What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-10 · 125 added, 129 removed, 239 unchanged (52% 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 Condensed Consolidated Financial Statements.

All comparisons under this heading between 2022 and 2021 refer to the twelve and twenty-eight weeks ended July 10, 2022 and July 11, 2021, unless otherwise indicated.

All comparisons under this heading between 2022 and 2021 refer to the twelve and forty weeks ended October 2, 2022 and October 3, 2021, 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 525 locations in North America.

As of July 10, 2022, the Company owned 426 restaurants located in 38 states.

As of October 2, 2022, the Company owned 424 restaurants located in 38 states.

The Company also had 101 franchised full-service restaurants in 16 states and one Canadian province.

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Financial and Operational Highlights

The following summarizes the operational and financial highlights during the twelve weeks ended July 10, 2022:

The following summarizes the operational and financial highlights during the twelve weeks ended October 2, 2022:

Restaurant Revenue, compared to the same period in the prior year, is presented in the table below:

Restaurant Revenue for the twelve weeks ended July 11, 2021

Restaurant Revenue for the twelve weeks ended October 3, 2021

Increase/(decrease) in comparable restaurant revenue (1)

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Total increase/(decrease) 12.2

Restaurant Revenue for the twelve weeks ended July 10, 2022

The following summarizes the operational and financial highlights during the twenty-eight weeks ended July 10, 2022:

Restaurant Revenue for the twenty-eight weeks ended July 11, 2021

Restaurant Revenue for the twelve weeks ended October 2, 2022

The following summarizes the operational and financial highlights during the forty weeks ended October 2, 2022:

Restaurant Revenue for the forty weeks ended October 3, 2021

Increase/(decrease) in comparable restaurant revenue (1)

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Total increase/(decrease) 90.7

Restaurant Revenue for the twenty-eight weeks ended July 10, 2022

Restaurant Revenue for the forty weeks ended October 2, 2022

(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated five full quarters as of the end of the period presented.

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Twelve Weeks Ended

July 10, 2022 July 11, 2021 Increase/(Decrease)

October 2, 2022 October 3, 2021 Increase/(Decrease)

Restaurant revenue (millions) $ 282.4 $ 270.2 4.5 %

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Total 87.4 % 87.5 % (10)

Twenty-eight Weeks Ended

July 10, 2022 July 11, 2021 Increase/(Decrease)

Forty Weeks Ended

October 2, 2022 October 3, 2021 Increase/(Decrease)

Restaurant revenue (millions) $ 951.7 $ 861.0 10.5 %

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Certain percentage and basis point 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.

The following table summarizes Net Loss, loss per diluted share, and adjusted loss per diluted share for the twelve and twenty-eight weeks ended and July 10, 2022 and July 11, 2021;

Twelve Weeks Ended Twenty-eight Weeks Ended

July 10, 2022 July 11, 2021 July 10, 2022 July 11, 2021

The following table summarizes Net Loss, loss per diluted share, and adjusted loss per diluted share for the twelve and forty weeks ended and October 2, 2022 and October 3, 2021:

Twelve Weeks Ended Forty Weeks Ended

October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021

Net loss as reported $ (12,567) $ (14,980) $ (33,605) $ (28,689)

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Asset impairment 0.14 — 0.82 0.09

Gain on sale of restaurant property (0.58) — (0.58) —

Change in accounting estimate, gift card breakage revenue, net of commissions (1)

Restaurant closure costs 0.06 0.11 0.12 0.27

Executive transition 0.11 — 0.12 —

Write-off of unamortized debt issuance costs (2)

Other financing costs (3)

0.06 — 0.09 —

Income tax expense 0.09 (0.03) (0.08) (0.16)

COVID-19 related charges 0.01 0.02 0.03 0.07

Write-off of unamortized debt issuance costs (2)

Executive transition 0.01 — 0.01 —

Restaurant closure costs (gains) (0.10) 0.07 0.02 0.34

Closed corporate office, net of sublease income 0.02 — 0.02 —

Litigation contingencies 0.01 0.01 — 0.08

Board and stockholder matter costs — — — 0.01

Income tax expense (0.14) (0.04) (0.17) (0.13)

Adjusted loss per share - diluted $ (1.03) $ (0.88) $ (1.90) $ (1.40)

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Diluted 15,892 15,709 15,816 15,647

(1) During the twenty-eight weeks ended July 10, 2022, the Company re-evaluated the estimated redemption pattern related to gift cards.

See Footnote 1, Basis of Presentation and Recent Accounting Pronouncements included in Part I.

(1) During the forty weeks ended October 2, 2022, the Company re-evaluated the estimated redemption pattern related to gift cards.

Basis of Presentation and Recent Accounting Pronouncements included in Part I.

Financial Information in this Quarterly Report on form 10-Q.

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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.

Adjusted loss per diluted share excludes the effects of changes in accounting estimates, asset impairment, litigation contingencies, the write-off of unamortized debt issuance costs, restaurant closure costs, other financing costs, COVID-19 related costs, executive transition costs, and related income tax effects.

Adjusted loss per diluted share excludes the effects of changes in accounting estimates, asset impairment, litigation contingencies, the write-off of unamortized debt issuance costs, restaurant and office closure costs, other financing costs, COVID-19 related costs, executive transition costs, and related income tax effects.

Other companies may define adjusted net loss per diluted share differently, and as a result our measure of adjusted loss per diluted share may not be directly comparable to those of other companies.

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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 10, 2022 July 11, 2021 July 10, 2022 July 11, 2021

Twelve Weeks Ended Forty Weeks Ended

October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021

Company-owned:

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Opened during the period — — 1 —

Sold or closed during the period — (2) — (2)

Closed during the period (1) — (1) (2)

End of period 101 101 101 101

Total number of restaurants 525 531 525 531

The following table presents total Company-owned and franchised restaurants by state or province as of July 10, 2022:

The following table presents total Company-owned and franchised restaurants by state or province as of October 2, 2022:

Company-Owned Restaurants Franchised Restaurants

California 57

Colorado 22 —

Connecticut 3

Illinois 21 —

Louisiana 2 —

Massachusetts 4 2

Maryland 12 —

Michigan — 20

Minnesota 4 —

North Carolina 17

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New Jersey 12 1

New Mexico 3 —

New York 14 —

Pennsylvania 11 21

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South Dakota 1

Tennessee 11 —

Virginia 20 —

Washington 37

Wisconsin 11 —

British Columbia 12

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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 10, 2022 July 11, 2021 July 10, 2022 July 11, 2021

Twelve Weeks Ended Forty Weeks Ended

October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021

Restaurant revenue 98.5 % 98.1 % 97.5 % 98.0 %

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Costs and expenses:

Restaurant operating costs (exclusive of depreciation and amortization shown separately below):

Restaurant operating costs (excluding depreciation and amortization shown separately below):

Cost of sales 25.0 23.2 24.6 22.5

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Depreciation and amortization 6.1 6.9 6.0 7.3

Selling, general and administrative 10.9 10.2 9.7 9.8

Pre-opening and acquisition costs 0.1 0.1 — 0.1

Other charges, net 2.8 0.8 2.0 1.3

Selling, general, and administrative expenses 12.4 11.0 10.5 10.2

Pre-opening costs 0.1 0.2 0.1 0.1

Other charges (gains), net (1.8) 0.6 0.8 1.1

Loss from operations (2.8) (4.4) (1.7) (2.2)

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Loss before income taxes (4.4) (5.4) (3.4) (3.3)

Income tax benefit 0.1 (0.1) 0.1 (0.1)

Income tax provision (benefit) — — — —

Net loss (4.4) % (5.4) % (3.4) % (3.3) %

Twelve Weeks Ended Twenty-Eight Weeks Ended

(Revenues in thousands) July 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

Twelve Weeks Ended Forty Weeks Ended

(Revenues in thousands) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Restaurant revenue $ 282,449 $ 270,202 4.5 % $ 951,718 $ 861,036 10.5 %

Franchise royalties, fees and other revenue 5,433 4,818 12.8 % 20,371 12,416 64.1 %

Franchise and other revenues 4,439 5,242 (15.3) % 24,810 17,658 40.5 %

Total revenues $ 286,888 $ 275,444 4.2 % $ 976,528 $ 878,694 11.1 %

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Net sales per square foot 106 101 5.3 % 358 322 11.1 %

Restaurant revenue for the twelve weeks ended July 10, 2022, which comprises primarily food and beverage sales, increased $16.5 million, or 6.1%, as compared to the second quarter of 2021.

Restaurant revenue for the twelve weeks ended October 2, 2022, which comprises primarily food and beverage sales, increased $12.2 million, or 4.5%, as compared to the third quarter of 2021.

The increase was due to a $14.1 million, or 5.3%, increase in comparable restaurant revenue, and a $1.9 million decrease at non-comparable restaurants, including the impact of restaurant closures.

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The increase in menu mix was primarily driven by our limited time menu offerings and higher dine-in sales volumes.

Off-premises sales decreased 6.3% and comprised 28.6% of total food and beverage sales during the second quarter of 2022, as compared to the same period in 2021.

Restaurant revenue for the twenty-eight weeks ended July 10, 2022, increased $78.4 million, or 13.3%, as compared to the twenty-eight weeks ended July 11, 2021.

Dine-in sales comprised 72.3% of total food and beverage sales during the third quarter of 2022, as compared to 69.2% in the same period in 2021.

Restaurant revenue for the forty weeks ended October 2, 2022, increased $90.7 million, or 10.5%, as compared to the forty weeks ended October 3, 2021.

The increase was due to a $93.6 million, or 11.2%, increase in comparable restaurant revenue, and a $2.9 million decrease at non-comparable restaurants, including the impact of restaurant closures.

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The increase in menu mix was primarily driven by our limited time menu offerings and higher dine-in sales volumes.

Off-premises sales decreased 10.3% and comprised 29.7% of total food and beverage sales during the twenty-eight weeks ended July 10, 2022, as compared to the same period in 2021.

Dine-in sales comprised 70.9% of total food and beverage sales during the forty weeks ended October 2, 2022, as compared to 64.5% in the same period in 2021.

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.

The Company-owned restaurants that were temporarily closed due to the COVID-19 pandemic were not included in the comparable base for the twenty-eight weeks ended July 10, 2022 or July 11, 2021.

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 reopened, 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.

The Company-owned restaurants that were temporarily closed due to the COVID-19 pandemic were not included in the comparable base for the forty weeks ended October 2, 2022 or October 3, 2021.

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 reopened and new 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 $0.6 million for the twelve weeks ended July 10, 2022 compared to the twelve weeks ended July 11, 2021.

Our franchisees reported a comparable restaurant revenue increase of 3.8% for the twelve weeks ended July 10, 2022 compared to the same period in 2021.

Franchise and other revenue increased $8.0 million for the twenty-eight weeks ended July 10, 2022 compared to the twenty-eight weeks ended July 11, 2021, primarily due to the re-evaluation of the estimated redemption pattern related to gift cards resulting in a $5.8 million adjustment to gift card breakage from aligning our estimate to the updated estimated redemption pattern.

Our franchisees reported a comparable restaurant revenue increase of 11.7% for the twenty-eight weeks ended July 10, 2022 compared to the same period in 2021.

Franchise and other revenue decreased $0.8 million, or 15.3% for the twelve weeks ended October 2, 2022 compared to the twelve weeks ended October 3, 2021.

Our franchisees reported flat comparable restaurant revenue for the twelve weeks ended October 2, 2022 compared to the same period in 2021.

Franchise and other revenue increased $7.2 million for the forty weeks ended October 2, 2022 compared to the forty weeks ended October 3, 2021, primarily due to the re-evaluation of the estimated redemption pattern related to gift cards resulting in a $5.9 million adjustment to gift card breakage from aligning our estimate to the updated estimated redemption pattern.

Our franchisees reported a comparable restaurant revenue increase of 8.0% for the forty weeks ended October 2, 2022 compared to the same period in 2021.

Cost of Sales

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Cost of sales $ 70,640 $ 62,671 12.7 % $ 234,283 $ 193,754 20.9 %

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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 increased 240 basis points for the twelve weeks ended July 10, 2022 as compared to the same period in 2021.

The increase was primarily driven by commodity inflation, partially offset by pricing and rebates.

Cost of sales as a percentage of restaurant revenue increased 230 basis points for the twenty-eight weeks ended July 10, 2022 as compared to the same period in 2021.

The increase was primarily driven by commodity inflation, partially offset by favorable mix shifts, pricing, and rebates.

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

Cost of sales as a percentage of restaurant revenue increased 180 basis points for the twelve weeks ended October 2, 2022 as compared to the same period in 2021.

The increase was primarily driven by commodity inflation, partially offset by pricing and favorable mix shifts.

Cost of sales as a percentage of restaurant revenue increased 210 basis points for the forty weeks ended October 2, 2022 as compared to the same period in 2021.

The increase was primarily driven by commodity inflation, partially offset by favorable mix shifts and pricing.

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Labor $ 100,522 $ 99,725 0.8 % $ 340,273 $ 310,333 9.6 %

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

For the twelve weeks ended July 10, 2022, labor as a percentage of restaurant revenue decreased 120 basis points compared to the same period in 2021.

The decrease was primarily driven by sales leverage and lower group insurance and management incentive compensation costs, partially offset by wage rate inflation.

For the twenty-eight weeks ended July 10, 2022, labor as a percentage of restaurant revenue increased 20 basis points compared to the same period in 2021.

The increase was primarily driven by higher wage rate inflation and staffing costs, partially offset by sales leverage and lower group insurance and management incentive compensation costs.

For the twelve weeks ended October 2, 2022, labor as a percentage of restaurant revenue decreased 130 basis points compared to the same period in 2021.

The decrease was primarily driven by sales leverage, lower hiring costs, and lower management incentive compensation costs, partially offset by wage rate inflation.

For the forty weeks ended October 2, 2022, labor as a percentage of restaurant revenue decreased 20 basis points compared to the same period in 2021.

The decrease was primarily driven by sales leverage, lower group insurance, and lower management incentive compensation costs, partially offset by higher wage rate inflation.

Other Operating

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Other operating $ 52,858 $ 51,462 2.7 % $ 172,725 $ 156,102 10.6 %

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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.

For the twelve weeks ended July 10, 2022, other operating costs as a percentage of restaurant revenue increased 80 basis points as compared to the same period in 2021.

The increase was primarily driven by increases in maintenance costs, utilities and third party commissions, partially offset by lower hiring costs and sales leverage.

For the twenty-eight weeks ended July 10, 2022, other operating costs as a percentage of restaurant revenue increased 20 basis points as compared to the same period in 2021.

The increase was primarily driven by increases in maintenance costs, utilities, and third party commissions, partially offset by lower supply costs driven by lower off-premises sales, lower hiring costs, and sales leverage.

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

For the twelve weeks ended October 2, 2022, other operating costs as a percentage of restaurant revenue decreased 30 basis points as compared to the same period in 2021.

The decrease was primarily driven by lower hiring advertisement costs, lower off-premises supplies, and sales leverage, partially offset by an increase in utilities and credit card fees.

For the forty weeks ended October 2, 2022, other operating costs as a percentage of restaurant revenue was flat compared to the same period in 2021.

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Occupancy $ 22,828 $ 22,519 1.4 % $ 76,406 $ 74,233 2.9 %

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

For the twelve weeks ended July 10, 2022, occupancy costs as a percentage of restaurant revenue increased 10 basis points compared to the same period in 2021 primarily driven by higher insurance costs, partially offset by sales leverage.

For the twenty-eight weeks ended July 10, 2022, occupancy costs as a percentage of restaurant revenue decreased 80 basis points compared to the same period in 2021 primarily driven by sales leverage, partially offset by higher insurance costs.

Our fixed rents for the twelve weeks ended July 10, 2022 and July 11, 2021 were $16.1 million and $16.0 million, an increase of $0.1 million.

Our fixed rents for the twenty-eight weeks ended July 10, 2022 and July 11, 2021 were $37.4 million and $37.0 million.

For the twelve weeks ended October 2, 2022, occupancy costs as a percentage of restaurant revenue decreased 20 basis points compared to the same period in 2021 primarily driven by sales leverage.

For the forty weeks ended October 2, 2022, occupancy costs as a percentage of restaurant revenue decreased 60 basis points compared to the same period in 2021 primarily driven by sales leverage, partially offset by higher insurance costs.

Our fixed rents for the twelve weeks ended October 2, 2022 and October 3, 2021 were $16.1 million and $15.8 million, an increase of $0.3 million.

Our fixed rents for the forty weeks ended October 2, 2022 and October 3, 2021 were $53.5 million and $52.8 million, an increase of $0.6 million.

Depreciation and Amortization

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Depreciation and amortization $ 17,368 $ 18,881 (8.0) % $ 58,924 $ 63,984 (7.9) %

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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 twelve weeks ended July 10, 2022, depreciation and amortization expense as a percentage of revenue decreased 90 basis points over the same period in 2021 primarily due to net closed Company-owned restaurants, and sales leverage.

For the twenty-eight weeks ended July 10, 2022, depreciation and amortization expense as a percentage of revenue decreased 150 basis points over the same period in 2021 primarily due to net closed Company-owned restaurants, and sales leverage.

For the twelve weeks ended October 2, 2022, depreciation and amortization expense as a percentage of revenue decreased 80 basis points over the same period in 2021 primarily due to net closed Company-owned restaurants, and sales leverage.

For the forty weeks ended October 2, 2022, depreciation and amortization expense as a percentage of revenue decreased 130 basis points over the same period in 2021 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 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Selling, general, and administrative $ 35,692 $ 30,343 17.6 % $ 102,168 $ 89,299 14.4 %

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and board of directors expenses.

General, and administrative costs in the twelve weeks ended July 10, 2022 increased $1.0 million, or 5.7%, as compared to the same period in 2021.

The increase was primarily driven by increased stock based compensation expense, merit increases, and increased manager-in-training costs, partially offset by a decrease in incentive compensation costs.

General, and administrative costs in the twenty-eight weeks ended July 10, 2022 increased $3.2 million, or 8.0%, as compared to the same period in 2021.

The increase was primarily driven by increased stock based compensation expense, merit increases, and increased manager-in-training costs.

Selling costs in the twelve weeks ended July 10, 2022 increased $2.7 million, or 25.8%, as compared to the same period in 2021.

General, and administrative costs in the twelve weeks ended October 2, 2022 increased $3.8 million, or 21.5%, as compared to the same period in 2021.

The increase was primarily driven by a timing shift of our annual leadership conference, increased stock based compensation expense, and merit increases, partially offset by lower corporate office costs.

General, and administrative costs in the forty weeks ended October 2, 2022 increased $7.0 million, or 12.1%, as compared to the same period in 2021.

The increase was primarily driven by the 2022 leadership conference, increased stock based compensation expense, merit increases, and increased manager-in-training costs, partially offset by lower corporate office costs.

Selling costs in the twelve weeks ended October 2, 2022 increased $1.5 million, or 12.2%, as compared to the same period in 2021.

The increase was primarily driven by increased marketing spend.

Selling costs in the twenty-eight weeks ended July 10, 2022 increased $4.3 million, or 22.8%, as compared to the same period in 2021.

Selling costs in the forty weeks ended October 2, 2022 increased $5.9 million, or 18.5%, as compared to the same period in 2021.

The increase was primarily driven by increased marketing spend.

Pre-opening Costs

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 10, 2022 July 11, 2021 Percent Change July 10, 2022 July 11, 2021 Percent Change

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change

Pre-opening costs $ 217 $ 418 (48.1) % $ 514 $ 792 (35.1) %

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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 10, 2022 related to the rollout of Donatos®.

The Company expects to continue its roll out of Donatos® in 2022 to approximately 50 restaurants.

We incurred pre-opening costs during the twelve and forty weeks ended October 2, 2022 related to the rollout of Donatos®.

As of October 2, 2022, the Company had completed its rollout of Donatos® at approximately 50 restaurants for 2022.

Interest Expense, Net and Other

Interest expense, net and other was $4.1 million for the twelve weeks ended July 10, 2022, an increase of $1.4 million, or 48.9%, compared to the same period in 2021.

The increase was primarily related to higher outstanding debt and a higher weighted average interest rate for the quarter.

Our weighted average interest rate on our credit facility debt was 8.7% for the twelve weeks ended July 10, 2022 as compared to 7.4% for the same period in 2021.

Interest expense, net and other was $11.6 million for the twenty-eight weeks ended July 10, 2022, an increase of $4.4 million, or 62.5%, compared to the same period in 2021.

The increase was primarily related to higher outstanding debt and a higher weighted average interest rate as well as the write off of approximately $1.7 million of deferred financing charges related to the Company's Prior Credit Facility upon the execution of the Credit Agreement on March 4, 2022.

Our weighted average interest rate on our credit facility debt was 8.4% for the twenty-eight weeks ended July 10, 2022 as compared to 6.7% for the same period in 2021.

Interest expense, net and other was $4.6 million for the twelve weeks ended October 2, 2022, an increase of $1.7 million, or 59.9%, compared to the same period in 2021.

The increase was primarily related to higher average outstanding debt, which increased $50.5 million compared to the same period in 2021, and a higher weighted average interest rate for the quarter.

Our weighted average interest rate on our credit facility debt was 9.7% for the twelve weeks ended October 2, 2022 as compared to 6.8% for the same period in 2021.

Interest expense, net and other was $16.2 million for the forty weeks ended October 2, 2022, an increase of $6.2 million, or 61.7%, compared to the same period in 2021.

The increase was primarily related to higher average outstanding debt, which increased $37.2 million compared to the same period in 2021, and a higher weighted average interest rate as well as the write off of approximately $1.7 million of deferred financing charges related to the Company's Prior Credit Facility upon the execution of the Credit Agreement on March 4, 2022.

Our weighted average interest rate on our credit facility debt was 8.7% for the forty weeks ended October 2, 2022 as compared to 6.6% for the same period in 2021.

Income Tax Provision

The effective tax rate for the twelve weeks ended July 10, 2022 was a 2.5% expense, compared to a 6.6% benefit for the twelve weeks ended July 11, 2021.

The effective tax rate for the twenty-eight weeks ended July 10, 2022 was a 2.4% expense, compared to a 2.2% benefit for the twenty-eight weeks ended July 11, 2021.

During the twelve and twenty-eight weeks ended July 10, 2022, the Company received $12.3 million and $14.8 million of federal and state refund claims, respectively, and expects to receive an additional $0.6 million during the second half of 2022.

The effective tax rate for the twelve weeks ended October 2, 2022 was a 0.3% benefit, compared to a 0.2% benefit for the twelve weeks ended October 3, 2021.

The effective tax rate for the forty weeks ended October 2, 2022 was a 1.4% expense, compared to a 1.1% benefit for the forty weeks ended October 3, 2021.

During the forty weeks ended October 2, 2022, the Company received $14.8 million of federal and state refund claims, respectively, and expects to receive an additional $0.7 million over the next 12-15 months due to processing delays at the IRS and state authorities.

Liquidity and Capital Resources

Cash and cash equivalents, and restricted cash increased $36.3 million to $59.0 million as of July 10, 2022, from $22.8 million at the beginning of the fiscal year.

Cash and cash equivalents, and restricted cash increased $35.4 million to $58.1 million as of October 2, 2022, from $22.8 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 maintain existing restaurants and infrastructure, execute on its long-term strategic initiatives, and pay down debt.

As of July 10, 2022, the Company had approximately $75.3 million in liquidity, including cash on hand and available borrowing capacity under its credit facility.

As of October 2, 2022, the Company had approximately $75.0 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 period presented (in thousands):

Twenty-Eight Weeks Ended

July 10, 2022 July 11, 2021

Forty Weeks Ended

October 2, 2022 October 3, 2021

Net cash provided by operating activities $ 38,800 $ 37,617

4 unchanged sentences

Operating Cash Flows

Net cash flows provided by operating activities decreased $0.7 million to $36.4 million for the twenty-eight weeks ended July 10, 2022.

The change in net cash provided by operating activities is primarily attributable to increased loss from operations, partially offset by increased non-cash items as well as other changes in working capital, including the tax refunds received in 2022, as presented in the Condensed Consolidated Statements of Cash Flows.

Net cash flows provided by operating activities increased $1.2 million to $38.8 million for the forty weeks ended October 2, 2022.

The change in net cash provided by operating activities is primarily attributable to changes in working capital, including the tax refunds received in 2022, partially offset by decreased cash from earnings after non-cash items, as presented in the Condensed Consolidated Statements of Cash Flows.

Investing Cash Flows

Net cash flows used in investing activities increased $4.8 million to $15.6 million for the twenty-eight weeks ended July 10, 2022, as compared to $10.8 million for the same period in 2021.

The increase is primarily due to increased spending on restaurant improvements, and investments in technology.

The following table lists the components of our capital expenditures, net of currency translation, for the twenty-eight weeks ended July 10, 2022 and July 11, 2021 (in thousands):

Twenty-Eight Weeks Ended

July 10, 2022 July 11, 2021

Net cash flows used in investing activities decreased $1.7 million to $18.3 million for the forty weeks ended October 2, 2022, as compared to $20.0 million for the same period in 2021.

The decrease is primarily due to proceeds received in connection with the sale of a restaurant property, partially offset by increased spending on restaurant improvements, and investments in technology.

The following table lists the components of our capital expenditures, net of currency translation, for the forty weeks ended October 2, 2022 and October 3, 2021 (in thousands):

Forty Weeks Ended

October 2, 2022 October 3, 2021

Restaurant improvement capital and other $ 12,376 $ 6,467

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Financing Cash Flows

Net cash flows provided by financing activities increased $32.4 million to $15.5 million for the twenty-eight weeks ended July 10, 2022, as compared to net cash flows used in financing activities of $16.9 million in the same period in 2021.

The increase is primarily due to $16.4 million in net draws made on long-term debt as a result of the Company's refinancing of debt on March 4, 2022 and $3.9 million in proceeds received related to a real estate sale, partially offset by an increase in cash used for debt issuance costs, compared to a net paydown of debt of $16.9 million in 2021.

Net cash flows provided by financing activities increased $31.0 million to $14.9 million for the forty weeks ended October 2, 2022, as compared to net cash flows used in financing activities of $16.0 million in the same period in 2021.

The increase is primarily due to $15.9 million in net borrowings in 2022 compared to a net paydown of debt of $15.7 million in 2021 as a result of the Company's refinancing of debt on March 4, 2022 and $3.9 million in initial deposit proceeds received related to the sale of a restaurant property in the second quarter of 2022, partially offset by an increase in cash used for debt issuance costs.

New Credit Agreement

On March 4, 2022 the Company entered into a new Credit Agreement (the "Credit Agreement"), which replaced its prior amended and restated credit agreement (the "Prior Credit Agreement").

The five-year $225.0 million Credit Agreement provides for a $25.0 million revolving line of credit and a $200.0 million term loan (collectively, the “Credit Facility”).

The new Credit Agreement references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S.

Treasury securities, or the Alternate Base Rate ("ABR"), which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5% per annum, or (c) one-month term SOFR plus 1.0% per annum.

As of July 10, 2022, the Company had outstanding borrowings under the Credit Agreement of $190.5 million net of unamortized deferred financing charges and discounts, of which $2.0 million was classified as current.

As of July 10, 2022, the Company had $25.0 million of available borrowing capacity under its Credit Agreement.

As of July 10, 2022, the Company had $8.4 million of letters of credit issued against cash collateral, compared to $8.6 million for the same period in 2021.

The Company's cash collateral is recorded in Restricted cash on our Condensed Consolidated Balance Sheets for the quarter ended July 10, 2022.

As of October 2, 2022, the Company had outstanding borrowings under the Credit Agreement of $190.4 million net of $8.6 million of unamortized deferred financing charges and discounts, of which $2.0 million was classified as current.

As of October 2, 2022, the Company had $25.0 million of available borrowing capacity under its Credit Agreement.

As of October 2, 2022, the Company had $7.8 million of letters of credit issued against cash collateral, compared to $8.6 million as of the prior comparable period.

The Company's cash collateral is recorded in Restricted cash on our Condensed Consolidated Balance Sheets as of the quarter ended October 2, 2022.

We are subject to a number of customary covenants under our new Credit Facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments, as well as a Total Net Leverage ratio covenant.

As of October 2, 2022, we were in compliance with all debt covenants.

Debt Outstanding

Total debt outstanding increased $23.4 million to $200.4 million at July 10, 2022, from $177.0 million at December 26, 2021, primarily driven by net proceeds from the issuance of the New Credit Facility during the twenty-eight weeks ended July 10, 2022.

Total debt outstanding increased $22.9 million to $199.9 million at October 2, 2022, from $177.0 million at December 26, 2021, primarily driven by net proceeds from the execution of the new Credit Facility during the forty weeks ended October 2, 2022.

Working Capital

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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 10, 2022, 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 10, 2022, we had $68.4 million of availability under the current share repurchase program.

From the date of the current program approval through October 2, 2022, 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 October 2, 2022, we had $68.4 million of availability under the current share repurchase program.

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

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Additionally, 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 and commodity cost inflation had a negative impact on our financial condition and results of operations during the twelve and twenty-eight weeks ended July 10, 2022.

Labor cost and commodity cost inflation had a negative impact on our financial condition and results of operations during the twelve and forty weeks ended October 2, 2022.

Uncertainties related to fluctuations in costs, including energy costs, commodity prices, annual indexed and other 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 2022.

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Contractual Obligations

There were no other material changes outside the ordinary course of business to our contractual obligations since the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2021, except for long-term debt obligations resulting from the refinancing of our Credit Agreement in March 2022 as previously discussed above and in Note 6, Borrowings , of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, Contractual long-term debt payments as of July 10, 2022 are as follows (in thousands):

Borrowings, of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, Contractual long-term debt payments as of October 2, 2022 are as follows (in thousands):

Payments Due by Period

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These amounts are estimates based on both purchase commitments for contracts, as well as anticipated inventory needed for the Company's restaurants, and could vary due to the timing of anticipated volumes.

See the maturity of lease liabilities table in Note 3, Leases, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

See the maturity of lease liabilities table in Note 3.

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

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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.

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• the level and impacts of inflation;

• the impacts of interest rate increases;

• the impact of federal, state, and local regulation of the Company's business;

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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-Q

Item 2. Management’s Discussion and Analysis