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Item 2. Management’s Discussion and Analysis

2024-08-22 compared with 2024-05-29 · 238 added, 184 removed, 197 unchanged (68% of the section changed)

1 unchanged sentence

Management's Discussion and Analysis of Financial Condition and Results of Operations provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying Condensed Consolidated Financial Statements.

References to the first quarter of fiscal 2024 and fiscal 2023 refer to the sixteen weeks ended April 21, 2024 and April 16, 2023, respectively.

References to the second quarter and year to date periods of fiscal 2024 and fiscal 2023 refer to the twelve and twenty-eight weeks ended July 14, 2024 and July 9, 2023, respectively.

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 503 locations in North America.

As of April 21, 2024, the Company owned 413 restaurants located in 39 states.

The Company also had 92 franchised full-service restaurants in 14 states and one Canadian province.

As of July 14, 2024, the Company owned 411 restaurants located in 39 states, and had 92 franchised restaurants in 14 states and one Canadian province.

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

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We also earn revenue from royalties and fees from franchised restaurants.

Highlights for the First Quarter of Fiscal 2024, Compared to the First Quarter of Fiscal 2023

Highlights for the Second Quarter of Fiscal 2024, Compared to the Second Quarter of Fiscal 2023:

• Total revenues are $300.2 million, an increase of $1.5 million.

• Comparable restaurant revenue (1) declined 0.8% excluding a deferred revenue benefit led by the change in the Company's loyalty program.

Including this benefit, Comparable restaurant revenue (1) increased 1.4%.

• Net loss is $9.5 million, compared to net income of $3.9 million last year.

• Adjusted EBITDA (2) is $11.8 million compared to $15.5 million last year.

• Subsequent to the close of the second quarter, executed an amendment to the credit agreement that revises financial covenants and expands revolver capacity.

Highlights for the Year to Date Period of Fiscal 2024, Compared to the Year to Date Period of Fiscal 2023:

• Total revenues are $688.7 million, a decrease of $27.8 million.

• Comparable restaurant revenue (1) decreased 6.5%.

• Net loss is $9.5 million, compared to a net loss of $3.3 million last year.

• Comparable restaurant revenue (1) declined 4.0% excluding a deferred revenue benefit led by the change in the Company's loyalty program.

Including this benefit, Comparable restaurant revenue (1) declined 3.2%.

• Net loss is $18.9 million, compared to net income of $0.7 million last year.

• Adjusted EBITDA (2) is $24.0 million compared to $51.9 million last year.

• Completed a sale-leaseback transaction for ten restaurants, generating net proceeds of approximately $23.4 million and a gain, net of expenses of $7.4 million.

• Repaid $21.2 million of debt in the first quarter of fiscal 2024 and an aggregate $45.1 million from the sale leaseback transactions.

(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated 18 months as of the beginning of the period presented.

For the first quarter of fiscal 2024 there were 406 comparable restaurants, out of the total 413 Company-owned restaurants.

• Completed a sale-leaseback transaction for ten restaurants in the first quarter of fiscal 2024, generating net proceeds of approximately $23.3 million and a gain, net of expenses of $7.4 million.

(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated for 18 months as of the beginning of the period presented.

(2) See below for a reconciliation of Adjusted EBITDA to Net income (loss).

Key Performance Indicators and Non-GAAP Financial Measures

Key Performance Indicators

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

Restaurant Revenue for the quarter ended April 16, 2023

(Dollars in millions) Twelve Weeks Ended Twenty-Eight Weeks Ended

Restaurant Revenue for the period ended July 9, 2023

$ 293.3 $ 700.2

Increase/(decrease) in comparable restaurant revenue 4.1 (21.5)

Increase/(decrease) in non-comparable and closed restaurant revenue (2.7)

Decrease in non-comparable and closed restaurant revenue

Total increase/(decrease) 1.2 (27.2)

Restaurant Revenue for the quarter ended April 21, 2024

Restaurant revenue and operating costs, and restaurant level operating profit for the period are detailed in the table below:

Quarter Ended

(Dollars in millions) April 21, 2024 April 16, 2023 Increase/

Restaurant revenue $ 378.6 $ 406.9 (7.0) %

Restaurant operating costs:

Cost of sales 90.2 99.7 (9.5) %

Labor 149.0 145.4 2.4 %

Other operating 66.5 72.1 (7.7) %

Occupancy 31.4 29.8 5.5 %

Total Restaurant Operating Costs $ 337.1 $ 346.9 (9.3) %

Restaurant Level Operating Profit (1)

Restaurant Revenue for the period ended July 14, 2024

$ 294.5 $ 673.0

(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.

Quarter Ended

(Dollars in millions) April 21, 2024 April 16, 2023 Increase/

Restaurant revenue $ 378.6 $ 406.9 (7.0) %

Restaurant operating costs:

(Percentage of Restaurant Revenue) (Basis

Cost of sales 23.8 % 24.5 % (70)

Labor 39.3 35.7 360

Other operating 17.6 17.7 (10)

Occupancy 8.3 7.3 100

Total Restaurant Operating Costs 88.9 % 85.2 % 370

Restaurant Level Operating Profit 11.0 % 14.7 % (370)

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.

The following table summarizes net loss, loss per diluted share, and adjusted income (loss) per diluted share for the periods presented:

Quarter Ended

(in thousands, except per share amounts) April 21, 2024 April 16, 2023

Net loss as reported $ (9,460) $ (3,256)

Loss per share - diluted:

Net loss as reported $ (0.61) $ (0.20)

Other Charges (gains), net:

Gain on sale leaseback, net (0.48) —

Litigation contingencies 0.03 0.26

Restaurant closure costs, net 0.01 0.11

Severance and executive transition 0.06 0.12

Asset impairment — 0.04

Asset disposal and other, net

Closed corporate office costs, net of sublease income 0.01 —

Income tax effect 0.07 (0.16)

Adjusted income (loss) per share - diluted $ (0.80) $ 0.25

Weighted average shares outstanding:

Basic 15,554 15,996

Diluted 15,554 15,996

The following table summarizes Net loss, EBITDA, and Adjusted EBITDA for the periods presented (in thousands):

Quarter Ended

April 21, 2024 April 16, 2023

Net loss as reported $ (9,460) $ (3,256)

Interest expense, net 7,313 7,576

Income tax provision (benefit) 181 20

Depreciation and amortization 18,154 21,825

EBITDA 16,188 26,165

Other charges (gains), net:

Gain on sale leaseback, net (7,425) —

Litigation contingencies 420 4,300

Restaurant closure costs, net 175 1,750

Severance and executive transition 945 1,891

Asset impairment — 694

Asset disposal and other, net

Closed corporate office costs, net of sublease income 115 62

Adjusted EBITDA $ 12,212 $ 35,924

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

Adjusted EBITDA and Adjusted loss per share-diluted are supplemental measures of our performance that are not required by or presented in accordance with GAAP.

We believe these non-GAAP measures give the reader additional insight into the ongoing operational results of the Company and are intended to supplement the presentation of the Company's financial results in accordance with GAAP.

Adjusted EBITDA and adjusted loss per share-diluted exclude the impact of non-operating or nonrecurring items including changes in estimate, asset impairments, litigation contingencies, gains (losses) on debt extinguishment, restaurant and office closure costs, gains on sale leaseback transactions, severance and executive transition costs and other non-recurring, non-cash or discrete items net of income tax impacts.

Other companies may define these non-GAAP measures differently, and as a result our measures may not be directly comparable to those of other companies.

Adjusted loss per share-diluted 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 (loss) from Operations, and Restaurant Level Operating Profit for the periods presented (dollars in thousands):

Quarter Ended

April 21, 2024 April 16, 2023

Income (loss) from operations $ (2,111) (0.5)% $ 4,181 1.0%

Franchise revenue 5,341 1.4% 5,283 1.3%

Other revenue 4,632 1.2% 5,636 1.3%

Other charges (gains), net (3,976) (1.0) 9,759 2.3

Pre-opening costs — — 582 0.1

Selling 13,547 3.5 8,376 2.0

General and administrative expenses 25,842 6.7 26,147 6.3

Depreciation and amortization 18,154 4.7 21,825 5.2

Restaurant level operating profit $ 41,483 11.0% $ 59,951 14.7%

Income (loss) from operations as a percentage of total revenues (0.5)% 1.0%

Restaurant level operating profit margin (as a percentage of restaurant revenue) 11.0% 14.7%

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 revenue 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 costs associated with selling, general, and administrative functions, and pre-opening costs, as well as, other charges (gains), net because these costs are non-operating or nonrecurring and therefore 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 (loss) from operations as an indicator of financial performance.

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

Restaurant Data

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

Quarter Ended

April 21, 2024 April 16, 2023

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023

Company-owned:

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Opened during the period — — — 1

Acquired from franchisees — 5 — 5

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

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Beginning of period 92 96 92 97

Opened during the period — — — —

Closed during the period — — — (1)

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

End of period 92 91 92 91

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Comparable Restaurant Revenue

As of the first quarter of fiscal 2024, the Company has revised its definition of comparable restaurant revenue to reflect company owned restaurants that have operated 18 months as of the beginning of the period presented.

As of the first quarter of fiscal 2024, the Company revised its definition of comparable restaurant revenue to reflect Company-owned restaurants that have operated for 18 months as of the beginning of the period presented.

The prior definition included Company-owned restaurants that have operated for five full quarters as of the beginning of the period presented.

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The change did not have a material impact on previously reported results and as such, prior periods were not revised to reflect the new definition.

For the first quarter of fiscal 2024, there were 406 comparable restaurants, out of the total 413 Company-owned restaurants.

The following table presents total Company-owned and franchised restaurants by state or province as of April 21, 2024:

For the second quarter and year to date periods of fiscal 2024, there were 405 and 404 comparable restaurants, respectively.

The following table presents total Company-owned and franchised restaurants by state or province as of July 14, 2024:

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.

Quarter Ended

(Dollars in thousands) April 21, 2024 April 16, 2023

Twelve Weeks Ended Twenty-Eight Weeks Ended

(Dollars in thousands) July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023

Restaurant revenue 98.1 % 98.2 % 97.7 % 97.7 %

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Interest income and other, net — (0.2) (0.1) (0.1)

Loss before income taxes (2.4) (0.7)

Income tax provision — —

Net loss (2.4) % (0.7) %

Income (loss) before income taxes (3.2) 1.4 (2.7) 0.1

Income tax provision (benefit) — 0.1 — —

Net income (loss) (3.2) % 1.3 % (2.8) % 0.1 %

(1) Expressed as a percentage of restaurant revenue.

Quarter Ended

(Dollars in thousands) April 21, 2024 April 16, 2023 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(Dollars in thousands) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Restaurant revenue $ 294,457 $ 293,281 0.4 % $ 673,025 $ 700,174 (3.9) %

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Total operating weeks 4,949 5,018 (1.4) % 11,560 11,648 (0.8) %

Restaurant revenue, which comprises primarily food and beverage sales, decreased $28.3 million, or 7.0%, in the first quarter of fiscal 2024, as compared to the comparable period of 2023.

Restaurant revenue decreased primarily due to a 6.5% decrease in comparable restaurant revenue.

The comparable restaurant revenue decrease was driven by a 9.4% decrease in Guest count, partially offset by a 2.9% increase in average Guest check.

The decrease in Guest count is due in part to overlapping elevated performance in the first quarter of fiscal 2023, our exit of virtual brands in the third quarter of fiscal 2023, and adverse weather impacts.

The increase in average Guest check resulted from a 5.4% increase in menu prices, partially offset by a 1.8% decrease from menu mix and a 0.7% decrease in discounts.

The decrease in menu mix was primarily driven by Guests shifting visits from third party delivery platforms with elevated menu prices, to dine in visits at standard menu prices, and the removal of low Guest preference, but higher priced burger options during the first quarter of 2023.

Dine-in sales comprised 76.1% of total food and beverage sales during the first quarter of 2024, as compared to 74.3% in the same period in 2023.

Restaurant revenue, which comprises primarily food and beverage sales, increased $1.2 million, or 0.4%, in the second quarter of fiscal 2024 , as compared to the comparable period of 2023.

Restaurant revenue increased primarily due to a benefit resulting from a change in the Company's loyalty program.

Excluding this benefit, comparable restaurant revenue declined 0.8%.

Including this benefit, comparable restaurant revenue increased 1.4%.

Comparable restaurant revenue reflects a 6.7% decrease in Guest count, offset in part by a 5.9% increase in average Guest check.

The increase in average Guest check resulted from a 7.6% increase in menu prices, partially offset by a 0.9% decrease from menu mix and a 0.8% decrease from discounts.

Dine -in sales compris ed 76.8% o f total food and beverage sales during the second quarter of 2024, as compared to 74.7% in the same period in 2023.

Restaurant revenue decreased $27.1 million or 3.9% in the year to date period of fiscal 2024, as compared to the same period of 2023.

Restaurant revenue decreased primarily due to a 4.0% decrease in comparable restaurant revenue led by the change in the Company's loyalty program.

Including the benefit of loyalty adjustments, comparable restaurant revenue decreased 3.2%.

Comparable restaurant revenue reflects an 8.3% decrease in Guest count, partially offset by a 4.3% increase in average Guest check.

The increase in average Guest check resulted from a 6.4% increase in menu prices, partially offset by a 1.4% decrease from menu mix and a 0.7% decrease from discounts.

Dine-in sales comprised 76.4% of total food and beverage sales during the year to date period of 2024, as compared to 71.4% in the same period in 2023.

Average weekly net sales volumes are calculated as 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.

Franchise revenue increased by $0.1 million, or 1.1%, in 2024 compared to 2023, primarily due to an increase in franchisee contributions.

Franchise revenue increased by $0.7 million, or 21.0%, in the second quarter of fiscal 2024 compared to the same period of 2023, primarily due to an increase in franchisee contributions.

The increase in 2024 follows a reduction in 2023, and returns franchisee contributions to their typical historical level.

Franchise restaurants reported a decrease of 5.9% in comparable restaurant revenue in the first quarter of fiscal 2024.

Other revenue decreased $1.0 million in 2024 compared to 2023, primarily related to reduced gift card breakage.

Franchise restaurants reported a decrease of 1.7% in comparable restaurant revenue in the second quarter of fiscal 2024 and a decrease of 3.2% for the year to date period of fiscal 2024 compared to the same periods in fiscal 2023.

Other revenue decreased $0.4 million and $1.4 million in the second quarter and year to date periods of fiscal 2024 compared to 2023, primarily related to business interruption insurance recoveries recognized in 2023.

Cost of Sales

Quarter Ended

(In thousands, except percentages) April 21, 2024 April 16, 2023 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Cost of sales $ 69,444 $ 71,372 (2.7) % $ 159,653 $ 171,042 (6.7) %

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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 70 basis points for the first quarter of fiscal 2024 as compared to the comparable period in 2023.

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

Quarter Ended

(In thousands, except percentages) April 21, 2024 April 16, 2023 Percent Change

Cost of sales as a percentage of restaurant revenue decreased 70 basis points for the second quarter of fiscal 2024 as compared to the comparable period in 2023.

The improvement was primarily driven by menu price increases and implementation of various cost savings initiatives, partially offset by negative product mix and commodity inflation.

Cost of sales as a percentage of restaurant revenue decreased 70 basis points for the year to date period of fiscal 2024 as compared to the comparable period in 2023.

The improvement was primarily driven by menu price increases and implementation of various cost savings initiatives, partially offset by product mix shifts to higher cost menu items and commodity inflation.

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Labor $ 113,908 $ 109,678 3.9 % $ 262,866 $ 255,100 3.0 %

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Labor costs include restaurant level hourly wages and management salaries as well as related taxes and benefits.

For the first quarter of fiscal 2024, labor as a percentage of restaurant revenue increased 360 basis points compared to the same period in 2023.

The increase was primarily driven by continued investments in hourly and management labor, increased incentive compensation related to a new partner bonus plan, and higher workers compensation and group health insurance costs.

For the second quarter of fiscal 2024, labor as a percentage of restaurant revenue increased 130 basis points compared to the same period in 2023.

The increase was primarily driven by strategic investments in hourly and management labor, increased incentive compensation related to a new partner bonus plan, and higher group health insurance costs.

For the year to date period of fiscal 2024, labor as a percentage of restaurant revenue increased 270 basis points compared to the same period in 2023.

The increase was primarily driven by strategic investments in hourly and management labor, increased incentive compensation related to a new partner bonus plan, and higher workers compensation and group health insurance costs.

Other Operating

Quarter Ended

(In thousands, except percentages) April 21, 2024 April 16, 2023 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Other operating $ 51,783 $ 51,842 (0.1) % $ 118,273 $ 123,892 (4.5) %

As a percent of restaurant revenue 17.6 % 17.7 % (0.1) % 17.6 % 17.7 % (0.1) %

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

For the first quarter of fiscal 2024, other operating costs as a percentage of restaurant revenue decreased 10 basis points as compared to the comparable period in 2023.

The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix and lower commission rates, and lower supplies costs driven by negotiated savings.

Quarter Ended

(In thousands, except percentages) April 21, 2024 April 16, 2023 Percent Change

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

For the second quarter of fiscal 2024, other operating costs as a percentage of restaurant revenue decreased 10 basis points as compared to the comparable period in 2023.

The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix and lower commission rates, partially offset by higher utilities costs.

For the year to date period of fiscal 2024, other operating costs as a percentage of restaurant revenue decreased 10 basis points as compared to the comparable period in 2023.

The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix and lower commission rates.

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Occupancy $ 24,595 $ 23,482 4.7 % $ 56,023 $ 53,283 5.1 %

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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 increased 100 basis points for the first quarter of fiscal 2024 compared to the comparable period in 2023.

The increase is due to the impact of an increase in fixed rents related to the sale-leaseback of 28 locations, the acquisition of five restaurants from a franchisee in the second quarter of fiscal 2023, and deleveraging due to lower restaurant revenue.

Occupancy costs as a percentage of restaurant revenue increased 40 basis points for the second quarter of fiscal 2024 compared to the comparable period in 2023.

The increase is due to the impact of an increase in fixed rents related to the sale-leaseback of 28 locations.

Occupancy costs as a percentage of restaurant revenue increased 70 basis points for the year to date period of fiscal 2024 compared to the comparable period in 2023.

The increase is due to the impact of an increase in fixed rents related to the sale-leaseback of 28 locations and the acquisition of five restaurants from a franchisee in the second quarter of fiscal 2023.

Depreciation and Amortization

Quarter Ended

(In thousands, except percentages) April 21, 2024 April 16, 2023 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Depreciation and amortization $ 13,402 $ 15,756 (14.9) % $ 31,556 $ 37,581 (16.0) %

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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 first quarter of fiscal 2024, depreciation and amortization expense as a percentage of revenue decreased 50 basis points compared to the comparable period in 2023, primarily due to asset impairments and sale-leaseback transactions reducing the depreciable asset base.

For the second quarter of fiscal 2024, depreciation and amortization expense as a percentage of revenue decreased 80 basis points compared to the comparable period in 2023, primarily due to asset impairments and sale-leaseback transactions reducing the depreciable asset base.

For the year to date period of fiscal 2024, depreciation and amortization expense as a percentage of revenue decreased 60 basis points compared to the comparable period in 2023, primarily due to asset impairments and sale-leaseback transactions reducing the depreciable asset base.

Selling, General, and Administrative

Quarter Ended

(In thousands, except percentages) April 21, 2024 April 16, 2023 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Selling, general, and administrative $ 28,652 $ 26,864 6.7 % $ 68,041 $ 61,387 10.8 %

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and Board of Directors' expenses.

Selling, general and administrative expense increased $4.9 million, or 14.1% in the first quarter of fiscal 2024 as compared to the comparable period in 2023.

General and administrative costs in the first quarter ended April 21, 2024 decreased $0.3 million, or 1.1%, as compared to the comparable period in 2023.

The decrease is primarily related to lower stock-based compensation expense and reduced incentive compensation accruals, partially offset by increased salaries and benefits related to an increase in headcount as compared to the prior year quarter.

Selling costs in the first quarter ended of fiscal 2024 increased $5.2 million, as compared to the comparable period in 2023.

The increase was primarily driven by increased marketing communication with consumers and revenue sharing events as part of our commitment to engage and support the local communities in which we operate.

Selling, general and administrative expense increased $1.8 million, or 6.7% in the second quarter of fiscal 2024 as compared to the comparable period in 2023.

General and administrative costs in the second quarter of fiscal 2024 were $16.6 million, a decrease of $3.5 million compared to the comparable period in 2023.

The decrease is primarily related to reduced incentive compensation accruals as compared to the prior year quarter.

Selling costs in the second quarter of fiscal 2024 were $12.0 million, an increase of $5.3 million compared to the comparable period in 2023.

The increase was primarily driven by increased marketing communication with consumers and related production costs.

General and administrative costs in the year to date period of fiscal 2024 were $42.5 million, a decrease of $3.8 million compared to the comparable period in 2023.

The decrease is primarily related to reduced incentive compensation accruals as compared to the same period last year, partially offset by higher benefit costs.

Selling costs in the year to date period of fiscal 2024 were $25.6 million, an increase of $10.5 million compared to the comparable period in 2023.

The increase was primarily driven by increased marketing communication with consumers and related production costs.

Pre-opening Costs

Quarter Ended

(In thousands, except percentages) April 21, 2024 April 16, 2023 Percent Change

Twelve Weeks Ended Twenty-Eight Weeks Ended

(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change

Pre-opening costs $ — $ 4 (100.0) % $ — $ 586 (100.0) %

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Pre-opening costs for any period will typically include expenses associated with restaurants opened during the period as well as expenses related to restaurants opening in subsequent periods.

For the first quarter of fiscal 2024, we did not open any new restaurants or roll out any Donatos ® locations.

During the first quarter of fiscal 2023 we opened one restaurant and completed the rollout of 25 Donatos ® locations.

We did not open any new restaurants or roll out any Donatos ® locations in the first half of fiscal 2024.

We opened one restaurant and completed the rollout of 25 Donatos ® locations in the first half of fiscal 2023.

Interest Expense

Interest expense for the first quarter of fiscal 2024 and 2023 was $7.5 million and $7.8 million, respectively.

The $0.3 million decrease was primarily due to the $45.1 million repayment of debt with the proceeds from the sale-leaseback transactions subsequent to the first quarter of fiscal 2023, partially offset by an increase in the weighted average interest rate to 13.5% in the first quarter of fiscal 2024 compared to 11.6% in the prior year quarter.

Average outstanding debt was $180.6 million and $213.5 million as of April 21, 2024 and April 16, 2023, respectively.

Interest expense for the second quarter of fiscal 2024 and 2023 was $5.1 million and $6.5 million, respectively.

The $1.4 million decrease was primarily due to the $29.6 million repayment of debt with the proceeds from the sale-leaseback transactions subsequent to the second quarter of fiscal 2023, partially offset by an increase in the weighted average interest rate to 13.6% in the second quarter of fiscal 2024 compared to 11.1% in the prior year quarter.

Average outstanding debt was $175.2 million and $207.1 million as of July 14, 2024 and July 9, 2023, respectively.

Interest expense was $12.6 million for the year to date period of fiscal 2024 and $14.3 million for the year to date period of fiscal 2023.

The $1.7 million decrease was primarily due to the $29.6 million repayment of debt with the proceeds from the sale-leaseback transactions subsequent to the second quarter of fiscal 2023, partially offset by an increase in the weighted average interest rate to 13.5% for the year to date period of fiscal 2024 compared to 12.3% in the same period last year.

Average outstanding debt was $175.2 million and $210.7 million as of July 14, 2024 and July 9, 2023, respectively.

Income Tax Provision

Income tax provision was $0.2 million in the first quarter ended April 21, 2024 compared to $0.1 million in the same period in the prior year.

The effective tax rate for the first quarter of fiscal 2024 was 2.0%, compared to 0.6% for the first quarter of fiscal 2023.

The effective tax rate for both periods reflects federal income taxes, minimum state income taxes and state franchise taxes, despite a pretax net loss position.

The effective tax rate for the second quarter of fiscal 2024 was a 0.4% benefit, compared to a 3.8% expense for the second quarter of fiscal 2023.

The effective tax rate for the year to date period of fiscal 2024 was 0.7%, compared to 21.0% for the year to date period of fiscal 2023.

The effective tax rate for the quarter and year to date periods of fiscal 2024 reflects the valuation allowance recorded against the Company's net tax assets in addition to certain federal and state income taxes due to attribute limitations, minimum state income taxes, and state franchise taxes.

The increase in tax rate for the fiscal 2023 periods as compared to the fiscal 2024 periods is due to the near break-even pretax book income generated in fiscal 2023.

Non-GAAP Financial Measures

Restaurant revenue and operating costs, and restaurant level operating profit for the periods presented are detailed in the table below:

Twelve Weeks Ended Twenty-Eight Weeks Ended

(Dollars in millions) July 14, 2024 July 9, 2023 Increase/

(Decrease) July 14, 2024 July 9, 2023 Increase/

Restaurant revenue $ 294.5 $ 293.3 0.4 % $ 673.0 $ 700.2 (3.9) %

Restaurant operating costs:

Cost of sales 69.4 71.4 (2.8) % 159.7 171.0 (6.6) %

Labor 113.9 109.7 3.8 % 262.9 255.1 3.1 %

Other operating 51.8 51.8 — % 118.3 123.9 (4.5) %

Occupancy 24.6 23.5 4.7 % 56.0 53.3 5.1 %

Total Restaurant Operating Costs $ 259.7 $ 256.4 1.3 % $ 596.9 $ 603.3 (1.1) %

Restaurant level operating profit (1)

$ 34.8 $ 36.9 (5.7) % $ 76.1 $ 96.9 (21.5) %

(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.

Twelve Weeks Ended Twenty-Eight Weeks Ended

(Dollars in millions) July 14, 2024 July 9, 2023 Increase/

(Decrease) July 14, 2024 July 9, 2023 Increase/(Decrease)

Restaurant revenue $ 294.5 $ 293.3 0.4 % $ 673.0 $ 700.2 (3.9) %

Restaurant operating costs:

(Percentage of Restaurant Revenue) (Basis

Points) (Percentage of Restaurant Revenue) (Basis

Cost of sales 23.6 % 24.3 % (70) 23.7 % 24.4 % (70)

Labor 38.7 37.4 130 39.1 36.4 270

Other operating 17.6 17.7 (10) 17.6 17.7 (10)

Occupancy 8.4 8.0 40 8.3 7.6 70

Total Restaurant Operating Costs 88.1 % 87.3 % 80 88.6 % 86.1 % 250

Restaurant level operating profit

11.8 % 12.6 % (80) 11.3 % 13.8 % (250)

The following table summarizes net income (loss), income (loss) per diluted share, and adjusted income (loss) per diluted share for the periods presented:

Twelve Weeks Ended Twenty-Eight Weeks Ended

(in thousands, except per share amounts) July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023

Net income (loss) as reported $ (9,489) $ 3,922 $ (18,949) $ 664

Income (loss) per share - diluted:

Net income (loss) as reported

$ (0.61) $ 0.24 $ (1.21) $ 0.04

Other charges (gains), net:

Gain on sale of restaurant property — (0.91) (0.48) (0.89)

Litigation contingencies 0.02 0.08 0.05 0.34

Restaurant closure costs, net 0.03 (0.01) 0.04 0.10

Severance and executive transition 0.01 0.06 0.07 0.17

Asset impairment 0.07 0.11 0.07 0.15

Asset disposal and other, net

0.05 0.01 0.17 0.07

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

Income tax effect (0.05) 0.17 0.02 0.01

Adjusted income (loss) per share - diluted $ (0.47) $ (0.24) $ (1.26) $ —

Weighted average shares outstanding:

Basic 15,680 16,037 15,608 16,014

Diluted 15,680 16,291 15,608 16,367

The following table summarizes Net loss, EBITDA, and Adjusted EBITDA for the periods presented (in thousands):

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023

Net income (loss) as reported $ (9,489) $ 3,922 $ (18,949) $ 664

Interest expense, net 4,997 6,305 12,311 13,881

Income tax provision (benefit) (40) 156 141 176

Depreciation and amortization 13,402 15,756 31,556 37,581

EBITDA 8,870 26,139 25,059 52,302

Other charges (gains), net:

Gain on sale of restaurant property — (14,586) (7,425) (14,586)

Litigation contingencies 356 1,240 776 5,540

Restaurant closure costs, net 423 (112) 597 1,638

Severance and executive transition 137 962 1,082 2,854

Asset impairment 1,128 1,693 1,128 2,387

Asset disposal and other, net

825 83 2,620 1,144

Closed corporate office costs, net of sublease income 62 113 177 175

Adjusted EBITDA $ 11,801 $ 15,532 $ 24,014 $ 51,454

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

Adjusted EBITDA and Adjusted income (loss) per share-diluted are supplemental measures of our performance that are not required by or presented in accordance with GAAP.

Adjusted EBITDA and adjusted income (loss) per share-diluted exclude the impact of non-operating or nonrecurring items including changes in estimates, asset impairments, litigation contingencies, gains (losses) on debt extinguishment, restaurant and office closure costs, gains on sale leaseback transactions, severance and executive transition costs and other non-recurring, non-cash or discrete items net of income tax impacts.

Other companies may define these non-GAAP measures differently, and as a result our measures may not be directly comparable to those of other companies.

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

GAAP as a measure of performance.

The following table summarizes income (loss) from operations and restaurant level operating profit for the periods presented (dollars in thousands):

Twelve Weeks Ended Twenty-Eight Weeks Ended

July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023

Income (loss) from operations $ (4,561) (1.5)% $ 10,257 3.4% $ (6,672) (1.0)% $ 14,437 2.0%

Franchise revenue 4,287 1.4% 3,544 1.2% 9,628 1.4% 8,826 1.2%

Other revenue 1,410 0.5% 1,823 0.6% 6,042 0.9% 7,460 1.1%

Other charges (gains), net 2,931 1.0 (10,607) (3.6) (1,045) (0.2) (848) (0.1)

Pre-opening costs — — 4 — — — 586 0.1

Selling 12,040 4.0 6,752 2.3 25,587 3.7 15,129 2.1

General and administrative expenses 16,612 5.5 20,111 6.7 42,454 6.2 46,258 6.5

Depreciation and amortization 13,402 4.5 15,756 5.3 31,556 4.6 37,581 5.2

Restaurant level operating profit $ 34,727 11.8% $ 36,907 12.6% $ 76,210 11.3% $ 96,857 13.8%

Income (loss) from operations as a percentage of total revenues (1.5)% 3.4% (1.0)% 2.0%

Restaurant level operating profit margin (as a percentage of restaurant revenue) 11.8% 12.6% 11.3% 13.8%

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

Liquidity and Capital Resources

Cash and cash equivalents, and restricted cash increased $7.0 million to $38.6 million as of April 21, 2024, from $31.6 million at the beginning of the fiscal year.

Cash and cash equivalents, and restricted cash decreased $0.4 million to $31.1 million as of July 14, 2024, from $31.6 million at the beginning of the fiscal year.

The Company is using available cash flow from operations to maintain existing restaurants and infrastructure, and execute on its long-term strategic initiatives.

As of April 21, 2024, the Company had approximately $55.6 million in liquidity, including cash and cash equivalents and $25.0 million available borrowing capacity under our Credit Facility.

As of July 14, 2024, the Company had approximately $48.1 million in liquidity, including cash and cash equivalents and $25.0 million available borrowing capacity under our Credit Facility.

The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands):

Quarter Ended

April 21, 2024 April 16, 2023

Twenty-Eight Weeks Ended

July 14, 2024 July 9, 2023

Net cash provided by operating activities $ 14,246 $ 18,225

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Operating Cash Flows

Net cash flows provided by operating activities decreased $3.6 million to $13.7 million for the first quarter of fiscal 2024 compared to the prior year quarter.

Net cash flows provided by operating activities decreased $4.0 million to $14.2 million for the first half of fiscal 2024 compared to $18.2 million for the comparable period in fiscal 2023.

The decrease in net cash provided by operating activities is primarily attributable to the decrease in restaurant level profitability.

Investing Cash Flows

Net cash flows provided by investing activities were $15.1 million for the first quarter of fiscal 2024, as compared to net cash flow used in investing activities of $16.1 million for the prior year quarter.

The $31.2 million increase in cash flows provided by investing activities is primarily due to $23.4 million in proceeds from sale-leaseback transaction, and lower capital expenditures in the current year.

The following table lists the components of our capital expenditures, net of currency translation, for the periods presented (in thousands):

Quarter Ended

April 21, 2024 April 16, 2023

Net cash flows provided by investing activities increased to $9.4 million for the first half of fiscal 2024, as compared to net cash flows used in investing activities of $0.1 million for the comparable period in fiscal 2023.

The $9.5 million increase in cash flows provided by investing activities is primarily due to reduction in current year capital expenditures and lower proceeds from sale lease-back transactions in the current year period.

In addition, cash used in investing activities in the prior year included a $3.5 million cash outflow for the acquisition of five franchised restaurants.

The following table lists the components of our capital expenditures for the periods presented (in thousands):

Twenty-Eight Weeks Ended

July 14, 2024 July 9, 2023

Restaurant improvement capital and other $ 7,485 $ 12,045

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Financing Cash Flows

Net cash flows used in financing activities increased to $21.9 million for the first quarter of fiscal 2024, as compared to $1.0 million in the prior year quarter.

The increase in cash flows used in financing activities primarily relates to a $21.2 million repayment of outstanding debt with proceeds from a sale-leaseback transaction.

Net cash flows used in financing activities increased to $24.1 million for the first half of fiscal 2024, as compared to $20.1 million for the comparable period in fiscal 2023.

The increase in cash flows used in financing activities primarily relates to a $21.2 million repayment of outstanding debt with sale-leaseback transaction proceeds in fiscal 2024 compared to a $15.5 million repayment of outstanding of debt with sale-leaseback transaction proceeds in fiscal 2023.

Credit Facility

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Treasury securities, or the Alternate Base Rate, which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5% per annum, or (c) one-month term SOFR plus 1.0% per annum.

As of April 21, 2024, the Company had outstanding borrowings under the Credit Facility of $162.0 million net of $6.0 million of unamortized deferred financing charges and discounts, none of which was classified as current.

As of April 21, 2024, the Company had $25.0 million of available borrowing capacity under its Credit Facility and $7.7 million of letters of credit issued against cash collateral.

As of July 14, 2024, the Company had outstanding borrowings under the Credit Facility of $162.3 million net of $5.6 million of unamortized deferred financing charges and discounts, none of which was classified as current.

As of July 14, 2024, the Company had $25.0 million of available borrowing capacity under its Credit Facility and $7.7 million of letters of credit issued against cash collateral.

The Company's cash collateral is reported in Restricted cash on our Condensed Consolidated Balance Sheets.

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 that adjusts each year in July.

As of April 21, 2024, we were in compliance with all debt covenants.

On August 21, 2024, the Company entered into the second amendment to our Credit Agreement (the “Second Amendment”).

The Second Amendment among other things:

provides certain relief from the financial covenant by increasing the required maximum net total leverage ratio beginning in the third quarter of 2024 through the third quarter of 2025;

increases the aggregate revolving commitments by $15.0 million to $40.0 million through the third quarter of 2025;

removes the variable pricing grid and increases the applicable margin on all term loans and revolving loans that are SOFR-based loans to 7.50% per annum and that are ABR-based loans to 6.50% per annum;

and adds certain additional reporting requirements.

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 net total leverage ratio covenant, as defined, that adjusts periodically as specified in the Second Amendment to our Credit Agreement.

As of July 14, 2024, we were in compliance with all debt covenants.

Additionally, as noted under " Credit Facility ” above, the Second Amendment increased the required maximum net total leverage ratio covenant from the third quarter of 2024 through the third quarter of 2025.

Working Capital

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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.

We believe our future cash flows generated from restaurant operations combined with our borrowing capacity under the Credit Facility, as amended by the Second Amendment, and cash on hand, will be sufficient to meet our anticipated cash requirements and fund capital expenditures over the next 12 months.

Share Repurchase

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Pursuant to the repurchase program, purchases may be made from time to time at the Company's discretion and the Company is not obligated to acquire any particular amount of common stock.

From the date of the current program approval through April 21, 2024, we have repurchased a total of 1,088,588 shares at an average price of $15.18 per share for an aggregate amount of $16,520,000.

The Company completed no share repurchases during the periods presented.

Accordingly, as of April 21, 2024, we had $58.5 million of availability under the current share repurchase program.

From the date of the current program approval through July 14, 2024, we have repurchased a total of 1,088,588 shares at an average price of $15.18 per share for an aggregate amount of $16,520,000.

The Company completed no share repurchases during the quarter and year to date periods ended July 14, 2024.

Accordingly, as of July 14, 2024, 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.

Our business is subject to seasonal fluctuations.

Sales in most of our restaurants were historically higher during the spring and summer months and winter holiday season due to factors including our retail-oriented locations and family appeal.

Sales in most of our restaurants were historically higher during the spring months and winter holiday season due to factors including our retail-oriented locations and family appeal.

As a result, our quarterly operating results may fluctuate significantly as a result of seasonality, and seasonality of sales may shift over time.

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Contractual Obligations

There were no other material changes outside the ordinary course of business to our contractual obligations since the filing of the 2023 Form 10-K for the fiscal year ended December 31, 2023.

There were no other material changes outside the ordinary course of business to our contractual obligations since the filing of the 2023 Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Refer to Footnote 8.

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(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.

(xi) our strategies to enhance our liquidity position;

and (xii) 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.

27 unchanged sentences

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