What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-03 compared with 2020-02-25 · 298 added, 198 removed, 166 unchanged (75% of the section changed)

1 unchanged sentence

Management's 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 consolidated financial statements.

All comparisons under this heading between 2019 and 2018 refer to the fifty-two week periods ending December 29, 2019 and December 30, 2018 , respectively, unless otherwise indicated.

All comparisons under this heading between 2020 and 2019 refer to the fifty-two weeks ended December 27, 2020 and December 29, 2019, unless otherwise indicated.

Description of Business

Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin,” “we,” “us,” “our” or the “Company”), primarily operates, franchises, and develops full-service restaurants with 556 locations in North America.

Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin," "we," "us," "our" or the "Company"), primarily operates, franchises, and develops casual dining restaurants with 546 locations in North America.

As of December 27, 2020, the Company operated 443 Company-owned restaurants located in 38 states.

The Company also had 102 franchised full-service restaurants in 16 states and one Canadian province as of December 29, 2019 .

The Company also had 103 franchised casual dining restaurants in 16 states and one Canadian province as of December 27, 2020.

The Company operates its business as one operating and one reportable segment.

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however, we experience a 53rd week once every five to six years.

Our discussions for fiscal years 2019 and 2018 both refer to 52 week fiscal years.

Both 2020 and 2019 refer to 52 week fiscal years.

Fiscal Year 2020 Accomplishments

Despite the COVID-19 pandemic, we made significant progress on our transformation strategy during fiscal year 2020 to solidify our financial longevity and develop a more robust enterprise business model.

Our accomplishments in 2020 include the following:

• Significantly grew off-premise sales, which more than doubled over the prior year;

• Continued Donatos® roll-out, in 79 restaurants as of December 27, 2020;

• Structurally improved restaurant and enterprise-level margin for the long-term compared to 2019;

◦ Reduced our menu by over one-third, improving operational execution and resulting in over $2 million in annual savings;

◦ Implemented new management labor structure which provides better supervisory coverage during peak hours and increases flexibility resulting in approximately $14 million in annual savings excluding labor savings associated with closed restaurants;

◦ Optimized our portfolio by completing lease negotiations for more than 75% of Company-owned restaurants resulting in 3% to 4% in occupancy expense savings over the remaining lease terms, as well as permanently closing select restaurants;

◦ Drove a permanent annual reduction in general and administrative expenses by more than 10%, or approximately $10 million, prior to future growth drivers and other inflationary costs.

• Reduced costs are expected to result in permanent incremental enterprise-level margin improvement of more than 100 basis points, as the Company returns to pre-COVID sales volumes;

• Implemented our TGX hospitality model, which combines technology and improved service coverage to deliver an elevated and more attentive Guest experience.

TGX improved speed of service (including decreased ticket and window times), increased cleanliness scores, and contributed to highest ever product quality and overall Guest satisfaction scores;

• Increased web traffic to drive a record number of Guests to our website, as well as increased social media engagement and a new high in total followers.

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Company Response to COVID-19 Pandemic

Due to the COVID-19 pandemic, we continue to navigate an unprecedented time for our business and industry.

The COVID-19 pandemic has had a material adverse effect on our business, and we expect the impact from COVID-19 will continue to negatively affect our business.

During 2020, the Company experienced dining room closures and indoor dining capacity limitations in accordance with local public health orders based on fluctuating COVID-19 cases during the year, particularly in our key states of California, Colorado, Oregon, and Washington that implemented more strict indoor dining restrictions.

Reopening dining rooms and expanding seating capacity was executed with the health, safety, and well-being of Red Robin's Team Members, Guests, and communities in mind with strict adherence to US Centers for Disease Control and Prevention, state, and local guidelines as our top priority.

We remain focused on expanding indoor and outdoor seating capacity, retaining higher off-premise sales levels compared to pre-COVID-19 levels, and consistently delivering a great Guest experience to continue to drive our improving sales.

As dining rooms reopen, we expect to build sales momentum from additional seating expansion, including use of outdoor all-weather tents and indoor booth and other partitions.

We continue to require Team Members to wear face coverings at all times and Guests to wear face coverings while entering, exiting, and walking around our restaurants.

Face masks are provided for Guests who arrive without one to ensure we are enabling the mutual safety of our Guests and Team Members.

Enhanced health and safety protocols remain in place across the business, including social distancing, face mask rules, daily symptom checks at the restaurants, emergency sick pay for hourly Team Members, and telecommuting policies for nearly all restaurant support center Team Members.

Sales and the Guest experience have been positively impacted by the accelerated implementation of our new TGX hospitality model, coupled with strong adherence to health and safety standards.

Notably, restaurants with reopened dining rooms are retaining meaningful off-premise sales, demonstrating the enduring and growing popularity of Red Robin for off-premise occasions.

Our new TGX hospitality model combines technology and improved service coverage to deliver an elevated and more attentive Guest experience.

TGX improved speed of service (including decreased ticket and window times), increased cleanliness scores, and contributed to highest ever product quality and overall Guest satisfaction scores.

TGX enables our servers to stay in their section the majority of the time to engage with Guests while server partners deliver food, beverages, refills, and clear dishes.

The use of handheld point-of-sale devices is critical to sending food orders to our kitchens and beverage orders to our server partners, ensuring speed of service, high quality food, and more attentive beverage and bottomless refills.

Additionally, we are particularly focused on our ability to execute a great off-premise experience.

We have put in place process and technology enhancements which streamlined and reduced friction in the ordering process, improved the accuracy of promise times for order pick-up and delivery, reinforced a triple check accuracy program ensuring every order goes through three checks before being handed to the Guest, added more convenient order pick up options, and dedicated assembly workspaces that can expand during peak periods.

With these measures in place, we are confident that we are delivering an elevated casual dining experience that differentiates Red Robin from the competition.

We secured the Company's liquidity position through our at-the-market equity offering resulting in net proceeds of $28.7 million, reductions in costs as discussed above, receipt of a $49.4 million federal cash tax refund, including interest, provided under provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and approximately $16 million of additional federal cash tax refunds expected to be received in 2021.

Additionally, under provisions of the CARES Act, we are deferring approximately $18 million in payroll taxes to be paid in fiscal years 2022 and 2023.

The Company took additional actions during 2020 to improve liquidity and enhance financial flexibility in response to the COVID-19 pandemic, which enabled us to make significant progress on our transformation strategy as outlined above.

These actions included temporarily reducing executive base salaries, Board member cash retainer fees, restaurant support center and non-furloughed restaurant supervisory Team Members wages and salaries by 20%, eliminating more than 50 restaurant support center general and administrative positions, postponing or eliminating all non-essential spend, suspending stock repurchases, temporarily halting full lease payments, and engaging in constructive discussions with landlords to achieve restructuring of lease agreements, as well as rent and other concessions.

We believe the actions we have taken in response to COVID-19 will be sufficient to fund our lease obligations, capital expenditures, and working capital needs for the next 12 months and foreseeable future.

As of February 21, 2021, the Company had approximately $122 million of liquidity, including cash on hand and available borrowing capacity under the credit facility.

This liquidity amount includes the impact of a cash payment of $8.5 million paid during the first quarter of 2021 related to a class action settlement of legal matters originally filed in 2017.

Although franchisees have had to restrict dining room capacity and close indoor dining rooms as a result of state and local public health orders at various times throughout the year, as of December 27, 2020, the majority of our franchisees' restaurants indoor dining rooms were open, and all of our franchisees' restaurants were open for off-premise.

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As of February 28, 2021, the Company had 372 total (comparable and non-comparable) indoor dining rooms reopened with limited capacity, representing approximately 87% of currently open Company-owned restaurants.

Notably, these restaurants have on average maintained off-premise sales that are more than two times what we generated before the pandemic after reopening dining rooms.

As of February 28, 2021, 12 restaurants remained temporarily closed due to the COVID-19 pandemic.

Of the 35 Company-owned restaurants initially closed due to the pandemic, 17 restaurants have been reopened and six restaurants have been permanently closed as of February 28, 2021.

We will continue to evaluate the potential timing of reopening these remaining temporarily closed restaurants.

Restaurant operating level expenses incurred for these restaurants during the temporary closures have been recorded in Restaurant closure and refranchising costs (gains) in Other charges;

see Note 5, Other Charges , in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Net comparable restaurant revenue and average weekly net sales per Company-owned restaurant with reopened indoor dining rooms for the Company's 28 day accounting periods through the second period of fiscal year 2021 and the most recent week ended February 28, 2021 are as follows:

Period Ended (2)

Reopened Company-owned Restaurant Indoor Dining Rooms (3)

1-Nov 29-Nov 27-Dec 24-Jan 21-Feb (4)

Net comparable restaurant revenues (13.7)% (20.7)% (23.3)% (8.1)% (16.3)% (9.1)%

Average weekly net sales per restaurant $42,778 $39,041 $40,578 $44,354 $41,998 $51,150

Number of comparable Company-owned restaurants (1)

362 245 236 299 354 360

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(1) Net sales performance for Company-owned restaurants with reopened indoor dining rooms for the full period presented.

Restaurant count shown is as of the end of the period presented.

(2) The periods ended November 1, November 29, and December 27, 2020 comprise the Company's fourth fiscal quarter.

The periods ended January 24, 2021 and February 21, 2021, and the week ended February 28, 2021, fall within our first fiscal quarter of 2021, and amounts presented for the periods are preliminary and subject to closing adjustments.

The first fiscal quarter of 2021 is comprised of the four accounting periods ended April 18, 2021.

(3) Sales performance was negatively impacted in the fourth quarter of 2020 by rising COVID-19 cases resulting in new restrictions lowering or suspending dining room capacity and full restaurant closures being concentrated in our highest performing states of California, Colorado, Oregon, and Washington.

Additionally, the prior year sales amounts in the comparable base included higher holiday season sales volume.

(4) Period includes the impact of reduced traffic due to winter weather in February of approximately 2% to 3%.

Results for this period also include the impact of reopening indoor dining rooms in jurisdictions that require lower capacity than the existing base of restaurants.

(5) Period represents the results of the first week of our third fiscal period.

Net comparable restaurant revenue and average weekly net sales per Company-owned restaurant for the Company's 28 day accounting periods through the second period of fiscal year 2021 and the most recent week ended February 28, 2021 are as follows:

Period Ended (2)

Company-owned Restaurants (3)

1-Nov 29-Nov 27-Dec 24-Jan 21-Feb (4)

Net comparable restaurant revenues (15.4)% (28.8)% (39.5)% (27.0)% (22.4)% (13.3)%

Average weekly net sales per restaurant $42,509 $38,941 $35,716 $39,702 $41,624 $50,226

Number of comparable Company-owned restaurants (1)

412 412 412 413 411 411

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(1) Comparable restaurants are those Company-owned restaurants that have operated five full fiscal quarters as of the period presented.

Restaurant count is as of the end of the period presented.

(2) The periods ended November 1, November 29, and December 27, 2020 comprise the Company's fourth fiscal quarter.

The first fiscal quarter of 2021 is comprised of the four accounting periods ended April 18, 2021.

Additionally, the prior year sales amounts in the comparable base included higher holiday season sales volume.

(4) Period includes the impact of reduced traffic due to winter weather in February of approximately 2% to 3%.

Results for this period also include the impact of reopening indoor dining rooms in jurisdictions that require lower capacity than the existing base of restaurants.

(5) Period represents the results of the first week of our third fiscal period.

We expect to see continued benefits from outdoor seating expansion of approximately 16 to 24 incremental seats where jurisdictions and weather allow.

Our outdoor seating expansions have added approximately 10% total capacity to restaurants with expanded outdoor seating.

We are encouraged by the positive trends in revenues and dining room openings in early 2021 as states have begun loosening indoor dining restrictions and COVID-19 vaccines have started to become more available.

These factors along with our business growth initiatives planned for 2021 and the improvements made to our business during 2020 have put the foundation in place to create sustainable long-term value as we move into a post-pandemic operating environment.

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We believe Donatos® will generate annual Company pizza sales of more than $60 million and profitability of more than $25 million by 2023, when we expect to have completed our rollout to approximately 400 Company-owned restaurants.

In 2021, we plan to add Donatos® to approximately 120 restaurants bringing the total number of Company-owned restaurants that offer Donatos® to approximately 200 by the end of the year.

We expect restaurants with Donatos® to drive incremental flow-through of $45 thousand in the second year, yielding a three to four year payback period.

First year startup costs include pre-opening expense of $12 thousand, required first year marketing investments of $30 thousand, and capital of $145 thousand per restaurant.

As we look ahead to a post-pandemic operating environment, we are preparing our Team Members with a "Ready-Set-Reopen" training playbook to ensure a great experience as our Guests return to our dining rooms.

This prescriptive guide addresses short, medium, and long term actions required to continue building satisfaction with our Guests and guides best practices for resuming the operation of our indoor dining rooms at 100% capacity.

We also have several technology solutions we plan to roll out in late 2021, including website enhancements and a new Red Robin mobile app.

These initiatives are cost-effective channels to engage on a direct and personalized level with our Guests.

Our technology platforms are expected to grow revenue through higher order conversion and increased Guest frequency, while driving additional Royalty™ participation.

Additionally our new loyalty platform will allow us to better segment our Guests and target marketing campaigns in a more meaningful way.

Our off-premise execution enhancements support our ability to retain off-premise food and beverage sales of more than twice pre-pandemic levels while operating at 100% indoor capacity.

In the fourth quarter of 2019, off-premise sales comprised approximately 14% of total food and beverage sales.

Financial and Operational Highlights

The following summarizes the financial and operational highlights during the fifty-two weeks ended December 27, 2020:

Financial performance.

Restaurant revenue decreased $26.7 million , or 2.0% , to $1.3 billion for the 52 weeks ended December 29, 2019 , as compared to the 52 weeks ended December 30, 2018 , due to a $20.2 million decrease from closed restaurants and a $7.7 million , or 0.6% , decrease in comparable restaurant revenue, partially offset by a $1.2 million increase from newly opened restaurants in their first full year of operations.

Restaurant operating costs, as a percentage of restaurant revenue, increased 110 basis points to 82.1% for the 52 weeks ended December 29, 2019 , as compared to 81.0% for the 52 weeks ended December 30, 2018 .

The increase was primarily due to a 70 basis point increase in labor costs and a 70 basis point increase in other operating costs, partially offset by a 30 basis point decrease in cost of sales.

Net loss was $7.9 million for the 52 weeks ended December 29, 2019 compared to net loss of $6.4 million for the 52 weeks ended December 30, 2018 .

Diluted loss per share was $0.61 for the 52 weeks ended

December 29, 2019 , as compared to diluted loss per share of $0.49 for the 52 weeks ended December 30, 2018 .

Excluding costs per diluted share included in Other charges of $0.86 for asset impairment, $0.19 for executive transition and severance, $0.19 for board and stockholder matter costs, $0.06 for executive retention, and a gain of $0.07 for restaurant closures and refranchising, adjusted earnings per diluted share for the 52 weeks ended December 29, 2019 was $0.62 .

Excluding charges per diluted share of $1.60 for asset impairment, $0.27 for litigation contingencies, $0.18 for reorganization costs, and $0.17 for smallwares disposal, adjusted earnings per diluted share for the 52 weeks ended December 30, 2018 was $1.73 .

We believe the non-GAAP measure of adjusted earnings per share gives the reader additional insight into the ongoing operational results of the Company, and it is intended to supplement the presentation of the Company’s financial results in accordance with GAAP.

Our Red Robin Royalty™ loyalty program operates in all our U.S.

Company-owned Red Robin restaurants and has been rolled out to most of our franchised restaurants.

We engage our Guests through Red Robin Royalty with offers designed to increase frequency of visits as a key part of our overall marketing strategy.

We also inform enrolled Guests early about new menu items to generate awareness and trial of these offerings.

Our media buying approach is concentrated on generating significant reach and frequency while on-air.

In addition, we use digital, social, and earned media to target and more effectively reach specific segments of our Guest base.

Our new "All the Fulls" omni-channel marketing campaign launched in 2019 focuses heavily on increased social and digital marketing techniques and the brand's emotional connection with Guests.

2020 Outlook and Beyond

We developed a compelling plan to quickly drive improved Guest experiences, business performance, and stockholder value as discussed in Item I, Business ;

our plan includes the following four fundamental elements:

Recapture Our Soul, Deliver the Brand Promise, Tell Our Story, and Accelerate Profitable Growth.

Based on this strategy, the Company currently expects the following in 2020:

Comparable restaurant revenue growth in the low single digits;

Incremental restaurant-level operating profit expected to be offset by pre-opening expenses, marketing, and project expenses associated with growth initiatives;

Net income of at least $2 million, including a tax benefit of $10 million to $12 million;

Adjusted EBITDA, a non-GAAP financial measure, of at least flat compared to approximately $101 million in 2019;

Capital expenditures of $50 million to $60 million, including the restaurant support center and systems;

restaurant maintenance, refreshes and remodels;

introduction of Donatos®;

and other investments to support growth initiatives.

Guidance Policy

• Restaurant revenue decreased $435.4 million, or 33.8%, to $854.1 million in 2020, as compared to 2019, due to a $330.1 million, or 28.5%, decrease in comparable restaurant revenue and a $105.3 million decrease from permanently closed restaurants.

• Restaurant operating costs, as a percentage of restaurant revenue, increased 1,110 basis points to 93.2% in 2020, as compared to 82.1% in 2019 primarily due to sales deleverage partially offset by savings initiatives.

Overall, the increase in restaurant operating costs as a percentage of restaurant revenue included a 480 basis point increase in other operating costs, a 360 basis point increase in labor costs, and a 300 basis point increase in occupancy costs, partially offset by a 30 basis point decrease in cost of sales.

• Net loss was $276.1 million in 2020 compared to net loss of $7.9 million in 2019.

Diluted loss per share was $19.29 in 2020, as compared to diluted loss per share of $0.61 in 2019.

Excluding costs per diluted share included in Other charges of $4.94 for goodwill impairment, $1.39 for restaurant asset impairment, $1.03 for restaurant closure and refranchising costs, $0.33 for litigation contingencies, $0.13 for board and stockholder matters costs, $0.10 for COVID-19 related costs, and $0.04 for severance and executive transition, adjusted loss per diluted share in 2020 was $11.33.

Excluding costs per diluted share of $0.86 for restaurant asset impairment, $0.19 for board and stockholder matter costs, $0.19 for severance and executive transition, $0.06 for executive retention, and a gain of $0.07 for restaurant closure and refranchising, adjusted earnings per diluted share in 2019 was $0.62.

• We believe the non-GAAP measure of adjusted (loss) earnings per share gives the reader additional insight into the ongoing operational results of the Company, and it is intended to supplement the presentation of the Company's financial results in accordance with GAAP.

• Marketing - Our Red Robin Royalty™ loyalty program operates in all our Company-owned Red Robin restaurants and has been rolled out to most of our franchised restaurants.

We engage our Guests through Red Robin Royalty™ which allows for increased segmentation and more precise targeting of offers designed to increase frequency of visits as a key part of our overall marketing strategy.

Our media buying approach prioritizes digital, social, and owned channels including our website and email to effectively target and reach our Guests.

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The Company provides guidance as it relates to selected information related to the Company's financial and operating performance, and such measures may differ from year to year.

Due to the uncertainty caused by the on-going COVID-19 pandemic, limited guidance is being provided for fiscal year 2021.

The Company currently expects the following in 2021:

• We expect that the recovery of our Western markets which represent a meaningful portion of our portfolio, pent up demand for casual dining, higher average Guest check with increasing on-premise dining, and industry restaurant closures will drive significant comparable restaurant revenue growth in 2021.

• We also currently expect that the combination of enterprise pricing, outdoor seating capacity expansions, restoration of full operating hours, and Donatos® expansion will generate incremental growth of mid-to-high single digit comparable restaurant revenue in 2021 beyond the benefits associated with the recovery;

• We expect capital expenditures of $45 million to $55 million, including continued investment in maintaining our restaurants and infrastructure with maintenance and systems capital, Donatos® expansion to approximately 120 restaurants, digital guest and operational technology solutions, and off-premise execution enhancements.

Restaurant Data

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

December 29, 2019

December 30, 2018

December 27, 2020 December 29, 2019

Company-owned:

Beginning of period 454 484

Opened during the period (1)

Sold to franchisee (2)

4 unchanged sentences

Acquired from corporate (2)

Closed during the period

End of period 103 102

1 unchanged sentence

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(1) The restaurants opened during the fiscal years presented consisted entirely of completed new restaurant openings.

(2) During the fourth quarter of 2019, the Company sold 12 restaurants located in British Columbia, Canada to a franchise partner.

(1) In addition to the permanent closures during 2020, 12 Company-owned restaurants that remained closed due to the COVID-19 pandemic as of December 27, 2020 may be reopened in 2021.

(2) During the fourth quarter of 2019, the Company sold 12 restaurants located in British Columbia, Canada to a franchisee.

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The following table presents total Company-owned and franchised restaurants by state or province as of December 27, 2020:

Company-Owned Restaurants (1)

Franchised Restaurants

California 64 —

Colorado 22 —

Connecticut — 3

Illinois 24 —

Louisiana 2 —

Massachusetts 4 3

Maryland 13 —

Michigan — 20

Minnesota 4 —

North Carolina 17 —

New Hampshire 3 —

New Jersey 12 1

New Mexico 3 —

New York 16 —

Pennsylvania 11 21

Rhode Island 1 —

South Carolina 4 —

South Dakota 1 —

Tennessee 11 —

Virginia 20 —

Washington 38 —

Wisconsin 11 —

British Columbia — 12

Total 443 103

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(1) Includes 12 Company-owned restaurants that remained closed due to the COVID-19 pandemic as of December 27, 2020 which may be reopened in 2021.

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Results of Operations

Operating results for each fiscal 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 2019 annual financial statements, with the exception of changes made due to the adoption of Topic 842 (Leases), 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.

Certain percentage amounts in the table below do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues.

December 29, 2019

December 30, 2018

December 27, 2020 December 29, 2019

Restaurant revenue 98.3 % 98.1 %

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Cost of sales 23.2 % 23.5 %

Labor 39.0 35.4

Other operating 19.3 14.5

Occupancy 11.7 8.7

Total restaurant operating costs 93.2 82.1

4 unchanged sentences

Loss from operations (31.7) % (1.0) %

Other (income) expense:

Other expense (income):

Interest expense 1.2 % 0.8 %

3 unchanged sentences

Income tax benefit (0.9) (1.1)

Net loss (31.8) % (0.6) %

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(1) Expressed as a percentage of restaurant revenue rather than total revenue

(Revenues in thousands)

Percent Change

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(Revenues in thousands) 2020 2019 Percent Change

Restaurant revenue $ 854,136 $ 1,289,521 (33.8) %

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Total revenues $ 868,715 $ 1,315,014 (33.9) %

Average weekly sales volumes in Company-owned restaurants

Average weekly net sales per Company-owned restaurants $ 38,381 $ 52,193

Total operating weeks 22,254 24,707 (9.9) %

Net sales per square foot $ 320 $ 444 (27.9) %

Restaurant revenue, which comprises primarily food and beverage sales, decreased $26.7 million for the 52 week fiscal year ended December 29, 2019 , or 2.0% , as compared to the 52 week fiscal year ended December 30, 2018 .

The decrease was due to a $20.2 million decrease from closed restaurants, and a $7.7 million , or 0.6% , decrease in comparable restaurant revenue, partially offset by a $1.2 million increase from newly opened restaurants in their first full year of operations.

The comparable restaurant revenue decrease was driven by a 4.7% decrease in Guest count partially offset by a 4.1% increase in average Guest check.

The increase in average Guest check comprised a 2.1% increase in pricing, a 1.7% increase in menu mix primarily driven by the Company’s current menu and promotional strategy, resulting in lower Tavern burger sales and higher Gourmet and Finest burger sales, and a 0.3% increase from lower discounting in 2019 compared to 2018.

We are implementing a series of new strategic initiatives;

(i) enhancing our brand promise of memorable moments of connection with our Guests, (ii) leveraging service model improvements and technology, and undertaking menu rationalization efforts in order to improve our dine-in experience, (iii) telling our story via consumer driven omni-channel messaging focused on our brand, and (iv) enhancing our focus on areas of profitable growth, including growing and enhancing our off-premise business, and our roll out of Donatos®, a high quality pizza brand "nested" inside of Red Robin restaurants that is expected to drive incremental top-line sales and gross margin.

Our strategic initiatives serve to develop our brand, while enhancing the value proposition Red Robin provides to its dine-in and off-premise Guests;

we believe our initiatives will drive increased Guest counts, incremental margin growth, and increased comparable restaurant revenue.

Average weekly sales volumes represent the total restaurant revenue for all Company-owned Red Robin restaurants for each time period presented, divided by the number of operating weeks in the period.

Comparable restaurant revenues include those restaurants that are in the comparable base at the end of each period presented.

New restaurants are restaurants that are open but not included in the comparable category because they have not operated for five full quarters.

Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes as well as the performance of new and acquired restaurants during the period and the average square footage of our restaurants.

Restaurant revenue, which comprises primarily food and beverage sales, decreased $435.4 million in 2020, or 33.8%, as compared to 2019.

The decrease was due to a $330.1 million, or 28.5%, decrease in comparable restaurant revenue due to the COVID-19 pandemic and a $105.3 million decrease from closed restaurants.

The decrease in comparable restaurant revenue was driven by restaurants operating at limited occupant capacity for dining rooms that were opened during the pandemic, off-premise only restaurants with closed dining rooms, or closed restaurants due to the COVID-19 pandemic.

Components of comparable restaurant revenue included a 27.7% decrease in Guest count and a 0.8% decrease in average Guest check.

The decrease in average Guest check comprised a 3.4% decrease in menu mix, partially offset by a 2.2% increase in pricing and a 0.4% increase from lower discounting.

The decrease in menu mix was primarily driven by lower sales of beverages and Finest burgers as a result of limited dining room capacity at reopened restaurants and operating off-premise only at restaurants with closed dining rooms.

Restaurants which offered Donatos® during 2020 outperformed non-Donatos® restaurants with similar indoor dining restrictions by over 370 basis points in net comparable restaurant revenue, partially offsetting the decline in restaurant revenue.

Off-premise sales increased 136.2% and comprised 41.1% of total food and beverage sales in 2020.

Average weekly net sales volumes represent the total restaurant revenue for all Company-owned Red Robin restaurants for each time period presented, divided by the number of operating weeks in the period.

Comparable restaurant revenues include those restaurants that are in the comparable base based on operating five full fiscal quarters as of the end of each period presented.

Temporarily closed Company-owned restaurants due to the COVID-19 pandemic were not included in the comparable base for the fiscal year ended December 27, 2020.

Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes and changes in dining room capacity due to the COVID-19 pandemic, and the average square footage of our restaurants.

Net sales per square foot represents the total of restaurant revenue for Company-owned restaurants included in the comparable base divided by the total adjusted square feet of Company-owned restaurants included in the comparable base.

Franchise revenues comprise primarily royalty income and advertising fund contributions.

Franchise revenue increased $0.1 million , or 0.5% , during the 52 week fiscal year ended December 29, 2019 compared to the 52 week fiscal year ended December 30, 2018 primarily due to a 0.8% increase in comparable franchise restaurant revenue, driving an increase in franchise fees and licensing royalties.

Other revenue comprises primarily of gift card breakage, which represents the value associated with the portion of gift cards sold that will most likely never be redeemed, and licensing royalties.

For the fiscal years ended December 29, 2019 and December 30, 2018 , we recognized $6.8 million and $3.9 million of gift card breakage, respectively.

Franchise revenue decreased $8.6 million, or 49.4%, in 2020 compared to 2019 primarily due to temporary abatement of royalty fees and advertising contributions from our franchisees and lower revenues at franchisee restaurants during 2020 as a result of the COVID-19 pandemic.

Franchise revenue was not recognized or collected from our franchisees during periods of abatement.

Our franchisees reported a comparable restaurant revenue decrease of 27.5% during 2020 as compared to 2019.

Other revenue comprises primarily of gift card breakage, which represents the value associated with the portion of gift cards sold that are unlikely to be redeemed, and licensing royalties.

During 2020 and 2019, we recognized $4.5 million and $6.8 million of gift card breakage.

Cost of Sales

(In thousands, except percentages)

Percent Change

(In thousands, except percentages) 2020 2019 Percent Change

Cost of sales $ 198,487 $ 303,404 (34.6) %

As a percent of restaurant revenue 23.2 % 23.5 % (0.3) %

Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales volume.

Cost of sales as a percentage of restaurant revenue decreased 30 basis points in 2019 as compared to the same period in 2018 .

The decrease was primarily driven by favorable pork and steak fry costs, partially offset by unfavorable ground beef costs.

(In thousands, except percentages)

Percent Change

Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales channel mix and volume.

Cost of sales as a percentage of restaurant revenue decreased 30 basis points in 2020 as compared to 2019.

The decrease was primarily driven by lower promotional discounts and favorable contract agreements, partially offset by lower beverage and Finest burger mix primarily due to higher off-premise sales.

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(In thousands, except percentages) 2020 2019 Percent Change

Labor $ 332,827 $ 456,778 (27.1) %

As a percent of restaurant revenue 39.0 % 35.4 % 3.6 %

Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits.

Labor as a percentage of restaurant revenue increased 70 basis points in 2019 compared to the same period in 2018 .

The increase was primarily driven by higher average wage rates and increased manager staffing levels within the restaurants.

Labor as a percentage of restaurant revenue increased 360 basis points in 2020 as compared to 2019.

The increase was primarily driven by sales deleverage and higher hourly wage and benefit rates driven by shifting labor mix in support of higher off-premise sales, partially offset by temporary salary reductions, the new management labor structure, lower restaurant manager incentive compensation, and restaurant Team Member training costs.

Other Operating

(In thousands, except percentages)

Percent Change

(In thousands, except percentages) 2020 2019 Percent Change

Other operating $ 164,468 $ 186,476 (11.8) %

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Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs including royalties paid to Donatos®.

Other operating costs as a percentage of restaurant revenue increased 70 basis points in 2019 as compared to the same period in 2018 .

The increase was primarily due to higher third-party delivery expense driven by growth in off-premise sales, as well as an increase in restaurant maintenance spending.

(In thousands, except percentages)

Percent Change

Other operating costs as a percentage of restaurant revenue increased 480 basis points in 2020 as compared to 2019.

The increase was primarily due higher third party delivery fees driven by higher off-premise sales and sales deleverage impacts on restaurant supply, utility, and technology costs, partially offset by a decrease in restaurant janitorial and maintenance costs and credit card processing fees.

(In thousands, except percentages) 2020 2019 Percent Change

Occupancy $ 99,521 $ 111,798 (11.0) %

As a percent of restaurant revenue 11.7 % 8.7 % 3.0 %

Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs.

Occupancy costs incurred prior to opening our new restaurants are included in pre-opening costs.

For the year ended December 29, 2019 , occupancy costs as a percentage of restaurant revenue remained flat compared the same period in 2018.

Our fixed rents for the years ended December 29, 2019 and December 30, 2018 were $73.9 million and $76.6 million respectively, a decrease of $2.7 million due to a net decrease in restaurant count resulting from 18 locations permanently closed during the period.

In 2020, occupancy costs as a percentage of restaurant revenue increased 300 basis points as compared to 2019 primarily due to sales deleverage, partially offset by restaurant closures.

Our fixed rents in 2020 and 2019 were $66.1 million and $73.9 million, a decrease of $7.8 million due 11 restaurants permanently closed during 2020, 18 restaurants permanently closed during 2019, and the recognition of occupancy costs in Other charges for the temporarily closed Company-owned restaurants during periods of closure.

Depreciation and Amortization

(In thousands, except percentages)

Percent Change

(In thousands, except percentages) 2020 2019 Percent Change

Depreciation and amortization $ 87,557 $ 91,790 (4.6) %

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Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of acquired franchise rights, leasehold interests, and certain liquor licenses.

For the year ended December 29, 2019 , depreciation and amortization expense as a percentage of revenue remained flat compared to the same period in 2018 .

In 2020, depreciation and amortization expense as a percentage of revenue increased 310 basis points as compared to 2019 primarily due to sales deleverage.

Selling, General, and Administrative

(In thousands, except percentages)

Percent Change

(In thousands, except percentages) 2020 2019 Percent Change

Selling, general, and administrative $ 106,822 $ 155,978 (31.5) %

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and board of directors' expenses.

Selling, general, and administrative costs increased $9.5 million , or 6.5% in 2019 as compared to the same period in 2018 .

The increase was primarily due to interim CEO expenses, increased Team Member benefits, increased professional services costs and higher national media spend to support the launch of the Company's new creative brand campaign.

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Selling, general, and administrative costs decreased $49.2 million, or 31.5% in 2020 as compared to 2019.

The decrease was primarily related to a reduction in national and local media spend, decreased Team Member salaries and wages resulting from the reduction in force and temporary salary reductions, and decreased Team Member benefit, travel and entertainment, and professional services costs.

Pre-opening Costs

(In thousands, except percentages)

Percent Change

(In thousands, except percentages) 2020 2019 Percent Change

Pre-opening costs $ 296 $ 319 (7.2) %

As a percent of total revenues — % — % — %

Number of restaurants opened during year

Average per restaurant pre-opening costs

* Percentage increases and decreases over 100 percent were not considered meaningful.

Pre-opening costs, which are expensed as incurred, comprise the costs of labor, hiring, and training the initial work force for our new restaurants and new initiatives;

occupancy costs incurred prior to opening;

travel expenses for our training teams;

the cost of food and beverages used in training;

licenses and marketing;

supply costs;

and other direct costs related to the opening of new restaurants.

Pre-opening costs, which are expensed as incurred, comprise the costs related to preparing restaurants to introduce Donatos® and other initiatives, as well as direct costs, including labor, occupancy, training, and marketing, incurred related to opening new restaurants and hiring the initial work force.

Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants.

Pre-opening costs for any given quarter will typically include expenses associated with restaurants opened during the quarter as well as expenses related to restaurants opening in subsequent quarters.

Costs related to preparing restaurants to introduce Donatos® will be expensed as incurred and included in pre-opening costs

Pre-opening costs in 2019 decreased $ 1.8 million as compared to the same period in 2018.

The decrease was due to no new restaurant openings during 2019 as compared to eight new restaurant openings during the same period in 2018.

We incurred pre-opening costs during 2020 related to the rollout of Donatos®.

As of December 27, 2020, there are 79 Company-owned restaurants serving Donatos®.

We plan to continue the rollout to approximately 120 restaurants in 2021 with full completion by 2023.

Rollout of Donatos® requires pre-opening expense of $12 thousand per restaurant.

Other Charges

(In thousands, except percentages)

Percent Change

(In thousands, except percentages) 2020 2019 Percent Change

Goodwill impairment $ 95,414 $ — *

Asset impairment 26,940 15,094 78.5 %

Executive transition and severance

Restaurant closure and refranchising costs (gains) 19,846 (1,187) *

Litigation contingencies 6,440 — *

Board and stockholder matter costs 2,504 3,261 (23.2) %

COVID-19 related costs 1,858 — *

Severance and executive transition 881 3,450 (74.5) %

Executive retention — 980 *

Restaurant closures and refranchising

Litigation contingencies

Reorganization costs

Smallwares disposal

Other charges $ 153,883 $ 21,598

* Percentage increases and decreases over 100 percent were not considered meaningful.

During 2019, the Company determined 29 Company-owned restaurants were impaired and recognized a non-cash impairment charge of $15.1 million .

During 2018, we determined that 41 Company-owned restaurants were impaired, 19 of which had immaterial impairments.

We recognized a non-cash impairment charge of $28.1 million as a result of the current and projected future results of these restaurants.

The Company reviewed each restaurant’s past and present operating performance combined with projected future results, primarily through projected undiscounted cash flows, which indicated impairment.

The carrying amount of each restaurant was compared to its estimated fair value as determined by management.

The impairment charge represents the excess of each restaurant’s carrying amount over its estimated fair value.

The fair value measurement for asset impairment is based on significant inputs not observed in the market and thus represents a level 3 fair value measurement.

For further information on Other Charges line items that were not comparable, refer to Note 4 , Other Charges , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report

Interest Expense

Interest expense in 2019 and 2018 was $10.2 million and $10.7 million , respectively.

Interest expense decreased in 2019 compared to the same period in 2018 primarily due to a lower weighted average outstanding debt balance partially offset by a higher weighted average interest rate.

Our weighted average interest rate in 2019 and 2018 was 5.1% and 4.2% , respectively.

Income Tax Benefit

During 2020, the Company recognized $21.7 million of impairment related to restaurant assets included in Asset impairment in Other charges on the consolidated statements of operations and comprehensive loss resulting from the continuing and projected future results of 40 Company-owned restaurants.

Although current fiscal year to date results continue to align with management's forecast, the increase in reported COVID-19 cases during the fourth quarter of 2020 across the United States and factors associated with the pandemic have changed management's expectation on the timing of the Company's recovery and projected results in future fiscal periods at certain restaurants.

Our restaurant asset impairment assessment is based on inputs subject to various risks and uncertainties caused by the COVID-19 pandemic, including forecasted revenues, expenses, and cash flows, current discount rates, growth rates, observable market data, and changes to the regulatory environment.

If reported COVID-19 cases increase or other factors associated with the pandemic develop, management's forecast could change in future periods requiring additional restaurant asset impairment.

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Recoverability of restaurant assets, including restaurant sites, leasehold improvements, information technology systems, right-of-use assets, amortizable intangible assets, and other fixed assets, to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets.

Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level.

Each restaurant's past and present operating performance was reviewed in combination with projected future results primarily through projected undiscounted cash flows that included management's current expectation of future financial impacts from COVID-19.

If the restaurant assets were determined to be impaired through comparison of the assets carrying value to its undiscounted cash flows, the Company compared the carrying amount of each restaurant's assets to its fair value as estimated by management to calculate the impairment amount.

The fair value of restaurant assets is generally determined using a discounted cash flow projection model, which is based on significant inputs not observed in the market and represents a level 3 fair value measurement.

In certain cases, management uses other market information, when available, to estimate the fair value of a restaurant's assets.

The restaurant asset impairment charges represent the excess of the carrying amount over the estimated fair value of the restaurant assets calculated using a discounted cash flow projection model.

For further information on Other charges line items, refer to Note 5, Other Charges , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Interest Expense and Interest Income

Interest expense in 2020 and 2019 was $10.2 million.

Our weighted average interest rate in 2020 and 2019 was 4.5% and 5.1%.

During the fourth quarter of 2020, we received a $49.4 million federal cash tax refund that included approximately $1.1 million of interest, recorded in the Interest income and other, net line on the consolidated statements of operation and comprehensive loss.

Income tax benefit was $7.5 million in 2020, compared to an income tax benefit of $14.3 million in 2019.

Our effective income tax rate was a 64.5% benefit in 2019 and a 70.0% benefit in 2018.

The decrease in the Company's 2019 effective tax benefit is attributable to a decrease in tax credits and an increase in the valuation allowance primarily driven by closing and refranchising all remaining company-operated restaurants in Canada in the fourth quarter of 2019.

Our effective tax rate was a 2.6% benefit in 2020 and a 64.5% benefit in 2019.

The decrease in tax benefit for the year ended December 27, 2020 is primarily due to a $79.4 million net valuation allowance and decrease in current year tax credits, partially offset by a decrease in income and the favorable rate impact of net operating loss ("NOL") carrybacks allowed as part of the CARES Act.

In addition to the cash tax refunds received during the year ended December 27, 2020, the Company expects to generate approximately $16 million of additional cash tax refunds within the next 12 months.

Liquidity and Capital Resources

Cash and cash equivalents increased $11.5 million to $30.1 million at December 29, 2019 , from $18.6 million at the beginning of the fiscal year.

We expect to continue to reinvest available cash flows from operations to pay down debt, maintain existing restaurants and infrastructure, make disciplined investment in growth projects, and repurchase our common stock.

The Company plans to use at least 50% of available cash flows for ongoing de-leveraging of the business.

The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands):

Cash and cash equivalents decreased $13.9 million to $16.1 million at December 27, 2020, from $30.0 million at the beginning of the fiscal year.

As the Company has stabilized its liquidity through its at-the-market equity offering, reduced overhead costs, and federal cash tax refunds provided under the provisions of the CARES Act, we expect to use available cash flow from operations to pay down debt, maintain existing restaurants and infrastructure, and execute on our long-term transformation strategy.

As of December 27, 2020, the Company had approximately $128 million in liquidity, including cash on hand and available borrowing capacity under its credit facility.

The table below summarizes our cash flows from operating, investing, and financing activities for each fiscal year presented (in thousands):

Net cash provided by operating activities $ 20,233 $ 57,915

Net cash used in investing activities (21,393) (57,030)

Net cash provided by (used) in financing activities

Effect of currency translation on cash

Net increase in cash and cash equivalents

Net cash (used in) provided by financing activities (11,704) 9,678

Effect of exchange rate changes on cash (1,065) 913

Net change in cash and cash equivalents $ (13,929) $ 11,476

Operating Cash Flows

Net cash flows provided by operating activities decreased $37.7 million to $20.2 million in 2020 as compared to 2019.

The changes in net cash provided by operating activities are primarily attributable to a $19.2 million decrease in profit from operations compared to the same period in 2018, as well as changes driven by Other charges (See Note 4, Other Charges , in Item 8 of Part II in this report) and timing of payments related to our operating assets and liabilities.

The changes in net cash provided by operating activities are primarily attributable to a $139.7 million decrease in profit from operations, as well as changes in working capital as presented on the consolidated statements of cash flows.

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Investing Cash Flows

Net cash flows used in investing activities increased $7.2 million to $57.0 million in 2019 as compared to 2018 .

The increase was due to increased investment in new restaurant technology partially offset by a decrease in restaurant openings during the year and lower restaurant maintenance capital expenditures.

The following table lists the components of our capital expenditures, net of currency translation effect, for the fiscal year ended December 29, 2019 (in thousands):

Investment in technology infrastructure and other

Net cash flows used in investing activities decreased $35.6 million to $21.4 million in 2020 as compared to 2019.

The decrease was due to lower investment in restaurant maintenance, restaurant technology and infrastructure, Donatos®, and restaurant remodels and refreshes due to the COVID-19 pandemic.

The following table lists the components of our capital expenditures for each fiscal year presented (in thousands):

Restaurant maintenance capital and other $ 9,794 $ 17,288

New restaurants

Restaurant remodels and refreshes

Investment in technology, infrastructure, and other 9,718 32,617

Donatos® 2,620 6,585

Restaurant remodels — 819

Total capital expenditures $ 22,132 $ 57,309

Financing Cash Flows

Net cash flows provided by financing activities increased $84.0 million to $9.7 million in 2019 as compared to 2018 .

The increase primarily resulted from a $86.2 million increase in net borrowings of long-term debt, offset by an increase of $2.0 million of cash used to repurchase the Company’s common stock.

Net cash flows (used in) provided by financing activities decreased $21.4 million to $11.7 million in 2020 as compared to 2019.

The decrease primarily resulted from a $48.9 million increase in net repayments of long-term debt and a $2.9 million increase in cash paid for debt issuance costs, partially offset by $28.7 million net cash proceeds received from the issuance of common stock, a decrease of $1.8 million for cash used to repurchase the Company's common stock, and a decrease of $0.1 million in cash proceeds received from the exercise of stock awards and the employee stock purchase plan.

Credit Facility

On June 30, 2016 , the Company entered into a credit facility (the “Credit Facility”), which provides for a $400 million revolving line of credit with a sublimit for the issuance of up to $25 million in letters of credit and swingline loans up to $15.0 million .

On August 19, 2019, the Company entered into a second amendment (the “Amendment”) to the Credit Facility.

The Amendment increased the lease adjusted leverage ratio to 5.0 through December 29, 2019 before returning to 4.75 thereafter.

In addition, the Amendment revised the definition of permitted acquisitions under the Credit Facility to correspond

with the change to the lease adjusted leverage ratio and clarified the classification of existing capital and operating leases.

The Company's lease adjusted leverage ratio was 4.72 as of December 29, 2019 .

The lease adjusted leverage ratio is defined in Section 1.1 of the Credit Facility, which is filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 5, 2016, as further amended by the Amendment filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 23, 2019.

The Credit Facility matures on June 30, 2021 .

Loan origination costs associated with the Credit Facility are included as deferred costs in Other assets, net in the accompanying consolidated balance sheets.

As of December 29, 2019 , the Company had outstanding borrowings under the Credit Facility of $206.0 million , in addition to amounts issued under letters of credit of $7.5 million .

As of December 27, 2020, the Company had outstanding borrowings under the credit facility of $169.8 million, of which $9.7 million was classified as current, in addition to amounts issued under letters of credit of $8.7 million.

Amounts issued under letters of credit reduce the amount available under the credit facility but are not recorded as debt.

As of December 29, 2019 , we had unused borrowing capacity under the Credit Facility of approximately $186.5 million .

On January 10, 2020, the Company replaced its Credit Facility with a new five-year Amended and Restated Credit Agreement (the "New Credit Facility") which provides for a $161.5 million revolving line of credit and a $138.5 million term loan for a total borrowing capacity of $300 million .

No amortization is required with the respect to the revolving line of credit, and the term loans require quarterly principal payments at a rate of 7.0% per annum of the original principal balance.

As of December 27, 2020, the Company had $111.8 million of available borrowing capacity under its credit facility.

Net repayments during 2020 totaled $36.2 million.

On January 10, 2020, the Company replaced its prior credit facility with the credit facility, the five-year Amended and Restated Credit Agreement, which provides for $161.5 million revolving line of credit and a $138.5 million term loan for a total borrowing capacity of $300 million.

The term loans require quarterly principal payments at a rate of 7.0% per annum of the original principal balance.

The interest rates of the revolving line of credit and term loans are based on either LIBOR or a base rate defined by the agreement.

LIBOR is set to terminate in December 2021, however, we anticipate an amended credit agreement will be executed at the new applicable interest rate.

See Note 8, Borrowings , in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further discussion.

Due to the prolonged nature of the pandemic, the Company entered into the Second Amendment to its credit facility during the first quarter of 2021.

The Second Amendment provides increased financial flexibility in the near-term, as we continue to de-lever our balance sheet.

The Company obtained a waiver of certain financial covenants through July 11, 2021, followed by the introduction of more favorable covenant levels through the second quarter of 2022.

Among other things, the Second Amendment also increases pricing, shortens the maturity date of amounts under the credit facility to January 10, 2023, and reduces the borrowing capacity of the revolving loans.

For further discussion, see Note 2, COVID-19 Pandemic , of Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

LIBOR is set to terminate in December 2021;

however, we anticipate an amended credit agreement will be executed at the new applicable reference rate.

We are subject to a number of customary covenants under our credit facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments.

During the first quarter of 2020, we were not in compliance with our debt covenants due to negative effects on our business from the COVID-19 pandemic.

As a result, we entered into the First Amendment to Credit Agreement and Waiver (the "First Amendment") to our credit facility in May 2020, which waived compliance with the lease adjusted leverage ratio financial covenant ("LALR ratio") and the fixed charge coverage ratio financial covenant ("FCC ratio") through the end of 2020.

As of December 27, 2020, we were in compliance with all debt covenants.

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Debt Outstanding

Total debt outstanding increased $13.5 million to $ 206.9 million at December 29, 2019 , from $193.4 million at December 30, 2018 , due to net borrowings of $13.5 million on the Credit Facility during 2019 .

Total debt outstanding decreased $36.2 million to $170.6 million at December 27, 2020, from $206.9 million at December 29, 2019, due to net repayments of $36.2 million on the credit facility during 2020.

In response to the onset of the pandemic in early 2020, the Company drew down its remaining capacity under the credit facility.

Three large repayments were made during 2020 to repay these borrowings made as a result of the COVID-19 pandemic, including $59 million such that the amount of the Company's consolidated cash on hand did not exceed $30 million on the First Amendment effective date as required by the First Amendment, $28.7 million during the second quarter of 2020 from the net proceeds received from the at-the-market equity offering as required by the First Amendment, and $42 million during the fourth quarter of 2020 resulting from the $49.4 million federal cash tax refund received during the quarter.

Share Repurchase

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Accordingly, as of December 27, 2020, we had $68.4 million of availability under the current share repurchase program.

Our ability to repurchase shares is limited to conditions set forth by our lenders in the Credit Facility and New Credit Facility.

The primary inflationary factors affecting our operations are food costs, labor costs, energy costs, and costs of construction materials used in restaurant remodels and refreshes.

A large number of our restaurant Team Members are paid at rates based on the applicable minimum wage and increases in the minimum wage rates have directly affected our labor costs in recent years.

Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases.

Labor cost inflation had a negative impact on our financial condition and results of operations during the fiscal year ended December 29, 2019 .

Uncertainties related to fluctuations in costs, including energy costs, commodity prices, annual indexed or potential minimum wage increases, and construction materials make it difficult to predict what impact, if any, inflation may continue to have on our business, but it is anticipated inflation will continue to have a negative impact on labor costs in fiscal year 2020.

Effective March 14, 2020, the Company temporarily suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic.

Our ability to repurchase shares is limited to conditions set forth by our lenders in the Second Amendment to our credit facility prohibiting us from repurchasing additional shares until the first fiscal quarter of 2022 at the earliest and not until we deliver a covenant compliance certificate demonstrating a lease adjusted leverage ratio less than or equal to 5.00:1.00.

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 and lower during the fall season.

Prior to the COVID-19 pandemic, sales in most of our restaurants have been higher during the summer months and winter holiday season and lower during the fall season.

As a result, our quarterly operating results and comparable restaurant revenue may fluctuate significantly as a result of seasonality.

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Payments Due by Period

2025 and Thereafter

Total 2021 2022 - 2023 2024 - 2025 Thereafter

Long-term debt obligations (1)

$ 196,951 $ 16,786 $ 32,335 $ 146,735 $ 1,095

Finance lease obligations (2)

15,479 1,581 2,558 2,547 8,793

Operating lease obligations (3)

720,017 86,111 149,342 137,888 346,676

Purchase obligations (4)

230,255 95,680 66,865 44,250 23,460

Other non-current liabilities (5)

6,740 1,277 2,648 376 2,439

Total contractual obligations $ 1,169,442 $ 201,435 $ 253,748 $ 331,796 $ 382,463

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These amounts require estimates and could vary due to the timing of volumes.

Excluded are any agreements that are cancelable without significant penalty.

(5) Other non-current liabilities primarily represent the employee deferred compensation plan liability.

Refer to Note 15, Employee Benefit Programs , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for additional information.

Refer to Note 16, Employee Benefit Programs , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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Financial Condition and Future Liquidity

We require capital principally to maintain, improve, and refurbish existing restaurants, support infrastructure needs, and for general operating purposes, as well as to grow the business through new restaurant construction.

In addition, we have and may continue to use capital to pay principal on our borrowings and repurchase our common stock.

In addition, we have and may continue to use capital to pay principal on our borrowings and repurchase our common stock as allowed by our credit agreement.

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 cash flows from operations will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months.

Based upon current levels of operations and anticipated growth, we expect cash flows from operations and available borrowing capacity under the credit facility will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months even with the expectation that the COVID-19 pandemic will continue to have a material adverse effect on our business.

We and the restaurant industry in general maintain relatively low levels of accounts receivable and inventories, and vendors generally grant short-term trade credit for purchases, such as food and supplies.

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We base our estimates and judgments on historical experiences and various other factors 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 results if we use different assumptions or conditions.

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 results if we use different assumptions or conditions.

We have identified the following as the Company's most critical accounting policies, which are most important to the portrayal of the Company's financial condition and results and require management's most subjective and complex judgment.

Information regarding the Company's other significant accounting policies is disclosed in Note 1, Description of Business and Summary of Significant Accounting Policies , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

Impairment of Long-Lived Assets.

Long-lived assets, including restaurant sites, leasehold improvements, other fixed assets, right of use assets, and amortizable intangible assets are reviewed when indicators of impairment are present.

Impairment of Long-Lived Assets - Long-lived assets, including restaurant sites, leasehold improvements, other fixed assets, right of use assets, and amortizable intangible assets are reviewed when indicators of impairment are present.

Expected cash flows associated with an asset are the key factor in determining the recoverability of the asset.

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If the sum of the undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.

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Judgments made by management related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance.

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The impairment charges represent the excess of each restaurant's carrying amount over its estimated fair value.

During 2019, we determined 29 Company-owned restaurants were impaired during our cash flow analysis which resulted in a non-cash impairment charge of $ 15.1 million .

During 2018, we impaired 41 Company-owned restaurants, 19 of which had immaterial impairments, for non-cash charges of $28.1 million .

Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs in the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software.

Goodwill, which is not subject to amortization, is evaluated for impairment annually at the end of the Company’s third fiscal quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of restaurant closures, that would indicate an impairment may exist.

Goodwill is evaluated at the level of the Company’s single operating segment, which also represents the Company’s only reporting unit.

When evaluating goodwill for impairment, the Company may first perform a qualitative assessment, or step zero of the impairment test, to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying amount.

If we do not perform a qualitative assessment, or if we determine it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit.

If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value.

Our decision to perform a qualitative impairment assessment in a given year is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock.

The Company performed a qualitative assessment and determined that goodwill was not impaired as of October 6, 2019 .

No indicators of impairment were identified from the date of our impairment test through the end of 2019 .

By review of macroeconomic conditions, industry and market conditions, cost factors, overall financial performance compared with prior results and projections, and other relevant entity-specific events, we determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount.

Our last quantitative assessment of goodwill was performed in 2018, and it was determined that goodwill was not impaired.

Income Taxes.

We make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.

When considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized.

We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.

We have recorded deferred tax assets reflecting the benefit of income tax credits.

Realization is dependent on generating sufficient taxable income prior to expiration.

Although realization is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized.

The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Off Balance Sheet Arrangements

Except for the letters of credit provided under the Credit Facility, we do not have any material off balance sheet arrangements.

During 2020, we determined 40 Company-owned restaurants were impaired during our cash flow analysis which resulted in a non-cash impairment charge of $21.7 million resulting from the effects of the COVID-19 pandemic on our business.

During 2019, we impaired 29 Company-owned restaurants as a result of our cash flow analysis resulting in non-cash impairment charges of $15.1 million.

Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs to the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software.

The Company impaired information technology assets totaling $5.2 million due to the COVID-19 pandemic redirecting our implementation of certain digital platforms in order to accelerate our speed to market.

Recently Issued Accounting Standards

See Note 3, Recent Accounting Pronouncements , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for our discussion of recently issued accounting standards.

See Note 3, Recent Accounting Pronouncements , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for our discussion of recently issued accounting standards.

Tabl e of Contents

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis