Red Robin: Reported Results for Fiscal Q1-2020

Greenwood Village / CO. (rrgb) Red Robin Gourmet Burgers Inc., a full-service restaurant chain serving an innovative selection of high-quality gourmet burgers in a family-friendly atmosphere, reported financial results for the quarter ended April 19, 2020.

First Quarter 2020 Financial Summary Compared to First Quarter 2019

Total revenues were USD 306.1 million, a decrease of 25.3 percent, primarily resulting from the closure of the Company’s dining rooms, and its operational shift to off-premise only in response to the Covid-19 pandemic;
Comparable restaurant revenue decreased 20.8 percent for the quarter after growing comparable restaurant revenue by 3.7 percent through the second fiscal period;
Comparable average Guest check increased 0.1 percent, resulting from a 1.6 percent increase in pricing and a 0.3 percent increase from lower discounting, partially offset by a 1.8 percent decrease from menu mix;
Comparable restaurant Guest counts decreased 20.9 percent for the quarter after growing comparable restaurant Guest counts by 0.9 percent through the second fiscal period;
Off-premise sales increased 86.1 percent and comprised 26.3 percent of total food and beverage sales;
GAAP loss per diluted share was USD 13.51 compared to GAAP earnings per diluted share of USD 0.05;
Adjusted loss per diluted share was USD 6.66 compared to adjusted earnings per diluted share of USD 0.19;
Net loss was USD 174.3 million compared to net income of USD 0.6 million; and
Adjusted Ebitda was a loss of USD 10.7 million compared to adjusted Ebitda of USD 34.3 million.

Paul J.B. Murphy III, Red Robin’s President and Chief Executive Officer, said, «We entered 2020 with accelerating business momentum, generating positive comparable restaurant revenue of 3.7 percent and positive Guest counts of 0.9 percent through the end of our second fiscal period. However, the Covid-19 pandemic resulted in an immediate shift of our priorities, inclusive of pivoting to a 100 percent off-premise model, the preservation of liquidity and the reduction of costs amid the ongoing uncertainty.»

«Since the onset of the health crisis, we have significantly improved our off-premise execution, resulting in a material improvement in Guest satisfaction scores. Comparable restaurant revenue trends have also shown continual improvement week by week, including (39.7) percent for the week ending June 7th. Importantly, we have recently begun opening dining rooms with limited capacities of up to 50 percent in our largest and highest volume market on the West Coast. In total, we have re-opened approximately 270 dining rooms with disciplined health and safety protocols and our new hospitality model we call TGX. Sales are exceeding our expectations, accompanied by record high dine-in Guest satisfaction scores and continued, strong retention of our elevated off-premise sales. For the week ending June 7th, restaurants with open dining rooms generated total comparable restaurant revenue of (26.7) percent, including off-premise sales of 40 percent of total food and beverage sales. The substantive actions the organization implemented has positioned us well to not only manage through these near-term challenging times, but to succeed in the long-term, post-Covid environment.»

First Quarter 2020 Operating Results

Total revenues, which primarily include Company-owned restaurant revenue and franchise royalties, decreased 25.3 percent to USD 306.1 million in the first quarter of 2020, from USD 409.9 million in the first quarter of 2019. Restaurant revenue decreased USD 99.1 million due to a USD 74.6 million decrease in comparable restaurant revenue(1) and a USD 24.5 million decrease from closed restaurants. The decrease in comparable restaurant revenue was driven by the closure of the Company’s dining rooms in response to the Covid-19 pandemic in mid-March and subsequent operational shift to an off-premise model.

System-wide restaurant revenue (which includes franchised restaurants) for the first quarter of 2020 totaled USD 370.9 million, compared to USD 483.7 million for the first quarter of 2019. In response to Covid-19’s effect on Red Robin franchisee’s operations, we temporarily abated franchise royalty payments and advertising contributions effective March 20, 2020.

Comparable restaurant revenue(1) decreased 20.8 percent in the first quarter of 2020 compared to the same period a year ago, driven by a 20.9 percent decrease in Guest count partially offset by a 0.1 percent increase in average Guest check. The decrease in Guest count was primarily driven by a 22.0 percent decrease from the Covid-19 pandemic. The increase in average Guest check resulted from a 1.6 percent increase in pricing and a 0.3 percent increase from lower discounting, partially offset by a 1.8 percent decrease in menu mix. The decrease in menu mix was primarily driven by the Company’s operational shift to off-premise only, resulting in lower sales of beverages and Finest burgers.

Net loss was USD 174.3 million for the first quarter of 2020 compared to net income of USD 0.6 million for the same period a year ago. Adjusted net loss (a non-GAAP financial measure) was USD 86.0 million for the first quarter of 2020 compared to adjusted net income of USD 2.4 million for the same period a year ago.

Restaurant-level operating profit as a percentage of restaurant revenue (a non-GAAP financial measure) was 8.8 percent in the first quarter of 2020 compared to 18.3 percent in the same period a year ago. Cost of sales as a percentage of restaurant revenue remained flat resulting from a decrease in beverage costs offset by an increase in ground beef prices. Restaurant labor costs as a percentage of restaurant revenue increased 360 basis points primarily due to sales deleverage, higher wage rates, and higher group insurance costs partially offset by lower restaurant manager incentive compensation. Other restaurant operating costs as a percentage of restaurant revenue increased 340 basis points primarily due to an increase in third-party delivery fees driven by higher off-premise sales volumes and sales deleverage impacts on restaurant maintenance, technology, supply, and utility costs. Occupancy costs as a percentage of restaurant revenue increased 250 basis points primarily due to sales deleverage impacts on rent expense and general liability and other real estate costs. 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, the most directly comparable GAAP metrics.

(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 have operated for the entirety of both periods presented.

Restaurant Revenue Performance

	Q1 2020		Q1 2019
Average weekly sales per unit:
Company-owned – Total	USD	41,785	USD	51,802
Company-owned – Comparable(1)	USD	42,888	USD	54,120
Franchised units – Comparable(1)	USD	43,910	USD	59,225
Total operating weeks:
Company-owned units	7,214		7,731
Franchised units	1,632		1,408

Other Results

Depreciation and amortization costs decreased to USD 28.3 million in the first quarter of 2020 from USD 28.4 million in the first quarter of 2019.

General and administrative costs were USD 26.7 million, or 8.7 percent of total revenues, in the first quarter of 2020, compared to USD 30.1 million, or 7.3 percent of total revenues, in the same period a year ago. The decrease was primarily driven by decreased Team Member benefits, travel and entertainment costs, and professional services costs, partially offset by increased Team Member salary and wages stemming from merit salary increases.

Selling expenses were USD 14.8 million, or 4.8 percent of total revenues, in the first quarter of 2020, compared to USD 18.0 million, or 4.4 percent of total revenues, during the same period a year ago. The decrease was primarily driven by a reduction in national media spend, gift card related costs, and project-related G+A costs.

Other charges in the first quarter of 2020 included USD 95.4 million of goodwill impairment, USD 15.5 million of restaurant asset impairment, USD 4.5 million of litigation contingencies, USD 1.5 million of board and stockholder matters costs, USD 1.4 million of restaurant closure and refranchising costs, USD 0.9 million of severance and executive transition costs, and USD 0.2 million of Covid-19 related charges.

The Company had an effective tax rate of a 7.9 percent expense in the first quarter of 2020, compared to an effective tax rate of a 291.4 percent benefit in the same period a year ago. The increase in tax expense is primarily due to a decrease in current year tax credits and the recognition of a valuation allowance on the Company’s tax credit deferred tax asset, partially offset by a decrease in income and a favorable rate impact of net operating loss carrybacks allowed as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which could generate up to USD 12 million of projected cash tax refunds within the next 12 months.

Loss per diluted share for the first quarter of 2020 was USD 13.51 compared to earnings per diluted share of USD 0.05 in the first quarter of 2019. Excluding costs per diluted share included in Other charges of USD 5.48 for goodwill impairment, USD 0.89 for restaurant asset impairment, USD 0.26 for litigation contingencies, USD 0.08 for board and stockholder matters costs, USD 0.08 for restaurant closure and refranchising costs, USD 0.05 for severance and executive transition costs, and USD 0.01 for Covid-19 related charges, adjusted loss per diluted share for the first quarter ended April 19, 2020, was USD 6.66. Excluding charges per diluted share of USD 0.11 for severance and executive transition costs, USD 0.02 for restaurant closure costs, and USD 0.01 for executive retention costs, adjusted earnings per diluted share for the first quarter ended April 21, 2019, was USD 0.19. 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

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

	Sixteen Weeks Ended
	April 19, 2020	April 21, 2019
Company-owned:
Beginning of period	454	484
Opened during the period	–	–
Closed during the period(2)	(2)	(1)
End of period	452	483
Franchised:
Beginning of period	102	89
Opened during the period	–	–
End of period	102	89
Total number of restaurants	554	572

(2) In addition to two permanent closures during the sixteen weeks ended April 19, 2020, 35 Company-owned restaurants were temporarily closed due to an inability to effectively operate these restaurants with an off-premise only operating model during the Covid-19 pandemic.

Balance Sheet and Liquidity

As of April 19, 2020, the Company had cash and cash equivalents of USD 88.9 million and total debt of USD 290.9 million, of which USD 9.7 million was classified as short-term. The Company made net draws of USD 84.0 million on its credit facility during the first quarter of 2020 using the proceeds to provide operating liquidity during the Covid-19 pandemic. As of April 19, 2020, the Company had outstanding borrowings under its credit facility of USD 290.0 million, in addition to amounts issued under letters of credit of USD 7.5 million. Amounts issued under letters of credit reduce the amount available under the credit facility but are not recorded as debt. As of April 19, 2020, the company had no remaining borrowing capacity under the credit facility to help mitigate the impact of Covid-19 on its business and provide operational liquidity.

On January 10, 2020, the Company replaced its credit facility with a new five-year Amended and Restated Credit Agreement (the “Credit Agreement”) which provides for a USD 161.5 million revolving line of credit and a USD 138.5 million term loan for a total borrowing capacity of USD 300 million. The Credit Agreement is included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 13, 2020.

As of April 19, 2020, the Company was not in compliance with certain financial covenants due to the negative impact of Covid-19 on its business. As a result, the Company entered into the First Amendment to the Credit Agreement and Waiver (the “Amendment”) on May 29, 2020 that waives compliance of the lease adjusted leverage ratio financial covenant and fixed charge coverage ratio financial covenant for the remainder of fiscal 2020 provided the Company issues new equity (or convertible debt) generating net cash proceeds of at least USD 25 million on or before November 13, 2020.

Per the maximum cash balance limitation required in the Amendment, the Company made a USD 59 million repayment on the revolving line of credit on May 29, 2020 to ensure cash on hand did not exceed USD 30 million. As of June 7, 2020, the Company had USD 30 million of cash on hand, USD 54 million of available borrowing capacity under its revolving line of credit and expects an average cash burn of USD 1 million to USD 2 million per week for the second fiscal quarter.

The Amendment was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 29, 2020.

Actions in Response to Covid-19

The Company has taken the following actions to preserve liquidity, and enhance financial flexibility:

Temporarily closed dine-in services at substantially all Red Robin-operated restaurants while continuing to provide to-go, delivery, and catering choices and ensuring the continuity of the Company’s supply chain;
Temporarily closed 35 Company-owned restaurants. In connection with these closures, restaurant managers were furloughed or transferred to nearby operational restaurants when possible;
Implemented enhanced health and safety protocols across the business, emergency sick pay for hourly Team Members, and telecommuting policies for nearly all corporate level employees;
Significantly reduced restaurant level costs and general and administrative expenses, including reducing by 20 percent executive base salaries, Board member cash retainer fees, and restaurant support center and non-furloughed restaurant supervisory Team Member wages and salaries;
Eliminated approximately 50 restaurant support center general and administrative positions;
Reduced selling expense by pivoting from national media to digital in support of the Company’s off-premise business;
Postponed or eliminated all non-essential spending, including capital expenditures for previously planned growth and other projects, including the Company’s continued rollout of Donatos®, restaurant refreshes, and IT projects; prior to the pandemic, the Company purchased Donato’s equipment for the Seattle market, including approximately 40 restaurants. We currently plan to resume our roll out of Donato’s in this legacy market by the end of the year;
Drew down the remaining capacity under the Company’s USD 300 million credit facility;
Suspended share repurchases and terminated the Company’s prearranged stock trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended; and
Began to engage in constructive discussions with landlords regarding potential restructuring of lease payments.

Second Quarter Business Update

Overall during the beginning of the second quarter of 2020, the Company’s weekly comparable restaurant revenue has sequentially improved. Preliminary net comparable restaurant revenue and average net sales per restaurant through the week ended June 7, 2020 is as follows:

	Week ended
Company-owned Restaurants	26-Apr	3-May	10-May	17-May	24-May	31-May	7-Jun
Weekly Net Comparable Restaurant Revenues	(56.0)%	(54.7)%	(52.2)%	(47.9)%	(47.0)%	(43.8)%	(39.7)%
Average Net Sales per Restaurant	USD 24,435	USD 24,514	USD 27,202	USD 28,895	USD 29,598	USD 32,239	USD 34,222
# of Comparable Company-operated Restaurants	414	414	414	414	414	414	414

Restaurant Re-Openings

As of June 7, 2020, the Company has re-opened approximately 270 dining rooms with limited capacity, representing approximately 65 percent of currently open Company-owned restaurants. These re-openings include restaurants located in the Company’s largest and highest volume markets on the West Coast. Notably, these restaurants have on average maintained off-premise sales that are approximately one and a half to two times pre-Covid-19 levels and 40 percent of sales mix since re-opening.

Preliminary net comparable restaurant revenue and average net sales per restaurant for re-opened Company-owned restaurants through the week ended June 7, 2020 is as follows:

Week ended

Re-opened Company-owned Restaurants(3)

26-Apr

3-May

10-May

17-May

24-May

31-May

7-Jun

Weekly Net Comparable Restaurant Revenues

N/A

(37.6)%

(35.8)%

(31.6)%

(26.9)%

(26.7)%

Average Net Sales per Restaurant

N/A

USD 27,171

USD 27,536

USD 33,835

USD 37,731

USD 37,682

# of Comparable Company-operated Restaurants

–

108

156

218

270

(3) Net sales performance for restaurants re-opened for full fiscal week presented. Restaurant count shown is as of the end of fiscal week presented.

Outlook for 2020 and Guidance Policy

In light of the ongoing uncertainty regarding the duration and impact of the Covid-19 pandemic, the Company withdrew its 2020 and long-term financial outlook on April 1, 2020.