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 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.
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 508 locations in North America. 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 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 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.
• Repaid $8.4 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 $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 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 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 October 2, 2022
$ 282.4
Increase/(decrease) in comparable restaurant revenue (1)
(9.6)
Increase/(decrease) in non-comparable restaurant revenue 0.3
Total increase/(decrease) (9.3)
Restaurant Revenue for the twelve weeks ended October 1, 2023
$ 273.1
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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 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 %
Restaurant operating costs:
Cost of sales 65.1 70.6 (7.8) % 236.2 234.3 0.8 %
Labor 103.7 100.5 3.2 % 358.8 340.3 5.5 %
Other operating 50.4 52.9 (4.7) % 174.2 172.7 0.9 %
Occupancy 23.5 22.8 3.0 % 76.8 76.4 0.5 %
Total Restaurant Operating Costs $ 242.7 $ 246.8 (6.3) % $ 846.1 $ 823.7 7.7 %
Restaurant Level Operating Profit (1)
$ 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 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 %
Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis
Points) (Percentage of Restaurant Revenue) (Basis
Points)
Cost of sales 23.8 % 25.0 % (120) 24.3 % 24.6 % (30)
Labor 38.0 35.6 240 36.9 35.8 110
Other operating 18.4 18.7 (30) 17.9 18.2 (30)
Occupancy 8.6 8.1 50 7.9 8.0 (10)
Total Restaurant Operating Costs 88.8 % 87.4 % 140 86.8 % 86.6 % 20
Restaurant Level Operating Profit (1)
11.1 % 12.6 % (150) 13.1 % 13.4 % (30)
Certain percentage and basis point amounts in the table above do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues.
(1) Restaurant Level Operating Profit is a non-GAAP measure. See below for a reconciliation of Restaurant Level Operating Profit to Income from Operations and Income from Operations as a percentage of total revenues.
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The following table summarizes net loss, loss per diluted share (GAAP measures), and adjusted loss per diluted share (a non-GAAP measure) for the 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 —
Restaurant closure costs, net (0.01) (0.10) 0.10 0.02
Severance and executive transition 0.02 0.11 0.20 0.12
Asset impairment 0.30 0.14 0.45 0.82
Other (1)
0.02 — 0.09 —
Closed corporate office costs, net of sublease income — 0.02 0.02 0.02
Other financing costs (2)
— 0.06 — 0.09
COVID-19 related charges — 0.01 — 0.03
Change in estimate, gift card breakage (3)
— — — (0.33)
Write-off of unamortized debt issuance costs (4)
— — — 0.11
Income tax expense 0.10 0.09 0.11 (0.08)
Adjusted loss per share - diluted $ (0.79) $ (1.04) $ (0.78) $ (1.94)
Weighted average shares outstanding:
Basic 15,799 15,892 15,949 15,816
Diluted (5)
15,799 15,892 15,949 15,816
(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 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 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.
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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
Income tax provision (benefit) 278 (43) 453 453
Depreciation and amortization 14,672 17,368 52,253 58,924
EBITDA 12,674 9,094 64,976 40,316
Change in accounting estimate, gift card breakage — — — (5,246)
Other charges (gains), net:
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
Restaurant closure costs, net (91) (1,570) 1,546 309
Severance and executive transition 341 1,825 3,195 1,954
Asset impairment 4,800 2,187 7,187 13,048
Other 277 — 1,366 —
Closed corporate office costs, net of sublease income 78 267 253 267
Other financing costs — 1,022 — 1,392
COVID-19 related charges — 123 — 423
Adjusted EBITDA $ 6,796 $ 3,877 $ 58,250 $ 43,711
We believe the non-GAAP measures of EBITDA and adjusted EBITDA give the reader additional insight into the ongoing operational results of the Company, and it is intended to supplement the presentation of the Company's financial results in accordance with GAAP. We define EBITDA as net loss before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA further excludes the effects of change in accounting estimate - gift card breakage, asset impairment, litigation contingencies, restaurant closure costs, net, other financing costs, COVID-19 related charges, severance and executive transition costs, closed corporate office, net of sublease income, and gain of sale leaseback, net of expenses, and other. We have revised our definition of adjusted EBITDA to exclude gain of sale leaseback, net of expenses and other. We did not revise prior years’ adjusted EBITDA because there were no other charges similar in nature to these costs. Other companies may define EBITDA and adjusted EBITDA differently, and as a result our measure of EBITDA and adjusted EBITDA may not be directly comparable to those of other companies. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net loss as reported in accordance with U.S. 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 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)%
Less:
Franchise royalties, fees and other revenue 4,427 1.6% 4,390 1.5% 20,713 2.1% 24,302 2.5%
Add:
Other charges (gains), net (5,878) (2.1) (5,217) (1.8) (6,726) (0.7) 8,236 0.8
Pre-opening costs — — 217 0.1 586 0.1 514 0.1
Selling 8,771 3.2 14,194 4.9 22,692 2.3 37,503 3.8
General and administrative expenses 19,190 6.9 21,498 7.5 66,656 6.7 64,665 6.6
Depreciation and amortization 14,672 5.3 17,368 6.1 52,253 5.3 58,924 6.0
Restaurant level operating profit $ 30,390 $ 35,567 $ 127,246 $ 127,946
Income (loss) from operations as a percentage of total revenues (0.7)% (2.8)% 1.3% (1.8)%
Restaurant level operating profit margin (as a percentage of restaurant revenue) 11.1% 12.6% 13.1% 13.4%
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 Forty Weeks Ended
October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022
Company-owned:
Beginning of period 418 426 414 430
Opened during the period — — 1 —
Acquired from franchisees — — 5 —
Closed during the period (1) (2) (3) (6)
End of period 417 424 417 424
Franchised:
Beginning of period 91 102 97 101
Opened during the period — — 1
Closed during the period — (1) (1) (1)
Sold to Company during the period — (5)
End of period 91 101 91 101
Total number of restaurants 508 525 508 525
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The following table presents total Company-owned and franchised restaurants by state or province as of October 1, 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 18 9
Utah 1 5
Virginia 20
Washington 37
Wisconsin 11
Province:
British Columbia 11
Total 417 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 Forty Weeks Ended
October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022
Revenues:
Restaurant revenue 98.4 % 98.5 % 97.9 % 97.5 %
Franchise and other revenues 1.6 1.5 2.1 2.5
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 23.8 25.0 24.3 24.6
Labor 38.0 35.6 36.9 35.8
Other operating 18.4 18.7 17.9 18.2
Occupancy 8.6 8.1 7.9 8.0
Total restaurant operating costs 88.8 87.4 86.8 86.6
Depreciation and amortization 5.3 6.1 5.3 6.0
Selling, general, and administrative expenses 10.1 12.4 9.0 10.5
Pre-opening and acquisition costs — 0.1 0.1 0.1
Other charges (gains), net (2.1) (1.8) (0.7) 0.8
Income (loss) from operations (0.7) (2.8) 1.3 (1.8)
Interest expense, net and other 2.1 1.6 2.0 1.7
Loss before income taxes (2.8) (4.4) (0.7) (3.5)
Income tax provision (benefit) 0.1 — — —
Net loss (2.9) % (4.4) % (0.8) % (3.5) %
Revenues
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 %
Franchise and other revenues 4,427 4,390 0.8 % 20,713 24,302 (14.8) %
Total revenues $ 277,560 $ 286,805 (3.2) % $ 994,020 $ 975,935 1.9 %
Average weekly net sales volumes in Company-owned restaurants $ 54,572 $ 55,469 (1.6) % $ 58,446 $ 55,927 4.5 %
Total operating weeks 5,005 5,092 (1.7) % 16,653 17,017 (2.1) %
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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 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 7.9% increase in menu pricing and a 0.9% decrease in discounts, partially offset by a 1.3% decrease in 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 74.8% 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. 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 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. 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 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 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 %
As a percent of restaurant revenue 23.8 % 25.0 % (1.2) % 24.3 % 24.6 % (0.3) %
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 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.
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Labor
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 %
As a percent of restaurant revenue 38.0 % 35.6 % 2.4 % 36.9 % 35.8 % 1.1 %
Labor costs include restaurant level hourly wages and management salaries as well as related taxes and benefits. 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 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 %
As a percent of restaurant revenue 18.4 % 18.7 % (0.3) % 17.9 % 18.2 % (0.3) %
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 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.
Occupancy
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 %
As a percent of restaurant revenue 8.6 % 8.1 % 0.5 % 7.9 % 8.0 % (0.1) %
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 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.
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Depreciation and Amortization
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) %
As a percent of total revenues 5.3 % 6.1 % (0.8) % 5.3 % 6.0 % (0.7) %
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 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 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) %
As a percent of total revenues 10.1 % 12.4 % (2.3) % 9.0 % 10.5 % (1.5) %
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 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 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 %
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 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.
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Interest Expense, Net and Other
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 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 12.6% 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 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. 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.
Liquidity and Capital Resources
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 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).
Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands):
Forty Weeks Ended
October 1, 2023 October 2, 2022
Net cash provided by operating activities $ 17,361 $ 38,800
Net cash provided by (used in) investing activities 18,992 (18,297)
Net cash provided by (used in) financing activities (33,741) 14,921
Effect of exchange rate changes on cash — (44)
Net change in cash and cash equivalents, and restricted cash $ 2,612 $ 35,380
Operating Cash Flows
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.
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Investing Cash Flows
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
Donatos ® expansion
8,602 4,396
Technology, infrastructure, and other 10,336 8,274
New restaurants and restaurant refreshes 1,421 1,989
Total capital expenditures $ 37,074 $ 27,035
Financing Cash Flows
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, $10.0 million of share repurchases, 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 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.
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 October 1, 2023, we were in compliance with all debt covenants.
Debt Outstanding
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.
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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 $75.0 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 $75.0 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.
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.
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 $223.7 million as of October 1, 2023 of which $43.3 million are due in 2023.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates, including our estimates of future restaurant level cash flows, which are subject to the current economic environment and potentially unknown future events, and we might obtain different results if we use different assumptions or conditions. We had no significant changes in our critical accounting policies and estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.
Recently Issued and Recently Adopted Accounting Standards
None noted.
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Forward-Looking Statements
Certain information and statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA") codified at Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as "anticipate," "assume," "believe," "could," "estimate," "expect," "future," "intend," "may," "plan," "project," "will," "would," and similar expressions. Forward-looking statements in this report relate to, among other things: (i) our business objectives and strategic plans; (ii) working capital, and the ability of our future cash flows from restaurant operations and our borrowing capacity to satisfy future working capital deficits and capital expenditures; (iii) our share repurchase program; (iv) our expectations about restaurant operating costs, including commodity and food prices and labor and energy costs, and our ability to mitigate potential increases in such costs; (v) anticipated continued investments in our partnership with Donatos® and other restaurant improvements, including the timing thereof; (vi) our expectations about anticipated uses of, and risks associated with, future cash flows, liquidity, capital expenditures, other capital deployment opportunities and taxes; (vii) the seasonality of our business; (viii) our ability to successfully implement, and our expectations regarding, our North Star five-point plan to enhance the Company’s competitive positioning, including the timing of our expected payments in connection with severance and executive transition costs; (ix) litigation contingencies and the adequacy of our reserves for legal matters; (x) our expectations regarding, and our ability to mitigate changes in, interest rates, commodity prices and other factors; and (xi) 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;
• 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.