Red Robin: Reports Results for Fiscal Q3-2019

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, today reported financial results for the quarter ended October 6, 2019.

Third Quarter 2019 Financial Summary Compared to Third Quarter 2018

• Comparable restaurant revenue increased 1.6 percent (using constant currency rates), the third consecutive quarter of improved trends;
• Comparable restaurant guest counts decreased 3.1 percent;
• Off-premise sales, including catering, increased 37.3 percent and comprised 13.2 percent of total food and beverage sales, including catering;
• Total revenues were USD 294.2 million, a decrease of 0.2 percent;
• GAAP loss per diluted share was USD 0.14 compared to earnings per diluted share of USD 0.13;
• Adjusted loss per diluted share was USD 0.24 compared to adjusted earnings per diluted share of USD 0.16 (see Schedule I);
• Net loss was USD 1.8 million compared to net income of USD 1.7 million; and
• Adjusted Ebitda was USD 14.7 million compared to USD 24.2 million.

Paul J.B. Murphy III, Red Robin’s President and Chief Executive Officer, said, «I am encouraged by the current momentum at Red Robin, reflected in rising operating and guest metrics, complemented by an effective new omni-channel creative campaign, that are driving better topline results. The team is making progress strengthening and transforming the dine-in business while investing in our strategic priorities. While there still is much work to do, these efforts are enabling us to build our brand reputation and the confidence of our Guests, which are critical to driving sustainable improvements in sales and profitability for years to come.»

Murphy added, «On behalf of the entire Red Robin team, I would like to thank Pattye Moore for her tremendous contributions during her tenure as interim CEO and for her service to the Company over the past 12 years. Under her effective leadership, the executive team established a stronger operational foundation that we can now build upon to create value for stockholders, Guests, Team Members, and other stakeholders.»

Third Quarter 2019 Operating Results

Total revenues, which primarily include Company-owned restaurant revenue and franchise royalties, decreased 0.2 percent to USD 294.2 million in the third quarter of 2019, from USD 294.9 million in the third quarter of 2018. Restaurant revenue decreased USD 0.4 million due to a USD 4.8 million decrease from restaurant closures, partially offset by a USD 4.4 million, or 1.6 percent, increase in comparable restaurant revenue.

System-wide restaurant revenue (which includes franchised units) for the third quarter of 2019 totaled USD 351.9 million, compared to USD 351.0 million for the third quarter of 2018.

Comparable restaurant revenue(1) increased 1.6 percent in the third quarter of 2019 compared to the same period a year ago, driven by a 4.7 percent increase in average guest check, partially offset by a 3.1 percent decrease in guest count. The increase in average guest check comprised a 3.2 percent increase in menu mix and a 1.5 percent increase in pricing. The increase in menu mix was primarily driven by the Company’s current menu and promotional strategy, resulting in lower Tavern burger sales and higher Finest burger and entrée sales.

Net loss was USD 1.8 million for the third quarter of 2019 compared to a net income of USD 1.7 million for the same period a year ago. Adjusted net loss was USD 3.1 million for the third quarter of 2019 compared to adjusted net income of USD 2.1 million for the same period a year ago (see Schedule I).

Restaurant-level operating profit margin (a non-GAAP financial measure) was 16.1 percent in the third quarter of 2019 compared to 16.8 percent in the same period a year ago. Cost of sales as a percentage of restaurant revenue remained flat. Restaurant labor costs as a percentage of restaurant revenue increased 90 basis points due to higher average wage rates and increased manager staffing levels. Other restaurant operating costs increased 30 basis points primarily due to a 70 basis point increase in third party delivery fees, partially offset by a 20 basis point decrease in utilities and a 20 basis point decrease in other restaurant expenses. Occupancy costs decreased 60 basis points due to restaurant closures. 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.

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

	Q3/2019			Q3/2018
Average weekly sales per unit(1):
Company-owned – Total	USD	51,221		USD	49,925
Company-owned – Comparable	USD	51,304		USD	50,454
Franchised units – Comparable	USD	57,788		USD	57,267
Total operating weeks:
Company-owned units		5,659			5,805
Franchised units		1,080			1,064

(1)Calculated using constant currency rates. Using historical currency rates, the average weekly sales per unit in the third quarter of 2018 for Company-owned – Total and Company-owned – Comparable was USD 49,926 and USD 50,455. 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 USD 21.3 million in the third quarter of 2019 from USD 21.8 million in the third quarter of 2018.

General and administrative costs were USD 19.2 million, or 6.5 percent of total revenues, in the third quarter of 2019, compared to USD 16.8 million, or 5.7 percent of total revenues, in the same period a year ago. The increase was primarily driven by interim CEO expenses and lower incentive based costs in 2018, partially offset by decreases in professional services and travel.

Selling expenses were USD 17.6 million, or 6.0 percent of total revenues, in the third quarter of 2019, compared to USD 12.0 million, or 4.1 percent of total revenues, during the same period a year ago. The increase was primarily driven by an increase in national and local media spend to support the launch of the Company’s new creative brand campaign.

Other gains in the third quarter of 2019 included USD 3.9 million in net gains related to lease terminations for previously closed restaurants, partially offset by USD 1.3 million of board and stockholder matter costs, USD 0.6 million in executive transition and severance, and USD 0.3 million in executive retention.

The Company had an effective tax benefit of 74.1 percent in the third quarter of 2019, compared to an effective tax benefit of 448.3 percent during the same period a year ago. The change in the twelve week effective tax benefit is primarily due to the decrease in income compared to the same period a year ago. The Company currently anticipates a full year tax benefit of USD 11 million to USD 13 million and full year cash tax payments of between USD 3.5 million and USD 4.0 million.

Loss per diluted share for the third quarter of 2019 was USD 0.14 compared to earnings per diluted share of USD 0.13 in the third quarter of 2018. Excluding a gain included in Other (gains) charges of USD 0.23 related to lease terminations for previously closed restaurants offset by costs included in Other (gains) charges of USD 0.07 for board and stockholder matter costs, USD 0.04 for executive transition and severance, and USD 0.02 for executive retention, adjusted loss per share for the third quarter ended October 6, 2019 was USD 0.24. Excluding charges of USD 0.03 for reorganization costs, adjusted earnings per diluted share for the third quarter ended October 7, 2018 were USD 0.16. 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:

		12 Weeks Ended		12 Weeks Ended		40 Weeks Ended		40 Weeks Ended
		2019-10-06		2018-10-07		2019-10-06		2018-10-07
Company-owned:
Beginning of period		472		484		484		480
Opened during the period(1)		1		2		–		8
Closed during the period		(2)		(1)		(13)		(3)
End of period		471		485		471		485
Franchised:
Beginning of period		90		88		89		86
Opened during the period		–		1		1		3
End of period		90		89		90		89
Total number of restaurants		561		574		561		574

The restaurant opened during the twelve weeks ended October 6, 2019 consisted of the reopening of one restaurant which was temporarily closed in the second quarter of 2019. Restaurants opened during the twelve and forty weeks ended October 7, 2018 consisted entirely of completed new restaurant openings.

Balance Sheet and Liquidity

As of October 6, 2019, the Company had cash and cash equivalents of USD 20.2 million and total debt of USD 188.9 million. The Company funded capital expenditures with cash flow from operations and made net draws of USD 7.5 million on its credit facility during the third quarter of 2019. As of October 6, 2019, the Company had outstanding borrowings under its credit facility of USD 188.0 million, in addition to amounts issued under letters of credit of USD 7.5 million. Amount issued under letters of credit reduce the amount available under its credit facility but are not recorded as debt.

The Company’s lease adjusted leverage ratio was 4.55x as of October 6, 2019. The lease adjusted leverage ratio is defined in Section 1.1 of the Company’s credit facility, which is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 5, 2016. On August 19, 2019, the Company entered into a second amendment to its credit facility to increase the lease adjusted leverage ratio to 5.0x through December 29, 2019 (see Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on August 23, 2019).

Refranchising Update

After an in-depth review, the Company has concluded it will suspend its U.S. refranchising program. Based on its analysis, the Company believes the value creation opportunity to stockholders from refranchising will be much greater once the operating fundamentals in the business have been further strengthened and the support capabilities for franchising enhanced. As the Company progresses towards these objectives, it will monitor and reassess its portfolio opportunities.

Outlook for 2019

The Company’s updated 2019 annual outlook remains the same for selling, general and administrative costs and capital expenditures. Comparable restaurant revenue, adjusted Ebitda, net income and adjusted diluted earnings per share have been updated to reflect current estimates.

• Comparable restaurant revenue of down 1.0 percent to flat (using constant currency rates);
• Selling, general and administrative costs of USD 154 million to USD 157 million;
• Net loss of USD 6.3 million to USD 1.7 million;
• Adjusted Ebitda, a non-GAAP measure, of USD 104 million to USD 110 million;
• Adjusted diluted earnings per share, a non-GAAP measure, of USD 0.64 to USD 0.99, which includes the impact of an estimated tax benefit of USD 0.47 to USD 0.57; and
• Capital expenditures of USD 45 million to USD 55 million.