Red Robin Gourmet Burgers, Inc., a casual dining restaurant chain serving an innovative selection of high-quality gourmet burgers in a family-friendly atmosphere, reported financial results for the quarter and year ended December 25, 2016.
Fourth Quarter 2016 Financial Highlights Compared to Fourth Quarter 2015
- Total revenues were $291.5 million, an increase of 1.8 percent
- Comparable restaurant revenue decreased 4.3 percent
Fiscal Year 2016 Financial Highlights Compared to Fiscal Year 2015
- Total revenues were $1.3 billion, an increase of 3.1 percent
- Comparable restaurant revenue decreased 3.3 percent
“The changes we made to streamline the team and focus on value, speed, and service in the back half of last year have strengthened our business and resulted in significantly improved guest service scores,” says Denny Marie Post, Red Robin Gourmet Burgers, Inc. chief executive officer. “We began this year piloting several off-premise growth initiatives. We will roll out the most promising programs as quickly as possible to support year-over-year earnings growth in the back half of 2017, heavily weighted to the fourth quarter as these programs come together.”
Operating Results
Total revenues, which primarily include company-owned restaurant revenue and franchise royalties, increased 1.8 percent to $291.5 million in the fourth quarter of 2016 from $286.3 million in the fourth quarter of 2015. Restaurant revenues increased $19.6 million due to new restaurant openings and acquired restaurants, partially offset by an $11.6 million, or 4.3 percent, decrease in comparable restaurant revenue and $2.3 million from closed restaurants. Franchise and other revenue decreased $0.6 million, primarily driven by a decrease in the number of franchisees from the same period a year ago.
System-wide restaurant revenue (which includes franchised units) for the fourth quarter of 2016 totaled $347.1 million, compared to $352.1 million for the fourth quarter of 2015.
Comparable restaurant revenue decreased 4.3 percent in the fourth quarter of 2016 compared to the same period a year ago, driven by a 2.9 percent decrease in guest counts and a 1.4 percent decrease in average guest check. Comparable restaurants are those company-owned restaurants that have operated five full quarters during the period presented, and such restaurants are only included in the comparable metrics if they are comparable for the entirety of both periods presented.
Restaurant-level operating profit margin (a non-GAAP financial measure) was 19.0 percent in the fourth quarter of 2016 compared to 21.9 percent in the same period a year ago. The 290 basis point margin decrease in the fourth quarter of 2016 resulted from a 190 basis point increase in labor costs, a 160 basis point increase in other restaurant operating expenses, and a 30 basis point increase in occupancy costs, partially offset by a 90 basis point decrease in cost of sales. Schedule II of this earnings release defines restaurant-level operating profit, discusses why it is a useful metric for investors, and reconciles this metric to income from operations and net income.
Depreciation and amortization costs increased to $22.1 million in the fourth quarter of 2016 from $18.5 million in the fourth quarter of 2015. The increased depreciation was primarily related to new restaurants opened and acquired since the fourth quarter of 2015 and restaurants remodeled under the Brand Transformation Initiative.
General and administrative costs were $20.3 million, or 7 percent of total revenues, in the fourth quarter of 2016, compared to $21.3 million, or 7.4 percent of total revenues in the same period a year ago. The decrease of $1 million resulted primarily from decreased incentive compensation and travel and entertainment.
Selling expenses were $9.2 million, or 3.1% of total revenues, in the fourth quarter of 2016, compared to $8.0 million, or 2.8%, of total revenues during the same period in the prior year.
Pre-opening costs were $1 million in the fourth quarter of 2016, compared to $2.4 million in the same period a year ago. The decrease was primarily due to timing of restaurant openings.
The company’s fiscal year 2016 effective tax rate benefit was 144.9 percent, compared to a 24.6 percent effective tax rate expense in fiscal year 2015. The change in the effective tax rate is primarily due to a decrease in earnings before income tax as well as an increase in the FICA tip tax credit.
Net loss for the fourth quarter ended December 25, 2016 was $8.8 million compared to net income of $11.7 million for the same period a year ago. Loss per diluted share for the fourth quarter 2016 was $0.68 compared to earnings per diluted share of $0.84 in fourth quarter 2015. For the fiscal year ended December 25, 2016, net income was $11.7 million compared to $47.7 million for the fiscal year ended December 27, 2015. Earnings per diluted share for fiscal year 2016 were $0.87 compared to $3.36 a year ago.
Excluding charges of $0.96 per diluted share for restaurant impairment and closure costs and $0.06 per diluted share for reorganization costs, adjusted earnings per diluted share for the fourth quarter ended December 25, 2016 were $0.35 compared to $0.86 for the same period a year ago. Adjusted net income for fiscal year 2016 was $37.4 million, compared to $47.1 million for the same period a year ago. See Schedule I for a reconciliation of adjusted net income and adjusted earnings per share (each, a non-GAAP financial measure) to net income and earnings per share.
Restaurant Development and Acquisitions
As of the end of the fourth quarter of 2016, there were 465 company-owned Red Robin restaurants and 86 franchised Red Robin restaurants for a total of 551 restaurants. During the fourth quarter, the company opened five Red Robin restaurants, bringing the total restaurant openings for the year to 26.
Under the Brand Transformation Initiative, the company completed 84 restaurant remodels during fiscal year 2016 and has substantially completed the transformation process for company-owned restaurants.
Balance Sheet and Liquidity
During the fourth quarter of 2016, the company repurchased 316,076 shares of its common stock for $14.6 million. During fiscal year 2016, the company repurchased 940,034 shares of its common stock for $46.1 million. As of December 25, 2016, there was approximately $53.9 million remaining under the current board authorization for stock repurchases.
As of December 25, 2016, the company had cash and cash equivalents of $11.7 million and total debt of $347.8 million, including $11.5 million of capital lease liabilities. The cmpany funded share repurchases, construction of new restaurants, restaurant remodels, and other capital expenditures with cash flow from operations and incremental borrowings of $31.5 million on its credit facility during the fourth quarter 2016. As of December 25, 2016, the company had outstanding borrowings under its credit facility of $335.5 million, in addition to amounts issued under letters of credit of $8.8 million, which reduce the amount available under its credit facility but were not recorded as debt.
As of the end of fiscal year 2016, the company’s lease adjusted leverage ratio was 4.35x. The lease adjusted leverage ratio is defined in Section 1.1 of the Credit Agreement for our credit facility, which is filed as Exhibit 10.32 of our Annual Report on Form 10-K on February 21, 2017.
Outlook for 2017
The company expects total revenues to grow between 6 percent and 8 percent, comprising comparable revenue growth of 0.5 percent to 1.5 percent and increased operating weeks associated with locations opened in 2016 and 2017, as well as the 53rd week in 2017.
Cost of sales, as a percentage of restaurant revenue, is projected to improve 25 to 75 basis points versus 2016 due to the benefit of pricing and menu optimization work, partially offset by a slightly inflationary commodity environment.
Restaurant labor costs, as a percentage of restaurant revenue, are projected to increase 25 to 75 basis points, driven by minimum wage increases in more highly penetrated markets, higher benefit costs, and restaurant manager bonuses planned at target levels, partially offset by the effect of pricing and improvements in labor productivity.
Other operating expenses are expected to be flat to slightly increased, as higher utility costs will be mostly offset by lower repair and maintenance costs.
Depreciation and amortization is projected to be slightly less than $95 million.
General and administrative expense is projected to be slightly more than $100 million, as incentive compensation planned at target is offset by the effect of restructuring activity that took place in the second half of 2016. Selling expense is expected to be flat as a percent of total revenues as compared to 2016. Pre-opening expense is projected to be approximately $6 million.
The company’s income tax rate is expected between 20 percent and 22 percent.
Earnings per diluted share is projected to range from $2.70 to $3 with approximately 40 percent expected in the first half of 2017 and 60 percent in the second half of 2017. The company expects Q1 earnings per diluted share between $0.40 and $0.60.
Overall capital expenditures are projected between $85 million and $95 million. The company plans to open approximately 17 and close nine Red Robin locations.
The sensitivity of the company’s earnings per diluted share to a 1 percent change in guest counts for fiscal year 2017 is estimated to be $0.40 on an annualized basis. Additionally, a 10 basis point change in restaurant-level operating profit margin is expected to impact earnings per diluted share by approximately $0.10, and a change of approximately $160,000 in pre-tax income or expense is equivalent to approximately $0.01 per diluted share.
