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Item 2. Management’s Discussion and Analysis

2023-08-17 compared with 2023-05-24 · 184 added, 150 removed, 248 unchanged (57% 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 2023 and 2022 refer to the sixteen weeks ended April 16, 2023 and April 17, 2022, unless otherwise indicated.

All comparisons under this heading between 2023 and 2022 refer to the twelve and twenty-eight weeks ended July 9, 2023 and July 10, 2022, unless otherwise indicated, and reflect the correction of certain information for the immaterial restatement of prior period financial statements as disclosed in Footnote 1, Basis of Presentation and Recent Accounting Pronouncements.

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 509 locations in North America.

As of April 16, 2023, the Company owned 415 restaurants located in 38 states.

As of July 9, 2023, the Company owned 418 restaurants located in 39 states.

The Company also had 91 franchised full-service restaurants in 14 states and one Canadian province.

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

Financial and Operational Highlights

Highlights for the Second Quarter of Fiscal 2023, Compared to the Second Quarter of Fiscal 2022

• Total revenues are $298.6 million, an increase of $4.6 million compared to 2022.

• Comparable restaurant revenue (1) increased 1.5%.

• 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.

• Tenth consecutive quarter of comparable restaurant revenue (1) growth.

• Comparable restaurant dine-in sales (2) increased 5.9%.

• 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.

• Net income is $3.9 million, an increase of $21.9 million compared to 2022.

• Adjusted EBITDA (3) (a non-GAAP metric) is $15.5 million, a $3.7 million increase compared to 2022.

• Completed Sale-Leaseback transaction for nine restaurants, generating net proceeds of approximately $28.5 million and a gain, net of expenses of $14.6 million.

• Repaid $15.5 million of debt and repurchased $5.0 million of stock.

Highlights for the Year to Date Period of Fiscal 2023, Compared to the Year to Date Period of Fiscal 2022

• Total revenues are $716.5 million, an increase of $27.3 million compared to 2022.

• Comparable restaurant revenue (1) increased 5.5%.

• Comparable restaurant dine-in sales (2) increased 11.8%.

• Net income is $0.7 million, an increase of $22.2 million compared to 2022.

• Adjusted EBITDA (3) (a non-GAAP metric) is $51.5 million, an $11.6 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.

(2) Comparable restaurant dine-in sales are calculated based on the Company’s point-of-sale sales data, which does not include adjustments for loyalty breakage

(3) See below for a reconciliation of Adjusted EBITDA, a non-GAAP measure, to Net income (loss)

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

Restaurant Revenue for the sixteen weeks ended April 17, 2022

Restaurant Revenue for the twelve weeks ended July 10, 2022

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

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Total increase/(decrease) 4.7

Restaurant Revenue for the sixteen weeks ended April 16, 2023

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 for the twelve weeks ended July 9, 2023

Restaurant revenues and operating costs (GAAP measures), and restaurant level operating profit (a non-GAAP measure) for the period are detailed in the table below:

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022 Increase/

(Decrease) July 9, 2023 July 10, 2022 Increase/

Restaurant revenue (millions) $ 293.3 $ 288.6 1.6 % $ 700.2 $ 669.2 4.6 %

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$ 36.9 $ 39.3 (6.1) % $ 96.9 $ 92.4 4.8 %

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 revenues and operating costs (GAAP measures), and restaurant level operating profit (a non-GAAP measure) as a percentage of restaurant revenue for the period are detailed in the table below:

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022 Increase/

(Decrease) July 9, 2023 July 10, 2022 Increase/(Decrease)

Restaurant revenue (millions) $ 293.3 $ 288.6 1.6 % $ 700.2 $ 669.2 4.6 %

Restaurant operating costs:

(Percentage of Restaurant Revenue) (Basis Points)

(Percentage of Restaurant Revenue) (Basis

Points) (Percentage of Restaurant Revenue) (Basis

Cost of sales 24.3 % 25.2 % (90) 24.4 % 24.5 % (10)

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See below for a reconciliation of Restaurant Level Operating Profit to Income from Operations and Income from Operations as a percentage of total revenues.

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)

The following table summarizes net income (loss), income (loss) per diluted share (GAAP measures), and adjusted income (loss) per diluted share (a non-GAAP measure) for the twelve and twenty-eight weeks ended July 9, 2023 and July 10, 2022:

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022

Net income (loss) as reported $ 3,922 $ (17,966) $ 664 $ (21,547)

Income (Loss) per share - diluted:

Net income (loss) as reported $ 0.24 $ (1.13) $ 0.04 $ (1.37)

Gain on sale leaseback, net of expenses (0.91) — (0.89) —

Litigation contingencies 0.08 (0.11) 0.34 (0.01)

Severance and executive transition 0.12 —

Restaurant closure costs, net (0.01) 0.06 0.10 0.12

Severance and executive transition 0.06 0.01 0.17 0.01

Asset impairment 0.11 0.55 0.15 0.69

0.01 — 0.07 —

Closed corporate office costs, net of sublease income 0.01 — 0.01 —

Other financing costs (2)

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16,291 15,830 16,367 15,783

(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.

(1) Other primarily includes non-cash charges related to terminated capital projects and disposals, and certain insurance claim proceeds.

(2) Other financing costs includes legal and other charges related to the refinancing of our Prior Credit Agreement (as defined below) in the first quarter of 2022.

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

The impact comprises $5.4 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.

(4) Write-off of unamortized debt issuance costs related to the remaining unamortized debt issuance costs related to our Prior Credit Agreement with the completion of the refinancing of our Prior Credit Agreement in the first quarter of fiscal year 2022.

(5) For the twelve weeks ended July 9, 2023, the impact of dilutive shares is excluded in the calculations as the adjustments for the quarter resulted in adjusted net income (loss).

For diluted shares reported on the Condensed Consolidated Statement of Operations, the impact of dilutive shares is included due to the reported net income for the quarter.

We believe the non-GAAP measure of adjusted income (loss) per share-diluted 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 income (loss) per share-diluted 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, gain on sale leaseback, net of expenses, closed corporate office costs, net of sublease income, COVID-19 related charges, severance and executive transition costs, and income tax effects and other.

We have revised our definition of adjusted income (loss) per diluted share to exclude gain on sale leaseback, net of expenses and other.

We did not revise the prior year’s adjusted income (loss) per share-diluted because there were no other charges similar in nature to these costs.

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

Adjusted income (loss) per share-diluted should be considered in addition to, and not as a substitute for, net income (loss) as reported in accordance with U.S.

GAAP as a measure of performance.

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)

The following table summarizes Net income (loss) (a GAAP measure), and EBITDA and Adjusted EBITDA (non-GAAP measures) for the twelve and twenty-eight weeks ended July 9, 2023 and July 10, 2022:

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022

Net income (loss) as reported $ 3,922 $ (17,966) $ 664 $ (21,547)

Interest expense, net 6,305 3,630 13,881 10,718

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Change in accounting estimate, gift card breakage — — — (4,842)

Other charges, net:

Other charges (gains), net:

Gain on sale leaseback, net of expenses (14,586) — (14,586) —

Litigation contingencies 1,240 (1,806) 5,540 (86)

Severance and executive transition 1,891 —

Restaurant closure costs, net (112) 930 1,638 1,879

Other 1,062 —

Severance and executive transition 962 129 2,854 129

Asset impairment 1,693 8,739 2,387 10,861

Other 83 — 1,144 —

Closed corporate office costs, net of sublease income 113 — 175 —

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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 define EBITDA as net income (loss) before interest expense, income taxes, and depreciation and amortization.

Adjusted EBITDA further excludes the effects of change in accounting estimate - gift card breakage, asset impairment, litigation contingencies, restaurant closure costs, net, other financing costs, COVID-19 related charges, severance and executive transition costs, closed corporate office, net of sublease income, and gain of sale leaseback, net of expenses, and other.

We have revised our definition of adjusted EBITDA to exclude gain of sale leaseback, net of expenses and other.

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.

EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income (loss) as reported in accordance with U.S.

GAAP as a measure of performance.

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

The following table summarizes Income from Operations (a GAAP measure), and Restaurant Level Operating Profit (a non-GAAP measure) for the twelve and twenty-eight weeks ended July 9, 2023 and July 10, 2022:

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022

Income (loss) from operations $ 10,257 3.4% $ (13,385) (4.6)% $ 14,437 2.0% $ (9,491) (1.4)%

Franchise royalties, fees and other revenue 5,367 1.8% 5,435 1.8% 16,286 2.3% 19,912 2.9%

Other charges, net 9,759 5,307

Other charges (gains), net (10,607) (3.6) 8,146 2.8 (848) (0.1) 13,453 2.0

Pre-opening costs 4 — 235 0.1 586 0.1 297 —

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Restaurant-level operating profit $ 36,907 $ 39,293 $ 96,857 $ 92,378

Income from operations as a percentage of total revenues 1.0% 1.1%

Income (loss) from operations as a percentage of total revenues 3.4% (4.6)% 2.0% (1.4)%

Restaurant-level operating profit margin (as a percentage of restaurant revenue) 12.6% 13.6% 13.8% 13.8%

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 Company defines restaurant-level operating profit to be income from operations less franchise royalties, fees and other revenue, plus other charges (gains), 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.

The Company excludes Other charges (gains), net because these costs are not related to the ongoing operations of its restaurants.

Restaurant-level operating profit as presented may not be comparable to other similarly titled measures of other companies in the Company's industry.

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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

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022

Company-owned:

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Opened during the period — — 1 —

Acquired from franchisees 5 — 5 —

Closed during the period (2) — (2) (4)

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Beginning of period 96 101 97 101

Opened during the period — 1 — 1

Closed during the period — — (1) —

Sold to company during the period (5) — (5) —

End of period 91 102 91 102

Total number of restaurants 509 528 509 528

The following table presents total Company-owned and franchised restaurants by state or province as of April 16, 2023:

The following table presents total Company-owned and franchised restaurants by state or province as of July 9, 2023:

Company-Owned Restaurants Franchised Restaurants

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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.

Sixteen Weeks Ended

April 16, 2023 April 17, 2022

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022

Restaurant revenue 98.2 % 98.2 % 97.7 % 97.1 %

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Selling, general, and administrative expenses 9.0 10.9 8.6 9.6

Pre-opening costs 0.1 —

Pre-opening and acquisition costs — 0.1 0.1 —

Other charges (gains), net (3.6) 2.8 (0.1) 2.0

Income from operations 1.0 1.1

Income (loss) from operations 3.4 (4.6) 2.0 (1.4)

Interest expense, net and other 2.1 1.4 1.9 1.7

Loss before income taxes (0.7) (0.8)

Income (loss) before income taxes 1.4 (6.0) 0.1 (3.1)

Income tax provision (benefit) 0.1 0.1 — 0.1

Net loss (0.7) % (0.8) %

Sixteen Weeks Ended

(Revenues in thousands) April 16, 2023 April 17, 2022 Percent Change

Net income (loss) 1.3 % (6.1) % 0.1 % (3.1) %

Twelve Weeks Ended Twenty-Eight Weeks Ended

(Revenues in thousands) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Restaurant revenue $ 293,281 $ 288,621 1.6 % $ 700,174 $ 669,218 4.6 %

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Total operating weeks 5,018 5,097 (1.5) % 11,648 11,925 (2.3) %

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 for the twelve weeks ended July 9, 2023, which comprises primarily food and beverage sales, increased $4.7 million, or 1.6%, as compared to the second quarter of 2022.

Restaurant revenue increased primarily due to an 1.5% 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.

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.

The comparable restaurant revenue increase was driven by a 7.5% increase in average Guest check, partially offset by a 6.0% decrease in Guest count.

The increase in average Guest check resulted from a 8.8% increase in menu prices, partially offset by a 2.1% decrease from menu mix.

The decrease in menu mix was primarily driven by guests shifting visits from third party delivery platforms with elevated menu prices, to dine in visits at standard menu prices, and the removal of low guest preference, but higher priced burger options.

Dine-in sales comprised 74.7% of total food and beverage sales during the second quarter of 2023, as compared to 71.4% in the same period in 2022.

Restaurant revenue for the twenty-eight weeks ended July 9, 2023, increased $31.0 million, or 4.6%, as compared to the twenty-eight weeks ended July 10, 2022.

The increase was due to a $36.1 million, or 5.5%, increase in comparable restaurant revenue, partially offset by a $5.2 million decrease at non-comparable restaurants, including the impact of restaurant closures.

The comparable restaurant revenue increase was driven by a 7.7% increase in average Guest check, partially offset by a 2.2% decrease in Guest count.

The increase in average Guest check resulted from a 8.0% increase in pricing, partially offset by a 0.7% decrease in menu mix and a 0.4% increase in discounts.

Dine-in sales comprised 71.4% of total food and beverage sales during the twenty-eight weeks ended July 9, 2023, as compared to 70.3% 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.

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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 and other revenue decreased $0.1 million, or 1.3%, for the twelve weeks ended July 9, 2023 compared to the twelve weeks ended July 10, 2022, and decreased $3.6 million, or 18.2% for the twenty-eight weeks ended July 9, 2023 compared to the same period in 2022.

Franchise revenue declined primarily due to a reduction in the percentage of sales each franchisee is required to contribute to support Selling activities.

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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.

Franchise restaurants reported an increase of 0.4% comparable restaurant revenue for the twelve weeks ended July 9, 2023 compared to the same period in 2022, and an increase of 4.3% for the twenty-eight weeks ended July 9, 2023 compared to the same period in 2022.

Cost of Sales

Sixteen Weeks Ended

(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Cost of sales $ 71,372 $ 72,702 (1.8) % $ 171,042 $ 163,643 4.5 %

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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.

Sixteen Weeks Ended

(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change

Cost of sales as a percentage of restaurant revenue decreased 90 basis points for the twelve weeks ended July 9, 2023 as compared to the same period in 2022.

The decrease was primarily driven by menu pricing, partially offset by commodity inflation.

Cost of sales as a percentage of restaurant revenue decreased 10 basis points for the twenty-eight weeks ended July 9, 2023 as compared to the same period in 2022.

The decrease was primarily driven by menu pricing, partially offset by commodity inflation.

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Labor $ 109,678 $ 101,643 7.9 % $ 255,100 $ 239,751 6.4 %

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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.

For the twelve weeks ended July 9, 2023, labor as a percentage of restaurant revenue increased 220 basis points compared to the same period in 2022.

The increase was primarily driven by investments in hourly labor, payroll taxes, and incentive compensation, partially offset by group insurance, and sales leverage.

Throughout the quarter, we made investments in management and hourly labor to support an enhanced Guest experience.

For the twenty-eight weeks ended July 9, 2023, labor as a percentage of restaurant revenue increased 60 basis points compared to the same period in 2022.

The increase was primarily driven by investments in hourly labor, incentive compensation, and payroll taxes, partially offset by sales leverage, and group insurance.

Other Operating

Sixteen Weeks Ended

(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Other operating $ 51,842 $ 52,003 (0.3) % $ 123,892 $ 119,867 3.4 %

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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 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.

Sixteen Weeks Ended

(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change

For the twelve weeks ended July 9, 2023, other operating costs as a percentage of restaurant revenue decreased 30 basis points as compared to the same period in 2022.

The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix, lower supplies costs driven by negotiated savings, and lower contract janitorial expenses, partially offset by higher repairs and maintenance costs.

For the twenty-eight weeks ended July 9, 2023, other operating costs as a percentage of restaurant revenue decreased 20 basis points compared to the same period in 2022.

The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix and lower contract janitorial expenses which were partially offset by higher repairs and maintenance costs.

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Occupancy $ 23,482 $ 22,980 2.2 % $ 53,283 $ 53,579 (0.6) %

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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 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.

Occupancy costs as a percentage of restaurant revenue were unchanged at 8.0% for the twelve weeks ended July 9, 2023 and July 10, 2022.

Increased insurance costs were offset by sales leverage.

Our fixed rents for the twelve weeks ended July 9, 2023 and July 10, 2022 were $16.2 million and $16.1 million, an increase of $0.1 million, primarily due to the sale-leaseback of nine locations and the acquisition of five restaurants from a franchisee, partially offset by net Company-owned restaurant closures.

For the twenty-eight weeks ended July 9, 2023, occupancy costs as a percentage of restaurant revenue decreased 40 basis points compared to the same period in 2022 primarily driven by sales leverage and the impact of closed restaurants.

Our fixed rents for the twenty-eight weeks ended July 9, 2023 and July 10, 2022 were $37.0 million and $37.4 million, a decrease of $0.4 million, due to net Company-owned restaurant closures, partially offset by the impact of the sale-leaseback of nine locations and the acquisition of five restaurants from a franchisee.

Depreciation and Amortization

Sixteen Weeks Ended

(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Depreciation and amortization $ 15,756 $ 17,637 (10.7) % $ 37,581 $ 41,556 (9.6) %

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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.

For the twelve weeks ended July 9, 2023, depreciation and amortization expense as a percentage of revenue decreased 70 basis points compared to the same period in 2022 primarily due to net Company-owned restaurant closures, asset impairments, and sales leverage.

For the twenty-eight weeks ended July 9, 2023, depreciation and amortization expense as a percentage of revenue decreased 80 basis points over the same period in 2022 primarily due to net closed Company-owned restaurants, asset impairments, and sales leverage.

Selling, General, and Administrative

Sixteen Weeks Ended

(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Selling, general, and administrative $ 26,864 $ 32,095 (16.3) % $ 61,387 $ 66,475 (7.7) %

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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.

General, and administrative costs in the twelve weeks ended July 9, 2023 increased $1.9 million, or 10.3%, 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, and deferred compensation plan costs related to 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 twelve weeks ended July 9, 2023 decreased $7.2 million, or 53.6%, as compared to the same period in 2022.

The decrease was primarily driven by lower internet and local media spend, and lower Donatos ® marketing costs.

General, and administrative costs in the twenty-eight weeks ended July 9, 2023 increased $4.3 million, or 10.0%, as compared to the same period in 2022.

The increase was primarily driven by higher incentive compensation, increased travel, and lower lower capitalized costs due to fewer capital projects, partially offset by a decrease in wages and stock compensation due to the reduction in force and executive transition.

Selling costs in the twenty-eight weeks ended July 9, 2023 decreased $9.4 million, or 40.3%, as compared to the same period in 2022.

The decrease was primarily driven by decreased marketing spend in internet and local media and Donatos ® marketing costs.

Pre-opening Costs

Sixteen Weeks Ended

(In thousands, except percentages) April 16, 2023 April 17, 2022 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 9, 2023 July 10, 2022 Percent Change July 9, 2023 July 10, 2022 Percent Change

Pre-opening costs $ 4 $ 235 (98.3) % $ 586 $ 297 97.3 %

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 ® 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.

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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 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.

For the twelve weeks ended July 9, 2023, pre-opening costs decreased by $0.2 million due to no new restaurant openings or rollouts of Donatos ® .

We incurred pre-opening costs during the twenty-eight weeks ended July 9, 2023 related to one new restaurant opening in Glendale, AZ and the rollout of 25 Donatos ® locations.

As of July 9, 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.

Interest expense, net and other was $6.2 million for the twelve weeks ended July 9, 2023 and $4.1 million for the twelve weeks ended July 10, 2022.

Interest expense for the twelve weeks ended July 9, 2023 and July 10, 2022 was $6.5 million and $4.2 million, respectively.

The $2.3 million increase was primarily due to a higher weighted average interest rate.

Our weighted average interest rate for the twelve weeks ended July 9, 2023 and July 10, 2022 was 11.1% and 8.7%, respectively.

Higher average outstanding debt, which increased $13.0 million compared to the same period in 2022, also contributed.

Interest expense, net and other was $13.6 million for the twenty-eight weeks ended July 9, 2023 and $11.6 million for the twenty-eight weeks ended July 10, 2022, an increase of $2.0 million, or 17.6%.

Interest expense for the twenty-eight weeks ended July 9, 2023 and July 10, 2022 was $14.3 million and $11.3 million, respectively.

The $3.0 million increase was primarily related to a higher weighted average interest rate, higher average outstanding debt, which increased $9.9 million compared to the same period in 2022, and 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 (as defined below) on March 4, 2022.

Our weighted average interest rate on our credit facility debt was 12.3% for the twenty-eight weeks ended July 9, 2023 as compared to 8.4% for the same period in 2022.

Interest income and other decreased by $0.3 million to an expense of $0.3 million for the twelve weeks ended July 9, 2023 from expense of $0.0 million in the twelve weeks ended July 10, 2022 due to investment losses related to the deferred compensation plan for which assets are held in a rabbi trust.

Interest income and other decreased by $0.9 million to an expense of $0.7 million for the twenty-eight weeks ended July 9, 2023 from income of $0.3 million in the twenty-eight weeks ended July 10, 2022 due to investment losses related to a deferred compensation plan for which assets are held in a rabbi trust in the twenty-eight weeks ended July 9, 2023 compared to interest income on bank account balances and investment gains related to the deferred compensation plan in the twenty-eight weeks ended July 10, 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 the twelve weeks ended July 9, 2023 was a 3.8% benefit, compared to a 2.5% expense for the twelve weeks ended July 10, 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.

The effective tax rate for the twenty-eight weeks ended July 9, 2023 was a 21.0% benefit, compared to a 2.4% expense for the twenty-eight weeks ended July 10, 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.

Cash and cash equivalents, and restricted cash decreased $2.0 million to $56.2 million as of July 9, 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.

As of July 9, 2023, the Company had approximately $69.0 million in liquidity, including cash and cash equivalents and available borrowing capacity under our Credit Facility (as defined below).

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

Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022

Net cash provided by operating activities $ 18,225 $ 36,439

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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.

Net cash flows provided by operating activities decreased $18.2 million to $18.2 million for the twenty-eight weeks ended July 9, 2023.

The decrease in net cash provided by operating activities is primarily attributable to the receipt of an income tax refund in 2022, and severance payments and higher interest payments in 2023.

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

Net cash flows used in investing activities decreased $15.5 million to $0.1 million for the twenty-eight weeks ended July 9, 2023, as compared to $15.6 million for the same period in 2022.

The decrease is primarily due to proceeds from sales of real estate, partially offset by a faster pace of Donatos ® installations during the first quarter of 2023, increased investment in restaurant improvements and the acquisition of five franchised restaurants.

The following table lists the components of our capital expenditures, net of currency translation, for the twenty-eight weeks ended July 9, 2023 and July 10, 2022 (in thousands):

Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022

Restaurant improvement capital and other $ 12,045 $ 7,379

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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.

Net cash flows used in financing activities were $20.1 million for the twenty-eight weeks ended July 9, 2023, as compared to net cash flows provided by financing activities of $15.5 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.

In 2023, the use of cash results primarily from the Company’s repayment of outstanding debt with proceeds from the sale-leaseback transaction, and 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").

On March 4, 2022 the Company replaced its prior amended and restated Credit Agreement (the "Prior Credit Agreement") with a new Credit Agreement (as amended to the date hereof, 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.

As of July 9, 2023, the Company had outstanding borrowings under the Credit Facility of $190.1 million net of $7.4 million of unamortized deferred financing charges and discounts, of which $2.9 million was classified as current.

As of July 9, 2023, the Company had $25.0 million of available borrowing capacity under its Credit Facility.

As of July 9, 2023, the Company had $11.7 million of letters of credit issued against cash collateral, compared to $8.4 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 July 9, 2023.

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.

As of July 9, 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.

Total debt outstanding decreased $16.5 million to $198.4 million at July 9, 2023, from $214.9 million at December 25, 2022, primarily driven by payments of long-term debt during the twenty-eight weeks ended July 9, 2023.

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 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.

In May 2023, the Company resumed its repurchase program.

Our Credit Agreement limits our ability to repurchase shares to certain conditions set forth by the lenders in the Credit Facility.

During the second quarter of fiscal 2023, we repurchased 382,017 shares at an average price of $13.19 per share, for an aggregate amount of $5.0 million.

Under the current authorization through July 9, 2023, we have repurchased a total of 608,500 shares at an average price of $19.00 per share for an aggregate amount of $11.6 million.

As of July 9, 2023, we had $63.4 million of availability under the current share repurchase program.

Our business is subject to seasonal fluctuations.

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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.

Our current purchase obligations for system-wide fixed price commitments for food, beverage, equipment, and restaurant supply items are $132.1 million as of July 9, 2023 of which $19.4 million are due in 2023.

Critical Accounting Policies and Estimates

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(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.

and (xi) 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.

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• 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;

• risks associated with our share 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;

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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