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RRGB > SEC Filings for RRGB > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for RED ROBIN GOURMET BURGERS INC

Form 10-Q for RED ROBIN GOURMET BURGERS INC


2-Nov-2012

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 and our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 25, 2011. All comparisons under this heading between 2012 and 2011 refer to the twelve and forty week periods ending September 30, 2012 and October 2, 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 September 30, 2012, the Company operated 336 company-owned restaurants located in 32 states. Our restaurants include five 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 132 restaurants in 21 states and two Canadian provinces as of September 30, 2012.

The following summarizes certain operational and financial highlights during the twelve and forty weeks ended September 30, 2012 and our outlook for the remainder of 2012:

† New Restaurant Openings. We opened six and eleven company-owned restaurants, including two and four Red Robin's Burger Works, during the twelve and forty weeks ended September 30, 2012, respectively. We plan to open up to three 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, 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 September 30, 2012, the 312 restaurants in our comparable base experienced a 1.1% increase in net sales from these same restaurants in the same period last year. This increase was driven by a 0.8% increase in guest count combined with a 0.3% increase in average guest check, including 0.5% related to certain changes to the Red Royalty™ loyalty program which reduced deferred revenue. For the forty weeks ended September 30, 2012, the restaurants in our comparable base experienced a 0.9% increase in net sales from the same period last year, which was driven by a 1.9% increase in average guest check, offset by a 1.0% decrease in guest count.

† Marketing Efforts. Our Red Royalty loyalty program is operating in all of our Company-owned restaurants and 64 franchise locations. Engaging our guests through this program is a key part of our marketing strategy and uses offers to support increases in the frequency of guest visits. We are also using the program to generate awareness of new menu items and to effectively engage our guests with smart rewards. Menu items featured included our Red's Tavern Double burger with all-you-can-eat Bottomless Steak Fries® at the everyday value price of $6.99, with popular trade-up Tavern Styles, a new shareable appetizer, and a special, limited time burger. Our "Take Back the Bar" initiative continued to increase year over year alcoholic beverage mix, differentiate our brand, and help target adult diners. Further, to create more relevancy to our current guests, we are testing a brand transformation program designed to better customize the guest experience. Elements being tested include changes to physical space of our restaurants, our service model, new menu formats, and improved food and beverage presentations. We utilize television, digital and social media campaigns along with other tools to support our marketing programs.

† Food Costs. As a percentage of restaurant revenue, we have experienced an increase in cost of goods during the twelve and forty weeks ended September 30, 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 certain 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 20 basis points for the forty weeks ended September 30, 2012 from the same period in 2011. This decrease is driven primarily by lower controllable labor cost, workers' compensation benefit costs and payroll taxes, partially offset by increased group insurance costs.


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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
                               September 30,    October 2,    September 30,    October 2,
                                   2012            2011           2012            2011
Company-owned (a):
Beginning of period                      331           321              327           314
Opened during period (b)                   6             2               11             9
Acquired from franchisee                   -             -                1             -
Closed during period                      (1 )           -               (3 )           -
End of period                            336           323              336           323

Franchised:
Beginning of period                      131           137              137           136
Opened during period                       3             -                3             2
Sold or closed during
period                                    (2 )           -               (8 )          (1 )
End of period                            132           137              132           137

Total number of Red Robin
restaurants                              468           460              468           460



(a) The average size of our Company-owned full service casual dining restaurants is approximately 6,500 square feet.

(b) Includes two Red Robin's Burger Works in the twelve weeks ended September 30, 2012, and includes four Red Robin's Burger Works in the forty weeks ended September 30, 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.


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                                      Twelve Weeks Ended              Forty Weeks Ended
                                  September 30,    October 2,    September 30,    October 2,
                                      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                              24.8          25.5             25.3          25.2
Labor (includes 0.0%, 0.1%,
0.0%, and 0.1% of stock-based
compensation expense,
respectively)                              34.2          33.6             33.6          33.8
Operating                                  13.5          14.4             13.1          13.9
Occupancy                                   7.8           7.6              7.3           7.2
Total restaurant operating
costs                                      80.3          81.1             79.3          80.2

Depreciation and amortization               6.2           6.3              5.8           6.0
Selling, general and
administrative (includes 0.4%,
0.3%, 0.4% and 0.2% of
stock-based compensation
expense, respectively)                     11.5          11.1             11.4          11.2
Pre-opening costs                           0.6           0.3              0.4           0.4
Asset impairment charge                       -           0.9                -           0.3
Income from operations                      2.7           1.6              4.5           3.3

Interest expense, net and
other                                       0.5           0.8              0.6           0.6
Income before income taxes                  2.2           0.8              3.9           2.7
Income tax expense (benefit)                0.6          (0.2 )            0.9           0.2
Net income                                  1.7 %         1.0 %            3.0 %         2.5 %

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                            Forty Weeks Ended
                       September 30,     October 2,     Percent      September 30,     October 2,     Percent
                           2012             2011        Change           2012             2011        Change
Restaurant revenue
(1)                   $       209,754   $    202,679         3.5 %  $       724,328   $    696,338         4.0 %
Franchise royalties
and fees and other
revenue (1)                     3,563          3,565        (0.1 )%          12,125         12,531        (3.2 )%
Total revenues (1)    $       213,317   $    206,244         3.4 %  $       736,453   $    708,869         3.9 %
Average weekly net
sales volumes in
Company-owned
restaurants (2)
Total restaurants     $        52,779   $     52,370         0.8 %  $        55,081   $     54,715         0.7 %
Operating weeks                 3,959          3,870         2.3 %           13,115         12,726         3.1 %



(1) In thousands, except percentages.

(2) Excludes Red Robin's Burger Works.

Restaurant revenue, which is comprised almost entirely of food and beverage sales, increased during the twelve weeks ended September 30, 2012, by $7.1 million compared to third quarter 2011. Sales in our comparable restaurant base increased approximately $2.2 million, or 1.1%, during the third quarter 2012. This increase was primarily the result of a 0.8% increase in guest count and a 0.3% increase in average guest check which includes 0.5% lift due to approximately $1.0 million of adjustments related to deferred revenue associated with our Red Royalty program. Net sales for non-comparable restaurants contributed an increase of $5.2 million over the prior year quarter, substantially all of which was attributed to revenue from restaurants opened since the end of the fourth quarter of 2011.


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Restaurant revenue for the forty week period ended September 30, 2012, increased $28.0 million, or 4.0%, compared to the forty weeks ended October 2, 2011. The restaurants in our comparable base experienced a 0.9% increase in revenue from the same period last year, which was driven by a 1.9% increase in average guest check partially offset by a 1.0% decrease in guest count. Revenue for non-comparable restaurants contributed an increase of $22.0 million in restaurant revenue.

We believe restaurant revenue increases for the twelve and forty weeks ended September 30, 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 October 2, 2011.

Average weekly sales volumes represent the total restaurant revenue for a population of restaurants in both the 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 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 third quarter 2012, there were 19 non-comparable restaurants.

Franchise royalties and fees, which consist primarily of royalty income and initial franchise fees, decreased 0.1% and 3.2% for the twelve and forty weeks ended September 30, 2012, respectively. The twelve and forty week decrease is primarily attributable to the decreased sales at franchise locations. Our franchisees reported that comparable restaurant sales decreased 0.6% for U.S. restaurants and increased 3.9% for Canadian restaurants for the third quarter of 2012 compared to the third quarter of 2011. For the forty weeks ended September 30, 2012, our franchisees reported that comparable restaurant sales for U.S. restaurants increased 1.9% and Canadian restaurants increased 4.7% from the forty week period ended October 2, 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 September 30, 2012 and October 2, 2011. For the forty weeks ended September 30, 2012 and October 2, 2011, we recognized $1.0 million and $1.3 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                          Forty Weeks Ended
                                      September 30,     October 2,    Percent     September 30,     October 2,    Percent
(In thousands, except percentages)        2012             2011       Change          2012             2011       Change
Cost of sales                        $        52,066   $     51,688       0.7 %  $       182,945   $    175,599       4.2 %
As a percent of restaurant revenue              24.8 %         25.5 %    (0.7 )%            25.3 %         25.2 %     0.1 %

Cost of sales, comprised of food and beverage expenses, are variable and generally fluctuate with sales volume. For the twelve weeks ended September 30, 2012, cost of sales as a percentage of restaurant revenue decreased 70 basis points compared to the same period in the prior year. This decrease was driven by decreased costs in cheese, produce, pork, seafood, poultry and canned and dry goods due to lower costs and usage as well as mix shift. These decreases were partially offset by an increase in commodity costs, in particular, potatoes and ground beef.

For the forty weeks ended September 30, 2012, cost of sales as a percentage of restaurant revenue increased 10 basis points, or $7.3 million, from the forty weeks ended October 2, 2011. This increase was driven by an increase in commodity costs, including potatoes, ground beef, and fry oil partially offset by a decrease related to lower produce, cheese and poultry costs.


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Labor



                                                Twelve Weeks Ended                         Forty Weeks Ended
                                      September 30,     October 2,    Percent    September 30,     October 2,    Percent
(In thousands, except percentages)        2012             2011       Change         2012             2011       Change
Labor                                $        71,729   $     68,143       5.3 % $       243,410   $    235,588       3.3 %
As a percent of restaurant revenue              34.2 %         33.6 %     0.6 %            33.6 %         33.8 %    (0.2 )%

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 September 30, 2012, labor costs as a percentage of restaurant revenue increased 60 basis points. Contributing to this increase as a percentage of restaurant revenue was a 90 basis point increase in variable compensation, group insurance, and management labor costs, partially offset by a 30 basis point decrease in workers' compensation and vacation costs.

For the forty weeks ended September 30, 2012, labor as a percentage of restaurant revenue decreased 20 basis points from the forty weeks ended October 2, 2011. This decrease is driven primarily by a 40 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 50 basis point increase in group insurance costs, merit increases, and variable compensation.

Operating



                                                Twelve Weeks Ended                                Forty Weeks Ended
                                      September 30,     October 2,    Percent       September 30,                         Percent
(In thousands, except percentages)        2012             2011        Change           2012          October 2, 2011     Change
Operating                            $        28,374   $     29,226       (2.9 )%  $        94,656   $          96,968        (2.4 )%
As a percent of restaurant revenue              13.5 %         14.4 %     (0.9 )%             13.1 %              13.9 %      (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 September 30, 2012, operating costs as a percentage of restaurant revenue decreased 90 basis points over prior year primarily due to decreases in payment card processing fees resulting from legislative changes, utility and telephone expenses, and restaurant service, maintenance and supply costs.

For the forty weeks ended September 30, 2012, operating costs as a percentage of restaurant revenue decreased 80 basis points, or $2.3 million. This decrease was primarily due to decreases in payment card processing fees, in supply costs, and a 20 basis point decrease in utility costs.

Occupancy



                                                Twelve Weeks Ended                         Forty Weeks Ended
                                      September 30,     October 2,    Percent    September 30,     October 2,    Percent
(In thousands, except percentages)        2012             2011       Change         2012             2011       Change
Occupancy                            $        16,309   $     15,458       5.5 % $        53,213   $     50,215       6.0 %
As a percent of restaurant revenue               7.8 %          7.6 %     0.2 %             7.3 %          7.2 %     0.1 %

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 September 30, 2012 were $10.5 million and $34.3 million, respectively. Fixed rents for the twelve and forty weeks ended October 2, 2011 were $9.9 million and $32.4 million, respectively. The increase in occupancy costs as a percent of restaurant revenue over prior year for the twelve and forty week period was primarily due to the increase in fixed rents related to the additional restaurants opened since third quarter 2011.


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Depreciation and Amortization



                                                Twelve Weeks Ended                          Forty Weeks Ended
                                      September 30,     October 2,    Percent     September 30,     October 2,    Percent
(In thousands, except percentages)        2012             2011       Change          2012             2011       Change
Depreciation and amortization        $        13,284   $     13,006       2.1 %  $        42,468   $     42,751      (0.7 )%
As a percent of total revenues                   6.2 %          6.3 %    (0.1 )%             5.8 %          6.0 %    (0.2 )%

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 forty weeks ended September 30, 2012, decreased due primarily to leverage from higher restaurant sales volumes on these fixed expenses.

Selling, General and Administrative



                                                  Twelve Weeks Ended                           Forty Weeks Ended
                                       September 30,     October 2,     Percent     September 30,     October 2,     Percent
(In thousands, except percentages)         2012             2011        Change          2012             2011        Change
Selling, general and administrative   $        24,469   $     22,926         6.7 % $        83,920   $     79,508         5.5 %
As a percent of total revenues                   11.5 %         11.1 %       0.4 %            11.4 %         11.2 %       0.2 %

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 September 30, 2012, selling, general and administrative costs increased 6.7%, or $1.5 million, due primarily to higher gift card fees to third party vendors, gift card production costs, consulting fees paid for information technology infrastructure changes, and higher stock-based compensation.

For the forty weeks ended September 30, 2012, selling, general and administrative costs increased 5.5%, or $4.4 million, due primarily to increased gift card fees to third party vendors, gift card production, stock-based compensation, and consulting fees paid for information technology infrastructure changes.

Pre-opening Costs



                                                    Twelve Weeks Ended                                Forty Weeks Ended
                                       September 30,      October 2,       Percent       September 30,      October 2,      Percent
(In thousands, except percentages)         2012              2011           Change           2012              2011          Change
Pre-opening costs                     $         1,250    $         622         101.0 %  $         2,835    $      2,799           1.3 %
As a percent of total revenues                    0.6 %            0.3 %         0.3 %              0.4 %           0.4 %         0.0 %
Average per restaurant pre-opening
costs                                 $           229    $         254          (9.8 )% $           235    $        281         (16.4 )%

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 six and eleven company-owned restaurants during the twelve and forty weeks ended September 30, 2012, respectively, compared to two and nine company-owned restaurants during the twelve and forty weeks ended October 2, 2011, respectively.


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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. The Company compared the carrying amount of the restaurant to its fair value as estimated by management. The impairment charge represents the excess of the restaurant's carrying amount over its estimated fair value.

Interest Expense, net and other

Interest expense, net and other was $1.1 million and $1.6 million for the twelve weeks ended September 30, 2012, and October 2, 2011, respectively, and $4.2 million and $4.4 million for the forty weeks ended September 30, 2012, and October 2, 2011, respectively. Interest expense, net for the twelve and forty weeks ended September 30, 2012 decreased over prior year period due primarily to lower average debt balances. Our weighted-average interest rate was 4.2% and 3.8% for the twelve and forty weeks ended September 30, 2012, versus 3.7% and 2.5%, respectively, for the twelve and forty weeks ended October 2, 2011.

Provision for Income Taxes

. . .

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