Red Robin Gourmet Burgers Reports Results for the Fiscal First Quarter Ended April 21, 2019

Company Announces Closure of 10 Underperforming Restaurants

Red Robin Gourmet Burgers, Inc., (NASDAQ:RRGB) last week reported financial results for the quarter ended April 21, 2019.

First Quarter 2019 Financial Highlights Compared to First Quarter 2018

  • GAAP earnings per diluted share were $0.05 compared to $0.34;
  • Adjusted earnings per diluted share were $0.19 compared to $0.69 (see Schedule I);
  • Total revenues were $409.9 million, a decrease of 2.8%;
  • Off-premise sales increased 20.6%, now comprising 11.6% of total food and beverage sales, including catering;
  • Comparable restaurant revenue decreased 3.3% (using constant currency rates); and
  • Comparable restaurant guest counts decreased 5.5%.

Pattye Moore, board chair and interim chief executive officer of Red Robin Gourmet Burgers, Inc., said, “As our financial results demonstrate, there is still much work to be done on the turnaround, and we are moving with urgency. We continue to focus on our five strategic priorities and are starting to see progress on multiple fronts and in the underlying key operational metrics we are tracking. The Board has engaged The Elliot Group, which has deep experience in our industry, to assist in the CEO search and the Search Committee has already begun the interview process. At the same time, in the nine weeks since I became Interim CEO, I have worked closely with the management team to narrow the list of critical initiatives and simplify our focus. We are actively working with The Cypress Group on selectively refranchising and reassessing our real estate portfolio, and today we announced the closure of 10 underperforming restaurants. We have hired an experienced industry leader as our new vice president of Consumer Insights and we are continuing to identify ways to improve all aspects of our business. All of these efforts are designed to enhance the customer experience, significantly improve cash flow, increase profitability and drive shareholder value. We are confident our initiatives will steadily improve our financial and operational performance and that our search process will identify a leader who can accelerate our turnaround.”

First Quarter 2019 Operating Results

Total revenues, which primarily include Company-owned restaurant revenue and franchise royalties, decreased 2.8% to $409.9 million in the first quarter of 2019 from $421.5 million in the first quarter of 2018. Restaurant revenue decreased $14.2 million due to a $13.5 million, or 3.3%, decrease in comparable restaurant revenue, a $2.2 million decrease from closed restaurants, and a $0.6 million unfavorable foreign currency exchange impact, offset by a $2.1 million increase in revenue from new restaurant openings.

System-wide restaurant revenue (which includes franchised units) for the first quarter of 2019 totaled $483.7 million, compared to $498.0 million for the first quarter of 2018.

Comparable restaurant revenue(1) decreased 3.3% in the first quarter of 2019 compared to the same period a year ago, driven by a 5.5% decrease in guest counts offset by a 2.2% increase in average guest check. The increase in average guest check was comprised of a 0.3% increase in menu mix and a 1.9% increase in pricing.

Net income was $0.6 million for the first quarter of 2019 compared to $4.4 million for the same period a year ago. Adjusted net income was $2.4 million for the first quarter of 2019 compared to $9.1 million for the same period a year ago (see Schedule I).

Restaurant-level operating profit margin (a non-GAAP financial measure) was 18.3% in the first quarter of 2019 compared to 20.0% in the same period a year ago. Cost of sales as a percentage of restaurant revenue decreased 40 basis points primarily due to a reduction in waste and lower Tavern mix. Restaurant labor costs as a percentage of restaurant revenue increased 120 basis points due to higher average wage rates, increased management headcount to fully staff our restaurants, and sales deleverage. Other restaurant operating costs increased 60 basis points primarily due to increases in third-party delivery fees and equipment repairs and maintenance costs. Occupancy costs increased 30 basis points primarily due to sales deleverage. Schedule II of this earnings release defines restaurant-level operating profit, discusses why it is a useful metric for investors, and reconciles this metric to income from operations and net income, in each case under GAAP.

________________________________________

(1)   Comparable restaurants are those Company-owned restaurants that have operated five full quarters during the period presented, and such restaurants are only included in the comparable metrics if they are comparable for the entirety of both periods presented.
 

Restaurant Revenue Performance

      Q1 2019   Q1 2018
Average weekly sales per unit(1):
Company-owned – Total $ 51,802 $ 53,618
Company-owned – Comparable $ 51,962 $ 53,766
Franchised units – Comparable $ 58,957 $ 60,523
Total operating weeks:
Company-owned units 7,731 7,772
Franchised units 1,408 1,386
 

________________________________________

(1)   Calculated using constant currency rates. Using historical currency rates, the average weekly sales per unit in the first quarter of 2018 for Company-owned – Total and Company-owned – Comparable was $53,704 and $53,853. The Company calculates non-GAAP constant currency average weekly sales per unit by translating prior year local currency average weekly sales per unit to U.S. dollars based on current quarter average exchange rates. The Company considers non-GAAP constant currency average weekly sales per unit to be a useful metric to investors and management as they facilitate a more useful comparison of current performance to historical performance.
 

Other Results

Depreciation and amortization costs decreased to $28.4 million in the first quarter of 2019 from $29.2 million in the first quarter of 2018.

General and administrative costs were $30.1 million, or 7.3% of total revenues, in the first quarter of 2019, compared to $28.6 million, or 6.8% of total revenues in the same period a year ago. The increase was primarily driven by increases in professional services, travel expenses related to manager training, and salaries, offset by lower incentive and equity compensation.

Selling expenses were $18.0 million, or 4.4% of total revenues, in the first quarter of 2019, compared to $17.7 million, or 4.2% of total revenues, during the same period in the prior year.

Other charges in the first quarter of 2019 included $2.0 million in executive transition and severance, $0.3 million in costs related to restaurants that were previously closed, and $0.1 million in executive retention.

The Company had an effective tax rate of a 291.4% benefit in the first quarter of fiscal year 2019, compared to an effective tax rate of a 21.2% benefit during the same period a year ago. The change in the effective tax rate is primarily due to the decrease in income in the first quarter of 2019 compared to the same period a year ago.

Earnings per diluted share for the first quarter of 2019 were $0.05 compared to $0.34 in the first quarter of 2018. Excluding charges of $0.11 per diluted share for executive transition and severance, $0.02 per diluted share for restaurant closure costs, and $0.01 per diluted share for executive retention, adjusted earnings per diluted share for the first quarter ended April 21, 2019 were $0.19. Excluding charges of $0.22 per diluted share for litigation contingencies and $0.13 per diluted share for reorganization costs, adjusted earnings per diluted share for the first quarter ended April 22, 2018 were $0.69. See Schedule I for a reconciliation of adjusted net income and adjusted earnings per share (each, a non-GAAP financial measure) to net income and earnings per share.

Restaurant Portfolio

There were no Red Robin restaurant openings and one closure during the first quarter of 2019.

Effective May 31, 2019, the Company will close 10 restaurants in connection with its previously announced real estate portfolio reassessment. Seven of these restaurants are in enclosed mall locations. This action is expected to drive improved profitability. Where possible, employees will be offered positions at nearby Red Robin locations. The 10 restaurants contributed $4.5 million in restaurant sales and $0.9 million in restaurant-level pre-tax operating losses, including an immaterial amount of depreciation expense for the four months ended April 21, 2019. As a result of these closures, the Company currently expects to recognize non-cash impairment charges of approximately $0.7 million to $2.6 million during the second quarter of 2019.

The following table details restaurant unit data for Company-owned and franchised locations for the periods indicated:

       

Sixteen Weeks
Ended

 

Sixteen Weeks
Ended

April 21, 2019 April 22, 2018
Company-owned:
Beginning of period 484 480
Opened during the period 4
Closed during the period (1 )
End of period 483   484
Franchised:
Beginning of period 89 86
Opened during the period   1
End of period 89   87
Total number of restaurants 572   571
 

Balance Sheet and Liquidity

As of April 21, 2019, the Company had cash and cash equivalents of $23.0 million and total debt of $183.4 million. The Company funded capital expenditures with cash flow from operations and made net repayments of $10.0 million on its credit facility during the first quarter of 2019. As of April 21, 2019, the Company had outstanding borrowings under its credit facility of $182.5 million, in addition to amounts issued under letters of credit of $7.4 million, which reduce the amount available under its credit facility but are not recorded as debt.

The Company’s lease adjusted leverage ratio was 4.23x as of April 21, 2019. The lease adjusted leverage ratio is defined in Section 1.1 of the Company’s credit facility, which is filed as Exhibit 10.32 to the Annual Report on Form 10-K filed on February 21, 2017.

Outlook for 2019

Red Robin’s updated 2019 annual outlook reflects lower dine-in sales partially offset by higher off-premise sales, a deliberate decision to delay the rollout of some restaurant-level technology solutions, higher than expected wage rates, incremental commission costs associated with an increase in third-party delivery sales, and lower selling, general and administrative costs. The updated 2019 guidance is as follows:

  • Comparable restaurant revenue of down 1.0% to up 1.0% (using constant currency rates);
  • Selling, general and administrative costs of $156 million to $159 million;
  • Net income of $8.0 million to $16.0 million;
  • Adjusted EBITDA, a Non-GAAP measure, of $107 million to $117 million;
  • Adjusted diluted earnings per share, a Non-GAAP measure, of $1.14 to $1.77, which includes the impact of an estimated tax benefit of $0.73 to $0.96; and
  • Capital expenditures of $45 million to $55 million

About Red Robin Gourmet Burgers, Inc. (NASDAQ: RRGB)

Red Robin Gourmet Burgers, Inc. (), a casual dining restaurant chain founded in 1969 that operates through its wholly-owned subsidiary, Red Robin International, Inc., and under the trade name Red Robin Gourmet Burgers and Brews, is the Gourmet Burger Authority, famous for serving more than two dozen craveable, high-quality burgers with Bottomless Steak Fries® in a fun environment welcoming to Guests of all ages. Whether a family dining with kids, adults grabbing a drink at the bar, or teens enjoying a meal, Red Robin offers an unparalleled experience for its Guests. In addition to its many burger offerings, Red Robin serves a wide variety of salads, soups, appetizers, entrees, desserts, and signature beverages. Red Robin offers a variety of options behind the bar, including its extensive selection of local and regional beers, and innovative adult beer shakes and cocktails, earning the restaurant a VIBE Vista Award for Best Beer Program in a Multi-Unit Chain Restaurant. There are more than 570 Red Robin restaurants across the United States and Canada, including locations operating under franchise agreements.

     
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Sixteen Weeks Ended
April 21, 2019   April 22, 2018
Revenues:
Restaurant revenue $ 400,484 $ 414,702
Franchise and other revenue 9,382   6,817  
Total revenues 409,866   421,519  
 
Costs and expenses:
Restaurant operating costs (exclusive of depreciation
and amortization shown separately below):
Cost of sales 93,715 98,515
Labor 142,894 143,015
Other operating 55,565 55,025
Occupancy 35,020 35,010
Depreciation and amortization 28,438 29,193
General and administrative 30,090 28,588
Selling 18,026 17,730
Pre-opening costs 319 1,137
Other charges 2,398   6,287  
Total costs and expenses 406,465   414,500  
 
Income from operations 3,401 7,019
 
Other expense:
Interest expense, net and other 3,238   3,407  
 
Income before income taxes 163 3,612
Income tax benefit (476 ) (768 )
Net income $ 639   $ 4,380  
Earnings per share:
Basic $ 0.05   $ 0.34  
Diluted $ 0.05   $ 0.34  
Weighted average shares outstanding:
Basic 12,967   12,960  
Diluted 13,041   13,065  
 
       
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 

(Unaudited)
April 21, 2019

December 30, 2018
Assets:
Current Assets:
Cash and cash equivalents $ 22,959 $ 18,569
Accounts receivable, net 12,626 25,034
Inventories 28,115 27,370
Prepaid expenses and other current assets 22,224   27,576  
Total current assets 85,924   98,549  
Property and equipment, net 541,161 565,142
Right of use assets, net 460,815
Goodwill 96,080 95,838
Intangible assets, net 33,287 34,609
Other assets, net 53,128   49,803  
Total assets $ 1,270,395   $ 843,941  
 
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable $ 33,783 $ 39,024
Accrued payroll and payroll related liabilities 40,051 37,922
Unearned revenue 41,239 55,360
Short-term portion of lease obligations 42,081 786
Accrued liabilities and other 38,423   38,057  
Total current liabilities 195,577   171,149  
Deferred rent 75,675
Long-term debt 183,375 193,375
Long-term portion of lease obligations 513,520 9,414
Other non-current liabilities 10,337   11,523  
Total liabilities 902,809   461,136  
 
Stockholders’ Equity:
Common stock; $0.001 par value: 45,000 shares authorized; 17,851 and 17,851 shares issued; 12,972 and 12,971 shares outstanding 18 18
Preferred stock, $0.001 par value: 3,000 shares authorized; no shares issued and outstanding
Treasury stock 4,879 and 4,880 shares, at cost (201,135 ) (201,505 )
Paid-in capital 212,025 212,752
Accumulated other loss, net of tax (5,130 ) (4,801 )
Retained earnings 361,808   376,341  
Total stockholders’ equity 367,586   382,805  
Total liabilities and stockholders’ equity $ 1,270,395   $ 843,941  
 

Schedule I

Reconciliation of Non-GAAP Results to GAAP Results
(In thousands, except per share data, unaudited)

In addition to the results provided in accordance with Generally Accepted Accounting Principles (“GAAP”) throughout this press release, the Company has provided non-GAAP measurements which present the 16 weeks ended April 21, 2019 and April 22, 2018, net income and basic and diluted earnings per share, excluding the effects of executive transition and severance, restaurant closure costs, litigation contingencies, reorganization costs, and the related income tax effects. The Company believes the presentation of net income and earnings per share exclusive of the identified item gives the reader additional insight into the ongoing operational results of the Company. This supplemental information will assist with comparisons of past and future financial results against the present financial results presented herein. Income tax effect of reconciling items was calculated based on the change in the total tax provision calculation after adjusting for the identified item. The non-GAAP measurements are intended to supplement the presentation of the Company’s financial results in accordance with GAAP.

     
Sixteen Weeks Ended
April 21, 2019   April 22, 2018
Net income as reported $ 639 $ 4,380
Executive transition and severance 1,994
Litigation contingencies 4,000
Restaurant closure costs 304
Reorganization costs 2,287
Executive retention

 

100
Income tax effect of reconciling items (623 ) (1,617 )
Adjusted net income $ 2,414   $ 9,050  
 
Basic net income per share:
Net income as reported $ 0.05 $ 0.34
Executive transition and severance 0.15
Litigation contingencies 0.31
Restaurant closure costs 0.03
Reorganization costs 0.17
Executive retention 0.01
Income tax effect of reconciling items (0.05 ) (0.12 )
Adjusted earnings per share – basic $ 0.19   $ 0.70  
 
Diluted net income per share (1):
Net income as reported $ 0.05 $ 0.34
Executive transition and severance 0.15
Litigation contingencies 0.30
Restaurant closure costs 0.03
Reorganization costs 0.17
Executive retention 0.01
Income tax effect of reconciling items (0.05 ) (0.12 )
Adjusted earnings per share – diluted $ 0.19   $ 0.69  
 
Weighted average shares outstanding
Basic 12,967 12,960
Diluted 13,041 13,065
 

Schedule II

Reconciliation of Non-GAAP Restaurant-Level Operating Profit to Income
from Operations and Net Income
(In thousands, unaudited)

The Company believes restaurant-level operating profit is an important measure for management and investors because it is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant-level operating efficiency and performance. The Company defines restaurant-level operating profit to be restaurant revenue minus restaurant-level operating costs, excluding restaurant impairment and closure costs. The measure includes restaurant-level occupancy costs, which include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs, but excludes depreciation related to restaurant equipment, buildings and leasehold improvements. The measure excludes depreciation and amortization expense, substantially all of which is related to restaurant-level assets, because such expenses represent historical sunk costs which do not reflect current cash outlay for the restaurants. The measure also excludes selling, general, and administrative costs, and therefore excludes occupancy costs associated with selling, general, and administrative functions, and pre-opening costs. The Company excludes restaurant closure costs as they do not represent a component of the efficiency of continuing operations. Restaurant impairment costs are excluded, because, similar to depreciation and amortization, they represent a non-cash charge for the Company’s investment in its restaurants and not a component of the efficiency of restaurant operations. Restaurant-level operating profit is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income from operations or net income as indicators of financial performance. Restaurant-level operating profit as presented may not be comparable to other similarly titled measures of other companies in our industry. The table below sets forth certain unaudited information for the 16 weeks ended April 21, 2019 and April 22, 2018, expressed as a percentage of total revenues, except for the components of restaurant-level operating profit, which are expressed as a percentage of restaurant revenue.

     
Sixteen Weeks Ended
April 21, 2019   April 22, 2018
Restaurant revenue $ 400,484   97.7 % $ 414,702   98.4 %
Restaurant operating costs (1):
Cost of sales 93,715 23.4 % 98,515 23.8 %
Labor 142,894 35.7 % 143,015 34.5 %
Other operating 55,565 13.9 % 55,025 13.3 %
Occupancy 35,020     8.7 % 35,010     8.4 %
Restaurant-level operating profit 73,290     18.3 % 83,137     20.0 %
 
Add – Franchise and other revenue 9,382 2.3 % 6,817 1.6 %
Deduct – other operating:
Depreciation and amortization 28,438 6.9 % 29,193 6.9 %
General and administrative expenses 30,090 7.3 % 28,588 6.8 %
Selling 18,026 4.4 % 17,730 4.2 %
Pre-opening costs 319 0.1 % 1,137 0.3 %
Other charges 2,398     0.6 % 6,287     1.5 %
Total other operating 79,271     19.3 % 82,935     19.7 %
 
Income from operations 3,401 0.8 % 7,019 1.7 %
 
Interest expense, net and other 3,238 0.8 % 3,407 0.8 %
Income tax benefit (476 )   (0.1 )% (768 )   (0.2 )%
Total other 2,762     0.7 % 2,639     0.6 %
 
Net income $ 639     0.2 % $ 4,380     1.0 %
 

________________________________________

(1) Excluding depreciation and amortization, which is shown separately.
Certain percentage amounts in the table above do not total due to rounding as well as the fact that components of restaurant-level operating profit are expressed as a percentage of restaurant revenue and not total revenues.
 

Schedule III

Reconciliation of Net Income to EBITDA and Adjusted EBITDA
(In thousands, unaudited)

The Company defines EBITDA as net income before interest expense, (benefit) for income taxes, and depreciation and amortization. EBITDA and adjusted EBITDA are presented because the Company believes investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for evaluating our ongoing results of operations without the effect of non-cash charges such as depreciation and amortization expenses, asset disposals, and asset impairment and restaurant closure charges. EBITDA and adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net income or cash flow from operations, as determined by GAAP, and our calculation thereof may not be comparable to that reported by other companies in our industry or otherwise. Adjusted EBITDA further adjusts EBITDA to reflect the additions and eliminations shown in the table below. The use of adjusted EBITDA as a performance measure permits a comparative assessment of our operating performance relative to our performance based on our GAAP results, while isolating the effects of some items that vary from period to period without any correlation to core operating performance. Adjusted EBITDA as presented may not be comparable to other similarly-titled measures of other companies, and our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by excluded or unusual items. We have not provided a reconciliation of our adjusted EBITDA outlook to the most comparable GAAP measure of net income. Providing net income guidance is potentially misleading and not practical given the difficulty of projecting event-driven transactional and other non-core operating items that are included in net income, including asset impairments and income tax valuation adjustments. The reconciliations of adjusted EBITDA to net income for the historical periods presented below are indicative of the reconciliations that will be prepared upon completion of the periods covered by the non-GAAP guidance.

     
Sixteen Weeks Ended
April 21, 2019   April 22, 2018
Net income as reported $ 639 $ 4,380
Interest expense, net 3,345 3,277
Income tax benefit (476 ) (768 )
Depreciation and amortization 28,438   29,193  
EBITDA 31,946   36,082  
 
Executive transition and severance 1,994
Litigation contingencies 4,000
Restaurant closure costs 304
Reorganization costs 2,287
Executive retention 100    
Adjusted EBITDA $ 34,344   $ 42,369