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 twelve and twenty-eight week periods ending July 8, 2012 and July 10, 2011, respectively, unless otherwise indicated.

Overview

Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin" or the "Company"), primarily develops and operates casual-dining restaurants. At July 8, 2012, the Company operated 331 company-owned restaurants located in 32 states. Our restaurants include three Red Robin's Burger Works™, a new, smaller non-traditional prototype with a limited menu and limited service. The Company operates its business as one operating and one reportable segment. The Company also franchises its restaurants, of which there were 131 restaurants in 21 states and two Canadian provinces as of July 8, 2012.

The following summarizes certain operational and financial highlights during the twelve and twenty-eight weeks ended July 8, 2012 and our outlook for the remainder of 2012:

† New Restaurant Openings. We opened one and five company-owned restaurants, including one and two Red Robin's Burger Works, during the twelve and twenty-eight weeks ended July 8, 2012, respectively. We plan to open up to ten additional company-owned restaurants in 2012, including two Red Robin's Burger Works, 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, and such restaurants are only included in our comparable metrics if they are comparable for the entirety of both periods presented. For the twelve weeks ended July 8, 2012, the 312 restaurants in our comparable base experienced an 80 basis point increase in net sales from these same restaurants in the same period last year. This increase was driven by a 90 basis point increase in guest count, partially offset by a 10 basis point decrease in average guest check. For the twenty-eight weeks ended July 8, 2012, the restaurants in our comparable base experienced an 80 basis point increase in net sales from the same period last year, which was driven by a 250 basis point increase in average guest check, offset by a 170 basis point decrease in guest count.

† Marketing Efforts. We launched our Red Royalty ™ loyalty program in all of our Company-owned restaurants during first quarter 2011 and have since added 63 franchise locations to the program. We continued to enhance and add menu items including offering a new Red's Tavern Double burger with all-you-can-eat Bottomless Steak Friesฎ at an everyday starting price of $6.99, as well as offering limited time menu items, 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 twelve and twenty-eight weeks ended July 8, 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 such as continued drought conditions throughout a large portion of the United States, continue to increase commodity prices, which we believe will have a moderate negative effect on our costs of sales for the remainder of this fiscal year and next year.

† Labor. Labor costs as a percentage of restaurant revenue decreased 10 basis points and 50 basis points for the twelve and twenty-eight weeks ended July 8, 2012, respectively from the same periods in 2011. These decreases are driven primarily by lower controllable labor cost, payroll taxes and workers' compensation benefit costs, partially offset by increased group insurance costs.

Restaurant Data



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



                                         Twelve Weeks Ended     Twenty-eight Weeks
                                        July 8,     July 10,   July 8,     July 10,
                                          2012        2011       2012        2011
Company-owned (a):
Beginning of period                          330         315        327         314
Opened during period (b)                       1           6          5           7
Acquired from franchisee                       1           -          1           -
Closed during period                          (1 )         -         (2 )         -
End of period                                331         321        331         321

Franchised:
Beginning of period                          136         137        137         136
Opened during period                           -           1          -           2
Sold or closed during period                  (5 )        (1 )       (6 )        (1 )
End of period                                131         137        131         137

Total number of Red Robin restaurants        462         458        462         458

(b) Includes one Red Robin's Burger Works in the twelve weeks ended July 8, 2012, and includes two Red Robin's Burger Works in the twenty-eight weeks ended July 8, 2012.

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. Variances are described in terms of basis points in which a basis point is one one-hundreth of one percent.

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.

                                            Twelve Weeks Ended      Twenty-eight Weeks Ended
                                           July 8,     July 10,      July 8,        July 10,
                                             2012        2011         2012            2011
Revenues:
Restaurant                                     98.3 %      98.3 %         98.4 %          98.2 %
Franchise royalties and fees and other
revenues                                        1.7         1.7            1.6             1.8
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                                  25.4        25.2           25.4            25.1
Labor (includes 0.0%, 0.1%, 0.0%, and
0.1% of stock-based compensation
expense, respectively)                         33.2        33.3           33.4            33.9
Operating                                      13.1        13.7           12.9            13.7
Occupancy                                       7.2         7.0            7.2             7.0
Total restaurant operating costs               78.9        79.2           78.9            79.8

Depreciation and amortization                   5.6         5.9            5.6             5.9
Selling, general and administrative
(includes 0.4%, 0.2%, 0.4%, and 0.2% of
stock-based compensation expense,
respectively)                                  11.4        11.4           11.4            11.3
Pre-opening costs                               0.3         0.7            0.3             0.4
Income from operations                          5.1         4.2            5.2             4.0

Interest expense, net and other                 0.6         0.7            0.6             0.6
Income before income taxes                      4.5         3.5            4.6             3.5
Income tax expense                              1.1         0.3            1.1             0.4
Net income                                      3.5 %       3.2 %          3.5 %           3.1 %

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



                                    Twelve Weeks Ended               Twenty-eight Weeks Ended
                                            July 10,    Percent    July 8,    July 10,    Percent
                            July 8, 2012      2011      Change      2012        2011      Change
Restaurant revenue (1)     $      219,932   $ 212,111       3.7 % $ 514,574   $ 493,659       4.2 %
Franchise royalties and
fees and other revenue
(1)                                 3,745       3,684       1.7 %     8,562       8,966      (4.5 )%
Total revenues (1)         $      223,677   $ 215,795       3.7 % $ 523,136   $ 502,625       4.1 %
Average weekly net sales
volumes in Company-owned
restaurants
Total restaurants          $       55,774   $  55,551       0.4 % $  56,076   $  55,740       0.6 %
Operating weeks                     3,931       3,818       3.0 %     9,156       8,856       3.4 %

Restaurant revenue during the twelve weeks ended July 8, 2012, which is comprised almost entirely of food and beverage sales, increased by $7.8 million compared to second quarter 2011. Sales in our comparable restaurant base increased approximately $1.6 million 0.8% during the second quarter 2012. This increase was primarily the result of a 0.9% increase in guest count, partially offset by a 0.1% decrease in average guest check. Net sales for non-comparable restaurants contributed an increase of $6.1 million over the prior year quarter, substantially all of which was attributed to revenue from restaurants opened since the end of the third quarter of 2011.

Restaurant revenue for the twenty-eight week period ended July 8, 2012, increased $20.9 million, or 4.2%, compared to the twenty-eight weeks ended July 10, 2011. The restaurants in our comparable base experienced an 80 basis point increase in revenue

from the same period last year, which was driven by a 250 basis point increase in average guest check, offset by a 170 basis point decrease in guest count. Revenue for non-comparable restaurants contributed an increase of $16.8 million in restaurant revenue.

We believe restaurant revenue increases for the twelve and twenty-eight weeks ended July 8, 2012 were driven by a combination of our second and fourth quarter 2011 menu price increases, 1.5% and 0.9%, respectively, the nationwide rollout of our tri-fold menu, the Red Royalty loyalty program, as well as the opening of new restaurants since July 10, 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 second quarter 2012, there were 312 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 second quarter 2012, there were 16 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 0.1% and 1.0% for the twelve and twenty-eight weeks ended July 8, 2012, respectively. The twelve and twenty-eight week increase is primarily attributable to the increased sales at franchise locations. Our franchisees reported that comparable restaurant sales increased 2.2% for U.S. restaurants and decreased 0.3% for Canadian restaurants for the second quarter of 2012 compared to the second quarter of 2011. For the twenty-eight weeks ended July 8, 2012, our franchisees reported that comparable restaurant sales for U.S. restaurants increased 2.2% and Canadian restaurants increased 3.9% from the twenty-eight week period ended July 10, 2011.

Other revenue consists primarily of gift card breakage. We recognized $0.4 million and $0.3 million, respectively, of gift card breakage for the twelve weeks ended July 8, 2012 and July 10, 2011. For the twenty-eight weeks ended July 8, 2012 and July 10, 2011, we recognized $0.6 million and $1.1 million, respectively, of gift card breakage. During the first quarter 2011, we recognized $0.4 million of third-party gift card revenue as an initial cumulative program adjustment for gift card sales sold in third party retail locations.

Cost of Sales



                                           Twelve Weeks Ended            Twenty-eight Weeks Ended
                                     July 8,    July 10,    Percent    July 8,    July 10,    Percent
(In thousands, except percentages)     2012       2011      Change      2012        2011      Change
Cost of sales                        $ 55,804   $  53,551       4.2 % $ 130,879   $ 123,911       5.6 %
As a percent of restaurant revenue       25.4 %      25.2 %     0.2 %      25.4 %      25.1 %     0.3 %

Cost of sales, comprised of food and beverage expenses, are variable and generally fluctuate with sales volume. For the twelve weeks ended July 8, 2012, cost of sales as a percentage of restaurant revenue increased 20 basis points, or $2.3 million, compared to the same period in the prior year. This increase was driven by an approximate 120 basis points increase in commodity costs, in particular, potatoes, ground beef, and fry oil. These increases were partially offset by a 70 basis point decrease in produce and cheese costs.

For the twenty-eight weeks ended July 8, 2012, cost of sales as a percentage of restaurant revenue increased 30 basis points, or $7.0 million, from the twenty-eight weeks ended July 10, 2011. This increase was driven by a 90 basis points increase in commodity costs, including potatoes, ground beef, and fry oil partially offset by a 70 basis point decrease related to lower produce and cheese costs.

Labor



                                           Twelve Weeks Ended             Twenty-eight Weeks Ended
                                     July 8,    July 10,    Percent     July 8,    July 10,    Percent
(In thousands, except percentages)     2012       2011      Change       2012        2011      Change
Labor                                $ 73,075   $  70,574       3.5 %  $ 171,681   $ 167,445       2.5 %
As a percent of restaurant revenue       33.2 %      33.3 %    (0.1 )%      33.4 %      33.9 %    (0.5 )%

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 July 8, 2012, labor costs as a percentage of restaurant revenue decreased 10 basis points. Contributing to this decrease as a percentage of restaurant revenue was a 50 basis point decrease in workers' compensation benefit costs and payroll taxes. This decrease is partially offset by a 40 basis point increase in group insurance costs.

For the twenty-eight weeks ended July 8, 2012, labor as a percentage of restaurant revenue decreased 50 basis points from the twenty-eight weeks ended July 10, 2011. This decrease is driven primarily by a 50 basis point decrease in controllable labor cost and a 30 basis point decrease in payroll taxes and workers' compensation benefit costs. These decreases were partially offset by a 30 basis point increase in group insurance costs and management salaries from merit increases.

Operating



                                           Twelve Weeks Ended             Twenty-eight Weeks Ended
                                     July 8,    July 10,    Percent     July 8,    July 10,    Percent
(In thousands, except percentages)     2012       2011      Change       2012        2011      Change
Operating                            $ 28,877   $  28,981      (0.4 )% $  66,282   $  67,742      (2.2 )%
As a percent of restaurant revenue       13.1 %      13.7 %    (0.6 )%      12.9 %      13.7 %    (0.8 )%

Operating costs include variable costs such as restaurant supplies and fixed costs such as energy costs and repairs and maintenance. For the twelve weeks ended July 8, 2012, operating costs as a percentage of restaurant revenue decreased 60 basis points over prior year primarily due to a 30 basis point decrease in payment card processing fees resulting from legislative changes as well as a 30 basis point decrease in utility and telephone expenses.

For the twenty-eight weeks ended July 8, 2012, operating costs as a percentage of restaurant revenue decreased 80 basis points, or $1.5 million. This decrease was primarily due to a 30 basis point decrease in supply costs, a 30 basis point decrease in payment card processing fees, and a 20 basis point decrease in utility costs.

Occupancy



                                           Twelve Weeks Ended            Twenty-eight Weeks Ended
                                     July 8,    July 10,    Percent    July 8,    July 10,    Percent
(In thousands, except percentages)     2012       2011      Change      2012        2011      Change
Occupancy                            $ 15,790   $  14,929       5.8 % $  36,904   $  34,757       6.2 %
As a percent of restaurant revenue        7.2 %       7.0 %     0.2 %       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 twelve and twenty-eight weeks ended July 8, 2012 were $10.3 million and $23.7 million, respectively. Fixed rents for the twelve and twenty-eight weeks ended July 10, 2011 were $9.7 million and $22.5 million, respectively. The increase in occupancy costs as a percent of restaurant revenue over prior year for the twelve and twenty-eight week period was primarily due to the increase in fixed rents related to the additional restaurants opened since second quarter 2011.

Depreciation and Amortization



                                           Twelve Weeks Ended             Twenty-eight Weeks Ended
                                     July 8,    July 10,    Percent     July 8,    July 10,    Percent
(In thousands, except percentages)     2012       2011      Change       2012        2011      Change
Depreciation and amortization        $ 12,532   $  12,634      (0.8 )% $  29,184   $  29,745      (1.9 )%
As a percent of total revenues            5.6 %       5.9 %    (0.3 )%       5.6 %       5.9 %    (0.3 )%

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 over the prior year periods due, in part, to three and five-year depreciable equipment for restaurants opened in 2008 and 2006 becoming fully depreciated. Depreciation and amortization as a percentage of revenue for the twelve and twenty-eight weeks ended July 8, 2012, decreased due primarily to leverage from higher restaurant sales volumes on these fixed expenses.

Selling, General and Administrative



                                             Twelve Weeks Ended                Twenty-eight Weeks Ended
                                       July 8,     July 10,    Percent     July 8,      July 10,    Percent
(In thousands, except percentages)      2012         2011       Change       2012         2011       Change
Selling, general and administrative   $  25,574   $   24,540        4.2 % $   59,451   $   56,582        5.1 %
As a percent of total revenues             11.4 %       11.4 %      0.0 %       11.4 %       11.3 %      0.1 %

Selling, general and administrative costs include all corporate and administrative functions that support our restaurant operations, our franchise operations, 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 July 8, 2012, selling, general and administrative costs increased 4.2%, or $1.0 million, due primarily to higher stock-based compensation, gift card fees to third party vendors and gift card production and consulting fees paid for information technology infrastructure changes.

For the twenty-eight weeks ended July 8, 2012, selling, general and administrative costs increased 5.1%, or $2.9 million, due primarily to increased gift card fees to third party vendors and gift card production, stock-based compensation, and consulting fees paid for information technology infrastructure changes.

Pre-opening Costs



                                             Twelve Weeks Ended                 Twenty-eight Weeks Ended
                                      July 8,      July 10,    Percent      July 8,       July 10,    Percent
(In thousands, except percentages)      2012         2011       Change        2012          2011       Change
Pre-opening costs                    $      602   $    1,516      (60.3 )% $    1,585    $    2,177      (27.2 )%
As a percent of total revenues              0.3 %        0.7 %     (0.4 )%        0.3 %         0.4 %     (0.1 )%
Average per restaurant pre-opening
costs                                $      138   $      304      (54.6 )% $      249    $      294      (15.3 )%

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. We opened one and five company-owned restaurants during the twelve and twenty-eight weeks ended July 8, 2012, respectively, compared to six and seven company-owned restaurants during the twelve and twenty-eight weeks ended July 10, 2011, respectively.

Interest Expense, net and other

Interest expense, net and other was $1.3 million and $1.5 million for the twelve weeks ended July 8, 2012, and July 10, 2011, respectively, and $3.1 million and $2.9 million for the twenty-eight weeks ended July 8, 2012, and July 10, 2011, respectively. Interest expense, net for the twelve weeks ended July 8, 2012 decreased over prior year period due primarily to lower average debt balances. For the twenty-eight weeks ended July 8, 2012, interest expense, net increased due primarily to higher average debt balances compared to the twenty-eight weeks ended July 10, 2011. Our weighted-average interest rate was 3.6% and 3.5% for the twelve and twenty-eight weeks ended July 8, 2012, versus 3.0% and 2.9%, respectively, for the twelve and twenty-eight weeks ended July 10, 2011.

Provision for Income Taxes

The effective income tax rate for the second quarter 2012 was 23.7% compared to 8.8% for the second quarter 2011. The effective income tax rate for the twenty-eight weeks ended July 8, 2012 and July 10, 2011 was 24.0% and 10.3%, respectively. The 2012 effective tax rate increase over prior year is primarily due to higher earnings as well as lower 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 decreased $5.1 million to $29.9 million at July 8, 2012, from $35.0 million at the beginning of the fiscal year. This decrease in our cash position is primarily the net result of:

† $24.6 million used for the construction of new restaurants, expenditures for facility improvements, investments in information technology;

† $21.6 million used for debt payments;

† $7.7 million used for purchase of Company stock; and

† $3.2 million used for the acquisition of a franchise restaurant; partially offset by

† $50.1 million of cash provided by operating activities.

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, the Company amended and restated its existing credit facility to provide a more flexible capital structure and facilitate its 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 . . .