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 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.
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 509 locations in North America. 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.
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%.
• Tenth consecutive quarter of comparable restaurant revenue (1) growth.
• Comparable restaurant dine-in sales (2) increased 5.9%.
• 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) 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:
(millions)
Restaurant Revenue for the twelve weeks ended July 10, 2022
$ 288.6
Increase/(decrease) in comparable restaurant revenue (1)
4.1
Increase/(decrease) in non-comparable restaurant revenue 0.5
Total increase/(decrease) 4.7
Restaurant Revenue for the twelve weeks ended July 9, 2023
$ 293.3
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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/
(Decrease)
Restaurant revenue (millions) $ 293.3 $ 288.6 1.6 % $ 700.2 $ 669.2 4.6 %
Restaurant operating costs:
Cost of sales 71.4 72.7 (1.8) % 171.0 163.6 4.5 %
Labor 109.7 101.6 7.9 % 255.1 239.8 6.4 %
Other operating 51.8 52.0 (0.3) % 123.9 119.9 3.4 %
Occupancy 23.5 23.0 2.2 % 53.3 53.6 (0.6) %
Total Restaurant Operating Costs $ 256.4 $ 249.3 8.0 % $ 603.3 $ 576.8 13.7 %
Restaurant Level Operating Profit (1)
$ 36.9 $ 39.3 (6.1) % $ 96.9 $ 92.4 4.8 %
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)
Cost of sales 24.3 % 25.2 % (90) 24.4 % 24.5 % (10)
Labor 37.4 35.2 220 36.4 35.8 60
Other operating 17.7 18.0 (30) 17.7 17.9 (20)
Occupancy 8.0 8.0 — 7.6 8.0 (40)
Total Restaurant Operating Costs 87.3 % 86.4 % 90 86.1 % 86.2 % (10)
Restaurant Level Operating Profit (1)
12.6 % 13.6 % (100) 13.8 % 13.8 % —
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 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)
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
Other (1)
0.01 — 0.07 —
Closed corporate office costs, net of sublease income 0.01 — 0.01 —
Other financing costs (2)
— — — 0.02
COVID-19 related charges — 0.01 — 0.02
Change in estimate, gift card breakage (3)
— — — (0.31)
Write-off of unamortized debt issuance costs (4)
— — — 0.11
Income tax expense 0.17 (0.14) 0.01 (0.17)
Adjusted income (loss) per share - diluted $ (0.24) $ (0.75) $ — $ (0.85)
Weighted average shares outstanding:
Basic 16,037 15,830 16,014 15,783
Diluted (5)
16,291 15,830 16,367 15,783
(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 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.
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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
Income tax provision (benefit) 156 434 176 496
Depreciation and amortization 15,756 17,637 37,581 41,556
EBITDA 26,139 3,735 52,302 31,223
Change in accounting estimate, gift card breakage — — — (4,842)
Other charges (gains), net:
Gain on sale leaseback, net of expenses (14,586) — (14,586) —
Litigation contingencies 1,240 (1,806) 5,540 (86)
Restaurant closure costs, net (112) 930 1,638 1,879
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 —
Other financing costs — 61 — 370
COVID-19 related charges — 93 — 300
Adjusted EBITDA $ 15,532 $ 11,881 $ 51,454 $ 39,834
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 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 income (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 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)%
Less:
Franchise royalties, fees and other revenue 5,367 1.8% 5,435 1.8% 16,286 2.3% 19,912 2.9%
Add:
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 —
Selling 6,196 2.1 13,365 4.5 13,921 1.9 23,308 3.4
General and administrative expenses 20,667 6.9 18,730 6.4 47,466 6.6 43,167 6.3
Depreciation and amortization 15,756 5.3 17,637 6.0 37,581 5.2 41,556 6.0
Restaurant-level operating profit $ 36,907 $ 39,293 $ 96,857 $ 92,378
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 (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 (gains), 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 income (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.
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Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022
Company-owned:
Beginning of period 415 426 414 430
Opened during the period — — 1 —
Acquired from franchisees 5 — 5 —
Closed during the period (2) — (2) (4)
End of period 418 426 418 426
Franchised:
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
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The following table presents total Company-owned and franchised restaurants by state or province as of July 9, 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 17
Georgia 6
Iowa 5
Idaho 8
Illinois 20
Indiana 11
Kansas 5
Kentucky 4
Louisiana 1
Massachusetts 5
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 19 9
Utah 1 5
Virginia 20
Washington 37
Wisconsin 11
Province:
British Columbia 11
Total 418 91
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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.
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022
Revenues:
Restaurant revenue 98.2 % 98.2 % 97.7 % 97.1 %
Franchise and other revenues 1.8 1.8 2.3 2.9
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Restaurant operating costs (excluding depreciation and amortization shown separately below):
Cost of sales 24.3 25.2 24.4 24.5
Labor 37.4 35.2 36.4 35.8
Other operating 17.7 18.0 17.7 17.9
Occupancy 8.0 8.0 7.6 8.0
Total restaurant operating costs 87.3 86.4 86.1 86.2
Depreciation and amortization 5.3 6.0 5.2 6.0
Selling, general, and administrative expenses 9.0 10.9 8.6 9.6
Pre-opening and acquisition costs — 0.1 0.1 —
Other charges (gains), net (3.6) 2.8 (0.1) 2.0
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
Income (loss) before income taxes 1.4 (6.0) 0.1 (3.1)
Income tax provision (benefit) 0.1 0.1 — 0.1
Net income (loss) 1.3 % (6.1) % 0.1 % (3.1) %
Revenues
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 %
Franchise and other revenues 5,367 5,435 (1.3) % 16,286 19,912 (18.2) %
Total revenues $ 298,648 $ 294,056 1.6 % $ 716,460 $ 689,130 4.0 %
Average weekly net sales volumes in Company-owned restaurants $ 58,477 $ 56,633 3.3 % $ 60,124 $ 56,123 7.1 %
Total operating weeks 5,018 5,097 (1.5) % 11,648 11,925 (2.3) %
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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. 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. 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 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. 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 $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. 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 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
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 %
As a percent of restaurant revenue 24.3 % 25.2 % (0.9) % 24.4 % 24.5 % (0.1) %
Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales volume. Cost of sales as a percentage of restaurant revenue decreased 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.
Labor
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 %
As a percent of restaurant revenue 37.4 % 35.2 % 2.2 % 36.4 % 35.8 % 0.6 %
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Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. For the twelve weeks ended July 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
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 %
As a percent of restaurant revenue 17.7 % 18.0 % (0.3) % 17.7 % 17.9 % (0.2) %
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. For the twelve weeks ended July 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.
Occupancy
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) %
As a percent of restaurant revenue 8.0 % 8.0 % — % 7.6 % 8.0 % (0.4) %
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. 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
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) %
As a percent of total revenues 5.3 % 6.0 % (0.7) % 5.2 % 6.0 % (0.8) %
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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 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
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) %
As a percent of total revenues 9.0 % 10.9 % (1.9) % 8.6 % 9.6 % (1.0) %
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 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
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 %
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.
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.
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Interest Expense, Net and Other
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 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. 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 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 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).
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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):
Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022
Net cash provided by operating activities $ 18,225 $ 36,439
Net cash used in investing activities (98) (15,624)
Net cash provided by (used in) financing activities (20,086) 15,455
Effect of exchange rate changes on cash — (6)
Net change in cash and cash equivalents, and restricted cash $ (1,959) $ 36,264
Operating 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 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
Donatos ® expansion
7,440 2,872
Technology, infrastructure, and other 5,066 4,877
New restaurants and restaurant refreshes 1,263 765
Total capital expenditures $ 25,814 $ 15,893
Financing Cash Flows
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 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 (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 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.
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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.
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 July 9, 2023, we were in compliance with all debt covenants.
Debt Outstanding
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
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.
Effective March 14, 2020, the Company temporarily suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic. 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.
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 $132.1 million as of July 9, 2023 of which $19.4 million are due in 2023.
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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.
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) 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;
• 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;
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• 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; 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.
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.