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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-17 · 149 added, 146 removed, 286 unchanged (51% of the section changed)

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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.

All comparisons under this heading between 2023 and 2022 refer to the twelve and forty weeks ended October 1, 2023 and October 2, 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 508 locations in North America.

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

As of October 1, 2023, the Company owned 417 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.

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

• Total revenues are $277.6 million, a decrease of $9.2 million.

• Comparable restaurant revenue (1) decreased 3.4%.

• Comparable restaurant dine-in sales (2) increased 0.5%.

• 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.

• Net loss is $8.2 million, a decrease of $4.5 million from a net loss of $12.7 million during the same period of 2022.

• Adjusted EBITDA (3) (a non-GAAP metric) is $6.8 million, a $2.9 million increase.

• Completed Sale-Leaseback transaction for nine restaurants, generating net proceeds of approximately $30.4 million and a gain, net of expenses of $14.9 million.

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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.

• Total revenues are $994.0 million, an increase of $18.1 million.

• Comparable restaurant revenue (1) increased 2.9%.

• Comparable restaurant dine-in sales (2) increased 8.4%.

• 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.

• Net loss is $7.5 million, a decrease of $26.7 million from a net loss of $34.2 million during the same period of 2022.

• Adjusted EBITDA (3) (a non-GAAP metric) is $58.3 million, a $14.5 million increase.

• Completed two Sale-Leaseback transactions for eighteen restaurants, generating net proceeds of $58.8 million and a gain, net of expenses of $29.4 million.

• Repaid $24.9 million of debt and repurchased $10.0 million of stock.

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

For the twelve and forty weeks ended October 1, 2023 there were 409 and 408 comparable restaurants, respectively, out of the total 417 Company-owned restaurants.

(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)

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

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

Restaurant Revenue for the twelve weeks ended July 10, 2022

Restaurant Revenue for the twelve weeks ended October 2, 2022

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

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Total increase/(decrease) (9.3)

Restaurant Revenue for the twelve weeks ended July 9, 2023

Restaurant Revenue for the twelve weeks ended October 1, 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/

Twelve Weeks Ended Forty Weeks Ended

October 1, 2023 October 2, 2022 Increase/

(Decrease) October 1, 2023 October 2, 2022 Increase/

Restaurant revenue (millions) $ 273.1 $ 282.4 (3.3) % $ 973.3 $ 951.6 2.3 %

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$ 30.4 $ 35.6 (14.6) % $ 127.2 $ 127.9 (0.5) %

(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.

Restaurant revenues and operating costs (GAAP measures), and restaurant level operating profit (1) (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)

Twelve Weeks Ended Forty Weeks Ended

October 1, 2023 October 2, 2022 Increase/

(Decrease) October 1, 2023 October 2, 2022 Increase/(Decrease)

Restaurant revenue (millions) $ 273.1 $ 282.4 (3.3) % $ 973.3 $ 951.6 2.3 %

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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 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)

The following table summarizes net loss, loss per diluted share (GAAP measures), and adjusted loss per diluted share (a non-GAAP measure) for the twelve and forty weeks ended October 1, 2023 and October 2, 2022:

Twelve Weeks Ended Forty Weeks Ended

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

Net loss as reported $ (8,161) $ (12,650) $ (7,496) $ (34,198)

Loss per share - diluted:

Net loss as reported $ (0.52) $ (0.80) $ (0.47) $ (2.16)

Gain on sale leaseback, net of expenses (0.94) — (1.84) —

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

Litigation contingencies 0.23 0.01 0.57 —

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Other financing costs (2)

— 0.06 — 0.09

COVID-19 related charges — 0.01 — 0.03

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Income tax expense 0.10 0.09 0.11 (0.08)

Adjusted income (loss) per share - diluted $ (0.24) $ (0.75) $ — $ (0.85)

Adjusted loss per share - diluted $ (0.79) $ (1.04) $ (0.78) $ (1.94)

Weighted average shares outstanding:

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(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.

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

The impact comprises $5.9 million included in Franchise royalties, fees, and other revenue partially offset by $0.6 million in gift card commission costs included in Selling on the Condensed Consolidated Statements of Operations.

(4) Write-off of unamortized debt issuance costs related to the remaining unamortized debt issuance costs related to our Prior Credit Agreement 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.

(5) For the twelve weeks ended October 1, 2023, the impact of dilutive shares is excluded in the calculations due to the net loss position for the quarter.

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 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 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 loss per diluted share to exclude gain on sale leaseback, net of expenses and other.

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

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

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

GAAP as a measure of performance.

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)

The following table summarizes Net loss (a GAAP measure), and EBITDA and Adjusted EBITDA (non-GAAP measures) for the twelve and forty weeks ended October 1, 2023 and October 2, 2022:

Twelve Weeks Ended Forty Weeks Ended

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

Net loss as reported $ (8,161) $ (12,650) $ (7,496) $ (34,198)

Interest expense, net 5,885 4,419 19,766 15,137

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Gain on sale leaseback, net of expenses (14,883) — (29,413) —

Gain on sale of restaurant property — (9,204) — (9,204)

Litigation contingencies 3,600 133 9,140 47

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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 income (loss) before interest expense, income taxes, and depreciation and amortization.

We define EBITDA as net 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.

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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.

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

GAAP as a measure of performance.

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

The following table summarizes Income from Operations (a GAAP measure), and Restaurant Level Operating Profit (a non-GAAP measure) for the twelve and forty weeks ended October 1, 2023 and October 2, 2022:

Twelve Weeks Ended Forty Weeks Ended

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

Income (loss) from operations $ (1,938) (0.7)% $ (8,103) (2.8)% $ 12,498 1.3% $ (17,594) (1.8)%

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The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:

Twelve Weeks Ended Twenty-Eight Weeks Ended

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

Twelve Weeks Ended Forty Weeks Ended

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

Company-owned:

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Total number of restaurants 508 525 508 525

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

The following table presents total Company-owned and franchised restaurants by state or province as of October 1, 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.

Twelve Weeks Ended Twenty-Eight Weeks Ended

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

Twelve Weeks Ended Forty Weeks Ended

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

Restaurant revenue 98.4 % 98.5 % 97.9 % 97.5 %

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Interest expense, net and other 2.1 1.6 2.0 1.7

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

Loss before income taxes (2.8) (4.4) (0.7) (3.5)

Income tax provision (benefit) 0.1 — — —

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

Net loss (2.9) % (4.4) % (0.8) % (3.5) %

Twelve Weeks Ended Forty Weeks Ended

(Revenues in thousands) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Restaurant revenue $ 273,133 $ 282,415 (3.3) % $ 973,307 $ 951,633 2.3 %

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Total operating weeks 5,005 5,092 (1.7) % 16,653 17,017 (2.1) %

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.

Restaurant revenue for the twelve weeks ended October 1, 2023, which comprises primarily food and beverage sales, decreased $9.3 million, or 3.3%, as compared to the third quarter of 2022.

Restaurant revenue decreased primarily due to a 3.4% decrease in comparable restaurant revenue.

The comparable restaurant revenue decrease was driven by a 10.4% decrease in Guest count, partially offset by a 7.0% increase in average Guest check.

The decrease in Guest count is due in part, to the Company's decision not to repeat the deep discount "$10 Meal Deal" promotion that was offered in the third quarter of fiscal 2022, and the decision to discontinue offering virtual brands.

These decisions are expected to reduce complexity and support execution of an enhanced Red Robin guest experience, that results in increased guest counts and profitability in time.

The increase in average Guest check resulted from a 7.7% increase in menu prices and a 2.1% decrease in discounts, partially offset by a 2.8% 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.

Dine-in sales comprised 75.6% of total food and beverage sales during the third quarter of 2023, as compared to 72.4% in the same period in 2022.

Restaurant revenue for the forty weeks ended October 1, 2023, increased $21.7 million, or 2.3%, as compared to the forty weeks ended October 2, 2022.

The increase was due to a $26.4 million, or 2.9%, increase in comparable restaurant revenue, partially offset by a $4.8 million decrease at non-comparable restaurants, including the impact of restaurant closures.

The comparable restaurant revenue increase was driven by a 7.5% increase in average Guest check, partially offset by a 4.6% 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 increase in average Guest check resulted from a 7.9% increase in menu pricing and a 0.9% decrease in discounts, partially offset by a 1.3% decrease in menu mix.

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.

Dine-in sales comprised 74.8% of total food and beverage sales during the forty weeks ended October 1, 2023, as compared to 70.9% 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 $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 and other revenue increased by less than $0.1 million, or 0.8%, for the twelve weeks ended October 1, 2023 compared to the twelve weeks ended October 2, 2022, and decreased $3.6 million, or 14.8% for the forty weeks ended October 1, 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 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.

Franchise restaurants reported a decrease of 2.3% comparable restaurant revenue for the twelve weeks ended October 1, 2023 compared to the same period in 2022, and an increase of 2.3% for the forty weeks ended October 1, 2023 compared to the same period in 2022.

Other revenue increased $0.9 million for the twelve weeks ended October 1, 2023 compared to the twelve weeks ended October 2, 2022 primarily due to higher gift card breakage and the reclassification of the year-to-date closed corporate office sublease income to other charges (gains) during the twelve weeks ended October 2, 2022.

Other revenue decreased $0.9 million for the forty weeks ended October 1, 2023 compared to the same period in 2022 primarily due to the change in estimate over gift card breakage 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

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Cost of sales $ 65,128 $ 70,640 (7.8) % $ 236,171 $ 234,283 0.8 %

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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 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

Cost of sales as a percentage of restaurant revenue decreased 120 and 30 basis points for the twelve and forty weeks ended October 1, 2023 as compared to the same periods in 2022.

The decreases were primarily driven by menu price increases and implementation of various cost savings initiatives, partially offset by commodity inflation.

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Labor $ 103,741 $ 100,522 3.2 % $ 358,841 $ 340,273 5.5 %

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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.

For the twelve and forty weeks ended October 1, 2023, labor as a percentage of restaurant revenue increased 240 and 110 basis points compared to the same period in 2022.

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

In 2023, we made investments in management and hourly labor to support an enhanced Guest experience, with an objective to drive increases in guest traffic count over time, resulting in an increase in restaurant profitability.

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

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Other operating $ 50,351 $ 52,858 (4.7) % $ 174,243 $ 172,725 0.9 %

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Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs.

For the twelve weeks ended July 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

For the twelve weeks ended October 1, 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 and lower commission rates, lower supplies costs driven by negotiated savings, and lower contract janitorial expenses, partially offset by higher repairs and maintenance costs.

For the forty weeks ended October 1, 2023, other operating costs as a percentage of restaurant revenue decreased 30 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 commission rates, lower contract janitorial expenses which were partially offset by higher repairs and maintenance costs.

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Occupancy $ 23,523 $ 22,828 3.0 % $ 76,806 $ 76,406 0.5 %

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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.

Occupancy costs as a percentage of restaurant revenue increased 50 basis points for the twelve weeks ended October 1, 2023 compared to the same period in 2022.

The increase is due to the impact of an increase in fixed rents, deleveraging from reduced restaurant revenue, and the sale-leaseback of 18 restaurant properties in 2023.

Our fixed rents for the twelve weeks ended October 1, 2023 and October 2, 2022 were $16.6 million and $16.1 million, an increase of $0.5 million, primarily due to increased expenses related to the sale-leaseback of 18 locations and the acquisition of five restaurants from a franchisee, partially offset by net Company-owned restaurant closures.

For the forty weeks ended October 1, 2023, occupancy costs as a percentage of restaurant revenue decreased 10 basis points compared to the same period in 2022 primarily due to the sale-leaseback of 18 restaurant properties in 2023.

Our fixed rents for the forty weeks ended October 1, 2023 and October 2, 2022 were $53.6 million and $53.5 million, an increase of $0.1 million, due to increased expenses related to the sale-leaseback of 18 locations and the acquisition of five restaurants from a franchisee, mostly offset by reduced expenses related to net Company-owned restaurant closures.

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

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Depreciation and amortization $ 14,672 $ 17,368 (15.5) % $ 52,253 $ 58,924 (11.3) %

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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.

For the twelve and forty weeks ended October 1, 2023, depreciation and amortization expense as a percentage of revenue decreased 80 and 70 basis points compared to the same period in 2022 primarily due to asset impairments and disposals.

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

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Selling, general, and administrative $ 27,961 $ 35,692 (21.7) % $ 89,348 $ 102,168 (12.5) %

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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.

General and administrative costs in the twelve weeks ended October 1, 2023 decreased $2.3 million, or 10.7%, as compared to the same period in 2022.

The decrease was primarily driven by a decrease in salaries and stock compensation due to a reduction in force and executive transition, and decreased travel due to holding a 2022 leadership conference and no leadership conference in 2023, partially offset by higher incentive compensation and lower capitalized wages due to fewer eligible capital projects.

General and administrative costs in the forty weeks ended October 1, 2023 increased $2.0 million, or 3.1%, as compared to the same period in 2022.

The increase was primarily driven by higher incentive compensation, increased travel, and lower capitalized costs due to fewer eligible 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 twelve and forty weeks ended October 1, 2023 decreased $5.4 million, or 38.2%, and $14.8 million, or 39.5%, as compared to the same periods in 2022.

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

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

Twelve Weeks Ended Forty Weeks Ended

(In thousands, except percentages) October 1, 2023 October 2, 2022 Percent Change October 1, 2023 October 2, 2022 Percent Change

Pre-opening costs $ — $ 217 (100.0) % $ 586 $ 514 14.0 %

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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.

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.

For the twelve weeks ended October 1, 2023, pre-opening costs decreased by $0.2 million due to no new restaurant openings or rollouts of Donatos ® .

Pre-opening costs increased by $0.1 million during the forty weeks ended October 1, 2023 related to one additional new restaurant opening in Glendale, AZ partially offset by the rollout of 25 less Donatos ® locations.

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.

Interest expense, net and other was $5.9 million for the twelve weeks ended October 1, 2023 and $4.6 million for the twelve weeks ended October 2, 2022.

Interest expense for the twelve weeks ended October 1, 2023 and October 2, 2022 was $6.1 million and $4.5 million, respectively.

The $1.6 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.

Our weighted average interest rate for the twelve weeks ended October 1, 2023 and October 2, 2022 was 13.4% and 9.7%, respectively.

Lower average outstanding debt, which decreased $5.0 million compared to the same period in 2022, also contributed.

Interest expense, net and other was $19.5 million for the forty weeks ended October 1, 2023 and $16.2 million for the forty weeks ended October 2, 2022, an increase of $3.4 million, or 21.0%.

Interest expense for the forty weeks ended October 1, 2023 and October 2, 2022 was $20.4 million and $15.8 million, respectively.

The $4.5 million increase was primarily related to a higher weighted average interest rate, higher average outstanding debt, which increased $5.0 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.

Our weighted average interest rate on our credit facility debt was 12.6% for the forty weeks ended October 1, 2023 as compared to 8.7% for the same period in 2022.

Interest income and other decreased by $0.2 million and $1.1 million for the twelve and forty weeks ended October 1, 2023, respectively.

The decreases were due to investment changes related to a deferred compensation plan for which assets are held in a rabbi trust, along with lower interest income on bank account balances in the forty-week period.

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 the twelve weeks ended October 1, 2023 was a 3.5% benefit, compared to a 0.3% benefit for the twelve weeks ended October 2, 2022.

The effective tax rate for both periods include 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 forty weeks ended October 1, 2023 was a 6.4% expense, compared to a 1.3% expense for the forty weeks ended October 2, 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.

Cash and cash equivalents, and restricted cash increased $2.6 million to $60.8 million as of October 1, 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).

As of October 1, 2023, the Company had approximately $73.6 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):

Twenty-Eight Weeks Ended

July 9, 2023 July 10, 2022

Forty Weeks Ended

October 1, 2023 October 2, 2022

Net cash provided by operating activities $ 17,361 $ 38,800

Net cash used in investing activities (98) (15,624)

Net cash provided by (used in) investing activities 18,992 (18,297)

Net cash provided by (used in) financing activities (33,741) 14,921

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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.

Net cash flows provided by operating activities decreased $21.4 million to $17.4 million for the forty weeks ended October 1, 2023.

The decrease in net cash provided by operating activities is primarily attributable to the receipt of an income tax refund of $14.7 million 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

Net cash flows provided by investing activities were $19.0 million for the forty weeks ended October 1, 2023, as compared to net cash flows used of $18.3 million for the same period in 2022.

The increase in cash flows provided by investing activities is primarily due to proceeds from sales of real estate, partially offset by 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 forty weeks ended October 1, 2023 and October 2, 2022 (in thousands):

Forty Weeks Ended

October 1, 2023 October 2, 2022

Restaurant improvement capital and other $ 16,715 $ 12,376

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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.

Net cash flows used in financing activities were $33.7 million for the forty weeks ended October 1, 2023, as compared to net cash flows provided by financing activities of $14.9 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.

In 2023, the use of cash results primarily from the Company’s repayment of outstanding debt with proceeds from the sale-leaseback transaction, $10.0 million of share repurchases, and standard principal payments due under the terms of the Company’s Credit Agreement.

Credit Facility

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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.

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.

As of October 1, 2023, the Company had outstanding borrowings under the Credit Facility of $182.1 million net of $7.0 million of unamortized deferred financing charges and discounts, of which $0.9 million was classified as current.

As of October 1, 2023, the Company had $25.0 million of available borrowing capacity under its Credit Facility.

As of October 1, 2023, the Company had $11.7 million of letters of credit issued against cash collateral, compared to $7.8 million as of the prior comparable period.

The Company's cash collateral is recorded in Restricted cash on our Condensed Consolidated Balance Sheets as of the quarter ended October 1, 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 July 9, 2023, we were in compliance with all debt covenants.

As of October 1, 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.

Total debt outstanding decreased $24.9 million to $190.0 million at October 1, 2023, from $214.9 million at December 25, 2022, primarily driven by payments of long-term debt during the forty weeks ended October 1, 2023.

Working Capital

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In May 2023, the Company resumed its repurchase program.

During the third quarter of fiscal 2023, we repurchased 480,071 shares at an average price of $10.33 per share, for an aggregate amount of $5.0 million.

Under the current authorization through October 1, 2023, we have repurchased a total of 1,088,588 shares at an average price of $15.18 per share for an aggregate amount of $16.5 million.

As of October 1, 2023, we had $58.5 million of availability under the current share 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 $132.1 million as of July 9, 2023 of which $19.4 million are due in 2023.

Our current purchase obligations for system-wide fixed price commitments for food, beverage, equipment, and restaurant supply items are $223.7 million as of October 1, 2023 of which $43.3 million are due in 2023.

Critical Accounting Policies and Estimates

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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