RED ROBIN GOURMET BURGERS INC 10-Q

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Condensed Consolidated Financial Statements. All comparisons under this heading between 2021 and 2020 refer to the twelve and twenty-eight weeks ended July 11, 2021 and July 12, 2020, unless otherwise indicated. Overview 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 531 locations in North America. As of July 11, 2021, the Company owned 430 restaurants located in 38 states. The Company also had 101 franchised full-service restaurants in 16 states and one Canadian province. The Company operates its business as one operating and one reportable segment. COVID-19 Impact Due to the coronavirus ("COVID-19") pandemic, we continue to navigate an unprecedented time for our business and industry. During the second quarter of 2021, the Company continued to expand dine-in seating capacity at Company-owned restaurants. 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. The Company continues to maintain a disciplined focus on execution to provide our Guests a consistent quality experience each and every time they visit through our Total Guest Experience hospitality model ("TGX"), off-premises enhancements, and our new management labor model. Notably, as of the end of our fiscal eighth period, the Company has sustained off-premises sales that are more than double pre-pandemic levels, even as its restaurants were operating without indoor capacity restrictions. Restaurant operating level expenses incurred for these restaurants during the temporary closures have been recorded in Restaurant closure and refranchising costs in Other charges; see Note 6, Other Charges, in the Notes to the Condensed Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. In addition, as our dining rooms have re-opened, our ability to attract and retain restaurant-level employees has become more challenging, as the job market for restaurant managers and hourly Team Members has become more competitive. Staffing is our number one priority; during the second fiscal quarter, we have supported our staffing efforts through technology enhancements to the application and hiring process, holding two national hiring days, and deploying internal and external resources to augment recruiting, hiring, and training efforts. We plan to achieve staffing levels above those in 2019 to support elevated demand compared to 2019. The challenges in hiring and retention have also affected certain of our suppliers, resulting in some intermittent product and distribution shortages. 13 Table of Contents Financial and Operational Highlights The following summarizes the operational and financial highlights during the twelve weeks ended July 11, 2021: Restaurant Revenue, compared to the same period in the prior year, is presented in the table below: (millions) Restaurant Revenue for the twelve weeks ended July 12, 2020 $ 160.1 Increase in comparable restaurant revenue 105.4 Increase from non-comparable restaurants 6.7 Total increase 112.1 Restaurant Revenue for the twelve weeks ended July 11, 2021 $ 272.2 The following summarizes the operational and financial highlights during the twenty-eight weeks ended July 11, 2021: Restaurant Revenue, compared to the same period in the prior year, is presented in the table below: (millions) Restaurant Revenue for the twenty-eight weeks ended July 12, 2020 $ 461.6 Increase in comparable restaurant revenue 133.7 Decrease from non-comparable restaurants (4.4) Total increase/(decrease) 129.3 Restaurant Revenue for the twenty-eight weeks ended July 11, 2021 $ 590.8 Restaurant revenues and operating costs as a percentage of restaurant revenue for the period are detailed in the table below: Twelve weeks ended 2021 compared to 2020 Twelve Weeks Ended 2021 compared to 2019 (1) July 11, 2021 July 12, 2020 Increase/(Decrease) July 14, 2019 (1) Increase/(Decrease) Restaurant revenue (millions) $ 272.2 $ 160.1 69.9 % $ 302.4 (10.0) % Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis Points) (Percentage of Restaurant Revenue) (Basis Points) Cost of sales 22.8 % 24.2 % (140) 23.9 % (110) Labor 36.4 % 39.2 % (280) 35.2 % 120 Other operating 17.2 % 21.6 % (440) 14.3 % 290 Occupancy 7.9 % 13.0 % (510) 8.4 % (50) Total 84.3 % 98.0 % (1,370) 81.8 % 250 (1) Presented for improved comparability to pre-COVID-19 operations. Twenty-Eight weeks ended 2021 compared to 2020 Twenty-Eight Weeks Ended 2021 compared to 2019 (1) July 11, 2021 July 12, 2020 Increase/(Decrease) July 14, 2019 (1) Increase/(Decrease) Restaurant revenue (millions) $ 590.8 $ 461.6 28.0 % $ 702.9 (15.9) % Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis Points) (Percentage of Restaurant Revenue) (Basis Points) Cost of sales 22.2 % 23.7 % (150) 23.6 % (140) Labor 35.6 % 39.3 % (370) 35.5 % 10 Other operating 17.7 % 18.8 % (110) 14.0 % 370 Occupancy 8.8 % 11.8 % (300) 8.6 % 20 Total 84.3 % 93.6 % (930) 81.7 % 260 (1) Presented for improved comparability to pre-COVID-19 operations. 14 Table of Contents The following table summarizes Net Loss, loss per diluted share, and adjusted loss per diluted share for the twelve and twenty-eight weeks ended July 11, 2021 and July 12, 2020; Twelve Weeks Ended Twenty-Eight Weeks Ended July 11, 2021 July 12, 2020 July 11, 2021 July 12, 2020 Net loss as reported $ (4,996) $ (56,261) $ (13,709) $ (230,559) Loss per share - diluted: Net loss as reported $ (0.32) $ (4.09) $ (0.88) $ (17.38) Restaurant closure and refranchising costs 0.11 0.55 0.27 0.68 Asset impairment 0.01 0.38 0.09 1.57 Litigation contingencies — — 0.07 0.34 COVID-19 related costs 0.02 0.05 0.05 0.06 Board and stockholder matter costs — 0.07 0.01 0.18 Severance and executive transition — — — 0.07 Goodwill impairment — — — 7.19 Income tax effect (0.04) (0.27) (0.13) (2.62) Adjusted loss per share - diluted $ (0.22) $ (3.31) $ (0.52) $ (9.91) Weighted average shares outstanding Basic 15,665 13,741 15,617 13,262 Diluted 15,665 13,741 15,617 13,262 We believe the non-GAAP measure of adjusted loss per diluted 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. Restaurant Data The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated: Twelve Weeks Ended Twenty-Eight Weeks Ended July 11, 2021 July 12, 2020 July 11, 2021 July 12, 2020 Company-owned: Beginning of period 440 452 443 454 Closed during the period (10) (2) (13) (4) End of period 430 450 430 450 Franchised: Beginning of period 103 102 103 102 Closed during the period (2) — (2) — End of period 101 102 101 102 Total number of restaurants 531 552 531 552 ________________________________________________________ 15 Table of Contents The following table presents total Company-owned and franchised restaurants by state or province as of July 11, 2021: Company-Owned Restaurants Franchised Restaurants State: Arkansas 2 2 Alaska — 3 Alabama 4 — Arizona 18 1 California 59 — Colorado 22 — Connecticut — 3 Delaware — 5 Florida 19 — Georgia 6 — Iowa 5 — Idaho 8 — Illinois 22 — Indiana 13 — Kansas — 4 Kentucky 4 — Louisiana 2 — Massachusetts 4 2 Maryland 13 — Maine 2 — Michigan — 20 Minnesota 4 — Missouri 8 3 Montana — 2 North Carolina 17 — Nebraska 4 — New Hampshire 3 — New Jersey 12 1 New Mexico 3 — Nevada 6 — New York 14 — Ohio 18 2 Oklahoma 5 — Oregon 15 5 Pennsylvania 11 21 Rhode Island 1 — South Carolina 4 — South Dakota 1 — Tennessee 11 — Texas 20 9 Utah 1 6 Virginia 20 — Washington 38 — Wisconsin 11 — Province: British Columbia — 12 Total 430 101 ——————————————————— 16 Table of Contents 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 2020 annual financial statements, and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our operating results may fluctuate significantly as a result of a variety of factors, and operating results for any period presented are not necessarily indicative of results for a full fiscal year. Twelve Weeks Ended Twenty-Eight Weeks Ended July 11, 2021 July 12, 2020 July 14, 2019 (1) July 11, 2021 July 12, 2020 July 14, 2019 (1) Revenues: Restaurant revenue 98.3 % 99.4 % 98.2 % 97.9 % 98.8 % 97.9 % Franchise and other revenues 1.7 % 0.6 % 1.8 % 2.1 % 1.2 % 2.1 Total revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Restaurant operating costs (exclusive of depreciation and amortization shown separately below): Cost of sales 22.8 % 24.2 % 23.9 % 22.2 % 23.7 % 23.6 % Labor 36.4 % 39.2 % 35.2 % 35.6 % 39.3 % 35.5 % Other operating 17.2 % 21.6 % 14.3 % 17.7 % 18.8 % 14.0 % Occupancy 7.9 % 13.0 % 8.4 % 8.8 % 11.8 % 8.6 % Total restaurant operating costs 84.3 % 98.0 % 81.8 % 84.3 % 93.6 % 81.7 % Depreciation and amortization 6.9 % 12.8 % 6.9 % 7.5 % 10.5 % 6.9 % Selling, general and administrative 10.2 % 12.2 % 11.4 % 9.8 % 13.1 % 11.6 % Pre-opening and acquisition costs 0.1 % — % — % 0.1 % — % — % Other charges 0.8 % 9.0 % 5.5 % 1.3 % 28.7 % 2.7 % Loss from operations (0.9) % (31.4) % (4.2) % (1.1) % (44.7) % (1.3) % Interest expense, net and other 1.0 % 1.2 % 0.7 % 1.2 % 1.1 % 0.8 % Loss before income taxes (1.9) % (32.6) % (4.9) % (2.3) % (45.8) % (2.1) % Income tax (benefit) provision (0.1) % 2.3 % (5.2) % (0.1) % 3.5 % (2.3) % Net (loss) income (1.8) % (34.9) % 0.3 % (2.3) % (49.4) % 0.2 % ___________________________________ (1) Presented for improved comparability to pre-COVID-19 operations. Certain percentage amounts in the table above do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues. 17 Table of Contents Revenues Twelve Weeks Ended Twenty-Eight Weeks Ended (Revenues in thousands) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Restaurant revenue $ 272,157 $ 160,144 69.9 % $ 590,834 $ 461,578 28.0 % Franchise royalties, fees and other revenue 4,818 978 392.6 % 12,416 5,609 121.4 % Total revenues $ 276,975 $ 161,122 71.9 % $ 603,250 $ 467,187 29.1 % Average weekly net sales volumes in Company-owned restaurants $ 53,135 $ 32,287 71.7 % $ 49,347 $ 37,915 30.2 % Total operating weeks 5,122 4,960 (1.0) % 11,973 12,174 (1.7) % Net sales per square foot $ 102 $ 62 64.1 % $ 221 $ 171 29.1 % Restaurant revenue for the twelve weeks ended July 11, 2021, which comprises primarily food and beverage sales, increased $112.1 million, or 69.9%, as compared to the twelve weeks ended July 12, 2020. The increase was due to a $105.4 million, or 66.3%, increase in comparable restaurant revenue, and a $6.7 million increase primarily from reopened restaurants that were temporarily closed during second quarter 2020. The comparable restaurant revenue increase was driven by a 47.7% increase in Guest count and a 18.6% increase in average Guest check. The increase in average Guest check resulted from a 3.0% increase in pricing, a 14.9% increase in menu mix and a 0.7% increase from lower discounting. The increase in menu mix was primarily driven by higher sales of beverages and appetizers, partially offset by lower gourmet burger mix. Off-premise sales comprised 32.8% of total food and beverage sales during second quarter 2021, compared to 63.8% in the same period in 2020. Restaurant revenue for the twenty-eight weeks ended July 11, 2021, increased $129.3 million or 28.0%, as compared to the twenty-eight weeks ended July 12, 2020. The increase was due to a $133.7 million, or 30.3%, increase in comparable restaurant revenue, partially offset by a $4.4 million decrease primarily from closed restaurants. The comparable restaurant revenue decrease was driven by a 20.4% increase in Guest counts and a 9.9% increase in average Guest check. The increase in average Guest check resulted from a 3.5% increase in pricing and a 5.8% increase in menu mix, and a 0.6% increase from lower discounting. The increase in menu mix was primarily driven by higher sales of appetizers and beverages. 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 are comprised of Company-owned restaurants that have operated five full quarters as of the end of the period presented. Company-owned restaurants that were temporarily closed due to the COVID-19 pandemic were not included in the comparable base for the twelve and twenty-eight weeks ended July 11, 2021 or July 12, 2020. 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, the average square footage of our restaurants, as well as the impact of changing capacity limitations in response to COVID-19 levels in a given locality. Net sales per square foot represents the total restaurant revenue for Company-owned restaurants included in the comparable base divided by the total square feet of Company-owned restaurants included in the comparable base. Franchise and other revenue increased $3.8 million for the twelve weeks ended July 11, 2021 compared to the twelve weeks ended July 12, 2020, due to charging and collecting royalty payments and advertising contributions from our franchisees during the second fiscal quarter of 2021; during the same period in 2020, the Company had temporarily abated franchisee royalty and advertising contribution payments, resuming collection during the latter half of the second fiscal quarter of 2020. Our franchisees reported a comparable restaurant revenue increase of 69.7% for the twelve weeks ended July 11, 2021 compared to the same period in 2020. Franchise and other revenue increased $6.8 million for the twenty-eight weeks ended July 11, 2021 compared to the twenty-eight weeks ended July 12, 2020, due to charging and collecting royalty payments and advertising contributions from our franchisees during the second fiscal quarter of 2021; during the same period in 2020, the Company had temporarily abated franchisee royalty and advertising contribution payments in mid-March, resuming collection during the latter half of the second fiscal quarter of 2020, as well as an increase in gift card breakage. Our franchisees reported a comparable restaurant revenue increase of 35.7% for the twenty-eight weeks ended July 11, 2021 compared to the same period in 2020. 18 Table of Contents Cost of Sales Twelve Weeks Ended Twenty-Eight Weeks Ended (In thousands, except percentages) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Cost of sales $ 61,917 $ 38,780 59.7 % $ 131,083 $ 109,206 20.0 % As a percent of restaurant revenue 22.8 % 24.2 % (1.4) % 22.2 % 23.7 % (1.5) % Cost of sales, which comprises of food and beverage costs, is variable and generally fluctuates with sales volume. Cost of sales as a percentage of restaurant revenue decreased 140 basis points for the twelve weeks ended July 11, 2021 as compared to the same period in 2020. The decrease was primarily driven by pricing, favorable mix shifts, and discounts, partially offset by commodity inflation. Cost of sales as a percentage of restaurant revenue decreased 150 basis points for the twenty-eight weeks ended July 11, 2021 as compared to the same period in 2020. The decrease was primarily driven by pricing and favorable mix shifts. Labor Twelve Weeks Ended Twenty-Eight Weeks Ended (In thousands, except percentages) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Labor $ 98,949 $ 62,742 57.7 % $ 210,608 $ 181,308 16.2 % As a percent of restaurant revenue 36.4 % 39.2 % (2.8) % 35.6 % 39.3 % (3.7) % Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. For the twelve weeks ended July 11, 2021, labor as a percentage of restaurant revenue decreased 280 basis points compared to the same period in 2020. The decrease was primarily driven by staffing shortages, and sales leverage, partially offset by higher wage rates, staffing costs and increased restaurant management compensation costs in 2021. $1.6 million of incremental labor costs were incurred due to increased hiring ads, incremental hiring and training resources, and retention and sign-on bonuses to support our staffing initiatives. For the twenty-eight weeks ended July 11, 2021, labor as a percentage of restaurant revenue decreased 370 basis points compared to the same period in 2020. The decrease was primarily driven by staffing shortages, and sales leverage, partially offset by higher wage rates and staffing costs. Other Operating Twelve Weeks Ended Twenty-Eight Weeks Ended (In thousands, except percentages) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Other operating $ 46,928 $ 34,663 35.4 % $ 104,640 $ 86,954 20.3 % As a percent of restaurant revenue 17.2 % 21.6 % (4.4) % 17.7 % 18.8 % (1.1) % Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. For the twelve weeks ended July 11, 2021, other operating costs as a percentage of restaurant revenue decreased 440 basis points as compared to the same period in 2020. The decrease was primarily driven by lower third party delivery fees and supplies due to lower off-premises sales volumes, and sales leverage. For the twenty-eight weeks ended July 11, 2021, other operating costs as a percentage of restaurant revenue decreased 110 basis points as compared to the same period in 2020. The decrease was primarily driven by sales leverage and supply costs, partially offset by higher third party delivery commissions. 19 Table of Contents Occupancy Twelve Weeks Ended Twenty-Eight Weeks Ended (In thousands, except percentages) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Occupancy $ 21,614 $ 20,758 4.1 % $ 51,714 $ 54,415 (5.0) % As a percent of restaurant revenue 7.9 % 13.0 % (5.1) % 8.8 % 11.8 % (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 twelve weeks ended July 11, 2021, occupancy costs as a percentage of restaurant revenue decreased 510 basis points compared to the same period in 2020 primarily driven by savings from permanently closed restaurants and restructuring of lease payments, rent concessions, and sales leverage. For the twenty-eight weeks ended July 11, 2021, occupancy costs as a percentage of restaurant revenue decreased 300 basis points compared to the same period in 2020 primarily driven by savings from permanently closed restaurants and restructuring of lease payments and rent concessions. Our fixed rents for the twelve weeks ended July 11, 2021 and July 12, 2020 were $16.0 million and $14.7 million, an increase of $1.3 million due to recognizing ongoing fixed rents of Company-owned restaurants that were temporarily closed due to the COVID-19 pandemic in Closed restaurant expense (a component of Other Charges) in 2020, compared to Occupancy in 2021, partially offset by a net decrease in store count resulting from 10 locations permanently closed during the period. Our fixed rents for the twenty-eight weeks ended July 11, 2021 and July 12, 2020 were $37.0 million and $36.3 million, an increase of $0.7 million due to recognizing ongoing fixed rents of Company-owned restaurants that were temporarily closed due to the COVID-19 pandemic in Closed restaurant expense (a component of Other Charges) in 2020, compared to Occupancy in 2021, partially offset by a net decrease in store count resulting from 13 locations permanently closed during the period. Depreciation and Amortization Twelve Weeks Ended Twenty-Eight Weeks Ended (In thousands, except percentages) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Depreciation and amortization $ 19,215 $ 20,560 (6.5) % $ 45,103 $ 48,880 (7.7) % As a percent of total revenues 6.9 % 12.8 % (5.9) % 7.5 % 10.5 % (3.0) % 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 twelve weeks ended July 11, 2021, depreciation and amortization expense as a percentage of revenue decreased 590 basis points over the same period in 2020. For the twenty-eight weeks ended July 11, 2021, depreciation and amortization expense as a percentage of revenue decreased 300 basis points over the same period in 2020. The decreases are primarily due to net closed Company-owned restaurants, and sales leverage. Selling, General, and Administrative Twelve Weeks Ended Twenty-Eight Weeks Ended (In thousands, except percentages) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Selling, general, and administrative $ 28,346 $ 19,697 43.9 % $ 58,956 $ 61,199 (3.7) % As a percent of total revenues 10.2 % 12.2 % (2.0) % 9.8 % 13.1 % (3.3) % Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include marketing and advertising costs; restaurant support center, regional, and franchise support salaries and benefits; travel; professional and consulting fees; corporate information systems; legal expenses; office rent; training; and board of directors expenses. Selling, general, and administrative costs in the twelve weeks ended July 11, 2021 increased $8.6 million, or 43.9%, as compared to the same period in 2020. The increase in selling, general and administrative costs in 2021 was primarily driven by lapping the significant reduction in marketing spend in 2020 due to the COVID-19 pandemic, increased Team Member benefits, and temporary salary reductions in 2020, partially offset by lower professional services spend. 20 Table of Contents Selling, general, and administrative costs in the twenty-eight weeks ended July 11, 2021 decreased $2.2 million, or 3.7%, as compared to the same period in 2020. The decrease was primarily driven by a decrease in travel and entertainment costs, decreased broadcast and national media marketing spend, decreased professional services spend and decreased salaries and wage expenses, partially offset by increased Team Member benefit costs. Pre-opening Costs Twelve Weeks Ended Twenty-Eight Weeks Ended (In thousands, except percentages) July 11, 2021 July 12, 2020 Percent Change July 11, 2021 July 12, 2020 Percent Change Pre-opening costs $ 374 $ 3 * $ 374 $ 156 * As a percent of total revenues 0.1 % — % 0.1 % 0.1 % — % 0.1 % * Percentage increases and decreases over 100 percent were not considered meaningful. Pre-opening costs, which are expensed as incurred, comprise the costs related to preparing restaurants to introduce Donatos®, 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 restaurants where Donatos® has been introduced, 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. We incurred pre-opening costs during the twelve and twenty-eight weeks ended July 11, 2021 and July 12, 2020 related to the rollout of Donatos®. The Company completed the rollout of 41 restaurants during the twelve weeks ended July 11, 2021, and expects to continue its roll out of Donatos® to approximately 80 restaurants in the second half of fiscal year 2021. Interest Expense, Net and Other Interest expense, net and other was $2.8 million for the twelve weeks ended July 11, 2021, an increase of $0.8 million, or 40.0%, compared to the same period in 2020. The increase was primarily related to a higher weighted average interest rate for the quarter due to increased rates associated with the Second Amendment to Credit Agreement (the "Second Amendment"), partially offset by a lower average outstanding debt balance compared to the same period in 2020. Our weighted average interest rate was 7.4% for the twelve weeks ended July 11, 2021 as compared to 4.2% for the same period in 2020. Interest expense, net and other was $7.1 million for the twenty-eight weeks ended July 11, 2021, an increase of $1.8 million, or 34.0%, from the same period in 2020. The increase was primarily related to a higher weighted average interest rate for the period as well as the partial write off of approximately $1.2 million of deferred financing charges related to the modification of our revolver in conjunction with the execution of the Second Amendment on February 25, 2021, partially offset by a lower average outstanding debt balance compared to the same period in 2020. Our weighted average interest rate was 6.7% for the twenty-eight weeks ended July 11, 2021 as compared to 4.2% for the same period in 2020. Provision for Income Taxes The effective tax rate for the twelve weeks ended July 11, 2021 was a 6.6% benefit, compared to a 7.0% expense for the twelve weeks ended July 12, 2020. The decrease in tax expense for the twelve weeks ended July 11, 2021 is primarily due to the change in full valuation allowance recognition. The effective tax benefit for the twenty-eight weeks ended July 11, 2021 and July 12, 2020 was 2.2%, compared to a 7.7% expense for the twelve weeks ended July 12, 2020.The decrease in tax expense for the twenty-eight weeks ended July 11, 2021 is primarily due to the change in full valuation allowance recognition. The Company has filed federal and state cash tax refund claims totaling approximately $16 million during 2021 from net operating loss carrybacks. While we expect to receive a portion of the refunds in 2021, due to government delays in processing these claims we do not expect to receive the majority until 2022. Liquidity and Capital Resources Cash and cash equivalents increased $9.5 million to $25.6 million as of July 11, 2021, from $16.1 million at the beginning of the fiscal year. As the Company continues to recover from the COVID-19 pandemic and generates operating cash flow, the Company is using available cash flow from operations to pay down debt, maintain existing restaurants and infrastructure, and execute on our long-term strategic initiatives. As of July 11, 2021, the Company had approximately $117 million in liquidity, including cash on hand and available borrowing capacity, under its credit facility. 21 Table of Contents Cash Flows The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands): Twenty-Eight Weeks Ended July 11, 2021 July 12, 2020 Net cash provided by (used in) operating activities $ 37,184 $ (18,607) Net cash used in investing activities (10,834) (11,413) Net cash (used in) provided by financing activities (16,931) 26,369 Effect of exchange rate changes on cash 34 (256) Net change in cash and cash equivalents $ 9,453 $ (3,907) Operating Cash Flows Net cash flows provided by (used in) operating activities increased $55.8 million to $37.2 million for the twenty-eight weeks ended July 11, 2021. The changes in net cash provided by (used in) operating activities are primarily attributable to a $90.5 million increase in profit from operations (defined as the change in operating margins from comparable and non-comparable restaurants), lower accounts receivable and higher accounts payable balances due to the timing of operational receipts and payments, deferral of payroll tax payments under the CARES Act, as well as other changes in working capital as presented in the Condensed Consolidated Statements of Cash Flows. Investing Cash Flows Net cash flows used in investing activities decreased $0.6 million to $10.8 million for the twenty-eight weeks ended July 11, 2021, as compared to $11.4 million for the same period in 2020. The decrease is primarily due to the Company selectively pursuing projects aligned with strategic uses of capital and cost management in restaurant technology and restaurant improvement capital, as well as increased spend on Donatos ® associated with adding 41 restaurants in the second fiscal quarter. The following table lists the components of our capital expenditures, net of currency translation, for the twenty-eight weeks ended July 11, 2021 and July 12, 2020 (in thousands): Twenty-Eight Weeks Ended July 11, 2021 July 12, 2020 Restaurant improvement capital and other $ 6,184 $ 7,194 Investment in technology infrastructure and other 2,878 4,262 Donatos ® expansion 1,792 — Total capital expenditures $ 10,854 $ 11,456 Financing Cash Flows Net cash flows used in financing activities increased $43.3 million to $16.9 million for the twenty-eight weeks ended July 11, 2021, as compared to net cash flows provided by financing activities of $26.4 million in the same period in 2020. The decrease is due to a $29.7 million decrease in proceeds from the issuance of common stock, net of issuance costs, and a $17.5 million decrease in net draws made on long-term debt, partially offset by a decrease in cash used for debt issuance costs, and a decrease in cash used to repurchase the Company's common stock due to the temporary suspension of the Company's share repurchase program beginning in 2020. Credit Facility As of July 11, 2021, the Company had outstanding borrowings under the credit facility of $153.9 million, of which $9.7 million was classified as current, in addition to amounts issued under letters of credit of $8.6 million. Amounts issued under letters of credit reduce the amount available under the credit facility but are not recorded as debt. As of July 11, 2021, the Company had $91.4 million of available borrowing capacity under its credit facility. Net payments during the twenty-eight weeks ended July 11, 2021 totaled $15.8 million, and net draws during the same period in 2020 totaled $0.6 million. 22 Table of Contents Covenants 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. As discussed in Note 7, Borrowings , in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of the Quarterly Report on Form 10-Q filed May 25, 2021, we entered into the Second Amendment to our Credit Agreement on February 25, 2021, which waives compliance with the lease adjusted leverage ratio financial covenant ("LALR") and fixed charge coverage ratio financial covenant ("FCCR") for the first two fiscal quarters of 2021, and provides for adjustments during the third and fourth fiscal quarter of 2021 and the first and second fiscal quarters of 2022 for the LALR and FCCR and related calculations. As of July 11, 2021, the Company is in compliance with all applicable covenants. Due to an anticipated delay in the timing of receipt of cash tax refunds, the Company proactively obtained a waiver from our lenders, waiving the application of our FCCR for our third and fourth fiscal quarters of 2021. Debt Outstanding Total debt outstanding decreased $15.8 million to $154.8 million at July 11, 2021 , from $170.6 million at December 27, 2020, due to net payments of $15.8 million on the credit facility during the twenty-eight weeks ended July 11, 2021 . Working Capital We typically maintain current liabilities in excess of our current assets which results in a working capital deficit. We are able to operate with a working capital deficit because restaurant sales are primarily conducted on a cash or credit card basis. Rapid turnover of inventory results in limited investment in inventories, and cash from sales is usually received before related payables for food, supplies, and payroll become due. In addition, receipts from the sale of gift cards are received well in advance of related redemptions. Rather than maintain higher cash balances that would result from this pattern of operating cash flows, we typically utilize operating cash flows in excess of those required for currently-maturing liabilities to pay for capital expenditures, debt repayment, or to repurchase stock as allowed. When necessary, we utilize our credit facility to satisfy short-term liquidity requirements. We believe our future cash flows generated from restaurant operations combined with our remaining borrowing capacity under the credit facility will be sufficient to satisfy any working capital deficits and our planned capital expenditures. Share Repurchase On August 9, 2018, the Company's board of directors authorized the Company's current share repurchase program of up to a total of $75 million of the Company's common stock. The share repurchase authorization was effective as of August 9, 2018, and will terminate upon completing repurchases of $75 million of common stock unless otherwise terminated by the board. Pursuant to the repurchase program, purchases may be made from time to time at the Company's discretion and the Company is not obligated to acquire any particular amount of common stock. From the date of the current program approval through July 11, 2021, we have repurchased a total of 226,500 shares at an average price of $29.14 per share for an aggregate amount of $6.6 million. Accordingly, as of July 11, 2021, we had $68.4 million of availability under the current share repurchase program. 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. Inflation The primary inflationary factors affecting our operations are food, labor costs, energy costs, and materials used in the construction of new restaurants. 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 have a negative impact on labor and commodity costs for the remainder of 2021. Seasonality Our business is subject to seasonal fluctuations. 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. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter, and comparable restaurant sales for any particular future period may decrease. 23 Table of Contents Contractual Obligations There were no other material changes outside the ordinary course of business to our contractual obligations since the filing of Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 18, 2021, except for lease obligations as a result of contractual rent concessions negotiated by the Company during the fiscal quarter ended July 11, 2021. See the maturity of lease liabilities table in Note 4, Leases, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors 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 future impact from the COVID-19 pandemic, and we might obtain different results if we use different assumptions or conditions. We had no significant changes in our critical accounting policies and estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020. Recently Issued and Recently Adopted Accounting Standards See Note 1, Basis of Presentation and Recent Accounting Pronouncements , of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Forward-Looking Statements Certain information and statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA") codified at Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as "anticipate," "assume," "believe," "could," "estimate," "expect," "future," "intend," "may," "plan," "project," "will," "continue," and similar expressions. Forward-looking statements may relate to, among other things: (i) our business objectives and strategic plans, including projected growth in Guest traffic and revenue, planned improvements in operational efficiencies, gross margins, and expense management and enhancements to our restaurant environments and Guest engagement; (ii) our expectations about pricing strategy and average check size; (iii) our ability to hire, train, and retain Team Members; (iv) investments in information technology systems and anticipated related benefits; (v) our expectations about restaurant operating costs, including commodity and food prices and labor and energy costs; (vi) anticipated legislation and other regulation of our business; (vii) recent initiatives such as changes to our service model and our partnership with Donato's®; (viii) our expectations about future cash flows, liquidity, future capital expenditures and other capital deployment opportunities, and taxes; (ix) our expectations regarding competition; and (x) our expectations regarding demand and business recovery, consumer preferences, and consumer discretionary spending. Although we believe the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties. In some cases, information regarding certain important factors that could cause actual results to differ materially from a forward-looking statement appears together with such statement. In addition, the factors described under Risk Factors, as well as other possible factors not listed, could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following: • the impact of COVID-19 on our results of operations, supply chain, and liquidity; • the effectiveness of the Company's strategic initiatives, including alternative labor models, service, and operational improvement initiatives; • our ability to staff, train, and retain our workforce for service execution; • the effectiveness of the Company's marketing strategies and promotions; • menu changes, including the anticipated sales growth, costs, and timing of the Donatos® expansion; • the implementation, rollout, and timing of technology solutions in our restaurants and at our restaurant support center, in addition to digital platforms that are accessed by our Guests; • our ability to achieve and sustain revenue and cost savings from off-premise sales and other initiatives; • competition in the casual dining market and discounting by competitors; 24 Table of Contents • changes in consumer spending trends and habits; • changes in the cost and availability of key food products and distribution, restaurant equipment, construction materials, labor, and energy; • general economic conditions, including changes in consumer disposable income, weather conditions, and related events in regions where our restaurants are operated; • the adequacy of cash flows and the cost and availability of capital or credit facility borrowings; • the impact of federal, state, and local regulation of the Company's business; • changes in federal, state, or local laws and regulations affecting the operation of our restaurants, including minimum wages, consumer health and safety, health insurance coverage, nutritional disclosures, and employment eligibility-related documentation requirements; and • costs and other effects of legal claims by Team Members, franchisees, customers, vendors, stockholders, and others, including negative publicity regarding food safety or cyber security. All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. 25 Table of Contents