repayments of $3.8 million. Our credit agreement matures in 2016.

Inflation

The primary inflationary factors affecting our operations are food, labor costs, energy costs, and materials used in the construction of new restaurants. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and historically increases in the minimum wage have directly affected our labor costs. Also, many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally affected by cost inflation. We believe that inflation had a material negative effect on our financial condition and results during the first quarter of 2012, due primarily to increased food costs. Uncertainties related to fluctuations in costs, including energy costs, commodity prices, annual indexed wage increases, and construction materials make it difficult to predict what impact, if any, inflation may have on our business during 2012, but it is anticipated that inflation will continue to have a negative impact in fiscal year 2012.

Seasonality

. . .