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. References to the third quarter and year to date periods of fiscal 2024 and fiscal 2023 refer to the twelve and forty weeks ended October 6, 2024 and October 1, 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 500 locations in North America. As of October 6, 2024, the Company owned 408 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.
Our primary source of revenue is from the sale of food and beverages at Company-owned restaurants. We also earn revenue from royalties and fees from franchised restaurants.
Highlights for the Third Quarter of Fiscal 2024, Compared to the Third Quarter of Fiscal 2023:
• Total revenues are $274.6 million, a decrease of $2.9 million.
• Comparable restaurant revenue (1) increased 0.6%.
• Net loss is $18.9 million, compared to a net loss of $8.2 million last year.
• Adjusted EBITDA (2) is $2.1 million compared to $6.8 million last year.
• Relaunched Loyalty Program increased to 14.5 million members compared to 13.1 million last year.
• Subsequent to the close of the third quarter, executed an amendment to the credit agreement that extends the adjustments to the financial covenants and expanded revolver capacity through the first quarter of fiscal 2026.
Highlights for the Year to Date Period of Fiscal 2024, Compared to the Year to Date Period of Fiscal 2023:
• Total revenues are $963.3 million, a decrease of $30.7 million.
• Comparable restaurant revenue (1) declined 2.6% excluding a deferred revenue benefit led by the change in the Company's loyalty program. Including this benefit, Comparable restaurant revenue (1) declined 2.1%.
• Net loss is $37.8 million, compared to net loss of $7.5 million last year.
• Adjusted EBITDA (2) is $26.1 million compared to $58.3 million last year.
• 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
Restaurant Revenue, compared to the same quarter in the prior year, is presented in the table below:
(Dollars in millions) Twelve Weeks Ended Forty Weeks Ended
Restaurant Revenue for the period ended October 1, 2023
$ 273.1 $ 973.3
Increase/(decrease) in comparable restaurant revenue 1.5 (19.6)
Decrease in non-comparable and closed restaurant revenue
(4.1) (10.1)
Total increase/(decrease) (2.6) (29.7)
Restaurant Revenue for the period ended October 6, 2024
$ 270.5 $ 943.6
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Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods presented:
Twelve Weeks Ended Forty Weeks Ended
October 6, 2024 October 1, 2023 October 6, 2024 October 1, 2023
Company-owned:
Beginning of period 411 418 415 414
Opened during the period — — — 1
Acquired from franchisees — — — 5
Closed during the period (3) (1) (7) (3)
End of period 408 417 408 417
Franchised:
Beginning of period 92 91 92 97
Opened during the period — — — —
Closed during the period — — — (1)
Sold to Company during the period — — — (5)
End of period 92 91 92 91
Total number of restaurants 500 508 500 508
Comparable Restaurant Revenue
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. The Company believes this change will provide investors with a better understanding of our financial performance from period to period. 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 third quarter and year to date periods of fiscal 2024, there were 402 and 401 comparable restaurants, respectively.
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The following table presents total Company-owned and franchised restaurants by state or province as of October 6, 2024:
Company-Owned Restaurants Franchised Restaurants
State:
Arkansas 2 1
Alaska 3
Alabama 3
Arizona 18 1
California 57
Colorado 21
Connecticut 3
Delaware 5
Florida 17
Georgia 6
Iowa 5
Idaho 8
Illinois 17
Indiana 11
Kansas 5
Kentucky 4
Louisiana 1
Massachusetts 5
Maryland 11
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 16 3
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 18
Washington 37
Wisconsin 11
Province:
British Columbia 11
Total 408 92
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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 2023 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
(Dollars in thousands) October 6, 2024 October 1, 2023 October 6, 2024 October 1, 2023
Revenues:
Restaurant revenue 98.5 % 98.4 % 98.0 % 97.9 %
Franchise revenue 1.1 1.2 1.3 1.2
Other revenue 0.4 0.4 0.7 0.9
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Restaurant operating costs (1) (excluding depreciation and amortization shown separately below):
Cost of sales 24.1 23.8 23.8 24.3
Labor 39.8 38.0 39.3 36.9
Other operating 18.4 18.4 17.8 17.9
Occupancy 8.8 8.6 8.5 7.9
Total restaurant operating costs 90.9 88.8 89.3 86.8
Depreciation and amortization 4.9 5.3 4.7 5.3
Selling, general, and administrative expenses 9.6 10.1 9.8 9.0
Pre-opening costs — — — 0.1
Other charges (gains), net 0.6 (2.1) 0.1 (0.7)
Income (loss) from operations (4.7) (0.7) (2.0) 1.3
Other expense (income):
Interest expense 2.3 2.3 2.0 2.1
Interest income and other, net (0.1) (0.2) (0.1) (0.1)
Loss before income taxes (6.9) (2.8) (3.9) (0.7)
Income tax provision (benefit) — 0.1 — —
Net loss (6.9) % (2.9) % (3.9) % (0.8) %
(1) Expressed as a percentage of restaurant revenue.
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Revenues
Twelve Weeks Ended Forty Weeks Ended
(Dollars in thousands) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Restaurant revenue $ 270,605 $ 273,133 (0.9) % $ 943,630 $ 973,307 (3.0) %
Franchise revenue 3,007 3,418 (12.0) % 12,635 12,245 3.2 %
Other revenue 1,026 1,009 1.7 % 7,068 8,468 (16.5) %
Total revenues $ 274,638 $ 277,560 (1.1) % $ 963,333 $ 994,020 (3.1) %
Average weekly net sales volumes in Company-owned restaurants $ 55,007 $ 54,572 0.8 % $ 57,261 $ 58,446 (2.0) %
Total operating weeks 4,920 5,005 (1.7) % 16,480 16,653 (1.0) %
Restaurant revenue, which is comprised primarily of food and beverage sales, decreased $2.5 million, or 0.9%, in the third quarter of fiscal 2024, as compared to the comparable period of 2023. Restaurant revenue decreased primarily due to the closure of 9 locations subsequent to October 1, 2023. Comparable restaurant revenue increased 0.6% and includes a 4.9% increase in average Guest check offset in part by a 4.3% decrease in Guest count. The increase in average Guest check resulted from a 7.5% increase in menu prices, partially offset by a 1.1% decrease from menu mix and a 1.4% decrease from additional discounts. The decrease in menu mix was primarily driven by greater incidence of promotional menu items offered at reduced prices.
Restaurant revenue decreased $29.7 million or 3.0% in the year to date period of fiscal 2024, as compared to the same period of 2023. Restaurant revenue decreased primarily due to a 2.1% decrease in comparable restaurant revenue inclusive of a benefit from the change in the Company's loyalty program. Comparable restaurant revenue reflects a 6.5% decrease in Guest count, partially offset by a 4.4% 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 during the first quarter of fiscal 2024. The increase in average Guest check resulted from a 6.7% increase in menu prices, partially offset by a 2.0% decrease from menu mix and a 0.8% decrease from 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 reduced incidence of add on menu items. Dine-in sales comprised 76.5% of total food and beverage sales during the year to date period of 2024, as compared to 74.8% 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 decreased by $0.4 million, or 12.0%, in the third quarter of fiscal 2024 compared to the same period of 2023, primarily due to a decrease in franchisee contributions. Franchise revenue increased by $0.4 million, or 3.2%, in the year to date period of fiscal 2024 compared to the same period of 2023, primarily due to an increase in franchisee contributions. Franchisee contributions were reduced in the third quarter of fiscal 2024 in line with the reduction in overall selling expense, following an increase in the first half of fiscal 2024. Franchise restaurants reported a decrease of 1.6% in comparable restaurant revenue in the third quarter of fiscal 2024 and a decrease of 2.7% for the year to date period of fiscal 2024 compared to the same periods in fiscal 2023.
Other revenue did not change and decreased $1.4 million in the third quarter and year to date periods of fiscal 2024 compared to 2023, respectively. The decrease in the year to date period of fiscal 2024 compared to 2023 is primarily related to business interruption insurance recoveries recognized in 2023.
Cost of Sales
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except percentages) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Cost of sales $ 65,105 $ 65,128 — % $ 224,759 $ 236,171 (4.8) %
As a percent of restaurant revenue 24.1 % 23.8 % 0.3 % 23.8 % 24.3 % (0.5) %
Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales volume. Cost of sales as a percentage of restaurant revenue increased 30 basis points for the third quarter of fiscal 2024 as compared to the comparable period in 2023. The increase was primarily driven by commodity inflation, product mix shift to higher cost menu items, and higher discounts, partially offset by menu price increases and vendor contributions to support our Managing Partner conference recorded as a reduction to cost of sales.
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Cost of sales as a percentage of restaurant revenue decreased 50 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.
Labor
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except percentages) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Labor $ 107,692 $ 103,741 3.8 % $ 370,559 $ 358,841 3.3 %
As a percent of restaurant revenue 39.8 % 38.0 % 1.8 % 39.3 % 36.9 % 2.4 %
Labor costs include restaurant level hourly wages and management salaries as well as related taxes and benefits. For the third quarter of fiscal 2024, labor as a percentage of restaurant revenue increased 180 basis points compared to the same period in 2023. The increase was primarily driven by strategic investments in management labor and incentive compensation related to a new partner bonus plan, increased hourly labor costs, and higher workers compensation insurance costs.
For the year to date period of fiscal 2024, labor as a percentage of restaurant revenue increased 240 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
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except percentages) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Other operating $ 49,740 $ 50,351 (1.2) % $ 168,014 $ 174,243 (3.6) %
As a percent of restaurant revenue 18.4 % 18.4 % — % 17.8 % 17.9 % (0.1) %
Other operating costs include costs such as repair and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. For the third quarter of fiscal 2024, other operating costs as a percentage of restaurant revenue is unchanged compared to the same period in 2023.
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 same period in 2023. The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix and lower commission rates.
Occupancy
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except percentages) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Occupancy $ 23,826 $ 23,523 1.3 % $ 79,850 $ 76,806 4.0 %
As a percent of restaurant revenue 8.8 % 8.6 % 0.2 % 8.5 % 7.9 % 0.6 %
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 20 basis points for the third quarter of fiscal 2024 compared to the same period in 2023. The increase is due primarily to the impact of fixed rents associated with the sale-leaseback of 28 locations.
Occupancy costs as a percentage of restaurant revenue increased 60 basis points for the year to date period of fiscal 2024 compared to the same period in 2023. The increase is due primarily to the impact of fixed rents associated with the sale-leaseback of 28 locations and the acquisition of five restaurants from a franchisee in the second quarter of fiscal 2023.
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Depreciation and Amortization
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except percentages) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Depreciation and amortization $ 13,330 $ 14,672 (9.1) % $ 44,886 $ 52,253 (14.1) %
As a percent of total revenues 4.9 % 5.3 % (0.4) % 4.7 % 5.3 % (0.6) %
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 third quarter of fiscal 2024, depreciation and amortization expense as a percentage of revenue decreased 40 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
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except percentages) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Selling, general, and administrative $ 26,290 $ 27,961 (6.0) % $ 94,329 $ 89,348 5.6 %
As a percent of total revenues 9.6 % 10.1 % (0.5) % 9.8 % 9.0 % 0.8 %
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. Selling, general and administrative expense decreased $1.7 million, or 6.0% in the third quarter of fiscal 2024 as compared to the comparable period in 2023.
General and administrative costs in the third quarter of fiscal 2024 were $20.8 million, an increase of $2.3 million compared to the comparable period in 2023. The increase is primarily related to costs incurred for the 2024 Managing Partner conference, partially offset by reduced incentive compensation and legal fees as compared to the prior year quarter.
Selling costs in the third quarter of fiscal 2024 were $5.5 million, a decrease of $4.0 million compared to the comparable period in 2023. The decrease was primarily driven by reduced marketing communication with consumers and related production costs.
General and administrative costs in the year to date period of fiscal 2024 were $63.3 million, a decrease of $1.5 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 costs associated with the 2024 Managing Partner conference.
Selling costs in the year to date period of fiscal 2024 were $31.1 million, an increase of $6.5 million compared to the comparable period in 2023. The increase was primarily driven by increased marketing communication with consumers and related production costs in the first half of fiscal 2024.
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Pre-opening Costs
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except percentages) October 6, 2024 October 1, 2023 Percent Change October 6, 2024 October 1, 2023 Percent Change
Pre-opening costs $ — $ — — % $ — $ 586 (100.0) %
As a percent of total revenues — % — % — % — % 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 period will typically include expenses associated with restaurants opened during the period as well as expenses related to restaurants opening in subsequent periods.
We did not open any new restaurants or roll out any Donatos ® locations in the year to date period of fiscal 2024. We opened one restaurant and completed the rollout of 25 Donatos ® locations in the year to date period of fiscal 2023.
Interest Expense
Interest expense for the third quarter of fiscal 2024 and 2023 was $6.3 million and $6.1 million, respectively. The $0.2 million increase was primarily due to an increase in the weighted average interest rate to 14.0% in the third quarter of fiscal 2024 compared to 13.4% in the prior year quarter. Average outstanding debt was $191.6 million and $194.5 million as of October 6, 2024 and October 1, 2023, respectively.
Interest expense was $18.9 million for the year to date period of fiscal 2024 and $20.4 million for the year to date period of fiscal 2023. The $1.4 million decrease was primarily due to the net paydown of debt with the proceeds from the sale-leaseback transactions, partially offset by an increase in the weighted average interest rate to 13.3% for the year to date period of fiscal 2024 compared to 12.6% in the same period last year. Average outstanding debt was $185.2 million and $205.9 million as of October 6, 2024 and October 1, 2023, respectively.
Income Tax Provision
The effective tax rate for the third quarter of fiscal 2024 was a 0.5% benefit, compared to a 3.5% expense for the third quarter of fiscal 2023. The effective tax rate for the year to date period of fiscal 2024 was 0.1%, compared to 6.4% 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 state income taxes due to attribute limitations, minimum state income taxes, and state franchise taxes. The higher effective 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.
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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 Forty Weeks Ended
(Dollars in millions) October 6, 2024 October 1, 2023 Increase/
(Decrease) October 6, 2024 October 1, 2023 Increase/
(Decrease)
Restaurant revenue $ 270.6 $ 273.1 (0.9) % $ 943.6 $ 973.3 (3.0) %
Restaurant operating costs:
Cost of sales 65.1 65.1 — % 224.8 236.2 (4.8) %
Labor 107.7 103.7 3.9 % 370.6 358.8 3.3 %
Other operating 49.7 50.4 (1.4) % 168.0 174.2 (3.6) %
Occupancy 23.8 23.5 1.3 % 79.9 76.8 4.0 %
Total Restaurant Operating Costs $ 246.4 $ 242.7 1.5 % $ 843.2 $ 846.1 (0.3) %
Restaurant level operating profit (1)
$ 24.2 $ 30.4 (20.4) % $ 100.4 $ 127.2 (21.1) %
(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 Forty Weeks Ended
(Dollars in millions) October 6, 2024 October 1, 2023 Increase/
(Decrease) October 6, 2024 October 1, 2023 Increase/(Decrease)
Restaurant revenue $ 270.6 $ 273.1 (0.9) % $ 943.6 $ 973.3 (3.0) %
Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis
Points) (Percentage of Restaurant Revenue) (Basis
Points)
Cost of sales 24.1 % 23.8 % 30 23.8 % 24.3 % (50)
Labor 39.8 38.0 180 39.3 36.9 240
Other operating 18.4 18.4 — 17.8 17.9 (10)
Occupancy 8.8 8.6 20 8.5 7.9 60
Total Restaurant Operating Costs 90.9 % 88.8 % 210 89.3 % 86.8 % 250
Restaurant level operating profit
9.0 % 11.1 % (210) 10.6 % 13.1 % (250)
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.
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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 Forty Weeks Ended
(in thousands, except per share amounts) October 6, 2024 October 1, 2023 October 6, 2024 October 1, 2023
Net income (loss) as reported $ (18,876) $ (8,161) $ (37,825) $ (7,496)
Income (loss) per share - diluted:
Net income (loss) as reported
$ (1.20) $ (0.52) $ (2.42) $ (0.47)
Other charges (gains), net:
Gain on sale of restaurant property — (0.94) (0.47) (1.84)
Litigation contingencies 0.02 0.23 0.07 0.57
Restaurant closure costs (gains), net (0.01) (0.01) 0.03 0.10
Severance and executive transition — 0.02 0.07 0.20
Asset impairment 0.01 0.30 0.08 0.45
Asset disposal and other, net
0.07 0.02 0.24 0.09
Closed corporate office costs, net of sublease income — — 0.01 0.02
Income tax effect (0.03) 0.10 (0.01) 0.11
Adjusted income (loss) per share - diluted $ (1.13) $ (0.79) $ (2.39) $ (0.78)
Weighted average shares outstanding:
Basic 15,754 15,799 15,652 15,949
Diluted 15,754 15,799 15,652 15,949
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The following table summarizes Net loss, EBITDA, and Adjusted EBITDA for the periods presented (in thousands):
Twelve Weeks Ended Forty Weeks Ended
October 6, 2024 October 1, 2023 October 6, 2024 October 1, 2023
Net income (loss) as reported $ (18,876) $ (8,161) $ (37,825) $ (7,496)
Interest expense, net 6,193 5,885 18,504 19,766
Income tax provision (benefit) (98) 278 43 453
Depreciation and amortization 13,330 14,672 44,886 52,253
EBITDA 549 12,674 25,608 64,976
Other charges (gains), net:
Gain on sale of restaurant property — (14,883) (7,425) (29,413)
Litigation contingencies 271 3,600 1,047 9,140
Restaurant closure costs (gains), net (175) (91) 422 1,546
Severance and executive transition 22 341 1,104 3,195
Asset impairment 178 4,800 1,306 7,187
Asset disposal and other, net
1,179 277 3,799 1,366
Closed corporate office costs, net of sublease income 57 78 234 253
Adjusted EBITDA $ 2,081 $ 6,796 $ 26,095 $ 58,250
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. 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 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.
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The following table summarizes income (loss) from operations and restaurant level operating profit for the periods presented (dollars in thousands):
Twelve Weeks Ended Forty Weeks Ended
October 6, 2024 October 1, 2023 October 6, 2024 October 1, 2023
Income (loss) from operations $ (12,877) (4.7)% $ (1,938) (0.7)% $ (19,551) (2.0)% $ 12,498 1.3%
Less:
Franchise revenue 3,007 1.1% 3,418 1.2% 12,635 1.3% 12,245 1.2%
Other revenue 1,026 0.4% 1,009 0.4% 7,068 0.7% 8,468 0.9%
Add:
Other charges (gains), net 1,532 0.6 (5,878) (2.1) 487 0.1 (6,726) (0.7)
Pre-opening costs — — — — — — 586 0.1
Selling 5,467 2.0 9,418 3.4 31,052 3.2 24,547 2.5
General and administrative expenses 20,823 7.6 18,543 6.7 63,277 6.6 64,801 6.5
Depreciation and amortization 13,330 4.9 14,672 5.3 44,886 4.7 52,253 5.3
Restaurant level operating profit $ 24,242 9.0% $ 30,390 11.1% $ 100,448 10.6% $ 127,246 13.1%
Income (loss) from operations as a percentage of total revenues (4.7)% (0.7)% (2.0)% 1.3%
Restaurant level operating profit margin (as a percentage of restaurant revenue) 9.0% 11.1% 10.6% 13.1%
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.
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Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand and availability under our revolving credit facility. Cash and cash equivalents, and restricted cash decreased $1.3 million to $30.3 million as of October 6, 2024, from $31.6 million at the beginning of the fiscal year. As of October 6, 2024, the Company had approximately $42.0 million in liquidity, including cash and cash equivalents and $20.0 million available borrowing capacity under our Credit Facility.
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 6, 2024 October 1, 2023
Net cash provided by operating activities $ 1,840 $ 17,361
Net cash provided by investing activities 4,873 18,992
Net cash used in financing activities (7,990) (33,741)
Net change in cash and cash equivalents, and restricted cash $ (1,277) $ 2,612
Operating Cash Flows
Net cash flows provided by operating activities decreased $15.5 million to $1.8 million for the year to date period of fiscal 2024 compared to $17.4 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 decreased to $4.9 million for the year to date period of fiscal 2024, as compared to net cash flows provided by investing activities of $19.0 million for the comparable period in fiscal 2023. The $14.1 million decrease in cash flows provided by investing activities is primarily due to lower proceeds from sale lease-back transactions in the current year period, partially offset by a reduction in current year capital expenditures. In addition, cash provided by 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):
Forty Weeks Ended
October 6, 2024 October 1, 2023
Restaurant improvement capital and other $ 9,772 $ 16,715
Technology, infrastructure, and other 9,642 10,336
Donatos ® expansion
— 8,602
New restaurants and restaurant refreshes — 1,421
Total capital expenditures $ 19,414 $ 37,074
Financing Cash Flows
Net cash flows used in financing activities decreased to $8.0 million for the year to date period of fiscal 2024, as compared to $33.7 million for the comparable period in fiscal 2023. Cash flows used in financing activities in fiscal 2024 primarily relate to the paydown of $21.2 million of debt with proceeds from the sale-leaseback transaction and debt issuance costs associated with an amendment to the credit facility, partially offset by $20 million in net borrowings on the revolving credit facility. Cash flows used in financing activities in fiscal 2023 primarily relate to the net paydown of debt of $24.6 million and $10.0 million in share repurchases.
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Credit Facility
On March 4, 2022, the Company entered into a credit agreement (as amended, the "Credit Agreement"), which provides for a 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, 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.
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 end of the third quarter of 2025; increases the aggregate revolving commitments by $15.0 million to $40.0 million through the end of 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.
On November 4, 2024, the Company entered into the third amendment to our Credit Agreement (the "Third Amendment") which extends the provisions of the Second Amendment through the end of the first fiscal quarter of 2026.
As of October 6, 2024, the Company had outstanding borrowings under the Credit Facility of $180.7 million, net of $7.2 million of unamortized deferred financing charges and discounts, none of which was classified as current. As of October 6, 2024, the Company had $20.0 million of available borrowing capacity under its Credit Facility and $8.1 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.
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 net total leverage ratio covenant, as defined, that adjusts periodically as specified in the Third Amendment to our Credit Agreement. As of October 6, 2024, we were in compliance with all debt covenants.
Additionally, as noted under " Credit Facility ” above, the Third Amendment extended the increase in the required maximum net total leverage ratio covenant from the third quarter of 2025 through the end of the first quarter of 2026.
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. 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 borrowing capacity under the Credit Facility, and cash on hand, will be sufficient to meet our anticipated cash requirements and fund capital expenditures over the next 12 months.
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 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. From the date of the current program approval through October 6, 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 October 6, 2024. Accordingly, as of October 6, 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.
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Seasonality
Our business is subject to seasonal fluctuations. 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. Accordingly, results for any one quarter or year are not necessarily indicative of results to be expected for any other quarter or for any year.
Contractual Obligations
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. See Note 8. Commitments and Contingencies .
Critical Accounting Estimates
Critical accounting 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 estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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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; (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; (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.
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 effectiveness of the Company's strategic initiatives, including our “North Star” plan, labor and service models, and operational improvement initiatives and our ability to execute on such strategic initiatives; the global and domestic economic and geopolitical environment; our ability to effectively compete in the industry and attract and retain Guests; the adequacy of cash flows and the cost and availability of capital or credit facility borrowings; a privacy or security breach or a failure of our information technology systems; the effectiveness and timing of the Company's marketing and branding strategies, including the loyalty program and social media platforms; changes in consumer preferences; leasing space including the location of such leases in areas of declining traffic; changes in cost and availability of commodities; interruptions in the delivery of food and other products from third parties; pricing increases and labor costs; changes in consumer behavior or preference; expanding our restaurant base; maintaining and improving our existing restaurants; the transition and retention of our key personnel; our ability to recruit, staff, train, and retain our workforce; operating conditions, including adverse weather conditions, natural disasters, pandemics and other events affecting the regions where our restaurants are operated; actions taken by our franchisees that could harm our business or reputation; negative publicity regarding food safety or health concerns; protection of our intellectual property rights; changes in federal, state, or local laws and regulations affecting the operation of our restaurants; an increase in litigation or legal claims by Team Members, franchisees, customers, vendors, stockholders and others; and the other Risk Factors described from time to time in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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.