Item 1A. Risk Factors
ITEM 1A. Risk Factors
Risk factors associated with our business are contained in Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended December 28, 2025, filed with the SEC on February 25, 2026. Except as set forth below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K. The risk factors set forth below amend and restate in their entirety the corresponding risk factors disclosed in our Annual Report on Form 10-K.
Our tactical refranchising initiatives, including our pending refranchising transactions, may not be completed on favorable terms or completed at all and may not result in the anticipated financial benefits.
As part of our First Choice plan, we are pursuing tactical refranchising opportunities to optimize our overall financing structure and strengthen our balance sheet. During the second quarter of fiscal 2026, we entered into three asset purchase agreements to sell restaurant assets associated with 116 of our 375 Company-owned restaurants for aggregate consideration of approximately $96.0 million in cash. None of the transactions had closed as of July 12, 2026, and each is subject to separate closing conditions, including required landlord consents, liquor license transfers, any required lender consent, and each purchaser obtaining financing. See Note 3. Significant Transactions. Tactical refranchising initiatives require significant management time and resources and may divert attention from day-to-day operations and other strategic priorities. The timing, pricing, and structure of any tactical refranchising transactions depend on market conditions.
There are a number of risks associated with these transactions, including the difficulty of predicting the ultimate costs and net proceeds of the sales, employee termination costs, the retention of restaurant team members through the transition to franchisee management, the results of negotiations with landlords, the effect of the sales on our ongoing operations, the tax consequences of the sales, and the future effect on our revenues, operating income, cash flows, and depreciation. If a transaction is delayed or terminated, we would continue to operate the affected restaurants and bear the related costs and lease obligations, and assets classified as held for sale would be reclassified. We may also remain primarily or secondarily liable on restaurant leases assigned or subleased to the purchasers, including where a purchaser is unable to obtain a full release from the landlord, and the amount of any liabilities to be recognized for those continuing obligations has not yet been determined.
Substantially all of our revenues are currently derived from sales at Company-owned restaurants. Any such transactions are expected to result in a shift from Company-owned restaurant revenues to franchise royalty income and advertising fund contributions, and we expect our total revenues to decrease as a result. Because the royalty and advertising fund contributions we will receive will represent a percentage of franchisee sales rather than the restaurant-level operating profit those restaurants previously generated, and because a substantial portion of our general and administrative expenses may not decline in proportion to the reduction in the number of restaurants we operate, the effect of the transactions on our operating income may be greater than their effect on our revenues. If our tactical refranchising initiatives are unsuccessful or do not achieve intended objectives, including improvements in liquidity and reductions in general and administrative expenses and long term debt, our business, financial condition, and results of operations could be materially adversely affected.
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Our franchisees could take actions that could harm our business, expose us to liability, or damage our reputation.
Franchisees are independent entities and are not our employees, partners, or affiliates. If our pending refranchising transactions are completed, our franchised restaurant base will increase from 90 to 206 restaurants and we will rely more on franchisees to operate restaurants in compliance with our brand standards, operating procedures, and applicable law. If our franchisees are not successful, then our business, results of operations, and reputation could be disproportionately adversely affected by the relative scale of such franchise operations. We share with our franchisees what we believe to be best practices in the restaurant industry; however, franchisees operate their restaurants as independent businesses. Consequently, the quality of franchised restaurant operations may be diminished by any number of factors beyond our control. Moreover, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements or may not hire and train qualified managers and other restaurant team members. In addition, as independent businesses, franchisees may not be required to comply with the same levels of business or regulatory compliance we are. While we try to ensure the quality of our brand and compliance with our operating standards, and the confidentiality thereof, are maintained by all of our franchisees, we cannot provide assurance our franchisees will avoid actions that negatively affect the reputation of Red Robin or the value of our proprietary information. Our image and reputation and the image and reputation of other franchisees may suffer materially, and system-wide sales could significantly decline if our franchisees do not operate restaurants according to our standards.
Following the refranchising transactions we will receive a greater portion of our revenues in the form of royalties and advertising fund contributions based on a percentage of sales at franchised restaurants, and a majority of our franchised restaurants would be operated by a small number of franchisees, several of which would each operate a significant number of our franchised restaurants. Accordingly, our financial results will to a greater extent depend upon the operational and financial success of our franchisees. If a significant franchisee, or a number of our franchisees in the aggregate, becomes financially distressed, our royalty and other revenues may decline, our receivables from franchisees and the related allowance for credit losses may increase, and advertising fund contributions supporting the Red Robin brand may be reduced. Our ability to enforce our rights under the franchise agreements may also be limited in the event of a franchisee bankruptcy or insolvency proceeding.
We are subject to federal and state laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationship. Further, there have been historical actions before the National Labor Relations Board ("NLRB") where it was alleged that a parent company could be held liable for the actions of its franchisees, including potentially jointly liable for labor and wage violations by its franchisees. Failure to comply with the laws and regulations governing our franchisee relationships or adverse decisions similar to the above-described NLRB actions could subject us to liability for actions of the franchisees, or expose us to liability to franchisees, or fines and penalties for non-compliance.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of fiscal 2026, the Company did not have any sales of securities in transactions that were not registered under the Securities Act that have not been reported in a Current Report on Form 8-K, nor were any share repurchases made by the Company.
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