Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
x
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended October 3, 2010
or
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 0-49916
RED ROBIN
GOURMET BURGERS, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
|
84-1573084
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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|
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6312 S. Fiddlers Green
Circle, Suite 200N
|
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Greenwood Village, CO
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80111
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(Address of principal executive offices)
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|
(Zip Code)
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(303) 846-6000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in
Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
o
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|
Accelerated filer
x
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|
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|
Non-accelerated filer
o
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|
Smaller reporting company
o
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(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding at November 3, 2010
|
Common Stock, $0.001 par value per share
|
|
17,088,079 shares
|
Table of
Contents
PART I
FINANCIAL INFORMATION
Item 1.
Financial
Statements
RED ROBIN
GOURMET BURGERS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
|
|
October 3,
2010
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December 27,
2009
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Assets:
|
|
|
|
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Current Assets:
|
|
|
|
|
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Cash and cash equivalents
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$
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11,240
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$
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20,268
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Accounts receivable, net
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|
5,903
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|
4,703
|
|
Inventories
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14,901
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14,526
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|
Prepaid expenses and other current assets
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9,895
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|
6,203
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|
Income tax receivable
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2,887
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4,713
|
|
Deferred tax asset
|
|
1,968
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|
4,127
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|
Restricted current assetsmarketing funds
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6,489
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|
665
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|
Total current assets
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$
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53,283
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$
|
55,205
|
|
|
|
|
|
|
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Property and equipment, net
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|
418,021
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431,536
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Goodwill
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61,769
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|
61,769
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Intangible assets, net
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44,609
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|
47,426
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|
Other assets, net
|
|
4,023
|
|
4,159
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|
Total assets
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$
|
581,705
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|
$
|
600,095
|
|
|
|
|
|
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Liabilities and Stockholders
Equity:
|
|
|
|
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Current Liabilities:
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
14,379
|
|
$
|
10,891
|
|
Construction related payables
|
|
4,447
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|
3,181
|
|
Accrued payroll and payroll related liabilities
|
|
28,513
|
|
26,912
|
|
Unearned revenue
|
|
5,752
|
|
15,437
|
|
Accrued liabilities
|
|
22,138
|
|
18,818
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|
Accrued liabilitiesmarketing funds
|
|
6,489
|
|
665
|
|
Current portion of term loan notes payable
|
|
18,739
|
|
18,739
|
|
Current portion of long-term debt and capital
lease obligations
|
|
868
|
|
779
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|
Total current liabilities
|
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$
|
101,325
|
|
$
|
95,422
|
|
|
|
|
|
|
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Deferred rent
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33,410
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|
30,996
|
|
Long-term portion of term loan notes payable
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85,214
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103,954
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Other long-term debt and capital lease obligations
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55,949
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67,862
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Other non-current liabilities
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8,152
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|
13,239
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|
Total liabilities
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$
|
284,050
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$
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311,473
|
|
|
|
|
|
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Stockholders Equity:
|
|
|
|
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Common stock; $0.001 par value: 30,000,000 shares
authorized; 17,079,573 and 17,079,267 shares issued; 15,587,293 and
15,586,948 shares outstanding
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17
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17
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Preferred stock, $0.001 par value: 3,000,000
shares authorized; no shares issued and outstanding
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|
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Treasury stock, 1,492,280 shares, at cost
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(50,125
|
)
|
(50,125
|
)
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Paid-in capital
|
|
170,710
|
|
167,637
|
|
Accumulated other comprehensive loss, net of tax
|
|
(324
|
)
|
(1,212
|
)
|
Retained earnings
|
|
177,377
|
|
172,305
|
|
Total stockholders equity
|
|
297,655
|
|
288,622
|
|
Total liabilities and stockholders equity
|
|
$
|
581,705
|
|
$
|
600,095
|
|
See notes to condensed consolidated financial statements.
2
Table of
Contents
RED ROBIN
GOURMET BURGERS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
Twelve Weeks Ended
|
|
Forty Weeks Ended
|
|
|
|
October 3,
2010
|
|
October 4,
2009
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October 3,
2010
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October 4,
2009
|
|
|
|
|
|
|
|
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|
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|
Revenues:
|
|
|
|
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|
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|
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Restaurant revenue
|
|
$
|
191,612
|
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$
|
183,878
|
|
$
|
657,094
|
|
$
|
648,436
|
|
Franchise royalties and fees
|
|
3,001
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|
3,035
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|
10,292
|
|
10,265
|
|
Other revenue
|
|
230
|
|
34
|
|
4,310
|
|
147
|
|
Total revenues
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|
194,843
|
|
186,947
|
|
671,696
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|
658,848
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|
|
|
|
|
|
|
|
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|
Costs and expenses:
|
|
|
|
|
|
|
|
|
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Restaurant operating costs (exclusive of
depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
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|
Cost of sales
|
|
46,723
|
|
42,961
|
|
160,432
|
|
156,472
|
|
Labor (includes $211, $126, $631, and $1,249 of
stock-based compensation, respectively)
|
|
68,231
|
|
64,113
|
|
233,080
|
|
224,063
|
|
Operating
|
|
29,080
|
|
27,963
|
|
96,695
|
|
94,968
|
|
Occupancy
|
|
14,074
|
|
14,434
|
|
48,361
|
|
47,836
|
|
Depreciation and amortization
|
|
13,341
|
|
13,112
|
|
43,777
|
|
43,815
|
|
Selling, general, and administrative (includes
$1,349, $600, $3,100, and $4,942 of stock-based compensation, respectively)
|
|
22,612
|
|
16,096
|
|
73,455
|
|
63,088
|
|
Pre-opening costs
|
|
740
|
|
125
|
|
1,992
|
|
3,263
|
|
Asset impairment charge
|
|
6,116
|
|
|
|
6,116
|
|
|
|
Total costs and expenses
|
|
200,917
|
|
178,804
|
|
663,908
|
|
633,505
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations
|
|
(6,074
|
)
|
8,143
|
|
7,788
|
|
25,343
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
1,099
|
|
1,321
|
|
4,241
|
|
4,994
|
|
Other
|
|
7
|
|
10
|
|
(13
|
)
|
29
|
|
Total other expenses
|
|
1,106
|
|
1,331
|
|
4,228
|
|
5,023
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
(7,180
|
)
|
6,812
|
|
3,560
|
|
20,320
|
|
Income tax (benefit) expense
|
|
(2,967
|
)
|
1,110
|
|
(1,512
|
)
|
4,352
|
|
Net income (loss)
|
|
$
|
(4,213
|
)
|
$
|
5,702
|
|
$
|
5,072
|
|
$
|
15,968
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.27
|
)
|
$
|
0.37
|
|
$
|
0.33
|
|
$
|
1.04
|
|
Diluted
|
|
$
|
(0.27
|
)
|
$
|
0.37
|
|
$
|
0.32
|
|
$
|
1.03
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
15,519
|
|
15,408
|
|
15,494
|
|
15,379
|
|
Diluted
|
|
15,519
|
|
15,535
|
|
15,668
|
|
15,488
|
|
See notes to condensed consolidated financial statements.
3
Table of
Contents
RED ROBIN
GOURMET BURGERS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Forty Weeks Ended
|
|
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
Net income
|
|
$
|
5,072
|
|
$
|
15,968
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
43,777
|
|
43,815
|
|
Gift card breakage
|
|
(4,165
|
)
|
|
|
Stock-based compensation expense
|
|
2,954
|
|
6,191
|
|
Asset impairment charge
|
|
6,116
|
|
|
|
Restaurant closure costs
|
|
89
|
|
598
|
|
Other, net
|
|
(3,144
|
)
|
(3,557
|
)
|
Changes in operating assets and liabilities
|
|
851
|
|
3,495
|
|
Cash provided by operating activities
|
|
51,550
|
|
66,510
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
Changes in marketing fund restricted cash
|
|
824
|
|
|
|
Acquisition of franchise restaurants, net of cash
acquired
|
|
|
|
(1,248
|
)
|
Purchases of property and equipment
|
|
(25,793
|
)
|
(40,776
|
)
|
Cash used in investing activities
|
|
(24,970
|
)
|
(42,024
|
)
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Borrowings of long-term debt
|
|
124,100
|
|
147,900
|
|
Payments of long-term debt
|
|
(159,631
|
)
|
(171,815
|
)
|
Payment for tender offer for stock options
|
|
|
|
(3,498
|
)
|
Proceeds from exercise of stock options and
employee stock purchase plan
|
|
636
|
|
937
|
|
Excess tax benefit related to exercise of stock
options
|
|
|
|
155
|
|
Payments of other debt and capital lease
obligations
|
|
(715
|
)
|
(463
|
)
|
Cash used in financing activities
|
|
(35,609
|
)
|
(26,784
|
)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(9,028
|
)
|
(2,298
|
)
|
Cash and cash equivalents, beginning of period
|
|
20,268
|
|
11,158
|
|
Cash and cash equivalents, end of period
|
|
$
|
11,240
|
|
$
|
8,860
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
Income taxes paid
|
|
$
|
725
|
|
$
|
2,103
|
|
Interest paid, net of amounts capitalized
|
|
3,802
|
|
5,089
|
|
Purchases of property and equipment on account
|
|
4,447
|
|
3,181
|
|
See notes to condensed consolidated financial statements.
4
Table of
Contents
RED ROBIN GOURMET BURGERS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Recent Accounting Pronouncements
Red Robin Gourmet Burgers, Inc. (Red Robin or the Company), a
Delaware corporation, develops and operates casual-dining restaurants. At October 3,
2010, the Company operated 312 company-owned restaurants located in 31 states.
The Company operates its business as one operating and one reportable
segment. The Company also franchises its
restaurants, of which there were 134 restaurants in 21 states and two Canadian
provinces as of October 3, 2010.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Red Robin and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
The Companys financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Some of the more
significant estimates included in the preparation of these financial statements
pertain to recoverability of long-lived assets, recoverability of goodwill,
estimated useful lives of other intangible assets, bonus accruals,
self-insurance liabilities, stock-based compensation expense, estimating
breakage on unredeemed gift cards, legal contingencies, and income taxes. Actual results could differ from those
estimates. The results of operations for
any interim period are not necessarily indicative of results for the full year.
The
accompanying condensed consolidated financial statements of Red Robin have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain
information and footnote disclosures normally included in the Companys annual
consolidated financial statements on Form 10-K have been condensed or
omitted. The condensed consolidated
balance sheet as of December 27, 2009, has been derived from the audited
consolidated financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles. For further information, please refer to and
read these interim condensed consolidated financial statements in conjunction
with the Companys audited consolidated financial statements included in the
Companys annual report on Form 10-K for the fiscal year ended
December 27, 2009.
The
Companys quarter which ended October 3, 2010, is referred to as third
quarter 2010, or the twelve weeks ended October 3, 2010; the second
quarter ended July 11, 2010, is referred to as second quarter 2010, or the
twelve weeks ended July 11, 2010; the first quarter ended April 18,
2010, is referred to as first quarter 2010, or the sixteen weeks ended April 18,
2010; and, together the first, second, and third quarters of 2010 are referred
to as the forty weeks ended October 3, 2010. The Companys quarter which ended October 4,
2009, is referred to as third quarter 2009, or the twelve weeks ended October 4,
2009; the second quarter ended July 12, 2009, is referred to as second
quarter 2009, or the twelve weeks ended July 12, 2009; the first quarter
ended April 19, 2009, is referred to as first quarter 2009, or the sixteen
weeks ended April 19, 2009; and, together the first, second, and third
quarters of 2009 are referred to as the forty weeks ended October 4, 2009.
Reclassifications
The
following table provides the effects of the reclassification of certain
marketing expenses from restaurant operating expenses to the selling, general,
and administrative expense category for the twelve and forty weeks ended October 4,
2009. This reclassification has been
previously disclosed in the Companys audited consolidated financial statements
included in the Companys annual report on Form 10-K for the fiscal year
ended December 27, 2009 and had no effect on previously reported net
income.
5
Table of
Contents
|
|
Twelve Weeks Ended
|
|
|
|
October 4, 2009
|
|
(In thousands)
|
|
As
Reported
|
|
Reclassification
|
|
As
Presented
|
|
Restaurant operating costs
|
|
$
|
31,950
|
|
$
|
(3,987
|
)
|
$
|
27,963
|
|
Selling, general, and administrative costs
|
|
$
|
12,109
|
|
$
|
3,987
|
|
$
|
16,096
|
|
|
|
Forty Weeks Ended
|
|
|
|
October 4, 2009
|
|
(In thousands)
|
|
As
Reported
|
|
Reclassification
|
|
As
Presented
|
|
Restaurant operating costs
|
|
$
|
106,976
|
|
$
|
(12,008
|
)
|
$
|
94,968
|
|
Selling, general, and administrative costs
|
|
$
|
51,080
|
|
$
|
12,008
|
|
$
|
63,088
|
|
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued authoritative guidance on the consolidation of variable interest
entities (VIE), which was effective beginning fiscal year 2010. The new guidance requires a qualitative
approach to identifying a controlling financial interest in a VIE, and it
requires ongoing assessment of whether an entity is a VIE and whether an
interest in a VIE makes the holder the primary beneficiary of the VIE. This new guidance did not have a material
effect on the Company.
In
January 2010, the FASB issued an update regarding guidance over the
disclosure requirements of fair value measurements. This update adds new requirements for
disclosure about transfers into and out of Levels One and Two and also adds
additional disclosure requirements about purchases, sales, issuances, and
settlements relating to Level Three measurements. The guidance is effective beginning fiscal
year 2010 for the disclosure requirements around Levels One and Two
measurements, and is effective beginning fiscal year 2011 for the disclosure
requirements around Level Three. This
new guidance currently has no impact on the fair value disclosures of the
Company, as there have been no transfers out of Levels One or Two.
2.
Restaurant Impairment and Closures
During the third quarter of fiscal 2010, we determined that four
company-owned restaurants were impaired, and, the Company recognized a non-cash
impairment charge of $6.1 million resulting from the continuing and projected
losses of these restaurants. We
reviewed each restaurants past and present operating performance combined with
projected future results, primarily through projected undiscounted cash flows,
which indicated possible impairment. The
Company compared the carrying amount of each restaurant to its fair value as
estimated by management. The impairment
charge represents the excess of each restaurants carrying amount over its
estimated fair value.
The Company closed one restaurant in the first quarter of 2010. The closed location was an older restaurant
that management did not believe would provide acceptable returns in the
foreseeable future. There was no
associated amount of goodwill to write off in connection with this
closure. The Company has incurred
$89,000 in expenses related to the restaurant closure for the forty weeks ended
October 3, 2010.
The Company closed four restaurants in the first quarter of 2009. There was no associated amount of goodwill to
write off in connection with these closures.
The Company recognized charges of $598,000 for the forty weeks ended October 4,
2009, related to lease terminations and other closing related costs for these
four restaurants.
3.
Stock-Based Compensation
Stock
Options
During
the twelve weeks ended October 3, 2010, the Company issued 44,000 options
with a weighted average grant date fair value of $9.05 per share and a weighted
average exercise price of $20.03 per share.
Compensation expense for these options is recognized over the remaining
weighted average vesting period for all options outstanding, which is
approximately 1.44 years. The Company
issued 36,000 options with a weighted average grant date fair value of $8.58
per share and a weighted average exercise price of $19.97 per share during the
twelve weeks ended October 4, 2009.
6
Table of
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During
the forty weeks ended October 3, 2010, the Company issued 298,000 options
with a weighted average grant date fair value of $9.14 per share and a weighted
average exercise price of $21.45 per share.
Compensation expense for these options is recognized over the remaining
weighted average vesting period for all options outstanding, which is
approximately 1.44 years. The Company
issued 402,000 options with a weighted average grant date fair value of $6.22
per share and a weighted average exercise price of $15.69 per share during the
forty weeks ended October 4, 2009.
The
fair value of options at the grant date was estimated utilizing the
Black-Scholes multiple option-pricing model with the following weighted average
assumptions for the periods presented:
|
|
Twelve Weeks Ended
|
|
Forty Weeks Ended
|
|
|
|
October 3,
2010
|
|
October 4,
2009
|
|
October
3, 2010
|
|
October
4, 2009
|
|
Risk-free interest rate
|
|
1.1
|
%
|
1.7
|
%
|
1.6
|
%
|
1.5
|
%
|
Expected years until exercise
|
|
3.9
|
|
3.6
|
|
3.6
|
|
3.6
|
|
Expected stock volatility
|
|
59.9
|
%
|
58.2
|
%
|
57.6
|
%
|
52.9
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Weighted-average Black-Scholes fair value per
share at date of grant
|
|
$
|
9.05
|
|
$
|
8.58
|
|
$
|
9.14
|
|
$
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2009, the Company completed a cash tender
offer for out-of-the-money stock options held by approximately 514 then current
employees and officers. As a result of
the tender offer, the Company incurred a one-time pre-tax charge of
approximately $4.0 million for all unvested eligible options that were
tendered. This was reflected as a charge
of $886,000 to labor expense and a charge of $3.1 million to selling, general,
and administrative expense in the first quarter 2009 financial results. It represented the compensation expense
related to the acceleration of vesting on the unvested options tendered in the
offer, which would otherwise have been expensed over their vesting period in
the future if they had not been tendered.
The Company paid $3.5 million for the approximate 1.6 million
options tendered in the offer.
Restricted
Stock
The
Company did not issue any shares of non-vested common stock during the twelve
or forty weeks ended October 3, 2010.
During the third quarter 2010, the Companys former CEO retired,
resulting in an accelerated vesting of 75,000 shares for approximately
$871,000. Compensation expense for the
aggregate 27,000 shares of non-vested common stock outstanding at October 3,
2010 is recognized over the remaining weighted average vesting period, which is
approximately 1.19 years. The Company
issued 34,500 shares of non-vested common stock during the forty weeks ended October 4,
2009. These awards had a weighted
average grant date fair value of $15.28 for the forty weeks ended October 4,
2009, respectively. These awards vest in
installments over four years on the anniversary dates.
Time
Based RSUs
During
the twelve weeks ended October 3, 2010, the Company granted 23,000
restricted stock units (RSUs) to certain non-employee directors and employees
under the Amended and Restated 2007 Performance Incentive Plan (the Stock Plan)
with a weighted average grant date fair value of $19.83. The fair value of each RSU granted is equal
to the market price of the Companys stock at date of grant. Compensation expense for the RSUs is
recognized over the remaining weighted average vesting period for all RSUs
outstanding, which is approximately 1.86 years.
The RSUs granted to employees vest in equal installments over four years
on the anniversary date and upon vesting, the Company issues one share of the
Companys common stock for each RSU. The
RSUs granted to non-employee directors are scheduled to vest in three equal
installments on the first, second, and third anniversaries of the date of
grant, and the shares underlying the units will be distributed to the reporting
person in three equal installments on or following the third, fourth, and fifth
anniversaries of the date of grant, unless earlier per the terms of the award
agreement. The Company granted 600 RSUs
with a weighted average grant date fair value of $18.99 during the twelve weeks
ended October 4, 2009.
During
the forty weeks ended October 3, 2010, the Company granted 114,000 RSUs
under the 2007 Stock Plan with a weighted average grant date fair value of
$20.83. The RSUs vest in equal
installments over four years on the anniversary date and upon vesting, the
Company issues one share of the Companys common stock for each RSU. The fair value of each RSU granted is equal
to the market price of the Companys stock at date of grant. Compensation expense for the RSUs is
recognized over the remaining weighted average vesting period for all RSUs
outstanding, which is approximately 1.86 years.
The Company granted 38,000 RSUs with a weighted average grant date fair
value of $15.18 during the forty weeks ended October 4, 2009.
7
Table of
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Performance
Based RSUs
In
March and September 2010, the Company granted performance based
restricted stock units (PSUs) to executives and other key employees. These PSUs are subject to company performance
metrics based on Total Shareholder Return and measure the overall stock price
performance of the Company to the stock price performance of a selected
industry peer group, thus resulting in a market condition. The actual number of PSUs subject to the
awards will be determined at the end of the performance period based on these
performance metrics. The fair value of
the PSUs is calculated using the Monte Carlo valuation method. This method utilizes multiple input variables
to determine the probability of the Company achieving the market condition and
the fair value of the awards. These
awards have a three-year performance period and are classified as equity as
each unit is convertible into one share of the Companys common stock upon
vesting. Compensation expense is
recognized on a straight-line basis over the requisite service period (or to an
employees eligible retirement date, if earlier). During the first quarter 2010, the Company
issued 40,500 PSUs under its 2007 Stock Plan with a grant date fair value of
$35.90. The Company issued 20,400 additional
PSUs during the third quarter 2010 with a grant date fair value of $33.01.
4.
Earnings
Per Share
Basic
earnings per share amounts are calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share amounts are
calculated based upon the weighted-average number of common shares and
potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares are excluded from
the computation in periods in which they have an anti-dilutive effect. Diluted earnings per share reflect the
potential dilution that could occur if holders of options exercised their
options into common stock. During the
twelve and forty weeks ended October 3, 2010, 764,000 and 529,000,
respectively, weighted stock options outstanding were not included in the
computation of diluted earnings (loss) per share because to do so would have
been anti-dilutive for the periods presented.
During the twelve and forty weeks ended October 4, 2009, 363,000
and 864,000, respectively, weighted stock options outstanding were not included
in the computation of diluted earnings per share because to do so would have
been anti-dilutive for the periods presented.
The Company uses the treasury stock method to calculate the impact of
outstanding stock options. The
computations for basic and diluted earnings (loss) per share are as follows (in
thousands, except per share data):
|
|
Twelve Weeks Ended
|
|
Forty Weeks Ended
|
|
|
|
October 3,
2010
|
|
October 4,
2009
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Net income (loss)
|
|
$
|
(4,213
|
)
|
$
|
5,702
|
|
$
|
5,072
|
|
$
|
15,968
|
|
Basic weighted-average shares outstanding
|
|
15,519
|
|
15,408
|
|
15,494
|
|
15,379
|
|
Dilutive effect of stock options and awards
|
|
|
|
127
|
|
174
|
|
109
|
|
Diluted weighted-average shares outstanding
|
|
15,519
|
|
15,535
|
|
15,668
|
|
15,488
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.27
|
)
|
$
|
0.37
|
|
$
|
0.33
|
|
$
|
1.04
|
|
Diluted
|
|
$
|
(0.27
|
)
|
$
|
0.37
|
|
$
|
0.32
|
|
$
|
1.03
|
|
5.
Gift Card Breakage
The
Company sells gift cards which do not have an expiration date, and it does not
deduct dormancy fees from outstanding gift card balances. The Company recognizes revenue from gift
cards when: (i) the gift card is
redeemed by the customer; or (ii) the likelihood of the gift card being
redeemed by the customer is remote (gift card breakage), and the Company
determines that there is not a legal obligation to remit the unredeemed gift
card balance to the relevant jurisdiction.
The determination of the gift card breakage rate is based upon the
Companys specific historical redemption patterns. The Company recognizes
gift card breakage by applying its estimate of the rate of gift card breakage
over the period of estimated performance (24 months as of the end of the third
quarter 2010). The Company completed its initial analysis of unredeemed
gift card liabilities for gift cards that it sold in its restaurants during the
first quarter 2010, and recognized $3.5 million into revenue as a one time
adjustment. For the twelve and forty
weeks ended October 3, 2010, the Company recognized $192,000 and $4.2 million
(inclusive of the one time adjustment) respectively, into revenue related to
unredeemed gift card breakage. The
Company has not recognized breakage on third party gift card sales due to the
relatively young age of the third party gift card program. Gift card breakage is included in other
revenue in the consolidated statements of operations.
8
Table of Contents
6.
Advertising Costs
Costs
incurred in connection with the advertising and marketing of the Company are
included in selling, general, and administrative expenses and expensed as
incurred or when the advertisement first runs.
Such costs amounted to $6.4 million and $23.3 million for the twelve and
forty weeks ended October 3, 2010, respectively, and $3.9 million and
$11.8 million for the twelve and forty weeks ended October 4, 2009,
respectively.
Under the Companys franchise agreements, both the Company and the franchisees
must contribute a minimum percentage of revenues to two marketing and national
media advertising funds (the Marketing Funds). These Marketing Funds are used to develop and
distribute Red Robin
®
branded marketing
materials, for media purchases and for administrative costs. The Companys portion of costs incurred by
the Marketing Funds is recorded as selling, general, and administrative
expenses in the Companys financial statements.
Restricted assets represent contributed funds held for future use.
7.
Derivative and Other Comprehensive Income
The Company enters into derivative instruments for risk management
purposes only, including derivatives designated as a cash flow hedge under
guidance for derivative instruments and hedging activities. The Company uses interest rate-related
derivative instruments to manage its exposure to fluctuations in interest
rates. By using these instruments, the
Company exposes itself, from time to time, to credit risk and market risk. Credit risk is the failure of either party to
the contract to perform under the terms of the derivative contract. When the fair value of a derivative contract
is positive, the counterparty owes the Company, which creates credit risk for
the Company. The Company minimizes the
credit risk by entering into transactions with high-quality counterparties
whose credit rating is evaluated on a quarterly basis. The Companys counterparty in the interest
rate swap is SunTrust Bank, National Association (SunTrust). Market risk, as it relates to the Companys
interest-rate derivative, is the adverse effect on the value of a financial
instrument that results from changes in interest rates. The Company minimizes market risk by
establishing and monitoring parameters that limit the types and degree of
market risk that the Company takes.
In March 2008, the Company entered into the variable-to-fixed
interest rate swap agreement with SunTrust to hedge the Companys floating
interest rate on an aggregate of up to $120 million of debt that is currently
outstanding under the Companys amended and restated credit facility. The interest rate swap has an effective date
of March 19, 2008, and $50 million of the initial $120 million
expired on March 19, 2010, in accordance with its original term, and the remaining
$70 million will expire on March 19, 2011.
The Company is required to make payments based on a fixed interest rate
of 2.7925% calculated on the remaining notional amount of $70 million. In exchange, the Company will receive
interest on $70 million of the notional amount at a variable rate that is
based on the 3-month LIBOR rate. The
Company entered into the above interest rate swap with the objective of
offsetting the variability of its interest expense that arises because of
changes in the variable interest rate for the designated interest payments
and designated the swap as a cash flow
hedge since its inception. Accordingly,
changes in fair value of the interest rate swap contract were recorded, net of
taxes, as a component of accumulated other comprehensive loss (AOCL) in the
accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain
or loss from AOCL, net of tax, on the Companys consolidated balance sheet to
interest expense on the Companys consolidated statements of income as the
interest expense is recognized on the related debt.
The following table summarizes the fair value and presentation in the
condensed consolidated balance sheets of the interest rate swap as hedging
instruments as of October 3, 2010 and December 27, 2009 (in
thousands):
|
|
Derivative Liability
|
|
Balance Sheet Location
|
|
Fair value at
October 3,
2010
|
|
Fair value at
December 27,
2009
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
806
|
|
$
|
1,833
|
|
Other non-current liabilities
|
|
|
|
222
|
|
Total derivatives
|
|
$
|
806
|
|
$
|
2,055
|
|
The
following table summarizes the effect of the interest rate swap on the
condensed consolidated statements of operations for the twelve and forty weeks
ended October 3, 2010 and October 4, 2009 (in thousands):
9
Table of
Contents
|
|
Twelve Weeks Ended
|
|
Forty Weeks Ended
|
|
|
|
October 3,
2010
|
|
October 4,
2009
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Unrealized gain (loss) on swap in AOCL (pretax)
|
|
$
|
(70
|
)
|
$
|
(353
|
)
|
$
|
(378
|
)
|
$
|
(1,496
|
)
|
|
|
|
|
|
|
|
|
|
|
Realized loss (pretax effective portion)
recognized in interest expense
|
|
$
|
(375
|
)
|
$
|
(626
|
)
|
$
|
(1,614
|
)
|
$
|
(1,582
|
)
|
As a result of this activity, AOCL decreased by $305,000 and $1.2
million on a pretax basis or $114,000 and $888,000 on an after tax basis for
the twelve and forty weeks ended October 3, 2010, respectively, and
increased by $273,000 and $86,000 on a pretax basis or $167,000 and $53,000 on
an after tax basis for the twelve and forty weeks ended October 4, 2009,
respectively. The interest rate swap has
no hedge ineffectiveness, and as a result, no unrealized gains or losses were
reclassified into net earnings as a result of hedge ineffectiveness. The
Company expects no ineffectiveness in the next twelve months. Additionally, the Company had no obligations
at October 3, 2010, to post collateral under the terms of the Interest
Rate Swap Agreement.
Comprehensive income consists of net income and other gains and losses
affecting stockholders equity that are excluded from net income. Comprehensive income (loss) consisted of (in
thousands):
|
|
Twelve Weeks Ended
|
|
Forty Weeks Ended
|
|
|
|
October 3,
2010
|
|
October 4,
2009
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Net income (loss)
|
|
$
|
(4,213
|
)
|
$
|
5,702
|
|
$
|
5,072
|
|
$
|
15,968
|
|
Unrealized gain on cash flow swap, net of tax
|
|
114
|
|
167
|
|
888
|
|
53
|
|
Total comprehensive income (loss)
|
|
$
|
(4,099
|
)
|
$
|
5,869
|
|
$
|
5,960
|
|
$
|
16,021
|
|
8.
Fair Value Measurement
Fair value measurements are made under a three-tier fair value
hierarchy, which prioritizes the inputs used in the measuring of fair value:
Level One: Observable inputs that reflect unadjusted quoted prices
in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level Two: Inputs other than quoted prices included in
Level 1 that are observable for the asset or liability, either directly or
indirectly.
Level Three: Inputs that are generally unobservable. These inputs
may be used with internally developed methodologies that result in managements
best estimate of fair value.
Assets and Liabilities Measured at Fair Value
The derivative liability associated with the interest rate swap is
considered to be a Level Two instrument. The interest rate swap is a
standard cash flow hedge whose fair value is estimated using industry-standard
valuation models. Such models project future cash flows and discount the future
amounts to a present value using market-based observable inputs, including
interest rate curves. See Note 7,
Derivative and Other
Comprehensive Income
, for
the discussion of the derivative liability.
The Companys deferred compensation plan is a nonqualified
deferred compensation plan which allows highly compensated employees to defer a
portion of their base salary, bonuses, and commissions each plan year.
The carrying value of both the liability for the deferred compensation
plan and associated life insurance policy are equal to their fair value. These
agreements are required to be measured at fair value on a recurring basis and
are valued using Level Two inputs. At October 3, 2010, and
December 27, 2009, a liability for participant contributions and
investment income thereon of $2.3 million and $2.4 million, respectively,
is included in other non-current liabilities.
To offset its obligation, the Companys plan administrator purchases
corporate-owned whole-life insurance contracts on certain team members. The cash surrender value of these policies at
both October 3, 2010, and December 27, 2009, was $2.3 million and is
included in other assets, net.
10
Table of
Contents
As of October 3, 2010, the Company had no financial assets or
liabilities that were measured using Level One or Level Three
inputs. The Company also had no
non-financial assets or liabilities that were required to be measured at fair
value on a recurring basis.
The following table presents our assets and liabilities that are fair
valued on a recurring basis for the quarter ended October 3, 2010, and for
the fiscal year ended December 27, 2009 (in thousands):
|
|
October 3,
2010
|
|
Level
One
|
|
Level
Two
|
|
Level
Three
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Life insurance policy
|
|
$
|
2,262
|
|
$
|
|
|
$
|
2,262
|
|
$
|
|
|
Total assets measured at fair value
|
|
$
|
2,262
|
|
$
|
|
|
$
|
2,262
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
806
|
|
|
|
806
|
|
|
|
Deferred compensation plan
|
|
2,286
|
|
|
|
2,286
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
3,092
|
|
$
|
|
|
$
|
3,092
|
|
$
|
|
|
|
|
December
27, 2009
|
|
Level
One
|
|
Level
Two
|
|
Level
Three
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Life insurance policy
|
|
$
|
2,317
|
|
$
|
|
|
$
|
2,317
|
|
$
|
|
|
Total assets measured at fair value
|
|
$
|
2,317
|
|
$
|
|
|
$
|
2,317
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
2,055
|
|
|
|
2,055
|
|
|
|
Deferred compensation plan
|
|
2,358
|
|
|
|
2,358
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
4,413
|
|
$
|
|
|
$
|
4,413
|
|
$
|
|
|
Disclosures of Fair Value of Other Assets and
Liabilities
The Companys liabilities under its credit facility and capital leases
are carried at historical cost in the accompanying consolidated balance
sheet. For disclosure purposes, we
estimate the fair value of the credit facility and capital lease obligations
using discounted cash flow analysis based on market rates obtained from
independent third parties for similar types of debt. Both the credit facility and the Companys
capital lease obligations are considered to be Level 2 instruments. The fair value of the Companys credit
facility as of October 3, 2010, and December 27, 2009, was
approximately $148 million and $179.5 million, respectively. There are $11.6 million of outstanding
borrowings recorded for the Companys capital leases as of October 3, 2010,
which have an estimated fair value of $11.4 million. At December 27, 2009, the carrying
amount of the Companys capital lease obligations was $6.6 million, and
the fair value was $7.7 million.
Asset Impairment
The Company took an impairment charge for four of its restaurants in
the third quarter 2010 of $6.1 million.
These are considered to be assets that are measured at fair value on a
nonrecurring basis. The inputs used for
the fair value measurement of the restaurants are considered Level Three. For further information refer to Note 2.
9.
Related Party Transactions
In 2009, the Company appointed a member and former franchisee to its
board of directors who qualifies as a related party. This board member is a principal of, and
holds, directly or indirectly, interests of between 45% and 100% in each of
three privately-held entities that hold the leases for three Company-owned
restaurants. Under those leases, the
Company recognized rent and other related payments in the amounts of $214,000
and $854,000 for the twelve and forty weeks ended October 3, 2010,
respectively, and $229,000 and $807,000 for the twelve and forty weeks ended October 4,
2009, respectively. Future minimum lease
commitments under these leases are $4.4 million as of October 3, 2010.
11
Table of Contents
10.
Commitments and Contingencies
In
the normal course of business, there are various legal claims in process,
matters in litigation, and other contingencies.
These include claims resulting from employment related claims and claims
from guests or team members alleging illness, injury or other food quality,
health, or operational concerns. To
date, no claims of this nature, certain of which are covered by insurance
policies, have had a material adverse effect on us. While it is not possible to predict the
outcome of these suits, legal proceedings, and claims with certainty,
management is of the opinion that adequate provision for potential losses
associated with these matters has been made in the financial statements and
that the ultimate resolution of these matters will not have a material adverse
effect on our financial position and results of operations.
11.
Share Repurchase and Rights Agreement
On August 12, 2010, the
Company announced that it extended its previously announced share repurchase
plan to December 31, 2011. The Company is authorized to repurchase
shares of common stock up to $50 million.
Such repurchases may be made from time to time in open market
transactions and through privately negotiated transactions. There have been no purchases of Company stock
to date.
On
August 11, 2010, the Board of Directors (Board) of the Company adopted a
shareholder rights plan. The rights plan sets forth the terms under which
the Company would issue preferred share purchase rights (the Rights).
Immediately after the adoption of the rights plan, the Board declared a
dividend of one Right for each outstanding share of common stock, par value
$0.001 per share, payable on August 23, 2010 to holders of record on that
date.
The
Board has authorized the adoption of the rights plan to protect stockholders
from coercive or otherwise unfair takeover tactics. In general terms, the
Rights will impose a significant penalty upon any person or group which
acquires beneficial ownership of 15% or more of the Companys outstanding
common stock without the prior approval of the Board. The rights plan
provides an exemption for any person who was as of August 11, 2010, the date
the rights plan was adopted, the beneficial owner of 15% or more of the Companys
outstanding common stock, so long as such person does not, subject to certain
exceptions, acquire additional common stock of the Company. The rights
plan will not interfere with any merger or other business combination approved
by the Board.
12.
Executive Transition
Stephen E. Carley was
appointed as Chief Executive Officer of the Company and as a member of the
Board, effective as of September 13, 2010.
In connection with the appointment of Mr. Carley as the Companys
new Chief Executive Officer, the Company also announced the termination of
Dennis B. Mullens, the former Chief Executive Officer, employment with the
Company. The charges of $2.3 million related
to executive transition were recorded to selling, general and administrative
expense.
13.
Subsequent Events
The
Company has evaluated subsequent events and found there to be no events
requiring recognition or disclosure through the date of issuance of this
report.
12
Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations
Managements
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 2010 and 2009 refer to the twelve and forty week periods ending
October 3, 2010, and October 4, 2009, respectively, unless otherwise
indicated.
Overview
The
following summarizes the operational and financial highlights during the twelve
and forty weeks of fiscal 2010:
·
New
Restaurant Openings
. We opened three and seven
company-owned restaurants during the twelve and forty weeks ended October 3,
2010, respectively. We opened no
restaurants in the third quarter 2009 and had opened 13 company-
owned restaurants through the third quarter 2009. We plan to open up to four additional
company-owned restaurants in the fourth quarter 2010, two of which opened early
in the fourth quarter. We believe all
remaining 2010 restaurant openings will be funded from our operating cash flows.
·
Comparable
Restaurant Sales.
For the twelve
weeks ended October 3, 2010, the 297 restaurants in our current comparable
base experienced a 0.9% increase in sales from the same period last year. This increase was driven by a 2.6% increase
in guest counts partially offset by a 1.7% decrease in the average guest
check. For the forty weeks ended October 3,
2010, the restaurants in our current comparable based experienced a 1.0%
decrease in sales from these same restaurants last year. This decrease was driven by a 2.1% decrease
in the average guest check partially offset by a 1.1% increase in guest
counts. During the forty weeks ended
October 3, 2010, our comparable restaurants have experienced a continual
return to positive guest counts. Year to
date guest counts for the forty weeks ended October 4, 2009 were a
decrease of 11.9% over the comparable 2008 period. We believe this return to positive guest
counts is due, in part, to our 2010 marketing efforts as discussed below.
·
Marketing
Efforts.
For 2010,
our marketing strategy is focused on product news with an emphasis on quality,
value, and variety to drive guest traffic, retention, and loyalty, which are
key components of our YUMMM advertising campaign. During the third quarter 2010, we launched a Limited
Time Offer (LTO) promotion featuring two products at a $6.99 price
point. This was the third and final LTO
promotion of fiscal year 2010. The LTO
campaign included four continuous weeks of media. Two of the weeks of television were in the
third quarter and two weeks were in the first weeks of the fourth quarter. One week of the Summer LTO was in the
beginning of the third quarter. Our
investment in the third quarter 2010 television advertising campaign was $3.4
million. For the forty week period ended
October 3, 2010, our television advertising support of our 2010 LTO
promotions increased our marketing spend
by $12.5 million over the comparable period of 2009. We continue to believe our 2010 LTO
promotions, supported by national television and digital advertising have
contributed to our increased guest counts and restaurant sales. Restaurant sales and guest counts during the
promotional campaigns have continued to run higher than pre- and post-promotional
periods.
13
Table of
Contents
·
Labor.
Labor costs as a percentage
of restaurant revenue increased 0.7% and 0.9% for the twelve and forty weeks
ended October 3, 2010. As a
percentage of restaurant revenues, we have seen an increase in our managerial
compensation, including bonus expense through the forty weeks ended October 3,
2010. These trends from the prior year
comparable period have been changing as our restaurant revenues and guest
counts have turned positive in recent periods and these primarily fixed costs
continue to be leveraged.
·
Food
Cost.
As a percentage of restaurant
revenue, we have seen an increase in both ground beef pricing and produce costs
for the forty weeks ended October 3, 2010.
Our ground beef, which is purchased on the spot market, has consistently
been higher than 2009 prices, in particular in the third quarter of 2010 when
our hamburger costs as a percentage of revenue were 0.4% higher than the third
quarter of 2009. We expect ground beef
pricing will decline in the fourth quarter but will remain significantly above
2009 prices. The increase in produce
costs through the third quarter 2010 were due to higher produce pricing in the first part of
the year from inclement weather in produce growing states combined with third
quarter 2010 increases due to higher usage of certain produce in our new salad
and seasonal produce offerings.
·
Asset
Impairment
. During the
third quarter of fiscal 2010, we determined that four company-owned restaurants
were impaired. The Company recognized a
non-cash impairment charge of $6.1 million related to the impairment of these
four restaurants. We reviewed each
restaurants past and present operating performance combined with projected
future results, primarily through projected undiscounted cash flows, which
indicated possible impairment. The
carrying amount of each restaurant was compared to its fair value as determined
by management. The impairment charge
represents the excess of each restaurants carrying amount over its fair value.
·
Executive
Transition
. Stephen E.
Carley was appointed as Chief Executive Officer of the Company and as a member
of the Board, effective as of September 13, 2010. In connection with the appointment of
Mr. Carley as the Companys new Chief Executive Officer, the Company also
announced the termination of Dennis B. Mullens, the former Chief Executive
Officer, employment with the Company. The charges of $2.3 million related
to executive transition were recorded to selling, general and administrative
expense.
In
view of the foregoing, the Company continues to make every effort to manage
controllable costs and streamline operations, while our restaurant teams focus
on driving traffic through the quality and value of our guest experience. Our reduced levels of new restaurant openings
and lower capital expenditures are expected to result in significant free cash
flow, the majority of which will be
14
Table of
Contents
used
to reduce outstanding indebtedness and maintain the flexibility to
opportunistically repurchase some of our common stock during the remainder of
2010.
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
|
|
|
|
October 3,
2010
|
|
October 4,
2009
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Company-owned:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
309
|
|
304
|
|
306
|
|
294
|
|
Opened during period
|
|
3
|
|
|
|
7
|
|
13
|
|
Acquired during period
|
|
|
|
|
|
|
|
1
|
|
Closed during period
|
|
|
|
|
|
(1
|
)
|
(4
|
)
|
End of period
|
|
312
|
|
304
|
|
312
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
Franchised:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
134
|
|
131
|
|
133
|
|
129
|
|
Opened during period (a)
|
|
|
|
1
|
|
3
|
|
4
|
|
Sold or closed during period (b)
|
|
(1
|
)
|
|
|
(3
|
)
|
(1
|
)
|
End of period
|
|
133
|
|
132
|
|
133
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
Total number of Red Robin® restaurants
|
|
445
|
|
436
|
|
445
|
|
436
|
|
(a)
Includes one franchised restaurant that was
re-opened during the second quarter 2010.
(b)
One restaurant was closed during the third quarter
2010 due to a fire and is expected to re-open fourth quarter 2010.
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 2009
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.
15
Table of
Contents
|
|
Twelve Weeks Ended
|
|
Forty Weeks Ended
|
|
|
|
October 3,
2010
|
|
October 4,
2009
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
98.3
|
%
|
98.4
|
|
97.8
|
%
|
98.4
|
%
|
Franchise royalties and fees
|
|
1.5
|
|
1.6
|
|
1.5
|
|
1.6
|
|
Other revenue
|
|
0.1
|
|
|
|
0.6
|
|
|
|
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
|
|
24.4
|
|
23.4
|
|
24.4
|
|
24.1
|
|
Labor (includes 0.1%, 0.1%, 0.1%, and 0.2% of
stock-based compensation expense, respectively)
|
|
35.6
|
|
34.9
|
|
35.5
|
|
34.6
|
|
Operating
|
|
15.2
|
|
15.2
|
|
14.7
|
|
14.6
|
|
Occupancy
|
|
7.3
|
|
7.8
|
|
7.4
|
|
7.4
|
|
Total restaurant operating costs
|
|
82.5
|
|
81.3
|
|
82.0
|
|
80.7
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
6.8
|
|
7.0
|
|
6.5
|
|
6.7
|
|
Selling, general, and administrative (includes
0.7%, 0.3%, 0.5%, and 0.8% of stock-based compensation expense, respectively)
|
|
11.6
|
|
8.6
|
|
10.9
|
|
9.6
|
|
Pre-opening costs
|
|
0.4
|
|
0.1
|
|
0.3
|
|
0.5
|
|
Asset Impairment
|
|
3.1
|
|
|
|
0.9
|
|
|
|
Income (loss) from operations
|
|
(3.1
|
)
|
4.4
|
|
1.2
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
0.6
|
|
0.7
|
|
0.6
|
|
0.8
|
|
Other
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(3.7
|
)
|
3.7
|
|
0.5
|
|
3.0
|
|
Income tax (benefit) loss
|
|
(1.5
|
)
|
0.6
|
|
(0.2
|
)
|
0.7
|
|
Net income (loss)
|
|
(2.2
|
)%
|
3.1
|
%
|
0.8
|
%
|
2.3
|
%
|
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
|
|
|
|
(In thousands, except percentages)
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Restaurant revenue
|
|
$
|
191,612
|
|
$
|
183,878
|
|
4.2
|
%
|
$
|
657,094
|
|
$
|
648,436
|
|
1.3
|
%
|
Franchise royalties and fees
|
|
3,001
|
|
3,035
|
|
(1.1
|
)%
|
10,292
|
|
10,265
|
|
0.3
|
%
|
Other revenue
|
|
230
|
|
34
|
|
NM
|
(1)
|
4,310
|
|
147
|
|
NM
|
(1)
|
Total revenues
|
|
$
|
194,843
|
|
$
|
186,947
|
|
4.2
|
%
|
671,696
|
|
658,848
|
|
2.0
|
%
|
Average weekly sales volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable restaurants
|
|
$
|
52,019
|
|
$
|
51,964
|
|
0.1
|
%
|
$
|
54,303
|
|
$
|
55,610
|
|
(2.4
|
)%
|
Non-comparable restaurants
|
|
58,240
|
|
49,385
|
|
17.9
|
%
|
57,553
|
|
53,893
|
|
6.8
|
%
|
2008 Acquired Restaurants (2)
|
|
|
|
|
|
|
|
|
|
51,392
|
|
NM
|
(1)
|
(1)
Percentage change of more than 100% is considered
not meaningful.
(2)
2008 Acquired Restaurants refers to 15 franchised
Red Robin® restaurants we acquired during fiscal year 2008. Beginning in the third quarter of fiscal year
2009, these restaurants entered into the comparable restaurant population and
their average weekly sales volumes, from that time forward, are included in the
comparable restaurant category.
16
Table of
Contents
Restaurant revenue during third quarter 2010, which is comprised almost
entirely of food and beverage sales, increased by $7.7 million compared to
third quarter 2009. Sales in our
comparable restaurant base experienced a sales increase of approximately $2.4
million or 0.9% during the third quarter 2010.
This increase was primarily the result of a 2.6% increase in guest
counts. Offsetting this increase was a
1.7% decrease in average guest check for the third quarter of 2010. This net increase, we believe, was driven by
our LTO promotion and the three weeks of television media support. Sales for new restaurants that have opened
since third quarter 2009 contributed an increase of $5.3 million during third
quarter 2010.
Restaurant revenue for the forty week period ended October 3,
2010, increased $8.6 million or 1.3% from the same period in 2009. Sales in our comparable restaurant base
experienced a sales decrease of approximately $9.9 million or 1.5% for the period. This was primarily the result of a 2.1%
decrease in the average guest check partially offset by a 1.1% increase in
guest counts. Sales for new restaurants
that have opened since third quarter 2009 contributed an increase of $18.5
million during the forty weeks ended October 3, 2010.
Average weekly sales volumes represent the total restaurant revenue,
excluding discounts, for a population of restaurants in both a 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 2010, there were 297 comparable restaurants compared to 269 comparable
restaurants at the end of the third quarter 2009. Non-comparable restaurants presented include
those restaurants that had not yet achieved the five full quarters of
operations during the periods presented.
At the end of the third quarter 2010, there were 15 non-comparable
restaurants versus 35 at the end of the third quarter 2009. Fluctuations in average weekly 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.
Franchise
royalties and fees, which consist primarily of royalty income and initial
franchise fees, decreased 1.1% and increased 0.3% for the twelve and forty
weeks ended October 3, 2010, respectively.
The twelve week decrease is attributable to one franchised restaurant
that was closed during third quarter 2010 due to a fire. The year to date increase is primarily
attributable to the increase in the number of franchised restaurants. Our franchisees reported that comparable
restaurant sales increased 3.5% for U.S. restaurants and decreased 0.6 % for
Canadian restaurants for the third quarter of 2010 compared to the third
quarter of 2009. For the forty weeks
ended October 3, 2010, our franchisees reported that comparable restaurant
sales for U.S. restaurants decreased 0.5 % and Canadian restaurants increased
1.9% from the forty week period ended October 4, 2009.
Other revenue consists primarily of gift card breakage. We recognize restaurant revenue when a gift
card is redeemed by a guest. Gift card
breakage revenue is recognized if the likelihood of gift card redemption is
remote and we determine that there is not a legal obligation to remit the
unredeemed gift card balance to the relevant jurisdiction. We base the gift card breakage rate upon specific historical redemption
patterns. We recognize gift card breakage
by applying our estimate of the rate of gift card breakage over the period of
estimated performance (24 months as of the end of the third quarter 2010). We recognized $3.5 million as a one time
adjustment during the first quarter 2010.
We recognized $192,000 and $4.2 million (inclusive of the one time
adjustment) respectively, of gift card breakage for the twelve and forty weeks
ended October 3, 2010.
Cost and Expenses
Cost of Sales
|
|
Twelve Weeks Ended
|
|
|
|
Forty Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 3,
2010
|
|
October
4, 2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Cost of sales
|
|
$
|
46,723
|
|
$
|
42,961
|
|
8.8
|
%
|
$
|
160,432
|
|
$
|
156,472
|
|
2.5
|
%
|
As a percent of restaurant revenue
|
|
24.4
|
%
|
23.4
|
%
|
1.0
|
%
|
24.4
|
%
|
24.1
|
%
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, comprised of food and beverage expenses, are variable and generally
fluctuate with sales volume. For the
twelve weeks ended October 3, 2010, cost of sales as a percentage of
restaurant revenue increased 1%, or $3.8 million. This increase was driven by a combined 0.7%
percentage of restaurant revenue increase in ground beef, produce, and cheese. The increase in cheese and ground beef costs
is due to higher raw materials costs. Produce
cost increases are due to a shift in the mix of products ordered including our
new salad offerings and our fall 2010 LTO promotion.
17
Table of Contents
For
the forty weeks ended October 3, 2010, cost of sales as a percentage of
restaurant revenue increased by 0.3%, or $4 million. This increase was driven by a combined 0.5%
increase in produce and ground beef, partially offset by a 0.3% decrease in
seafood and meats other than ground beef.
Labor
|
|
Twelve Weeks Ended
|
|
|
|
Forty Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Labor
|
|
$
|
68,231
|
|
$
|
64,113
|
|
6.4
|
%
|
$
|
233,080
|
|
$
|
224,063
|
|
4.0
|
%
|
As a percent of restaurant revenue
|
|
35.6
|
%
|
34.9
|
%
|
0.7
|
%
|
35.5
|
%
|
34.6
|
%
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
costs include restaurant hourly wages, fixed management salaries, stock-based
compensation, bonuses, taxes, and benefits for restaurant team members. For the twelve weeks ended October 3,
2010, labor costs as a percentage of restaurant revenues increased 0.7%, or
$4.1 million. This increase was primarily
driven by a 0.5% increase in administrative labor, including manager
bonuses, and a 0.5% increase in workers compensation and insurance expenses. These increases were offset by a 0.2%
decrease in payroll taxes due to the payroll tax holiday provided by the 2010
Hiring Incentives to Restore Employment (HIRE) Act.
For
the forty weeks ended October 3, 2010, labor as a percentage of revenue
increased 0.9%, or $9 million. This
increase was driven by a 0.6% increase from sales deleverage on fixed
administrative labor, including manager bonuses and a 0.2% increase in workers
compensation expense.
Operating
|
|
Twelve Weeks Ended
|
|
|
|
Forty Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Operating
|
|
$
|
29,080
|
|
$
|
27,963
|
|
4.0
|
%
|
$
|
96,695
|
|
$
|
94,968
|
|
1.8
|
%
|
As a percent of restaurant revenue
|
|
15.2
|
%
|
15.2
|
%
|
0.0
|
%
|
14.7
|
%
|
14.6
|
%
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs include variable costs such as restaurant supplies, energy costs, and
other fixed costs such as repairs and maintenance. For the twelve and forty weeks ended October 3,
2010, operating costs as a percentage of restaurant revenues remained flat and
increased 0.1% respectively, over prior
year. This is the result of increased
repairs and maintenance costs to maintain our restaurant facilities.
Occupancy
|
|
Twelve Weeks Ended
|
|
|
|
Forty Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 3,
2010
|
|
October
4, 2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Occupancy
|
|
$
|
14,074
|
|
$
|
14,434
|
|
-2.5
|
%
|
$
|
48,361
|
|
$
|
47,836
|
|
1.1
|
%
|
As a percent of restaurant revenue
|
|
7.3
|
%
|
7.8
|
%
|
-0.5
|
%
|
7.4
|
%
|
7.4
|
%
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
costs include fixed rents, percentage rents, common area maintenance charges,
real estate and personal property taxes, general liability insurance, and other
property costs. For the twelve weeks
ended October 3, 2010, the decrease as a percentage of revenues was driven
by a decrease in general insurance costs.
For the forty weeks ended October 3, 2010, occupancy expenses as a
percentage of revenues remained flat.
18
Table of
Contents
Depreciation and Amortization
|
|
Twelve Weeks Ended
|
|
|
|
Forty Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October
3, 2010
|
|
October
4, 2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Depreciation and amortization
|
|
$
|
13,341
|
|
$
|
13,112
|
|
1.7
|
%
|
$
|
43,777
|
|
$
|
43,815
|
|
(0.1
|
)%
|
As a percent of total revenues
|
|
6.8
|
%
|
7.0
|
%
|
(0.2
|
)%
|
6.5
|
%
|
6.7
|
%
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization includes depreciation on capital expenditures for restaurants
and corporate assets as well as amortization of acquired intangible assets and
liquor licenses. Depreciation and
amortization expense as a percentage of revenue for the twelve and forty weeks
ended October 3, 2010, decreased from sales leverage on these fixed
expenses.
Selling, General, and Administrative
|
|
Twelve Weeks Ended
|
|
|
|
Forty Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Selling, general, and administrative
|
|
$
|
22,612
|
|
$
|
16,096
|
|
40.5
|
%
|
$
|
73,455
|
|
$
|
63,088
|
|
16.4
|
%
|
As a percent of total revenues
|
|
11.6
|
%
|
8.6
|
%
|
3.0
|
%
|
10.9
|
%
|
9.6
|
%
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative costs include all corporate and administrative
functions that support our existing restaurant operations, our franchises, and
provide infrastructure to facilitate our future growth. Components of this category include corporate
management, supervisory and staff salaries, bonuses, marketing costs,
stock-based compensation and related employee benefits, travel, information
systems, training, office rent, franchise administrative support, Board of
Directors expenses, legal, leadership conference, and professional and
consulting fees. For the twelve weeks
ended October 3, 2010, selling, general, and administrative costs
increased 40.5%, or $6.5 million, due primarily to executive transition costs
of $2.3 million, a $3.0 million increase over 2009 for our marketing and
advertising campaign related to television support for the fall 2010 LTO,
higher bonus expense at the corporate level and higher Board of Directors and
governance related expenses.
For
the forty weeks ended October 3, 2010, selling, general, and
administrative costs increased 16.4%, or $10.4 million, due primarily to an
increase of $10.2 million over 2009 in the marketing and advertising campaign
related to television media support for the spring, summer and fall LTO
campaigns, executive transition costs of $2.3 million, and higher Board of
Directors and governance related expense of approximately $0.5 million. This increase was partially offset by $1.1
million decrease in bonuses at the corporate level and a $1.0 million net
decrease in stock compensation related primarily to the tender offer completed
during the first quarter of 2009.
19
Table of
Contents
Pre-opening Costs
|
|
Twelve Weeks Ended
|
|
|
|
Forty Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
October 3,
2010
|
|
October 4,
2009
|
|
Percent
Change
|
|
Pre-opening costs
|
|
$
|
740
|
|
$
|
125
|
|
NM
|
|
$
|
1,992
|
|
$
|
3,263
|
|
(39.0
|
)%
|
As a percent of total revenues
|
|
0.4
|
%
|
0.1
|
%
|
(0.3
|
)%
|
0.3
|
%
|
0.5
|
%
|
(0.2
|
)%
|
Average per restaurant pre-opening costs
|
|
$
|
247
|
|
$
|
|
|
|
|
$
|
257
|
|
$
|
267
|
|
(3.7
|
)%
|
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.
Pre-opening costs for the twelve weeks ended October 3, 2010, and October 4,
2009, reflect the opening of one and zero new restaurants, respectively. For the forty weeks ended October 3,
2010, the average per restaurant pre-opening costs were flat.
Interest Expense, net
Interest
expense was $1.1 million and $1.3 million for the twelve weeks ended October 3,
2010, and October 4, 2009, respectively, and $4.2 million and $5.0 million
for the forty weeks ended October 3, 2010, and October 4, 2009,
respectively. Interest expense decreased
16.8% and 15.1% over the quarter and year-to-date prior year periods,
respectively, primarily due to reduced overall borrowings under our credit
facility. Our weighted average interest
rate was 2.7% and 2.9%, respectively, for the twelve and forty weeks ended October 3,
2010, versus 3.1% for both the twelve and forty weeks ended October 4,
2009.
Provision for Income Taxes
The effective income tax rate for the third quarter 2010 was 41.3%, a
tax benefit, compared to 16.3%, a tax expense, for the third quarter 2009. The effective income tax rate for the forty
weeks ended October 3, 2010, and October 4, 2009, was 42.5%, a tax
benefit, and 21.4%, a tax expense, respectively. The effective tax benefit in 2010 is
primarily due to lower income, as well as, more favorable general business and
tax credits, primarily the FICA Tip Tax Credit, as a percent of current year
income (loss) before tax. We anticipate
that our full year fiscal 2010 effective tax rate will be approximately 46.0%,
a tax benefit.
Liquidity and Capital Resources
General.
Cash and cash equivalents decreased $9.1
million to $11.2 million at October 3, 2010, from $20.3 million at the
beginning of the fiscal year. This decrease was due primarily to $51.6 million
of cash provided by operating activities, offset by $25.8 million used for the
construction of new restaurants and expenditures for facility improvements and
$36.2 million net pay down of debt. We
expect to continue to reinvest available cash flows from operations to develop
new restaurants or enhance existing restaurants, pay down debt, and maintain
the flexibility to opportunistically repurchase some of our common stock.
Financial Condition and
Future
Liquidity.
We require capital principally to grow the
business through new restaurant construction, as well as to maintain, improve
and refurbish existing restaurants, support for infrastructure needs, and for
general operating purposes. In addition,
we have and may continue to use capital to acquire franchise restaurants or
repurchase our common stock. Our primary
short-term and long-term sources of liquidity are expected to be cash flows
from operations and our revolving credit facility. Based upon current levels of operations and
anticipated growth, we expect that cash flows from operations will be
sufficient to meet debt service, capital expenditures, and working capital requirements
for at least the next twelve months. The
Company and the restaurant industry in general maintain relatively low levels
of accounts receivable and inventories, and vendors generally grant trade
credit for purchases, such as food and supplies. We also continually invest in our business
through the addition of new restaurants and refurbishment of existing
restaurants, which are reflected as long-term assets and not as part of working
capital. We expect to open up to an
additional four restaurants in 2010 and expect to open up to 15 new restaurants
in fiscal year 2011. We typically
maintain current liabilities in excess of our current assets which results in a
working capital deficit. We are able to
operate with a substantial working capital deficit because restaurant sales are
primarily conducted on a cash basis.
Rapid turnover results in limited investment in inventories, and cash
from sales is usually received before related accounts payable for food, supplies
and payroll become due.
20
Table of
Contents
Credit Facility.
Our existing credit facility has permitted us
to have a more flexible capital structure and facilitate our growth plans. The
credit facility is comprised of (i) a $150 million revolving credit
facility maturing on June 15, 2012, and (ii) a $150 million term
loan maturing on June 15, 2012, both with rates based on the London
Interbank Offered Rate (LIBOR) plus a margin that is currently 0.875%. We expect the current 0.875% margin to become
1.0% during the fourth quarter. The
credit agreement also allows us, subject to lender participation which is at
their sole discretion, to increase the revolving credit facility by up to an
additional $100 million in the future and to request maturity extensions.
As part of the credit agreement, we may also request the issuance of up to
$15 million in letters of credit, the outstanding amount of which reduces
the net amount that we may borrow under the agreement. The credit facility
requires the payment of an annual commitment fee based upon the unused portion
of the credit facility. The credit facilitys interest rates and the annual
commitment rate are based on a financial leverage ratio, as defined in the
credit agreement. Our obligations under the credit facility are secured by
first priority liens and security interests in the capital stock of
subsidiaries of the Company. Additionally, the credit agreement includes a
negative pledge on all tangible and intangible assets of the Company and its
subsidiaries (including all real and personal property) with customary
exceptions. Our credit facility is with a consortium of banks that include
Wells Fargo Bank N.A., Bank of America N.A., Keybank N.A., and SunTrust Bank,
National Association among others. We do not believe that any of our lenders
will be unable to fulfill their lending commitments under our credit facility.
With
regard to the term loan facility, we are required to repay the principal amount
of the term loan in consecutive quarterly installments which began
September 30, 2007, and will end on the maturity date of the term
loan. At October 3, 2010, we had
$104 million of borrowings outstanding under our term loan, $45.2 million of
borrowings, and $6.2 million of letters of credit outstanding under our
revolving credit facility. Loan
origination costs associated with the credit facility and the net outstanding
balance of costs related to the original and subsequent amendments to the
credit facility are $579,000 and are included as deferred costs in other
assets, net in the accompanying consolidated balance sheet as of October 3,
2010. In addition to the required
repayments on the term loan, we expect to utilize excess cash flow after
capital expenditures to reduce our debt during 2010.
Covenants.
We are subject
to a number of customary covenants under our various credit agreements,
including limitations on additional borrowings, acquisitions, and dividend
payments. In addition, we are required
to maintain two financial ratios: a leverage ratio calculated as our debt
outstanding including issued standby letters of credit divided by the last
twelve months earnings before interest, taxes, depreciation and amortization
(EBITDA) adjusted for certain non-cash charges; and a fixed charge ratio
calculated as our consolidated cash flow divided by our consolidated debt
service obligations. As of October 3,
2010, we were in compliance with all covenants under our credit agreements.
Inflation
The primary inflationary factors affecting our operations are food,
labor costs, energy costs, and materials used in the construction of new
restaurants. A large number of our
restaurant personnel are paid at rates based on the applicable minimum wage,
and historically increases in the minimum wage have directly affected our labor
costs. Many of our leases require us to
pay taxes, maintenance, repairs, insurance, and utilities, all of which are
generally subject to inflationary increases.
We believe, however, that inflation did not have a negative impact on
our financial condition and results during the first three quarters of 2010,
due to the macroeconomic environment.
Uncertainties related to fluctuations in costs, including energy costs,
commodity prices, annual indexed wage increases and construction materials make
it difficult to predict what impact, if any, inflation may have on our business
during the last quarter of 2010 or in future periods.
Seasonality
Our
business is subject to seasonal fluctuations.
Historically, sales in most of our restaurants have been higher during
the summer months and winter holiday season.
Our quarterly and annual operating results and comparable restaurant
sales may fluctuate significantly as a result of seasonality and other
factors. Accordingly, results for any
one quarter are not necessarily indicative of results to be expected for any
other quarter or for any year and comparable restaurant sales for any
particular future period may decrease.
Off
Balance Sheet Arrangements
Except
for operating leases (primarily restaurant ground leases), we do not have any
off balance sheet arrangements.
Critical Accounting Policies and Estimates
Critical
accounting policies and estimates are those that we believe are both
significant and that require us to make difficult, subjective or complex
judgments, often because we need to estimate the effect of inherently uncertain
matters. We base our estimates and
judgments on historical experiences and various other factors that we believe
to be appropriate under the circumstances.
Actual results may differ from these estimates, including our estimates
of future restaurant level cash flows, which are subject to the current
economic environment, and we might obtain different estimates if we used
different assumptions or conditions. We
had no significant changes in our critical accounting policies and estimates
since our last annual report. Our
critical accounting estimates are contained in our annual report on
Form 10-K for the year ended December 27, 2009.
21
Table of
Contents
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued authoritative guidance on the consolidation of variable interest
entities , which was effective beginning fiscal year 2010. The new guidance requires a qualitative
approach to identifying a controlling financial interest in a VIE, and it
requires ongoing assessment of whether an entity is a VIE and whether an
interest in a VIE makes the holder the primary beneficiary of the VIE. This new guidance did not have a material
effect on the Company.
In
January 2010, the FASB issued an update regarding guidance over the
disclosure requirements of fair value measurements. This update adds new requirements for
disclosure about transfers into and out of Levels One and Two and also adds
additional disclosure requirements about purchases, sales, issuances, and
settlements relating to Level Three measurements. The guidance is effective beginning fiscal
year 2010 for the disclosure requirements around Levels One and Two
measurements, and is effective beginning fiscal year 2011 for the disclosure
requirements around Level Three. This
new guidance currently has no impact on the fair value disclosures of the
Company, as there have been no transfers out of Levels One or Two.
Forward-Looking Statements
Certain information and statements contained in this report are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended.
Forward-looking statements include statements regarding our
expectations, beliefs, intentions, plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts, including, without limitation,
statements that reflect the Companys current expectations regarding, among
other things, future restaurant sales and results of operations, economic
performance, liquidity and capital resources, ability to fund new restaurant
growth and repay debt from cash flows and compliance with debt covenants,
anticipated gift card breakage revenue, anticipated tax rates, advertising
success, financial condition and achievements of the Company, and the potential repurchase by the Company of
shares of its common stock. These statements
may be identified, without limitation, by the use of forward-looking
terminology such as anticipate, believe, estimates, expect, ongoing, plan,
projected, will, would or comparable and similar terms or the negative
thereof. Certain forward-looking
statements are included in this Form 10-Q, principally in the sections
captioned Financial Statements and Managements Discussion and Analysis. All forward-looking statements included in
this Form 10-Q are based on information available to the Company on the
date hereof. Such statements speak only
as of the date hereof and we undertake no obligation to update any such
statement to reflect events or circumstances arising after the date hereof. These statements are based on assumptions
believed by us to be reasonable, and involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those
described in the statements. These risks
and uncertainties include, but are not limited to, the following: our
ability to open and operate additional restaurants in both new and existing
markets profitably, the anticipated number of new restaurants and the timing of
such openings; estimated costs of opening and operating new restaurants,
including general and administrative, marketing and, franchise development
costs; expected future revenues and earnings, comparable and non-comparable
restaurant sales, results of operations, and future restaurant growth (both
company-owned and franchised); anticipated restaurant operating costs,
including commodity and food prices, labor and energy costs and selling,
general and administrative expenses and the success of our advertising and
marketing activities and tactics, including the effect on revenue and guest counts;
anticipated advertising costs and plans to include television advertising to
support 2010 LTO promotions; our ability to attract new guests and retain loyal
guests; expectations regarding competition and our competitive advantages; any
future price increases and their impact on our revenue and profit; future
capital expenditures and the anticipated amounts of such capital expenditures;
our expectation that we will have adequate cash from operations and credit
facility borrowings to reduce our debt and to meet all future debt service,
capital expenditure, including restaurant development, and working capital
requirements in fiscal year 2010; anticipated compliance with debt covenants;
the sufficiency of the supply of commodities and labor pool to carry on our
business; anticipated restaurant closings and impairment charges; anticipated
interest and tax expense; impact of the adoption of new accounting standards
and our financial and accounting systems and analysis programs; future changes
in financial accounting standards; the integration and transition associated
with the election of a substantial number of new board members and the
appointment of our new CEO; and other risk factors described from time to time
in the Companys Annual Report on Form 10-K for 2009 filed with the SEC on
February 25, 2010.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
Under our credit agreement we are exposed to market risk from changes
in interest rates on borrowings, which bear interest at one of the following
rates we select: an Alternate Base Rate (ABR), based on the Prime Rate plus
0.00% to 0.25%, or a LIBOR, based on the relevant one, two, three or six-month
LIBOR, at our discretion, plus 0.50% to 1.00%.
The spread, or margin, for ABR and LIBOR loans under the credit
agreement is subject to quarterly adjustment based on our then current leverage
ratio, as defined by the credit agreement.
As of October 3, 2010, we had $79.2 million of borrowings subject
to variable interest rates, after considering the
22
Table of
Contents
impact
of variable-to-fixed interest rate swaps.
A plus or minus 1.0% change in the effective interest rate applied to
these loans would have resulted in pre-tax interest expense fluctuation of
$792,000 on an annualized basis.
Our objective in managing exposure to interest rate changes is to limit
the impact of interest rate changes on earnings and cash flows and to lower
overall borrowing costs. To achieve this objective, we use an interest rate
swap and may use caps to manage our net exposure to interest rate changes
related to our borrowings. As appropriate, on the date derivative contracts are
entered into, we designate derivatives as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value
hedge), or a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability (cash
flow hedge).
During March 2008, the Company entered into a variable-to-fixed
interest rate swap agreement with SunTrust Bank, National Association
(SunTrust) to mitigate our floating interest rate on an aggregate of up to
$120 million of our debt that is currently or expected to be outstanding
under our amended and restated credit facility.
The interest rate swap has an effective date of March 19, 2008, and
$50 million of the initial $120 million expired on March 19,
2010, in accordance with its original term, and the remaining $70 million will
expire on March 19, 2011. The
agreement was designated as a cash flow hedge under which we are required to
make payments based on a fixed interest rate of 2.7925% calculated on an
initial notional amount of $70 million, in exchange we will receive
interest on a $70 million of notional amount at a variable rate. The variable rate interest we receive is
based on the 3-month LIBOR rate. This
hedge is highly effective under the guidance ASC 815
Derivatives
and Hedging
for derivative instruments and hedging activities
.
The Company reclassifies gain or loss from
accumulated other comprehensive income, net of tax, on our consolidated balance
sheet to interest expense on our consolidated statement of income as the
interest expense is recognized on the related debt. For the twelve and forty weeks ended October 3,
2010, respectively, the $114,000 and $888,000 unrealized gain, net of taxes, on
the cash flow hedging instrument is reported in accumulated other comprehensive
loss.
Primarily all of our transactions are conducted, and our accounts are
denominated, in United States dollars.
Accordingly, we are not exposed to significant foreign currency risk.
Many of the food products purchased by us are affected by changes in
weather, production, availability, seasonality and other factors outside our
control. In an effort to control some of
this risk, we have entered into some fixed price product purchase commitments
some of which exclude fuel surcharges and other fees. In addition, we believe that almost all of
our food and supplies are available from several sources, which helps to
control food commodity risks.
Item 4.
Controls
and Procedures
Evaluation of Disclosure Controls
and Procedures
The
Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Companys reports under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and
communicated to the management of Red Robin Gourmet Burgers, Inc. (Management), including the Companys Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to
allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, Management recognizes that any controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objectives. As a result, the Companys CEO and CFO have
concluded that, based upon the evaluation of disclosure controls and procedures
(as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange
Act), the Companys disclosure controls and procedures were effective as of the
end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
The
Companys Management, with the participation of the CEO and CFO, have evaluated
whether any change in the Companys internal control over financial reporting
occurred during the fiscal quarter ended October 3, 2010. Based on that evaluation, Management concluded
that there has been no change in the Companys internal control over financial
reporting during the fiscal quarter ended October 3, 2010, that has
materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
23
Table of Contents
PART II - OTHER INFORMATION
Item 1.
Legal
Proceedings
In December 2009, the Company was served with a purported class
action lawsuit,
Marcos R. Moreno vs. Red
Robin International, Inc.
The case was filed in Superior Court
in Ventura County, California and has been removed to Federal District Court
for the Central District of California under the Class Action Fairness Act
of 2005 (CAFA). Red Robin filed its
Answer and Affirmative Defenses on February 10, 2010. The lawsuit
alleges failure to pay wages and overtime, failure to provide rest and meal
breaks or to pay compensation in lieu of such breaks, failure to pay timely
wages on termination, failure to provide accurate wage statements, and unlawful
business practices and unfair competition. Plaintiff is seeking compensatory
and special damages, restitution for unfair competition, premium pay, penalties
and wages under the Labor Code, and attorneys fees, interest and
costs. On March 24, 2010, the Court granted a stay of the case
pending the outcome of a California case currently pending before
the California Supreme Court for review. That case
involves similar allegations regarding rest and meal breaks. It is
anticipated that the California Supreme Court will provide useful guidance
on rest and meal breaks when the opinion in that case is issued.
We believe the
Moreno
suit is
without merit. Although we plan to
vigorously defend against this suit, we cannot predict the outcome of this
lawsuit or whether we may be required to pay damages, settlement costs, legal
costs or other amounts that may not be covered by insurance.
In
the normal course of business, there are various other claims in process,
matters in litigation and other contingencies.
These include claims resulting from employment related claims and claims
from guests or team members alleging illness, injury or other food quality, health
or operational concerns. To date, no
claims of these types of litigation, certain of which are covered by insurance
policies, have had a material effect on us.
While it is not possible to predict the outcome of these other suits,
legal proceedings and claims with certainty, management is of the opinion that
adequate provision for potential losses associated with these other matters has
been made in the financial statements and that the ultimate resolution of these
other matters will not have a material adverse effect on our financial position
and results of operations.
Item 1A.
Risk
Factors
Item
1A.
Risk Factors
A
description of the risk factors associated with our business is contained in
Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal
year ended December 27, 2009 filed with the Securities and Exchange
Commission on February 25, 2010. One additional risk factor is added
at the section entitled Risks Related to Our Business under Item 1A, to read
in its entirety as stated below. This cautionary statement is to be used
as a reference in connection with any forward-looking statements. The
factors, risks and uncertainties identified in this cautionary statement is in
addition to those contained in any other cautionary statements, written or
oral, which may be made or otherwise addressed in connection with a
forward-looking statement or contained in any of our subsequent filings with
the Securities and Exchange Commission.
If we do not successfully manage the
transitions associated with our new CEO and board members, there could be an
adverse impact on our revenues, operations, or results of operations.
On
August 12, 2010, we announced the appointment of our new chief executive
officer, Stephen E. Carley, who also serves as a director. In addition, since March 2010, we have
added four new members to our Board of Directors. Our success will be dependent upon the
ability of Mr. Carley to gain proficiency in leading our Company, his
ability to implement or adapt our corporate strategies and initiatives, and his
ability to develop key professional relationships, including relationships with
the board of directors, our employees, franchisees, guests, and other key
constituencies and business partners. If we are unable to effect a smooth
transition with our new directors and CEO, or if our new CEO should
unexpectedly prove to be unsuitable, such failure and disruption could
adversely impact our revenues, operations and results.
In
addition, our new CEO could make organizational changes, including changes to
our management team and may make future changes to our Companys structure and
operations. A failure to retain key executives and other personnel or inability
to recruit and assimilate such persons could adversely affect our Company and
our ability to compete effectively.
24
Table of Contents
Item 6. Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification
of Chief Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
of Chief Financial Officer
|
|
|
|
32.1
|
|
Section 1350
Certifications of Chief Executive Officer and Chief Financial Officer
|
25
Table of
Contents
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
Red Robin Gourmet Burgers, Inc.
|
|
|
|
November 5, 2010
|
|
/s/ Katherine L. Scherping
|
(Date)
|
|
Katherine L. Scherping
|
|
|
Chief Financial Officer
|
26
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