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Red Robin Gourmet Burgers Reports Earnings for the Fiscal First Quarter 2010

2010-05-24

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Red Robin Gourmet Burgers, Inc., (NASDAQ: RRGB), a casual dining restaurant chain focused on serving an innovative selection of high-quality gourmet burgers in a family-friendly atmosphere, reported financial results for the 16 weeks ended April 18, 2010.

Financial and Operational Results

Results for the 16 weeks ended April 18, 2010, compared to the 16 weeks ended April 19, 2009, are as follows:

Restaurant revenue increased 0.3% to $267.5 million.
Company-owned comparable restaurant sales decreased 2.3%.
Restaurant-level operating profit decreased 5.7% to $48.8 million.
GAAP diluted earnings per share were $0.32 vs. $0.25 in the fiscal first quarter a year ago. GAAP diluted earnings per share in the fiscal first quarter 2009 included $0.22 per diluted share in one-time charges.
The Company recorded $3.5 million, or $0.19 per diluted share, in other income as a result of a one-time adjustment to unredeemed gift card liabilities (see “Gift Card Breakage Income” below)
Three new company-owned Red Robin® restaurants opened during the fiscal first quarter 2010. Three additional restaurants that were under construction during the first quarter – one company-owned and two franchised -- have opened since the end of the quarter. Two franchised restaurants and one company-owned restaurant closed during the first quarter.

As of the end of the fiscal first quarter 2010, there were 308 company-owned and 131 franchised Red Robin® restaurants.

“While there are still many challenges in the current macroeconomic environment and the restaurant industry as a whole, we are encouraged by the strengthening of our comparable restaurant sales,” said Dennis Mullen, Red Robin Gourmet Burgers, Inc.’s chief executive officer. “Our guest counts and same store sales have benefited from our recent television advertising support, as well as our continued focus on quality, variety, value and our restaurant Team Members’ commitment to outstanding guest service. We’re looking forward to building on that momentum into the summer, with innovative and craveable additions to our menu, new LTO’s supported with TV advertising and other exciting marketing programs and the new restaurant development we have underway for the balance of the year.”

Fiscal First Quarter 2010 Results

Comparable restaurant sales decreased 2.3% for company-owned restaurants in the fiscal first quarter of 2010 compared to an 8.1% decrease in the fiscal first quarter of 2009, driven by a 0.1% increase in guest counts and a 2.4% decrease in the average guest check, which included the impact of LTO price promotions in the quarter. Fiscal first quarter 2010 comparable restaurant sales reflected a sequential improvement from the Company’s comparable restaurant sales decrease of 10.5% reported in the fiscal fourth quarter of 2009 and the decrease of 14.9% reported in the fiscal third quarter of 2009. The Company estimates that severe winter storms in several markets in the Northeast, California and Mid-Atlantic states in the fiscal first quarter of 2010 negatively impacted comparable restaurant sales by approximately 1.4% and diluted earnings per share by $0.10.

Average weekly comparable sales from the 286 company-owned comparable restaurants were $55,896 in the fiscal first quarter of 2010, compared to $58,079 for the 244 company-owned comparable restaurants in the fiscal first quarter of 2009. Average weekly sales for the 22 non-comparable company-owned restaurants were $56,560 in the fiscal first quarter of 2010, compared to $55,245 for the 41 non-comparable restaurants in the fiscal first quarter a year ago. For all company-owned restaurants, average weekly sales were $55,909 from the 4,906 operating weeks in the fiscal first quarter of 2010 compared to $57,352 from the 4,768 operating weeks in the fiscal first quarter of 2009.

Total company revenues, which include company-owned restaurant sales, franchise royalties and fees and other revenue, increased 1.7% to $275.5 million in the fiscal first quarter of 2010, versus $270.8 million last year. Included in other revenue in the fiscal first quarter of 2010 was $3.8 million attributed to recognition of gift card breakage revenue, as described below. Franchise royalties and fees of $4.2 million in the fiscal first quarter of 2010 were flat compared to the same period a year ago.

For the fiscal first quarter of 2010, the Company’s U.S. franchise restaurant sales of $93.6 million were lower compared to $95.0 million in the prior year period. Comparable sales in the fiscal first quarter of 2010 for franchise restaurants in the U.S. decreased 2.1% and for franchise restaurants in Canada increased 4.8% from the fiscal first quarter of 2009. Average weekly comparable sales for the U.S. franchised restaurants were $51,857 from the 106 comparable restaurants in the fiscal first quarter of 2010, compared to $52,961 for the 98 comparable restaurants in the fiscal first quarter of 2009. Average weekly sales in the fiscal first quarter of 2010 for the Company’s 18 comparable franchise restaurants in Canada were C$54,293 versus C$51,058 in the same period last year. Canadian results are in Canadian dollars.

Selling, general and administrative expenses were $30.8 million in the fiscal first quarter of 2010 and $24.8 million in the fiscal first quarter of 2009, which were 11.2% and 9.1% of total revenue, respectively. Included in the fiscal first quarter of 2010 was $6.6 million of investment in the Company’s television media campaign, which included a $1.2 million investment made by the Company to fund its franchisees’ portion of this initial system-wide television campaign. Beginning in the fiscal second quarter of 2010, franchisees will contribute an additional 1.25% of their revenue to the national cable television advertising efforts for the remainder of 2010. System-wide funding for the remaining national cable television campaigns and some local television advertising support in fiscal 2010 will total $11.4 million, of which $8.9 million will be funded by the Company from selling, general and administrative expenses.

Net interest expense was $1.9 million in the fiscal first quarter of 2010 and $2.1 million in the fiscal first quarter of 2009.

Net income for the fiscal first quarter of 2010 was $4.9 million or $0.32 per diluted share, compared to net income of $3.8 million, or $0.25 per diluted share, in the fiscal first quarter of 2009.

For the fiscal first quarter of 2010, the Company’s effective tax rate was 17.1% compared to an effective tax rate of 25.3% in the fiscal first quarter of 2009. The decrease is primarily due to more favorable general business and tax credits, primarily the FICA Tip Tax Credit, which as a percent of current year income before tax did not change at the same rate as the change in taxable income. The Company anticipates that the effective tax rate for the full fiscal year 2010 will be approximately 17%.

Schedule I of this earnings release defines restaurant-level operating profit and reconciles this metric to income from operations and net income for all periods presented. The Company’s restaurant-level operating profit metric is designed to afford management and investors with a basis for considering and comparing restaurant performance. It is not calculated in conformity with generally accepted accounting principles (“GAAP”). It is intended to supplement, rather than replace GAAP results. Restaurant-level operating profit is useful to management and to the Company’s investors because it is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant-level operating efficiency and performance.

Balance Sheet and Liquidity

On April 18, 2010, the Company held $13.9 million in cash and cash equivalents and had a total outstanding debt balance of $170.2 million, including $113.3 million in borrowings under its $150 million term loan, $50.5 million of borrowings under its $150 million revolving credit facility and $6.3 million outstanding for capital leases. The Company has also issued $5.4 million of outstanding letters of credit under its revolving credit facility. In the first fiscal quarter of 2010, the Company paid down $21.2 million in debt, and since the end of the first quarter 2010, the Company has made additional debt repayments of $3.5 million on its revolving credit facility.

The Company is subject to a number of customary covenants under its credit agreement, including limitations on additional borrowings, acquisitions, dividend payments, and requirements to maintain certain financial ratios. As of April 18, 2010, the Company was in compliance with all of its debt covenants, and the Company expects to remain in full compliance.

RED ROBIN GOURMET BURGERS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) (Unaudited)

		April 18, 2010			December 27, 2009
Assets:
Current Assets:
	Cash and cash equivalents	$	13,886		$	20,268
	Accounts receivable, net		5,292			4,703
	Inventories		14,594			14,526
	Prepaid expenses and other current assets		6,462			6,203
	Income tax receivable		2,498			4,713
	Deferred tax asset		3,392			4,127
	Restricted current assets—marketing funds		858			665
	Total current assets	$	46,982		$	55,205

	Property and equipment, net		424,581			431,536
	Goodwill		61,769			61,769
	Intangible assets, net		46,151			47,426
	Other assets, net		4,044			4,159
	Total assets	$	583,527		$	600,095

Liabilities and Stockholders’ Equity:
Current Liabilities:
	Trade accounts payable	$	15,694		$	10,891
	Construction related payables		2,873			3,181
	Accrued payroll and payroll related liabilities		27,403			26,912
	Unearned revenue		6,513			15,437
	Accrued liabilities		21,580			18,818
	Accrued liabilities—marketing funds		858			665
	Current portion of term loan notes payable		18,739			18,739
	Current portion of long-term debt and capital lease obligations		765			779
	Total current liabilities	$	94,425		$	95,422

	Deferred rent		31,959			30,996
	Long-term portion of term loan notes payable		94,584			103,954
	Other long-term debt and capital lease obligations		56,079			67,862
	Other non-current liabilities		11,281			13,239
	Total liabilities	$	288,328		$	311,473

Stockholders’ Equity:
	Common stock; $0.001 par value: 30,000,000 shares authorized; 17,093,724 and 17,079,267 shares issued; 15,601,414 and 15,586,948 shares outstanding		17			17
	Preferred stock, $0.001 par value: 3,000,000 shares authorized; no shares issued and outstanding		-			-
	Treasury stock, 1,492,280 shares, at cost		(50,125	)		(50,125	)
	Paid-in capital		168,766			167,637
	Accumulated other comprehensive loss, net of tax		(715	)		(1,212	)
	Retained earnings		177,256			172,305
	Total stockholders’ equity		295,199			288,622
Total liabilities and stockholders’ equity		$	583,527		$	600,095

RED ROBIN GOURMET BURGERS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
			Sixteen Weeks Ended
			April 18, 2010			April 19, 2009

Revenues:
	Restaurant revenue		$	267,505		$	266,595
	Franchise royalties and fees			4,169			4,152
	Other revenue			3,836			66
		Total revenues		275,510			270,813

Costs and expenses:
	Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
		Cost of sales		65,013			65,283
		Labor (includes $209 and $986 of stock-based
		compensation, respectively)		95,361			91,385
		Operating		38,639			38,415
		Occupancy		19,708			18,908
		Tender offer stock based compensation - restaurants		-			886
	Depreciation and amortization			17,251			17,637

	Selling, general, and administrative (includes $893 and $3,727 of stock-based compensation, respectively)			30,750			24,773
	Pre-opening costs			877			2,550
	Tender offer stock based compensation - corporate			-			3,116
	Restaurant closure costs			85			586
		Total costs and expenses		267,684			263,539

Income from operations				7,826			7,274

Other expense (income):
	Interest expense, net			1,885			2,114
	Other			(30	)		10
		Total other expenses		1,855			2,124

Income before income taxes				5,971			5,150
Provision for income taxes				1,020			1,305
Net income			$	4,951		$	3,845
Earnings per share:
	Basic		$	0.32		$	0.25
	Diluted		$	0.32		$	0.25
Weighted average shares outstanding:
	Basic			15,477			15,356
	Diluted			15,607			15,432

Schedule I

Reconciliation of Non-GAAP Restaurant-Level Operating Profit to Income

from Operations and Net Income

(In thousands, except percentage data)

The Company believes that restaurant-level operating profit is an important measure for management and investors because it is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant-level operating efficiency and performance. The Company defines restaurant-level operating profit to be restaurant revenues minus restaurant-level operating costs, excluding restaurant closures and impairment costs. The measure includes restaurant level occupancy costs, which include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance and other property costs, but excludes depreciation related to restaurant buildings and leasehold improvements. The measure excludes depreciation and amortization expense, substantially all of which is related to restaurant level assets, because such expenses represent historical sunk costs which do not reflect a current cash outlay for the restaurants. The measure also excludes selling, general and administrative costs, and therefore excludes occupancy costs associated with selling, general and administrative functions, pre-opening costs, reacquired franchise costs, legal settlements and costs associated with the tender offer of stock options attributed to non-restaurant employees. The Company excludes restaurant closure costs as they do not represent a component of the efficiency of continuing operations. Restaurant impairment costs are excluded, because, similar to depreciation and amortization, they represent a non-cash charge for the Company’s investment in its restaurants and not a component of the efficiency of restaurant operations. Restaurant-level operating profit is not a measurement determined in accordance with generally accepted accounting principles (“GAAP”) and should not be considered in isolation, or as an alternative, to income from operations or net income as indicators of financial performance. Restaurant-level operating profit as presented may not be comparable to other similarly titled measures of other companies. The table below sets forth certain unaudited information for the sixteen weeks ended April 18, 2010 and April 19, 2009, expressed as a percentage of total revenues, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenues.


		Sixteen Weeks Ended
		April 18, 2010			April 19, 2009
Restaurant revenues		$	267,505	97.1%	$	266,595	98.4%
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
	Cost of sales		65,013	24.3		65,283	24.5
	Labor		95,361	35.6		91,385	34.3
	Operating		38,639	14.4		38,415	14.4
	Occupancy		19,708	7.4		18,908	7.1
	Tender offer stock-based compensation expense
			-	-		886	0.3
Restaurant-level operating profit			48,784	18.2		51,718	19.4

Add – other revenues			8,005	2.9		4,218	1.6
Deduct – other operating:
	Depreciation and amortization		17,251	6.3		17,637	5.8
	Selling, general, and administrative		30,750	11.2		24,773	9.1
	Pre-opening costs		877	0.3		2,550	0.9
	Tender offer stock-based compensation expense
			-	-		3,116	1.2
	Restaurant closure costs		85	-		586	0.2
	Total other operating		48,963	17.7		48,662	17.2

Income from operations			7,826	2.8		7,274	2.7

Total other expenses, net			1,855	0.7		2,124	0.8
Provision for income taxes			1,020	0.4		1,305	0.5
	Total other		2,875	1.1		3,429	1.3

Net income		$	4,951	1.8%	$	3,845	1.4%

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 revenues, as opposed to total revenues.