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RRGB > SEC Filings for RRGB > Form 10-Q on 16-Aug-2013All 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


16-Aug-2013

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 2013 and 2012 refer to the twelve and twenty-eight week periods ending July 14, 2013, and July 8, 2012, respectively, unless otherwise indicated.

Overview

Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin" or the "Company"), primarily develops, operates and franchises casual-dining restaurants with 477 locations as of July 14, 2013. The Company operated 344 Company-owned restaurants located in 33 states comprised of 339 casual dining locations and five Red Robin's Burger Works®, a smaller non-traditional prototype with a limited menu and limited service. The Company also franchises restaurants, of which there were 133 restaurants in 21 states and two Canadian provinces as of July 14, 2013. The Company operates its business as one operating and one reportable segment.

The following summarizes the operational and financial highlights during the twelve and twenty-eight weeks ended July 14, 2013, and our outlook for the remainder of 2013:

† Comparable Restaurant Revenue. 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 14, 2013, the 323 restaurants in our comparable base experienced a 4.3% increase in net sales compared to the same period last year. This increase was driven by a 5.0% increase in average guest check, partially offset by a 0.7% decrease in guest count. For the twenty-eight weeks ended July 14, 2013, the 320 restaurants in our comparable base experienced a 3.1% increase in net sales compared to the same period last year. This increase was driven by a 3.7% increase in average guest check, partially offset by a 0.6% decrease in guest count. Our comparable sales are measured using the most closely aligned calendar weeks.

† Marketing. Our Red Robin Royalty™ loyalty program operates in all of our Company-owned restaurants and in 75 of our franchised locations. Engaging our guests through this program is a key part of our marketing strategy and uses offers designed to increase the frequency of guest visits. We are also using the program to generate awareness of new menu items and to engage our guests with smart rewards. Our "Take Back the Bar" initiative continues to increase our alcoholic beverage mix, differentiate our brand, and help target adult diners.

† Brand Transformation Initiative. As of July 14, 2013, we have completed brand transformation projects at 21 of our restaurants. Additionally, we plan to expand our brand transformation initiatives into an additional 20 restaurants during the remainder of 2013 through remodeling efforts.

† Food Costs. As a percentage of restaurant revenue, we have experienced a decrease of 70 basis points and 60 basis points in cost of goods during the twelve and twenty-eight weeks ended July 14, 2013, respectively, compared to the same periods in the prior year. This decrease was primarily driven by lower hamburger, potatoes and produce costs, as well as favorable product mix.


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† Labor. Labor costs as a percentage of restaurant revenue decreased 50 basis points and 10 basis points for the twelve and twenty-eight weeks ended July 14, 2013, from the same periods in 2012. This decrease was primarily driven by lower controllable labor and workers' compensation costs, as well as an insurance-related refund during the second quarter 2013.

† Other Operating. Other operating costs as a percentage of restaurant revenue decreased 100 basis points and 70 basis points for the twelve and twenty-eight weeks ended July 14, 2013 as compared to the same periods in 2012. The decrease primarily related to lower promotional activities through the first half of the year as well as a decline in supply costs and credit card fees in the second quarter.

† New Restaurant Openings. We opened two Company-owned restaurants during the twelve weeks ended July 14, 2013. We plan to open 20 Company-owned restaurants in 2013 and potentially several Burger Works®, which we expect to fund from our operating cash flows.

† Selling, General and Administrative. As a percentage of total revenue, selling, general and administrative costs increased 50 basis points and 70 basis points for the twelve and twenty-eight weeks ended July 14, 2013, from the same periods in 2012. This increase was primarily driven by investments in talent to support value-enhancing initiatives and higher incentive-based compensation.

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 Ended
                             July 14, 2013    July 8, 2012    July 14, 2013    July 8, 2012
Company-owned:
Beginning of period                    342             330              339             327
Opened during period (1)                 2               1                5               5
Acquired from franchisee                 -               1                -               1
Closed during period                     -              (1 )              -              (2 )
End of period                          344             331              344             331

Franchised:
Beginning of period                    133             136              133             137
Sold or closed during
period                                   -              (5 )              -              (6 )
End of period                          133             131              133             131

Total number of Red Robin
restaurants                            477             462              477             462



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

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 2012 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            Twenty-eight Weeks Ended
                                    July 14, 2013    July 8, 2012    July 14, 2013    July 8, 2012
Revenues:
Restaurant revenue                           98.4 %          98.3 %           98.4 %          98.4 %
Franchise royalties, fees and
other revenues                                1.6             1.7              1.6             1.6
Total revenues                              100.0           100.0            100.0           100.0

Costs and Expenses:
Restaurant operating costs
(exclusive of depreciation and
amortization shown separately
below):
Cost of sales                                24.7            25.4             24.8            25.4
Labor                                        32.7            33.2             33.3            33.4
Other operating                              12.1            13.1             12.2            12.9
Occupancy                                     7.2             7.2              7.3             7.2
Total restaurant operating costs             76.7            78.9             77.7            78.9

Depreciation and amortization                 5.6             5.6              5.7             5.6
Selling, general and
administrative                               11.9            11.4             12.1            11.4
Pre-opening costs                             0.5             0.3              0.4             0.3
Income from operations                        6.5             5.1              5.3             5.2

Interest expense, net and other               0.3             0.6              0.3             0.6
Income before income taxes                    6.2             4.5              5.0             4.6
Provision for income taxes                    1.5             1.1              1.2             1.1
Net income                                    4.7 %           3.5 %            3.8 %           3.5 %

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

Total Revenues



                                            Twelve Weeks Ended                                      Twenty-eight Weeks Ended
                                                                     Change                                                     Change
(Revenues in thousands)    July 14, 2013      July 8, 2012         $          %       July 14, 2013      July 8, 2012         $         %
Restaurant revenue        $       234,490    $      219,932    $   14,558     6.6 %  $       535,803    $      514,574    $  21,229      4.1 %
Franchise royalties,
fees and other revenue              3,809             3,745            64     1.7 %            8,845             8,562          283      3.3 %
Total revenues            $       238,299    $      223,677    $   14,622     6.5 %  $       544,648    $      523,136    $  21,512      4.1 %

Average weekly net
sales volumes in
comparable restaurants
(1)                       $        57,769    $       55,388    $    2,381     4.3 %  $        56,795    $       55,069    $   1,726      3.1 %
Average weekly net
sales volumes in
Company-owned
restaurants (1)           $        57,699    $       55,774    $    1,925     3.5 %  $        56,719    $       56,076    $     643      1.1 %
Total operating weeks               4,111             3,962           149     3.8 %            9,555             9,206          349      3.8 %
Net sales per square
foot in Company-owned
restaurants               $           107    $          104    $        3     2.9 %  $           246    $          243    $       3      1.2 %



(1) Includes Company-owned casual dining restaurants only.

Restaurant revenue during the twelve weeks ended July 14, 2013, which is comprised almost entirely of food and beverage sales, increased $14.6 million compared to second quarter 2012. Net sales in our comparable restaurant base increased approximately $9.2 million or 4.3% during the second quarter 2013, compared to second quarter 2012. The comparable sales increase was primarily the result of a 5.0% increase in average guest check, partially offset by 0.7% decrease in guest counts.

Restaurant revenue during the twenty-eight weeks ended July 14, 2013, increased by $21.2 million compared to the twenty-eight weeks ended July 8, 2012. Net sales in our comparable restaurant base increased approximately $15.5 million or 3.1% during


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the twenty-eight weeks ended July 14, 2013, compared to same period last year. The comparable sales increase was primarily the result of a 3.7% increase in average guest check, partially offset by 0.6% decrease in guest counts.

Average weekly net sales volumes represent the total restaurant revenue for all Company-owned casual dining restaurants 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. New 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. Fluctuations in average weekly net 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 and the average square feet of our restaurants. During the twelve and twenty-eight weeks ended July 14, 2013, total average weekly net sales in Company-owned restaurants increased 3.5% and 1.1%, respectively, compared to the same periods last year due mainly to menu price increases initiated since the fourth fiscal quarter of 2012.

Franchise royalties, fees and other revenue, which consist primarily of royalty income and initial franchise fees, increased 1.7% and 3.3% for the twelve and twenty-eight weeks ended July 14, 2013, 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 1.9% for U.S. restaurants and increased 1.2% for Canadian restaurants for the second quarter of 2013 compared to the second quarter of 2012. For the twenty-eight weeks ended July 14, 2013, our franchisees reported that comparable restaurant sales for U.S. restaurants increased 0.3% and Canadian restaurants increased 2.3% from the twenty-eight week period ended July 8, 2012.

Cost of Sales

Twelve Weeks Ended Twenty-eight Weeks Ended
Change Change
(In thousands, except percentages) July 14, 2013 July 8, 2012 $ % July 14, 2013 July 8, 2012 $ % Cost of sales $ 58,024 $ 55,804 $ 2,220 4.0 % $ 133,006 $ 130,879 $ 2,127 1.6 % As a percent of restaurant revenue 24.7 % 25.4 % (0.7 )% 24.8 % 25.4 % (0.6 )%

Cost of sales, comprised of food and beverage costs, is variable and generally fluctuates with sales volume. For the twelve weeks ended July 14, 2013, 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 lower ground beef, potatoes and produce costs, as well as favorable product mix.

For the twenty-eight weeks ended July 14, 2013, cost of sales as a percentage of restaurant revenue decreased 60 basis points, or $2.1 million, from the twenty-eight weeks ended July 8, 2012. This decrease was driven by lower commodity costs, including seafood, cheese, ground beef and produce costs.

Labor

Twelve Weeks Ended Twenty-eight Weeks Ended
Change Change
(In thousands, except percentages) July 14, 2013 July 8, 2012 $ % July 14, 2013 July 8, 2012 $ % Labor $ 76,648 $ 73,075 $ 3,573 4.9 % $ 178,530 $ 171,681 $ 6,849 4.0 % As a percent of restaurant revenue 32.7 % 33.2 % (0.5 )% 33.3 % 33.4 % (0.1 )%

Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. For the twelve weeks ended July 14, 2013, labor costs as a percentage of restaurant revenue decreased 50 basis points. This decrease primarily resulted from lower controllable labor and workers' compensation costs as well as an insurance refund during the second quarter 2013.

For the twenty-eight weeks ended July 14, 2013, labor as a percentage of restaurant revenue decreased 10 basis points from the same period in 2012. This decrease was driven primarily by a 30 basis point decrease in controllable labor and workers' compensation costs, partially offset by a 20 basis point increase in management salaries from merit increases.


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Other Operating



                                                    Twelve Weeks Ended                               Twenty-eight Weeks Ended
                                                                           Change                                              Change
(In thousands, except percentages)    July 14, 2013     July 8, 2012      $       %       July 14, 2013     July 8, 2012      $       %
Other operating                      $        28,463   $       28,877   $ (414 ) (1.4 )% $        65,553   $       66,282   $ (729 ) (1.1 )%
As a percent of restaurant revenue              12.1 %           13.1 %          (1.0 )%            12.2 %           12.9 %          (0.7 )%

Other operating costs include costs such as restaurant supplies, utilities, and other costs such as service repairs and maintenance costs. For the twelve weeks ended July 14, 2013, other operating costs as a percentage of restaurant revenue decreased 100 basis points over prior year. The decrease as a percentage of restaurant revenue resulted from a 70 basis point decrease related to lower promotional activities and a 30 basis point decrease attributable to lower supply costs and credit card fees.

For the twenty-eight weeks ended July 14, 2013, other operating costs as a percentage of restaurant revenue decreased 70 basis points due primarily to lower promotional costs.

Occupancy

Twelve Weeks Ended Twenty-eight Weeks Ended
Change Change
(In thousands, except percentages) July 14, 2013 July 8, 2012 $ % July 14, 2013 July 8, 2012 $ % Occupancy $ 16,779 $ 15,790 $ 989 6.3 % $ 39,352 $ 36,904 $ 2,448 6.6 % As a percent of restaurant revenue 7.2 % 7.2 % 0.0 % 7.3 % 7.2 % 0.1 %

Occupancy costs include fixed rents, contingent rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs. Occupancy costs incurred prior to opening our new restaurants are included in pre-opening costs. The increase in occupancy costs over prior year periods for the twelve and twenty-eight weeks was primarily due to the increase in fixed rents related to the additional restaurants opened since second quarter 2012.

Depreciation and Amortization

Twelve Weeks Ended Twenty-eight Weeks Ended
Change Change
(In thousands, except percentages) July 14, 2013 July 8, 2012 $ % July 14, 2013 July 8, 2012 $ % Depreciation and amortization $ 13,319 $ 12,532 $ 787 6.3 % $ 31,153 $ 29,184 $ 1,969 6.7 % As a percent of total revenues 5.6 % 5.6 % 0.0 % 5.7 % 5.6 % 0.1 %

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 increased over the prior year periods, largely due to an increase in leasehold improvement amortization due primarily to the opening of new restaurants, as well as an increase in depreciation related to placing into service certain elements of our information technology systems.

Selling, General and Administrative

Twelve Weeks Ended Twenty-eight Weeks Ended
Change Change
(In thousands, except percentages) July 14, 2013 July 8, 2012 $ % July 14, 2013 July 8, 2012 $ % Selling, general and administrative $ 28,386 $ 25,574 $ 2,812 11.0 % $ 65,994 $ 59,451 $ 6,543 11.0 % As a percent of total revenues 11.9 % 11.4 % 0.5 % 12.1 % 11.4 % 0.7 %

Selling, general and administrative costs include all corporate and administrative functions. Components of this category include corporate, regional and franchise support salaries and benefits, travel, information systems, training, office rent, professional and consulting fees, board of directors' expenses, legal expenses and marketing costs. For the twelve weeks ended July 14, 2013, selling, general and administrative costs increased 11.0%, or $2.8 million over the twelve weeks ended July 8, 2012, driven primarily by an increase in salaries and benefits due to investments in talent to support value-enhancing initiatives and higher incentive based compensation.

For the twenty-eight weeks ended July 14, 2013, selling, general and administrative costs increased 11.0%, or $6.5 million, due primarily to an increase in salaries and benefits and higher incentive based compensation.


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Pre-opening Costs

Twelve Weeks Ended Twenty-eight Weeks Ended
Change Change
(In thousands, except percentages) July 14, 2013 July 8, 2012 $ % July 14, 2013 July 8, 2012 $ % Pre-opening costs $ 1,291 $ 602 $ 689 114.5 % $ 2,125 $ 1,585 $ 540 34.1 % As a percent of total revenues 0.5 % 0.3 % 0.2 % 0.4 % 0.3 % 0.1 %

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, occupancy costs incurred prior to opening, and other direct costs related to the opening of new restaurants. Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size of the restaurants being opened and the location of the restaurants. Pre-opening expenses for any given quarter will typically include expenses associated with restaurants opened during the quarter as well as expenses related to restaurants opened towards the end of the prior quarter and restaurants opening in subsequent quarters.

Interest Expense, Net and Other

Interest expense, net and other was $0.7 million and $1.3 million for the twelve weeks ended July 14, 2013, and July 8, 2012, respectively, and $1.8 million and $3.1 million for the twenty-eight weeks ended July 14, 2013, and July 8, 2012, respectively. Interest expense, net and other for the twelve and twenty-eight weeks ended July 14, 2013 decreased over prior year period due primarily to lower average debt balances. Our weighted-average interest rate was 2.8% and 2.7% for the twelve and twenty-eight weeks ended July 14, 2013, versus 3.6% and 3.5%, respectively, for the twelve and twenty-eight weeks ended July 8, 2012.

Provision for Income Taxes

The effective income tax rate for the second quarter 2013 was 24.3% compared to 23.7% for the second quarter 2012. The effective income tax rate for the twenty-eight weeks ended July 14, 2013 and July 8, 2012 was 24.1% and 24.0%, respectively. We anticipate that our full year fiscal 2013 effective tax rate will be approximately 24%.

Liquidity and Capital Resources

General. Cash and cash equivalents decreased $5.9 million to $16.5 million at July 14, 2013, from $22.4 million at the beginning of the fiscal year. 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.

Cash Flows



The table below summarizes our cash flows from operating, investing and
financing activities for each period presented (in thousands):



                                                       Twenty-eight Weeks Ended
                                                  July 14, 2013         July 8, 2012
Net cash provided by operating activities       $          71,005     $         50,083
Net cash used in investing activities                     (31,689 )            (27,935 )
Net cash used in financing activities                     (45,211 )            (27,246 )
Net increase (decrease) in cash and cash
equivalents                                     $          (5,895 )   $         (5,098 )

Operating Cash Flows

Net cash flows provided by operating activities were $71.0 million for the twenty-eight weeks ended July 14, 2013, compared to $50.1 million for the same period in 2012. Of the $20.9 million increase, approximately $18.4 million relates to the acceleration of payments to vendors at the end of fiscal year 2012 in order to aid in the conversion to our new information technology system, an increase in accrued liabilities related to restaurant construction and remodeling, as well as an increase in accrued payroll costs. In addition, approximately $10.8 million of the increase relates to profit from restaurant operations due to increased sales and lower operating costs, partially offset by a $6.5 million increase in salaries, benefits and inventive-based compensation.


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Investing Cash Flows

Net cash flows used in investing activities were $31.7 million for the twenty-eight weeks ended July 14, 2013, compared to $27.9 million for the same period in 2012. The increase over prior year is due primarily to investments in new restaurant openings, kitchen equipment and technology infrastructure. The following table lists the components of our investing activities for the twenty-eight weeks ended July 14, 2013 (in millions):

                                                       Twenty-eight Weeks Ended
                                                             July 14, 2013
New restaurants                                      $                      20,540
Restaurant facility improvements                                             8,945
. . .
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