Item 2. Management’s Discussion and Analysis
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 2023 and 2022 refer to the sixteen weeks ended April 16, 2023 and April 17, 2022, 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 511 locations in North America. As of April 16, 2023, the Company owned 415 restaurants located in 38 states. The Company also had 96 franchised full-service restaurants in 16 states and one Canadian province. The Company operates its business as one operating and one reportable segment.
Financial and Operational Highlights
Total revenues are $418.0 million, an increase of $22.4 million compared to 2022.
• Comparable restaurant revenue (1) increased 8.6%.
• Ninth consecutive quarter of positive comparable restaurant revenue (1) growth.
• Comparable restaurant traffic increased 0.6%.
• Comparable restaurant revenue (1) and comparable restaurant traffic both exceeded the industry averages as measured by the Black Box Casual Dining index.
• Comparable restaurant dine-in sales increased 16.4%.
• Comparable restaurant sales for the first thirteen weeks of the quarter increased 10.0% (3) .
Net loss of $3.1 million was unchanged compared to 2022.
• GAAP loss per diluted share was $0.19 compared to GAAP loss per diluted share of $0.20 in 2022.
• Adjusted income per diluted share (2) was $0.25 compared to adjusted loss per diluted share of $0.12 in 2022.
Income from operations was $4.3 million, or 1.0% of total revenues, compared to $4.4 million, or 1.1% of total revenues, in 2022.
Restaurant Level Operating Profit Margin (2) (a non-GAAP metric) was 14.7% versus 14.0% in 2022.
Adjusted EBITDA (2) (a non-GAAP metric) was $36.1 million, an $8.1 million increase compared to 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.
(2) See below for a reconciliation of Adjusted EBITDA, a non-GAAP measure, to Net loss; Restaurant Level Operating Profit Margin, a non-GAAP measure, to Income from operations as a percentage of total revenues; and Adjusted income per diluted share, a non-GAAP measure, to Net loss and loss per diluted share.
(3) Comparable restaurant sales for the first thirteen weeks of fiscal 2023 are calculated based on the Company’s point-of-sale sales data, which does not include adjustments for loyalty breakage.
Restaurant Revenue, compared to the same period in the prior year, is presented in the table below:
(millions)
Restaurant Revenue for the sixteen weeks ended April 17, 2022
$ 380.6
Increase/(decrease) in comparable restaurant revenue (1)
32.0
Increase/(decrease) in non-comparable restaurant revenue (5.7)
Total increase/(decrease) 26.3
Restaurant Revenue for the sixteen weeks ended April 16, 2023
$ 406.9
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Restaurant revenues, operating costs, and restaurant level operating profit for the period are detailed in the table below:
Sixteen Weeks Ended
April 16, 2023 April 17, 2022 Increase/(Decrease)
Restaurant revenue (millions) $ 406.9 $ 380.6 6.9 %
Restaurant operating costs:
Cost of sales 99.7 90.9 9.6 %
Labor 145.4 138.1 5.3 %
Other operating 72.1 67.9 6.2 %
Occupancy 29.8 30.6 (2.6) %
Total Restaurant Operating Costs $ 346.9 $ 327.5 18.5 %
Restaurant Level Operating Profit (1)
$ 60.0 $ 53.1 12.9 %
Restaurant revenues and operating costs as a percentage of restaurant revenue for the period are detailed in the table below:
Sixteen Weeks Ended
April 16, 2023 April 17, 2022 Increase/(Decrease)
Restaurant revenue (millions) $ 406.9 $ 380.6 6.9 %
Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis Points)
Cost of sales 24.5 % 23.9 % 60
Labor 35.7 36.3 (60)
Other operating 17.7 17.8 (10)
Occupancy 7.3 8.0 (70)
Total Restaurant Operating Costs 85.2 % 86.0 % (80)
Restaurant Level Operating Profit (1)
14.7 % 14.0 % 70
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.
(1) Restaurant Level Operating Profit is a non-GAAP measure. See below for a reconciliation of Restaurant Level Operating Profit to Income from Operations and Income from Operations as a percentage of total revenues.
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The following table summarizes Net loss, loss per diluted share (GAAP measures), and adjusted loss per diluted share (a non-GAAP measure) for the sixteen weeks ended April 16, 2023 and April 17, 2022:
Sixteen Weeks Ended
April 16, 2023 April 17, 2022
Net loss as reported $ (3,100) $ (3,105)
Loss per share - diluted:
Net loss as reported $ (0.19) $ (0.20)
Litigation contingencies 0.26 0.11
Severance and executive transition 0.12 —
Restaurant closure costs, net 0.11 0.06
Other (1)
0.06 —
Asset impairment 0.04 0.13
Other financing costs (2)
— 0.02
COVID-19 related charges — 0.01
Change in estimate, gift card breakage (3)
— (0.33)
Write-off of unamortized debt issuance costs (4)
— 0.11
Income tax expense (0.16) (0.03)
Adjusted income (loss) per share - diluted $ 0.25 $ (0.12)
Weighted average shares outstanding:
Basic 15,996 15,748
Diluted (5)
16,360 15,748
(1) Other includes non-cash charges primarily related to terminated capital projects, disposals, and lease terminations.
(2) Other financing costs includes legal and other charges related to the refinancing of our Prior Credit Agreement in the first quarter of 2022.
(3) During the sixteen weeks ended April 17, 2022, the Company re-evaluated the estimated redemption pattern related to gift cards. The impact comprises $5.9 million included in Franchise royalties, fees, and other revenue partially offset by $0.6 million in gift card commission costs included in Selling on the Condensed Consolidated Statements of Operations.
(4) Write-off of unamortized debt issuance costs related to the remaining unamortized debt issuance costs related to our Prior Credit Agreement (as defined below) with the completion of the refinancing of our Prior Credit Agreement in the first quarter of fiscal year 2022.
(5) For the sixteen weeks ended April 16, 2023, the impact of dilutive shares is included in the calculations as the adjustments for the quarter resulted in adjusted net income. For diluted shares reported on the Condensed Consolidated Statement of Operations, the impact of dilutive shares is excluded due to the reported net loss for the quarter.
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 change in estimate, gift card breakage, asset impairment, litigation contingencies, the write-off of unamortized debt issuance costs, restaurant closure costs, other financing costs, COVID-19 related charges, severance and executive transition costs, and related income tax effects and other. We have revised our definition of adjusted loss per diluted share to exclude severance and executive transition and other. We did not revise the prior year’s adjusted loss per diluted share because there were no other charges similar in nature to these costs. 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. Adjusted loss per diluted share should be considered in addition to, and not as a substitute for, net loss as reported in accordance with U.S. GAAP as a measure of performance.
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The following table summarizes Net loss (a GAAP measure), and EBITDA and Adjusted EBITDA (non-GAAP measures) for the sixteen weeks ended April 16, 2023 and April 17, 2022:
Sixteen Weeks Ended
April 16, 2023 April 17, 2022
Net loss as reported $ (3,100) $ (3,105)
Interest expense, net 7,576 7,088
Income tax provision (benefit) 20 62
Depreciation and amortization 21,825 23,919
EBITDA 26,321 27,964
Change in accounting estimate, gift card breakage — (5,246)
Other charges, net:
Litigation contingencies 4,300 1,720
Severance and executive transition 1,891 —
Restaurant closure costs, net 1,750 949
Other 1,062 —
Asset impairment 694 2,122
Closed corporate office costs, net of sublease income 62 —
Other financing costs — 309
COVID-19 related charges — 207
Adjusted EBITDA $ 36,080 $ 28,025
We believe the non-GAAP measures of EBITDA and adjusted EBITDA give 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. We define EBITDA as net loss before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA further excludes the effects of change in estimate - gift card breakage, asset impairment, litigation contingencies, restaurant closure costs, net, other financing costs, COVID-19 related charges, severance and executive transition costs, and closed corporate office, net of sublease income, and other. We have revised our definition of adjusted EBITDA to exclude other, severance and executive transition costs, and closed corporate office, net of sublease income. We did not revise prior years’ adjusted EBITDA because there were no other charges similar in nature to these costs. Other companies may define EBITDA and adjusted EBITDA differently, and as a result our measure of EBITDA and adjusted EBITDA may not be directly comparable to those of other companies. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net loss as reported in accordance with U.S. GAAP as a measure of performance.
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The following table summarizes Income from Operations (a GAAP measure), and Restaurant Level Operating Profit (a non-GAAP measure) for the sixteen weeks ended April 16, 2023 and April 17, 2022:
Sixteen Weeks Ended
April 16, 2023 April 17, 2022
Income from operations $ 4,337 $ 4,370
Less:
Franchise royalties, fees and other revenue 11,075 14,938
Add:
Other charges, net 9,759 5,307
Pre-opening costs 582 62
Selling 7,725 9,942
General and administrative expenses 26,799 24,438
Depreciation and amortization 21,825 23,919
Restaurant-level operating profit $ 59,951 $ 53,100
Income from operations as a percentage of total revenues 1.0% 1.1%
Restaurant-level operating profit margin (as a percentage of restaurant revenue) 14.7% 14.0%
The Company believes restaurant-level operating profit is an important measure for management and investors because it is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant-level operating efficiency and performance. The Company defines restaurant-level operating profit to be income from operations less franchise royalties, fees and other revenue, plus other charges, net, pre-opening costs, selling costs, general and administrative expenses, and depreciation and amortization. The measure includes restaurant-level occupancy costs that include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs, but excludes depreciation and amortization expense, substantially all of which is related to restaurant-level assets, because such expenses represent historical sunk costs which do not reflect current cash outlay for the restaurants. The measure also excludes selling costs and general and administrative expenses, and therefore excludes costs associated with selling, general, and administrative functions, and pre-opening costs. The Company excludes Other charges, net because these costs are not related to the ongoing operations of its restaurants. Restaurant-level operating profit is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income from operations or net loss as indicators of financial performance. Restaurant-level operating profit as presented may not be comparable to other similarly titled measures of other companies in the Company's industry.
Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:
Sixteen Weeks Ended
April 16, 2023 April 17, 2022
Company-owned:
Beginning of period 414 430
Opened during the period 1 —
Closed during the period — (4)
End of period 415 426
Franchised:
Beginning of period 97 101
Closed during the period (1) —
End of period 96 101
Total number of restaurants 511 527
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The following table presents total Company-owned and franchised restaurants by state or province as of April 16, 2023:
Company-Owned Restaurants Franchised Restaurants
State:
Arkansas 2 1
Alaska 3
Alabama 4
Arizona 18 1
California 57
Colorado 22
Connecticut 3
Delaware 5
Florida 18
Georgia 6
Iowa 5
Idaho 8
Illinois 20
Indiana 11
Kansas 5
Kentucky 4
Louisiana 1
Massachusetts 3 2
Maryland 12
Maine 2
Michigan 19
Minnesota 4
Missouri 8 3
Montana 1
North Carolina 17
Nebraska 4
New Hampshire 3
New Jersey 11 1
New Mexico 3
Nevada 6
New York 14
Ohio 17 2
Oklahoma 5
Oregon 15 5
Pennsylvania 11 20
Rhode Island 1
South Carolina 4
South Dakota 1
Tennessee 9
Texas 20 9
Utah 1 5
Virginia 20
Washington 37
Wisconsin 11
Province:
British Columbia 11
Total 415 96
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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 2022 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.
Sixteen Weeks Ended
April 16, 2023 April 17, 2022
Revenues:
Restaurant revenue 97.4 % 96.2 %
Franchise and other revenues 2.6 3.8
Total revenues 100.0 100.0
Costs and expenses:
Restaurant operating costs (excluding depreciation and amortization shown separately below):
Cost of sales 24.5 23.9
Labor 35.7 36.3
Other operating 17.7 17.8
Occupancy 7.3 8.0
Total restaurant operating costs 85.2 86.0
Depreciation and amortization 5.2 6.0
Selling, general, and administrative expenses 8.3 8.7
Pre-opening costs 0.1 —
Other charges (gains), net 2.3 1.3
Income from operations 1.0 1.1
Interest expense, net and other 1.8 1.9
Loss before income taxes (0.7) (0.8)
Income tax provision (benefit) — —
Net loss (0.7) % (0.8) %
Revenues
Sixteen Weeks Ended
(Revenues in thousands) April 16, 2023 April 17, 2022 Percent Change
Restaurant revenue $ 406,893 $ 380,612 6.9 %
Franchise and other revenues 11,075 14,938 (25.9) %
Total revenues $ 417,968 $ 395,550 5.7 %
Average weekly net sales volumes in Company-owned restaurants $ 61,372 $ 55,743 10.1 %
Total operating weeks 6,630 6,828 (2.9) %
Restaurant revenue for the sixteen weeks ended April 16, 2023, which comprises primarily food and beverage sales, increased $26.3 million, or 6.9%, as compared to the first quarter of 2022. Restaurant revenue increased primarily due to an 8.6% increase in Comparable Restaurant Revenue. This increase outweighed the impact of reduced revenue from non-comparable restaurants primarily due to the net impact of restaurant closures and openings.
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The comparable restaurant revenue increase was driven by an 8.0% increase in average Guest check, and a 0.6% increase in Guest count. The increase in average Guest check resulted from a 7.2% increase in menu prices and 0.8% from menu mix. The increase in menu mix was primarily driven by consumer preference to return to dine-in visits that result in a greater check average. Dine-in sales comprised 74.3% of total food and beverage sales during the first quarter of 2023, as compared to 69.5% in the same period in 2022.
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 have operated five full quarters as of the end of the period presented. 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.
Franchise and other revenue decreased $3.9 million, or 25.9%, for the sixteen weeks ended April 16, 2023 compared to the sixteen weeks ended April 17, 2022. Franchise revenue declined primarily due to a reduction in the percentage of sales each franchisee is required to contribute to support Selling activities. This reduction results from an increased focus on local restaurant marketing and reduced national and/or mass media channels pursuant to our North Star strategy. The percentage of sales each franchisee is required to contribute could change in the future, as we expect to align contributions with spending levels, subject to compliance with the respective franchise agreement. Franchise restaurants reported an increase of 7.8% comparable restaurant revenue for the sixteen weeks ended April 16, 2023 compared to the same period in 2022. This increase was partially offset by the closure of five franchised locations from April 17, 2022 to April 16, 2023.
Other revenue declined primarily due to a change in accounting estimate in the first quarter of 2022, that resulted in $5.9 million of additional gift card breakage.
Cost of Sales
Sixteen Weeks Ended
(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change
Cost of sales $ 99,670 $ 90,941 9.6 %
As a percent of restaurant revenue 24.5 % 23.9 % 0.6 %
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 increased 60 basis points for the sixteen weeks ended April 16, 2023 as compared to the same period in 2022. The increase was primarily driven by commodity inflation, partially offset by menu pricing.
Labor
Sixteen Weeks Ended
(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change
Labor $ 145,421 $ 138,108 5.3 %
As a percent of restaurant revenue 35.7 % 36.3 % (0.6) %
Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. For the sixteen weeks ended April 16, 2023, labor as a percentage of restaurant revenue decreased 60 basis points compared to the same period in 2022. The decrease was primarily driven by sales leverage, lower group insurance and workers' compensation costs, partially offset by higher incentive compensation, payroll taxes, and training. Throughout the quarter, we made investments in management and hourly labor to support an enhanced Guest experience.
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Other Operating
Sixteen Weeks Ended
(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change
Other operating $ 72,050 $ 67,864 6.2 %
As a percent of restaurant revenue 17.7 % 17.8 % (0.1) %
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. For the sixteen weeks ended April 16, 2023, other operating costs as a percentage of restaurant revenue decreased 10 basis points as compared to the same period in 2022. The decrease was primarily driven by lower contract janitorial costs and reduced third party commissions expenses associated with lower off premise mix partially offset by higher repairs and maintenance costs and credit card discounts.
Occupancy
Sixteen Weeks Ended
(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change
Occupancy $ 29,801 $ 30,599 (2.6) %
As a percent of restaurant revenue 7.3 % 8.0 % (0.7) %
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. For the sixteen weeks ended April 16, 2023, occupancy costs as a percentage of restaurant revenue decreased 70 basis points compared to the same period in 2022 primarily driven by sales leverage.
Our fixed rents for the sixteen weeks ended April 16, 2023 and April 17, 2022 were $20.7 million and $21.3 million, a decrease of $0.5 million, due to net Company-owned restaurant closures.
Depreciation and Amortization
Sixteen Weeks Ended
(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change
Depreciation and amortization $ 21,825 $ 23,919 (8.8) %
As a percent of total revenues 5.2 % 6.0 % (0.8) %
Depreciation and amortization include depreciation on capital expenditures for restaurants and corporate assets as well as amortization of reacquired franchise rights, leasehold interests, and certain liquor licenses. For the sixteen weeks ended April 16, 2023, depreciation and amortization expense as a percentage of revenue decreased 80 basis points compared to the same period in 2022 primarily due to net Company-owned restaurant closures, impaired assets, and sales leverage.
Selling, General, and Administrative
Sixteen Weeks Ended
(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change
Selling, general, and administrative $ 34,523 $ 34,380 0.4 %
As a percent of total revenues 8.3 % 8.7 % (0.4) %
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.
General, and administrative costs in the sixteen weeks ended April 16, 2023 increased $2.4 million, or 9.7%, as compared to the same period in 2022. The increase was primarily driven by increased incentive compensation due to performance, lower capitalized costs due to fewer capital projects, higher travel expenses, increased legal costs, and deferred compensation plan asset market activity, partially offset by a decrease in wages and stock compensation due to the reduction in force and executive transition.
Selling costs in the sixteen weeks ended April 16, 2023 decreased $2.2 million, or 22.3%, as compared to the same period in 2022. The decrease was primarily driven by lower print agency spend, Donatos ® marketing costs, and franchise advertising obligations.
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Pre-opening Costs
Sixteen Weeks Ended
(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change
Pre-opening costs $ 582 $ 62 838.7 %
As a percent of total revenues 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 ® 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 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 sixteen weeks ended April 16, 2023 related to one new restaurant opening in Glendale, AZ and the rollout of 25 Donatos ® locations. As of April 16, 2023, we completed the rollout of Donatos ® at 272 company owned restaurants.
Interest Expense, Net and Other
Interest expense, net and other was $7.4 million for the sixteen weeks ended April 16, 2023 and April 17, 2022. Interest expense for the sixteen weeks ended April 16, 2023 and April 17, 2022 was $7.8 million and $7.1 million, respectively. The $0.7 million increase was primarily due to higher interest rates, partially offset by 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 for the sixteen weeks ended April 16, 2023 and April 17, 2022 was 11.6% and 8.2%, respectively.
Interest income and other increased by $0.7 million to income of $0.4 million for the sixteen weeks ended April 16, 2023 from expense of $0.3 million in the sixteen weeks ended April 17, 2022 due to interest income on bank account balances and investment gains related to a deferred compensation plan for which assets are held in a rabbi trust in the sixteen weeks ended April 16, 2023 compared to investment losses related to the deferred compensation plan in the sixteen weeks ended April 17, 2022.
Income Tax Provision
The effective tax rate for the sixteen weeks ended April 16, 2023 was a 0.6% expense, compared to a 2.0% expense for the sixteen weeks ended April 17, 2022. The effective tax rate for both periods includes changes in the valuation allowance as a result of originating temporary differences during the year and varies from statutory rates primarily as a result of the valuation allowance as discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2022.
Liquidity and Capital Resources
Cash and cash equivalents, and restricted cash increased $0.2 million to $58.4 million as of April 16, 2023, from $58.2 million at the beginning of the fiscal year. The Company is using available cash flow from operations to maintain existing restaurants and infrastructure, and execute on its long-term strategic initiatives. As of April 16, 2023, the Company had approximately $59.0 million in liquidity, including cash and cash equivalents and available borrowing capacity under our Credit Facility.
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Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands):
Sixteen Weeks Ended
April 16, 2023 April 17, 2022
Net cash provided by operating activities $ 17,342 $ 13,296
Net cash used in investing activities (16,084) (9,548)
Net cash provided by (used in) financing activities (1,017) 15,417
Effect of exchange rate changes on cash (1) 8
Net change in cash and cash equivalents, and restricted cash $ 240 $ 19,173
Operating Cash Flows
Net cash flows provided by operating activities increased $4.0 million to $17.3 million for the sixteen weeks ended April 16, 2023. The increase in net cash provided by operating activities is primarily attributable to the increase in restaurant level profitability and changes in working capital, partially offset by higher non-restaurant costs and 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 $6.5 million to $16.1 million for the sixteen weeks ended April 16, 2023, as compared to $9.5 million for the same period in 2022. The increase is primarily due to a faster pace of Donatos ® installations and increased investment in restaurant improvements.
The following table lists the components of our capital expenditures, net of currency translation, for the sixteen weeks ended April 16, 2023 and April 17, 2022 (in thousands):
Sixteen Weeks Ended
April 16, 2023 April 17, 2022
Restaurant improvement capital and other $ 7,433 $ 4,856
Donatos ® expansion
5,878 1,176
Technology, infrastructure, and other 1,731 3,116
New restaurants and restaurant refreshes 1,042 568
Total capital expenditures $ 16,084 $ 9,716
Financing Cash Flows
Net cash flows used in financing activities were $1.0 million for the sixteen weeks ended April 16, 2023, as compared to net cash flows provided by financing activities of $15.4 million in the same period in 2022.
In 2022, financing activities were a source of cash, due to net draws made on long-term debt as a result of the Company's refinancing of debt on March 4, 2022. In 2023, the use of cash results primarily from standard principal payments due under the terms of the Company’s Credit Agreement.
Credit Facility
On March 4, 2022 the Company replaced its prior amended and restated Credit Agreement (the "Prior Credit Agreement") with a new Credit Agreement (the "Credit Agreement"), which provides for a new Senior Secured Term Loan and Revolving Credit Facility (the "Credit Facility"). The Credit Agreement's interest rate 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 April 16, 2023, the Company had outstanding borrowings under the Credit Facility of $205.2 million net of $7.8 million of unamortized deferred financing charges and discounts, of which $2.9 million was classified as current. As of April 16, 2023, the Company had $10.0 million of available borrowing capacity under its Credit Facility.
As of April 16, 2023, the Company had $9.0 million of letters of credit issued against cash collateral, compared to $9.1 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 April 16, 2023.
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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 well as a Total Net Leverage ratio covenant. As of April 16, 2023, we were in compliance with all debt covenants.
Debt Outstanding
Total debt outstanding decreased $1.0 million to $213.9 million at April 16, 2023, from $214.9 million at December 25, 2022, primarily driven by payments of long-term debt during the sixteen weeks ended April 16, 2023.
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 April 16, 2023, 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 April 16, 2023, 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. The Company reserves the right to re-instate this program at any time. The new Credit Agreement limits our ability to repurchase shares to certain conditions set forth by the lenders in the new Credit Facility.
Seasonality
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants were greater during the summer months and winter holiday season and lesser during the fall season. As a result, our quarterly operating results may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter.
Contractual Obligations
There were no other material changes outside the ordinary course of business to our contractual obligations since the filing of the 2022 Form 10-K for the fiscal year ended December 25, 2022. Our current purchase obligations for system-wide fixed price commitments for food, beverage, equipment, and restaurant supply items are $137.6 million as of April 16, 2023 of which $27.9 million are due in 2023.
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 potentially unknown future events, 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 25, 2022.
Recently Issued and Recently Adopted Accounting Standards
None noted.
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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 Securities Exchange Act of 1934, as amended (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," "would," and similar expressions. Forward-looking statements in this report relate to, among other things: (i) our business objectives and strategic plans; (ii) working capital, and the ability of our future cash flows from restaurant operations and our borrowing capacity to satisfy future working capital deficits and capital expenditures; (iii) our share repurchase program; (iv) our expectations about restaurant operating costs, including commodity and food prices and labor and energy costs, and our ability to mitigate potential increases in such costs; (v) anticipated continued investments in our partnership with Donatos® and other restaurant improvements, including the timing thereof; (vi) our expectations about anticipated uses of, and risks associated with, future cash flows, liquidity, capital expenditures, other capital deployment opportunities and taxes; (vii) the seasonality of our business; (viii) our ability to successfully implement, and our expectations regarding, our North Star five-point plan to enhance the Company’s competitive positioning, including the timing of our expected payments in connection with severance and executive transition costs; (ix) litigation contingencies and the adequacy of our reserves for legal matters; (x) our expectations regarding, and our ability to mitigate changes in, interest rates, commodity prices and other factors; and (xi) recently announced transactions including sale-leaseback transactions and acquisitions of certain restaurants from a franchisee.
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:
• our ability to implement, and the effectiveness of, the Company's strategic initiatives, including our North Star plan, labor models, service and operational improvement initiatives;
• general economic conditions, including changes in consumer disposable income, weather conditions, and related events in regions where our restaurants are operated;
• menu changes, including the anticipated sales growth, costs, and timing of restaurant improvements including the Donatos® expansion;
• the implementation of and realization of benefits from our restaurant management transition program;
• changes in consumer spending trends and habits;
• changes in the cost and availability of key food products, distribution, labor, and energy;
• the adequacy of cash flows and the cost and availability of capital or Credit Facility borrowings and our potential sale-leaseback transactions;
• expectations relating to our recently announced acquisition of certain restaurants from a franchisee;
• the impact of, and 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;
• changes in interest rates and commodity prices, and our ability to mitigate the impacts of such changes;
• risks associated with our stock repurchase program;
• 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; and
• the other Risk Factors identified in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.
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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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.